When should we take more risks with our investments?
Why should I invest in Real Estate when the returns are at most 20-30% over 3-5 years, when investing in the financial markets can possibly net me 100% returns in less than a year?
Now, this isn’t a post about Real Estate Investing vs all the other different kinds of investments.
I am a believer of diversified portfolios. This is true-r today than ever before as besides for Real Estate Investing and financial markets, consumers now have things like bitcoin, as well as alternative investments like art, alcohol and even watches.
However, Real Estate has characteristics which make it a very suitable asset class for retirement planning. These are:
1. Tangible can see and feel
2. Hedge against inflation
3. Tends to appreciate because of scarcity and population growth
And most of all, a steady and less volatile income stream from rental.
So let’s explore how to retire with Real Estate.
I explain this through what I call the Property Life Cycle.
0 – 25 years old: learning & accumulating wealth
At this stage, we are still schooling and learning. We are still mostly ignorant about the world, and even if we are financially literate, we would lack the funds for investment.
Also, maybe you just started work and don’t have a lot of savings.
Hence, it is really just about accumulating wealth here so that they can be put to better use in the next phase.
25 – 55: the asset growth phase
Here, you are in your prime life stage where you are stable, growing and incomes are increasing year after year.
During this time, people can afford to be more aggressive in their career choices, and investments.
The need for passive income is less as job stability is high and predictable.
Also, if you are on the left side of 35, leverage plays a huge factor as you are still eligible for the maximum 75% loan to value and 30 year loan tenure.
Which means you can stretch out your purchase when you invest in real estate.
Investors should go for the highest possible capital gains now, instead of defensive options, even if it means negative cash flow for the period.
Not all real estate investments are created equal, but with good selection, a gain of about 100% every 5-7 years is very possible.
Then once you have accumulated a property portfolio, which can consist of residential, commercial, industrial and even overseas, you would then be at the next phase.
55—65: consolidation and preservation.
Here, you start to slow down.
Perhaps competition at your workplace is more intense with the new young generation, and job stability isn’t like what it was before.
Mindsets has also shifted and you now priorities stability and predictability over intense risky moves.
So it’s time to pay off your housing mortgage.
If you have multiple, re-evaluate to see if any rebalancing is required.
Once mortgages are paid down, you are prepared for the last stage.
It’s the time you want now! You’re ready with a portfolio of real estate investments which are fully paid.
There are 2 options.
1. Sell everything and downgrade, unlocking a huge sum of money in the process.
2. Keep the properties for rental income.
Either way, you should be good for a comfortable retirement ????
So this is the structure that I use to help my clients plan how to retire with real estate.
Note this important point, the years are only for reference.
In this standard structure, 65 is the retirement age.
However, if your target is 50, we can shift the scales accordingly.
The key idea is to guide you to decide what kind of purchase you should be considering at your current phase.
Once you know your phase, and your ending point, there should be no doubt on what kind of real estate asset to acquire.
My Own Example
When I was 26, and looking to get my 1st property, I figured I was in the asset growth phase.
Like all first time buyers with a limited budget, the comparison was between a resale flat and a new hdb BTO.
Ultimately I decided to not overstretch my finances and went for a 3 room flat in Bidadari, the upcoming estate in the north east.
Given my options on the market as well as the outlook on hdb prices, it was the right choice.
Even though many people questioned my decision to pick a 3-rm unit instead of a larger one.
There is a video I shot about my Bidadari decision, which you can view here.
To conclude, you can use this Property Life Cycle as a reference guide.
At the end of the day what you want is a rental property.
How many of you agree that an additional $2,000 a month would be life changing?
Which phase are you at now?
If you are interested to educate yourself further, you might be interested in one of my Offers!
Feel free to leave your comments and feedback as well, or further questions via the contact form.
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