Property remains the hidden gem in passive income generation

You don’t have to ask too many friends and family before you get the advice that property is a sure thing or that you should pay off your bond before saving money in other investments.

 

Knowing then that property is such an important aspect in all clients’ portfolios – how should Financial Advisors and Planners approach the subject? It is important that all financial advisors and planners assist clients to have a structured retirement plan in place in order to give a client the best possible chance of achieving financial independence. This is when the assets you’ve accumulated over your life time generate sufficient or more income than your lifestyle requires and is able to escalate above inflation indefinitely.

 

As with most investment options there is then more than one way to approach the plan that will lead to financial independence. The important aspect, however, of structuring a portfolio is making sure that the assets you invest in generate a cash flow and that you are not just dependent on the capital appreciation of the asset.

The rationale behind this is quite simply that you want to keep the asset and live off the income rather than continually having to buy and sell to realise an asset to maintain your lifestyle.

The biggest advantage of investing in property is based on the fact that you can utilize other peoples’ money to finance the property. Apart from a limited number of derivatives, property is the only major asset where money is lent based on the security of the asset.

 

This is a major advantage because the investor is rewarded with the total growth and income of the asset even though the asset is still financed and effectively the property of the financiers.

This is obviously a double-edged sword. As long as the property generates more money, capital appreciation and rental income, than has to be repaid to the financiers, the investor is in the money and his asset base is increasing. The first goal for any property investor is to get to a point where the rental income is equal to or exceeds the total costs of the property, including the loan repayment, rates and taxes and general maintenance.

 

Even in the current difficult climate this is attainable in roughly 5 to 7 years. If the bond is financed over 20 years the investor only has to invest his own money for the first 5 to 7 years. Thereafter the property is effectively paid by the tenant for the remainder of the 15 to 13 years and then generates a decent income that can supplement all other retirement savings.

It is important to stress the advantages of property with clients, but the biggest mistake that almost every client makes is that by assuming that their primary residence is an asset and could be used to supplement their retirement income. Unfortunately the primary residence only costs money and will never generate an income unless some creative planning (building or expanding to create place for tenants) takes place. This important point is often overlooked by clients and sometimes advisors.