The 10 Essential Rules To Creating Real Estate Wealth

Real estate is an infinite game, with very defined rules. There are a lot of pieces to the puzzle and mastering each one takes time – especially if you’re hoping to create genuine and long-term wealth.

Yet when you learn to do it well, you really can end up retiring exactly the way you desire and living the rest of your life off passive income.

Now we know there is more to life than financial gain which is why it’s so important to take a holistic approach to our wealth. However, there’s absolutely no shame in using money and investment to give yourself more freedom, and fundamentally create a better life.

Property investment is one of the best vehicles you can take advantage of to get yourself in a strong financial position when retirement comes, but you need to know how to do it properly.

That’s why I’m giving you my personal list of rules, or ingredients, you’ll need to make it long term in real estate as an investor:

• MAKE USE OF LEVERAGE

Leverage is the crux of how most successful property investors get by. In fact, understanding how to best leverage your assets is what leads to sustainable wealth creation.

Right now, for example, you can have $50,000 of positive equity in your home, then go to the bank and borrow another 90% to turn that into $500,000! It’s an incredible opportunity to create growth.

However, there is a bit of an artform when it comes to creating leverage in your life, and it comes down to your number. The number you want to live off per annum when you decide to retire or give up full-time work.

Using the 20 rule, where we times your chosen number by 20 – with the fair assumption that most people can get a 5% return – you can figure out exactly how much real estate you will need to have paid off to live from passive income.

Say you need to pay off $2 million of real estate to live off $100,000 yearly. Well, you probably have a bit of work to do, and perhaps you’ll need to sell some of your properties to better leverage others.

The number one thing to remember is if you’re in a position where you could be borrowing more money and you’re not doing it, you may just be missing out on a huge opportunity that will reshape your life later on.

• DON’T BE THROWN BY THE CYCLES

Investment markets constantly go through cycles – good ones and bad ones. They’re designed to be that way, so there’s no point being thrown by them.

A lot of property investors struggle to make it past the six year mark, and that’s because they don’t understand the movement of cycles. Yet we know that anyone who holds real estate for less than a market cycle (about ten to fifteen years) is virtually guaranteed to lose money after paying taxes, stamp duty and holding costs.

After every expansion period there will always be a contraction period – stick it out and the odds of you reaching your financial goals will soar.

• UNDERSTAND THE PSYCHOLOGY OF WEALTH

Again, there is a lot to be said mentally about time spent in the market. See the goal of property investment is not to win, it’s to outlast.

I had a client who had owned a property in Brisbane since 2016. After three to four years without seeing significant growth and then coming into the era or coronavirus, he decided he couldn’t do it anymore and sold.

I assured him all he needed to do was wait another eight months, but psychologically he was far too panicked.

There is a whole side to property investing that involves the psychology of wealth, and it’s how we address those trials and tribulations that ensure we’re playing the game the right way.

• DIVERSIFY YOUR ASSETS

Something I believe in strongly is having in place a property diversification plan.

This is essentially a buy and hold real estate strategy spread out across a number of different market locations e.g Sydney, Melbourne and Perth.

Having five, top quality assets in different marketplaces makes for a terrific foundation for your portfolio because they usually all perform at different times which allows you a fairly consistent amount of growth.

Once you’re happy with how your properties have grown and don’t feel like you need any extra equity, you can start diversifying into cash flow assets and speculation assets.

• DON’T BE CLICKBAITED

It’s becoming far too easy for property investors to fall down the clickbait rabbit hole. There is so much noise even surrounding our daily life that distracts from the big picture and stops us from making realistic decisions.

Things like media stories saying the real estate market is headed for collapse (based on no real fundamental data) or Bitcoin billionaires are making investors feel financially unwell.

Don’t waste time looking so deeply into these kinds of things – a good property investor knows that choosing the opposite of what most other people are doing usually yields better results.

Spend more time researching markets and getting your finances in order instead of being a sheep in the game.

• FOCUS ON BEING ASSET RICH

Owner-occupiers pay way too much, almost double, for their homes.

So, when you think about how many people find themselves at the end of their life with hardly any money to spend, it can usually be traced back to these owner-occupiers who only have one single asset to their name – their own home.

• GET CLEAR ON THE TYPE OF CASH FLOW YOU’RE AIMING FOR

We know we want to end up on passive income which means we have to know where our cash flow is coming from.

Now I put real estate into three fundamental buckets. The first is low yielding real estate which is heavily negatively geared. These properties are best to just steer clear of all together if you want to end up with cash flow.

The second type which you also should be avoiding is what I call blunder equity deals, where the deteriorations of the asset means any rent you get back is going straight into fixing up that property.

The third is what you’re aiming for which finds that sweet spot that balances great growth potential and a desirable location. This is where cash flow actually works in your favour and isn’t going to be gobbled up by other costs.

• UNDERSTAND INCREASING CAPITAL COSTS

Continuing on from cash flow assets, one of the biggest mistakes property investors make is buying real estate which is capital intensive.

Not factoring in before purchasing future capital costs as properties age and standards are changed can be a major financial oversight.

For example, soon enough we’ll see similar energy efficiency standards introduced in real estate as has been done in Europe. Imagine how much of your cash flow would have to be poured into your properties that aren’t able to meet the required energy rating needed in our future economy?

This is why we want to buy newer assets with a bit of life in them on the market that don’t require you to spend a single cent on capital costs for at least 20 years, minus the odd repair or piece of maintenance.

• CONSIDER INCOME INEQUALITY

Did you know the average income of the middle class is almost three times that of the lowest income groups? There is an obvious income inequality occurring in Australia and it’s only getting wider.

As a property investor, you want to do two things:

One, follow the middle and upper end of the real estate markets because that’s where the wealthier people earning more are likely to pay for housing. The difference between a suburb that gets 7% capital growth and one that gets 3% means you have the chance to reach your financial goal at a much faster rate.

Two, be wary of the half-awake-from-being-broke tenant. These aren’t the ones who are able to confidently say the weekly rent will be paid on time.

• REMEMBER THE FOUR X GROWTH PLAN

My golden strategy for investing is what I call the 4 X Growth Plan – if you missed my previous blog on this you can read it here.

Essentially you need to understand that in real estate, growth comes in four different ways. You can manufacture it from value investing by getting yourself a good deal.

You can also choose a really great location, prime for gentrification, and allow the influence of wealthy people to add to your growth.

Thirdly, you can get growth from the market, particularly if you’ve invested in cities. Additionally, if you have diversified your portfolio across separate marketplaces as I mentioned earlier, you’ll likely see growth across the board throughout a cycle.

Lastly, you’ll see the effects of behavioural growth add value. This could be real estate that has a good view, or a new train line put in close by, or a really good lifestyle precinct in walking distance.

IS THE INVESTOR JOURNEY RIGHT FOR YOU?

Property investing is certainly not made for the fella looking to make a quick buck. It’s a lifelong journey to become financially free.

There really is so much money out there waiting for you to tap in, all you need is to have the right team behind you and the right mindset. If you’re yet to get started in real estate, I’d suggest coming along to one of Positive Real Estate’s free investing seminars.

Our team of awesome coaches can help you map out where you want to go and the avenues you’ll need to take to get there. Spots always fill up quickly so book now to avoid disappointment.

By Sam Saggers