Net Income is Absolutely Terrible
The problem that we have in this country is that we’ve seen absolutely hysterical runaway capital growth and insane growth over a 20 year period, and rental increases just have not kept up.
There was a point in time when I bought my very first house, and I wasn’t particularly calculated or switched on about property (in fact, far from it) but I did the math and went, “If I rent this house, it will cost me this amount of money. If I buy it, it will cost me this amount of money.” It was pretty much on par – in fact, ownership was actually going to cost me less in terms of ongoing repayments and things like that.
But that certainly hasn’t been the case for some time now. The issue that a lot of young people face right now is this very daunting idea that even saving their deposit for the very first properties is super tricky.
So they remain renters, and the upshot of it is that there just hasn’t been the sort of wages growth that would allow rents to rise in tandem with the house prices that have occurred in recent times.
So, bottom line: net income is absolutely terrible. And many people still subscribe to the idea that they’re happy to tolerate negative cash flow in order to accumulate a property portfolio, which they hope will rise in value over the time and give them a high net worth.
So this episode is for you if you feel you’ve done everything right by the property playbook, you have a multi-million dollar property portfolio – but you still feel a really huge gap between where you thought you’d be, where you want to be, and where you actually are. This episode is dedicated to helping you fully grasp what I think your three main options are.
I talk to people all the time who are in this position. They’re experiencing intense frustration because they’ve done all the right things and they cannot fathom why they are trapped, working, because they simply just can’t manoeuvre the portfolio of properties that they have to generate the sort of income that they need, let alone want.
Client Case Study #1
A client of mine was running a super successful business that had a profit of about $1,000,000 a year; not a huge property portfolio, but a few very large blue chip properties. They had done as much as they could to improve those properties and optimise them so that they were renting for as much money as possible.
The pain that this guy and his wife were in is that the business they ran was incredibly time intensive. They were in a situation where they wanted to give their family a different kind of lifestyle from a vocation or a career perspective. They wanted to almost do a 180 degree pivot, but with the pressures of having a family and all the costs associated with that, they just felt they physically couldn’t do it.
The thing is, it wasn’t their fault at all. They had done all the right things. And it’s really common that the typical property investor journey is exactly like that.
You end up in a situation where you document your balance sheet and go, “Wow, that looks really sexy and it looks really good.” But you simply can’t hang up your gloves and say, “I’m done,” because there’s just virtually no income coming from elsewhere.
So the problem is that people are taught to focus on capital growth and not income.
Don’t Get Trapped in the Traditional Retirement Model
I want to open you up to some out of the box thinking and bring you some comfort in knowing that there are other ways of skinning the cat.
You don’t have to be trapped in the traditional retirement model, which says that you can’t get off the train until you’re 65 or 70. It is possible to tweak what you’re doing with minimal impact and very low risk and get yourself to a position of being financially free very, very quickly.
So the truth of the matter is, you don’t actually need a huge property portfolio to achieve financial freedom. It’s definitely an advantage, but if you’re someone who either wants to build a pipeline of passive income or you just like the idea of it, maybe you don’t even need it, you just like the idea of having a bit of an insurance policy, as far as I can see, there are three options that you have.
Selling Down Your Investment Capital
Number one is probably the strategy that I hear from about 50% of people when I talk to them about their wealth situation.
They’ve mentally made the calculation for how many years they believe they will be alive in retirement phase and not running a business, and they’ve multiplied that by the amount of money that they think they need per annum, and added a little bit of a cushion in some cases.
And that is the amount of working investment capital that they believe they need. Their plan is just to sell that down over 15, 25 or whatever that number of years is.
The challenge with that model, though, is that we don’t actually know how long we’re going to live. The evolution of healthcare is becoming stronger over time. They’re starting to grow organs and all sorts of things.
The truth of the matter is, people are living into retirement for significantly longer than they originally planned, and so the idea of building a nest egg that you then live off and eat the cow is actually starting to become a flawed plan.
The other thing that I find wrong with that planning scenario is that it doesn’t really account for unexpected bumps along the way. If you’re someone who has an interest in supporting members of your family or community, or there are things you want to do to have an impact in your years after business ownership: budgeting your nest egg for perceived years in retirement just doesn’t give you a whole lot of room for error.
So your first option is, you sell down to fund your lifestyle and everything else that you want to pursue. I can understand where it comes from and I can understand the logic, but I see that strategy failing more often than not.
Keep Working in Some Capacity to Bridge the Gap
The second option is that you keep working in some capacity to bridge the gap. So this is also a very common scenario.
I’ve got two clients who are approaching, within a space of 12 to 18 months, the time when they want to exit their businesses. Both of them for various reasons don’t believe they have a saleable business. One guy in particular feels that a business sale is fraught with complexity that he doesn’t want to focus on.
And so, before working with me, there was an idea, “We’ve got this really paltry income coming off our retirement funds, or retirement capital that isn’t quite enough for us to live the life we want, but if we work part time to some capacity – whether it’s helping other businesses, or continuing to do a little bit of consulting on the side, or running a business part time – then that should bridge that gap between where we are and where we need to be.”
If you really love the work you do as these guys do, that is a perfectly viable strategy. But in quieter moments I’ve asked these two guys if that is really what they want to do.
Do they really want to be in the situation where they have no choice but to work, whether it’s part time or otherwise, knowing that year on year they’ve constantly got to be bridging that gap? Or would they prefer it if that baseline living expenditure was taken care of and the choice to work part time or not work or travel was optional?
And these guys both admitted that this would be their preferred way of living.
So that second strategy, which is to keep working in some capacity to bridge the gap, is better than the alternative, which is being forced to stay in your business regardless of whether you like it or not.
But it’s not ideal. It’s not people’s preferred outcome for retirement, for lack of a better word, but when they exit their businesses, it’s almost like that freedom to choose how you spend your time should be without strings attached.
The hybrid model – which is work a little bit, earn a little bit, have some investments that give some income but just kind of manage the gap – is not really ideal.
Considering Alternative Investments
The third and final option is about understanding how to take a very small piece of your hard earned working investment capital and put it into investments which deliver strong, predictable passive income.
You don’t have to turn up to manage the deal, and you’re working with people you know, like and trust, and you feel it’s adequately protected through being backed by real property and that will effectively, in one hit, immediately bridge that gap between where you are and where you want to be.
Unless you’re someone who is a control oriented investor, meaning you like to be very active and manage every asset that you own from the ground up and aren’t interested in a passive income and a passive investing strategy, then there’s no question that that third option is the most attractive.
What I want to do today is have you understand that there are three broad options that you have if you have a multi-million dollar property portfolio and you feel stuck. You don’t have to be stuck. What I’m trying to really encourage people to do through this podcast is embrace a different worldview.
If you’ve done the hard yards and you have a good capital base behind you, a good business that develops great dividends and you want to pivot, you want to not so much take on massive risk, but tweak the property portfolio that you have so that you’re effectively creating the income stream that you need to live the life that you want, you must consider the pathway of alternative investments.
It’s not about taking wild and crazy risks, it’s about working out what the minimum amount of money is that you need to make work harder for you so that you can reach financial freedom now or within the next 2-5 years – not 30 years down the track.
I definitely think it’s a different perspective for a lot of people, which is, how about instead of eroding my capital base, I just make it work and create income in annuity for forever.
If we can impart that sort of wisdom to our children, that the goal isn’t to save our way or grow our way to a net worth that is meaningful, but more using leverage and creating a property portfolio to fast track our pathway to financial freedom, I think we will really set them up for a completely different financial future and maybe a different relationship with money than than what we’ve had.
I have great empathy for people who have had a bumpy road. I talk to people every day who are in a lot of financial pain, but who from all standards of society would be perceived as rich.
My hats are off to those people who have financial freedom, that ability to stake a line in the sand and just say this is what I need, this is what I want, and I’m prepared to do what it takes to change my relationship with money.
Final Thoughts
I hope this has been useful. My parting message is, a multi-million dollar portfolio is such a gift.
If you’ve been smart enough to do the right things with your money and you’re in that situation but you just want to understand more about how to make that pivot, please just reach out.
I’m more than happy to chat to you about what I do and whether alternative investments are potentially a fit for you. I don’t sell anything apart from myself.
If you’re a business owner feeling frustrated that despite doing everything right in the property investing playbook and you’re no closer to financial freedom, then head over to www.inkosiwealth.com to learn more about how you can use alternative investments to catapult your investing income and blend strategies to shave decades off your timeline to financial freedom.
If you’re interested in understanding how to create wealth through alternative strategies, please check out my programs, where I help you catapult your investment income and blend strategies to shave decades off your timeline to financial freedom.
Or, you’re welcome to get in touch today, book a call with me, and I would be happy to talk you through it – no obligation!
