My first long term plan

In 2001 I was 25 years old. I had been working on the idea of rental property investment could lead to wealth. I wanted to buy more rental properties but had two constraints – my wife wasn’t sure it was a great idea and I wasn’t convinced that I had the formula right.

So I developed what was the first of my long term plans to help our decision making.

Here’s a copy if your interested in seeing it:

Click here for the full version

Some notes about this first plan

I carefully chose a conservative set of assumptions. I went for the lowest average increase in rents and property values over the past 30 years

The plan helped me realize a few key things:

  • It was very possible (and very easy) to end up with multiple millions of dollars in net worth at age 55. It wouldn’t take much of our disposable income to build up a reasonable portfolio. This was the first time I had really understood this.
  • Property investment at minimum levels was probably not going to be enough to retire on – we would need either more than five rental properties or other income streams.
  • I needed to find properties with a gross yield of higher than 8%. If I could get properties that yield 11-15% it would be about right. They would also be cash flow positive from the outset, rather than requiring an annual top up from us.

So how did it go

We put the plan into effect. But of course things didn’t go quite as planned.

Between 2001 and 2004 we built up a portfolio of four rental properties. Landlording is not the easiest way to make money – we learnt many many lessons about choosing good properties, managing cash flow, maintenance, and managing tenants.

We had quite a lot of surplus cash from our income which wasn’t needed for the portfolio – we used that it get rid of the student loan and build up savings outside of real estate.

By 2004 the portfolio was cash flow positive with enough rent coming in to cover the loans and all other expenses. We then decided to put things on automatic pilot and travel. We spent the next three years travelling and earning essentially no money (we spent the all they money we earned while overseas).

We came back in 2007 to some problems in the portfolio. One of the properties had been mismanaged completely and the tenants had done about $80,000 worth of damage. Management of a second property had been problematic and had rent arrears owing of around $10,000 (payment of these arrears are still coming through from the debt collectors now – in 2016!). To cover these costs we initially re-mortgaged and then sold two of the rentals.

In 2008 and 2009 we bought back up to five properties as the market dropped away with the GFC and finally in 2015 we decided to change strategies and sold all but one property. This have us sufficient capital to be financially independent (in terms of covering our basic living costs). I’ll write up more about our current long term plan in another post.

Further reading

This was my first attempt to plan out savings and spending options, in 2001 the internet was only just getting momentum, there was no Facebook, no YouTube and no personal finance online community. These days there is a wealth of information and support available for young property investors and there are a lot other people who have used this strategy much more effectively. To get started I recommend checking out:

  • The Mad Fientist podcast: Adventuring Along – From $0 to Retired in 5 Years
    This is a great interview from the Mad Fientist of Ali and Joe from Adventuring Along who build up a portfolio over 15 or so properties in only 5 years.
  • And here’s the Mr Money Mustache forum on real estate. Essential advice from a wise community. If you are in the US I’d start with the books on the list in the post.
  • Property Investment: A strategy for success by Martin Hawes is an excellent first book to read about how to guide on choosing and managing property. Its an updated version of his earlier book that gave me the idea of what’s possible. The book is focused on New Zealand so if you live somewhere else on planet earth some of the strategies (and all of the tax advice) will be of limited value. However, the advice and approach Hawes teaches is really practical and is useful in all markets.Here’s an Amazon link for the kindle edition, or try your local library.
  • Rich Dad/Poor Dad is Robert Kiyosaki’s classic book about how leveraged investments work (aka how to get rich with other people’s money). This is the book that first gave me the idea I could have control a large number of properties with carefully controlled levels of risk. Its a good and easy read. I wouldn’t bother with the other stuff that Kiyosaki has put out after this. He’s turned the success of this book into a franchise but all his main ideas are in this book. Here’s an Amazon link for the kindle edition, or try your local library.

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