Is it too late to invest if you haven’t started before hitting the big four-zero?
Not by a long stretch.
Here’s how to go about it.
When some people hit 40 they have a mid-life crisis, buy a sports car, or have an affair.
But for others, the milestone might prompt them to make more of an effort in securing their financial future.
Beyond 40, those who neglected to spend much time setting or achieving investment goals in their 20s and 30s might see their preferred retirement age rolling ever closer and decide they need to invest sooner rather than later.
API has consulted a trio of property advisers to create a step-by-step guide for anyone over 40 looking to get started in property investment.
The concepts outlined in the guide generally follow from the assumption that the would-be property investor owns their own home, and therefore has some level of equity available to help them get started in investment.
STEP 1: GET THE RIGHT MINDSET
“There are many stories of people who conquered all sorts of adversity or started investing later in life and ended up achieving financial freedom.” Yardney notes.
“There are lots of example in the business world – like Ray Kroc who was over 50 before he started McDonald’s – and I’ve seen lots of examples of people in the property world as well, so it’s not too late.”
Destiny founder and property author Margaret Lomas agrees.
“If you bear in mind that you most likely need at least 10 years to get a good outcome, and 15 is fantastic, then after 40 it becomes all about how much time you have and how hard you’re prepared to hit it.”
ProSolution Private Clients director Stuart Wemyss says the key question to ask is: “What’s worse – starting a little later or not starting at all?”
Yardney agrees it’s important for people who might be wondering whether it’s too late to ponder the alternative to getting started.
“Most people won’t be able to retire on their superannuation, especially people over 40 because superannuation wasn’t around when they were young,” he says.
He believes would-be investors over 40 will most likely need to break out of their entrenched money habits if they’re going to get active in property investment.
“People shouldn’t feel bad about not starting to invest before 40 because they’re probably following the ‘old rules of money’, such as avoiding debt and providing for themselves by getting a job and working hard.”
STEP 2: ESTABLISH YOUR ATTITUDE TO RISK
Different investors have different appetites for risk and, according to Lomas, those risk profiles should be a major factor in deciding on an investment strategy.
Lomas says the investor’s risk profile will determine:
- The loan-to-value ratio (LVR) they’re prepared to use to invest;
- The amount of debt they’re comfortable with; and
- The type of property they’re prepared to buy.
She says investors over 40 should be more inclined towards a lower-risk strategy, as “they can’t really start again” if they’re financially crippled. “This means lower LVRs, lower borrowing and buying standard residential rather than riskier niche market properties,” she explains.
STEP 3: SET YOUR GOALS
When do you want to retire?
How much money do you think you’ll need to live off?
These might be questions you’ve put off or ignored up until now, but before buying investment property it’s time to confront them.
“It’s all about goals,” Wemyss says.
“They need to determine how much money they’ll need in retirement and when retirement actually is. We’re finding that many people will want to reduce working hours rather than ceasing working altogether.
“This can help retirement strategies as we don’t have to replace the client’s entire income – just supplement if for a while.
Investors need to think non-financially first.
That is, what lifestyle they want, holidays, how much they want to work and so on.
Then they can translate that into dollars.”
STEP 4: SELECT YOUR PROPERTY STRATEGY
Once you know where you want to be in perhaps 10 or 15 years’ time, you need to map out a course to get you there.
Michael Yardney says the first step is to get educated.
It’s vital for investors to become educated to ensure they don’t rely on the advice of those trying to sell them property.
The next step, Yardney maintains, is for the investor to surround themselves with a good team.
“Don’t try to do it on your own,” he suggests.
“Get a good accountant, a good property solicitor, a good finance broker, a good property strategist. If you’re the smartest person on your team, you’re in trouble.”
Many would-be investors aged over 40 would unknowingly be in a strong financial position to quickly kickstart their investment portfolio, Yardney says.
“A lot of people over 40 have actually followed these old rules of money, bought a house, paid it off and so therefore they’re in a very good position to buy a couple of properties,” he notes.
Other steps to take include checking your borrowing capacity and establishing how much equity you have available to use, Lomas says.
As far as choosing an investment strategy goes, Yardney believes it’s best to keep things simple.
“What I’d be suggesting to people over 40 is to start to build an asset base that once it gets big enough is going to generate ongoing passive income – a self-perpetuating money machine – like a portfolio of well-located residential investment properties.”
Wemyss says simply that investors looking to get started over the age of 40 need to focus on high capital growth if they’re going to meet their retirement goals.
“Even if you think you can get a combination of high income and high growth, late starters can’t take the risk because there’s a good chance they’ll only get one of these…
The combination of leverage and high-growth property can’t be beaten in terms of supercharging a retirement strategy.”
STEP 5: DEVELOP A RETIREMENT STRATEGY
Wemyss says it’s important for late starters in property to consider how they might make the transition to retirement and fund their living expenses before they even start investing.
This is because the ultimate plan may have an impact on the structures used to acquire and hold property.
“If someone has a limited timeframe until retirement then it’s unlikely that a buy-and-hold strategy will work for them because they won’t be able to hold the property long enough to produce a large enough income,” he says.
“They’ll have to do something to essentially convert the capital growth that they’ve generated into income – because you can’t take your capital growth down to the shops to buy groceries. The two obvious things you can do are sell a property or ‘live off equity’. Many people are loath to sell good-quality properties – including me!
However, sometimes a strategy necessitates it because we need the income, and it can make good financial planning sense…
“When you’re close to or in retirement you should adopt a more conservative asset allocation…
The benefit of (this) is that you’re more insulated from fluctuations in the prices of growth assets.
Practically, this is difficult to achieve when investing in property because you may have large amounts of equity tied up in individual properties.
However, having five to seven years of living expenses held in fixed interest and cash investments mitigates a lot of risks.
Practically, this is difficult to achieve when investing in property because you may have large amounts of equity tied up in individual properties. However, having five to seven years of living expenses held in fixed interest and cash investments mitigates a lot of risks.
“Selling a property can often achieve this safe approach.
That said, this more conservative asset allocation would only be adopted once you have a sufficient asset base to meet your loans.”
STEP 6: START IMPLEMENTING YOUR PLAN
This is perhaps the most vital step of all, especially for those who haven’t taken action at an earlier age.
Goals are vital, Lomas says, but they’re worthless without the commitment to take action.
“I have a friend who decided he wanted to get started at age 38. He read as much as possible, drew up a plan of attack and then committed – after one year he now owns 10 properties,” she says.
“At the same time, I have another friend who has been telling me for 10 years she wanted to get started. She’s now 52 and has just bought her first property, but is kicking herself now for all the years she has wasted.”
As you invest, you’ll need to keep track of how you’re travelling along the path you mapped out at the beginning, and adjust your actions accordingly.
STEP 7: CONSIDER YOUR RISK MANAGEMENT
Risk is one of the first factors to consider, but it’s also worth revisiting once you’ve started investing.
“Risk is simply the chance of your investments or strategy under-performing in terms of capital growth and/or income not meeting expectations and therefore not being able to meet retirement,” Wemyss says.
“When you don’t have much time, you can’t afford to make mistakes…
As such, investors need to sit down and identify all the things that can go wrong with their strategy and think about ways that they can reduce their risk.
For example, if they’re tight in cash flow then fixing some of their mortgages’ interest rates would be one way to mitigate the risk of rising interest rates. Engaging the services of a buyers advocate to select a high-growth property is a way of mitigating the risk of selecting the wrong investment property.”
Wemyss adds that in planning for retirement, investors need to factor in the possibility of ill health.
STEP 8: KEEP GOING
Some might find it hard to maintain motivation and keep rolling on with their investment plans, especially if they suffer some early setbacks.
Lomas suggests it’s a good idea to associate with other people who are doing similar things, as this can be “incredibly motivating and keeps you going during the rough times.”
Michael Yardney says that once an investor has borrowed against the equity in their home and bought an appreciating asset, the next step is to repeat the process, either using more equity from that original property, or over time the equity that builds up in the first investment.
He adds, “Nearer retirement age, slow down so that you’re not buying as many properties and you’re starting to lower your loan-to-value ratio. Your properties go up in value but your loans proportionately become less.
“The intention near retirement age is to start getting cash flow, so you pay off some of your debt. Sometimes you can use some of your superannuation to pay off some of the debt.
“The intention is to have a large portfolio with a loan-to-value ratio of around 50 per cent to 60 per cent, which would make them cash flow neutral or cash flow positive.
It’s still giving a level of leverage, which means their portfolio is going to grow, but also the cash flow they’re going to need to replace their income from exertion.”
WHAT CAN INVESTORS OVER 40 ACHIEVE?
“The real answer is that it depends on how far away from retirement they are,” Wemyss says.
“Really, starting with anything less than 10 years is harder to achieve without taking higher risks. Ten or more years and the results can be very good – again, depending on the individual situation. t also depends on their financial goals too.”
Lomas says the results can certainly be worthwhile.
“If we assumed a 40-year-old has 50 per cent equity in a house worth $400,000 and is prepared to commit to an 80 per cent LVR on that house, they would have $120,000 as a deposit,” she explains.
“This could buy a further $550,000 to $600,000 in property depending on the costs of buying, as long as they could afford to fund any negative cash flow they might have…
“After 10 years at lower growth – as I expect lower growth for a time – that property could be worth around $900,000, and about $1.1 million after 15 years. This makes a net worth at age 55 of $550,000…
“Remember too, as long as the assets are held after retirement, the yields and values should grow each year, so by age 65 the property value should be $1.6 million, with a net value of $1 million and a net income of $50,000.”
No equity, mate
The ideas presented in this article are mostly aimed at would-be property investors who are aged over 40 and have equity in their own home.
But those over 40 who don’t own any property whatsoever shouldn’t feel it’s too late to get started either, according to Stuart Wemyss from ProSolution Private Clients.
He provides the following investment tips for those over 40 and with no equity up their sleeves.
- Make a start as soon as possible.
- Given the lack of existing property, focus on capital growth, which can propel these investors forward financially and create access to future deposits.
- Whether they buy an investment property or a home is not a major factor per se. What they need to do is buy a high-growth property.
- ‘Creating equity’ via a renovation, subdivision or similar would be a good idea, in order to supercharge their net worth and equity.
- Investors getting started over 40 shouldn’t take silly risks because they feel like they need to make up for ‘lost time’. Slow and steady wins the race.
- Invest in quality assets and use cash flow wisely.
Frequently Asked Questions
Shouldn’t I pay off the debt on my own home completely before investing?
Michael Yardney responds: “A lot of people thin paying off their home gives them security, so a lot of people over 40 have actually got equity in their home, and they think they have to pay (all the debt) off before they do anything else. That’s again one of the old rules of money and it doesn’t make sense. Waiting until you’ve paid off your house means you’ve got a lot of idle equity sitting under your roof doing nothing – equity you could use to borrow against to make more money.”
I’d like to buy a holiday house as an investment. Is this a good idea?
Michael Yardney responds: “Investors shouldn’t buy on emotions. I’ve actually found that older people often buy properties near where they want to retire or near where they want to holiday. Holiday homes are a luxury, they’re about lifestyle; that’s okay but don’t pretend it’s an investment.”
How do I know what sort of property to buy?
Michael Yardney responds: “It’s buying high-growth properties in capital cities with a level of scarcity that are going to be in continuous strong demand by owner-occupiers… and in particular look for properties where you can add some value with renovation or development so they can manufacture some capital growth and outperform the market.”
Stuart Wemyss responds: “Simply put, high capital growth. Late starters need the benefit of compounding capital growth if they have any chance of meeting their goals. High income, low growth investments ain’t going to cut it.”
Editors note:We are republishing this article to help out our newer readers. It was written by Matthew Liddy and was originally published in Australian Property Investor Magazine and has been republished with their permission
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