The Blue Roof

Under the Free Stuff tab I have added another free e-book – Investments and Investing. I am still figuring out the download process from a software point of view. So please bear with me. Nothing funny will happen, except that you will see a few screens with non-applicable info. Ignore part of it until you can download the e-book – and enjoy it.

 Back to Financial Planning for Financial Freedom.

 What is the biggest risk(s) when buying property? Cash Flow. You must be able to afford your property under all circumstances. I will repeat this: When investing in property, cash flow is your biggest risk so you have to ensure that you can afford the property under ALL circumstances.

 I assume that you have done your home work properly and bought the right type of property (that will be my next e-book).

 What is left, is to ensure you can afford to pay the costs if the property is vacant for a month. Or if there are repairs and maintenance that has to be done. It is also a good idea to ensure that you can still afford the property should the interest rate go up.

 The other problem (I don’t know if it is a world wide problem) is that the government (politicians, they ruin the world) have almost legalised squatting. It is a very expensive and time consuming process to evict a non-paying tenant. If you live in South Africa, you can now take out very cheap insurance to protect yourself against non-paying tenants. I suggest you do it. Then the risk is almost nothing!

 Yes, I agree, the fact that you gear the property makes it, at least emotionally, different from other investments where you can default at will, because you only lose your own money and stay poor. But it is exactly because of the gearing that it is such a powerful investment! And with returns in excess of 25% per annum, you cannot afford NOT to think about what I am saying.

 And if you have questions – comment! Or email me pietm3(at)yahoo.com

Now we get to the best part – we are going to build real wealth and real financial freedom!

 What we have done up till now, is fairly traditional financial planning. At this point traditional financial planing would ask: when would you LIKE to retire? They would assume that your income would grow at about the inflation rate until you retire and that you will retire on 70% of your last income. They would assume an investment return rate until you retire, assume that you are normal and will not live longer than the average person. They would assume an investment return rate after you retire and an inflation rate for the last golden years.

 Then they will calculate the amount of cash you will need on the day that you retire (based on assumptions for your golden years) and based on this calculation and the assumptions for the years before you retire, they will tell you how much you have to save every month to have enough capital to afford the 70% of your income in the golden years. To me that is way too risky. What if I live longer (I hope to). What if inflation is higher or investment returns lower? What if there is a market crash the year I plan to retire? Nope, this is not for me.

 So let’s do it this way.

 What is your gross income from your job right now? Replace it with investment income as quickly as possible. Let’s assume a gross income of R12 000 from your job. Then you need 4 properties with a rental income of R3 000 per month! Or 3 with R4 000 rental.

 And this is where many people become their own worst enemy! “I cannot afford 4 properties!” “The bank will never lend me money!” “I don’t want the hassle of tenants.” As long as this is the mindset, you will not have property and financial freedom will be nothing more than a dream!

 Who said you have to buy 3 or 4 or 5 properties at once? Why can you not start with only one? And if you really have a problem with affordability, make a plan! If you really have a problem to get a bond, make a plan!

 If you buy into this, you have a very concrete goal: I am going to buy 4 properties within the next 4 years. Then I am going to repay all the bonds within 11 years. Which means I am financially free within 15 years.

 How does that sound for a goal? And the truth is, it can be done!

 Let me put another common excuse in its grave: “It is for people who earn double what I earn.” Oops! If they earn double they also need double the number of properties! Yes, I will admit that it is easier for people with a higher income to get started, as they normally have more discretionary income. But the truth is that I have seen many people with normal incomes (such as teachers and technicians) who have a much bigger estate than highly qualified and highly paid professionals. In the end it is not your income that determines your wealth, but what you DO with what you earn.

 Tomorrow we will consider risks.