Valuing Your Time As An Investor
Without time, there won’t be any investors, investors are basically people who make money through time by securing good assets.
Then how do we value our time as investors?
If you purchase an investment property, assuming that you borrow 100% (this can be done using the equity from your existing properties such as your home). Let’s use an average $300k investment property as example:
- you will have 10% growth plus 4% yield, so the first year you will gain 14%;
- your costs are 1% expenses plus 7% interest, so the first year you will lose 8%
If you put the two together, you will have a net gain of 6% the first year, which translates to $18,000. Using a 38 hour week, this gives you an hourly rate of $9.
Using that simple calculation, even if you borrow the lot, your hourly rate is at least:
- $45 (annualized to $90k), if you have $1.5M worth of real estate;
- $90 (annualized to $180k), if you have $3M worth of real estate;
- $180 (annualized to 360k), if you have $6M worth of real estate;
You get the idea. This hourly rate gets better every year when you properties grow in value.
So if you have $1.5M worth of real estate, which is roughly 5 properties at the value of $300k, you’re making an extra $90k a year, currently less than 2% of the workforce has more than $90k income a year, that puts you into top 2% of the workforce, and the good thing is that you didn’t have to work for it, and your properties do all the work for you.
Statistics shows that only 3% of the population gets more than $50k a year after their retirement, if you get yourself into the top 2% now, you’ll be doing fine when you retire. That’s why one of our missions at Investors Direct is to help every client to get to 5 properties ($300k each in the current market) as quickly & safely as possible. Obviously people who have got 5 properties rarely stop there, but by then having more properties becomes a choice rather than necessity.
Most of us would know that it’s a huge jump from $45k to $90k in annual salary, many of us may never be able to achieve that unless you step into management role or become some kind of specialist. But it’s a lot easier with investment; you just need to purchase a few more good investment properties.
Another way to look at time as an investor is that if your net gain is $18k a year after you purchase a property, which means every month it’s giving you $1,500. If you are waiting and procrastinating, you’re practically giving away $1,500 per month. Just imagine that you have to give away $1,500 a month to your next door neighbor for no particular reason month in month out, would you be happy to do that?
Then people would ask how would you know that now is a good time to buy? The fact is nobody knows. Most experienced investors will tell you that it’s pointless to try to pick the bottom, as you buy cheap when the market is down, and you pay more when the market is up. That’s why “You buy real estate and wait” is probably the rule most successful investors follow. People who follow “You wait and buy real estate” are the ones that are always late.
In the investment world, there are two types of people: the Critics and the Doers.
- A non-doer is very often a critic, that is, someone who sits back and watches doers, and then waxes philosophically about how the doers are doing. It’s easy to be a critic, but being a doer requires effort, risk and change. Our culture is full of critics, they always know everything, they can tell you when the market is up or down, but they just never bought any properties themselves, and we sometimes even pay to hear them
Psychology also reveals that critics are also procrastinators; they will tell themselves that they will do it later, then they don’t have to admit to themselves that they are not going to do it. And it is easier to accept themselves that way, they might even throw in a few arguments to justify their reasons to make it noble as well.
Many years ago, when I went through tertiary education in finance at business school, I used to be one of those critics that tried to analyze everything and be absolutely sure about everything before I made a move; the result was that I did nothing as I was too clever and too cautious.
The reason I decided not to be a critic any more is that I was so broke being a critic. I figure out to be wealthy, I just need to be the opposite, I would rather to be rich than to be right! And I have not regretted my decision since.
- A real doer has no time for criticizing others, they are too busy doing. They have no time for the noise, they know now is the only time that is really available to us to do anything. You can’t buy properties tomorrow; you can only buy properties today, as tomorrow is only in our imagination.
After all these years, I have come to a very simple conclusion: if you’re not doing it, you don’t really know it. For people who are always thinking but not doing, it’s true that you can’t make a mistake in your head, but you can’t make a dollar in your head either!
So the action here is how to get your property portfolio to the size you desire the quickest and safest possible way.
I’ve seen a couple of strategies people use:
- Some investors will leverage to the highest LVR possible, and have no issues with paying mortgage insurance or sometimes higher interest rate, so that they can preserve their equity for the next purchase. This way they get to a larger property portfolio quicker, as long as they leave enough cash to cover the contingency, they’re traveling just fine;
- Some investors don’t have a lot of equity initially, they find ways to tap into other people’s equity, through second mortgage or equity partnership, this also works well for the ones who know what they’re doing;
- Some of our clients have started helping their children purchasing investment properties using their equity from existing properties. As long as the children also want to do this and get proper advice, the parents can give their kids a head start compared to other people. For more details, see the next article “How Do You Help Your Kids to Start Investing in Properties?”
Some people may worry how they can pay for the interest repayment if they borrow so much, the fact that you may be able to refinance to release more equity next year to use debt to service debt gives you the possibility of using future money to pay for future interest repayment. For more details on how to do this and what to be aware about in doing so, you can come to our educational events as listed under “Upcoming Events” on our website www.investorsdirect.com.au.
Most people would work for a whole year and wouldn’t even get a $5K increase in their pay, and buying an investment property even with 100% finance, you will, on average, gain $18k and more each year after.
It doesn’t matter how busy you are, if you spend that much time working every day for the $5k increase, I am sure you can find a bit of time to think about how you can get at least $18k increase year in and year out, but most of us just aren’t doing that. How can we change that?
It’s very simple, to make anything a priority in your life, you just need to schedule it, once it’s scheduled, it’s real.
A strategy many successful business people and investors use is to schedule a fixed time regularly, e.g. 8pm each Sunday (or the first Sunday of the month) is set aside for the family to discuss their family wealth creation progress.
Nothing is real until you schedule it in, if you have problems sticking to the time yourself, you should probably schedule an appointment with one of our consultants, to make sure that you put aside the time to think about how you may increase your wealth on a regular basis.
Let’s see if you can take action here:
- Pencil in your diary a time for your next family meeting, or
- Pick up the phone to call us on 1300 663 836 or email us at mail@investorsdirect.com.au to schedule an appointment to discuss your option.
This is the only guaranteed way that you will spend some time working on your wealth instead of waiting for it to happen.
By the way, if you agree with what I said and did nothing until you read this line, you’re a bloody procrastinator!:) Go back and do it now!
This article was written by Bill Zheng, founder of Investors DirectTM Financial Group, a leading property finance company that provides finance solutions exclusively for property investors and developers. He has been a keynote speaker for numerous high profile property and finance conferences throughout Australia and overseas.
Copyright © 2005 Investors DirectTM Financial Group.
Bill Zheng
Investors Direct
|
