The Man Who Changed My Mind About Property

“Sell everything,” he said firmly but calmly.

“WHAT!…WHY?” I asked.

“I have cancer.”

I went numb.

Bob started a tiny toy store in the late seventies.

Back then very few people had credit cards except maybe a ‘bank card’, so he became the bank and offered his customers ‘lay-buy’.

His business exploded!

He sold toys, bikes, sports gear, fishing gear, camping gear and anything else that ignited a kids excitement.

By the time he became a client in the late nineties, I reckon there was gold in the walls of his bulging shop.

His model for building wealth was simple…make your money in business, hold your wealth in property.

Hence my confusion when he said, “sell everything.”

I was just a young stockbroker, but it was his decision to sell all his investment properties unencumbered of debt which confounded me.

The rivers of rent flooding his bank account would have been plenty for a comfortable retirement.

So I asked why…

“Properties are like toys, they have a limited life cycle” he said.

Bob knew that as his properties aged, they’d require more work and he didn’t want his wife lumbered with the headaches. Her grief would be enough.

So, he sold the lot and invested the proceeds in a portfolio of managed funds so she never had to worry about money again, presumably.

There’s no denying residential investment property is a great way to grow your wealth during accumulation stage (pre-retirement).

But I’m not convinced it’s the best way to fund your retirement once you’re in retirement stage.

Properties are like people, the more they age the more maintenance they require!

The most successful investors I’ve witnessed have one common trait – they treat their properties as a business first, investments second.

Meaning, just because something has a roof on it doesn’t mean it will be a great investment.

They obsess about its cashflow and at what point the property will start realising diminishing returns because of repairs and maintenance.

It’s about navigating the intersection between rising rents and rising costs.

Simply put, they understand all property investments peak before they start handing some of the profits back.

Everything cycles.

Please note – diminishing returns does not imply no returns or negative returns, although it could.

As a general rule, you need to hold a property for two property cycles to do well. The first cycle to cover your costs and the second cycle for profit.

This also means you need an exit plan (including a tax plan) otherwise you end up with more diminishing returns.

In the words of Kenny Rogers…you gotta know when to hold ‘em and when to fold ‘em.

Bob could have found a good property manager to help his wife but he understood property investing is like a second job. It pays well but it’s demanding.

In your forties and fifties, retirement planning is all about how much money you’ll have.

In your sixties and seventies, it’s about how much time and energy you’ll have.

Bob understood this at the tender age of 58.

Have a great weekend and thanks for reading!

Adam

Back paddock – complexity fails, simplicity scales.