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Setting financial goals for your golden years – Part 3

If you have followed my advice from previous columns you will now have your retirement plan. The important point with this effort is that you now know your goal and what you need to do to achieve it.

Unless your financial plan consists of “winning the lottery” your retirement will be funded through NZ Super plus money you generate through investments. These investments might be in the form of company shares, managed funds, index funds, term deposits, or rental properties.

The investment vehicles you choose make up your “investment portfolio. Conventional wisdom says that it’s best to have a diverse portfolio with a range of investment options in order to spread your risk evenly across a range of asset classes. The downside of this spread is that when one sector is doing well your overall return may well be dragged down by those sectors doing poorly.

The reality is that there is no such animal as a totally risk-free hands-off investment that can earn you a good return. As with most things in life, the greater the return the greater the risk. There is a broad range of risks that impact every investor to some degree, and which need to be considered before determining a suitable portfolio of investments for any particular individual.

Given all the uncertainty around the various investment choices available, may people choose to invest in property. Experience has shown that property is an excellent option for kiwi families looking to fund their retirement. It enables large capital gains without the requirement for a massive injection of wealth. You can usually get started in investment property using the equity you’ve built in your own family home. Property investment can help you accelerate retirement savings, and many people have been able to retire early thanks to their successful property portfolios.

However, it is important to realise that even property is never a ‘no-risk no-work’ investment choice. Successful property investment comes from acting on decisions that fit with your needs, your capabilities, and your strategy. You may choose to invest in property on an arms-length basis, purchasing units in a commercial property syndicate or shares in a listed property company, or alternatively decide to invest directly into the outright ownership of a residential or commercial property.

Many home-owners, comfortable with the known, have considered acquiring one or two residential rental investment properties during their pre-retirement years. To be successful, this requires though before action. Where do you best fit into the property business? Are you best suited to be a landlord, a renovator, a speculator, a builder, or a developer? Each of these roles requires a different set of skills, a different approach to funding, and a different time commitment.

While a landlord buys a property based on the rental return they can expect to extract from that property, the renovator is more interested in the price they can anticipate on resale after the building has been improved. A speculator buys today with the expectation of selling at a higher price within a fairly short period of time. A builder or a developer is most likely to be more interested in the value of the land and its potential, while possibly viewing any existing structure as a liability that may be costly to shift or remove. Thus, by identifying at the outset your own role in the property market, you can easily identify which particular properties from among those on offer suit your particular strategy and not waste time and effort on those that are not going to help you get to where you want to go.

So many people are looking for that one “hot tip” that will make them a millionaire overnight. Unfortunately, that’s just not the way it works. It takes effort and thought.  You wouldn’t jump into a big purchase like buying a car without researching what you wanted and what models are available. So why would you not learn about property investing before you dive in? After all, it’s your own money and your own future you’re playing with. If you do decide that investment property is the way to go, join your local Property Investors Association and take an active part. Attend the meetings, talk to people there. Read investment books and other resources, attend seminars, and learn to sort the wheat from the chaff.

Peter Lewis. 
Peter is an established long-term Auckland residential landlord. He is also active in providing tenancy advice to the North Shore Citizens Advice Bureau and works within various property investment associations. He is not a certified financial planner or an accountant.