S2E5 - How To Build A Portfolio Without Sacrificing Your Lifestyle

Imti: [00:00:00] Today we're talking about go to sleep factor. Not just whether you can invest, but whether you're actually ready to do it in a way that feels safe, sustainable, and right for your life, because that's the conversation that we're having every single day as investing gets more expensive. Because for a lot of first time investors, the issue isn't lack of information, they're actually probably drowning in it. It's that they've heard so many different opinions that they dunno what ready actually feels like. So we wanna break that down in a practical way, in a step-by-step way that you can work your way through. So we're gonna break it down using our five step framework, which is called the Go to Sleep Framework.

And what it will do is it will take you from understanding why you're investing and what you want to achieve. Through to the day-to-day impacts on your life through to having a strategy that you can just go to sleep at night with. Let's jump straight into step one of the GTS framework, which is the vision.

So before you talk about borrowing capacity or suburbs, you [00:01:00] really need to know what you're trying to build. What is it that you're trying to achieve? What's the vision? So Pete, this is a conversation that I know you have all the time. Firstly, how far ahead should someone be thinking when they're looking at doing this?

Pete: Five to 10 years is definitely what I call the sweet spot. Anything longer than that, it becomes really hard for people to visualise, conceptualise, and actually be in that position.

Imti: Mm-hmm.

Pete: But when you're thinking five to 10 years, it is somewhat immediate and it is, something that you can see yourself achieving in the near future.

Imti: Mm-hmm. It's long enough to let property do its thing, but short enough that you can understand the rewards that you might reap from it. Right.

Pete: A hundred percent.

Imti: Being able to quit that job that you hate or drop down to part-time work. Having that flexibility, that is something that can actually be created in a five or 10 year strategy.

Pete: Yeah, definitely.

Imti: And it's something that a lot of our clients are looking to achieve. It's not have millions of dollars, it's have financial flexibility and just do the things that they want to do. When you are [00:02:00] having that conversation, Pete, what do you wanna understand about the life that they're trying to create?

Pete: So I really just ask one simple question, and it's, at the five year mark, if you were to build out this portfolio, whether it's one or two properties, where do you want life to be?

Imti: Mm-hmm.

Pete: What do you want from that? And I can't sit here and tell clients what they want. That's actually a question that's really important that people would need to actually ask themselves. What do you want to be, where do you wanna be in five years time with this portfolio, but also where do you want to be in 10 years time? And that ultimately will answer the question that we're trying to work out in terms of what they're trying to create.

Imti: Mm-hmm. And I think that the big thing.

Here is that a lot of couples we find are actually misaligned, and I don't mean it in a way that they're, you know, horrible couples and shouldn't be together. It's just that they haven't had the conversation in a lot of depth around what does a life look like in five years? What does it look like in 10 years?

And unless you are both on the same page, you can't actually get started. Because it [00:03:00] has downstream implications to buying the property and all that sort of stuff, which we cover in a ton of other episodes. But it's about, if it's a couple investing, both people being on the same page regarding that vision.

Right.

Pete: Yeah, definitely. And just a couple of points where to ki ckstart people thinking about it is like what you said in five years, do you wanna look at going part-time?

Imti: Mm-hmm.

Pete: Or in 10 years, do you wanna look at maybe selling down the investments, buying that dream home, like what is it you actually want to achieve and then just work backwards from there.

But getting on the same page is so important.

Imti: Yeah, a hundred percent. And for a lot of people it's, don't think about it when you are old and decrepit and you have a bung knee and you're 65 years old, make it the short to medium term and then it only gets bigger from there. And you can worry about that later.

Pete: That's it.

Imti: But at least look at that initial frame. So that's the five to 10 year impact, which you wanna really look at in step one. And it's just about getting very, very clear on what your day looks like. Let's bring it back [00:04:00] to the day-to-day, because I know that a lot of people are concerned about how property investment impacts their lifestyle.

So step two of this journey is the short term pains, trade offs, whatever you wanna call them, that you are happy to live with. And step two is about lifestyle impacts. So one, we're talking about lifestyle impacts. Pete, if you're having a conversation and you're sitting at home with your partner, how do you tell the difference between healthy stretching and overcommitting?

Pete: It's a tough one. There's no real formula for that. I actually think it just comes down to feeling. I'm a big believer in trusting your gut, and when you're talking about this with your partner, when you get into the nitty gritty of it, trust your gut. You're both together, you're trying to work it out. You both gotta trust the process, but if it gets to a point where you're thinking, oh, this is probably just overstretching, it's not healthy, your gut's gonna tell you that.

Imti: Mm-hmm. It's very emotions led.

Pete: Yep.

Imti: And there is no right or wrong answer for every single couple.

It's a different answer. So an exercise that may [00:05:00] help with the feeling and help you break this down into behaviors.

Is going through a negotiables, non-negotiables exercise. I know this is something that you do a lot, Pete, with your clients, what does that look like in terms of understanding a couple's negotiables and non-negotiables?

Pete: We do that from the property perspective and the investment strategy. But if we look at the lifestyle side of things, what I would be saying is go your separate ways and just think about those things that you guys will not compromise on.

Imti: Mm-hmm.

Pete: There's absolutely no compromise, no stretch with the budget on that list of items. And then on your negotiable side, that's the stuff that you can compromise on. A couple of examples might be from a negotiables perspective, if you're going out three times a week, maybe you can bring that back to two.

Imti: Mm-hmm.

Pete: If you like to go away for a whole month every year, maybe it comes back to three weeks. We can't sit there and tell people what their negotiables and non-negotiables are because everyone's different, right? If you can go away separately and come up with this list and [00:06:00] then come back collectively and actually talk it through, that's a really powerful move.

Imti: Yeah. The most powerful thing there is doing it separately.

Pete: Yeah.

Imti: So both of you can work through your own individual day-to-day lifestyle impacts that you are happy to either keep, change or you're just like, no, it's never changing. I'm getting coffee seven days a week. And that's fine.

A great point that you made regarding the lifestyle trade-offs is that they don't have to be all or nothing. You don't have to give up going on holidays, full stop.

Maybe the compromise is, oh, we went away for four weeks last year, and now it's three weeks moving forward, and we're happy to do that if it helps us achieve step one, the vision. The biggest misconception I find a lot of people make during this process is that they'll go. I don't wanna sacrifice my lifestyle. And they look at it through a black and white lens, and so they don't invest in property, but those people end up investing in property, but then they go, oh, I wish I did this 12, 18, 24 months ago because it didn't impact my day to day as much as I [00:07:00] thought it would.

Pete: Yeah. And ultimately that comes back to the cash flow side of things as well.

Imti: Mm-hmm.

Pete: If you can work out from a lifestyle point of view, which what you're willing to compromise and not compromise on, that then flows onto cash flow and you actually realise, well, the impact's actually not that bad.

Imti: Mm-hmm. And I think that's the perfect way for you to lead me into step three, which is cash flow. And this is something that me and my team, we talk about with clients every single day. Being a broker, numbers is part of the gig. A lot of it's actually real world impact and strategy. I'm not gonna talk about loan structures when it comes to cashflow. What I really want to talk about is real world impact and how we help clients understand what the day-to-day impact is on their life. Now, the key thing here is that you need to understand, if you can, roughly how much your holding costs for a property are going to be if you purchase an investment. For most first time property investors, they're using a lower deposit, they're borrowing more money. The property is gonna be cashflow negative from day one, [00:08:00] which is fine. That's actually perfectly normal, and I think we need to normalize that. Once you understand what that outgoing number looks like, it could be $20,000 a year that you need to top up the home loan by. That scares a lot of people because the immediate thought is, oh, I'm losing this $20,000 every year.

The second step to understanding the cashflow implications is, what's your rate of savings right now? What are you actually saving? For a lot of these couples, they're saving 30, 40 grand a year. They're very good savers. And in that situation, the cost is actually the difference between the two. If you're in a situation where you're saving 40 grand a year and it costs you 20 to hold a property a year, and this is parking tax benefits and all that complicated stuff, just at a crude level, right. You could realistically hold an investment property and still save 20 grand a year.

So you've got a asset that's building for the long term, but you're protecting [00:09:00] your cash flow in the short term. And it's understanding those two numbers that help people really get their head around the cashflow impacts. Because a lot of the time people are surprised that when they boil it down to fortnightly pay cycle, it's $200 a fortnight and they're saving $400 a fortnight. Oh, my lifestyle doesn't actually change that much. And I can invest.

Pete: Yeah,

Imti: It's like this light bulb moment, but until you drill it down to that level, you don't really understand it because everyone's trained to think that negative cashflow properties are bad and that you should chase positively geared stuff, and that you don't want to be bridging a gap between the investment and the rent that's coming in.

But the realities are that's what it looks like right now, if you want to get a good asset and get into the market early enough that you don't have the market go away from you. And if you need to make a compromise with your cash flow or you need to tweak those dials, because in step two [00:10:00] you've gotten clear on what the day-to-day impacts you're happy to compromise are, you can actually put numbers to that and then you go, okay, well instead of spending five grand on a holiday, we're gonna spend three grand on a holiday.

We're still gonna go on holiday, but we're just gonna drop our budget a bit and we're gonna take that two grand and we're gonna plug it into the cashflow difference. Our day-to-day lifestyle isn't changing that much, but we get to hold an investment property. The other thing that I'd probably add to that is that the way that we do this is actually reviewing clients' bank statements and their spending patterns in real time, not what they hope that they're going to spend moving forward.

Because generally what'll happen is, unfortunately when people are going to apply for a loan, they'll try and drop their expenses that they disclose, thinking that it's a good thing. What it ends up doing is it creates this false picture of what they're actually capable of. So we'll take clients' bank statements and model things off their real life expenses so we can actually articulate to them, [00:11:00] Hey, this is the lifestyle impact on you moving forward without changing a single thing. That tends to help them have that breakthrough moment when it comes to cash flow.

Pete: And I think just to round it all out, steps one to three, you gotta be realistic.

Imti: Mm, a hundred percent. Because if you're too ambitious, the wheels on the bus fall off and property investment is expensive. If you buy and then sell within the first 24 months, despite what Instagram will tell you, you won't make money. You'll lose cash. And so you need to be really clear on one, two, and three. That's the cash flow of it all. Let's talk savings buffer. And that's step four in the process, is understanding your savings.

Pete, put simply, what is the savings buffer that people should have in place at a minimum?

Pete: It ultimately comes down to how they're saving, so if their savings rate is relatively high

Imti: Mm-hmm.

Pete: Then a three month buffer is more than enough. So within that three months, what I normally like to tell clients is if everything goes wrong, so if the tenant stops paying, [00:12:00] if you've got maintenance. That's gonna cover everything.

Imti: Mm-hmm.

Pete: If the savings buffer is not where it needs to be, then you probably want to extend out that savings to probably six months.

So if everything goes wrong, you've got six months of savings that you can draw on to continue to hold the property, because at the end of the day, like you said before, you sell too early, you are not gonna get the outcome you want, and you're probably never going to invest again. The game of property is holding it for as long as you can, and this is what will help you do that.

So three months if your savings is relatively high, and then six months if we're, not struggling to save, but the savings is not where it needs to be.

Imti: Yeah.

Pete: Savings rate that is, sorry.

Imti: Mm-hmm. Yeah. So to boil it down, in terms of applying it to my day-to-day situation, what it would look like is if I'm able to hold the investment property and still have excess savings at the end of the month. Three months is workable, whereas if I'm looking at buying the investment property and I can't build up my savings [00:13:00] as quickly or my savings stall, six months is probably where I want to be before I start. Would that be right?

Pete: Yeah, that's it.

Imti: The common misconception there from a lot of people can be that they need more money in the bank before they start, whereas bringing it back to the cash flow of it all is that two things can be true at once. You can maintain your lifestyle and buy an investment property. A third thing can be true as well. You can maintain your lifestyle, hold an investment property, and still have a good rate of savings to bridge that buffer. It just comes down to your individual circumstance.

Pete: Yeah, you've pretty much nailed it. You really don't need to live paycheck to paycheck to own an investment property.

Imti: No.

Pete: That leads us to the next point.

Imti: Yeah, of course. So I agree. The paycheck to paycheck thing, it's if you have cashflow, you've got day-to-day comfort. If you've got savings buffer, you know that if something goes wrong and it's a medium level issue, you're okay. The fifth step is insurance. So the way that I break this down for a lot of people [00:14:00] is puddles, ponds, oceans.

If you've got a puddle, it's a small little amount of water. If it's a puddle issue, it's something that you can deal with in your cashflow, day to day. An example of a puddle issue might be that a door handle needs replacing at the property. Generally most people can just jump into their cash flow and sort that out.

Then you've got pond level issues, which it could be a situation where an oven needs replacing, for example. That might be 1500 bucks, once it's all said and done. Cool, we dive into our savings buffer and we deal with a pond level problem. Where insurance comes in is for the ocean level problem, and what I mean by that is tree falls on your property, tenant decides to light it on fire, one of you is outta work for an extended period of time because of a workplace injury. The big life events that are super expensive that people think that they need to have a savings buffer for, and that's what slows them [00:15:00] down, are actually managed with adequate insurances instead. And then over time, as your savings get bigger and bigger, your insurances can taper off a little bit. That's how you can manage all levels of issues that can go wrong and be able to go to sleep at night. And when it comes down to insurance, a lot of people would wanna know, what types of insurances should be in place. So Pete, when you are looking at a property, what, what insurance types are you looking at?

Pete: Yes. So building insurance is number one.

Imti: Mm-hmm.

Pete: You just gotta make sure you've got that. And really at the end of the day, you can't get the loan without the building insurance.

Imti: Mm-hmm.

Pete: So most people will have that. Contents insurance is another one.

Imti: Mm-hmm.

Pete: But the one that, it surprises me that people ask me if they need it, but I'll say, get it at the same time because there's an extra cost is landlord insurance.

Imti: Okay.

Pete: So landlord insurance will pretty much cover you for any damage that the tenant does, but also if they for some reason stop paying. You've got the insurance there, which you can draw on to continue getting the rent that they're supposed to be paying. So in my eyes, [00:16:00] it's a non-negotiable, you actually don't need landlord insurance to get the loan, but it's definitely something that you need.

Yes, it's extra money, but again, it ties in with the go to sleep factor.

Imti: A hundred percent. And vacancy is definitely one of those things that a lot of people assume that they need to have the cash in the bank to solve for. It is actually something that can be managed by insurance.

Pete: Yep.

Imti: The key ones that I walk people through, when we're taking out the loan, is income protection and life insurance. They're the other two that everyone, when we're young, we think we're invincible, we worry about it later, not something for us to worry about later. Because we're taking on a lot of debt to invest in a property.

Again, bringing it back to puddle, pond, ocean. If you've got an ocean level problem where one of you is outta work because of an injury or one of you passes away, you don't wanna make sure that everything that you worked for falls apart and you need to sell in distress 'cause you can't afford it anymore.

And I think it's the most slept on insurance and a lot of [00:17:00] people don't understand. They haven't even been told, it's not even a don't understand thing that you can work with people to have it structured within your super and paid out of your super. And those super policies that they have at the moment actually aren't good enough for the amount of debt that they're taking on during an investment property journey. It may only cover them for $250,000, but they're taking out a million dollars worth of debt. The assumption that I come across with a lot of people is that, oh yeah, I've got insurance in my super. I'll be sweet. Can be right some of the time, a lot of the time can be leveled up and taken care of.

But I think that really rounds out how to ensure that if you do have an ocean level problem, you have the insurances in place to deal with it.

Pete: Yeah. But being honest as well with insurance companies, don't lie to them, because they'll look for any reason not to pay out. And one quick thing before we wrap up is on your building insurance, make sure you are not being cheap when it comes to the cost to rebuild the property.

Building costs have gone up quite significantly over the [00:18:00] last couple of years. So just making sure that you are setting the right value there because again, knowing that you've got the right value, if the property was to burn down, at least you know that, at the end of the day, you can make your claim through insurance and you're going to get enough money to rebuild the property exactly how it was. So yeah, big mistake I see people make, is trying to be cheap on the building value. So just making sure, I guess you're getting that right from the start, and reassessing it every single year too.

Imti: A hundred percent. That flows through to insurance in general. Don't try and save a hundred dollars a year for a $200,000 difference in your claim.

Pete: Yeah, a hundred percent.

Imti: So to bring us home, the question was at the start of this episode. How do I know that I'm ready to invest in property safely and can go to sleep at night? And walking through the GTS framework, the five steps are just get clear on the long-term vision, the five to 10 year plan, the day-to-day, lifestyle impacts, your cashflow, your savings, and making sure that you've got enough in the bank.

[00:19:00] And then step five being the insurances of it all. Because the insurances of it all will also help you realise that your savings buffer may not need to be as high as you need it to be. If you follow this framework step by step, you'll be in a position where you can confidently make a go no go decision around starting your investment property journey.

And I'll wrap us up there, Pete, as always, enjoyed running this through with you, and if you're first time listener, welcome aboard. If you're a return, we'll hopefully see you next episode.