In the early stages of investing, you’ll potentially feel like you’ve loaded yourself up with a lot of debt and assets to manage, and that your loan to value ratio (LVR) will be at its highest.

This is when some investors start to get cold feet, feeling like it’s just too much to manage. But this is a long-term play.

Most investors in Australia don’t move past their first investment property. Data released by the Australian Taxation Office (ATO) in 2021 highlighted that 71.48 per cent of property investors own one property, but when assessing investors who have two properties, it drops significantly to 18.86 per cent.

Typically, I see three things that hold up investing beyond the first property: a lack of equity in the first investment property; a lack of serviceability to move on to the next property; but also a limited mindset to grow their portfolio, as they may have experienced a short-term setback (e.g. rental vacancy).

Keep this in mind as you create your long-term wealth plan.

The 3 phases of investing

There are three phases to your property investing: the acquisition phase, the growth phase, and the exit phase. Let’s take a closer look at each phase.

1. The acquisition phase

This is the period in which you purchase the properties in your portfolio.

The timeframe in which you purchase these could ebb and flow, depending on your situation and how your purchases build on one another. This is where your focus is on building the properties within your portfolio. It might be nine years; it might be 12 years, give or take.

The acquisitions phase of investing might feel like nothing is improving or growing. This is where your risk profile will really come into play. I often hear investors getting cold feet as their debt increases, and they’re unsure if they should just back off and walk away. My advice is: don’t. Stay active.

If you buy well, you’ll see the results in time. What property can do growth-wise in 20 years is astounding. Be prepared to be patient, and allow your properties the time and space to grow in value. Go in with a strategy, stay on top of the investments and you won’t drown in them.

Each portfolio is unique. For example, you may decide to sell a property during the acquisition phase simply to transfer out of a speculative investment or to increase serviceability for lending – or even increase cash flow for your lifestyle.

2. The growth phase

This is where you focus on maintaining the quality of your investments and allow them to grow. This is about time in the market. Let the value of your investments grow or add value to assist in their growth.

During this phase, do not disengage from the investing process – maintain a healthy level of management by meeting with your property managers.

Develop a culture of having what I like to call an ‘annual AGM’ to check in on each property: ask about any issues, see how the numbers are looking, check the performance of the markets you’re invested in, and address what needs attention. Focus on maintaining the quality of your investments so they serve you in the long run.

You may be selling the odd property here and there, but generally you are letting your portfolio grow and taking advantage of the leveraging effect of using the bank’s money. For example, you may have exposure to $2 million worth of property now. If you are getting on average 5 per cent market growth per annum, your property portfolio alone is increasing by $100,000 per annum.

As property is quite a robust beast, with buying and selling costs, you are not playing around with it too much, otherwise you are too impacted by transaction costs and capital gains tax when you may be at the peak of your earning potential.

3. The exit phase

This is where you use the properties for the wealth creation purpose you bought them for: to sell and use that wealth created as you’d originally planned!

Perhaps you’re planning to use the money for retirement; then this is the phase to turn that capital growth into cash.

Essentially, you want to develop a long-term exit plan before you’ve even bought your first investment. This phase is where you land your purchase strategy on the other side and maximise the wealth you’ve created.

Do you need to be debt-free at the end of this phase? Short answer: no.

You should have totally paid off your permanent place of residence (PPOR) by this stage, meaning the running costs of your life are much less.

Your investment properties don’t need to be debt-free at the point you retire or switch from active income to passive income. What they do need to be is self-preserving.

By the time you hit retirement (or exit phase), ideally you are cash flow positive with your portfolio, and your tenants’ rent is covering all the running costs, including paying down the principal repayments each month.

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This is an edited extract from Sort Your Property Out and Build Your Future by John Pidgeon. Purchase a copy of the book here.