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How many investment properties do you need to retire? - featured image
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How many investment properties do you need to retire?

key takeaways

Key takeaways

It doesn’t really matter how many properties you own.

Having a retirement plan to look after your golden years is non-negotiable.

Have you wondered how many investment properties you would need to get the ultimate goal of financial freedom?

I’ve found that while most property investors hope to one day replace their personal income with cash from their investment properties, most don’t have a strategy to achieve their goals.

So, just how many properties does it take to enable you to quit your day job and live comfortably?

The answer is simple…

It depends.

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OK, that's probably not what you wanted to hear, but in fact, it’s a bad question.

It doesn’t really matter how many properties you own.

What is more important is the value of your asset base and how hard your money works for you.

Because I’d rather own one Westfield shopping centre than 50 secondary properties in regional Australia.

How to invest in real estate for retirement income

While many property investors know they want their properties to replace their income, I’ve found most don’t actually think about how they’ll actually achieve financial freedom.

They don’t have a strategy.

They don’t have a plan.

They just hope it will happen.

Other investors think that they’ll live off their rental income, yet I rarely see this happen.

It’s just too hard to grow a portfolio of cash flow positive properties of sufficient size to replace your income.

On the other hand, the wealthy investors I deal with have built a cash machine by growing a substantial asset base of high growth properties, and then lowering their loan to value ratios (LVR) so they can transition into the next phase, the cash flow phase of their investment life.

They lower their LVR in a variety of ways.

They could:

  • Stop (or slow down) buying properties, so that while the value of their portfolio keeps rising, their loans remain much the same
  • Add value to their properties by manufacturing capital growth through renovations or development
  • Pay off some debt using their superannuation
  • Reduce their debt by paying off principal and interest
  • Sell a property or 2.

But the first stage of their wealth creation strategy always involves building a substantial asset base.

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Can’t I just live off the rent?

Let’s say you want an annual after-tax income of $100,000.

How are you going to achieve that?

How many properties do you need?

If your plan is to eventually pay down your debt and live off the rent, you’ll probably need at least $5 million worth of properties with no mortgage to achieve that $100,000 after-tax income.

Don’t believe me?

The average gross yield for well-located properties in Australia is around 3%, but let’s be generous and say you earn a 4% yield across your property portfolio.

This means if you eventually own $1 million worth of properties with no debt, you’ll get $40,000 rent.

But you’ll still have to pay rates and taxes and agents’ commissions and repairs, leaving you with around $30,000 a year.

And then you’ll have to pay tax on this income.

So, when you do the sums you’ll see that you need an unencumbered portfolio worth at least $5 million to earn the $100,000 a year after tax you want.

Remember that’s $5 million worth of property and no mortgage debt, otherwise, your cash flow will be lower.

And of course, you’ll also need to own your own home with no debt against it.

Let me ask you a question...

Will you ever be able to save $5 million?

Will you ever build a portfolio that size on a few dollars a week of positive cash flow from your rent?

By now it should be clear that the only way to build a substantial asset base is to take advantage of leveraging and compounding the growth of well-located properties.

In my mind the only way to become financially independent through property is to first grow a substantial asset base (by buying high growth properties) and then transition to the next stage – the cash flow stage – by lowering your debt, but not paying it off completely.

Living off investment properties after retirement

Here’s how it works.

Fast forward 10-15 years and imagine you own your own home plus $5 million of well-located investment properties.

If you had a typical 80% LVR, you would be negatively geared.

On the other hand, if you had no debt against your property portfolio you would have positive cash flow but would forego the benefits of leverage.

Somewhere in the middle, maybe with a 45 -50% LVR, your property portfolio would be self-funding.

You may even have a little cash flow left over, but not enough to live on.

If you think about it, it will be much easier to amass a $5 million property portfolio with $2.5 million of debt than the same size portfolio with no debt.

You could then go to the bank and explain you’ve got a self-funding portfolio that isn’t reliant on your income and in fact, there’s a little cash left over for serviceability.

You would then ask for an extra $100,000 loan, so you’re increasing your LVR slightly.

The good news is that you don’t have to pay tax on this money because it’s not income.

But you would have to pay interest, which won’t be tax-deductible if you use the money for your living expenses.

This means after the interest payments you’re left with around $93,000 to live off.

Crunch the numbers

At the end of the year, you’ve “eaten up” your $100,000 but in a good year, your $5 million property portfolio would increase in value by say $500,000.

In an average year, it will have increased in value by $400,000 and in a bad year, it may have only gone up by $150,000 or $200,000.

Of course, your rents will also have increased because your properties have increased in value.

Sure you’ve used up the $100,000 you borrowed, but because your portfolio has risen in value, along with rents, your LVR is less at the end of the year than at the beginning, so you finish off the year richer than you began it.

You truly have a cash machine, and then you can do this over and over again.

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Does this really work?

In the old days living off equity was easy.

You just had to go to the bank and get a low doc loan and as long as your properties increased in value it was smooth sailing.

Sure it’s harder today, much harder.

But it’s definitely doable.

You just have to lower your LVR to show serviceability to the banks.

Needless to say, you can’t achieve this overnight.

It takes time to build a substantial asset base and a comfortable LVR.

But if you take advantage of the magic of leverage, compounding and time, it happens.

Is property really a good investment for retirement?

It sounds like a lot of trouble to build a property portfolio to fund your retirement.

And it is and it takes 20 to 30 years but what’s the alternative?

In the past relying on superannuation and the old-age pension was once the norm when it came to funding your retirement.

But an ageing Aussie population means we now need to be a bit more self-sufficient.

And this means that having a retirement plan to look after your golden years is non-negotiable.

So diversifying your investments, including property, can provide the cash flow you need to sustain your lifestyle.

But it doesn’t come without some drawbacks.

Here’s a list of the pros and cons of investing in property to supplement your retirement.

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The pros

  1. It’s a reliable source of income

Rental income is a great and reliable way to pay off your mortgage.

And once the loan is paid off it's a steady income to fund your retirement lifestyle, supplementing your superannuation every month.

  1. You could win the capital gains game

If you make a smart choice about the property you buy, you can earn a hefty profit through capital gains at a sale.

  1. You can leverage generous tax breaks

Looking at your property as a long-term investment can pay dividends when it comes to retirement.

Negatively-geared properties provide a tax deduction throughout the life of your loan.

If and when it comes time to sell your investment property at a profit, you may also be entitled to claim up to a 50% discount on capital gains tax, if you’ve owned the property for more than 12 months.

  1. You’re in control

The great thing about investing in property for retirement is that you get to choose where and when to buy (and when to sell) and how much rent to charge.

You can even add value to your property through renovations and upgrades to boost your investment further.

The cons

  1. Property markets can be volatile

As we know, navigating the property market can be a rollercoaster ride.

Prices can surge quickly, and also plummet without warning.

This is why it’s so important to buy an investment-grade property in a great suburb, rather than investing in something which is cheap or ‘good value for money at the time.

These types of investments are more resilient to market volatility.

But ultimately, even with the right investment choices, there is always the danger that you can never have complete control over what the markets do.

  1. You have to spend money to make money

Owning an investment property comes with the responsibility of paying ongoing costs -  such as maintenance, extended vacancy periods, insurance and land tax.

  1. You could pay more tax

If you’ve paid off your mortgage, your property may move from a negative or neutral geared investment to a positively geared investment (where you’re receiving more in rental income than what you’re paying out).

That means you’ll have to start paying tax on that income – but that’s really much the same for any income you earn.

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Selling investment properties after retirement

I know some financial planners recommend selling an investment property or two before retirement in order to free up any equity built on the property and convert it into spending cash or more investments etc.

But if you can wait until after retirement to sell your investment property, you could actually see the amount of tax on capital gains and depreciation recapture decrease based on your taxable income.

Assuming your taxable income is zero (you know, because you’ve retired), your capital gains tax could also be much less.

While it’s not that retirees are exempt from capital gains tax, because there is no age bracket for paying the tax, it is dependent on your total income.

Also, it’s worth remembering that assets purchased before 20 September 1985 are exempt, and exemptions apply to certain SMSF asset sales.

Keep in mind, however, that when you sell an investment property after retiring, it can affect your Age Pension entitlements.

But you’re not planning to be on the pension, are you?

And you really shouldn’t be considering selling your cash machine of investment properties either.

The importance of an asset protection plan

Of course, this strategy depends on the growth in your property portfolio and your ability to ride the property cycle.

This means that as you build your asset base, buying high-growth properties and adding value, you will need an asset protection plan to see you through the ups and downs that you’ll experience.

After all, over the next 10 years, we’ll have good times and bad.

There will be periods of high-interest rates and times of lower interest rates.

And we’ll have periods of strong economic growth, but there will also be downturns.

Savvy investors count on the good times but plan for the downturns by having an asset protection plan, as well as a finance and tax strategy to make sure they set up their structures in the most efficient way.

Don’t get me wrong, while I’ve just made gaining financial freedom from property investing sound simple, it’s not easy.

And that’s not a play on words.

The fact is, around 20% of those who get involved in property investment sell up in the first year and close to half sell their property in the first 5 years.

And of those investors who stay in property, about 90% never get past their second property.

So if you want financial freedom from property investment to fund your dreams, you’re going to have to do something different to what most property investors are doing.

You’re going to have to listen to different people to who most Australian property investors listen.

You’re going to need to set yourself some goals and follow a strategy that’s known, proven and trusted.

Then you grow your property investment businesses one property at a time.

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Buying the right type of property is the key.

One that has a level of scarcity, meaning they will be in continuous strong demand by owner-occupiers (to keep pushing up the value) and tenants (to help subsidise your mortgage); in the right location (one that has outperformed the long term averages), at the right time in the property cycle (that would be now in many states) and for the right price.

To become a successful investor you will need to surround yourself with a team of independent and unbiased professional advisors (not salespeople).

A team of people who are known, proven, and trusted, so it is probably appropriate to remind you that in changing times like we are experiencing, no one can help you quite like the independent property investment strategists at Metropole.

About Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media. Visit Metropole.com.au
98 comments

I agree that Perth still has some growth left in it, Luke Howard performed over the last decade. To me it is too volatile a market to be investment grade - it's too dependent on the mining industry

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Is that in Sydney or Melbourne? Have you heard of a City called Perth? I’m achieving yields of 8 AND 12%.! With cap growth.! Better get into the market here as resi is set to outperform Sydney ( again) and due the next 2-3 years.

1 reply

Commercial property is definitely one of the ways to get more cash flow in retirement. However yields of 7 to 8% are not achievable at present, and in a rising interest rate environment the value of commercial property goes down. It's not really the ...Read full version

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