How to Retire with One Investment Property

How many properties do you need to retire?

That’s one of the more common questions asked by most property investorsProperty Retire

While it may be a popular question, it is also an irrelevant one, as I am about to explain.

Put simply, it is not about the number of assets or quantity, but it is about the size of your asset base and quality.

Could you really live off the returns of just one investment property?

Well of course it depends on what property you own, but it is entirely possible and it doesn’t mean you have to own one Westfield shopping centre.

I am going how this could work owning just one, “A-Grade”, blue chip property using a very simple approach.

Here are my thoughts;

Step 1 : Begin with the End in Mind

Firstly, begin with the end in mind…  one of the 7 habits of highly effective people according to Stephen R. Covey.

Many of the investors I see have never asked themselves what the end game would look like?

And if or when they do, they set the bar very low.

They misunderstand the question and immediately think: “What is the bare minimum I could live off?”

They usually land on somewhere between $50,000 – $80,000; but when I ask the question again, most admit they’d like around $100,000 a year in income.

So, let us use this as a reference point and keep it very simple.

Let’s say you are a beginning investor and want to retire in 20 years and desire $100,000 per annum income from your property portfolio.

Of course, when you do eventually retire you would also want to have paid off the mortgage on your home, otherwise you’d need even more cash coming in.

Step 2 : Choose Your Vehicle

The next step is to choose the investment vehicle that will get you there the fastest and safest way.

I see two choices to make here.

The first one is choosing your asset class e.g. property, shares or business.

My choice is property for two main reasons:

  1. You can leverage your funds and use more of someone else’s money
  2. You can add value to your property, meaning you can accelerate the capital growth and therefore your asset appreciation.

Now we have chosen the asset class, step two is considering the right strategy.

Step Money Invest PurposeIn my mind the only way to live of the profits of only one property is to own a very valuable property – one that has increased in value considerably over the years through its capital appreciation or capital growth.

Investing in a cash flow property rather than a high-growth property could of course give you an extra $5,000 or so a year in cash flow, but after tax, you wouldn’t be left with enough to change your lifestyle.

And of course, without substantial capital growth, your rental growth will stagnate over the years.

Sure, the end game is to live off the cashflow of your property, but in the short-term you will be working and receiving an income which you should use to support your high growth investment property which, in a perfect world, could double in value (and therefore the rental income will double) in around 10 year’s time.

You would only require an average capital growth rate of 7% per annum to achieve this, which is very realistic for a well located capital city property.

And this type of property would deliver a starting rental yield of around 3.5% per annum.

Step 3: Asset Selection

For the sake of this exercise I am going to set your investment budget at around $750,000, which will give you access to a quality, high growth asset in either Sydney, Brisbane or Melbourne.

Our research shows that well located assets in investment grade locations have performed very similar on average over the last four decades and at just over that 7% target.

Also, current rental returns meet the requirements and, in some cases, may be a little bit higher.

To select the right property, you should be:

  • Looking to buy in a location which has strong owner occupier appeal – where the local residents earn above average incomes.
  • Purchase your property below it’s intrinsic value. Of course this means you would avoid high-rise new developments, of the planned properties or house and land packages with the insignificant developers and marketing margin involved.
  • Find a property which exhibits a high Land to Asset ratio.
  • In a location with a long term (20 – 30 years) history of proven capital growth of at least 7%.
  • A property with a twist – looking at special and different. This could include proximity to good public transport, being in a sought after school zone, or a high walkability score
  • A property with potential to add value.

Property Investor

Remember…the location will do 80% of the heavy lifting of your property’s long term performance; the remaining 20% will be from owning an investment garde asset in the right location.

Once you have chosen the suburb or location, to increase your chances of achieving above average growth, you must only buy the best pocket or best streets of the location you have selected.

This most likely means a quiet, tree lined street, away form main roads or train lines and avoiding flooding or any potential zoning or development issues.

So your starting point is you would own one investment grade property, in a high growth location worth $750,000.

Step 4 : Add Value

With the right asset in your portfolio, you should then plan and implement the add value component of your strategy.

Property ValuesIt may not be straight away, but over the short to medium term you should look to add value in some way.

You may look at simple cosmetic renovation or something more substantial like a major renovation or even a development.

With inflation and wages growth being subdued in the coming years, you can’t just rely on the market to do the heavy lifting.

By adding value, you are “manufacturing” growth and increasing your cash flow and then you will receive a compounding result on this.

Along with the additional rent, the tax and depreciation benefits will close the cash flow gap, meaning your holding costs for your investment property are likely to be very low.

Step 5 : Wait

Now it is a waiting game…

You need to have time in the market and multiple property cycles.

Of course most property investors wouldn’t or shouldn’t stop at just one property plus their home, and that’s not what I’m suggesting you should do.

Waiting For SellHowever for the sake of this exercise and to allow me to show you that one great property could help you enjoy your golden years let’s continue on with this example.

The situation is you would own your home and an A Grade investment asset where you have added value, increased cash flow and manufactured equity, so now is the time to pay down your debt.

I would suggest focussing your energies on paying down my home mortgage first, as the interest on your home loan is not a tax deductible.

After the first decade or so, you would expect your well-located property to have doubled in value from $750,000 to around $1.5 million.

By this time with the help of inflation and having boosted your cashflow from adding value, your property would most likely be in a substantially cash flow positive position.

Sure, future growth may be a little less due to our current low inflationary  and low growth economic environment, but that’s where you’ve used renovation or development as an insurance policy.

Whatever you miss out on with inflation or appreciation, you can manufacture yourself.

And then for the second decade it is much thesame, pay down debt and allow your asset to appreciate over another full property cycle.

Step 6 : Cash Machine

At the second your investment property could be worth up to $3million.

As it is not an exact science, lets be conservative and suggest anywhere between $2mil – $3 million.

Now I know those numbers may sound unrealistic, but look back at the price your parents paid for the house they bought many years ago, how expensive it seemed to them then and what that family home is worth today.

MortgageSo back to your scenario… by the end of the second decade of you owning your property, most likely you would have paid off your home mortgage, but perhaps you still some a level of debt on your investment property loan.

You may choose to use some Superannuation to pay this down, you may have savings or shares, or an inheritance, that you could use to clear the debt.

If you did succeed to own your home with no debt and build a $2- $3million asset base over two decades with little to no debt, at even a 4% rental return, you would be looking at $80,000 – $120,000 of additional income per annum.

It would be a substantial source of income to add to your Superannuation, savings and any shares or additional income streams you may have.

In Summary

So back to the original question: “How many properties do you need to own to be able to live a comfortable life in your retirement years?”

The answer is – it does not matter how many properties you own.

It is about owning quality A-grade assets as opposed to the quantity of assets.

By choosing the right vehicle, the right location and the right property and then adding value at some stage, you have set a strong platform.

5 RetirementThen it’s all about having time in the market and correct cash flow management to ensure you can ride the ups and downs of the property and economic cycle, and slowly pay down your debt.

I hope this theoretical exercise proves to you that the fastest way to build your asset base with the least amount of effort and the lowest amount of risk, is to focus on capital growth.

While cashflow is beneficial and keeps you in the game, it will not create the long term wealth you’re looking for.

In fact those properties that offer higher cash flow are usually associated with higher risks, less stability and more volatility.

The extra cash flow is really a form of compensation.

If you’re looking to retire on cash flow positive properties, this would generally require owning significantly more properties, because you will never get the capital growth to build a substantial asset base, as well as taking on more risk and in general your portfolio would require more effort and attention.

So, buy for growth and even just one asset could set you up for a much more comfortable retirement than you initially thought.

Now is the time to take action and set yourself for the opportunities that will present themselves as the market moves on

Metropole

If you’re wondering what will happen to property in 2020–2021 you are not alone.

You can trust the team at Metropole to provide you with direction, guidance and results.

In challenging times like we are currently experiencing you need an advisor who takes a holistic approach to your wealth creation and that’s what you exactly what you get from the multi award winning team at Metropole.

If you’re looking at buying your next home or investment property here’s 4 ways we can help you:

  1. Strategic property advice. – Allow us to build a Strategic Property Plan for you and your family.  Planning is bringing the future into the present so you can do something about it now!  This will give you direction, results and more certainty. Click here to learn more
  2. Buyer’s agency – As Australia’s most trusted buyers’ agents we’ve been involved in over $3Billion worth of transactions creating wealth for our clients and we can do the same for you. Our on the ground teams in Melbourne, Sydney and Brisbane bring you years of experience and perspective – that’s something money just can’t buy. We’ll help you find your next home or an investment grade property.  Click here to learn how we can help you.
  3. Wealth Advisory – We can provide you with strategic tailored financial planning and wealth advice. Click here to learn more about we can help you.
  4. Property Management – Our stress free property management services help you maximise your property returns. Click here to find out why our clients enjoy a vacancy rate considerably below the market average, our tenants stay an average of 3 years and our properties lease 10 days faster than the market average.
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Brett Warren

About

Brett Warren is Director of Metropole Properties Brisbane and uses his 13 plus years property investment experience to advise clients how to grow, protect and pass on their build their wealth through property. Visit: www.brisbanebuyersagent.com.au


'How to Retire with One Investment Property' have 3 comments

    Avatar

    August 2, 2020 John Beattie

    Hi Michael,
    I think my comments speak for themselves. Things have changed a lot in the past 12 years and the concept needs updating. (I think)
    Just being controversial, ha ha.

    Reply

    Avatar

    August 1, 2020 John Beattie

    Hi Brett / Michael,
    Whilst I agree with the overall concept here I cannot agree with the figures in some respects. What you are portraying is like a distant memory now compared with the way finances, inflation, rents and holding costs have performed over the past 12 years. Or around the time of the GFC. Not to be too negative but it sounds oversimplified or like a fairy tale these days. Overall when I look at the rental returns my properties are getting now compared with then they have increased by only 25% and nothing like 120% you allude to, I wish they had. One of the biggest hurdles for anyone is constant cashflow and banking on a scenario where rents continually go up is now a pipe dream. My own have hovered around the same figure with maybe a $30 increase in the past 5-6 years. If it were not for reduced interest rates substituting for rental increases my properties from a cashflow perspective would have been more negatively geared once council rates, insurance, land tax and maintenance costs are taken into account. Capital gain has been the saving grace to this during this time and as you say that may slow down in future years. With interest rates at rock bottom and wages only increasing by 2-2.5% per annum over the past years it is hard to see where increased rental income is going to come from to achieve this extra cashflow. Also paying down a property may be a great idea but when everyone is virtually taking out interest only loans to provide greater cashflow and you have low income growth and reduced capital gain, it will be years before someone can pay down any worthwhile amount from the initial loan amount.
    At present I feel the strategy should be to accumulate a minimum of 2 properties and to eventually sell down one to provide positive cashflow and money as a lump sum to invest in superannuation, shares or such providing a regular income. Refinancing has also become far more difficult than years ago when you had significant wage growth and rental growth to provide serviceability. All up property investment has become significantly harder and the returns take longer to accumulate. Currently the only option I see is for someone with one property to sell it once they retire or forced to retire. Each situation will be different but I feel 2 or more is better if it can be managed.
    Property is still a very worthwhile investment but you have to be quite savvy to comprehend just how patient and diligent you need to be and how to navigate the ups and downs that life throws up at you. I guess you would say that a Team such as Metropole with their experience is even more important these days than it was back then and you would be absolutely correct in that regard.

    Reply

      Michael Yardney

      August 1, 2020 Michael Yardney

      John, I thought Brett’s post was going to be controversial.

      Both Brett and I agree you need much more than one property to retire comfortably. But it was a concept that he was trying to get across

      Reply


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