In his recent column in Switzer, John McGrath discusses the number of investment properties you need to have a successful portfolio.
HERE’S WHAT HE HAD TO SAY:
‘How many investment properties do you need?’
This is a question that a lot of investors ask me and unfortunately there’s no definitive answer – it depends on many factors.
The most important thing to figure out is what you want from your investments.
For example, fully funding your retirement with passive income, or simply having some supplemental income; are two common goals.
The problem is, most people stop at one or two properties and that’s definitely not enough for something as big as fully funding your retirement.
Some numbers released by the Australian Taxation Office and RP Data in 2013 provide a snapshot of how we currently invest in real estate.
Just over 70% of investors own just one property and a further 18% own just two.
Then it drops down to 5.5% who own three, 2% who own four, 0.8% who own five and 0.9% who own six or more.
It could be argued that even six won’t be enough to fund your retirement if you want a good lifestyle; and right now only 0.9% of investors are even close to that point.
Here are some tips to help you figure out how many investments you’re going to need to achieve your goals.
1. Get a game plan
The best idea is to work backwards. Say you want to fully fund your retirement with $100,000 in passive income.
Would five properties returning $20,000 per year would work? Actually, no.
You’ll need to pay tax on that income and even if you owned all five debt-free, they’re still going to cost money to maintain.
Strata levies alone on five standard two bedroom apartments in Sydney could easily add up to more than $20,000 per year, so there goes one full lot of rental returns to cover just one maintenance cost.
So do the numbers taking everything into account.
2. Be realistic
One investment property worth $1 million, returning a 5% yield; is going to deliver $50,000 in income.
Three of those probably sounds great for your retirement.
The problem, of course, is the high acquisition cost of such assets.
There aren’t many ordinary investors around who can afford a $1 million investment property.
The more realistic scenario is acquiring multiple, more affordable properties – so you’ll need a significant number of them to achieve your goals.
3. You need capital growth to achieve income
When people talk about property income, they immediately think about yield.
But if you’re aiming to fund your retirement, it’s critical that your properties achieve solid capital growth – for two primary reasons.
- Capital growth will enable you to buy more properties – the equity from investment one, accrued over a bit of time, will help you fund the deposit for investment two, and so on.
- When you’re ready to retire, odds are you will not have paid off the debt on a multi-property portfolio.
A common strategy is selling half your portfolio to pay off the remaining assets; and you live off the income from those that are left.
4. Safety in diversity
As with most investments, diversity provides safety.
Go for a mix of property types (apartments and houses) and a mix of higher growth/lower yielders and lower growth/higher yielders.
5. Get going ASAP
Real estate is a long term investment strategy only.
The longer you hold your investments, the more capital growth you will achieve.
You also need a fair bit of time if you’re aiming to build a large portfolio – putting together the money for each purchase might take a year or two (if you’re lucky!) on each acquisition, whether it’s funded from savings or equity.
If you need 10 properties to achieve your $100,000 passive income; and you buy every two years, we’re talking 20 years minimum to get your portfolio together.
6. Get comfortable with good debt
[sam id=54 codes=’true’] You’ve heard of the term ‘good debt’?
Remind yourself of this if you’re nervous about taking on high debt – which is inevitable on a large portfolio.
Property is a very safe, reliable way of accumulating wealth and you need debt to do it.
Don’t push yourself too hard financially, make sure you have a buffer for rate rises and so on over the very long term Accept it, make smart choices when buying, and stick to a budget.
Finally, talk to your financial advisor and accountant before embarking on any investment strategy.
There is a lot to consider, including tax matters, ownership structure and debt management to name only a few, so get some advice from people you trust.