Ever thought of quitting your job and working on (or living off) your property full time?
If so, you’re not alone.
I frequently see clients or potential clients of Metropole who want this.
In fact only the other day I sat with someone who said:
“I’ve been wanting to get out of the business we’ve been in for the last 12 years and move into property full time.
I keep hearing about people who are doing this and it’s frustrating.
So how can we do this as we are on two good incomes and we want to try replace them with property related income.”
My answer was – it’s not easy…
And I’ll explain why in a moment.
A related request I often hear from beginning investors is:
“I’d like to buy and investment property or two so I can use the income to pay for the kids school fees and maybe have some left over for holidays etc.”
My reply to both these types of questions usually leads to disappointment.
I say: “That’s not how property works!”
You just can’t live off the positive cash flow of your properties.
I know some people suggest you can, but I’ve consulted with hundreds of property investors each year and have spoken with thousands over the years who use our property management services and it’s been years since I’ve come across anyone who amassed a sufficiently large enough portfolio to “live” off the cash flow of their properties.
I’ve worked with many investors who’ve lived off the equity of their property portfolios, because they’ve bought high growth properties and built a substantial asset base.
There are 3 stages to successful property investing:
- The Asset Growth Stage – this usually takes 10 – 15 years or more – at least 2 good property cycles.
Our strategy at Metropole, one that has stood the test of time, is to acquire high growth properties to build a substantial asset base using leverage and time to compound your returns, and then slowly transition into…
- The Cash Flow Stage – by slowly lowering your loan to value ratios. Then once you’ve lowered your LVR you can enjoy…
- Living off your asset base.
I know many investors would love to live off the cash flow of their properties, but it’s just too hard to grow a portfolio of cash flow positive properties of a 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
• 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; or
• Sell a property or two.
But the first stage of their wealth creation strategy always involves building a substantial asset base.
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 $4million 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 4%, but let’s be generous and say you earn a 4.5% yield across your property portfolio.
This means if you eventually own $1 million worth of properties with no debt, you’ll get $45,000 rent.
But you’ll still have to pay rates and taxes and agents commissions and repairs; leaving you with something like $35,000 a year.
And then you’ll have to pay tax on this income.
When you do the sums you’ll see that you need an unencumbered portfolio worth at least $4million to earn that $100,000 a year after tax.
Remember that’s $4 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.
Does living off equity 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, but it’s definitely do-able.
You have to own the right type of property and 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 loan-to-value ratio.
But if you take advantage of the magic of leverage, compounding and time, it happens.
Of course this strategy depends on the growth in your property portfolio and your ability to ride out the property cycle.
As I said, this takes successful investors 15 years or more and of course most beginning investors never make it.
Finally, don’t believe all you read or hear – very few people “do” property full time.
Most have a full time job while they build their property investment business on the side.
OF COURSE IF YOU WANT TO LIVE OFF THE EQUITY OF YOUR PROPERTY PORTFOLIO YOU’LL NEED TO OWN THE RIGHT TYPE OF PROPERTIES
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 sales people) – 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.
Remember the multi award winning team at Metropole have no properties to sell, so their advice is independent and unbiased.
You may also want to read: How many properties do I need to retire?
Subscribe & don’t miss a single episode of Michael Yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to Michael Yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.