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How Many Investment Properties Do You Need To Retire?

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How Many Investment Properties Do You Need To Retire?

By Fred Rasheed

Most people look into purchasing investment properties to be able to enhance their wealth for retirement so they can continue to live an ordinary life. What do I mean by an ordinary life? Well think about all of the activities you do now and the items you enjoy having in your everyday life. Now, let’s speed through to the age of 65. You’re now retired with plenty of time on your hands but have no pay packet at the end of the week. Can you afford to do all the things you love to right now? And now you have all the time in the world to do whatever you want but do you have the money? If not you need to ask yourself … how much do I really need? If you’re going to use property to enhance your wealth and income then the next question could well be, how many properties do I need?

Many first time property investors have been led to believe that if they invest in property that one day the additional income they receive from rent will replace their current paid job, however they don’t realise what it really takes to achieve that goal. In fact, is it really possible for the average person to replace their income? For the average person, I don’t think it is. Sure you could probably buy a positive geared property in the USA or buy property in a mining town but what if something goes wrong?

I have always believed that the income isn’t that important, it’s the capital growth that will make you wealthy, not the cash flow. Sure the cash flow is important as without it you may not be able to amass ongoing properties however; it is a small part of the bigger picture. Let me give you an example to explain what I mean.

Let’s say after tax your income is $100,000 per annum which is what you want to have in retirement. If you had $3 million worth of properties with no mortgage then you could possibly achieve $100,000 after tax income. Hmmmm not that easy is it? $3,000,000 is a BIG number and the average person will never achieve a portfolio this large. Anyway let’s push on and see how it pans out.

Why so much? The average return on an investment property in Adelaide for example is around 4.5 per cent. This means for each $1million worth of properties you own, and that’s with no debt, you’ll get $45,000 per annum in rent. We still have to pay rates and taxes, repairs, management fees etc leaving you with around $40,000 a year.

Don’t forget the taxman, as they will want something from you as well, so let’s say we now have $33,000 left per year x 3 = $100,000 which means you will need $3,000,000 worth of properties.

Remember that’s $3 million worth of property and no mortgage debt, and with the average price for a property at say $300,000 you will need to have 10 properties.

Do you think that you can build a portfolio of $3,000,000 to achieve the results above? Ok, I’m sure that most of you are saying to yourselves ….probably not. What if I told you there’s a way to jumpstart the process and make it happen? All you need to do is use some leverage that you probably already have and that’s the power of using your family home to purchase your first investment property and then over time using the compounding growth to build your assets further.

There are some more things to consider. Over the years the rent will increase and help with the cash flow and allow you to free up cash and purchase your next property.

One of the first rental properties I bought back in 1997 was a 2 bedroom unit in Tusmore for $82,000 and it was receiving $110 per week in rent. The property is now worth around $300,000 and the rent is $260 per week.

Let’s look at the numbers:

1997 Rent was $110 per week – $82,000 @ 6 per cent = $95 per week leaving me $15 per week.

2012 Rent is $260 per week – $82,000 @ 6 per cent = $95 per week leaving me $165 per week.

In this situation although the cash flow isn’t significant, the additional $165 per week is certainly enough income to help me buy my next property without costing me any money each week from my pocket.

The only way to become financially independent through property is to first grow an asset base and then use that growth to leverage against and expand your portfolio. Here’s a quote that I use that will really make you think:

“To be really comfortable in retirement, you will need to make more money when you’re asleep than when you are awake”.

Meaning, let’s say you have one investment property now worth $300,000, and the average growth while you own the property equates to say 8 per cent. That means that you are worth $24,000 more each year. So if you earn $100,000 per year now, you will need roughly 4 of these properties to earn $100,000 in growth.

Imagine in say 15 years the 4 properties that you bought were worth say $600,000 each. At 8 per cent you would be growing your wealth by $48,000 per year per property. (4 X $48,000 = $192,000 per year). Sure, some years it won’t grow as much however when the market increases it will normally catch up and average out.

The beauty of property is that it can’t get fired and it will normally have a longer working life than you. Also your rents will have increased because your properties have increased in value. Now you could live a little better off using the equity in retirement by selling the properties as the need arises and until the money runs out.

It’s important to note you won’t achieve this overnight, but with good planning early enough in life you will be able to take advantage of the compounding effect and the ability to duplicate the process.

Let’s go back to my property in Tusmore. In 17 years when I retire I would hope that the value would have risen to around $800,000 and I will still only owe $82,000 leaving me a good amount of equity to live off for a few years to come before I need to sell the next property.

If you want financial independence in retirement to fund your dreams, you’re going to have to talk to the right people to ensure you are on the right track and have a well thought out plan each step of the way.

Fred Rasheed is a successful property investor and the founder and CEO of Total Investment Property Solutions. 


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  • RaboDirect

    Great post Fred, nice break down without the jargon. We found in our National Savings & Debt Barometer that nearly a third of Boomers (30 per cent) intend to use their superannuation to pay off their mortgage. This is really concerning and a risky approach to retirement planning; so the more education for Aussies the better.

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