Working out How Many Properties are Needed to Reach you Goal

Working out How Many Properties are Needed to Reach you Goal


These are the rough steps to work out how many properties you need to buy to reach your goals.


Step 1: How much income do you want?

Firstly work out the destination to your journey. How much money do you want to be earning from property, per year, as a passive income.

Work it out for gross pre-tax income and don’t worry about inflation for now.

Keep in mind you may have separate retirement income from super which we won’t take into account here.


Example, Mr and Mrs Johnson want an annual pre-tax income of $100,000.


Step 2: How much yield

Work out the approximate yield of the properties you want to focus on. If you want to get a variety of different types of property then average out the yields.

Property related expenses need to be taken into account so reduce the yield by about 20%.

Example, if your properties are returning 5%, work on 4% after costs (management fees, insurances, repairs etc)


Step 3: Work out the Capital Needed To Generate the Income.

Take the income worked out in step 1 and divide it by the yield in step 2.

Example $100,000 / 4% = $2,500,000


This figure is the amount of unencumbered property that you will need to reach your desired income level.


By this stage the first signs of depression may appear.


Step 4: How many properties to get the income

In this step you should average the purchase prices of the properties you are focusing on and see how many of these you need paid off to get the figure in Step 3.


e.g. $400,000 properties –

2,500,000/400,000 = 6.25

So you would need 6.25 properties paid off in full.


Step 5: Check your figures by going backwards

Take the number of properties need and x by the average purchase price and then divide this by the yield and see if you get the desired income in step 1.

6.25 x $400,000 = $2,500,000

$2,500,000 x 4% = $100,000


Step 6: How soon do you want to get there?

Work out how often you have to end up with a fully paid off property (on average).

X properties in Y years = Y/X

6.25 properties in 10 years = 10/6.25 = 1.6

So every 1.6 years you must pay off one property.


Step 7: Face Reality

Full stage depression has probably now set in as you realise that paying off one property every 1.6 years may be rather difficult, even if you could save 200% of your salary.


Step 8: Consider Strategies to Speed Things up at the end

There are various strategies which can help to speed things up, some of which are:



Strategy A

If you can tap into some good capital gains it may be possible to buy more properties than needed and then sell some down.

In this example 6.25 properties unencumbered are needed. This could possibly be achieved faster by buying 13 properties and then selling 5 and paying down the debt on the remaining ones. There are various strategies to reduce CGT when doing this.


Strategy B

Sell the PPOR tax free and move into an investment property. A variation of Strategy A.


Strategy C

Don’t pay down the loans on the investment properties, but keep cash in the offset accounts against these properties. Retire quicker by then drawing down on these funds (which is tax effective) and living on this until rents rise enough for the cash flow to reach the desired amount.


Strategy D

A variation of Strategy C is to delay the sale of the extra properties to get more capital growth to enable a bigger repayment of debt.


See some more ideas in this other thread that I started:

5 Living Off Equity Strategies to Speed up Retirement 5 Living Off Equity Strategies to Speed up Retirement


What about inflation?

Properties values and rents will hopefully be raising with inflation so we should be able to work based on today’s values. Hopefully this will be inaccurate because property values will rise faster than inflation. If this is the case the goal will be reached sooner.


Step 9 = Complete rethink?


Please cirtically comment.

 

Using Super to pay down debt? Bit difficult though given age of access and varying super balances

 

Lol your a crack up

 

Seems like a sound plan.
Minimise depression by starting earlier, keep moving and accumulate when you possibly can.
Don't stop at 13 properties, keep going, 20, 30, 40. Sell down once you're ready for retirement and be pleasantly surprised yet beat yourself for not trying even harder

 

@Terry_w when u say u need 2.5m paid off properties
Is that 2.5m in today's number? Thx

 

No. That's 2.5m from when @Terry_w started investing.

 

You forgot, go balls to the wall for mining towns building new places to rent as furnished digs......only need a handful of them to smash it.


oh wait, that would have been good to setup 10 years ago, nevermind....I had someone trying to get me to build multiple places in a mining town for miners about 18 months ago......the logic was....I am doing it, sold everything else and moved here, do you think I am stupid ?

......was a rare occasion where what came to mind stayed there.

So, Terry, I have lost about the last 40 years, very very low income now, how do you suggest we turbocharge this plan ? @datto says he has a cheap supplier of balaclavas ( or was it baclava datto ? )

lol

 

Does Terry invest ??? I though he was just peddling cheap money ?

 

Oh, and get out of Gaol free cards if going with Dattos plan ?

 

I could sketch a plan out but I don't have time.

 

Starting early is good but it's probably more to do with how long it will take that will cause depression...ouch

 

Another strategy I can think of when you get to "speeding things up at the end", would be by cashing out some low yielding residential property into higher-yielding assets EG equities, commercial property etc. If you can boost the 4% return it would help a lot...

 

We followed a much simpler plan.
Go hard without limits.
Hustle and make money wherever you can.
Invest in property, but rely solely on it for your only means of wealth creation.
When you feel like you may have enough, stop and count your chips.

Personally, I believe setting an financial goal and working backwards from there is very limiting and may prevent one from taking opportunities which may deviate from a conservative plan.

 

Yes in today's numbers

 

You could do that.

If you know you have access to super in X years, you may start retirement earlier by living on equity (or a variation) - drawing down on money you don't have access to by borrowing it.

 

Is there a calculator for Strategy A? e.g. your calculations but also allows for %CG, % rent increases, staggered purchase of properties across 10 years.

 

Just thinking out aloud, if people are using this approach to speed things up...

1. Buy 1st property for $270k, rent $300/week
2. Build a Granny Flat/Dual Occ for 130K, rent for $300/week
3. Total cost $400K, Total rent $600/week.
4. Total annual rent is $31k, yield is 7.8%.
5. Take 80% of the rent = $25k, yield is 6%
6. So you need 4 x $25k unencumbered (not 6.25)

Rinse and repeat 8 times. Sell down when it doubles, whenever this maybe..
You may be able to get away purchasing 8 or less, as the following consideration helps:

• the yield are higher with GF build, surplus fund from rental should help/be used to pay down debt (I am stealing euro's NRAS concept here)
• the new Granny Flat/Dual Occ depreciation should help as well.

Also if structured right at the beginning, the dual occ build in certain States/Council you may able strata title it so you can sell each separately..

When it's time to sell, sell the old house and keep new build, less hassle with maintenance, better depreciation. You left with 8 properties that are constructed less than 10 years. Unencumbered on 8 x $300/wk, which arrives similar figure.

 

You wouldn't take money out of a low tax environment to pay down deductible debt in a high tax environment.

 

I was thinking more at the end game stage. i.e. get to $2mil equity, draw $500k super balance to reach $2.5m equity and retire immediately (probably a bit old for most PC members to retire once they can access their entire super!).

 

I think you would if you hit the relevant age and had minimum withdrawals from your super imposed on you.

If you were still investing at near retirement age, I think it would make sense to direct any surplus income to super (concessional) rather than paying down debt. Then, withdraw from super tax free to reduce debt after you start drawing the pension from super. Correct me if I'm wrong?