How to replace your income through property investment

Lets assume you need income of $100,000 every year to live comfortably in retirement.

a) This would require you to have 3-5 debt free residential property worth at least $2.7m. Assume the average yield on house is 4.5% which would provide rental income of $121,500 per annum. Allow for 2 weeks vacancy and rental management fees and your income would reduce to $108,649. Finally after paying your rates and maintenance costs you would have income of around $100,000 per annum. Now if you are of retirement age you could spend this income tax free however if you managed to retire early you would have to pay personal income tax of approximately $25,000 leaving you net income of $75,000.

So much for the old rule of thumb saying you need 5% x property value = retirement income.

b) Commercial property can provide you with a higher income depending on the type of commercial property and your tenant quality. Yes you can get income of up to 10% on commercial property however the risk of losing the tenant can also be quite high and long vacancy periods are common with the higher yielding commercial properties. Commercial properties with high quality tenants are closer to 5% which is similar to residential property and you could easily have one commercial property worth $2.7m instead of 3-5 residential properties but who can afford to buy one commercial property for this much when you are beginning to build your property portfolio. Most lenders also require a minimum 20-30% deposit for commercial property

THE BIG QUESTION

The big question is "how do you get 3-5 residential properties debt free" so that you can replace your income through property investment? It takes a very long time for the rental income on a property to pay down all the debt when the rental yield is only 4.5% without making further contributions. The reality is that the property will go up in value significantly over time but it will still have a debt when you retire however the income after debt servicing will still provide the retirement income required.

You could also sell some of your property portfolio and pay off all your debt but you will pay a heft tax bill on the capital gain amount - not a wise decision when you are trying to retire.

This takes time. How can we get a better rental yield than 4.5%? This is barely cashflow positive after you use negative gearing to get some of your tax back.

THE ALTERNATIVES

a) Build up a property portfolio in a regional area. This is a common strategy employed by many. OK if you understand the risks involved. You can achieve rental yields of 6-7% allowing each property to provide after-tax-cashflow day 1. Some investors have 20+ properties in their portfolio with each property providing $5,000 positive cashflow after meeting all their loan repayments, rates, maintenance costs etc which could conceivably provide $100,000 in retirement income in a relatively short amount of time. To build up this many properties in a short space of time you would either need to buy below market value or renovate to create the equity uplift to enable you to buy another property.

You would have a large portfolio value and a large amount of debt with an exposure to regional property market swings - so beware. Don't expect large capital growth in your property portfolio like you would get in areas closer to capital city locations.

b) Purchase properties with higher residential yields in capital city locations such as a house with a granny flat or a dual occupancy property. These provide a higher yield up to 7% and can have good capital growth. You don't have the choice of buying these under market value or doing a renovation so you need to wait 3-5 years for the capital growth before being able to utilise the equity to buy another property.

THE SOLUTION

What if you could buy a property in a capital city location and get a 10%+ rental yield for under $600,000? That's $60,000 rental income per property instead of $27,000 at 4.5%.

Would you buy it and how many would you need to replace your income through property investment?

If you wish to know how to creating this cashflow through property, then please feel free to contact us.

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