If someone told you that you could retire today, but it would cost you $2M.... would you do it?
What about if they told you don’t have to pay the $2M today, you’ve got the rest of your life to pay it off bit by bit?
And what if it was even better than that – it’s not real money that you have to pay it off with – it’s money you would have made if you hadn’t retired.
This is a scenario that many residential IP investors face. When (if ever) is the right time to sell the c/f poor, growth IPs and invest in low risk, higher yielding assets?
I believe that sacrificing $2M of future growth is a small price to pay for 10 years extra retirement. A strategy that uses solely IPs is a poor way of retiring early – they are generally seen as a ‘slow & steady’ route to a self-sufficient retirement.
The reason residential IP is a slow way of retiring is that –
As an example –
Assume $200K equity is initially available, with an 80% LVR this allows the purchase of $1M of IPs.
Assume these IPs grow 100% over 4 yrs, giving $2M worth of IP with $1M of equity.
But the rent only grows by inflation – say 20% over the 4 yrs.
If the yield was 5% on the original purchase price – it’s now 6% on the original purchase price. So you have 6% income, but still have outgoings of 8.5% (6.5% interest+2% costs).
So how do you retire early when you’re asset rich & cashflow poor. One answer is to convert growth assets to income producing assets. It means paying some CGT (usually at a 50% discounted rate, spread over a few yrs), but it means retiring early & having the option to continue investing in IP at the start of the next cycle.
So the $1M equity in the example is reduced to $750K after sales expenses & CGT. Investing it all in LPTs yielding 8% will give an income of around $60K usually indexed linked. The sacrifice is the $2M growth you’ll miss out on over the next 10-year cycle.
The alternative is to hold some/all the high growth IPs, until the c/f of the remaining ones is sufficient to cover all costs and provide a retirement income. This is likely to take significantly more than 10 years.
NB I am not an advisor & this is not advice
What about if they told you don’t have to pay the $2M today, you’ve got the rest of your life to pay it off bit by bit?
And what if it was even better than that – it’s not real money that you have to pay it off with – it’s money you would have made if you hadn’t retired.
This is a scenario that many residential IP investors face. When (if ever) is the right time to sell the c/f poor, growth IPs and invest in low risk, higher yielding assets?
I believe that sacrificing $2M of future growth is a small price to pay for 10 years extra retirement. A strategy that uses solely IPs is a poor way of retiring early – they are generally seen as a ‘slow & steady’ route to a self-sufficient retirement.
The reason residential IP is a slow way of retiring is that –
- yields are generally lower or similar to interest rates
- rents rise at roughly the same rate as inflation – currently slowly
- running costs for IP are significant – approx 2% for land tax, rates, insurance, management/strata fees, vacancy etc
As an example –
Assume $200K equity is initially available, with an 80% LVR this allows the purchase of $1M of IPs.
Assume these IPs grow 100% over 4 yrs, giving $2M worth of IP with $1M of equity.
But the rent only grows by inflation – say 20% over the 4 yrs.
If the yield was 5% on the original purchase price – it’s now 6% on the original purchase price. So you have 6% income, but still have outgoings of 8.5% (6.5% interest+2% costs).
So how do you retire early when you’re asset rich & cashflow poor. One answer is to convert growth assets to income producing assets. It means paying some CGT (usually at a 50% discounted rate, spread over a few yrs), but it means retiring early & having the option to continue investing in IP at the start of the next cycle.
So the $1M equity in the example is reduced to $750K after sales expenses & CGT. Investing it all in LPTs yielding 8% will give an income of around $60K usually indexed linked. The sacrifice is the $2M growth you’ll miss out on over the next 10-year cycle.
The alternative is to hold some/all the high growth IPs, until the c/f of the remaining ones is sufficient to cover all costs and provide a retirement income. This is likely to take significantly more than 10 years.
NB I am not an advisor & this is not advice
