$100,000/pa Passive Income...

[spludgey]

Probably sounds like a stupid question but how do you guys measure a $100,000/pa income?

Total income - total expenses = $100k

If I just looked at the income, I'd be able to retire this year! Unfortunately the banks, councils, real estate agents, water companies, insurers all want some money too.

Also a $500k property that's renting for $600/week will never break even, it'll be strongly negatively geared.

For me it's both about rental increases and about buying positive cashflow property to start with. I calculated a while ago that I'll need at least 12 properties to get the cash flow I want.

 

[skater]

Probably sounds like a stupid question but how do you guys measure a $100,000/pa income?

.

Um....you would calculate it the same way as someone with a Business calculates their income. Money in, less money out.

So.....your GROSS income will be all money received. Your NET income is what you have left after your expenses are paid.

Now with property, many people have negative income (negative gearing), but if you are planning on retiring from the workforce, you need to be making money from property NOT losing it.

Some people retire by buying a heap, then selling half to reduce debt. Others do different things. You could buy, reno, sell, or you could buy, subdivide, sell, or maybe buy commercial, or a heap of residential. Some work on trying to time the market, others work on time in the market & others a combination of both. It's an individual thing and there is no right or wrong way to do it, you just have to work out what works for you.

For what it's worth, I've got more than 10. My portfolio is cashflow positive and this figure is constantly growing over time. I'm also still purchasing and I have a mix of things in the portfolio. Some are earmarked for future sell off, some to get a Granny Flat, some to keep.

When I refer to passive income, I refer to NET income. And yes, we will retire with a nice net income from property.

 

[Rixter]

Also a $500k property that's renting for $600/week will never break even, it'll be strongly negatively geared.

Depends on how much money you put into the deal and age of the property..What if you have low/no loan debt against it and it qualifies for non-cash depreciation deductions?

 

[skater]

Depends on how much money you put into the deal and age of the property..What if you have low/no loan debt against it and it qualifies for non-cash depreciation deductions?

Maybe it's a splitter block?

 

[spludgey]

Depends on how much money you put into the deal and age of the property..What if you have low/no loan debt against it and it qualifies for non-cash depreciation deductions?

Fair enough, point taken. I was thinking of a 100% or 105% mortgage.

 

[geoffw]

Also a $500k property that's renting for $600/week will never break even, it'll be strongly negatively geared.

For me it's both about rental increases and about buying positive cashflow property to start with. I calculated a while ago that I'll need at least 12 properties to get the cash flow I want.

I've had superb capital gains from cashflow negative. These financed the business.

I've had them a while now. What was negative does come positive at some stage.

 

[Deltaberry]

Probably sounds like a stupid question but how do you guys measure a $100,000/pa income?

For example if you buy a property for $500,000 and rent it for $600/week, then it will only be at break even point (after borrowing and maintanence costs) which means 0 cash flow. Not accounting for manufactured yield and capital gain, does that mean you guys are counting the future potential increase in rent and capital growth over the 10 years as part of your passive income for properties which are deemed 'buy and hold'?. Or are you measuring $100,000 at the end of 10 years, which will be more like $150,000/pa in today's money?

Otherwise it seems like for $100,000/pa you need $2000 per week which is each of your 10 properties positively geared for $200 per week and that means you need to add value to each property you buy for this plan to work.

$100k passive income means:

Rent minus
- Interest Cost
- Council rates
- Maintenance
- Water Rates
- Insurance
- Land Tax
- Agent Fees
- etc etc
= $100k per annum

Or at least for residential property.

 

[DennisLeung]

I think I understand now. So just to double check:

100,000 / 52 = roughly $2000 per week net

To further break down $2000 per week net is the difficult part. When I look at real estate dot com and other sites you can only find property deals which are highly negatively geared, slightly negatively geared or neutrally geared. So what this means to me is that when you buy your properties initially in year 0, you will have invested all this deposit money and purchase costs for a $0 per week net increase in your income. Over time, as rents increase and your LVR decreases, you can refinance cash out (capital) and improve your cash flow (living expenses). For example house purchased for 350,000 right now will rent out for $800 per week in year 10 which will make it cash flow positive by a couple of hundreds of dollars per week and the sum of all these small weekly positive cash flows will equate to $2000 per week. So in conclusion then you would probably need about $2000 (which will probably be more like $2800 net per week in 10 years time) divided by $150 (per week per property) which equates to about 13-14 properties in 10 years time which are bought at 350,000 right now and neutrally or only slightly negatively geared.

The problem is, if someone doesn't have the money to buy 13-14 right now so that 10 years will be more like 15 years.

Is this the right idea? I think you guys were talking about yields (assuming that they were gross) which was confusing as I thought that a 7% yield property would have a net income of $0 per week and 8-10% yields would provide a net weekly income of less than $100 each.

How come you guys are already able to achieve $100,000 passive incomes?! You must all have millions of dollars of equity already is that true?

 

[VYBerlinaV8]

Probably sounds like a stupid question but how do you guys measure a $100,000/pa income?

For example if you buy a property for $500,000 and rent it for $600/week, then it will only be at break even point (after borrowing and maintanence costs) which means 0 cash flow. Not accounting for manufactured yield and capital gain, does that mean you guys are counting the future potential increase in rent and capital growth over the 10 years as part of your passive income for properties which are deemed 'buy and hold'?. Or are you measuring $100,000 at the end of 10 years, which will be more like $150,000/pa in today's money?

Otherwise it seems like for $100,000/pa you need $2000 per week which is each of your 10 properties positively geared for $200 per week and that means you need to add value to each property you buy for this plan to work.

I consider $100k pa to be income before tax.

My personal goal is $150k per year (before tax), but in 2005 dollar terms, and with a fully paid off PPOR.

I'd say we're about 8-10 years away.

I was originally hoping to get there by age 45, but I've shifted that out a little since buying a big PPOR and renovating it nicely. I'm currently 37.

 

[Ace in the Hole]

Forget about the number of properties.
Forget about the value of the properties.

When your income exceeds expenses by 100k, without having to do any work, that's your 100k passive income.

Unless you have extremely high yielding properties, you will likely have to have a decent amount of equity in your properties to get 100k passive income.
For most people, it usually takes a little while.

 

[VYBerlinaV8]

For most people, it usually takes a little while.

I expect it wil have taken us 15-20 years in the end.

 

[skater]

For most people, it usually takes a little while.

Yep! It's not a get rich quick scheme. This is s.l.o.w. But it works.

 

[Deltaberry]

To further break down $2000 per week net is the difficult part.

Well yes, that's usually the more difficult part.

 

[onetwothreefour]

Well yes, that's usually the more difficult part.

clever....

 

[spludgey]

How come you guys are already able to achieve $100,000 passive incomes?! You must all have millions of dollars of equity already is that true?

At portfolio yield of 7.5% you need less than $1.5M in equity to have a passive income of $100k! (I'm assuming that 7.5% is completely cashflow neutral, so it doesn't matter how much your total portfolio is worth.)

 

[Ace in the Hole]

At portfolio yield of 7.5% you need less than $1.5M in equity to have a passive income of $100k! (I'm assuming that 7.5% is completely cashflow neutral, so it doesn't matter how much your total portfolio is worth.)

Could you break the figures down for that?
I can understand that you could get close to 100k passive if you owned 1.5 mil of property outright yielding 7.5%
However, how could this work at cash flow neutral?

 

[Aaron_C]

Could you break the figures down for that?

Equity of $1.5m at 80% LVR means an asset value of $7.5m and debt of $6m.

A gross yield of 7.5% means a rental of $562,500 pa.
Interest of 5% pa means interest of $300,000 pa

Net income is $262,500. Less other living costs / maintenance etc easily gives you $100k pa. Done.

 

[skater]

At portfolio yield of 7.5% you need less than $1.5M in equity to have a passive income of $100k! (I'm assuming that 7.5% is completely cashflow neutral, so it doesn't matter how much your total portfolio is worth.)

Saying 7.5% yield on equity of $1.5m is a bit simplistic in my mind.

Your yield is going to be skewed by many things. For instance, you could have a portfolio of $3m with 50% equity 7.5% yield and only have one or two properties in that portfolio. You will have one or two sets of rates, water, insurance etc.....

Or with the same $ value portfolio hold 10 or more little cheapies, with 10 or more sets of expenses. You would probably have a lot more $ to spend on this kind of portfolio, therefor your net yield will be lower than the above example.

OR you could have a portfolio of $10m with only $1.5m in equity. Your loan repayments and other expenses will be a damn sight higher than either of the first two examples, bringing the net yield lower again.

 

[Ace in the Hole]

Equity of $1.5m at 80% LVR means an asset value of $7.5m and debt of $6m.

A gross yield of 7.5% means a rental of $562,500 pa.
Interest of 5% pa means interest of $300,000 pa

Net income is $262,500. Less other living costs / maintenance etc easily gives you $100k pa. Done.

Thanks.

I figure that this is made more possible in recent times due to low interest rates.

If someone were starting today with 1.5 mil cash, could they buy 7.5 mil of resi property (since we are generally talking resi), and get those type of returns?
Also, have to factor in stamp duty and other purchasing costs.
That would be 25 x 300k properties if we are looking at cheapies, the acquisition costs will add up.
Also, all ongoing costs for 25 properties will add up to a fair bit.

And in the situation where others have accumulated property for a while and built some equity from capital growth, it's not likely the yields on current valuations would be 7.5%.

Also, if someone were starting today, aiming for equity of $1.5m at 80% LVR with an asset value of $7.5m and debt of $6m, if not on a high salary, would they hit serviceability issues?


These questions are to try and help those just starting out, so they can try and make some sort of plan and understand the figures.
Might even help more experienced investors.
I've been doing this over 10 years and still don't know the figures properly.

 

[Aaron_C]

With $6m of debt you would hit serviceability issues if you are on a standard wage....but if you earn a lot it's not big deal.