How many Ip's needed to retire? (I am a bit shocked!)

[jingo]

The Property Puzzle

Related to the topic, I have just finished reading a book by Stuart Wemyss called 'The Property Puzzle'. Stuart invents fictional characters at various stages in life, and prepares a financial plan for each based on the cashflow method and capital growth method.

If the investors go the cashflow method, then they require more properties than if they buy growth orientated properties.

It's well worth a read - I found it interesting anyway!

Regards Jason.

 

[Alex P Keaton]

thanks, i'll see if i can get a hold of a copy

 

[StuartW]

Related to the topic, I have just finished reading a book by Stuart Wemyss called 'The Property Puzzle'. Stuart invents fictional characters at various stages in life, and prepares a financial plan for each based on the cashflow method and capital growth method.

If the investors go the cashflow method, then they require more properties than if they buy growth orientated properties.

It's well worth a read - I found it interesting anyway!

Regards Jason.

Thanks Jason. I'm really gald you enjoyed it.

 

[Paul Do]

2 median fully paid off properties to generate average weekly income in Sydney. This strategy leaves the 2 properties behind after you're gone.

If you want more than average weekly income, you can get a reverse mortgage to spend the kids' inheritance and increase your income.

 

[BayView]

Here is a very basic plan of how you could do it ("how many IP's to retire?")

By year 15, you sell off the two earliest properties and live off the rents of the remaining ones, which have no debt.

Of course, you will have management fees and other expenses coming out of the rents.

 

[tigers63]

Hi Bayview.
I looked at the spreadsheet you created and it is interesting. I just have one query/concern about the purchase price and hence the loan balance as you go. You assume proprty doubles every 8-9 years and yet each new property you list is still valued at 200k. Am i interpreting it incorrectly?

 

[crc_error]

yeh you would not be buying 200k properties each year. the value of each new purchase should go up every 3 years to be realistic. but this doesn't alter the outcome. the idea is to get to 1 mil worth of property as soon as possible, and then let rental increases do their thing. but I do think in the model, he is to keen on the amount of rent.. ie $200k property wont fetch $230pw rent, more like $160pw. (0.0008% is the average return in capital cities)

and on $1m worth of debt, you would pay at least $1300pw interest @ 7% so even after 15 years, you would not be cash flow positive once you add in holding costs.

 

[skater]

yeh you would not be buying 200k properties each year. the value of each new purchase should go up every 3 years to be realistic. but this doesn't alter the outcome. the idea is to get to 1 mil worth of property as soon as possible, and then let rental increases do their thing. but I do think in the model, he is to keen on the amount of rent.. ie $200k property wont fetch $230pw rent, more like $160pw. (0.0008% is the average return in capital cities)

and on $1m worth of debt, you would pay at least $1300pw interest @ 7% so even after 15 years, you would not be cash flow positive once you add in holding costs.

It all depends on where you invest. I have several in Sydney, admittedly on the outskirts, where I have properties that if I were to sell, the buy price would be mid $200k. The rent on these are around $280pw. The latest one I purchased was $150k and is rented @ $230pw. There is no way I would ever purchase something for $200k that rents for $160pw.

 

[crc_error]

how is the capital growth of those IP's skater? with such high rent, I would assume this comes at a cost of capital growth?

I would also assume these are apartments with body corp, which also eats away at the higher rent collected.

 

[skater]

how is the capital growth of those IP's skater? with such high rent, I would assume this comes at a cost of capital growth?

I would also assume these are apartments with body corp, which also eats away at the higher rent collected.

All houses except one. As I posted in another thread, the CG is slow and steady ATM. It has been about 10-20% in the last year or so. It usually works it's way out from the centre. I'm expecting things to hot up a bit more in the next couple of years, as places become unaffordable closer to the city.

I usually look for properties with a small CG built into the purchase price too. The recent purchase was a unit. Two others in the same block sold at a similar time to mine. One for $175k, the other for $199k. The cheaper of the two is getting $10 per week less rent than mine.

 

[wobbycarly]

yeh you would not be buying 200k properties each year. the value of each new purchase should go up every 3 years to be realistic. but this doesn't alter the outcome. the idea is to get to 1 mil worth of property as soon as possible, and then let rental increases do their thing. but I do think in the model, he is to keen on the amount of rent.. ie $200k property wont fetch $230pw rent, more like $160pw. (0.0008% is the average return in capital cities)

and on $1m worth of debt, you would pay at least $1300pw interest @ 7% so even after 15 years, you would not be cash flow positive once you add in holding costs.

For a simple picture, that spreadsheet's not bad. I have a couple of issues with it as crc_error has also noted. I think the growth is possibly conservative, which is good - let's not get over-excited!

But, instead of purchasing a $200,000 house every 2nd year, I changed it to purchase a similar house (eg, year 3 purchase for $256k). Same thing with rents.

Then I extrapolated to year 16, where I sold the first 2 properties to reduce the debt (564-200 and 564-256). I included holding costs, and assumed that we get to keep 75% of the rent (the rest goes in fees, maintenance, etc) Note in year 9 we are looking at a shortfall of nearly $1000 pw. Oh yeah, and the text says that rents rise by 3%, but the numbers are 5%.

No tax implications included.

At year 16, I get to "retire" on -$366 a week. Are my calcs wrong?

 

[Perth Investor]

Then I extrapolated to year 16, where I sold the first 2 properties to reduce the debt (564-200 and 564-256).

snip...

At year 16, I get to "retire" on -$366 a week. Are my calcs wrong?

I think the plan would have been to pay out as much debt as ppossible with the asset sales? So the end debt would be down to ~$600K, and the rent position would be much better.

Either that or you suck up the -$366 per week, and live on the (564-200 and 564-256) surplus cash from the asset sales for a number of years, which is about $500K or something?

Or, my preferred option: To keep the bank happy you really only need to reduce debt to $1.35 million when you sell (the 80% mark), so sale price is a bit over a mil, pay $300K to debt, keep $700K in an offset account to live off for the next ~10 years.

In ten years time your $1.7M property portfolio is now $3.4M, and you can do the same thing again. Although this is dangerous if you retire early at say 45, it's a much better option when you retire at 65.

Or option 4B part 2 is you don't sell at all, and the day before you retire you get yourself a financial plan that says you need a million in the share market, and you go to the bank and ask for a million dollar loan, which you put most into the share market, and then draw down on that over 10 years living on that.

Then in ten years when you have run out of money, you have a $5.6m portfolio (remember you haven't sold anything yet...) with a debt of $2.6M, net assets $3M, pretty hand position to be in...

That's all my ideas for now...

 

[wobbycarly]

Yep, when I started along this PI road - without a plan, mind you - I was expecting to, one day, live on rent. But as I've gone along, and learnt "stuff", the LOE path is starting to make more sense - and I'm coming up with a plan.

 

[Perth Investor]

Yeah I think most people's "plan" around these parts - if the plan is to live off "rent" - is to either buy shares or commercial property for cashflow, cashflow sucks with IP's.

 

[Rixter]

cashflow sucks with IP's.

Rent's for covering holding costs...CG's for covering lifestyle costs.

 

[Dazz]

Why do you think that is Perth Investor ??

What is wrong with the 'system of investment' that your clients simply refuse to pay a decent yield ??

Is it because they don't have enough money, or there is so much competition and so many "well off Landlords" who are prepared to receive a lower rent to keep a 'good' tenant that you get drowned out.

I honestly tried about 6 years ago my very best to cajole / convince / persuade my residential tenants as clients to pay more....but they wouldn't have a bar of it. I eventually gave up and played a different game. Have you had more success ??

 

[BayView]

Hi Bayview.
I looked at the spreadsheet you created and it is interesting. I just have one query/concern about the purchase price and hence the loan balance as you go. You assume proprty doubles every 8-9 years and yet each new property you list is still valued at 200k. Am i interpreting it incorrectly?

Yes, the spreadsheet is ultra basic for ease of reading.

I can promise one thing; property does double every 10 years approx - at least that has been the case in my short stint on this planet, and I don't think my window of existence here was a gliche in (property) history.

I am basing it on what the $200k property of that time was like. It was thrown together a few years ago to show my brother, so back then it was your average 2 x 1 villa unit in Affordableville, Australia.

So, for example;in year 3 the average 2 x1 had increased to $256k. This is based on a 8.5 year (approx) double of pricing. If you think it's a stretch, then do it in blocks of 10 years which is possibly more accurate. Either way, you will be in the ball park.

 

[crc_error]

problem with property is the ability to keep buying.

everyone is limited to their wage, and this is why most people are not able to buy more than 1 or 2 IP's.

its all good well to say to buy 10 IP's and retire, but its very hard to keep buying like this without some other source of income.

in melbourne for one, you will find each IP would cost you pre tax deductions about $10k PA each year to hold.. so it will take a long time with 3% rental increases to cover this.

sure you can buy in the country with higher yield, but this comes at a cost of capital growth.

so until rents catch up to the recent capital growth spirt, and cover more of the cash outgoings, i would say the idea of 10 IP's for the average wage earner is not likely.

 

[Bill.L]

Hi Marc,

By year 15, you sell off the two earliest properties and live off the rents of the remaining ones, which have no debt.

I would prefer to sell off the last 2 purchased, and therefore pay a lot less CGT.

All other things would stay the same. In your spreadsheet you have reduced the value of your properties by the 2 sold, but only reduced the debt by one sale in year 16.

bye

 

[Ausprop]

Hi Marc,



I would prefer to sell off the last 2 purchased, and therefore pay a lot less CGT.

given that in a 10 year period properties typically rise strongly in a couple, flat for many and sometimes down in a couple, it woul dbe cheaper and easier to just not buy them in the first place unless you happened to jag the couple of good up years