Let's say one person earns $40k a year
No debt, no home equity.
Buys 1st IP, repaying interests. WAIT....for CG.
Buy 2nd IP increased equity from 1st IP, repayment INCREASES (now 2 loans). WAIT.....for CG.
Then what? (Highly probably already 6yrs gone) cannot service more IP loans.
Alternatively, use the increased CG to fund the interest repayment. --> more debt. Purchase 3rd IP.....
At the end of 15yrs, sell some IPs and repaying some loans, retire from RENTAL INCOME??
If 4yrs per IP purchase, --> 4 IPs, even if selling 2 of the IPS and EVEN if AFTER CGT and other selling costs still equal to DOUBLE. Then you have 2 properties paid off.
2 IP rental income SURELY not enough to RETIRE!
Any1 got real numbers and scenarios?
It is quite possible to retire in this time-frame using a combination of the rental income and the equity in the properties.
Many people live off their asset base equity, and it is a strategy that, if managed correctly, is quite safe.
For example; over 15 years, you buy 5 properties every 2 years at $200k each (realistically, by about year 10 there will be very few $200k properties in existence, but stay with me for the sake of the argument). You use 100% finance, and the purchase costs are 6%. Total finance is $1,060,000.
Assume that property doubles in value every 7 years or so.
So, the properties will increase in value by an average of $28,571 per year approx.
year 1. $200k property
year 3. $200k property
year 5. $200k property
year 7. $200k property
year 9. $200k property
Now let's apply the $28k (rounded down for easy calcs) cap gain as an average per year, and there are no repayments off the loans as they are investment and tax deductible (I personally believe in debt reduction as you go). Using the $28k figure, the properties double in value every 8.5 years.
Let's also assume that rents go up by 5% per year on average, and in year 1 the rent for each property is $230 per week (5.9% rent return).
Of course, by the time you get to each purchase year the rent will have increased with the property values, but I want to keep this simple (for me to work out).
At year 15, the property portfolio value is $2,260,000.
The rent income per year is $93,637.96
In reality, it could easily be more, based on the rent return staying at 5% of the portfolio value of $2.26 mill ($113,000).
The loan is still $1,060,000. The interest rate has averaged 8% for the 15 years, so your repayments are $84,800 per year.
Your equity is $1,200,000.
The Bank will only let you access 80% of the properties' value, less any outstanding loans;
$1,808,000 - $1,060,000 = $748,000 useable equity. You may not be able to access all of this due to servicability however.
So now, the property portfolio value is increasing at, say; 5% per year = $113,000 in year 16.
You draw down 10% of your useable equity to live in year 16 year; $74,800.
The portfolio value has still increased in nett value by $38,200 in the first year that you begin to start taking equity draw-downs (year 16).
In year 2 of draw-downs (year 17), the portfolio increases by $118,650.
You draw down the same amount to live, your portfolio nett value has still increased by $43,850. And so on.
I haven't included any expenses or tax returns/tax owing on the properties in this scenario, but it is safe to assume that by about year 12 the cashflow would be positive.
This is not even an aggressive investing strategy. This is Mr. and Mrs. Thong, plod along stuff. It is a bit simplistic as I said, but you get my drift.
I have attached a simple excel spreadsheet of all the figures I have mentioned.
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