What does it really take to earn $100k PA Passive Income

[peastman]

I attended a seminar the other day, mainly inhabited by gen X and gen Y property wannabes.

The presenter did the usual thing asking how much passive income people wanted with the general answer of $100k-$150k PA.

He then went on to explain why property was the best way to do it, and living on rent was the best strategy. He wrote down a few impressive numbers to make it all look very achievable.

Everyone went away thinking they were all about to become wealthy very quickly and easily, but I would be very surprised if many of them actually looked seriously at the figures to see what really had to happen to earn that $100k passive income.

Here we go:-

The idea is buy some property and eventually sell some to pay down debt and live on the rent. Nothing unusual here.

Being young and wanting to retire early, property could not be bought using a SMSF because you would not be able to access the money therefore tax must be taken into consideration.

So to clear $100K you would need a taxable income of $144,200PA.
Assuming your portfolio was paid off, the other expenses (Rates, Vacancies, Strata Fees, Repairs etc) would probably come to about 20% of the rent. That means your rental income needs to be $180250PA

Lets assume you are getting 5% return on your portfolio. That means your portfolio is worth $3,605,000

Now that $3.6M portfolio needs to be owned outright, so assuming a 50% LVR so you can sell half of your portfolio to clear debt on the other half, you have to build a portfolio worth $7,210,000

If the average property in your portfolio is say $400k, you would need 18 properties.

Now some people can and have done this, but the reality is that this is not easy to do.

 

[handyandy]

I would suggest that the real property expenses including some run of the mill maintenance is more like 30% rather than 20%.

This would bring it up to nearly a $4mil portfolio owned outright and with your 50% $8mil

Ratchets up pretty quickly.

Cheers

 

[oracle]

I would suggest that the real property expenses including some run of the mill maintenance is more like 30% rather than 20%.

Cheers

Agreed. Also properties with high capital growth don't usually return 5% gross rent. 4% to 4.5% would be more reasonable.

Interesting to see what do the numbers look like with above adjustments.

Cheers,
Oracle.

 

[Peter_Tersteeg]

The solution is actually fairly simple:

Accumulate 5-7 properties worth $500k each, returning 5% rental yield (on purchase price). Wait 25-30 years and they'll pay themselves off (you did say it was mostly Gen-Y, they've got that kind of time).

The tricky part is having the resources and dedication to buy those 5-7 properties as quickly as you can. It's tough for the first 5 years, very easy after 10. The good this is that as you're doing this, you'd likely learn a bunch of other things to help you get there a lot faster.

 

[Corey Batt]

Now consider what passive fully franked return that 3.6mil in property would generate from diversified Listed Investment Companies etc.

 

[MTR]

But this is very very slow.

Another option to move it along is instead of buying and holding start looking at properties where you can add value and increase turnover either by renovating, developing property however start with very simple projects, buy and cut up block, sell the rear inject funds into the property and you will be cash flow positive after this exercise.

Another option which is simple and not that much work required other than homework, follow a rising market, Syd was the way to go 2 years ago, buy as much as you can and sell down after 12 months (reduce 50% CGT). Change the mindset from accumulating property to income. This requires discipline because even if the market continues to rise you need to pull the pin and take the money to reduce debt.

 

[MTR]

Just a side issue, however the successful investors I have met or know that retired, actually never retire, they continue to build wealth because they can and I think this is important because they continue to increase income streams.

My point is even if you are close to having enough to retire this may infact be adequate if you have the skill to create income so switch from passive investor early to active investor, hope this makes sense.

 

[see_change]

Be surprised if the average person can do this quickly

Accelerators , high income , low expenses , timing the market ( in particular buying bargains while timing market ) , developing , inheritance , taking higher risks by borrowing aggressively and investing within super once your equity in super has built up.

Cliff

 

[westminster]

I attended a seminar the other day, mainly inhabited by gen X and gen Y property wannabes.

The presenter did the usual thing asking how much passive income people wanted with the general answer of $100k-$150k PA.

Now some people can and have done this, but the reality is that this is not easy to do.

I totally get what you are saying. If the presenter had spelled it out that this may take 20-25years then that's not the answer they want to hear. They want to hear that it's possible and in their mind they are hearing 'you can be retired by 35 with no sacrifice to your lifestyle'

 

[D.T.]

Be surprised if the average person can do this quickly

Accelerators , high income , low expenses , timing the market ( in particular buying bargains while timing market ) , developing , inheritance , taking higher risks by borrowing aggressively and investing within super once your equity in super has built up.

Cliff

Not sure why theres a mention of Super here. We're talking about retiring early, not when we're old fogies.

 

[TMNT]

I totally get what you are saying. If the presenter had spelled it out that this may take 20-25years then that's not the answer they want to hear. They want to hear that it's possible and in their mind they are hearing 'you can be retired by 35 with no sacrifice to your lifestyle'

the reality is, (and this is not generation bashing, im not gen Y and ive become lazier with society) that people these days want it all right now with little or no sacrifice, my parents started off in a **** box apartment, my first IP was also not so great but better then my parents,

if you told a young person, hey you can have your 4bdr fairly new house in a fairly nice suburb, but that would mean no international holidays for 10 years, and cutting your going out and fine dining to once a month or 2 months, you might as well tell them to not breathe.

so it all comes down to expectations which is changing in line with society, which im guilty of too

if a massive recession came by with high unemployment, no more 6 figure salaries , then maybe society will change, who knows

 

[LoneWolf]

Even to acheive 100k passive income in say 25-30 years time is still a good result for your average joes, say one starts at the age of 20, he/she will be able to retire comfortably at 50

Now, even today, not many 50yr old have the luxury of 100k passive income

So i guess its better to work off something than nothing, even for gen x or y's

For the elite investors, sure, this timeframe and return sound ridicolous, but seriously not everyone works on the same pace

 

[Peter_Tersteeg]

the reality is, (and this is not generation bashing, im not gen Y and ive become lazier with society) that people these days want it all right now with little or no sacrifice, my parents started off in a **** box apartment, my first IP was also not so great but better then my parents,

if you told a young person, hey you can have your 4bdr fairly new house in a fairly nice suburb, but that would mean no international holidays for 10 years, and cutting your going out and fine dining to once a month or 2 months, you might as well tell them to not breathe.

so it all comes down to expectations which is changing in line with society, which im guilty of too

if a massive recession came by with high unemployment, no more 6 figure salaries , then maybe society will change, who knows

I read an article a few years ago, published in a newspaper. It was saying that kids these days are complaining that they'll never afford a house, they need to stop spending and start saving, reign in their expectations, etc.

The article was dated over 40 years ago. It would appear that nothing ever changes.

The solution to a comfortable retirement is simple. It only requires some action over a period of time and the ability to sacrifice a bit and then wait for decades.

It is possible to be financially independent in less that 10 years, but most just aren't capable of this. Sadly most people don't have the patience to do it the easy but slow way either.

 

[Neptune]

Very well explained Peastman. I guess if investing as a couple and structured properly then each couple could be on a lower tax bracket and hence the overall number of properties wouldn't need to be as great but still substantial. $100k after tax would still lead to a comfortable lifestyle.

 

[sanj]

Not sure why theres a mention of Super here. We're talking about retiring early, not when we're old fogies.

I utilize super a fair bit, I'm only 32

 

[D.T.]

I utilize super a fair bit, I'm only 32

Same age here - you don't mind that you won't get access to it?

 

[sanj]

Same age here - you don't mind that you won't get access to it?

Can you provide me with a single bit of evidence that supports your claim I won't have access to it? The govt cannot afford the pension to continue the way it is atm, especially with the huge number of baby boomers who will be retiring.

I fully expect the tax breaks to be tweaked with slightly but it will still end up being much more tax effective than investing outside super.

Ultimately we all have to put money into super, why not utilize it effectively?

 

[VYBerlinaV8]

The solution to a comfortable retirement is simple. It only requires some action over a period of time and the ability to sacrifice a bit and then wait for decades.

This. I've been investing for 10 years now, and in another 10 I'd expect to be towards the end of paying it all off.

 

[Rolf Latham]

100 k a year recurring from what though ?


ta
rolf

 

[willair]

I guess the lopsided question is with the vast number of investors posting in the site from early 2000,how many in this site are making 100k per year
out of their investments, i'm no where near that amount all you need to throw a spanner in the works is a simple GFC headwind,throw in a few floods where the insurance wipes you like a dunny rag,maybe some of the fast buck property gurus are maybe they will tell their story..