I have two properties as IP's and will be purchasing another mid-this year. I have goal of becoming financially dependant in 10 years time and I am hoping that real estate will do it for me.
I do not want to be rich, if i can earn a passive income of $70,000 before tax, that'll do for me. I dont have any expensive hobbies, all I want is surplus income to be able to travel the world and move about without having to worry about working. Is this achievable? Who has done this?
I guess I am just a little apprehensive after reading a few articles about how most residential real estate investors never get to achieve a level of financial independance, and talking with a few of my parents friends, they seemed to agree, even though they have property. They say that increases in water, electricty, rates, tax etc etc, eat up most of any of the gains made by increases in rents.
I guess Im just wanting to know that my goals are achievable. I will pursue my dreams no matter what, just curious to hear from the members here.
Thanks.
First, as KYL suggested; remove the "I don't want to be rich" words from the vocab. If you are financially independant then you are rich - compared to most of the Planet. Those words are a "safety-net" mindset - an excuse for not reaching your goals.
Second, don't listen to friends and relatives - unless they are already financially independant, or have a decent sized IP portfolio already - at least 3 IP's - most of the Planet's investors own only one IP. And, investors are only about 30% of the housing market.
Third, I don't think property on it's own will get you there in 10 years. You can experience some great cap gains in 10 years, but the rents won't keep up enough, and you won't have accumulated enough cap gain in that time to be able to sell off some IP's, pay down some of the debt and have enough from the existing properties' rents to live I suspect. This is because in that first 10 years you will accumulating, which requires leveraging, so you will keep on eating into the cap gain in the form of debt. The LVR will remain quite high.
However, you can use the growing equity (cap gain) to expand into other money-making ventures. Such as businesses, or maybe some subdivs and/or developments, or high yield shares.
Personally, we have used a large chunk of our equity this year to buy existing businesses. Why? Because we could see that the properties we were holding would not allow us to escape from the rat-race anytime soon - even after selling some of them off to pay down the debt. The remaining cashflow would not be enough to live on. We would still need to work. And, we started investing in 2001 with a fully paid for PPoR to use as a springboard, and had the last boom to help us. So for someone starting out, the task is huge. Not saying it can't be done - but let's take off the rose-coloured glasses for a sec.
So why businesses?
Well, an outlay of $500k on a property
may produce a pos cashflow in year one - but highly unlikely if it is 100% LVR. But you can buy a similar priced business in the same manner - using equity and receive an immediate return of around $100k nett income if you buy the right business (we have recently done this).
In 10 years, the IP worth $500k will probably double in value; nett worth would then be $500k - but you can't live off that cap gain while you are waiting - you are not financially free. I guess you could seel the IP and live off the remaining profit after taxes and costs are deducted, but the income is not ongoing after you've spent it, and your asset to keep on producing the cap gain has gone, unless you re-invest the profit from the IP sale.
But with the business, your $100k income is yours, right now and you can live off half and re-invest the other $50k back into the business. In 10 years, your equity in the business is the same as the IP, and you've had an income you can live off along the way.
Now, if you have 2 of these business, then the returns are substantially better. This is what we have done this year. We decided to invest our equity into income from businesses rather than back into more property. So now, we have almost $1 mill of equity invested into an immediate income that will replace our PAYE income. It hasn't yet - we are both still working and pouring all the profits back into the businesses, and living only off the PAYE. The businesses are managed, so my input is very small. In one more year the PAYE jobs will no longer be required. Minimal work - 20 hours per week maximum - with an income far exceeding the outgoings. Financial Independance!
Now, this does not mean we will stop buying property. Property is the basis of the wealth and assets and I believe is the
safest of all investments to park your wealth in, so we will continue to add to the base.
Businesses are not for everyone, but consider this; most of the richest people in the world own businesses and also hold much of their wealth in their businesses and real estate.
Property has allowed us to do this change in strategy. You could also do it through buying businesses from the start rather than property, but it is much harder to get into a decent dollar level of business when starting out due to lenders' LVR's etc, whereas you can get onto the property ladder for a very small amount, with very high LVR's and the returns on smaller, cheaper properties can be very, very good.
