Once upon a time, having $1 million could give you all you needed for the rest of your life. Having $1 million in the bank back in the 1990s meant 25 years worth of salary, plus the interest it earned, which at the time was more than a year’s average salary every year.
Of course back then, $1 million was worth much more than what it is now. Inflation has rolled on and the goalposts have shifted.
So what’s the new benchmark
If you ask b Invested founder Nathan Birch, he believes $3 million is the new $1 million when it comes to setting yourself up.
If you had $3 million worth of assets returning 10 per cent a year, that’s $300,000 cashflow. Even if you only earned a 5 per cent return, that’s still $150,000 a year. It’s still very good, when you consider average salaries are around $70,000.
Growth and return
First of all, that $3 million worth of assets can grow in value over time. If it goes up 10 per cent, that’s an extra $300,000, and if it doubles in value, that’s $6 million. And such movements happen time and again throughout history. And with inflation, if your $3 million worth of assets is in property, then your debt, mortgage and everything else gets stuck in today’s dollars, while your rental return goes up and up, reaching tomorrow’s dollars and beyond.
So how do you get there?
Ideally, you could buy 10 x $300,000 properties to get $3 million worth of assets, but how do you pay down that debt? There are a few options. The first could be debt consolidation where you use the profits and rents to pay out the mortgages. If you hold the properties long enough and the debt remains the same, inflation will allow you to eventually use the rental income alone to pay down the debt.
Power of assets
If you put $500,000 in the bank back in 1990, you’d earn $50,000 a year in interest, which was like $150,000 in today’s money. Nowadays, you put $500,000 in the bank and it earns you about $2500 a year, which isn’t enough to buy you much. Inflation has shown us that cash is trash. It’s the worst investment to have held onto over time as it is worth less every day than it was the day before.
But if you had bought property instead, you’d have picked up an asset that returns cash and your cashflow is tied to inflation, so that the more it goes up, the more return you get.
If you had $3 million worth of property and were paying interest on repayments of 3 per cent, you’re looking at $90,000 a year to service the debt. If the $3 million was spread across 10 properties, and each property was earning $350 a week rent, that’s around $180,000 a year in income. Take away other holding costs like rates, bills, management and insurance and you’re a bit worse off, but still cashflow positive.
Time in market
Over time, that debt remains static and eventually goes down, while your rental income keeps increasing with inflation. In the last couple of years, rents have gone up by $100 a week in a lot of areas. If you have 10 properties, that’s $1000 a week, or $50,000 plus a year.