How many properties do you need to retire early?
When it comes to property investing, there is no one size fits all approach.
The same can be said for retirement.
So, how can you figure out how many cashflowing properties you need in order to leave work for good?
As always, it is all about strategy.
Buying with a plan.
Head of Binvested, Nathan Birch, knows how good it feels to retire.
At 24, he quit his job to become a full-time property investor. He was able to do this because he had built a passive income stream through his investment portfolio.
He says, a lot of people out there buy investment properties for the sake of it. They don’t have a strategy for what they are doing.
But, if you want to achieve an early retirement through investing, you need to map out a plan of attack.
How much do you need to retire?
First thing’s first – you need to know how much money it would take for you to be able to retire.
“Where do you want to be in five, ten or 15 years’ time?” says Nathan.
“What is it that you’re trying to accomplish?”
It’s no good having some vague notion of needing to be rich – you need to identify just how big your income should be in order to support your lifestyle.
Questions to ask yourself?
1) What sort of retirement do I want?
2) What will my lifestyle look like?
3) How much will this cost each year?
While some may want a basic income through investing that will allow them to take on work or knock it back, others may want enough to pay for all of their expenses plus a yearly overseas holiday.
Similarly, some may have kids who they want to send to private schools, while others may not have any dependants to look after.
Coming up with a budget.
The best way to truly understand how big your retirement income needs to be, is to map out your budget, says Nathan.
“If you know your budget, you know how much income you need,” he says.
There are plenty of budget apps out there, as well as this free budget planner available on ASIC’s Moneysmart.
Don’t forget to factor in any future costs that may be likely, such as the cost of your wedding or your child’s impending orthodontic treatment.
Working backwards from here.
Once you can place a figure on your retirement needs, you can then estimate how many properties you need to own outright.
If you assumed an average rent of $300 per week, just one property would earn you $15,600 a year.
If you owned seven of these properties outright, you would have a yearly passive income stream of more than $100,000.
Owning five of these would bring in about $75,000 a year.
Mapping out your strategy.
Once you know the number of properties it would take to support you financially, it is time to figure out how you could achieve this.
“Planning is so crucial,” says Nathan.
If you want to make $100,000 a year – it isn’t just going to fall out of the sky, he says. There is a big difference between having no passive income to having $20,000, then $50,000 and then $100,000.
What will it take to own them outright?
It may be that in order to own seven properties outright, you would need to acquire 14 properties and take them through a property cycle.
Once they have doubled in value, selling off half should enable you to pay off your debt and own the remaining properties unencumbered.
To achieve this, it is necessary to buy properties that have a strong upside for growth, as well as a good cashflow that covers all expenses.
Buying in metropolitan areas with strong demand helps to reduce the risk of negative or little capital growth.
Having the right team around you.
To avoid making costly mistakes, it is advisable to have a good team of professionals backing you up. A buyer’s agent, finance strategist, accountant, lawyer and financial planner who can work in line with your goals as an investor will give you the upper edge.
They can help you identify different strategies that will keep you moving forward to achieve your goals.
The benefits of a good foundation.
Nathan says building a good foundation portfolio is very important.
“Your first ten properties are crucial,” he says.
If you start with this many bread and butter properties, you could expand into the next stage of your investing or you could sell off half after taking them through a property cycle.
Selling off half after they have doubled in value would give you a good basic income of $75,000 – which is generally enough to cover food, accommodation, bills and other expenses.
“Cashflow is the biggest key,” says Nathan.
“It’s the thing that keeps businesses alive.”
It is also the thing that will keep you and your family alive once you retire.
And, the best thing about rental income is that it goes up as time goes by – which means your retirement income will cover the rising costs of inflation.