Apparently you need 2mil worth of IP for a comfortable retirement. Is anyone there yet?

Discussion in 'Investment Strategy' started by Otie, 11th Nov, 2017.

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Have you already accumulated 2 mil worth of property? If yes, is this made up of

  1. 1 property

    7 vote(s)
    3.6%

  2. 2 properties

    12 vote(s)
    6.3%

  3. 3 properties

    25 vote(s)
    13.0%

  4. 4 or more properties

    88 vote(s)
    45.8%

  5. Haven't reached 2 mil yet.

    60 vote(s)
    31.3%
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  1. Otie

    Otie Well-Known Member

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    I was reading an article yesterday where some "experts" were saying that for retirement, you should be aiming for $2m worth of property (value in 2017) made up of 4 properties, inc your PPOR. Apparently the 4th property is the one that pays off the other 3 when it comes time to retire if you have not paid down debt over the life of the loans. I would imagine you would sell the PPOR and move into one of the IP's for this strategy to avoid CG tax.

    I think this only works for IP's in Melb/Syd and maybe to an extent some of the other capital cities though as this particular strategy seems to have the expectation of good capital gains/double every ten years type thing. I don't see regionals working for this. They were saying that you can expect this type of strategy to work within as little as 15 years, depending on cycle stages. Im allowing 30 years to be safe for myself.

    I have only began the property investment thing over the last 15 months, so am relatively new to it.
    I want to know how many of you are at the $2mil/how many IP's point, and how long did it take you to get there?
    Have any of you retired off property? Any of you been in the game a long time and seen a similar strategy come to fruition?
     
    Otie, 11th Nov, 2017
    #1
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  2. Trainee

    Trainee Well-Known Member

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    How is it 2m of ips if it includes your ppor? Would having a fully paid off ppor be enough to retire? Your asking the wrong question.
     
    Trainee, 11th Nov, 2017
    #2
  3. JProperty

    JProperty Well-Known Member

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    Assuming a 4% yield (aspirational for many) you'd need at least $4 million to live very comfortably in 15-20 years. $2 million doesn't make retirement too easy if you don't want to liquidate properties. Remember to factor in costs of just owning the properties and all the taxes.
     
    JProperty, 11th Nov, 2017
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  4. Blacky

    Blacky Well-Known Member

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    Just another puff piece containing dubious mathematics and unfounded statistics would be my guess.

    Blacky
     
    Blacky, 11th Nov, 2017
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  5. wylie

    wylie Moderator Staff Member

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    $4m at a 4% yield gives $160k per year (or I'm so bad at maths).

    Assuming you hold those assets, wouldn't that be well more than plenty for most people for the rest of their lives?

    Edit: I'm excluding PPOR in that $4m figure.
     
    wylie, 11th Nov, 2017
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  6. Hodor

    Hodor Well-Known Member

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    Isn't it $2m in today's money, you'd be hoping it would be $4m in 20 years.

    Still seems like not a lot of you're including the PPOR in the $2m. Best to exclude it I would have thought.
     
    Hodor, 11th Nov, 2017
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  7. Otie

    Otie Well-Known Member

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    sorry, poor wording. 2 mil of property
     
    Otie, 11th Nov, 2017
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  8. Otie

    Otie Well-Known Member

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    no, because it will not provide you with any income
     
    Otie, 11th Nov, 2017
    #8
  9. Otie

    Otie Well-Known Member

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    I did think that 2 mil didn't seem like enough.
     
    Otie, 11th Nov, 2017
    #9
  10. Trainee

    Trainee Well-Known Member

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    You need to work backwards. Say you want 100k. With property you might need 3m+. With shares 2m. Then add your ppor on top. Another 2 years of expenses in cash to allow for market crashes. Even more the younger you are. You need to work out your figure.
     
    Trainee, 11th Nov, 2017
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  11. The Y-man

    The Y-man Moderator Staff Member

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    Ok - let's try this with some real numbers

    So $2m / 4 = $500k each

    500k property - lets say rents for $350 pw

    Let's say each bought at 90% LVR

    Total loan = $1.8m
    Interest @ 5% = $90k pa

    Rental income = 3 x 350 x 90% x 48 = $45.36 kpa
    (this allows for 1 month vacancy pa, 10% fees and other costs)

    Out of pocket pa = $44.6 (before tax benefits)
    Possibly as low as $31.2k with tax benefits

    Ten years later - let's just say you bought in a decent middle ring sub, and prices have doubled (about 7% pa growth)

    All you props are now worth $1m each.

    You sell your own home.

    You pay down loan to $350k.
    Interest now $17.5 k pa

    Rental income (let's say it went up 10% over that time?)

    1.1 x 45.36 = $49.9k pa

    Less interest leave you:
    $32.4 k pa to live on AND you NEED TO PAY RENT

    So it leaves you $15.76k pa or $1313 per month to live on (after paying rent)

    The Y-man

    EDIT - I had to fix up the LVR. Also, have ignored Stamp duty which means you still need to have close to 20% deposit
     
    Last edited: 11th Nov, 2017
    The Y-man, 11th Nov, 2017
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  12. ellejay

    ellejay Well-Known Member

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    Why not buy a mix of higher yielding properties and speculation/growth properties? I have a couple that I bought for $200k that rent for $360, a couple of units bought for $130k each and after a quick tidy getting $260 pw each. High rental and buying demand area , great tenants. I've had 20% growth in last year. I also have 1 in Hoppers which had good growth this year but crappy yield. I can take the growth from this to pay off my ips that give both yield and good average growth. I can have the same cash flow as someone who's paid down ips in Melb/Syd. Seems to be working for me.

    Oh and I intend to sell all my ips over the next 30yrs so have the equity coming in regularly to add to rental income from the remaining.
     
    Last edited: 11th Nov, 2017
    ellejay, 11th Nov, 2017
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  13. The Y-man

    The Y-man Moderator Staff Member

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    It's hard to kind of equate this - it took us about 7 years to get to 8 IP's total value $1.7m+ in purchase price (yesteryear).

    Again - as I warned in another thread - you need to take this with a grain of salt as we are DINKS with well paid jobs + some part time work.


    We've been in the game almost 20 years - and yes, the strategy itself is IMHO fine ~ we could have done something similar 10 years ago.

    The end part requires a "conversion" as alluded to by @ellejay

    Let's say at the end of 10 years, you have the 4 properties now worth $1m each as per the earlier scenario.

    Now I am going to leave CGT and stuff out for now for the sake of simplicity - but in real life, you need to time this carefully (with your worked income etc)*

    Let's say you sell the 3 IP's but keep your home.

    You have $3m.
    You pay out the loan of $1.8m
    You have $1.2m in your pocket and still have your home.

    You put the $1.2 in REIT or LIC or some other INCOME PRODUCING instrument (I am going the way of REIT at the moment ~ as you have probably noticed on other threads) yielding about 6% pa

    That's $72k pa to live on, and you have your own home.

    The $72k is likely tax advantaged (REIT income can be tax deferred, LIC income will likely be franked) and when split between 2 people represents $36k each which puts you in a pretty low tax bracket.... and I know *families* that live on a taxable income of $72k per year with a mortgage to pay down - so this deal is pretty good!


    *Ok - if we take CGT into account, you need to do something along the lines of a "transition plan" where for example you sell one property at a time, at least 12 months apart (to get it into different tax years). This might cost you roughly $500k x 505 x 30% = $75k in CGT per property.

    Take 3 x $75k off from the $1.2m = $975k
    At 6% income, would get you $58.5k pa (and rememebr you have a fully paid off home) - still pretty eminently livable (not too excessive, but livable!)

    This strategy has assumed NO FURTHER saving other than paying for the ~$45k pa shortfall every year of holding costs for the IPs. In other words for a couple earning say $80k each, which would be about $56k after tax - they would have about $67k to live on (again they have a home - part of the holding costs).

    The Y-man

    *edit - stuffed up loan figure in first post - adjusted
     
    Last edited: 11th Nov, 2017
    The Y-man, 11th Nov, 2017
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  14. D.T.

    D.T. Specialist Property Manager Business Member

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    Good analysis. I think a lot of people try to do all these fancy tricks or things they've heard on the latest seminar or blog post. Reality is, just need to buy decent houses and wait. Its unsexy.
     
    D.T., 11th Nov, 2017
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  15. devank

    devank Well-Known Member

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    It is a simple algebra.
    Say you buy an IP for $x.
    Assuming you have two cycles+ and any property doubles in every cycle, it will be worth $4x.
    That $4x pays off all 4 properties.

    How much cashflow you want is another story.
     
    devank, 11th Nov, 2017
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  16. Otie

    Otie Well-Known Member

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    I would be comfortable on 50k p/a between my husband and I if I had a fully paid off PPOR. I think we would struggle to spend it tbh, especially when Im old;). I can't imagine myself being as materialistic (I'm not really ver materialistic as it is), I would just need to pay living expenses, a new 25k car every 7 or 8 years, a cheap SE asian holiday every year, and a good one (Europe/US etc) every 5 years.
     
    Otie, 11th Nov, 2017
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  17. Otie

    Otie Well-Known Member

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    I think I should employ you as my accountant! Sounds so simple and uncomplicated!!!!
     
    Otie, 11th Nov, 2017
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  18. datto

    datto Well-Known Member

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    OK. Now what if you buy $2m of high yield shares instead of IPs.

    Say CBA @ $80 per share = 25,000 shares @ $4 per share dividend pa = $100K pa plus imputation credit.

    You still get capital growth and you don't have to worry about rates, pesky tenants etc etc...you can even get rid of your tax agent lol.
     
    datto, 11th Nov, 2017
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  19. Trainee

    Trainee Well-Known Member

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    How much are you spending now？
     
    Trainee, 11th Nov, 2017
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  20. Chris Au

    Chris Au Well-Known Member

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    shhh, that's in the 'are shares better than property' thread:eek:
     
    Chris Au, 11th Nov, 2017
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