Can you really retire from investing in property in under 15 years?

Discussion in 'Investment Strategy' started by John Ferguson, 4th Nov, 2016.

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  1. John Ferguson

    John Ferguson Well-Known Member

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    CAN YOU REALLY RETIRE THROUGH PROPERTY IN 10-15 YEARS?

    I hear and see so many people say they are going to invest in property so they can quit their day job by replacing their income with a passive income from property within 10 - 15 years. This is a marketing concept widely used throughout the industry.

    But when you actually sit down with someone and go through the numbers, they soon realise the time, commitment and harsh reality of this scenario playing out is not as easy and straightforward as predicted.

    Some quick numbers.

    Say you purchase a mix of growth properties yielding 4% and lower growth properties yielding 6%. An average gross yield of 5%. You do this for 12 years at an average of 1 property per two years = 6 properties.

    Say by the 12th year the portfolio is worth $6 million, an average of $500k per property. In that 12 years you were able to pay off you PPOR.

    So you have $6million in IP at 80% LVR = $4.8milion debt.

    So $6m in properties x 5% rental yield = $300k rental income. Say the interest on the debt is 5% also ($4.8m x 5% = $240k loan repayments) then you have the holding costs for the $6m in properties at about 1% = $60k.

    $300k rent - $240k repayments plus $60k holding costs = zero (break even)
    So you are know where near being able to retire after 12-15 years of investing. Equity rich and cash flow poor.

    Obviously this scenario varies but this would be more of a realistic and common outcome.

    So what do you do and how do you replace your income?

    You could sell $4.8m in property and hold $1.2m in property debt free. This would provide you around $45k in rent - tax = about $38k passive income. Decent but generally not enough to retire and replace your income to support your lifestyle. But then essentially you are selling the goose that lays the golden egg.
    Another option is to sell some property and refinance at an LVR of 80% and live of the equity. This has risk as you need to ensure your portfolio is growing high enough to cover the equity being accessed in the properties held.
    Or you hold the property through two more cycles of growth and then sell down some properties and you could essentially have a retirement income of about $100k per year. This is the most safe and realistic plan. But it is a 25-30 year plan.
    So do you get where I am going with this. People really need to sit down and do the numbers and have a sound understanding of this reality.

    In my view investing is a method used to preserve wealth and cash flow is how you create wealth. I believe when people understand this they would be able to act accordingly, if their goal is to retire in 10-15 years. How do you do this?

    Really I believe there is only two ways. Build a business and sell it in 10-15 years (Higher risk and requires a huge sacrifice) or invest in property and develop both property and land at the same time to manufacture growth and fast track your wealth. Also high risk and takes huge sacrifices.

    Love to hear some thoughts and opinions especially from people who have been able to replace their income from employment with a passive income be it through property or any other investment vehicle
     
  2. Ouchmyknees

    Ouchmyknees Well-Known Member

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    If I'm reading it correctly, "$6million in IP at 80% LVR = $4.8milion debt", you are assuming there is no capital growth for 12 years?

    Unless you mean you will keep refinancing all IPs in the 12 year period to get equity out (and maintain LVR at 80%) to fund future IP purchases.
     
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  3. gecko235

    gecko235 Active Member

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    Development might be a useful strategy.

    One of the properties I own is subdividable.

    1x400k land
    3x200k for building
    Total 1m

    Finished product sells for 400k
    3x400k=1.2m

    Rough numbers.
     
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  4. wombat777

    wombat777 Well-Known Member

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    This! Read some of @Leo2413's and @MTR's posts.

    It might take you a bit to build equity to get started. One approach is to start with small projects.
     
  5. MTR

    MTR Well-Known Member

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    Just a few strategies to increase the odds in your favour.

    Only buy in a rising/booming market in all markets across Australia, as many as you can finance/buy, and sell down prior to peak.
    If you don't understand when markets are moving start learning because this will save you many years and one of the easiest ways to make money.

    Developing Property
    Source sites where you can add value, start small and learn along the way. Sell down properties and create cash flow.

    Put together DA (approved plans and permits)
    Once you have been involved with developing you will be able to use this strategy very easily. Basically identifying blocks of land where you get council approval, but do not build, flick it to a builder, these can make you 25%, low risk short time frame. The builder needs to have 20% minimum in the game.

    Buy Below Market Value
    Find a dud real estate agent, I can tell you there is one or more in any State around Australia, network and source properties well below market value and access equity move on.

    I created income streams using all the above strategies and also buying in USA properties with over 20% yields.
    Currently continuing to buy properties in US and developing property in US.

    MTR:)

    R
     
  6. John Ferguson

    John Ferguson Well-Known Member

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    Naturally equity is going to have to be used to purchase further properties for the average person/family as the entry costs to get into property and the deposit required is substantial and raising enough cash to keep buying further properties is a difficult task.

    It's very hard to gage how much growth to put into a model as so many investors invest in the wrong properties and experience minimal growth. Obviously there are exceptions who could achieve an average return of 10% per annum. This would be rate. I'd suggest the majority would get growth between 3-5% on average.

    Venture capitalist invest with an expected ROI of 20% and they highly skilled intelligent individuals.

    Just my thoughts and opinions
     
  7. Ace in the Hole

    Ace in the Hole Well-Known Member

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    Why not do both, we did and it worked very well.
    No risk because we started with only 12k.

    Regarding the headline question, income level makes a huge difference to results, all else being equal.
     
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  8. John Ferguson

    John Ferguson Well-Known Member

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    Thanks for he response. Sounds like you are an experienced and skilled investor.

    I will have to look at more of your posts.

    My plan is to start to source development opportunities and I am in Talks of getting into a broking business with another broker, which is going to effect my burrowing capacity short term, but long term I think it can provide me with access to more opportunities and the opportunity to earn a higher income and build a passive income through a trailing commission and build the wealth of the business.
     
    Last edited: 4th Nov, 2016
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  9. John Ferguson

    John Ferguson Well-Known Member

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    I'm currently looking for properties with subdivision potential. Hard to find anything available worth investing in at the moment in Hobart.

    Do not have the income stream currently to burrow enough to tackle anything on the mainland or the resources to source something with potential
     
  10. John Ferguson

    John Ferguson Well-Known Member

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    Doing both is definitely what I am researching and studying at the moment.

    I believe people are fairly naive when they think investing in property is how they are going to replace their income and retire in 10-15 years and don't realise how difficult it is and that you need other ways to create passive income.

    But having a high income can definitely accelerate the process.
     
    Last edited: 4th Nov, 2016
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  11. Sackie

    Sackie Well-Known Member

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    Can you really retire from investing in property in under 15 years?

    Yes it's within the realm of possibility imo.

    Depending on how much your net passive income figure is for 15 years time. 50k passive income is much different to 200k. Will take risk, slogging, many sacrifices, a lot of hard work and the right mindset. Get that last one wrong and its little chance imo.

    But it's possible if you want it bad.


    Just my 2 cents.
     
  12. larrylarry

    larrylarry Well-Known Member

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    Yes I am doing both.
     
  13. John Ferguson

    John Ferguson Well-Known Member

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    Do you mind providing some info about what you have done and how it's worked etc. do you have a business as well as investments etc.

    I'm always very interested in hearing how others have created success.
     
    Last edited: 4th Nov, 2016
  14. Phase2

    Phase2 Well-Known Member

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    You could just sell up all 6 properties (staging sales so that you don't get a huge CGT hit) and reinvest the remaining equity in Industrial stocks or the oft-mentioned LICs / ETFs. That will probably be my play at retirement time.

    Say you managed to end up with $1m after selling up. Fully franked divs in decent companies are around 5.5-5.8% at the moment. If you stopped work, you'd fully benefit from the franking credits, taking you to around 8% yield. = $80k/yr, split between husband and wife = $40k ea, which is ~ $35k ea after tax.

    I could live pretty comfortably on $70k/yr with the PPOR paid off.
     
  15. Perthguy

    Perthguy Well-Known Member

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    I agree. It does depend where you are starting from though, what your income level is and how you invest in property. For example, I have been investing with a mate 50/50 on properties for 9 years. We are doing ok but I doubt we would be ready to retire in another 6 years. The problem is when we started we were both broke low income earners. The first 2 properties were 105% lends because we didn't have any cash to put into them.

    However, we have done ok and now have some equity and cashflow behind us. I am preparing to make the most of the next round of property booms in the next 15 years. I believe that in the next 15 years Brisbane, Perth, Melbourne and Sydney will all boom. Adelaide may also have some strong growth.

    If you could more or less pick the order of the booms, buy splitter blocks, knock down the houses and build two new ones and get the timing roughly right moving from City to City, I think you could build up a decent portfolio as long as you are prepared to strategically sell down assets at the right time to keep moving forward. But it depends on where you are starting from and what your income is.

    Starting from a low base, I think it would be a lot of work to position yourself to retire in 15 years.
     
  16. Cactus

    Cactus Well-Known Member

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    Yes, I believe so, and I believe you answered your own question. I'm doing what you have said. I'm 2 years in. Let's speak in 11 years time at my latest target date.
     
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  17. sash

    sash Well-Known Member

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    I have achieved financial freedom in about 12 year...mostly buy and hold.

    Pretty much can replace my net income by selling 20% of portfolio of 30....
     
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  18. John Ferguson

    John Ferguson Well-Known Member

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    That is another strategy I have also thought about and it does make a lot of sense. Something I will contemplate if I get to that position.
     
  19. Cactus

    Cactus Well-Known Member

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    Why don't you?


    (I ask when I prob won't either. Meliora Sequamur)
     
  20. tobe

    tobe Well-Known Member

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    I've been investing almost 15yrs. Got 6 properties. Overall cashflow neutral. Over the 15 years it has only been slightly negative, haven't noticed really. Always managed thru an agent, time factor minimal.

    Was able to access equity 2 years ago and start a business and have 2 years income ready while I build it.
    Haven't done any development, sold any properties or anything tricky. I guess the only thing I've done is gear. I kept the overall lvr at 95% until just before the gfc and then spent a good while locked out when banks rules and my circumstances changed.
    Is it possible to retire? Maybe, but the income wouldn't be great initially until the yields increased.