Help with end goal math to work backwards.

Firstly, apologies if this is posted in the wrong section.

One thing I've learnt, unfortunately already after starting our investment journey (but better late than never right?) is to have a goal and work backwards by choosing strategies and purchasing properties that work towards that goal.

This is all good and well, except my math ability still fails me.

Could someone please explain how to workout the following - I'd like to be shown how the math works so that if we decide to move the goalpoasts we can reassess, also others mathematically challenged can learn, so provided actual numbers for examples).

- Goal of $X property portfolio (in today's value) all paid off in Y amount of years. ($2mil in 20 years)
- Goal of $X passive rental income (assuming nothing owed on loans and after expenses) in the equivalent of today's value in Y years ($100,000 pa in 20 years)

I'm aware many assumptions will need to be estimated/averaged out (inflation, growth etc). I'll admit its a bit out of my depth for now but hoping that the kind people of PC will take the time to explain it to this simpleton.

Obviously strategy would be dependant on income and risk tolerance amongst other things, but just trying to get my head wrapped around the basics as from what I understand in this post APRA environment where credit isn't as easy to get, it is more important than ever to make every purchase count.

Thanks in advance.

 

If the goal is $100,000 pa in rental income.

Lets assume 20% of income is related expenses, so you'd need 100,000 / .8 = $125,000 pre expenses.

Assume you get 5% yield from property, so you'd need 125,000 / 0.5 = $2,500,000 net assets.

How you get that $2,500,000 is dependent on your circumstances, location, skillset etc.

It might be 5 x $500,000 fully paid off.
It might be 10 x $500,000 with 50 LVR
It might be 100 x $100,000 with 75 LVR

You can adjust the numbers based on your own expense levels and yields.

 

@D.T. good post, but there's a small mistake in it.
Given a 5% yield with 4.3% interest and 1% costs on top (20% of 5%) would mean that you actually have less cash to play with in examples two and three.
You can of course rejig it slightly to have costs and and interest equal your yield and they will cancel out.

 

This is how I work it out.

goal = $100,000 income pa in today's dollars before tax.
Yield on type of property looking at on average = 5%
Yield after expenses = 4%.

To get the capital needed just divide the desired income by the yield after expenses
$100,000 divided by 4% = $2,500,000

Test it by $2,500,000 x 4% = $100,000

This means you will need roughly $2,500,000 in unencumbered property to generate a $100,000 pre tax income. In today's dollars.

If you are looking at $500,000 type properties you may need 5 of them fully paid off.

How do you get 5?

2 ways
1) buy 5 and just pay them off
2) buy more than 5 and sell some to pay off the rest
a) this may involve buying 10 and selling 5


or

say buy 10 and aim for $2,500,000 in equity without having to sell. You might sell one every now and then to use as supplementary income while your rents rise.

 

Thanks for all your replies. It really is much simpler than I thought. Also, good to know that although perhaps modest goals to many others, it is unreal to think that supplementing one of our annual incomes by the time we reach 50 is very possible!

 

It's very doable by basically anyone. Just have to stick to it.

I have friends who want to do it, and have the money/income to do it, but are in eternal state of "I just need to buy/do X first."

 

They should read the book 'slight edge'. Things easy to do are generally not done because they are easy to do - easy to put off until later, but later never comes.

 

It shouldn't be a concern in general as it's too far into the future, but you probably have to run inflation into your numbers. When you say $100k in 20 years, that's probably in today's terms.

To get the same bang for buck in 20 years it's probably closer to $200k, and hence a 5% return means you need a $4m equity position.

 

I don't work inflation in because we are talking property so they will grow in value at or more than inflation as will rents.

So the amount of properties you need = say 5 x $500,000 properties is $500,000 properties in today's market. Next year these properties maybe worth $540k and so on.

 

Here's the shortened Version

 

Have a look at this list.
https://propertychat.com.au/community/threads/excel-list.338/#post-3128

There is a file called: 41 Required_Asset_to_Retire.xlsx
"I created this excel file to test how much IP assets we need to accumulated in order to achieve desired passive income.
- Inputs go into the yellow cells (all in Col B & C).
- Cell B21 is where you can experiment to see how much more you need to invest.
- Age & Year cols will be shaded in green if you have enough investments.
"

 

I'm working on the basis that around 30 % of rental income will go on expenses / maintenance .

There is a member who has a large long term portfolio and that is the value he's found he runs at.


Cliff

 

I think you're probably right.

 

+1. This spreadsheet is great

 

Don't forget the tax man's piece of that nice $100k figure..

On a side note:
Maybe that is why having decent depreciation benefits on a buy and never sell strategy is good (even though they eventually run dry). You arent realising the cg ( and the reduced cost base) but maintain paper deductions freeing up more of your 100k desired profit..

 

I think the problem with that is that by retirement time, they're used up.

Personally I'd rather collect old properties now to hold, then redevelop them just prior to retirement. That way, have lower maintenance properties and nice tax benefits when you need to enjoy your time and money respectively.

 

Do tax benefits matter much if I'm aiming to earn 80K after retiring?

 

If you have a spouse that is $40k each perhaps. not much tax on that, but dollars helps.

 

Probably not, but might mean the difference between needing to generate a portfolio grossing $100K vs $130K