How much property do you REALLY need???

Hi All,

Last Wednesday we had the regular meet-up organised by @skater at Wenty Leagues in Sydney.

Happened to finally put name to face for @Handyandy, undoubtedly one of the most successful investors on PC - in both Sydney & US markets. Got chatting with Mrs. Handyandy. Mrs. Handyandy made a good point that any income they receive from property is equally divided into 3 portions:

1) Property Maintenance
2) Bills - inc taxes
3) What they must pay themselves

I must admit, no body has articulated it that simply. Typically people use percentages...not really something that gets registered so this formula seemed to make sense.

The discussion yielded their take (per my understanding) that if you are aiming for 150k in income, you need to divide that into 3 parts - 50k for maintenance, 50k bills, 50k for what you could pay yourself.

So that to me, fails the test of requiring 20 times the income required in unencumbered assets; 20 x $150k = $3,000,000 in equity. i.e. a base portfolio of AT LEAST $3,000,000 TODAY for this to happen at a future point in time.

So to really get $150k in income you need to be aiming for 3 x $150,000 = $450,000 i.e. $9,000,000 in equity (20 x $450,000) in today's dollars, i.e. a base portfolio of AT LEAST 9,000,000 TODAY for this to happen at a future point in time.

Keen to know your take on this. It's not impossible, however it would really depend on when you start investing. People may disagree with these numbers, but going by what was called out by someone whose been there and done that, I took note of this and I think this point needs important consideration, else all posts which aim for 100k, 150k or whatever amount are a stab in the dark - not saying it's wrong, just that it needs a bit more consideration once that goal is set.

Also, @skater made a good point that you don't really need that much to live on comfortably given you'd expect paying down your PPOR was part of the plan and that way you make considerable savings and technically don't really need THAT much to live on - in today's dollars of course.

What's your take on this?

Edit: These calcs are at 5%. A number of us on here aim for more than 7% returns from day 1 FYI.

Cheers.

 

Well, I think 5 acres is not really enough, but would live with that, or an acre if I really had too......oh, you mean how many properties

I saw you come in, and then you ran off early, anyway, if you asked me, I would say pay the loans off, I know people with nowhere near this ridiculous amount of $$$ of property with the 9, but they do not owe a cent & live comfortably without any govt assistance, have done for a long time.

 

I don't think they meant "equally"

 

You aren't increasing your yield. You don't go and buy a 9m asset yielding 5% then retire. Over 10-20 years your yield based on purchase price increases and should be in double digits.

 

If consistently 1/3 in property maintenance, you either need a better class property, or tenant.........

I suspect that these figures may not be a true over the long term, as it is my understanding that Handyandy is refurbishing a lot of places currently.

Once this is completed I would expect the maintenance figures to reduce considerably.

 

Not necessarily. If you're pegging a 5-6% return and spend 2% of capital value on r&m then @Handyandy is soot on.

Accelerated depreciation makes up some of the difference.

 

I agree on splitting the income into those 3 parts, however there is no way it would be equal. 50k on maintenance on a 150k income, surely that is wrong.

I'm still accumulating but for example on the 57k annual rent of current IP portfolio, only $1,300 went to maintenance (2.3%) including a new fence! so I really only average spend $200 (0.3%) nothing close to the 33.33% quoted.

Bills, if that includes loans/interest is way more than a 3rd. For me it's about 87% currently. Without loans would be 27% so closer to the 3rd

So if loans were payed off then I would be paying myself around 72% of the rental income before tax or more than 50% after tax.

So going off this I don't think you would need that 9mil equity to pay yourself 150k. I think closer to 6mil would do it easy i.e. 20x300k

 

I don't think it's too far off actually.

Firstly if they have a lot of properties they may pay an avg tax rate of 30%

A lot of people have written before that their maintenance and management costs exceed 20% and are closer to 30%.

I suppose that leaves an earning of 40%.

 

I think you will find that maintenance in the USA is a lot higher than it is here. I think I read somewhere that you need to make everything like new again for each tenancy, because the tenants are really picky. Handyandy has, as you all know, quite a few US properties.

He also has been doing a lot of renovating, and as he owns a heap of unit blocks, there has been some very expensive work on the structures. Things like concrete cancer, I believe.

Our portfolio is completely different. We have a broad base of single houses, with a couple of units thrown into the mix. Our maintenance costs aren't that high. Plus ours are spread out, over several States. Things like Land Tax are not overly expensive. I'm not sure what kind of stuctures Handyandy has in place, but lets, for a minute, presume he has each unit block in a separate trust. Right there, you have big accounting bills, and probably Land Tax on each structure.

We have been living quite comfortably for 12 months off of the income from our portfolio. While I haven't sat down & worked out the percentages of maintenance and bills, etc, we have all income going into the one account, and all payments coming out of that same account. I then draw a certain amount each month for our living expenses. I DID do a large spreadsheet before Hubby left his job, which had all expenses including things like Land Tax, taken into account. We don't draw a huge amount to live off, and it's working fine so far, but we have more property that we could easily sell if we've left ourselves with too little income. I wanted to preserve as many as possible in the portfolio, but I'm not emotionally attached to them either.

 

We got nothing on HandyAndy, but feel those 3 categories are nowhere near equal cuts, but it would be a case by case thing.

On a 10 mil purely resi portfolio for the past 5 years, our maintenance has come in at less than 1% of total rental income.

Insurance, management fees, bills, land/personal taxes, etc, would come under point 2.
Can't imagine this would be any more than 25% depending on how you're structured.

In my opinion, you'd keep closer to 125 of 150 in the example, rather than just 50 of 150.
But again, case by case basis.

 

Sounds a little high but not too far off the mark. The longer you own the properties the more they get neglected, after 10 years of people living in there who don't have a vested interest in caring for the place you are up for a 10k reno even on a unit or small house. 15-20 years later your talking ripping out kitchens and bathrooms so the figures are even higher.

 

HA portfolio's in the main is in Sydney market, I think he has around 14 properties in Atlanta and 60 properties in Sydney.

Holding property in US is not much different to holding property in Australia in terms of maintenance costs, though PM a different beast, but taxes are less and maintenance/trades much cheaper in US to trades in Australia.





MTR

 

Nice thread

 

Skater is it too personal to share how much you guys are living off pa? I assume no mortgage on ppor as well? And that its just the two of you that you need to sustain?

 

Regarding US property maintenance, for our properties there we use a fantastic product called "Home Warranty Insurance". You pay $600 (per property, per year) and if anything goes wrong, it's a $60 call out fee and the problem is taken care of including parts. There is a list of parts not included (generally major capital expenses like a whole dishwasher or hot water system) but having owned there for about 5 years now we've never been hit with any extra charges on any call out. It basically allows you to have much greater control over maintenance expenses and the company will send out basically any licenced trade for any problem.

For anyone who owns property in the US who isn't aware of it I'd suggest getting onto it! The cost is in addition to normal home/contents insurance but well worth the money!

 

I have handled this in a different way. I get rents from 4 properties. I have sold down the remainder, some I have put into dividend reaping shares but the remainder sits in an interest bearing account that I draw down on, to pay the outgoings on the 5 properties, including the PPOR. I like having the ability to use the cash for anything I want, eg flying somewhere on a whim buying a $500 pair of shoes. Replacing my car with a new one, etc.

I started off with 16 properties when Alan died but had mortgages on some, so sold down and paid them off, then as time has gone on I sold one a year but stopped selling them off 3 years ago. This funds a very good lifestyle for me and my adult son. At this stage I do not need to sell any more, which means I will be leaving 5 properties to my son, who has his own house.

I know some will disagree with my method, but it suits me.

 

Nothing wrong with that method Chippy. We'll be doing the same eventually, putting up with a double digits worth of tenants has no appeal to me. You only need so much at the end of the day and the older I get the less I find I spend anyway.

 

Good for you.......Why would anyone disagree, many on PC are trying to replicate what you have achieved.

 

The only property you NEED to have is a mortgage free PPOR. Everything else you can have but there is NO NEED for it.
Me personally - I'm leaving only two (and not renting them out).

 

Also, most investors I know who have reached financial freedom don't ever stop investing/trading and continuing to create income/cash flow, if you like what you are doing and its fun, then there is no need to stop.