How to Mini-Retire on Just 4 Investment Properties

How to Mini-Retire on Just 4 Investment Properties



Many people want to get out of the rat race as soon as possible. One way they could do this quickly is by buy selling properties every few years. The sale would generate a lump sum upon which the person could live on for the next 2 to 3 years. Buying another would replace the sale of the one sold.


Most would estimate a large number of properties would be needed for this, but it could possibly be done on just 3 or 4 investment properties.


Example (hypothetical)

Bart buys a $400,000 property which he anticipates will doubles in value every 10 years. He borrows $400,000 tp buy it.


Bart needs about $80,000 pa to live on (before tax), but at the moment the rent equals the expenses so it would be a long time before Bart could retire on property alone. By this time Bart may have owned the first property for 5 years.


Bart buys another 3 properties over the following years and now has 4 properties.

By this time 10 years has passed since the first property was purchased and the $400,000 property (No. 1) is now worth $800,000.


Bart plans on quitting his job and selling Property 1 on July 1. He will have a $400,000 capital gain for which he would pay $80,000 in capital gains tax at most – Actually if he has no other income it would be around $67,232 in tax. Lets round this up to $80,000.


So after paying $40,000 in tax Bart would have $320,000. $320,000/$80,000 = about 4 years of living expenses. It would actually be more because tax has already been paid on this, but let’s just assume it is 4 years. So Bart could lay on the beach for the next 4 years doing absolutely no work and still have enough to get by.


But now Bart has now only got 3 properties left. If he sold the next one, and then the 3rd and then the 4th he may run out of money to live on in about 16 years.


To overcome this problem Bart needs to buy another replacement property when he sells Property 1. So what he would do is to apply for another loan before he quits his job. If he can service he could purchase Property 5 before he sells Property 1. If servicing is tight he may have to sell Property 1 first.


At this point property 1 is now worth $800,000 so Bart should probably be borrowing $800,000 to buy Property 5. This may be the sticking point with declining serviceability. Also the $800,000 property is fully borrowed for so the cash flow may be negative by a few thousands – especially if Bart will have income during this period.


So let’s assume Bart could purchase Property 5, he has sold Property 1 so he still has 4 properties all growing in value by about 5% per year on average. Rents will be increasing along the way but hopefully Bart will be able to hold out the full 4 years. If he can’t this strategy would still work if he had 4 properties because by the time he gets around to selling number 5 it may be 20 years instead of 10.


After 4 years Bart needs some more money again and he must sell Property 2.


Bart would need to get a loan to buy Property 6 as a replacement property for Property 2.


To do this he may have to go back to work again for say 6 months. This would give him the income to qualify for the loan with. Once he has gotten the loan he can quit and go back to retirement.


After 4 more years he would sell the next property.


And so on.


Issues to consider

a) Loans will revert to PI

This can be budgeted for, and reducing loan balance means less interest and more profits but it will each into cashflow. But keep in mind the principal payments will mean there is more cash available when the property is sold.


b) Difficulties getting a job after 4 years not working

This will be potentially difficult, depending on what industry you work in.


c) Difficulty getting a loan

We don’t know what the lending environment will be like in 4 years. Will you b able to get a job and if so would the income be enough to service? Short answer is we don’t know.


d) Rising interest rates could also eat into Cash Flow

This could be avoided by fixing loans


e) CGT

I have assumed the worst case scenario in terms of CGT. This could be reduced in several ways – such as prepaying interest on remaining loans in the year of the sale.

There may be negative taxable income too while not working and these losses would be carried forward.

Properties may even be jointly owned with each spouse being taxed on just 50%.

Different ownership structures could be used.

I might cover this in more detail in a Part 2.


f) No growth

Capital growth properties should be aimed for. If there are 4 properties and each is being sold every 4 years it would be about 12 years between purchase and sale so this should allow for at least some decent growth.

Feel free to rip this strategy to shreds

 

To address the difficulty of getting another job after being out of the workforce, an alternative may be to take a 12mth leave of absence without pay during the year the property is sold and the cgt event is triggered....

Potentially then also haggle with employer upon return to said job to convert job to part-time status.

 

Maternity leave is your friend. Is it wrong to call babies income producing/tax saving vehicles?

 

@peastman had a similar strategy "The Lazy Persons Guide to Property Investing"

Buy a property every 3 years.
In 15 years you will have 5 properties.
Then buy and sell 1 every 3 years.
This gives 15 years growth every 3 years

 

Hahaha.... where do I start?
If Bart bought at the height of boom in 2008 in Perth, his property is probably still below what he paid for. Poor Bart is going to have to work until he is 96.

You can't get a new loan buy just working 6 months. Most banks want to see your two year tax returns.

There are so big holes in this "strategy" I could fit an elephant through.

A much easier and straight forward way to reach $80k passive income is try to have 2 to 3 paid off investment properties. They will get you close to $80k.

 

Or. If Bart bought in Sydney in 2008, he's sitting on a beach drinking Mojitos.

 

Not in Perth My IP in Perth was at $440 pw (4 paid off properties required), but is now at $280 pw (6 paid off properties required).

 

You may be thinking of self employed. In a PAYG job any lender will give you a loan if you've been in a job for 6 months.

You might be onto something though. Lenders want to see your employment history for 2 years. If your history shows that you work for a few months, then quit for a few years, then work again when you want to borrow more money, that's going to be a problem.


I agree that Terry's strategy has holes and significant risks. Here's a safer strategy:

* Buy 4 properties as quickly as possible.
* Buy another 2 properties after 10-15 years. The cash flow from the first 4 should easily support these two.
* Over time, use the surplus cash flow to pay down debt.
* At 20 years, sell one or two properties over a period of time (to manage capital gains) and pay off any remaining debt.
* With 4 properties you probably can't live like a king on the rental income, but you'll live quite well with little risk.

This is a very basic strategy that most people can achieve with very little risk. Most of the sacrifice is in the first few years. The downside is nobody likes to think of a 20 year strategy, many people I speak with want to do it in 5 years. The upside is that with a little more effort, you can actually do a lot better an asset base of 6 properties and a basic end income.

 

Thanks Zac, let me counter your arguments below:

If Bart bought at the height of boom in 2008 in Perth, his property is probably still below what he paid for. Poor Bart is going to have to work until he is 96.

If Bart had bought in Perth or anywhere else with no capital gains he would hopefully not be paying properties 2,3 and 4 in the same location.

You can't get a new loan buy just working 6 months. Most banks want to see your two year tax returns.

Don't forget I am a finance broker - this is only the case for self employed. If you are employed as a PAYG then generally you would need to be in a job 3 to 6 months.

There are so big holes in this "strategy" I could fit an elephant through.

Any other examples?

A much easier and straight forward way to reach $80k passive income is try to have 2 to 3 paid off investment properties. They will get you close to $80k.

With 3 x $500,000 properties rented at say $400 pw you would only have rental income of $62,400 before costs are taken into account. If these were 20% of rent that would leave just $49,920 p.a. pre tax.


I am not saying that paying off 2 or 3 properties is a bad idea, but just that it may take longer. A way to speed this up is to buy 6 and then sell 3, but this is harder now with the servicing restrictions.

 

Why all the buying and selling?
You lose 5% of purchase price on the way in (Stamp duty, fees etc), and 3% on the way out, plus CGT.

Why not just borrow against value increases and LOE?

In your example he still ends up with increasing debt load anyway.

Blacky

 

Thanks Redwing. I had a read of these and it is very similar. But I didn't see where he talks about retiring.

 

Its mainly because of serviceability. If you can borrow you should do this first and live off the rents, not the loan, use the loan to fund the repayments as it is more tax effective.

Once the loan runs out you may need to sell at this point, but using the loan may have squeezed out an extra 1 to 2 years growth out of that property.

 

Yes, this has been basically my strategy.
But interestingly after acquiring my properties I have found I don't really need to purchase any more. My spreadsheet tells me I can retire comfortably for the next 30 years or more. By then I will be pushing 90 and not needing much money anyway.

 

thanks peastman. I should point out in this strategy you would only be selling when you had to and only to get money to live on for the next few years. If you can delay or even avoid selling that would be better as you are delaying tax and avoiding transaction costs.

 

Can you elaborate on how your numbers work?

 

This is the investor club model, they call it harvesting I think??

I just don't like this model whatsoever. There are too many variables that can impact considerably on the outcome and you have mentioned these.

How can you truly retire if you are dependent on finance??? no job, no loan??

 

We should get Phil (@peastman) to run a workshop on his model.

His model is fairly sophisticated and takes into account a lot of variables including growth and rental income. Scenarios have been run around low and high growth. He's got it to the point were growth isn't really required.

It's at the stage where it's no longer dependant on finance. In context however you probably can't execute this strategy at 30 or 40. Phil also did his modelling long before he executed the retirement strategy, so he knew the specifics of the goal to work towards and had very clear plans in place.

 

While I don't really want to disclose my personal finances on a public forum, basically I have made a spreadsheet that takes into account my property and non property assets, with variables for the year, income required, interest rates, inflation and real estate growth. CGT and selling costs are taken into consideration too.
It then gives me projections on when the money runs out. By using conservative numbers of Income required = $80k, Interest rate = 6%. Inflation = 3% and growth = 4% it tells me I run out of money at age 92.
However reality will never be as straight forward as my spreadsheet. Numbers will go up and down all over the place, but it gives me an indication. I will be checking annually and adjusting accordingly.
Life is good.

 

Right.
So are you are using this model now and not reliant on income from a day job?

 

I am not reliant on a day job anymore, but I do still do a few bits and pieces, just because.
My wife still works full time because she is enjoying her job, but in a couple of years she will be 60 and I think that's when she will say "no more".
But I would not be surprised if we still keep doing some sort of work, but very much on our terms.