And i was having a chat in some online investor group about properties and met this guy who thinks he can guide us to replace our income with passive in 10 years... He wrote me an email a day later ... Warning: it is very lengthy so please be patient ... Spoiler: Email - - - I worked in the patholgoy department of a big hospital for 24 years before I migrated to Australia. I retired at the age of 45. It was not due to my high salary (income) in the hospital, it is due to my investments on properties early at young age. I started investing in properties at the age of 23 up to now (63). The investment environment at that time was very good for starting investments in properties. The bank was providing 90% loan to the investors. As an property investor, I just need to pump in 10% of the purchase cost. At that time, there was no possibility of doing property development by me. The area of investment is of critical issue to my success. At that time, I selected the Discovery Bay area of Hong Kong. It is an outlying island from the Hong Kong island. Most of the houses are villas or terraces. Occasionally, there were some highrise apartments as well. The only transport to the Hong Kong island was by speedy ferries. The estate environment is more like environments in overseas countries such as Australia, USA or some developed Western Countries. Most of the expatriates working in Hong Kong would like to live in this area. As a result, the rental income is relatively higher and the lifestyles are more like overseas countries. It would be easier to rent out the properties. Yet the property prices are relatively cheaper than many urban area because of inconvenient public transport and more expensive transportation fees. Can you see the point I am trying to tell you? Select area that would give you good rental income and have appreciation opportunities in the future. The purchase price has to be realistic and should be affordable to most working classes (most people). Properties like this would provide positive cashflow for your investment. The annual return at that time was around 12-13% per year. The interest rate was about 8-10% per year. e.g. A one bedroom apartment with purchase price of HK$400,000 would give you a monthly rental of HK$4800. The monthly bank mortgage repayment (capital and interest) was around HK$4200. I would end up having an extra income of HK$600 in my pocket. I hope you can see the point. OK, now back to our Australian environment. You are in Sydney and I am in Melbourne. You know the difference in property prices in the two cities better than I do. I would not advise clients to do anymore property investments in Sydney at this price level because the price is too high and the rental return is too low. Most of the investments are of negative gearing. That means investors would lose money every year in order to upkeep the property. The rental income is not enough to cover the interest of the mortgage. If you are having just one or two investment properties, you may still be able to support the negative gearing properties. If you have more properties in your portfolio, then it is difficult to support these negative gearing properties. We are in the hope that the appreciation is quick enough to cover up the loss in the negative gearing properties. However, there is always a limit to which a property can keep on appreciating. That is the question of affordability. The appreciation would slow down or stop when the price is beyond the reach of most Australians. (except a small amount of rich Chinese business owners). Another story I need to tell you is "When to retreat from the property market?" At the end of 1996, I sold out all my properties in Hong Kong including the one I was living in myself. That means I retreated from the Hong Kong property market completely at that time. The reason for my selling of properties were as follows: 1. Political uncertainty after 1997 with the return of Hong Kong to China. 2. The property prices are beyond the reach of at least 95% of the people (unaffordable prices) This situation told me that the peak of the property cycle has been very close. I made the decision to cash out and take the profits first. It is proved to be correct because the property market of Hong Kong crashed down in 1998 for 70% from the peak level. A lot of greedy investors turned into bankrucy or committing suicide or got into psychiatric hospitals. Property market has its own cycle. In Sydney, the cycle is advancing to a very high level. The prices are beyond the reach of most working classes. I estimate it is beyond the affordability of at least 80% of the people. As a smart investor, I would not step into this situation at this level. The upside is around 10-20%. The downside is about 40-50% The decision is yours. Let's talk about the main topic of how to achieve passive income to replace your salary income (or active income). I hope you should understand what I mean by active income. You know passive income, so I assume you should know active income. The definition of passive income is: no matter whether you are getting out of bed every morning to report to your company or you have to work for someone in order to get the income, the money is keep coming into your bank account regularly every month and every year. Right! Passive income could be in many formats such as dividend payment, pension, rental income or gift income from someone etc., Out of the different formats of passive income, the rental income is usually accessible by most people if they have invested in properties. In other words, if your rental income minus your mortgage payment is your net rental income. You just create your net rental income after cost =your salary income. In such a situation, your passive income =your current salary income. In order to increase your rental income, you have to acquire more properties that can produce a good rental income for you. I have told you that it is better to buy into good rental income properties with appreciation potential and yet the purchase prices are not too high. The cheaper the better. In my seminar, I would teach investors to buy into old properties with land bigger than 700 Sq. M. so that we can build another two properties at the backyard. Not all properties with this criteria would allow you to build two more properties at the back. We have to search for these types of existing properties for the clients. We should find some area or suburbs that the price and rent is in good proportion. e.g. A property of 746 Sq. M. that allows to build one 3 bedroom and a 2 bedroom townhouses at the back. The purchase price is $210,000. I missed out this one for my client last Saturday because it was sold earlier to the auction. The stupid agent did not tell me that someone is placing an offer before the auction. I have two clients who want to buy into this property with me going to the auction for them. I was familiar with the owners of that agency. The agent did not know me well. The property is 93 Station Street, Norlane Victoria. You may check on it yourself. My plan is that if I can acquire that property for the client, then we would rent out the front house straight away to get a rental income of at least $220-240 per week for the first year. We would apply for planning permits to build the two new properties at the back during the first year. Within 18 months, we should be having three properties on the lot. I would asvise the clients not to sell these properties at once for the short term profit. Instead, I would advise the client to rent out all the properties for rental income. The new properties would get at least $270-280 per week. The three properties woud get around $800 dollars a week (more than $3200 per month). The rental income is good enough to cover his bank mortgage interest. After one year, we would do refinancing from the bank to see what is the total market values of the three properties. The client would carry on with his career earning the salary income to save some spare capital. When the spare capital together with the increased equity in the three investment properties is enough to be used as the starting capital for a second project, the client would buy into another similar property repeating the same thing. The client needs to develop twice only in a ten year period. When the second project is completed, the client is holding 6 investment properties all for rental income. He just holds on to these 6 investment properties for a total period of ten years. The first project takes about 2 years to complete.-hold on to them for another 8 years. The second projects started 2 years later and completed at the fourth year-hold on to them for another 6 years. At the end of the 10 years period, check on the market values of the 6 properties. I would assume they should have doubled in their values in 10 years. It is highly achievable in Australia with entry prices of $200,000-500,000. When the prices are doubled by itself, the client may select one or two most expensive properties out of the 6 properties and sell them to pay back the mortgage of the bank. You would find that the client is still holding on to four investment properties which would bring to him an anual rental income of at least $50,000 without any mortgage loan. We all know that the average salary for a working individual in Australia is around $60,000 per year. With a passive income of $50,000-55,000 would allow the client to live a very comfortable lifestyle in Australia. The client doesn't need to cash out the profit from all the properties. I am assuming the average value of each remaining property is $250,000 adding to a total of $1 Million. The average rental income for these properties would be 5% per year. It would provide an additional income of $50,000 to the client. Do you like to have such passive income for your family? There is no way for you to get this result by investing in most area of Sydney, unless you have to travel 3-4 hours out of Sydney centre to look for those neutrally geared or positively geared properties. In Melbourne , we have this condition and environment for the start-up investors. In Australia, we have the best property management system in the world. It would not cause problems for us to invest in properties in other states. Not many places in the world has this system including USA, Canada, Hong Kong, Malaysia, Taiwan, China, Macau, Europe etc., I hope that you can understand my illustration in words. If not , let me know so that I can use some graphics to show you again. When I come to Sydney for a seminar, I would let you know.