Working out How Many Properties are Needed to Reach you Goal These are the rough steps to work out how many properties you need to buy to reach your goals. Step 1: How much income do you want? Firstly work out the destination to your journey. How much money do you want to be earning from property, per year, as a passive income. Work it out for gross pre-tax income and don’t worry about inflation for now. Keep in mind you may have separate retirement income from super which we won’t take into account here. Example, Mr and Mrs Johnson want an annual pre-tax income of $100,000. Step 2: How much yield Work out the approximate yield of the properties you want to focus on. If you want to get a variety of different types of property then average out the yields. Property related expenses need to be taken into account so reduce the yield by about 20%. Example, if your properties are returning 5%, work on 4% after costs (management fees, insurances, repairs etc) Step 3: Work out the Capital Needed To Generate the Income. Take the income worked out in step 1 and divide it by the yield in step 2. Example $100,000 / 4% = $2,500,000 This figure is the amount of unencumbered property that you will need to reach your desired income level. By this stage the first signs of depression may appear. Step 4: How many properties to get the income In this step you should average the purchase prices of the properties you are focusing on and see how many of these you need paid off to get the figure in Step 3. e.g. $400,000 properties – 2,500,000/400,000 = 6.25 So you would need 6.25 properties paid off in full. Step 5: Check your figures by going backwards Take the number of properties need and x by the average purchase price and then divide this by the yield and see if you get the desired income in step 1. 6.25 x $400,000 = $2,500,000 $2,500,000 x 4% = $100,000 Step 6: How soon do you want to get there? Work out how often you have to end up with a fully paid off property (on average). X properties in Y years = Y/X 6.25 properties in 10 years = 10/6.25 = 1.6 So every 1.6 years you must pay off one property. Step 7: Face Reality Full stage depression has probably now set in as you realise that paying off one property every 1.6 years may be rather difficult, even if you could save 200% of your salary. Step 8: Consider Strategies to Speed Things up at the end There are various strategies which can help to speed things up, some of which are: Strategy A If you can tap into some good capital gains it may be possible to buy more properties than needed and then sell some down. In this example 6.25 properties unencumbered are needed. This could possibly be achieved faster by buying 13 properties and then selling 5 and paying down the debt on the remaining ones. There are various strategies to reduce CGT when doing this. Strategy B Sell the PPOR tax free and move into an investment property. A variation of Strategy A. Strategy C Don’t pay down the loans on the investment properties, but keep cash in the offset accounts against these properties. Retire quicker by then drawing down on these funds (which is tax effective) and living on this until rents rise enough for the cash flow to reach the desired amount. Strategy D A variation of Strategy C is to delay the sale of the extra properties to get more capital growth to enable a bigger repayment of debt. See some more ideas in this other thread that I started: 5 Living Off Equity Strategies to Speed up Retirement 5 Living Off Equity Strategies to Speed up Retirement What about inflation? Properties values and rents will hopefully be raising with inflation so we should be able to work based on today’s values. Hopefully this will be inaccurate because property values will rise faster than inflation. If this is the case the goal will be reached sooner. Step 9 = Complete rethink? Please cirtically comment.