There’s no doubt that property ownership can unlock doors to an exciting self-funded retirement. Being financially independent is undoubtedly an exciting chapter of the “Australian Dream”.
Additionally, unlike some other wealth creation vehicles, property ownership is accessible to almost any hard-working individual or couple. With the right strategy and careful execution many people use property to fund a retirement that many others dream of, including:
- Travel each year (inc. business-class tickets)
- New vehicles
- The ability to purchase luxury consumables
- Eating at nice restaurants
- Spending money on children and grandkids
- Leaving a legacy, and/or inheritance
- And more…
But the question is, how many properties do you need to retire on a substantial income? And how much money must each property generate to achieve this goal? This is a question we’re asked by many of our clients. Let’s unpack the answers below…
(Please note, this article is NOT financial advice in any shape or form – consider seeing an adviser who will provide a strategy based on your own unique situation – see more details at the end of this article)
Firstly, How Much Income Do You Need When You Retire?
Your desired annual retirement income depends on your intended lifestyle.
In other words, the more expensive your intended lifestyle, the more income you’ll need. This means that it’s difficult to declare a ‘one-size-fits-all’ retirement income amount for every self-funded retiree, but in saying that, there are some common guidelines that help shape this figure.
For example, the ASFA Comfortable Retirement Standard benchmark describes a target minimum income amount of around $44,200 per year for a single person, or $62,400 per year for a couple (see here for details).
This figure—$44,200 or $62,400—doesn’t include the payment of rent or a mortgage, nor does it include the luxuries mentioned above… so you’ll need to plan appropriately if you wish to enjoy the finer things (or if you have ongoing financial commitments). This is where dedicated financial planning comes into play (again, consider speaking to a certified financial adviser for help here).
For the sake of this article, let’s say you decide upon a target shared retirement income of $90k per year.
How Do Investment Properties Contribute To Retirement Income?
Put simply, one of the most common ways investment properties contribute to retirement income cashflow is via rental payments received from tenants.
For example, let’s say you own one investment property worth $350,000. And let’s say you receive rental income of $350 per week (which already includes the subtraction of any operating expenses ie. rates, agent fees, body corporate fees et cetera). Therefore, this property generates you $18,200 per year in income.
This $18,200 amount is called the property’s ‘yield’ and is often represented as a percentage. In this case, its yield is 5.2% each year.
Now, let’s say you own five properties worth $350,000, all of which pay 5.2% yield each year. This means you receive an income of $18,200 x 5 = $91,000 per year.
This means your property portfolio – five properties valued at $1.75M, with a yield of 5.2% – pay you $91,000 each year and meets your income goal.
Of course, this is a very simple example and there are many more factors at play. Each property’s yield will be different, and each property’s value will differ too… but the underlying principle is simple: draw a return from your property investment.
The $2M Sweet Spot
Many property strategists claim a combined property portfolio balance of around $2,000,000 is a “sweet spot” for many average investors. A 5% yield of $2M creates an income of $100,000 a year.
This means you could own two properties valued at $1m each, or four properties at $500k each, and so on. Again, there are many factors at play, but this combined figure has the potential to generate enough residual income to support a comfortable lifestyle in retirement.
Is It Possible To Collect *That* Many Properties?
For many people new to the property investing game, paying off five investment properties over the course of their career might seem like a significant task. However, if you start early enough, and utilise the right strategy, a task like this is achievable. That’s where we come in.
We help clients just like you create your strategy, and help you execute it for maximum success.
We help you reach your property portfolio goals by helping you with specialised strategies like:
- Releasing equity
- Opening new lending avenues
- Getting you better loan rates
- Better leveraging Trust structures
- Smart loan structuring
- And more
To further help you arrange and structure new and existing loans for long term stability, flexibility and investment success, Trilogy Funding has developed a 30-minute Finance Strategy Session which we conduct with you over the telephone or in-house at our office.
During this fast-paced, zero-nonsense session, you’ll run through a discovery process with a skilled and experienced Finance Strategist to assess your current situation and get greater clarity over where you’d like to be in the medium-to-long term. Based on this information, we’ll give you an idea of what we believe is feasible for your portfolio over the next five years. We’ll also provide some immediately actionable tips to help you maximise your current position.
The presentation is conducted by one of our experienced mortgage brokers who specialise in structuring and expanding complex portfolios for property investors. Please be assured that this consultation will not be a thinly disguised sales presentation; it will consist of the best strategic intelligence our team can supply in a thirty minute time span.
Please note, the numbers and assumptions listed in this article are for educational purposes only. Individuals should seek specific advice pertaining to their unique situation and the real estate market before making any decisions.
Trilogy Funding Two is a corporate credit representative (Representative Number 506131) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237)