One such question that is commonly asked by investors is “how many investment properties do you actually need?” The answer to this is simple – it all depends on the investor and their goals.
I like to tell my clients to start with the end goal in mind and work out exactly what you want to achieve and how long you have to achieve this. Perhaps you want to save up enough money so you can retire early and live solely off this passive income without having to work again, or maybe you just want to have an extra line of income to support you.
It also depends on what other investments you own. However, if you are solely investing in property then it is important to note that having just one or two investment properties is definitely not enough to fuel your retirement. The funny thing is, is that most investors stop at just one or two properties.
According to 2013 figures from RP Data and the Australian Taxation Office, just over 70% of investors own one investment property whilst a further 18% own two investment properties. This number drops significantly with just 5.5% of investors owning three properties, 2% owning four, whilst less than 2% own five or six properties.
If you are aspiring to lead a luxurious retirement lifestyle, then five or even six investment properties might still not be enough.
So, going back to the question, “how many investment properties do you actually need?” we know that this depends on the lifestyle you wish to lead and the goals you set. So how exactly do you reach these goals?
The first thing that you must do before anything else is to make a plan of action. This consists of several things that you need to seriously think about to work out exactly how large that nest egg should be to fund your retirement. Key factors to decide upon include:
- What age do you wish to retire?
- What annual income do you wish to retire on?
- Find out the current market value of all your savings and investments.
- Take into account inflation.
- Also think about tax and strata costs.
So say that you are 40 years old and wish to retire at 60, this gives you 20 years to save. If you wish to live off $100,000 a year, then five investment properties returning $20,000 per year would not be enough, due to having to pay tax and strata costs on any apartments that you own. These costs across all five properties could easily add up to $20,000 a year. Also the cost of living increases over time with inflation, so the equivalent of $100,000 today will be much more in 20 years time.
Secondly, if you want to reach your goals you need to put that plan into action as soon as possible. Property investment is a long term strategy, so the earlier you start the more capital growth you are likely to achieve. Time is also a requirement if you are seeking to build a large property portfolio as it can take a few years at least to fund each acquisition, regardless of whether it is from your savings or through equity.
Let’s say you need 10 properties to reach your goal of $100,000 per annum. This means you will need to purchase an investment property every two years, giving you a timeframe of at least 20 years to build your property portfolio.
So in order to purchase more properties, you will need good capital growth. This will help you to fund the deposit for your next property and this process can be repeated again and again. Capital growth is also important when it comes to selling properties for retirement. A common situation is where investors sell off a proportion of their portfolio in order to pay off the remaining debts of the others, allowing you to live off the income on the remaining properties.
When creating a large property portfolio you should keep in mind the importance of diversity and spreading your risk across various properties, such as having some high growth properties and low yield, buying interstate as well as purchasing different size properties.
In order to keep risk to a minimum you should only buy properties that you can afford and not stretch your budget too far. However you should bear in mind that this approach will need you to acquire more properties to reach your goal, compared to fewer higher priced properties.
One thing that seems to stop many investors getting past their second investment property is the level of debt that they will accumulate. Now it is essential to remember that not all debt is bad. There are actually two types of debt: ‘good debt’ and ‘bad debt’ and property is good debt and seen as a safer investment, and less volatile compared to shares for example. In order to gain wealth, you will need to take on this ‘good debt’, but as mentioned earlier you need to budget within your means and ensure you have some emergency cash available for a rainy day.
In summary, there is no ‘right’ number of properties you need to acquire – it all depends on your end goals. However, the earlier you start this process the better off you will be.
Contact Robert today to book a no-obligation consultation of how iBuyNew can help you start and build your property portfolio tailored to your financial goals and find out how many investment properties you actually need.
Published on 6th of July 2015 by Marty Stanowich