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How Many Investment Properties Do You Need to Retire?

How Many Investment Properties Do You Need to Retire

If – like the rest of us – you are looking for financial freedom, then you might find yourself wondering exactly how many properties you need to invest in to retire. The goal here being to replace your personal exertion income with cash from your investment properties. And, if you really are like most, you probably don’t have a strategy to achieve this. So, the question remains, just how many properties does it take to quit your day job and live comfortably? 

Well… It Depends

It’s probably not the answer you were looking for. But, you’re asking the wrong question to begin with. Because its not about how many properties you own, rather it’s the value of those assets and how hard that money is working for you. Quite simply, it is much better to own say one shopping centre rather than 50 secondary properties in regional Australia. 

Don’t Believe Us?

For example: If your goal is to achieve an annual after-tax income of $100,000, and you plan to pay down your debt and live off the rent. You would need at least $4 million worth of properties with no mortgage to achieve this after-tax figure. 

Here’s why: Let’s be generous and say you earn 4.5% yield across your property portfolio. This means you own $1 million worth of properties with no mortgage debt, and you would get $45,000 rent. Minus rates and taxes, agents’ commissions, repairs and other such expenses and you’re looking at a figure closer to $35,000 per year. Don’t forget, you then have to pay tax on this income. 

In summary: If you do your calculations you will see that you would need a mortgage free property portfolio worth at least $4 million to achieve an annual $100,000 after-tax income. And of course, you’ll need to own your own debt free home as well. If saving $4 million feels overwhelmingly unachievable, that’s because it is. 

You Need a Strategy that Works

OK, so you know that you want your properties to replace your income, but you probably have no idea how to actually achieve this. As we explained above, if you are thinking that you can live off of your investment properties rental income, it is extremely difficult to grow a portfolio of cash flow positive properties significant enough in size to replace your income.  

Successful property investors generally achieve their wealth first by growing a substantial asset base of high growth properties, and then by lowering their loan to value ratios (LVR). This allows them to transition into the cash flow phase of their investment life. They do this in a variety of ways: 

  • Stop/Slow down purchasing properties, allowing for the values to keep rising while their loans remain much the same. 
  • Add value to their properties (manufacturing capital growth) through renovations or developments. 
  • Pay off some debt using superannuation. 
  • Using principal and interest loans to reduce debt. 
  • Selling one or more properties. 

Needless to say, you won’t achieve a retirement worthy property portfolio overnight. It takes time to build a substantial asset base and a comfortable loan-to-value ratio. But, if you give it time, it can happen. 

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