Get your property portfolio ready for retirement
How can people work out what kind of income their portfolio should be generating, or how many properties they're going to need, when they retire?
I think one of the opportunities for people is to actually firstly start by measuring how far away they are from retirement and link it to property cycles.
So, typically a property cycle will go for anywhere between seven, even up to 13, years and actually at the moment it’s probably fair to say that property cycles are getting longer. In other words property isn’t necessarily doubling every 10 years anymore, it’s probably more like 15 years.
You need to start there. So I guess if you’re in your 20s and you were looking to retire at 40, let’s say that’s 15 years away, well you’re going to have to secure a few assets in different market places. And actually be in there for long enough for those properties to well and truly increase in value over that time.
I tend to say that if you were to find one property every year for 10 years, and you spent on average around $300,000 on each property, you actually end up with around $3.6 million worth of property after 10 years of purchasing.
You can imagine your debt on that will be relatively high, so you’d have to work out over time as the properties increase in value, which ones you’re going to eliminate to reduce your debt and which ones you’re going to keep to essentially live off.
So in other words, after 10 years opr purchasing, and add another give years of holding the assets, if your portfolio’s at $3.6 million in value, your equity position will be about $1.6 million.
So then you work out: well could you live off $1.6 million?
If that’s the worst you did just by buying one property a year for the next 10 years and having all 10 in the market for say 15 years, that’s not such a bad outcome and it’s certainly better than what most people’s superannuation bucket looks like.
When they’re buying, do investors always need to have retirement in mind?
I think so, I mean at the end of the day, buying real estate shouldn’t be for kicks and giggles, we’re all looking to get out of the rat race and it’s just a matter of how fast you can do that.
So when you’re buying real estate it’s very important if you want to speed up your retirement time to choose real estate which essentially will recycle your deposit very quickly.
In other words, if you were to put a $50,000 deposit into a property, you want to get that $50,000 out of that property in the form of equity very very quickly.
That’s where property strategy comes into play – buying in the right market places, learning how to add value to real estate. The whole point of things like renovations or doing a small little subdivision or buying in the next hotspots – all of that, it all links to how fast you’re going to get your money in and out of a property deal.
So you put it in, you get it out. The faster you can do that, then the faster you can buy your property and that then allows you to buy one property every year for the next 10 years. That’s how people end up doing it – they choose assets which have got good rents, but fast recycle times.
Then it just comes down to market capitalisation, which isn’t a theory of real estate, it’s a theory of basic economics. If you put money in 10 different market places and you’ve got a market cap of $3.6 million over 10 years, it’s going to start to perform, it’s exposed to the market, the market goes for a ride and you go with it.
Is it possible to do this without using really risky strategies and without exposing yourself to big risks?
Absolutely.
Property isn’t necessarily doubling every 10 years anymore, it’s probably more like 15 years
Personally I started out with $5,000 and saved $30,000. My Grandma left me $5,000 and literally by doing nothing more than buying a property a year for the last 10 years, I’ve built up a sizable equity position just by simply being the tortoise.
I’ve done nothing special at all, it’s just up to the principle of finding where the bottom of the market is and buying there.
It can be hard to work out how much money you are going to need because X amount isn’t going to be worth the same amount in 20 years’ time. So how can people work out what $1 million today is going to be? How can they work out what is a reasonable figure for the future?
Well the ABS has an interesting statistic on this, which is for every 100 people who are born, 15 will die before the pension age, which is 65, a further 77 will be on the pension, potentially working out how to survive from that, only seven people actually end up financially okay. It's worth noting here that the ABS deems $50,000 per annum per person as financially okay. And out of 100 people that are born, one person essentially ends up basically extremely wealthy.
So to answer the question, in the eyes of the government, $50,000 per annum is an acceptable amount.
Now let’s just say you cashed in $1.6 million worth of equity, if you put that just in a cash management account in a bank, you’re going to get that $50,000 on a five per cent interest rate.
It depends, if you’re talking about retiring filthy rich, you’re probably going to have to take some big risks, get into developing or some more advanced kind of strategies. But I actually believe most people are just looking to work hard, save, invest well and live a sustainable retirement, not necessarily a flash-Harry retirement.
So of course if you want to speed up how much market capitalisation you’ve got, you’ve just got to buy more real estate along the way.