Property Investment, done effectively and with good advice is an excellent way to boost your retirement income and supplement your superannuation and pensions. Here, we provide a guide to help estimate the additional returns property can offer.
In simplistic terms, for every $25,000 of net income you hope to have in retirement, you need around $1 million of unencumbered property in addition to having your home paid off in full. When managed effectively, capital growth and living off equity can almost double this income.
Cash flow income from property refers to rent received which is one form of income. However, when planning for retirement, it’s also important to understand how equity and capital growth can be used to increase the size of your portfolio and your retirement income.
Living off rent alone
The long term average gross rental income in Australian capital cities for most property is about 4 per cent of its value (for example approximately $385 per week for a $500,000 property), but the net return after allowing for ongoing costs such as agent management fees and maintenance is closer to 2.6 per cent, or $250 per week for a $500,000 property. This doesn’t allow for the interest on a loan, so this is the net rent for a debt free or unencumbered property.
At 2.6 per cent net, you should receive close to $25,000 for every $1 million of unencumbered property, so you would need around $2 million of property to have an $50,000 income if you want to live off the rent alone. However, as property values and rents typically increase in value faster than inflation (and assuming you started with $100,000 savings in the bank), the average income you could potentially draw in retirement would be closer to $60,000 pa.
Bear in mind that some areas have yields up to 6 per cent plus gross, or 4.6 per cent net, so careful selection of your investment area with the help of an advisor is key, as it the development of a strategic property investment plan.
Living off Rent, Equity and Capital Growth
Living off equity and capital growth can significantly reduce the amount of property needed to retire, or greatly increase your return compared to just rent alone.
Assuming a fairly conservative growth rate of six per cent per annum compounding (which is lower than the nine per cent sixty year historical average), property should double in value approximately every 12 years.
Retirement option 1
Keep all your properties forever and leave them to family or charities as inheritance. This option only allows you to live off the average rent alone of $60,000 pa.
Retirement option 2
Keep only your home forever and pass that on as inheritance when the time comes, and instead sell your investment properties over time. For example, sell one at retirement around age 65, then another every ten years. If you lived to 105, while investing the net sale proceeds after selling costs into a managed or superannuation fund that averaged say 6 per cent return, you could then draw out close to $110,000 pa to age 105.
Of course, any other investments and superannuation on top of your property portfolio will improve your retirement income. If your super fund averages 6 per cent return, but you were also drawing down on the capital, much like selling properties in the example above, $1m growing at 6 per cent, being drawn down over 40 years would increase your retirement drawings by around $65,000 per annum.
Unsure where to start? Perhaps look at attending a property investment workshop.
“The biggest roadblock to people achieving financial freedom through property was their mindset, not their actual financial situation” (Walsh, 2018).
Interested in reading more on property investment? Have a look at our other popular insights:
- Get Started In Property Investment
- Secure Your Future By Setting Property Investment Goals
- How to Retire on Double Your Current Income Through Astute Property Investment
Disclaimer: the information provided in this article is general in nature. Always seek professional guidance from a Licensed Financial Planner and Qualified Property Investment Advisor regarding your personal financial situation.