In last month’s article we started to examine the question, “How much property and equity do you need to acquire in order to live a comfortable and prosperous retirement?”
In simplistic terms, for every $20,000 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 (bear in mind these figures are in today’s dollars when allowing for inflation of 2.5 per cent per annum).
Most investors are likely to have superannuation and possibly other investments to supplement this income. If you are unsure about how much income these investments will provide, we encourage you to speak to a financial planner to get a clearer idea. Here we talk specifically about property as an investment. This information is very general in nature and largely based on past performance of property, so always be conservative and seek professional advice for your personal situation.
Let’s say you wanted to achieve $60,000 per annum income from property. Based on the assumptions above, you would need around $3 million of debt free property (in addition paying off your home).
John and Mary are both 28-years-old and have a combined household income of $120,000 (growing at 5 per cent per annum). In five years time they plan to have two children over a three year period. They have a combined credit card debt of $2000.
The couple are buying their first home for $600,000 with a $570,000 interest only loan (fixed for five years at 7.3 per cent). They must pay a deposit of $30,000 and $12,000 mortgage insurance and $2,000 in other costs.
After government rebates there are no stamp duty costs and they may be eligible for a First Home Owners Grant. They also plan on making additional payments of at least $100 per week to build a safety net buffer, in addition to their leftover savings of $15,000.
Assuming a fairly conservative growth rate of seven per cent per annum compounding, less than the nine per cent historical average, property should double in value about every 10 years.
Using the equity growth and rental income along the way, the couple should be able to purchase investment property approximately every four years (depending on interest rate and growth fluctuations). Assuming average interest rates and using mostly fixed rate interest only loans, it should be quite achievable to qualify for the finance safely, provided they exercise caution and keep the buffer and other risk management strategies in place.
Next month we’ll examine how this strategy can help this couple comfortably achieve their income goal of $60,000 per annum from property alone after 30 years.
Richard Sheppard is the Managing Director of inSynergy Property and Finance Solutions. inSynergy provides professional property investment advice, property market research, specialised mortgage broking services and is an accredited investment property buyers’ agent. Visit www.insynergy.net.au or phone 1300 308 808.