In the first two of this three part series, we examined a couple who were looking to retire with an income from their property portfolio of at least $60,000 in today’s dollars (which is approx $120,000 in 30 years time, allowing for inflation of 2.5 per cent)
To achieve this, the couple would need to build an investment property portfolio worth $3 million net of debt, in addition to owning their home outright. The couple have a combined household income of $120,000, that they expect will increase by close to five per cent per annum, and they plan to have two children within five to eight years. They are buying their first home for $600,000 with a $570,000 interest only loan (fixed for five years at 7.3 per cent) and must pay a $30,000 deposit, $12,000 for mortgage insurance and $2000 in other costs. They plan on making additional payments of at least $100 per week to build a safety net buffer. In addition to this, they have approximately $15,000 of further savings.
Assuming a fairly conservative growth rate of seven per cent per annum compounding, and using the equity growth and rental income along the way, the couple plan to purchase a near new investment property worth around $500,000 approximately every four years (depending on interest rate, income and growth fluctuations).
After about 20 years the couple will have purchased five investment properties and want to retire in another 10 years, so they stop buying property and leave what they already have to grow until then. The couple are then 58 years old and have a property portfolio worth $13.8 million with debt of $3.24 million, so they decide to sell two of the investment properties to pay the debt in full. After paying selling costs, all debt and capital gains tax, they still have close to $550,000 cash remaining, three investment properties worth a total of $4.8 million, their home worth $4.8 million is paid off and all well ahead of their target of $3 million.
After tax benefits, this investment property portfolio costs a maximum of $215 per week at five year fixed rates of 7.3 per cent (or $275 per week at a 15 year fixed rate of 7.8 per cent). However, this amount could also be reduced and positively geared by around 10 to 12 years for the whole investment property portfolio.
This property portfolio should net close to $192,000 per annum in rental income, which in today’s dollars, based on 2.5 per cent inflation over 30 years, is equivalent to about $96,000. Of course they also have their superannuation, so are now extremely well placed to live a comfortable retirement.
Naturally, we have had to use a number of generalisations to arrive at this outcome and it does require a substantial amount of debt, so it is highly recommended to apply strong risk management principles with such a strategy as well as seeking sound professional advice.
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.