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How many properties do you need to retire?

Find out how many properties you need in your portfolio to retire in comfort.

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Regardless of your ambitions, one financial goal shared by every Australian is to retire in comfort and to not have to worry about working ever again, preferably sooner rather than later. But if you’re planning on using your rental income to fund your retirement, have you ever sat down and worked out how many properties you need to retire? All you need is a calculator and a few spare minutes, so let’s look at what you need to do.

Using investment property to fund your retirement

If you want to use your investment property portfolio to fund your retirement, there are two main ways to go about it:

  • Strategy 1: Live off the rental income. The aim is to build a portfolio that provides enough rental income to cover all your expenses and to give you enough money to live off. This means you can continue generating an income and building your wealth. Plus, maintaining ownership of the properties means you have valuable physical assets to pass on to your kids. On the downside, you’ll need to cope with high debt levels and your income is at the mercy of market fluctuations.
  • Strategy 2: Sell to take advantage of capital growth. The second option is to build a portfolio of high-growth properties. Then, wait for them to increase in value as much as possible, sell them and live off the capital growth. This option doesn’t leave you at the mercy of property market fluctuations in your retirement years. However, it means you only have a finite amount of money to spend in retirement, and you will need to manage your budget carefully.

The strategy you choose is entirely up to you and depends on your financial situation and the lifestyle you plan to lead in retirement.

This article focuses on the first strategy of using rental income from your investment property portfolio to pay for your retirement.

But before you start hunting for suitable investment properties, it’s important to take a closer look at your retirement plans.

How much money do you need each year?

Before you can calculate the number of properties you need in your portfolio, you first have to work out how much income you require each year. How much money do you need each year to be able to live the retirement you want?

Unfortunately, there’s no set method for working this out. It’s up to you and the lifestyle you want to lead once you leave the workforce. One way to look at it is to think in terms of the income you currently earn. Would that amount be enough for you in retirement, covering not only your everyday living expenses but also eating out, regular holidays and any other experiences you might like to spend your money on?

The answer you decide upon will be crucial to determining how many properties you need in your portfolio. A budget of $100,000 per year is a common target for many investors, but your figure could be lower or higher based on your personal needs.

To give you a rough guide as to how much you might need, the Retirement Standard from the Association of Superannuation Funds of Australia (ASFA) provides an estimate of the annual living costs of retired Australians. As you can see in the table below, according to the standard, a couple that wants to enjoy a comfortable lifestyle in retirement has annual living costs of almost $60,000.

ASFA Retirement StandardAnnual living costsWeekly living costs
Couple – modest$34,560$663
Couple – comfortable$59,619$1,143
Single – modest$23,996$460
Single – comfortable$43,372$832

How soon do you plan to retire?

The next factor you need to take into account is when you plan to retire. After all, an investor who plans to retire in five years’ time will have very different financial goals from someone who doesn’t anticipate retiring for another 20 years. Take some time to consider how much longer you want to keep working and how long that leaves you to start building your portfolio as it usually takes time to save the funds you need to purchase your next property.

You also need to remember the effect of inflation during this time. If you want to retire on an income of $100,000 a year in today’s money, the rising cost of living means that figure could be much higher if you don’t plan to retire for another 20 years.

The cost of investing

Finally, you also need to consider the costs associated with acquiring and maintaining your portfolio. Each property attracts a range of costs, including insurance, rates, property management fees, maintenance expenses and more. If you adopt the rental income strategy (Strategy 1), then you’ll need to manage these costs throughout your retirement. Multiplied over several properties, these expenses can be sizable.

There are two more important factors you need to take into account: loan repayments and tax. In a perfect world, you wouldn’t have to borrow money to buy your investments, but the vast majority of property investors need help from the bank to grow their portfolios. Even interest-only repayments can add up to a substantial amount each year, which you will need to cover with your rental income.

And don’t forget that you’ll also need to pay tax on any income you receive, reducing your total earning power. You need to factor all of these expenses into your equations to get an accurate guide to the amount of income you will be able to generate.

investment Crunching the numbers

By now, you should have a target figure in mind for your annual retirement income, so let’s take a look at how many investment properties you need to generate the income you want.

$50,000 annual income

Let’s assume your goal is to earn $50,000 in rental income a year. One rental property worth $1 million, returning a rental yield of 5%, will deliver $50,000 in income per year. Of course, this 5% figure needs to be the net rental yield, which takes into account loan costs, property management fees, maintenance expenses and strata levies.

Unfortunately, affording a $1 million investment property is something most investors can’t do, so a more realistic option might be to acquire several more affordable properties over a period of time.

For example, let’s say you own four rental properties worth $350,000 each. After acquiring the first property and spending a couple of years paying off your loan, you then use the equity in that property to buy your second investment, and so on. If each of those properties had a net rental yield of 5%, you would generate rental income of $70,000 per year.

However, remember that you’ll need to pay tax on that amount, a total of $14,297 at 2016-17 marginal tax rates, resulting in an annual income of $55,703.

Number of properties owned4
Value of each property$350,000
Net rental yield5%
Before-tax income$70,000
Income tax payable$14,297
Annual income$55,703
$100,000 annual income

An annual income of $100,000 is a figure many investors aim for, but some fail to grasp the amount of rent they need to earn this much. Some people make the mistake of assuming that five rental properties producing $20,000 of rental income per year is all they need. They fail to take into account not only tax but also the many costs of acquiring and maintaining properties.

Let’s assume you have five rental properties, each worth $500,000 and returning a net rental yield of 5%. After tax, this portfolio produces a rental income of $91,118, well short of your goal.

But what if those properties experience capital growth of 5% every year for the next three years? By the time 36 months has passed, each property is worth (approximately) $580,000 and produces $29,000 each in net rental income. This means that, after tax, you’ll have an annual income of $103,718.

This shows why it’s important to consider capital growth and not just rental yield when choosing your investments.

Number of properties owned5
Value of each property$580,000
Net rental yield5%
Before-tax income$145,000
Income tax payable$41,282
Annual income$103,718

Top tips for generating retirement income

If you’re planning on using your investment property portfolio to provide income for your retirement, keep the following tips in mind:

  • There’s no easy answer. There is no “one-size-fits-all” answer to the question of how many properties you need to retire. Not only do you need to consider your own financial situation and how much income you need each year, but choosing the right properties is crucial. Even slight variations in rental yield and capital growth from year to year can throw your calculations out and force you to adjust your figures.
  • Don’t forget about capital growth. While some investors focus only on the potential rental yield of the investments they purchase, remember that capital growth is just as important. Capital growth makes it possible for you to buy more properties by using the equity you have in your initial investment property to fund the deposit for your next purchase. It also gives you the option of combining the two strategies mentioned earlier. You could sell off a portion of your portfolio to pay off your investment loans, but retain some properties to provide an income in retirement.
  • The power of equity. When a property increases in value, so does the equity you have in that property. Not only can you use this equity to purchase your next property, but when you have multiple properties you can also use it to access a line of credit from your bank and fund your retirement.
  • Set a timeframe. Think about when you want to retire and what you need to do before then to make it happen. For example, if you’re planning on retiring in 15 years and you need five properties to produce your desired income, you’ll need to purchase a new property every three years.
  • What about your kids? Another factor that could influence how you manage your portfolio is whether you want to leave everything to your children after you pass away. Alternatively, do you still want to be coping with the stress and workload of owning multiple investment properties in your final years or would you prefer to pass those duties on to your children?
  • Realise the risk. It’s essential that you’re aware of the risks involved with property investment before you get started. If you own several properties and the market experiences a downturn, how would you manage financially? Remember to diversify your portfolio for added protection against risk.
  • The sooner the better. Property investing is a long-term investing strategy, and acquiring multiple properties takes time. The earlier you start, the more capital growth you will be able to experience and the larger portfolio you will be able to build.

How many properties do you need to retire?

The answer to this question is the subject of much debate amongst property investment experts. Some put the figure at more than 10 properties, while others say the magic number is somewhere in the 3-5 range.

But as the calculations above show, the number of properties you need to retire really depends on your own personal circumstances. Only by considering your financial goals and how you plan to live during retirement can you work out a realistic number of properties to target for your investment portfolio.

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Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
UBank UHomeLoan Variable Rate - Discount Offer for Investor Variable P&I Rate
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homeloans.com.au Low Rate Home Loan with Offset - LVR 60% to 80% (Investment, P&I)
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UBank UHomeLoan - 1 Year Fixed Rate (Investor, P&I)
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Athena Evaporate Home Loan - 60% to 70% LVR  Investor, P&I
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Pepper Money Essential Prime Full Doc Home Loan - LVR >75% up to 80%
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Athena Celebrate Home Loan - 60% LVR  Investor, P&I
2.69%
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IMB Fixed Rate Home Loan - 3 Years Fixed (LVR ≤90% Investor, P&I, NSW and ACT borrowers only)
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Macquarie Bank Basic Home Loan - LVR up to 70% (Investor, P&I)
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UBank UHomeLoan - 3 Year Fixed Rate (Investor, P&I)
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ING Orange Advantage Loan - $150k to $500k (LVR ≤ 80% Investor, P&I)
2.74%
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UBank UHomeLoan Variable Rate - Investor Extra Offer Investor Interest Only
3.29%
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Athena Variable Home Loan - Investor, IO
2.99%
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UBank UHomeLoan - 1 Year Fixed Rate (Investor, IO)
2.44%
2.85%
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Pepper Money Essential Prime Alt Doc Home Loan - LVR up to 55%
3.85%
4.04%
$599
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UBank UHomeLoan - 5 Year Fixed Rate (Investor, P&I)
2.74%
2.83%
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Lock in a 5 year fixed rate on your investment loan and pay no ongoing fees.
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