Property Plan Calculator shows how hard or easy it (really) is to retire on rental income?

Property Plan Calculator shows how hard or easy it (really) is to retire on rental income?

Earning a living pays the bills along the way and gives us the chance to invest so one day we will be independently wealthy and able to retire comfortably.

It’s only during your working years that you can accumulate assets; something you have to do if you are to have lifestyle choices in retirement.

But, the greatest impediment to an investment property self-funded retiree is the high levels of debt you may still have when they finish working.

Rental income is not likely going to be able to support a property investor with high levels of debt; so an ideal strategy is to not just accumulate assets but to also reduce debt.

This is easier said than done in many cases as people use their limited resources just to acquire the property assets in the first place.

Let’s look at some of the ways you can reduce the debt you take into retirement and use your investment properties to fund you.

How do property investors retire from their property portfolios?

1. Sell half of your investment properties to pay off the debt on the others, and then live off rental income

I hear it regularly… “We want to buy 10 properties over the next 20 years, then sell half, pay off the debt of the remaining five, and retire on rental income.”

Good luck with that strategy!

Firstly, your ability to accumulate 10 properties in 20 years is a lot easier said than done. Do you actually know what is achievable? Have you had an analysis done on what may be possible for you or have you just plucked a number from the air (or a book you’ve read)?

Do you know how much equity would be left over after selling half and paying out the principle on those properties and the capital gains tax (CGT)? Do you know the actual numbers, or is this just a theory you’ve heard or read somewhere?

You would probably lose half of your gain in taxes and more in selling costs.

2. Keep my properties and live off surplus rental income

This is a great strategy and should be your goal; but… exactly how many properties will you need and in exactly what year will there be the required surplus rental income to allow you to do this?

Here’s what I’ve discovered.

We are living in low inflationary times, and have done for a number of years now.

Low inflation means prices rise slower, including property.

If you have 25 years or more in the workforce and you were to qualify to invest in four properties over the next eight to 10 years, I can show you how to do this easily.

3. Sell everything and take my profits

I am not a fan of this strategy at all, which sounds better than it really is. How do you think you’d feel if you created $2 million dollars of equity but only got to retire with $1 million. Selling properties you own will incur sales costs and CGT - more than half of your profits!

The only way to live off rental income

To retire comfortably on rental income you must have enough in surplus rents, after interest and costs are paid.

As I said earlier, if you are young enough, with time in the market on your side, a healthy surplus of rents should be easy to achieve (assuming you stick to following the appropriate strategy throughout your working life).

Unfortunately, the reality is, most people don’t see the need to invest when they are young and don’t get started until they are middle aged, often with a mortgage and kids and not a lot of income left over.

The solution in most cases, therefore, must involve reducing debt along the way.

You need to reduce investment property debt before retirement

1.Paying down principal (as well as service interest) on investment properties

  • This strategy can work except it requires you pay down tax deductible debt with your after tax dollars (i.e. the money you have already paid taxes on) to reduce the very debt that gives you a tax deduction in the first place.

Thus for a win in retirement you have to suffer a double whammy loss through your accumulation phase, which in turn limits your ability to invest again and again.

  • Another ‘fault’ with this strategy is that it only works for those that have sufficient funds in their budget to be able to allocate the extra money towards paying down the principle on their investment properties.

With a mortgage and just one investment property this is probably an achievable strategy for many people, however, one investment property is not going to give you much choice in retirement.

It’s those that build portfolios of three, four or more investment properties that create equity for retirement, and these people (with few exceptions) are simply not in the financial position to be paying down the debt (principal and interest) on their entire portfolio.

Anyone can sell you a property but…

I would be doing you no favours by failing to point out the value add difference, when dealing with MRD.

There are plenty of real estate agents all over the country who are eager and willing  to sell you an investment property.

At MRD we are more interested in devising workable strategies to help you achieve your financial goals. Not just strategies around asset accumulation but ones that focus on debt reduction too.

Property Plan Calculator

If you are serious about your future and you want to know that what you do today is going to deliver right outcomes ‘tomorrow’, then request to speak with us and have our Property Plan Calculator (PPC) demonstrated.

You can have a  demonstration of this privately with your partner, or just you if you’re single, either via a web meeting or face to face.

Let us know how we can best assist you at this time by leaving a short message, with your best contact number and time >>>here.

Partnering with your for your investment success,

Nick Lockhart