Whether your real estate portfolio is already taking your real money to new heights, or that you have only recently felt the desire to discover how real estate can help you reach your retirement goals, there is no It's never too late to create your successful financial strategy.
It's important to always start with the end in mind, says Metropole director of real estate strategists, Brett Warren.
"Most people start at the beginning. They start by thinking, "Let's buy one property and buy another," and they don't have the end in mind, "says Warren.
"Rather than start with the number of properties [you will need] start with the income you want, then this gives you a little guide, because you can work backwards from that. What is most important is the value of your wealth and how hard your money works for you. "
Speculation comes into play when you lay the groundwork for a largely unpredictable future, and people tend to change their preferences over time. However, Warren encourages investors to start by considering and making adjustments to the amount of money they are currently spending on their living expenses.
"Chances are you'll have fewer mouths to feed after your kids leave home – but don't count on it. Adult kids always seem to be in trouble and need help" , he said.
"In addition, it is likely that you will want to vacation more often or pursue certain hobbies or hobbies that you do not currently have. And unfortunately there will be medical and other expenses than you won't have to pay today. "
While it is impossible to take into account the number of years of retirement, Warren says that many Australians will live well in the 80s or 90s.
"You will probably have to finance 25 or more years of living expenses in your retirement phase," he says.
Chasing a round number
When Warren meets with clients and asks how much income they think they will need to finance their retirement plan, he says "almost everyone says $ 100,000 a year after tax"
To provide a broader context as to the position in which an investor should be able to reach $ 100,000 in real estate income each year, Warren works on an average gross rental yield of 3.5% – that is before any expenses, such as council rates or income tax are taken into account – which, he says, is "the yield of properties well located in Australia" .
"If you end up owning $ 1 million in debt-free properties, which means you have paid off all the mortgages, you will receive rent of $ 35,000 each year. But you still have to pay rates, taxes real estate, agent commissions and repairs, leaving you with something like $ 30,000 a year. And then you have to pay taxes on that income, "says Warren.
He adds that you would need a wholly-owned real estate portfolio worth millions of dollars in order to earn $ 100,000 a year after tax.
Director of Results Mentoring Brendan Kelly – who has also often heard $ 100,000 a year from clients – points out that, since your annual income has provided you with a lifestyle you have become accustomed to, by adding a little more. might indicate the amount you will need during your retirement years.
"It's likely that you want to vacation more often or pursue certain hobbies or hobbies that you don't currently have. And unfortunately there will be medical costs and others that you won't have to pay today "
“If you earn $ 60,000 a year, you may want $ 70,000; if you're at $ 120,000, you might want $ 130,000 – that becomes a goal, ”he says.
Another way to calculate the amount you may need is from a "zero-based" approach.
"It's a more scientific approach when you sit there and find out all the things you want to do in a year," says Kelly.
This implies that the investor asks a multitude of questions to be explored about the type of lifestyle he wishes to maintain in retirement, such as the frequency with which he wishes to travel, the frequency with which he wants to go out every week, and how often would they like to organize social functions.
Once you have determined how much you want to earn in retirement from your investments, whether that figure is $ 30,000 or $ 300,000, you must then determine the value of the assets that you want to accumulate.
"The answer to the amount of money you need to live comes from the size you are able to make of your net assets or net worth," said Kelly.
"I could have $ 10 million in residential property, but with $ 8.75 million in debt. If I were in this position, the costs associated with holding this volume of residential property with so much debt would likely eliminate any possibility of significant cash flow in retirement.
"But if I owned $ 1.25 million of higher yielding debt-free property, I would be in a much better position to take advantage of the desirable cash flow from my retirement property."
The magic number: $ 100,000 per year
For an income stream of $ 100,000 per year to be obtained through property, Kelly explains that, based on a conservative average annual gross rental yield of 3%, the investor would need to About $ 3.33 million in assets producing net income.
"This is a large sum to be held in a property for $ 100,000 of rental rental income," he says.
On the other hand, if an investor could obtain, say, a net return of 10% on properties held in more regional areas and / or commercial properties, then he would only need of a portfolio valued at around $ 1 million in net assets to produce the same income, says Kelly.
"This amount of net assets is a much easier and faster target to reach than the original $ 3.33 million." The art of your success here lies in the return you can create yourself, "he says.
"Accumulating a mass number of properties is not the answer; accumulating properties that have a high yield without debt is the answer. »
The number of properties necessary for the retirement of the wealthy then also becomes a question of strategy with which the investor agrees.
Marketing
As an investor nears retirement, they will want to reduce the debt in their real estate portfolio as much as possible. To speed up the process, investors will sell properties so they can transfer equity from those that do not generate a high return to profitable properties.
However, Kelly says that investors should continue to learn about the different ways in which they can generate higher returns.
"They agree that they have to get rid of the debt, so they settle down, but the return they often end up in is not very good," he says.
"The dilemma faced by most investors is that they are emotionally attached to their accumulated properties, that they have a hard time letting go and that they are not selling their residential properties for the benefit of businesses."
Commercial property allows an investor to obtain a higher return and to sign a longer rental contract, sometimes spanning 10 years. However, if the property becomes vacant, the drought period can last for months or even years, which represents a considerable period of time with no income.
"If you have a mix of residential and commercial properties, you could get a 4-5% return on something residential and a 9-10% return on your commercial properties," Kelly suggests.
"The net effect is a higher yield portfolio with a lower total target net worth of, say, $ 1.5 million with managed risk."
While Residential Properties Will Probably Have More Frequent But Shorter-Term Vacant Housing than Commercial Properties, Kelly Says: "If Your Commercial Property Becomes Vacant for a Period, You Will Have Enough Money [coming in from your residential] to continue eating. and live during the period when the commercial property remains vacant. »
What about the retirement pension?
Property director Simon Pressley thinks retirement pension can be used as a way to increase wealth and buy real estate assets, but says the build-up assets outside the retirement pension has more advantages.
"We are headed for an inability to access retirement pension before the age of 70, but what if you want to retire in advance ? And governments change the super rules forever, ”he says.
“Even if it requires more discipline, I like controlling the ownership of assets outside the retirement pension; the leverage opportunities are much greater and I can do what I want when I want. »
