Their objective is to determine exactly how many rental properties to buy in order to completely replace their earned incomes and eventually quit their day job.
Unfortunately, there isn’t an easy answer to that question. In reality, the number of properties needed in order to be financially secure will be different for each person.
After all, your financial situation is unique to you, so the amount of money you need to live comfortably will depend on you. It’s also important to determine how much income you need to generate in order to create a viable income from your rental properties.
Not all properties generate the same amount of income. Likewise, you need to take into account any outstanding debt and operating expenses that need to be paid out of any rental income you receive.
Let’s take a closer look at how to calculate the number of rental properties you might need in order to live comfortably off the rent.
Living off the rental income
Let’s assume you want to generate an annual after tax income of $80,000 from your investment properties. How many properties do you need?
You could purchase just one investment property on the beachfront for $3 million and rent it out for $1,550 per week. If you manage to pay down the outstanding debt so the property is freehold, you’ll generate $80,600 in rental income before expenses.
Alternatively, you might buy 10 properties worth $300,000 each and rent them out for $300 per week each. You’ve still spent $3 million on property purchases, but you’ll generate $156,000 in rental income before expenses.
So which scenario is the best option for your financial goals?
New vs Old
One of the key factors to consider when you’re calculating the number of properties you need is your expenses. Aside from paying interest charges on your investment mortgage, you also need to consider the other associated expenses of owning a rental property.
You’ll need to think about things like council rates, water rates, landlord’s insurance premiums, and rental management fees. If you buy an apartment or unit, you’ll also need to factor in strata management fees.
Then there are maintenance and repair costs to think about. Older homes are more likely to require costly maintenance and repairs as fixtures and fittings start to age, which could eat into your overall rental profits.
By comparison, a new property may require less maintenance and upkeep initially. There may also be additional tax advantages to consider that have the potential to boost your cash flow overall.
Capital growth vs rental yield
If your financial goal is to eventually live off your rental income, it makes sense to think about your potential rental yield. Across most capital cities in Australia, the average rental yield is around 4%.
Of course, it’s possible to find properties with much higher yields. There are also properties out there with much lower rental yields too.
Unfortunately, many investment properties that tend to offer slightly higher-than-average yields are often in areas with little potential for capital growth.
For example, across some low income areas and many regional areas it might be possible to find investment properties with rental yields of 6% or 7% – or even higher. However, the potential for capital growth is reduced.
On the other hand, a property in a highly-sought after location might cost significantly more to buy initially and only generate a rental yield of 2%. However, the potential for capital growth is increased.
When you’re working out your investment strategy, take the time to consider which aspect is most important to you.
Are you aiming solely at rental yield? Generating sufficient rental income to replace your day job is a great strategy, but will you be stuck with a lemon if you decide to sell one of those properties at a later date?
Or will capital growth play a role in your strategy? After all, if you plan to sell one or two properties in the future to pay off the debt on your remaining properties, then capital growth will be an important factor for you.
Your individual investment strategy
Overall, it really doesn’t matter how many investment properties you own. The key to becoming financially secure is to determine the right investment strategy to suit your personal financial situation.
Call any of the experienced professionals at Nieuvision on 1300 832 554 and discuss how we can help you create a solid investment strategy that can help you achieve your financial goals. Or to book a seat at Nieuvision’s next FREE property investment info session click here.
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