How Much Property Portfolio Do You Need In Order To Retire?

Today I want to cover about the end goal – retirement. We don’t invest in property just because it’s fun. Everyone has a good reason to invest in property and it’s mostly for wealth creation. But really, how much is “enough” for retirement?

Before we attack this question we need to look at the definition of retirement because it is different for everyone. For some people retirement means quit full time working and have enough income to pursue their personal interest while living a relatively comfortable life.

Whereas for others because they love what they do, they may still want to work but just have the flexibility to scale back to do part time instead of full time work. Scaling back working time means more time for their family or their personal interest.

But all in all, the common theme here is that we all want to reduce the amount of time we have to work, but still have the same income as if we are working full time. That’s why we are looking at investing in property to be able to provide such passive income. And how much passive income will be determined by the lifestyle you want.

Let’s say, you have a goal of reaching passive income of $100K before tax. How much property portfolio will you need to amass? Using a 5% average gross rental return, this means:
[Unencumbered Property Portfolio value required] x 5% = $100,000
So the unencumbered property portfolio value required would be about $2 million.

There are various ways to get to $2 mil property portfolio unencumbered. But let’s say we use the simple strategy of buy and hold for long period of time in order for property value to double, and then sell down half of portfolio to pay off mortgage on the other half. Then what we need is:
[Property Portfolio Value required today] = [Unencumbered Property Portfolio value required] x 2

So to be able to live off $100K passive income before tax, we’ll need to accumulate $4 million dollar worth of property portfolio today and hold it long enough for their value to double. We then sell down 50% of portfolio to pay off the mortgage on the other 50%, and can then live off the rent from the unencumbered properties 

Note: we haven’t factored in any form of tax here – in reality there will be income tax from rent as well as CGT as we sell down assets. Consult your Accountant on the details of tax incurred.

Note 2: In 2018 term, $100K pre-tax income is about $75K after tax.

What about if we want to calculate the portfolio value required to achieve $100K passive income after tax? Without going into the nitty-gritty of ATO’s income tax threshold, we can use a rough guide of 30% income tax rate as part of our calculation. In other words:
[Passive income required before tax] = $100,000 x 130%

So the passive income required before tax would be $130,000. Using the same formula we’ve had before:
[Unencumbered Property Portfolio value required] x 5% = $130,000
So the unencumbered property portfolio value required would be about $2.6 million. And Property Portfolio value required today would be $5.2 million.

Big numbers aren’t they!? That’s why the earlier we make a start, the more opportunity we can get to that goal as wealth creation will take time!

As always, if you have any questions about any of the above content feel free to leave a comment or contact me directly.

Cheers,
David