March 15, 2022
Gavin Hepponstall

How many properties do I need to retire financially independent?

"How much property do I need before retirement?" It’s one of the most important questions that every property investor asks themselves. Retirement is the finish line to look forward to after decades of hard work and disciplined saving.

How many properties do I need to retire financially independent?

"How much property do I need before retirement?"

It’s one of the most important questions that every property investor asks themselves.

Retirement is the finish line to look forward to after decades of hard work and disciplined saving.

Most of us envision spending our retirement with our family, out on the golf course or sipping pina coladas on a tropical beach.

In reality, the quality of our retirement is determined by the financial situation we have set up for ourselves.

Ultimately, you should be aiming to replace your income with a mixture of superannuation and other investments, allowing you to live out the retirement you deserve.

But how many properties do you need to achieve financial freedom? I’ll give you a formula to help you with this but first let’s break it down.

How much passive income do you want for your retirement?

It’s the question you first need to ask and it feels like it should have a simple answer: “As much as I can get.”

The problem with this kind of thinking is that it lacks clarity. It’s much harder to work towards a vague destination because you won’t have the directions to get there.

Investors with this mindset are often the ones who think buying as many properties as they can will be the fastest way to wealth. This runs the risk of spreading yourself thin, building large debt or rushing into purchases that aren’t good long-term investments.

Vague goals can have the opposite effect too. Many investors don’t have a plan to keep them on track which causes them to miss out on potential growth. According to recent ATO figures, 73% of property investors stop after buying only one investment property.

To know how many properties you’ll need by the time you retire, you have to first work out how much passive income you’ll require to live out the retirement you want.

As a guide, the Association of Superannuation Funds of Australia (ASFA) offers an updated retirement standard on the level of income retirees need.

ASFA’s current figures indicate that an annual income of $44,818 for singles and $63,352 for couples is the benchmark required in order to live out a comfortable retirement.

Keep in mind, these estimates don’t account for many of the luxuries we have planned for our later years. Any additional expenses for travelling, hobbies, family and cars will also need to be factored into your budget.

My personal advice? Plan out a retirement that makes your decades of labor worth it. What lifestyle would feel like a just reward for a lifetime of your hard work?

Once you have that number, let’s say it’s $80,000 per year, you will have something concrete to work towards.

Setting up passive income through rent

For property investors, the rent you receive from your tenants will be your primary source of cash flow.

Your gross rental yield is simply the difference between the annual rent you receive from a property and the overall cost of the investment.

When developing a plan for your retirement portfolio, you’ll need to determine the rate of rental yield you expect to generate from your properties.

The following are the factors that have the biggest influence on rental yield:

  • The location of your properties. In the Melbourne and Sydney markets, houses achieve an average rental yield of around 3%, compared to less expensive cities like Perth and Darwin which can expect rates upwards of 5%.
  • Which end of the market you buy in. Expensive, high-end properties will generate much lower rates of rental yields compared to the cheaper options on the market.
  • The type of property you buy. Units and apartments typically offer much higher rates of rental yield due to the lower cost of investment in high-demand areas.
Average rental yield graph
Source: Domain

Keep in mind, higher-yielding assets will generally generate greater cash flow, but may not perform as strongly with their capital growth.

Once you have your estimated rental yield, let’s say it’s 3.5%, we can work out your portfolio goal for retirement.

How do I know how much property I’ll need for retirement?

It’s a common belief that only wealthy or high-income earners have the means to be successful property investors.

This isn’t necessarily true.

With appropriate advice, patience and discipline, it is very much possible to build a property portfolio that provides enough passive income to finance a comfortable retirement.

First of all, don’t listen to all the spruikers and salesman who are say they can help you buy 10 properties in 10 years. This is always a red flag.

Almost always, the successful property investors have got where they are through planning and informed decisions.

The easiest way to formulate a property plan is to work backwards from your goal. To help you with this, I’m about to give you a little formula.

If your goal is to be receiving $80,000 in passive income by the time you retire, then your assets need to be generating that amount of cash flow each year.

This is where our magic little formula comes in.

  1. Divide your expected rental yield from 100. For example, if your expected rental yield is 3.5%, then the equation would 100 ÷ 3.5, which equals 28.57.
  2. Once you have that number, multiply it by your goal retirement income. In this example, the equation would be 28.57 x $80,000, which comes to $2,285,600. That figure is how much unencumbered property you’ll need by the time you retire in order to receive your desired passive income.

You’ll realise that once you establish an end target, the journey to get there might not feel so daunting.

This formula should demonstrate that it’s not about how many properties you own, but the overall quality of their performance.

If the goal value of your debt-free portfolio is $2,285,600 like in this example, you could reach this target using any number of properties. Two to three medium-size assets could be all you need to own by the time you retire.

If your investment strategy involves property, remember that the underlying value of your assets will be your strongest path to wealth.

Your retirement is so important, so make sure you do your research, seek help when you need it and have a clear plan to get you there.

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