How many properties do you need to own to never work again?

Have you wondered how many properties you would need for financial freedom?

I’ve found that while most property investors hope to one day replace their personal exertion income with cash from their investment properties, most don’t have a strategy to achieve their goal.

So just how many properties does it take to enable you to quit your day job and live comfortably?

The answer is simple: it depends.

OK, that’s not what you wanted to hear, but in fact it’s the wrong question to ask.

It doesn’t really matter how many properties you own. What is more important is the value of your asset base and how hard your money works for you.

Why do I say this?

Because I’d rather own one Westfield Shopping Centre than 50 secondary properties in regional Australia.

How will you live off your property portfolio?

While many property investors know they want their properties to replace their income, I’ve found most don’t actually think about how they’ll actually achieve financial freedom.

They don’t have a strategy. They don’t have a plan. They just hope it will happen.

Other investors think that they’ll live off their rental income, yet I rarely see this happen. It’s just too hard to grow a portfolio of cashflow-positive properties of a sufficient size to replace your income.

On the other hand, the wealthy investors I deal with have built a cash machine by growing a substantial asset base of high-growth properties and then lowering their loan to value ratios (LVR) so they can transition into the next phase, the cashflow phase of their investment life.

They lower their LVR in a variety of ways. They could:

• stop (or slow down) buying properties, so that while the value of their portfolio keeps rising, their loans remain much the same;
• add value to their properties by manufacturing capital growth through renovations or development;
• pay off some debt using their superannuation;
• reduce their debt by pay off principal and interest; or
• sell a property or two.

But the first stage of their wealth creation strategy always involves building a substantial asset base.

Can’t I just live off the rent?

Let’s say you want an annual after tax income of $100,000. How are you going to achieve that? How many properties do you need?

If you plan is to eventually pay down your debt and live off the rent, you’ll probably need at least $4 million worth of properties with no mortgage to get that $100,000 after-tax income.

Don’t believe me?

The average gross yield for well-located properties in Australia is around 4%, but let’s be generous and say you earn a 4.5% yield across your property portfolio.

This means if you eventually own $1 million worth of properties with no debt, you’ll get $45,000 rent. But you’ll still have to pay rates and taxes and agents’ commissions and repairs, leaving you with something like $35,000 a year. And then you’ll have to pay tax on this income.

When you do the sums you’ll see that you need an unencumbered portfolio worth at least $4 million to earn that $100,000 a year after tax.

Remember that’s $4 million worth of property and no mortgage debt, otherwise you cashflow will be lower.

And of course you’ll also need to own your own home with no debt against it.

Let me ask you a question: will you ever be able to save $4 million?