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Is Your Goal to Retire Earlier?
This is the second in a series of articles based on goal setting. One of the most important areas we cover in the University Endorsed Property Investment course is that of setting your own goals. I break down these goals into six different categories:
• Retire richer
• Retire earlier
• Supplement your income
• Work part-time
• Give up your day job
• All or some of the above!
This week I consider the goal of wanting to retire earlier. The most common approach to achieving this goal is to purchase and hold numerous properties. Over time, they will grow in value and then you sell the properties when you are ready to retire. Let me illustrate with a step by step example.
Let’s imagine that your goal is to retire with $1 million in 10 years time.
Step 1 – Purchase $1.2 million worth of property
This could be done in a number of ways; purchase 4 x $300,000 properties, 3 x $400,000 properties or even 2 x $600,000 houses. For the purpose of this example and to minimize the holding costs, I am assuming that you are buying 4 properties each worth $300,000. Let’s also assume that each property earns $300 per week in rent.
Step 2 – Borrow $1.2 million as an interest only loan
The reason you’d want to take out an interest only loan is that it helps with your cash flow as you will be paying off all the interest in one lump sum when you sell the properties in 10 years time.
Step 3 – Hold the properties for 10 years
In Year 1, each property will cost you approximately $100 per week from your own pocket as the rent and tax benefits are not enough to meet the mortgage repayments and other rental expenses. In other words, you are negatively geared to the tune of $100 per week. In Year 2, hopefully your rent has increased and it may only cost you $90 per week per property. As time goes on, your out of pocket expenses decrease and by Year 10, your properties will either be neutrally or hopefully even positively geared.
Step 4 – Sell the properties
Let’s assume that property doubles every 7 to 10 years. If we take a conservative point of view and base our figures on property doubling every 10 years, these properties should be worth $2.4 million in 10 years time. If you pay off the original $1.2 million loan, you still have $1.2 million left over!
I have configured this illustration so that we are left with $1.2 million in 10 years time. I assumed that you wanted to retire on the equivalent of $1 million in today’s money which is the same as retiring on $1.2 million in 10 years time, when you take into account the effects of inflation. (It will actually be $1,195,093 in 10 years time; I have just rounded off).
I assume that you will need to pay capital gains tax (CGT) when you sell the properties but to keep things straightforward, I have not accounted for CGT. There are many ways you can minimize (or possibly even eliminate) your CGT liability. Some methods to minimise/eliminate capital gains tax include
• purchasing in a variety of entities
• purchasing in a Self Managed Superannuation Fund (SMSF)
• staggering the sale of the properties over two or more financial years
Summary:
To retire earlier, you should buy multiple properties using an interest only loan and hold them until you are ready to retire. Then sell the properties, pay off the outstanding loans and live off the proceeds and interest.
I have assumed that you wanted to retire on $1 million. If you want to retire on more than this, you will need to buy more property. You will also have to take into account your individual tax situation.
I am not suggesting that retiring in 10 years is easy. I know that paying off one loan is hard enough for many people, let alone trying to pay off four mortgages. What I am outlining is that the process of retiring earlier is relatively simple. You still need the capacity to borrow a large sum of money and the discipline to hold onto all the properties until you are ready to retire.
Happy House Hunting!
• Written by Peter Koulizos, university lecturer, author and buyers advocate.
