How many properties do you need?
When you’re planning out your investing strategy, one of the first aspects to consider is the number of properties you need or want. Without spending hours crunching through detailed spreadsheets, how do you work this out efficiently?
Just one first thanks
Some people we work with would just be happy to buy their first property. But once you have done that, the prospect of buying ‘a few’ more starts to become a reality.
A basic starting point we use is to think about the annual income you’re targeting – for example $100,000. Next, we work out how many properties would deliver this income.
In planning, we need to use some assumptions and a baseline. In order to model the number of properties required to achieve $100,000, we use rental income of $400 to $600 per week per property, and work this out on 50 weeks per year. Using 50 weeks per year provides a small buffer for vacancy periods. We also have allowed $6,000 in costs to cover insurance, property management and maintenance, rates and a small contingency for emergencies.
Using this approach provides us with information about the number of properties required to achieve the total rental target, and also demonstrates the variables involved in meeting the target. That is, seven properties will deliver the target rental at the lower end of the scale, while only four are required at the higher rental amount.
Cost to purchase
The next step is quite difficult to model, so please note we are making quite broad assumptions in relation to purchase prices.
We’re assuming here that a property achieving a rental income of $400 per week will cost less to purchase than a property achieving a rental income of $600 per week. This is definitely not a rule, but the table above demonstrates the importance of acquisition price in relation to the rental amount.
There are many other variables to consider, not the least of which is your ability to increase a property’s rent through renovation or mini-development, and many ways to purchase at a range of price points. If rent was proportional to the purchase price, as it is in this example, then you would achieve your target rental income for a lower total acquisition price. This news surprises some people when we work through their planning.
What a shame real life is not like living in a model. It would be great for investment predictability. But real life is not as predictable as our model, and for this reason your plans need to be revised with each purchase you make.
Along with the realities of purchasing in an active market, our model has not taken into account the ease of purchasing lower priced properties, or tax and other acquisition costs such as stamp duty. However, it provides a framework for planning and allows us to move towards the end game . . .that is, how do you ‘own’ the properties or pay down the loans.
Pay it off
For the purposes of providing a succinct overview, we have not covered the quite crucial step of explaining how to leverage one property to purchase more, as this is addressed in detail in our other publications. So, to stay on topic, outlined below are just a few of the ways you might use to achieve the goal of earning $100,000 outright.
- Buy very well = less to pay off.
- Buy and let capital growth and rental increases pay the loan repayments over time.
- Combine the excess rents (in a positive cash flow portfolio) to pay one property off at a time (or just pay the offset to the minimum amount . .see my note below).
- Use projects to fast track your repayments – for example, buy a property to renovate and sell or split in half and sell the back block.
- Buy more than you plan to keep, wait for capital growth then sell the most strategically beneficial property/ies at a strategically beneficial time.
- Renovate to increase rents.
- Develop some properties to facilitate wholesale purchases – for example, develop townhouses to replace one house on a single lot.
It wouldn’t be a Crave blog if I didn’t add a little extra point at the end. The best case scenario would be to use good loan structures so you have an offset facility attached to your portfolio, with the aim of not completely paying off the loan entirely. But . .you would need to speak to a mortgage broker who could advise you on the best way to manage your specific requirements.
This is the fourth blog in a series of portfolio strategy information. The other blogs include . . .
- Buy, sell, hold . . . just know your property numbers
- Step two after your property review
- Relax and get your ratios out
Buy smarter = limitless ways to build lifetime income
Crave Property Advisory is a unique property strategy and buyers agent service. As the only independent and unbiased advisory that can help you use any property strategy Australia-wide, Crave’s services extend to home, investment and commercial property. A highly client focused organization, Crave developed the Modular Investing System (MI System) to provide clients with the ability to use a tailored mix of strategies and efficiently build profitable portfolios that create lifetime income.
Debra Beck-Mewing is the CEO of Crave Property Advisory, and has more than 20 years’ experience in property investing, Australia-wide. She has used a range of strategies to build her property portfolio including renovating, granny flats, sub-division and development. Debra is skilled in identifying development opportunities, and sourcing properties that have multiple uses and multiple exit strategies. She is a Qualified Property Investment Advisor, licensed real estate agent and also holds a Bachelor of Commerce and Master of Business.
Disclaimer – This information is of a general nature only and does not constitute professional advice. We strongly recommend you seek your own professional advice in relation to your particular circumstances.