One of the main objectives in accumulating investment properties is to build up an ongoing income stream.
So it’s important to get an understanding of the size of your net worth and how to calculate a cash return on this so you can forecast the level of income you could receive.
Your net worth is calculated by adding up the value of your income producing assets and then deducting your liabilities, which are usually your borrowings.
Note that while you can use equity in your home for investment, or perhaps downsize in the future, it is not part of this net worth calculation as it’s usually not producing an income (plus you need somewhere to live).
Therefore as a rough guide, if you had $3M worth of investment properties and $1M of debt on these, then your net worth would be $2M. Now let’s use a conservative cash return on this of say 5%. This would provide a recurring annual gross income of approximately $100,000 (net of most property expenses).
While this is a simplified calculation, what it really suggests is that it doesn’t depend on the number of properties that you own, rather it’s the size of your net worth. This calculation does indicate, however, that you will need a significant portfolio of properties to get a six figure income in retirement.
To invest at this level you will usually need a timeline of around 10-15 years
..and a financial road-map in place to get you there and a strategy that takes into account capital growth, cash flow and debt reduction. It’s also important to remember that most of us don’t simply build up a property portfolio of this size overnight. It takes patience, skill, motivation and …. Time !!
