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Brought to you by Australian Property Investor

07th November 2006

How to achieve financial independence through property

We all yearn for financial freedom - the power to leave our day jobs and enjoy a long, leisurely retirement. November's Australian Property Investor magazine reveals how Australians can use property to earn just as good an income from doing nothing as they did from working nine to five.

Working hard, plying extra cash into the super fund and banking on a nice hefty payout at the end of your career won't necessarily provide enough wealth for retirement. It might free up some spending money in the short term, but most Australians will live well beyond their 60s and 70s. So what do they do when their super dries up?

There's the pension, but after living on $50,000 to $60,000 a year, would you be happy settling for an $18,000 or so handout from the government?

As API explains, with a bit of foresight, some smart strategies and the old, reliable bricks and mortar, Australians have the capacity to make their golden years even more comfortable - and a lot more prosperous!

According to API, the first step is to build equity through property investment, and then to spend time consolidating your portfolio - reducing the debt.

Monique Wakelin of Wakelin Property Advisory tells API, "The more equity you can control and the sooner you can control it, the greater your level of financial independence. Your increasing equity adds to your asset base because it allows you to use that equity as leverage to buy further assets."

How much is enough?

But how much equity (or property) will you need in order to become financially independent?

Michael Yardney of Metropole Properties takes a reasonably simple angle on how much is enough, theorising that five median-priced properties paid out completely can give investors the ability to replace their annual working income.

"In Australia, the average rent for median-priced property is about a quarter of the average weekly income," Yardney explains in API. "Therefore if you want to replace your average weekly income, you'll need at least four properties owned outright… plus a fifth to pay for rates, maintenance, outgoings and so forth."

How to live off your portfolio

Once the time comes and you leave your job, the key to financial independence is to turn your equity into income.

Mark Armstrong, CPA with Property Planning Australia, tells API that investors need to adopt some savoir-fare when they swap their day job for a life lived on equitable indulgence.

He says the smart approach is all about "getting your equity to generate income for you, so that you're not actually reducing your equity. Investors should think, 'I've got $1 million worth of equity - where can I now put it to start making it work for me in terms of an income'."

He suggests, "That's where they might look to the share market or commercial property trusts - a nice diversified portfolio."

Yardney outlines an alternative option - living off equity.

"The concept of living off equity is one that very few people adopt because it's foreign to what they've been taught. What you have to do to live off equity is to live off increased borrowings.

"The principle is: I've got $2 million worth of properties in good locations across capital cities so therefore every year I'm worth $200,000 more. If I live on $100,000 of that I'm still going to be worth another $100,000 every year, so even if I'm eating away $100,000 capital, at the end of the first year I'll be worth $2.1 million, at the end of the next year $2.2 million and so on."

He adds, "You really can't count on that 10 per cent increase each and every year because we know property doesn't achieve that rate of growth consistently, so every year you have to leave yourself a safety buffer."

I quit!

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