Are you thinking something like … “How many properties do you need to do what?”
Good question.
Well, let’s say you want to achieve financial independence. Let’s go with that premise.
So, let’s rephrase the question, “How many properties do you need to achieve financial independence?”
Now we’re getting somewhere!
Now you have to determine how much money you require to make the declaration, “I’m financially independent!”
And, guess what? That number is probably different for everyone. What’s your number?
What’s Your Number?
Once you know your number, you can begin to answer the question, “How many properties do I need?”
To keep the conversation going, let’s say you required $5,000 a month. That number would give you financial independence. That’s net income. Income after all your property expenses and taxes are paid. That’s the money left over for you to live on. To spend on food, travel, clothes, rent, mortgage, charity, etc.
Isn’t that the great thing about money; it gives you so many choices. And, an added side benefit … it never clashes with anything you’re wearing!
A Few Assumptions …
So, let’s start listing some assumptions. Got to start somewhere …
First, each rental property rents for $350 per week. And, they’re all paid off.
“Wait a minute!” you exclaim. “How did they all get paid off?”
Well, another assumption. Let’s say you’ve had the properties for many years. And, let’s say you have more properties than you “need.” So, you sold off the ones you don’t need to pay for the ones you do. Make sense? That’s how most property investors do it. They don’t pay for anything. They let their assets pay for everything; including other assets. Make sense?
“Wait a minute!” you exclaim again. “How do you figure on $350 a week in rent?”
Another assumption. I’ve got rental properties in 3 Australian states and none of the rents are that low. My lowest rent is for a property in Adelaide; renting for $385 per week. My lowest rental in Alice Springs is $580 per week. I feel $350 per week is a reasonable assumption and achievable in the Australian market.
Break out the Calculator; Let’s Crunch Some Numbers!
Now we break out the calculator. Although these calculations will be fairly simple and straight forward.
Target income: $5,000 a month. Rent is $350 per week per property. Take off 25% for expenses. I use 25% in my calculations; you may use another figure. This 25% accounts for property management, insurance, taxes, maintenance and all other expenses related to a rental property.
So, effective rent; rent after expenses comes to about $350 – (.25 X $350) = $350 – $87.5 = $262.50 per week. This comes to $1,137.50 per month
And the Answer is …
Now, we can answer the question, “How many properties do you need?”
Just divide the $5,000 by the net rent $1,137.50; let’s do it.
$5,000 / $1,137.50 = 4.4 properties.
There you go. If you’re goal is $5,000 a month, then you need 4.4 properties – fully paid off – renting for at least $350 per week.
Since it may be a challenge to get “.4” of a property, shall we round up the number to 5? Can we go with 5 properties for this example? OK, settled. Five properties is the answer!
Of course with 5 properties, your income has now gone up from $5,000 a month to $5,687.50. Oh well, that’s one of the hazards of property investing; your income can go up unexpectedly. You just have to learn to live with it.
Yes, you’re right, it can go down unexpectedly as well. But, that’s why you build a buffer into your portfolio. Your 5th house would be your buffer. It’s a little more than what you “need.” And, what’s to stop you from having a 6th rental property?
So, now the question changes. Now the question becomes obvious. Are you ready for the next question?
Ready or not, here it comes …
How long will it take you to get the properties you need?