# How many properties do you need to retire? – Rich Harvey and Dr Andrew Wilson

In today’s show I am joined by buyer’s agent Rich Harvey and Chief Economist Dr Andrew Wilson to discuss how many properties you need in your portfolio to retire. Rich has a simple formula.

#### Transcript:

Kevin:  First up, welcoming into the show, buyer’s agent Rich Harvey from Property Buyer. He’s done some study on just how many properties you need to have in your portfolio that would allow you to retire.
Rich, I know that you’ve looked at this, but is there a formula or a magic number if you’re determining how many properties you need to retire?
Rich:  There are some pretty simple calculations you can do, and I’ll make the math pretty simple, but I always like to start with the end in mind. Stephen Covey is one of my great mentors, and he’s written that book Seven Habits of Highly Effective People.
For property investors out there who want to retire someday, a really simple goal is to go “Well, what sort of income do I want to earn from my passive assets, my passive property portfolio?”
If you want to earn, say, \$100,000 in income, the simplest way is to go “On average, across Australia, you should be able to achieve around a 5% gross rental yield.” Divide that 5% into \$100,000, and you come up with \$2 million. So you’re going to need roughly \$2 million of unencumbered property assets.
The next question, Kevin, is how many properties do you need to get to \$2 million worth of assets? It’s a bit of a scary number, but effectively, my strategy would be to buy around \$4 million worth of property over a period of time, hold those properties for one to two property cycles, and then sell down half your portfolio to pay off the debt on the properties. That should leave you with roughly \$2 million to give you your \$100,000 income.
Kevin:  So it has to be \$2 million unencumbered.
Rich:  Correct, that’s right. And I haven’t allowed for a lot of expenses, and there are taxes and a few other things there, so it’s a very simplistic equation. You do need to get financial advice and some good number-crunching on those, as well.
Kevin:  If you’re looking at building a healthy portfolio, what sort of gearing should you have, loan to value ratio?
Rich:  When you’re starting out – it depends what age and stage you’re at – if you’re in your 20s, I always advocate going and putting in the minimum deposit possible, because you’re in the accumulation phase. You have plenty of years of work ahead. Starting at 80% loan-to-value ratio is fine. I even started at 90% and paid lender’s mortgage insurance just to get going at some points in my portfolio. But as you get towards your 50s and your 60s, you don’t want to be going that high. Gearing that high can be a dangerous scenario.
It depends on your age and stage, but my general advice is in the earlier stages of your career when you have a long work life ahead of you, gear it more strongly, but putting in 20% is always a rough rule of thumb.
Kevin:  It’s very easy now to get into investment with the interest rates the way they are, but I was reflecting back on property back in 1975 just yesterday, and interest rates then were almost around 10%. What sort of a buffer would you put above the current interest rate to allow for increased rates?
Rich:  The banks are basically adding at least 3% buffer.
Kevin:  3%, yes.
Rich:  Yes, even 3.5% some of the lenders.
Kevin:  Almost doubling it.
Rich:  Yes. Look, it’s a bit of overkill. I don’t believe interest rates are going to go that high ever again. It’s interesting to see, what’s actually happened is because interest rates have been so low, people have been able to gear quite heavily and just the volume of debt out there is quite remarkable. So when the Reserve Bank changes rates, there’s a lot more sensitivity to those rates on the upward cycle.
Definitely have a buffer in place, and usually I allow around at least 2% above the current rate. Another tip is if you’re paying off an owner-occupier loan, pay it off with that extra percent in mind and pay down your non-deductible a little bit faster.
Kevin:  I want to bring Dr. Andrew Wilson into this discussion, as well, because we were talking – just before we started chatting to you – about the number of investors who are coming back into the market, particularly in Sydney and Melbourne. Are you noticing that as well, Rich?
Rich:  Yes, there are. I think with this election now being called, hopefully it’s going to bring a bit more confidence and certainty back into the market. I thought that if Labor had got in, there would have actually been a little mini boom in people chasing after established properties, because they were going to abolish negative gearing. But we’re seeing a little bit more confidence starting to return, like we’re starting to get a little bit more enquiries than we have been the last few months for our buyer’s agency service.
I think the wobbles in the share market and around the world, like the Brexit, that tends to send a bit of a ripple effect through, so we’re starting to see investors still wanting to get into the market.
Andrew:  I think, Rich, another driver of that is that the lower interest rates go, the more attractive residential property investment does become. I think there’s almost an intuition there that the flattening of interest rates really reflects that the upside risks to higher interest rates are lower, particularly in a low-yield economy.
Deposit rates are under 2% now, as you said, the share market is all over the shop, plus there are concerns about where the international economy is going, and I think in those circumstances, you get more demand for residential property, notwithstanding what is happening in the cycles.
I think that even the prospect of a change to negative gearing had investors up and about, and we’re certainly tracking a spike in the Sydney market over the last two months. My spies down in Melbourne tell me that there has also been an investor spike down there in the northern and western suburbs. So you don’t really need to incentivize investors much in the current climate to get them back into bricks and mortar investment.
Kevin:  Rich, we’ve received a text in from Michelle. She is in her 20s, and she wants to know whether her strategy should be any different from someone who’s, say, in their late 40s. In other words, the properties she’d be looking at, should they be different from someone near on double her age?
Rich:  Again, it depends on Michelle’s income, as well. When you’re starting off, if you’re on an income of, say, \$50,000 and you have got kids and a lot of expenses, you really have to watch your cash flow. So getting a property that really looks after itself, that’s more positively geared, that’s a really good strategy.
But when you’re in your younger years, if you can afford to buy a property with a really good growth bias, that’s going to help you accelerate your equity a bit faster, because you can then redraw the capital gain, redraw the equity, and then use that as a deposit to go again for your second property.
Kevin:  You’re based in Sydney. Let me ask you the question about Sydney investors. What sort of properties are they looking at right now, Rich?
Rich:  Quite a mixture. We have some clients with a budget of \$500,000 up to \$2 million. They’re generally looking for properties in good quality suburbs, close to schools, shops, and transport, particularly areas around Sydney that are benefiting from all the infrastructure development going on.
There’s a host of things happening in Sydney. You have the North West Rail Link, South West Rail Link, light rail going through, NorthConnex; there’s a lot of transport infrastructure. In the Beaches, you have a hospital going in, so a lot of investors are trying to capitalize on where that reduced travel time or improved amenity is happening. And then, of course, traditional investors will just buy in the blue-chip suburbs and just try to get a foothold.
Kevin:  Are there any areas around Australia where you’re concerned about an oversupply of stock, particularly with units?
Rich:  Starting with Sydney, absolutely. Places like Zetland, Mascot, Parramatta, some pockets of Homebush, you definitely have a very significant number of apartments going in there, which I wouldn’t be buying at all.
Brisbane, certainly around West End, Fortitude Valley. I wouldn’t be putting my money into Perth or Darwin at this point. I just find that the Darwin market is too volatile, and I think Perth has got a little bit further to fall. In Melbourne, as always, some of those city and inner and city fringe areas – again Docklands and some of the apartment areas around there – I’d be avoiding, as well.
Kevin:  Rich, I want to thank you for your time, it’s been great talking to you. Rich from Property Buyer, thanks.
Rich:  Thank, Kevin, have a great day.