11 Oct Quit your job & work in property full time – Michael Yardney
Ever thought of quitting your job and working on, or living off, your property full time? Is it even possible? In today’s show Michael Yardney, from Metropole Property Strategists, gives us a reality check. He says its possible but not easy and he explains why.
Kevin: I don’t know about you, but I quite often hear people say that they want to quit their job and they want to go into property full time. How do you do it? Is it possible?
Michael Yardney, that’s the question I want to ask of you. Michael, of course, is from Metropole Property Strategists. Michael, you probably hear this a lot, do you?
Michael: Kevin, yes, I do. Look, only a couple of days ago, I heard somebody say, “Look, I want to get out of the business we’ve been in for 10 or 12 years now. We want to move into property full time.” They say that they read about it in the magazines, they hear about it. They’re wondering how they can do it. The answer is it’s not easy, Kevin.
Kevin: But it is possible?
Michael: It is possible. I think another related question, though, we probably should mention is that people say, “Michael, I’d like to buy an investment property, and. I want the income to pay for my kids’ school fees, or maybe I want to have a little bit left over and go on holidays.”
When people say, “Michael, I want to get to property full time and pay my wages, I want to get into property to pay my school fees,” I say to them something that disappoints them, Kevin. I say, “That’s not how property works.”
What I believe you have to do is rather than live off that little bit of positive cash flow that you can get out of properties if you buy cash-flow properties, is actually to build an asset base first, Kevin. To me, there are three stages of successful property investing.
Kevin: Okay. What are they, Michael?
Michael: The first one is the asset grow stage. This usually takes 10 or 15 years or more. You need two good property cycles. My strategy is to acquire high-growth properties and let them increase in value, leverage off them, and buy them again.
Then you transition slowly into the cash flow stage of your investment career by lowering your loan-to-value ratios, and then, eventually, yes you can live off your properties, Kevin. But it’s not something where you can buy a property today and then suddenly live off it or have it pay your school fees. It doesn’t work that way. Wealthy investors that I’ve dealt with have first built their assets and then transitioned to cash flow.
Kevin: You mentioned there about lowering their LVRs. How do you go about doing that?
Michael: Kevin, there are a couple of ways. First of all, you stop or maybe you slow down buying properties so that while the value of your portfolio grows with time, your loans remain much the same. Or you can actually lower your loan-to-value ratios by increasing the value of your properties by manufacturing some capital growth through properties. Or you pay off some debt, because in the end, you get to the stage where you pay principal and interest. Or sometimes you actually have a bit of a superannuation bonus as you retire and you can use that. Sometimes, you should sell a property or two, but can I put a warning in here, please, Kevin?
Michael: A lot of people have heard the concept that I’m going to buy ten properties and then I’ll sell five at the end, and then end up with five with no debt, but that doesn’t work that way. Because to buy those properties, you usually have something like an 80% loan-to-value ratio, and when you sell them, you pay some capital gains tax.
Selling one property doesn’t give you the money to have another one debt-free, so that strategy doesn’t work. But the reason you would maybe sell one or two is to lower a little bit your loan-to-value ratios.
Kevin: Given that’s the case, then, is it at all possible just to live off the rent?
Michael: People would like that concept, and let’s say you want to live off $100,000 of income a year from your rents. I say to clients, “How many properties would you need?” They’re not really too sure about that.
But if you work out that you get around 4.5% yield – and that’s generous in today’s economy – and if you owned $1 million worth of property with no debt, you’d only have $45,000 rent, but you have to pay agents’ commission and land tax, and repairs, so you’d only be left with maybe $35,000.
If you really want at least 100,000 to live off, Kevin, you have to have $4 million worth of real estate with no debt plus your own home, and then you’d end up after tax maybe with $100,000. Kevin, most people just can’t save enough or pay off that much debt to live off the rentals of their property.
Kevin: Michael, does living off equity really work?
Michael: The concept I’m talking about, you’re right, is living off equity, and prior to the Global Financial Crisis, boy was it easy. You just get a low-doc loan, no-doc loan. Today, it’s much harder, but despite all the APRA changes, I know a lot of our clients are doing it, I’m able to do it.
The concept really is you have to own the right properties, you have to have lowish loan-to-value ratios, and you have to have the right finance structures to be able to do it, but it’s definitely something you should aspire to.
Kevin: Michael, any final words of warning?
Michael: Don’t believe everything you hear or you read. Very few people do property full time. It’s hard to become a property developer full time, you need much deeper pockets than you think, and most people I’ve seen become wealthy have got a full-time job while they build their property business on the side as a part-time job until they eventually have a big enough asset base to live off their property portfolio.
Kevin: Thank you, Michael. Michael Yardney from Metropole Property Strategists. Michael’s blog, of course, is PropertyUpdate.com.au.
Michael: My pleasure, Kevin.