Is property development all it's cracked up to be?


You must be into property or you wouldn’t be reading this. That makes us family – sort of.

We’ve decided that property will be the asset class that will fulfill our wealth aspirations. Good choice.

So how are we going to get there (financially free and in control of financial future) and how long is it going to take? Let’s start at the bottom of the property ladder – property investment. And to keep it simple let’s choose the most common type for the average person – residential property.

An old thumb rule from financial planners was, given a long enough investment phase, to have clients retire on what they were earning before they gave up work. Let’s go with that and keep it simple.

The median income is $48,000 pre-tax or about $41,000 after tax. The average full-time wage is $86,000 pre-tax or about $66,000 after tax. So let’s target $60,000 as a figure a lot of people (outside of you of course) would see as being an ok retirement income.

By way of comparison, the annual basic single pension is just over $22,000 and for a couple is around $16,800.

The question is, how many unencumbered investment properties would you need to produce the required $60,000. That will vary with the value of properties often based on location and the net yield. Let’s go with an average $600,000 property and a 3.5% net yield.

My math tells me you would need to own three such houses debt free to achieve the target. OK, so how many people are in that position? I grabbed some stats from the ATO based on 2016 figures. I expect they would be similar now. Here’s how it goes.

People who own 1 or more investment properties = $2.1M (15% of the taxpaying population)

People who own 1 investment property = 1.5M (10.7%)

People who own 2 investment properties = 400,000 (2.6%)

People who own 3 investment properties = 123,000 (0.87%)

And remember, this is the number who own properties. Most would be carrying varying levels of debt, not unencumbered. Maybe they can dump their superannuation on the debt and retire it.

Without getting bogged down in statistics it is plainly obvious very few people ever get to retire on their property investments. And why do so many buy 1 property and either slam on the brakes or bail out altogether?

I suggest it is painful because of negative cash flow (less of an issue at current interest rates) but mostly because it is so slow. Particularly if we could be moving into an era of more subdued growth.

So is property investment all it’s cracked up to be? I’ll answer that by saying the old “buy and hold” strategy simply doesn’t cut it for most unless you’re on a massive income.

Whether you’re new to property or an old hand, I think you’d agree there must be better and faster ways to build equity and cash flow…there is…check out our Facebook page to find out more.

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