True Passive Income In Retirement | Podcast Episode 2

Can the business of property investing give you a passive income source?

Let’s explore that today – listen in to our second podcast episode or read the transcript below.

Hi Christine Williams here from Smarter Property Investing coming to you from The Property Couch, brought to you by Smarter Property Investing.

Today I have Donna here, and Donna has a couple of questions for me so she’s going to ask them and I will respond and see how we go.

She’s had these questions come into her from different people.

Donna: Thankyou! So, actually this is a personal question – my colleague and I were discussing passive income.

We’re both self employed people and we all want to have that amazing business that gives you passive income where you can sit at home, feet on the couch, reading a book and the dollars are hitting your bank account.

We were discussing how business that tote to be a passive income source are generally not that actually passive. There is still quite a considerable component of work you need to do. You need to find clients, deal with customer service, deal with enquiries, broken websites need fixing – there is always something that needs to be done. Yes, if you build it up big you could get a good income, but it’s never passive passive.

Then we were discussing other ways you could possibly generate passive income and I wanted to ask you – is property investing a legitimate way to generate a true passive income? Because, I can tell you my friend and I will be listening very closely.

Christine: It’s a very good question Donna and in the first instance, no it’s not. However long term yes, it is.

I suppose I can start it off with there is no such thing as a free lunch.

When I am talking to people about property, I am a long-term strategy girl and when I say long term a minimum of 10 years, 15-20 years. It really depends on you.

When I think about a passive income and when I think about investing in property, I am going to start answering this by way of – when you’re about to commit to something and you’re about to save for something you have to put money away.

So, let’s think about this as a savings plan and let’s look at it from a savings plan perspective rather than contributing to property.

So, we have $100 per week and we decided that we were going to contribute $100 per week into the bank religiously and we’re not going to stop and we’re going to do that and we’re going to do that for 10 years.

So, $100pw would be $5,200 per year and after 10 years $52,000 and I am not taking into consideration adding on interest or anything like that. But at the end of 10 years you have $52,000 in the bank which is really good.

But let’s look at that from contributing $100 per week to property. If you purchased a property today and if after all expenses were paid out, rental income coming in and all your expenses paid out (property management fees, rates, insurances and so forth) and it cost you $100 per week to hold, that property, will cost you after 10 years $52,000 as long as the expenses are stabalised and the interest rate is stabilised.

But, at the end of those 10 years let’s just say that your property today cost you $500,000 – the ABS will tell us that property doubles every 10 years. So, it should technically be worth a million dollars.

So, that $52,000 that you have contributed over the last 10 years has actually made you nearly $500,000.

Now that hasn’t answered your question but I have explained the $100 per week contribution to you for the simple reason is that when you’re contributing that money, you would have in the initial stages – it has cost you $100pw to hold because your rent might have been $500pw that you were getting. If your property doubles it generally means that your rent will double as well (not necessarily all the time) but it generally means your rent will double in the right climate and market.

So, if you were getting $500 rent per week today and that covered all of your expenses less $100 per week, and then in 10 years time the property doubled and it was worth $1M and you were getting $1000 per week in rent and the expenses were still sitting at $500 in actual fact you have a passive income.

That’s how this works.

This is a long-term investment and it becomes passive income. So, no you haven’t actually paid off your property but because the rent has doubled you end up with passive income.

When I am talking to clients about future income or what they want during retirement, and if they say to me, they want $50,000 a year in retirement well we could turn around and say that’s 2 properties, $500 each. If they want $75,000 its actually 3 properties.

I always say you need Three To Be Free. Why 3 properties? Well because 1 property does the government a favour, you don’t get any pension if you have one property over and above your own. 2 properties, you still don’t get any pension but I don’t know if $50,000 a year is enough for me to live on (it might be for other people) but 3 properties could give you $75,000 a year in passive income.

It works.

It’s not a short-term strategy, it takes a minimum of 10 years, 15 years – at 20 years it’s a piece of cake.

So, for those 30 and 40 year olds out there, you can look forward to a very comfortable passive income.  Of course, there is a lot of accounting stuff, of course you have to think about taxation, rebates and that sought of stuff but it is easy. Once you know how and you follow the system it really works.

At 3 properties, as long as your borrowing capacity is there and as long as you’re comfortable contributing in the beginning – eventually it’s going to be giving back by 10-fold. It really will work.

Donna: So, just to make sure that I have understood it correctly, the average Joe Bloe has understood it correctly, at the beginning it could cost you $100 per week hypothetically. There is no passive income, it’s actually costing you money. But, by the time you retire you will have surplus cash, hitting your bank account once all the bills and costs have been paid. That you worked for as a 30 year old like myself. So, all the work I do now I will be reaping as a retired lady where I literally will have cash hitting my account and I don’t have to do a thing.

Christine: That’s right.

Donna: Especially now that we have great online property managers that we can source, we have other services that can take care of everything. I literally have to do nothing but spend my money.

Christine: (laughing) That is one way of looking at it. I suppose when we’re talking passive income at the end of the day, you will definitely come out with money. If people treat this like a business. They treat building a property portfolio like a business all the routine paperwork stuff and accounting stuff it just becomes a part of the process but at the end of the day it’s a cash cow. Property makes money for you. Not only from a capital growth perspective (you know actually goes up in value) but from a cashflow perspective from rent. So, 10, 15, 2o years down the track it is basically income coming in that you’re not doing anything for.

Then of course you have the option to keep or to sell and then of course there is going to be a lump sum after taxes are paid and that’s a huge incentive to start in todays dollars contributing something like $100pw instead of it ending up being $5,000 at the end of the year vs what it could be worth at the end of 10 years.

Donna: I was literally about to say that. I was thinking I know what I would prefer, either the $52,000 or half a million dollars at the end of 10 years. It’s a no brainer.

So let me ask you this, this hit my head so I am sure other people thought the same. As a 35 year old lady, yes me getting three properties by the time I retire is….I have ample ample time – have you ever had anyone kind of get to the third property and go “well I’m going to keep  going – three is a magic number to get that sweet spot but what if I want $100,000 a year in income? What if I want $200,000? What if I want to spoil my entire family? What if I want to do more?

Christine: Well at the moment with two little kids it may be a really big dream or a really big ask to say plus your own home you want another three properties – I can understand that perfectly. It’s a big jump it really is. Sometimes it’s a really big jump for people to think they can afford their first property so for me to sit here and say Be Free With Three – I understand everyone holding their breath and thinking “how can I do it?” – well you actually can as long as you have the time. So the answer to your question Donna is, my clients who have three properties, honestly after their second the are saying “do I stop at 3? Can I have more?” and the answer to the question is of course you can.

You do not have to stop at 3 you can have as many as you like, but once again. This is a business. So you’re thinking about business, building a business you can have as many as you like. As long as your borrowing capacity is there and as long as the banks comfortable lending you the money and as long as you follow the strategies to purchase under what I call the PIES formula (which will be in another session podcast where I will explain what my PIE formula is) to make sure that you’re investing in the right area at the right time. To make sure you have the right capital growth on the right investment, yes you don’t have to stop at 3, you can go as many as you like.

Donna: So this might be a tiny segway but, you said something that made me a little bit curious. You said that people often get scared about investing in their first property. Once they get over that hump of that first one and they realise that it wasn’t that hard and wasn’t that scary – I can do this again as long as I can afford it. Banks lend me the money I will do number 2, number 3 and so forth.

Why do you think people are scared to do that first investment property when they have already bought their first property – the one that they’re living in. What’s the difference? They were so eager, so gung ho for that first one – but why does that excitement not translate over to their first investment property?

Christine: Because getting into your own home, it’s a big jump. We have to think about a deposit we have to save, be it 5 or 10% deposit, we have to think about the stamp duty (first home owners negate that) but it’s a big hurdle. Then they have this big mortgage to pay (whether they were paying rent and now a mortgage) and their cashflow in their household may be a little bit strained. It could be we’ve gone to Harvey Norman, we bought a new car, had a trip, we might have had a birth in the family or something like that and because cashflow is so tight they just think they can’t do it again.

The biggest misconception is that yes we love our family home because let’s face it – one of the greatest Australian dreams is to own your own home, and I still love that and I still think it’s great – but misconception is by owning your home, you don’t actually own it UNTIL you don’t own the bank anything. You’re actually renting off the bank whilst you’re paying your own mortgage.

So, it is a cashflow expense coming out of the household income but when you have an investment property the tables have turned. Not only does the tenant help you pay for it the tax man helps you pay for it. The burden is not 100% yours. It’s actually generally only about 15%. I work it out that if the property costs you more than 15% to hold over and above the income and tax deductions, it’s probably not the right return on investment.

Yes, it’s a numbers thing, yes I work it out and no it’s not that easy for you to pick up the pencil or your calculator and work out how to do it, but I can do that. Understand your own home is 100% your own responsibility, no one helps you. It’s just yours.

But with an investment property between the tenant and the tax man, they generally provide 85% of the mortgage income and expenses.

So, to me it’s a no brainer. It’s not hard to have an investment property as it is to owning your own home.

Donna: Well if that doesn’t make you ask questions, I don’t know what will. So, what do people do if they have questions Christine?

Christine: The details are here and you might have burning questions drop me a line, pick up the phone call me and I will answer them for you but until then we will talk at our next session and I look forward to hearing from you from Christine Williams at the Property Couch, brought to you by Smarter Property Investing.

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