How many people in Australia can adopt the strategy that investing in property is the way to success?
Almost no one touting that property investing is the way to go asks this very important question. The starting point to work this out is asking another question “How many investment properties do you need to classify yourself as a success?” Well, this depends on how much income you need to derive from your investment properties to replace the current income you make from working. This income can come from developing, flipping, improving etc but then implementing these strategies to get property income still requires you to “work”. It’s a different type of work but work all the same. What about I talking about here is income derived from properties without having to lift a finger. In this case that income is almost entirely rent based.
Say you want $100,000 pa income. If you want more then the situation get worse. Net rental yields are typically around 3.0% (or between 4 or 5% before expenses taxes etc). This means you will need a minimum of $3,300,000 of 100% owned property (no mortgage at all) to get $100,000 pa of spending dollars. This does not take into consideration capital gain, and the subsequent increase in rent, because this is needed so your income is not eroded by inflation and that your property investments will be present in your Will. The “average” property price in Australia (2017) is around $600,000. So that means you will need at least 5 or 6 properties that are 100% owned. Ok. Excellent so far. So the ethos most often espoused is that the more investment properties you have the better off you will be long term. However, the most important question, that is almost never asked, is “How many people in Australia can implement this basic strategy of obtaining 5 investment properties?”
The answer is simple math but the result is catastrophic to the idea that “everyone can retire rich investing in property”. There are 10 million properties in Australia of which almost 70% of them are owner occupied leaving 3 million rented properties. Over 70% of all available rental properties are owned by someone who has just 1 investment property. This leaves 900,000 properties. So, if you need 5 properties for each investor then there can only be a maximum of 180,000 successful property investors otherwise there will be no more renters to live in your properties. With about 17 million adults in Australia that’s about 1% or about only 1 in every 100 adult Australians can ever hope to earn enough passive income to totally replace their working income through property investing. Ouch.
I’m certainly not saying, don’t try, because everyone should try to better themselves. What I am saying is that 99 must fail in order for that 1 to succeed. Thus, whenever I hear property investment guru’s touting the “anyone can do this” line, I immediately dismiss them as grossly misinformed or at worse liars because it totally glosses over how difficult it is to obtain a passive income from non-commercial property investing and that it is impossible for more than a small amount of people to be considered truly successful property investors. This is also why it is so difficult to find suitable non-commercial investment properties and why there are so few “get rich through property investing” success stories.
It’s also why there are so few genuinely rich property investors, because to be rich in this way means that there must therefore be at least 99 others who aren’t. And this is classifying a property investor who only earns $100,000 pa as rich!
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I have left out commercial properties and also tried to leave this comment thread as simplistic as possible to get the message across how monumentally difficult it is and why anyone who does actually reach this level of property investment success can be so proud of their achievement.
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This topic was modified 7 years, 1 month ago by
Ben. Reason: grammar and fixing math error
I think the question ‘how many people could do this’ is irrelevant. The question you should be asking is ‘could I do this’?
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I believe I can see a few flaws in this post:
1. Calculations are based on buying right now X properties to get right now Y rent to get the $100k p/a income right now. That’s not how it works. Rents grow with time so the rental yield (rent divided to purchase price) becomes much much higher over time, so the investor will need fewer properties.
2. There’s a difference between ‘everyone can do it’ and ‘anyone can do it’. The latter is more accurate but still, most people don’t do it, although they can. The former is probably not true for anything (if everyone are doctors, nobody would be policeman/engineers/builder/anything else, so no, not everyone could be doctors or property investors).
3. Going back to calculations, one of the things I love most about property is the control I have over it. You can buy a property and add value in multiple ways, pretty much independently of what the market is doing. This has dramatic effect on financials (both rent and capital gains).
4. Can’t see the logic behind the claim that “99 must fail in order for 1 to succeed”. Even if the numbers in the original post were right (which as mentioned above, I don’t believe that’s the case), 99 still won’t fail. Out of those that do give property a go, why must they fail? Some will be content with less income, others will buy and sell for profit and so on. Property isn’t a zero sum game and there is definitely more than one way to define success.
5. Back to calculations: why are properties owned by investors that hold 1 IP removed from available stock? Are those investors beyond redemption? Will they never buy more properties or sell their existing IP? Also, people die so OO houses come on the market that way too. Population grows so demand grows so more properties are built. All these things add many more properties to the stock that is available over the course of an investment journey (which takes years, not all happening right now).
6. Math is awesome but I always keep in mind the following saying: “if you torture the data long enough, it will confess to anything”. That’s true regardless if a spruiker presets the data or a naysayer 😉
Hope this makes sense? 👍😎
Ethan Timor | Aligned Finance Pty Ltd
http://www.alignedfinance.com.au/
Email Me | Phone MeActive Investor & Broker; Based in Northern NSW, servicing Australia wide; Author of '34 Proven Ways to Maximise Your Borrowing Power' (download free from our website)
Hi Ethan
1. The $100,000 arbitrary income figure is simply the rental income from 5 “average” Australian properties:- approx $20k per property or $380 per week per property. It is also the annual income figure I used to represent “financial success”.
2. Using the historical purchase price to calculate rental yield is wrong. Any accountant will tell you that they would not use the purchase price of $58,000 for a typical Sydney home to calculate the rental yield an investor is getting today simply because the property was purchased in 1978.
3. “Anyone can do it” is mostly correct, but certainly not everyone. There are restrictions on who can be a doctor (intelligence tests, limited university places etc), engineers (limited university places, a limited number of jobs available etc). The point of my article was that there are similar limitations on how many people can be successful property investors with the main limitation being the finite number of rental properties and the need to have approx 5 rental properties to replace a typical working income.
4. Sure, I love the control factor as well and have renovated many properties over the years and been rewarded handsomely through capital gain as well as improved rental return. But I had to work at this. It required my physical and mental input. It’s not work if you love it…so it could be argued that the time and effort I spend making money with investment properties is not work. Or at least that’s what I try to tell myself every time I find myself spending a huge amount of time dealing with building contractors, repairmen, painters, council, lawyers, etc etc.
What I was trying to stress was income without any work at all. Strictly investor cashflow income…like dividends are the income part of owning a share. But even my example still requires “work” in the form of having to reply to property managers emails…which can be painful enough!
5. So true that there are lots of ways to define success. But any model must have one defined. So I chose financial success through property investing as meaning replacing a working income with property investment income and I choose $100,000 as that working income figure. You gotta choose something tangible to represent financial success and this seemed fair enough to me. I also included success to mean that you die with all property assets still intact and generating $100,000 (@ today’s value).
6. They fail if they don’t meet my arbitrary measure of success. And yes, 99 out of 100 must fail in order for that 1 to succeed. Exactly the same way as 99 fail to become a doctor, lawyer etc. But what I ignored is that 98 out of the 99 who “failed” most likely never even has any aspirations to become a successful property investor and thus are not “failures” because they didn’t even try. However, the hypothesis that only 1 out of 100 people can ever be successful property investors is still valid.
7. The ones that only own 1 IP are removed because for over half a century this number or percentage of property investors who only own 1 IP has not changed significantly from 70%. I don’t know why it is but this has been the case for a very long time. After this, there is a lot of variability in the number of properties owned by any one investor, but they are scrapping amongst the 30% of rental properties left.
PS. I know the scrapping amongst 30% of rental properties left figure is wrong, but I used it because it is easier for people to follow than the truth and it does not make much difference to the argument anyway. Why is it wrong and what should it be? Maths genius only apply!…lol Tip…the original true statistic is that “70% of property investors only own 1 property”.
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I’m an avid property investor who has multiple property investments and has done, is doing many of the capital/value improvements, buy low / sell high and other strategies to try to get more properties or reduce debt and I love talking to family and friends about property investment opportunities and strategies. I wanted to do more than just point out why everyone cannot do this and to go a bit further to try to put a figure on how many can do this with the result being that only 1 out of 100 people can use non-commercial property as their main method for becoming financially successful and why this is the case.
Hi Ben,
“(I wanted) to get the message across how monumentally difficult it is, and why anyone who does actually reach this level of property investment success can be so proud of their achievement.”
Worked for me, Ben – that is a very interesting summation and I must admit to never having thought of that limitation which does, as you spelled out, show just how special it is to reach that level.
Well written !!
Benny
Hi Ben,
We probably lost most readers already (long posts…) so I’ll keep my replies as brief as possible.
1. The $100,000 arbitrary income figure is simply the rental income from 5 “average” Australian properties:- approx $20k per property or $380 per week per property. It is also the annual income figure I used to represent “financial success”.
No worries but why look at 5 properties’s current average return? Why not 2 properties that were bought 20 years ago and provide now each $50K rental p/a?
2. Using the historical purchase price to calculate rental yield is wrong. Any accountant will tell you that they would not use the purchase price of $58,000 for a typical Sydney home to calculate the rental yield an investor is getting today simply because the property was purchased in 1978.
Are we talking accounting laws or property investors’ strategy? ;-)
If I bought the property at $58K in 1978 and today it brings me $116K rent (see? sometimes 1 property is more than enough, no need to buy 5 ;-) ) then my real yield is 200%. The fact that I can sell that property off for $4M and therefore the yield to the buyer would be 3% is maybe relvent, maybe not.
Tthe main limitation being the finite number of rental properties and the need to have approx 5 rental properties to replace a typical working income.
Disagre that one needs 5 properties as illustrated already above.
The ones that only own 1 IP are removed because for over half a century this number or percentage of property investors who only own 1 IP has not changed significantly from 70%. I don’t know why it is but this has been the case for a very long time.
Yeah, well, sorry but that’s definitely torturing the numbers by cherry picking the data to suit your theory. You took away 70% of the stock and then let 100% of the population to fight for the remaining 30%. It’s either or. Either 70% of investors are out of the game (them and their properties) or 100% of the investors (not the population, since not ‘everyone’ will do it as we already agreed) are in the game with 100% of the stock. How does these options change your calculations?
I wanted to do more than just point out why everyone cannot do this and to go a bit further to try to put a figure on how many can do this with the result being that only 1 out of 100 people can use non-commercial property as their main method for becoming financially successful and why this is the case.
I definitely agree with some of the points you made and I really appreciate the effort you’ve put in to come to a definite tangible number on ‘how many property investors that live off $100K p/a rental income can exist at the same time in Australia’ but I disagree with the methology. The example aboved showed 1 investor living off 1 property (albeit bought 40 years ago but it does tick your ‘success’ criteria).
What I’m trying to say is that the formula you’re using is lacking dimension of time. Rents grow with time so $20K rental income today = $100K tomorrow so sometimes even 1 property is enough to be ‘successful’ :-)
How does adding a time dimension change your calculations? Probably significantly…
Hope this makes sense? :-)
Ethan Timor | Aligned Finance Pty Ltd
http://www.alignedfinance.com.au/
Email Me | Phone MeActive Investor & Broker; Based in Northern NSW, servicing Australia wide; Author of '34 Proven Ways to Maximise Your Borrowing Power' (download free from our website)
Hi Ethan
Your definitely right about one thing. The long posts would have lost almost all readers.
😂👍😎
Ethan Timor | Aligned Finance Pty Ltd
http://www.alignedfinance.com.au/
Email Me | Phone MeActive Investor & Broker; Based in Northern NSW, servicing Australia wide; Author of '34 Proven Ways to Maximise Your Borrowing Power' (download free from our website)
Thanks.
I have lots of other, more positive stories, and may share or comment more here.
But, as I am so busy running a small business managing staff etc etc it is very difficult to find the time. But seeing as I am currently in that happy place “between” property investments and don’t have much “on the go” I might be able to find some time without my wife nagging at me like she was last night…”What are you wasting your time writing? Come to bed!”.
The long posts would have lost almost all readers.
Hehe – well some die-hards are still here !! :p
What I’m trying to say is that the formula you’re using is lacking dimension of time. Rents grow with time so $20K rental income today = $100K tomorrow so sometimes even 1 property is enough to be ‘successful’ :-)
How does adding a time dimension change your calculations? Probably significantly…
True Ethan, at least in part – but then, if we are to look at how rents have moved with inflation, so too have living costs. So the $100k needed to be “rich” today would need to grow over time too, thus necessitating owning the five IPs. The one thing that doesn’t grow (depending) is a Mortgage, so long as one doesn’t borrow to buy more, or to draw living costs from Capital.
I hope others do get to read this – if only to test THEIR theories against one or other side of the argument.
Benny
Hi Benny
All true. Some other model parameters:
1. No mortgage at all on any IP’s. Otherwise you would not be getting all the rent as some of it will have to go to pay mortgage payments. Yeah…I know this sounds ridiculous but if say half your rent goes to pay mortgage payments then to get $100,000 pa income you will need 10 “average” IP’s not 5…making the situation of how many people can do it worse.
2. No drawing down on any capital gains. You own these properties outright and they stay that way.
3. You live off the rental income only ($100,000 pa). Of course as time goes by inflation increase the property prices and therefore the rent but this increase will be offset by increases in living costs. Lookup Net present value for the “time” factor that you seem to think makes a difference to this model but doesn’t if you want the same spending power $100,000 gives you now to continue ‘ad-infinitum’.
4. I did say you die with these IP’s (mortgage free) but it might be nicer to say that you pass them onto your children mortgage free in your will.Ethan: Yeah sure one property may be enough. If it rents for $100,000 NET pa (or whatever you feel is the right annual income for you to live off) then cool. But my calculations were based off “average” home prices and the “average” price for a home in Australia ATM is approx $600,000. I did the same for gross/net rental yield etc. It would have been invalid for me to suggest anything other than “average” stats.
You can research all these “average or typical” PI stats online.
I also 100% agree that time is your friend when it comes to strategies to get there but these strategies are for another thread. This is more of an END GOAL discussion.
Can you post pdf files here?
Hi All
I feel that this post would be excellent read for investors who are at the beginning of shaping their investment strategy.To encourage them to think about many possible scenarios, not just: in time I should be right. For example: what if growth is stagnant for 10-15 years? No big dramas with ‘property bust’, just no growth above the inflation? Or/and rents go up only for inflation?
Etc.
Also, I have seen many investors starting on ‘add value’ strategy, loosing money ONLY because lack of time (and expertise). It is WORK, and if nothing else, it is a very important point Ben is making.
After completing one small development project, I calculated my hourly rate for my time invested. It was much higher then ‘day to day job’ would pay to majority of people ($245/hour, out of memory, BEFORE tax).
But it was not in thousands of dollars. And it involved taking of risk, which is non-existent when person collects a pay cheque in exchange for their time and skill (unless you are a surgeon or similar).I am not saying not to do it. On the contrary! Just take it all on board and plan well.
I agree with Ben in principle, but in practice I think it is a moot point.
Experience shows that different people want different things out of life, and for some, following an investment pathway similar to what I describe in my books, etc. just isn’t of interest – at that time or circumstance in life, or at all.
Let’s not forget too that there are many pathways to the wealth creation summit.
Furthermore, not everyone who invests in real estate desires the same outcome, derived the same way. Consider the divergence in belief between negative and positive gearing.
Taking up Terry’s point then, in reality the opportunity is open to those who want to pursue it on an individual basis, which offers hope to those who want to make sacrifices and work hard to achieve a level of financial empowerment open to all, but sought in earnest by few.
Regards,
– Steve
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi Steve
There is a huge amount of personal variability in IP desire, agenda, methods, circumstances, situations, goals, ambitions, expectations etc. I get that. In addition, I agree that the opportunity is open to all, and it’s also even nice to suggest that this offers hope to those who sacrifice and work hard etc. But I reject the premise that all who try can succeed as there is a definite limit on how many property investors can succeed. Ignoring this leads to trouble for all.
In practice, my moot point exposes itself most when things are going really well and you start seeing everyone jumping on the bandwagon. Fortunately, drastic consequences have not happened to any real extent in Australia but acute examples can easily be found in foreign markets wherever property investors get sold on capital gain ignoring vacancy rates and rental return factors. Lots of example western property markets showed this up during the GFC (Ireland is but one example) and more recently the ghost cities phenomena throughout China.
The business world history is also littered with financial markets that have gone awry when something is sold based on capital gain hopes alone. It’s human nature to want to join in when profits look so good. Check out Tulip Mania for the first recorded example. https://en.wikipedia.org/wiki/Tulip_mania
It’s not a pleasant topic though thinking about potential restrictions on anyone’s plans of getting many multiple IP’s especially when you’ve written books with titles like “0 to 260 properties in 7 yrs”. (which I read way back when you first wrote it in 2006). I thought, yeah, I could do this too. I’ve adopted and embraced IP wholeheartedly but have only managed to accumulate 8 so far. Yet about 5 yrs ago my wife worried about getting and keeping tenants in them all. I told her not to be so stupid but did some quick calculations anyway and went…jeez…if just 100,000 Australians had what I have I would be in serious trouble fighting them for tenants. So the notion of even thousands of people being able to have 260 IP’s started sounding a little cuckoo.
Cheers.
Hi Ben,
It’s not how many properties you own that matters, rather the financial consequences of owning them.
1, 2, 5, 10, 100… it’s just a number.
What’s more important, at least the way I roll, is the cash flow you derive, and therefore the freedom from work obtained, that is key.
I’m not on the same page with your thinking about the properties though. Economics works to explain that markets find an equilibrium at the price point where supply meets demand. There are enough houses for enough people who want them (can afford them?) at that price point, all the time.
Whether that price is affordable, reasonable, sustainable, etc. is another conversation.
Bye,
– Steve
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
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