Podcast: 4 Ways To Live Off Your Property Portfolio | Ep. 222

Posted by Ed McKnight on 23/04/20
4 Ways To Live Off Your Property Portfolio 001
Listen to the Show

Listen to the Show

Show Notes

What's Covered in the Show?

In this episode, we discuss different ways to live off your property portfolio. There are four ways we discuss, each with their pros and cons:

Using a reverse mortgage to live off the equity within your properties Using a principal and interest mortgage to pay down debt to create a decent rental yield you can live off Buying multiple properties, selling half and paying off the mortgage on the rest to create a rental yield Restructuring your portfolio when you need the cash from one geared towards capital growth to one geared towards yield

Our conclusion and preferred option is that the last option best suits most Kiwi buy and hold investors. Listen to the full show to fund out why.

We also mention that we are holding a property investment webinar this Tuesday at 7pm where you will learn how to run the numbers on an investment property.


Transcript of the Podcast

Ed McKnight: Hello and welcome along to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and today on the show we're talking about how do you live off your property portfolio?

Now, this is a really interesting question that's come in from one of our listeners thanks so much for sending it and, and it's a common question because one of the reasons that people get into property investment is for their retirement or so eventually one day you can quit your job and have some passive income and you'll be looked after from your properties.

Now, there are actually a whole range of different strategies you can use to live off your portfolio, some of which we're going to go through today. We're going to talk about some of the ones that you might hear out in the market, and then we're going to talk about our preferred strategy that we typically recommend to clients as well at Opes.

So one of the first ones is, is often recommended by a guy called Mike Yardney, and they talk about living off the equity on your portfolio, basically by using a line of credit. How does this usually work Andrew?

Andrew Nicol: So basically what they're talking about here is using all of you equity, that you've got to borrow some more money and then use that money as you need it. And so the benefit of doing this, of course, is that you don't have to sell the property.

The downside is that you're going further and further into debt. Now, I'd have to do some modelling around this, and I might take this as an opportunity to create another spreadsheet. But I would say that overall, I don't know that I'm a major fan of this.

My thing will be to kind of more stage sales and use your money that way so you're not getting into debt. Because certainly when you're in retirement, that can be a little bit more of a challenge. And then you get into a situation where you're looking at things like, reverse mortgages, which are a product that I'm inherently against, which is where you borrow money and you don't actually have to pay back that mortgage, it's just paid when you sell the property.

And whilst they can be a solution, if someone really needs to and they're a last resort on their own house, I'd suggest that then you're probably going to erode all that equity that you wanted to maybe pass down to future generations. So they're I'm a major fan of.

Ed McKnight: Fantastic. Let's talk about the next one, there's one often recommended by Graham Fowler.

He's the author of some books, like a 20 properties in one gear, and the way he usually structures everything is he looks for very high yielding properties, often in small towns in lower socioeconomic areas, and he sets everything up on a P&I principal and interest loan in order to pay down debt, so eventually you have rental income to live off and obviously pay tax on at some point in the future.

Andrew, what do you think about this kind of strategy to pay down debt in lower socioeconomic areas, high yielding areas though, in order to decrease debt and increase rental yield.

Andrew Nicol: It is definitely a better option than the first, in my opinion.

It comes with its own challenges and that's finding these high yielding properties that you're going to be able to pay down, pay not only the interest, but pay down the principle as well. I've time and time again bleated on about going interest only on investments.

We're running a webinar actually just to do a quick plug, next week, it should be this week by the time this releases, talking about some of the numbers in investment and return on investment. And so I still stand by the fact that I don't know that that's the optimum way, but if you can find those high yielding properties, and pay down the debt, then yes, once your debts paid off and you've got nothing to service then all of that money that you're taking in as rent is usable income, which is a good solution.

Again, maybe not my preferred option, but is definitely a way of making that work. It potentially could take quite a long time is one consideration. You know, if a loan is on a 30 year term, it's not 30 years until your actually going to be able to see any of that income, to be able to use it. But anyone that may be wanting to retire sooner than 30 years, that might not be the optimum solution for you.

Ed McKnight: Yeah, and it's quite a conservative strategy that if you've read the book, you'd see that. Probably I would say our strategy is, or the way we tend to set things up are a bit more conservative in some ways, but less conservative in others.

So it's quite conservative on his part to, with that strategy in terms of paying down debt in order to decrease it. I would say as well, when you read the book, you'll see there are a couple of expenses that we conservatively budget for which aren't in those cash flows. So a property that would look cash flow positive, using that modelling would actually look cashflow negative under ours because we account for things like maintenance and vacancy, which isn't in that model.

And that's why you do need to dig into the detail when you're reading from different authors to see, well, it's cashflow positive, but with what assumptions as well. Um, now the other strategy.

Andrew Nicol: Sorry to interrupt there. Just one other thing that I want to add to that, as typically those properties that are really high yielding in lower socioeconomic areas require a lot of maintenance.

And when you think about a property, let's say you paid it off faster than the expected loan term 30 years and did it in 20 years, what sort of maintenance is going to be required in 20 years and what kind of tenant are you going to attract, and I know that there are a lot of people who I deal with who are in retirement now, they don't want any hassles with their rental properties. And so they do want low maintenance.

The last thing you want us really high maintenance properties where you have large bouts of vacancy, and therefore you don't have the income that you expected.

Ed McKnight: Yes, and we do have quite a good review on that I think we did recorded a review of there a couple of months ago, which is a podcast episode where we talk about just quite matter of factly, like these are the differences and how do you replicate that strategy?

And I think within his book as well, Graham kind of says, well, this is who this strategy would work for this, this is who it doesn't work for. And I think that's quite important to just recognise that, can you replicate that strategy?

Let's just jump onto the next way to live off your property portfolio, which is to build up a portfolio of growth properties and then as they accumulate equity and grow in value, sell half of them pay off the debt on the other half.

And then you've got some free hold rental properties that you can live off the income of. I've seen this strategy recommended by a couple of different property coaches as well. What do you think about this, Andrew?

Andrew Nicol: So this is probably one of my personal preferred ones, and this is probably how operate my own portfolio, so I kind of always think of it buy two so that you can sell one and pay off the other when they both double in value. And so if you work on a 5% capital growth rate, which was relatively conservative.

Then in 15 years of buying two properties, you'll have enough equity in both of them, or either of them to sell one and pay off the other. And even if you got significantly less growth, if you're thinking, well, how can you guarantee 5% capital growth rate? You can't, you can't guarantee anything.

Even if you've got, say, a 3% capital growth rate which is insanely low, historically, it would take 25 years. Right? So 25 years from now in a really, really low growth environment, you can still sell one and pay off the other, and it probably didn't cost you a whole lot to own those two properties over that period of time, because of course, rents going up in that time.

So it could well be that, you do it sooner, so, this is probably my preferred option. And also if there was ever a blanket capital gains tax, you're only being taxed on what you're selling. You're not being taxed on the property that you're keeping other than the income that you receive from it obviously. But I think this is probably my preferred option.

And the great part about this is you've got an income for ever. You've got that income, which is inflation adjusted by rental income coming in for the rest of the life, and you've got an asset to pass down to future generations. So this is probably my preferred one, but it requires obviously buying multiple properties.

Ed McKnight: Fantastic. And let's move on to the last strategy. I know this is your preferred one, Andrew, but just before I do that, this was a really good prompt because we talked about this strategy, or you did rather for about 30 minutes with the Auckland Property Investors Association on a webinar, and this is probably my trigger or prompt to go get that, download that, and put it on our website and link it in the show notes because it was a really good one.

And this is where you convert your property portfolio from a high growth position to a high yielding position. And that might be that if you've got some standalone houses, you sell those in order to buy high yielding dual key apartments that might get less capital growth because it's quite a specific product, but is much higher yielding, talk to us about this Andrew.

Andrew Nicol: Yeah. So this maybe requires a slightly longer period than the, you know, 15 years to double in value, but say you buy a few properties and you have them increasing in value, the idea is that you get to a point where there's enough equity in those properties to be able to sell them and use the cash to buy outright some really high yielding rentals now high yielding rentals where you're building wealth aren't necessarily ideal for that model, but once you're in retirement once you're relying on rental income that's when you want to start to think about transitioning.

And I always say that probably you need to leave a five year window. So if you're 40 now, then the next 15 years is likely to be the building wealth phase. So you're buying as many properties as you can to build up wealth, and when you hit sixty, if you're retiring at 65, it's selling those down and looking for opportunities of yield, and it's amazing how you can take the equity that you would spend on high growth property or get on a high growth property and turn that into some really high yielding properties, which again as Ed said before you're not going to get the same growth in, but that's okay.

That growth isn't going to be used by you, that's going to be passed down to future generations, but the income that you receive off that it doesn't take many properties to create a really decent income, which is going to be inflation adjusted and it's going to be continued no matter how long we live because of course, any retirement modelling requires you to make an estimate as to when are you going to live, when you're going to die sorry. If you live past 95 and the modelling is 95, that suddenly gets a bit more painful.

So what we want to do is have a future proof scenario where you can have a guaranteed income no matter how long you live for, no matter a life expectancy gets pushed out by increasing medication and everything like that. And so, this is a really good model, and is my preferred by far.

Ed McKnight: And the other reason that I really like this is that say you've got two growth orientated properties under the last one where you sell one to pay off the other.

Well, if you pay off the other, you might only be getting a four or 5% yield depending on where it is and what sort of property it is, say it's a standalone house, might be a 4% yield, but if you sell your growth property and go and buy a high yielding apartment, six or 7% yield, then you're getting more cash out of that.

Because as you get older, as you near retirement or decide that you want to retire early, your goals change. You're not as worried about growth. You want the yield. So although having that growth as good as Andrew said, we always say it goes to your kids because that property won't be sold or the benefit of that equity won't be generated until you unfortunately pass away and that's why it goes to your kids.

But hey Andrew, let's wrap it up there.

Please do remember to rate, review, and subscribe to the podcast. It really does help us get the message out to more and more people and hey, if you do want to learn how to run some numbers on properties like Andrew, then come along to our webinar. It is this Tuesday, 21st of April, in fact by the day we released this it's probably going to be tonight actually. At 7pm.

I'm going to drop a link in the show notes. There's a tap or swipe over that cover art. It'll take you right there or just head along to our website, Opespartners.co.nz you'll be able to sign up there.

Thanks for listening to the Property Academy podcast. I'm your host, Ed McKnight, and I'm Andrew Nicol, and we're going to be back again tomorrow with even more daily strategies, tactics, and insights to help you get the most out of the New Zealand property market.

Until next time.