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Can You Build A $300k Passive Income

Can You Build A $300k Passive Income

When you set goals for your property investment portfolio, it’s important to assess the thinking behind them, writes Andrew Nicol.

By: Andrew Nicol

1 July 2020

To succeed in building a property investment portfolio you need “AA” goals. That is, goals that are ambitious and achievable. Last week on the Property Academy Podcast (my daily 10-minute property podcast) we had a listener ask whether it would be possible to generate a $300,000 annual income from property in 15 years, if they’re currently earning a modest income.

It’s great that this person has set an ambitious goal. And I love that they have the desire to change their life through property. But I believe this goal may fail on one of my three goal setting criteria:

Goals must be specific – This goal has both a specific financial goal ($300,000 income) within a specific timeframe (15 years).

Goals must have commitment – This person comes across as very committed. That’s why they’re trying to educate themselves every day on property investment (I always tell people to write their goal down and put it on their fridge!).

Where this goal falls down is on the last of my three criteria: Goals must be achievable – It’s probably not a realistic goal to achieve this massive goal in a relatively short period (15 years is medium term in property) if you currently have limited means.

‘You could use multiple strategies at once for example a mix of buy-andhold and trading strategies’

Let’s walk through the numbers to see why. First, we need to account for the fact that over 15 years, prices will go up. If we account for an average of 2%bannual inflation, the investor will require $403,760 in income by the end goal in order to buy what $300,000 can by today.

Then we need to consider the assets that would be required to create that income. I recommend using a 4% net yield (the operating profit after taking off rates, insurance and operating expenses).

Based on that 4% net yield, the investor would need about $10.1 million of investment properties, with no debt on them to create the target income.

If we simplify and use the idea that property doubles in value every 15 years, then you would need to buy $10.1 million of properties now. You’d then wait 15 years until the portfolio is worth $20.2 million with $10.1 million of debt. You’d then sell half of them, pay off the investment debt and have the $10.1 million of assets.

If you’re investing in a city like Christchurch, where the median price hangs around the $450,000 to $500,000 mark, you’d need to invest in at least 20 properties right now to hit the goal.

That’s probably not realistic for someone with modest means. So, what’s the alternative?
1. Change the goal Sometimes goals can be too ambitious. So, what might be achievable? Replacing your current inflation adjusted income, over 15 years is a
good ballpark. It’s still ambitious, it’s still going to take work, but it’s going to be more achievable.
2. Use multiple property investment strategies You could also use multiple strategies at once – for example a mix of the buy-andhold and trading strategies.

Buying to hold will allow you to build passive income and can act as your base income, which you could then supplement with trading. It’ll be tough. It’ll take work. But, if you have put your goal on the fridge (see above) and sare willing to do what it takes, then this could be another alternative.

Also, if you’d like to listen to the whole podcast episode, then you can go to opespartners.co.nz/goals and you’ll be able to select where you prefer to listen to your podcasts, which will then take you on to the episode.