Many people start their property investment journey because of the desire to acquire great wealth, but wealth means different things to different people, so how exactly does “wealth-creation” work in the real estate business?
Smart Property Investment’s Phil Tarrant, an avid investor, has successfully built a 12-property portfolio worth more than $6 million over the course of six years, but he continues to seek good assets to acquire across Australia.
Property investors who find themselves in the same situation often decide to transition to the “consolidation phase” of their journey, refraining from adding more properties to their portfolio. Would it work out for Phil if he decides to stop buying properties now?
Would it work out for Phil if he decides to stop buying properties now?
“Let's say we hold off for two market cycles. Property, and I don't really like this saying, but [it] probably doubles in value between every eight to 12 years… so one cycle double[s] in growth, two cycles [creates] four times growth,” he said.
“[In] 20 to 25 years, it's going to be a 24-million-dollar valuation. Let's say, because we've stopped, we don't need to do anymore refinancing… [and] the debt position will stay the same—just south of four million dollars. You've got 20 million dollars in equity sitting there, which will generate you quite a comfortable lifestyle.”
His accountant Munzurul Khan said that in order to reach this comfortable retirement situation, there are many things that Phil should be taking into account, including time and costs. However, it is still highly likely that he gets a one-million-dollar return or $1 million worth of passive income every year.
“We need to take the time value into account. $20 million as of today is very different to $20 million in, say, two-cycle time—still it's very good. We also take into account that, perhaps, there are some selling costs… [and] there would be some tax that we need to pay along the way,” he said.
“All of those clip away a little bit, but the end result is still the numbers [that] are so astronomical. The numbers are so large… and if you just do 5 per cent return, [which] you're expecting, that is… many times more than what's the medium level of income of Australia.”
Maintaining the property portfolio
As ideal as the situation sounds for Phil, earning passive income after deciding to stop purchasing properties entails good maintenance of the property portfolio.
According to Phil: “Obviously, there's holding costs. We're going to have to maintain the portfolio.”
However, a long time in the market will almost always translate to positive progress as long as the property investor has built a portfolio with good assets.
“There will be a point in time where it would turn from a negative to a positive cash flow asset… If you're not refinancing debt or anything, that will organically move into a positive territory [because] that's what property does if you hold [it] over time,” the property investor said.
His final advice for budding property investors: “Buy good assets and they're going to go up in value… Properties that go up in value over time will generate this income.”
Tune in to Phil Tarrant and Munzurul Khan’s episode on The Smart Property Investment Show to know how to avoid mistakes by getting the “simple things right,” the best ways to reach your retirement goal, and the many stages of successful property investment.