'I invest for the mailbox money': How to properly invest in real estate

The nest reserve tactic involves owning a handful of properties, and once you reach retirement age, you opt to trade one and rely on the acquired funds for sustenance.

Andrew Nicol is the presenter of The Property Academy Podcast. In addition to this, he serves as a financial consultant and holds the position of managing director at Opes Partners. Furthermore, he is the author of a book called Wealth Plan: A Guide to Property Investment for a Luxurious Retirement.

PERSPECTIVE: Numerous pieces suggest that investors purchase rental properties as a safeguard for their retirement.

However, what is the mechanism behind this process?

There are a couple of approaches you can take.

These strategies are often referred to as the "cash cow" and "saving grace" approaches.

Retire Rich: Real Estate Tactics

The strategy of the golden goose involves possessing a couple of rental properties and depending on the rental income during your later years.

Every two weeks, your bank account receives a deposit of rental income. You can utilize this money to support your retired lifestyle. There's no need to engage in work, and as long as your property is occupied, your finances will remain stable.

Another alternative is the savings plan approach. This is when you possess a limited number of assets, and subsequently, when you reach retirement age, you vend one of them and sustain yourself with the proceeds.

After you have utilized the funds, you proceed to vend your subsequent property. Employing this strategy, the monetary resources deplete eventually. However, a lesser number of dwellings are required to successfully achieve this.

I'd like to share with you a couple of anecdotes to demonstrate how these concepts function.

The golden hen tactic is when you possess a handful of leased properties and sustain your livelihood during your elderly stage with the generated rental income.

Single Mom Retires With $79K/year

I initially crossed paths with Tanya when establishing Opes Partners back in 2013. At that time, she had already possessed two investment properties for a solid ten years each.

At the time, she was 57 years old and, like many parents, she dedicated her attention to her two teenage sons. However, she also focused on taking care of herself.

She desired to invest in real estate to create a residual revenue stream. In simpler terms, her goal was to expand her property holdings and rely on rental income for her livelihood.

This implies that she would have the ability to take care of herself during her retirement period. She wouldn't have to depend on her children or rely on government pension funds.

We predicted that if she acquired two additional properties, she would be able to comfortably retire at 65 with a reasonably good passive income.

One of the drawbacks associated with this approach is that property investors frequently assume substantial levels of debt. They possess a handful of properties and depend on the properties appreciating in worth to amass their financial prosperity.

By effectively handling your debt and interest rates, you can significantly increase your earnings.

However, if you borrow more money than you are capable of managing and the interest rates increase, you may find yourself experiencing significant distress.

Tanya successfully achieved her goal. Two years back, she liquidated her assets from four houses and acquired two apartments without needing a loan.

Combined, these rented properties generate a yearly income of $79,000 for her. This amount is calculated after deducting all expenses such as taxes, upkeep, and insurance.

Without even having to leave her bed in the morning, Tanya has the ability to make $1500 per week (before taxes). This amount does not even take into account her NZ Superannuation.

As far as she maintains reliable renters, this situation will persist throughout her entire lifespan. It doesn't matter if she lives until 82, 92, or even 102 years old. This is what we refer to as the golden goose plan.

Lucky Wellington Pair's Lifelong Fortunes

I encountered Bruce and Carol, residents of Wellington, at a time when Bruce was just about to celebrate his 49th birthday and Carol was 46 years old.

They had never put money into real estate previously, but they had managed to pay a significant portion of the mortgage on their home.

They decided to take a unique approach with Tanya and opted for the nest egg tactic.

After careful calculations, we determined that by allocating their funds into three properties within the upcoming years, they would be able to allocate $57,000 annually for their retirement. This amount would be utilized to supplement their superannuation savings.

However, this plan's feasibility relies solely on Bruce and Carol's financial capacity to retain ownership of these properties.

Andrew Nicol serves as the managing partner at Opes, a property investment firm.

If they incur a larger amount of debt than they are capable of managing, they might experience significant financial distress related to their mortgage.

When Bruce reached the age of 65, the worth of their properties had increased, and they had also managed to reduce some of their debts.

In accordance with the Nest Egg approach, they decided to sell off one of their properties. By doing so, they received a lump sum of money and set aside the $57,000 they planned to utilize throughout the year in their bank account. The remaining funds were then put into a term deposit for investment purposes.

Once the term deposits reach their maturity date, an amount of $57,000 will be withdrawn for spending purposes before reinvesting the remaining funds for another year.

Bruce and Carol have convenient means to readily available funds without any concerns about tenants' rent payments. The cash is readily accessible to them beforehand.

Once their funds are depleted, they will proceed to sell an additional property and sustain themselves with the remaining funds after settling the mortgage.

There are additional perils and disadvantages associated with the nest egg approach.

Initially, Bruce and Carol will need to sustain themselves using the main amount of their investment rather than solely relying on the generated interest. Therefore, there will come a time when the funds will be depleted.

Additionally, should the interest rates decline during their retirement, their financial resources will deplete faster than anticipated.

How Many Properties For Retirement?

When I commenced my journey in purchasing properties at the age of 19, I received counsel stating that acquiring 10 rental properties was a prerequisite. Following this belief, it was presumed that such a portfolio would pave the way for a lifestyle of contentment and ease.

That's false. Moreover, it is ineffective in the present time. It is challenging to create such a substantial portfolio.

After collaborating with numerous couples from New Zealand, I have discovered that three to four properties are generally the ideal number.

If maintained over an extended period (that's the main aspect), it frequently generates sufficient riches to enjoy a tranquil retirement.