How to generate passive income through real estate property?

These days I often get asked how could one generate passive income through real estate or in other words how could someone replace their 9 to 5 job income. It’s a different story that I don’t see anyone working 9 to 5 rather it is beyond 9 to 7.

Let’s first understand what is passive income?

In simple terms, passive income is earnings that is being generated where you’re not actively involved day in and day out. In other words, the income that is generated repeatedly and consistently over a long period of time with very minimum or no effort.

There are multiple ways an individual can look at generating passive income like stocks and bonds, creating Copywrite assets like books or music, selling multi-level marketing products and rent generating residential and commercial real estate properties.

Each one of these has its own limitations and advantages but however in this article, I would be covering on residential real estate properties as according to me it is a most stable asset which not only generates passive income but also gives a good capital growth.

When acquired a residential real estate in and around suburbs where there are good prospects of new employment generation, high rated schools, walkable to train/metro and shopping centres will get you the most desired results.

Now let us look at what are the characteristics of a good asset:

  • Ownership – Straight and simple having ownership rights on an asset
  • Cash Flow – The asset that gives a consistent cash flow repeatedly
  • Keep or increase value – Either keep its value or increase when looked at a reasonable long period of time
  • Leverage – Where banks lend you money at maximum to acquire that asset

In the below image you can see that only the property is the asset among other assets which ticks all the boxes.

How does passive income through real estate property work?

Well, when it comes to passive income through a property in order to have a reasonable income or to replace your current job income it cannot be achieved through one or two properties but rather with 6 to 8 properties over a period of 8 years to 10 years.

Having said that you could achieve building your property portfolio faster by having the right strategy and approach. A strategy is a different aspect and I would most likely cover it in another future article. But in short, any property portfolio gets built typically in 3 stages.

  • Foundation stage: It is the stage where you look at acquiring 2 to 3 capital growth properties
  • Growth stage: Review and realign your portfolio strategy, mortgage reduction strategies
  • Consolidation stage: Generate passive income and achieve your financial freedom

Let’s look at with one example of how you can achieve passive income through property. You could simply divide this income with total passive income target you would like to achieve for you to arrive at the total number of properties to have in your property portfolio or the value of properties to acquire in dollar terms.

In the above image, you can see that the value of the property bought is of $500,000 with a weekly rental of $400 and I am considering 3 weeks of vacancy as a buffer.

For this example, I am considering interest rate @4.5 PA. Agreed that the rate of interest offered in the market might be less but I am taking a 4.5% interest rate would increase over a period of the asset held.

You could see that this property is actually making a loss of $6,167 or in other words, its expenses are more than the income it is producing.

But when we take into consideration of inflation and assuming the rental growth being at 4% PA then you could notice that this property would generate a rental income of $615 per week in 10 years of time from now. Wherein you would actually be making a passive income of $4,798 PA on this one property.

When we bring the concept of negative gearing you would also get to claim depreciation on the property and you would potentially get a sizeable tax refund and this depends on your annual income and lot of other factors. Generally, the higher the tax bracket makes sense to have more properties to optimise on your tax savings.

It is best advised to have a chat with your tax consultant to get a complete understanding as to how negative gearing works. As here I am touching this concept for illustration or information purpose only.

With property, you not only achieve the passive income but you would also achieve good capital growth. Historically in past 25 years, the unit prices in Sydney has grown at a 6.3% PA and assuming that the market grows at the same rate over a period of time then this means a unit bought today at $500,000 in 10 years’ time would be valued at $921,091.

(Source: 25 years of housing trends by Aussie Mortgage Broker)

I would prefer investing in units over house & land packages for the below reasons:

  • Rental return on units is between 3.5% to 4% over 2.5% to 2.8% in House & Land
  • You will be required to pay 1.6% land tax annually once it hits the threshold in NSW at the time of writing this article
  • Units are easy to let out generally as they are closer to transport, schools, workplaces and shops
  • Rental affordability for tenants is more with units as against the houses
  • No additional effort is required by the tenants to maintain any lawn or back yard in units

I hope this article has given you a starting point and I would be delighted to assist you if you’re looking at buying your owner-occupied or investment property.

As an astute property consultant in Sydney, I would be more than happy to meet and discuss the possible property investment strategies and options suitable for your current and future needs.

Please note this article is for information purpose only. You are advised to do your due diligence before taking any action as this information is general and not considered your individual circumstances.

You’re advised to speak with accredited professionals with regards to taxation, accounting and mortgage as required.

I do not hold an Australian Financial Services Licence as defined by section 9 of the Corporations ACT 2001(Cth) and I am not authorised to provide financial services to the Listener, Reader, or Viewer, and I have not provided financial services to the Listener, Reader, or Viewer.

In the meantime, please have a look at the property options in Sydney and please feel free to call me at +61 470 467 709 to schedule a meeting to take this forward and help in achieving your property investment goals.


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