Few nights ago I was thinking out loud about (once I pay them off) selling all my investment properties to buy a single owner-occupier house in a great location that has the highest capital growth. Instead of owning 5 x $200k property, what if I trade them for 1 x $1mil super high-growth owner-occupier property so that few years from now, that $1mil property will double its value to become $2mil. Thus, leaving me with $1mil equity. What do you think? 

The thing is, in my opinion, 1 x $1mil equity won’t make me feel rich. First of all, I might not be able to access that $1mil equity because the banks have been super tight at the moment, and I would have to prove to them that I have the income to service $1mil equity (Remember, equity is not your money. For every cent you access, the bank would put interest rate on it).

OK…what if I sell my property and got the $1mil profit as cash instead? (Kaching..) At this point you have $2mil sitting as cash.

You know what, $2mil cash won’t make me feel rich at all either. First of all, I have to find another property to live in. And secondly, I will have to downsize and live a lesser-quality life. Why? Imagine you bought a $1mil property that has now become $2mil. I’m sure every other property in the same area would have also doubled its value. Meaning, the only way for you to have some spare profit from your $1mil gain is by moving to a cheaper suburb. And this now means, your quality of life is degrading. Right?

Let’s say you now buy a $500k property, leaving you with $1.5mil cash sitting. I actually still can’t really retire just on $1.5mil cash. Why? We all know how easy it is to spend money. If that $1.5mil is just sitting there as cash, and not income producing, not only will it become worthless as time goes by, the fact that you know you now have $1.5mil cash sitting around could have caused you to be reckless and over-spend. Just look at the many Lotto winners and how easily they waste their fortune away.

What if I put it in the bank? Let’s say the bank is generous enough to give me 2%/year. $1.5mil only gives me $30k (before tax). Can you really feel rich on $30k pre-tax annual income? I don’t think so.

So…what is the conclusion? If I have $1.5mil sitting around, I would buy 7 x $200k property earning $300/week income. That is $2100/week gross. Actually, let’s calculate:

7 properties paid-off earning $300/week = $2100/week = $109,200 annual income
PM 10%: $10,920/year
Council rates + water $3000/property: $21,000/year
Maintenance $1000/property: $7,000/year
Insurance $1000/property: $7000/year

Income net: $63,280 pre-tax

At this point I have not got any mortgage, and am earning $63,280 passive income (just treat it as if you earn a salary from your day job). I might not feel rich, but with that kind of income, given I have no mortgage, I think I can live comfortably. Plus….my $2mil is still in tact in the form of my $500k owner-occupier house plus 7 x $200k properties.

My conclusion is, owning just one property will not take me to a better place. It is really in the owning of multiple properties can I start earning passive income that makes sense. And, the only way for me to keep buying more properties is if my cashflow is positive (or neutral at the very least). If I just keep buying a $500k property that rents for $450/week (ie. negative gearing money-losing property), I can probably buy 2-3 property tops. My borrowing power will easily dry up.

With positive gearing properties is different however. The $148k that rents for $240/week, or $170k that rents for $280/week, or the $205k that rents for $300/week. All these 7%+ gross yield positive gearing properties have allowed me to buy more and accumulate. I should be seen as someone who actually earns more income. And yes, I might be paying more tax, but the good news is, my borrowing power remains strong.

What’s your thought on this subject?