Passive Income Target
Passive income relates to any income that comes from sources outside the primary job that you are not required to ‘work’ for. Think rent from property, dividends from shares, interest from savings, etc. A good activity when setting your investment goals is to define the passive income target you wish to achieve through property investing. Relate this back to the reason you started investing in the first place. Many look to replace their current salary/income. Eg. $50k/year salary = $50k/year passive income goal.This may be much higher/lower depending on your circumstances, lifestyle, spending habits, etc. If the goal is to reduce workload or go part-time then a percentage of your salary may be a more suitable goal. There are two reasons for this activity:
Define end value of the portfolio – Ever heard of the ‘rule of 25’? Iike to think of it as more of a guide. Using the example of $50k target income then using the rule of 25 we can say that there needs to be $1.25 million ($50k x 25) worth of income producing assets unencumbered (no loans owing) in the portfolio. The reason this target is set shows that with a conservative estimate of 4% rental yield, the portfolio will return $50k/year. These are general numbers and it becomes more complex when factoring in net vs gross, maintenance, vacancies, etc. However for now this leads to our second reason why we set this target.
Simplify the End-Game – Doing this exercise and targeting an exact figure allows us to visualise the end result. Property is as much about mindset as it is about finance, numbers and buildings. Crystallising the target value enables us to keep track of why we started in the first place.Property is long term and no doubt your circumstances and goals will change.Being a consistent goal setter along with holding yourself accountable will increase your chances of success.
Setting a passive income target allows us to reverse engineer the end result. By looking at where we want to be and working backwards it promotes long term thinking. We start to see the end result of the portfolio is the main focus and the number/type of properties within a portfolio largely becomes irrelevant.
- The Tattooed Investor