The scenarios and examples used here are based on an Excel spreadsheet which can be obtained by emailing me and requesting the 7 Year Retirement Plan Strategy.

The strategy is particularly relevant to Australian property circumstances and mortgage loan offers - however I am sure it can be readily adapted for other countries.

Most property investors have no long term plan when they purchase their first investment property. They have entered the investment property process because someone has led them to it or they know someone else who has done it, or because they wish to be financially independent "somewhere down the track".

They have no plan as to where they are going or how they are going to get their money out at the end of that track.

Most think that when they pay off the loan they will have a rental return, when net of expenses, will be enough to put some worms on the hook and petrol in the outboard in retirement.

Some will hear that if you sell your investment property after retirement, they will pay little capital gains tax, and can either put the resultant cash into a pension plan or into their super fund.

Here is an alternative worth thinking about because it means that not only will you not pay any capital gains tax, no real estate agent selling expenses, but your income in retirement will be tax free.

I call it my 7 Year Retirement Plan as you can retire in 7 years time, on a $40,000 plus, tax free income, based on just three properties.

Here is how you do it.

The strategy involves purchasing three properties over a short time frame that are in localities that will provide around 6-8% average capital growth per annum. Now in Australia where I live this would normally mean a capital city - generally not a regional area where the underlying fundamental for growth - demand exceeding supply - (and that usually means continuing jobs growth) - is not sustainable.

Once the first purchased property is cash flow neutral before your tax deductions, or better still, cash flow positive, you can implement your "cash out" strategy.

This entails going to your existing lender on that property and asking for a loan top-up - extension, refinance - you are going to borrow your first years retirement income from the growth in equity of the property.

Now this is really where it is essential that you get the Excel Spreadsheet from me - (email me at

way@fastlink.com.au

and ask for the 7 Year Retirement Plan Spreadsheet)

so you can play around with scenario's and better follow what I am suggesting here.

The gist of the exercise is that each year you are going to visit each successive property and by topping up your interest only loan on the property, borrow enough from your equity to either live on, or at least, supplement any other income you may have.

The underlying assumptions are these:

1)There has been sufficient capital growth to enable you to borrow within an 80% loan-to-value ratio from a property - this avoids paying any unnecessary Lenders Mortgage Insurance and make the lenders decision to grant the loan so much easier;

2)the cash outgoings on the property are covered by the rental income (you don't need to have the interest payments on the additional borrowings covered by the rent as you are going to borrow the interest payment on your "living" money as well);

Now you will see from playing around with the spreadsheet that this is possible with just 3 properties - but in order to provide a buffer for unusually lean capital growth periods, you may wish to purchase an extra property or two, so that there is a longer period than four years with just three properties before you are back at property number one, to borrow against it again.

This is the strategy I am using to prepare for my imminent retirement.

Today (Year 1) you purchase an investment property (IP1) in a capital growth location (somewhere that provides preferably 8%+ per annum).

Next year (Year 2) you purchase another property (IP2) - (and in the spreadsheet we assume it is exactly the same as you purchased in Year 1 except that as prices have risen by whatever Growth percentage is at the top right hand corner, you will pay the same price as you did for IP1 + the Growth percentage applicable).

And in Year 3 the same again – you purchase IP3.

Now it may be that you don’t purchase 3 properties in 3 years. If you don’t for whatever reason, then the retirement point will just get pushed back in time to allow for the appropriate capital growth to have occurred so we can implement our tax-free cash-out strategy.

If we have selected IP1 in an appropriate capital growth location – and you can change the Growth percentage from 8% to whatever, to judge for yourself what change another Growth rate makes to the figures – somewhere around Year 6 or 7 we can start to implement our cash-out strategy. And you don’t have to be retired to do this. Yes I know it is called a 7-Year Retirement Plan and I show the first Income in Retirement happening in Year 6 – I have just under-promised and over-delivered!

In the example spreadsheet, we show in the ‘Spend’ column an amount of $40,000. This is what we have chosen as the amount we would like to spend that year. So we approach our lender on IP1 and ask that lender to ‘top-up’ our interest only loan of $299,000 we have against IP1 to cover the extra $40,000 borrowings. They check that IP1 is valued at a figure higher than what we need (and hopefully the new total borrowings are less than 80% of it’s value so we avoid having to pay Lenders Mortgage Insurance). We also are going to borrow the amount of interest that we are going to pay during the next year on our borrowed $40,000 - that is $2,800 (7% of $40,000).

We are also going to borrow $2,800 the next year against the same property, as we will need to pay 7% interest on the $40,000 we borrowed the year before, and so on for every year of this strategy.

The borrowed money that we spend as if it was income, is tax free – it is NOT income – we borrowed it, and we still owe it back to our lender. So this strategy is truly a tax-free passive income.

One of the assumptions of the spreadsheet is that at the point in time when we implement this strategy, the property against which we borrow our spend amount is assumed to be either positively geared or at least, neutrally geared. If not, then it may be appropriate to also borrow the amount that is needed to pay for the cash outgoings on the property.

Another consideration is perhaps not to rely on just 3 properties as the asset base, but to put another one into the mix to spread out even further, the point in time where you are revisiting each property for borrowing purposes. This will have the additional benefit of smoothing out any lower than expected periods of capital growth.

If you have a copy of the spreadsheet, you may experiment with different interest rates, growth rates, the purchase price of investment property 1 (but not the other properties), and how much income you need in retirement (at the bottom of the sheet) for years 1 to 10. When you experiment with any of these changes you will see that all other figures change accordingly.

To put this into some relevant context, these are the average annual capital growth figures (*) for the last 10 years for:

                       Houses                        Units

                  Median Value   % pa             Median Value   % pa

Brisbane        $380,500        10.36%            $270,500      7.27%

Melbourne       $384,500        10.87%            $304,000      10.24%

Sydney          $543,000         9.5%             $378,000      7.97%

* Residex (June 2006)