We are fortunate enough to sit down and talk to hundreds of clients every single month about investing in property. When we ask why they want to invest in property there are usually two main reasons. To build wealth for retirement, or to create another income stream (passive income).
The original idea most people had for investing in property is to buy something that goes up in value, with the aim to sell it one day, pay out the debt and walk away with the equity increase from the capital growth. Why? Because everyone was told to buy property, negatively gear it and reduce your taxable income. Add value to the property and walk away with your profit. Now, I’m not even going to get into CGT territory but there are a number of reasons why this strategy is limited and outdated and we can show you why.
So, how do we create an income stream from property?
The simple answer is to buy a property that makes more money than it costs you! But it’s not that easy.
The easiest way to do this is to put a large amount of cash into the purchase, keep the loan at a minimum and ensure the rent covers the loan. The interest expense on a property investment loan accounts for a large majority of the property expenses particularly at a high loan to valuation ratio.
But for most investors that’s not a reality, because we typically use our equity from other properties to 'get in' and we find that the loans are often, most, if not all of the purchase price.
So just go find something that’s got a stupidly high rental yield and costs as little as possible, right?
Well yes, but it’s not that simple. Don’t be that person who goes to a country town and buys a cheap property that never grows, just to get some extra income.
The reason being is you don’t want to buy something in an area that doesn’t increase in value.
Capital growth is one of the most effective ways to create wealth and in a country town this can be very limited compared to our major cities.
Don’t cut your nose to spite your face.
A really good positively geared property can generate a net return of $20,000 (after all costs and expenses). However, a property in a strong capital growth region can increase in value by 8-10% per year. On a $500k property that’s an extra $40,000-$50,000 per year.
So you don’t want to sacrifice capital growth just to chase a strong cashflow.
The dream for most investors is to find both. Positive cashflow in a high growth area.
That’s the goal and that’s what we have spent years buying, selling and developing for clients.
But why is the cashflow important???
Who wouldn’t want to earn extra income? If tax is an issue, we can show you how to do it and claim back any extra tax you would have to pay.
Cashflow is the key component to serviceability with the banks. Why do you think 90% of investors can’t get past 2 properties? Because most people are negatively geared. Once the banks see’s that the property is costing you money, your serviceability decreases and thus your capacity to borrow any further will diminish.
Security. If your property is positively geared now and interest rates do increase, you have a lot more security that the rent will still cover the loan and that you won’t have to fork our money each month.
Possibly the best part about the extra income. What will you do with it? Holidays? Kids School Fees? New car? Our strategies have a heavy influence in using the extra income from your investment properties to help pay down debt at a much faster rate. Have you ever calculated how much faster you can pay off your home loan with an extra $200 a week? Or $300 or $400?
It all comes down to your strategy and what your goals are.
How would it feel knowing a property gave you the security of paying for itself. Gave you extra money in your pocket every week. Helped reduce your taxable income and helped pay off your existing debt in half the amount of time? Oh and at the same time it’s in a strong capital growth region that has shown an average growth rate of 8% per year over the last 8 years? Pretty good right?
Imagine not having to sell your investments at retirement, paying down the debt on all properties and living off the income they generate each year.
Positive Cashflow is the future of investing the right way. And you’ll be surprised how many different ways you can do it.
Ps. A true positively geared property is one that shows a net profit after all loan repayments and all expenses. Don’t get suckered into the real estate ads just showing rent vs repayments.
If you have any questions regarding positive gearing, please don't hesitate to contact us - contact@thepropertyroom.com.au
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