Successful Property Investors use the following key elements within a BUY & HOLD Strategy to build wealth to fund a lifestyle they desire.
Leverage (Debt) to Buy Properties.
Knowledge Skills Property Team
Beware Property Sharks = negative equity
Wealth to Fund $100,000 p.a Income
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Your intention as a Property Investor is to Buy & Hold a number of properties to build enough equity to contribute to funding your lifestyle income. It’s not a question of how many properties, but rather how much net equity with a net return on investment (ROI) you need to work towards!
Each Property Purchased will need:-
Leverage is the use of various types of debt to buy properties you couldn’t buy otherwise with your available equity to create a multiplying effect on your deposit to build net worth.
Higher leverage means using higher debt which is commonly described as having a higher LVR ( loan to value ratio).
Multiplying the effect on your Equity
As your investment properties increase in value, the leverage or debt will create a multiplying effect on your underlying equity, see the following
Please note – less deposit will require you to buy properties that have higher rental income to avoid being cashflow negative.
Example of the power of debt to multiply
John and Mary buy an investment property for $500,000, with a 20% deposit, raised by using the existing equity from other properties, which over time has achieved a 7% annualised capital growth. What is the multiply effect on their equity?
After 1 year
Over Time:- Over time your priority will shift from high leverage around 80-90% LVR to a much lower LVR.
De-Leveraging (lowering LVR) debt on your property portfolio can be achieved by a combination of capital growth, positive cash flow to reduce debt, and possible selling down of some properties.
Over a ten-year period, purchasing the right properties (with the key elements) build wealth/equity that will reduce your LVR, and allow for your rental cash flow to fund your lifestyle.
Being tax-smart will ensure you pay less –
Residential Properties have achieved organic growth in value over the long term (historical growth has averaged between 6- 8% per annum compounding in most Australian capital cities) plus rental income to service interest and other holding costs.
To fund your lifestyle, these same properties need to be cash flow positive to avoid long-term negative gearing. Over time properties grow in value and rental income, while holding costs like interest fall as a percentage of the overall income (regardless of rising or falling prevailing interest rates at the time.)
If property purchases are missing any of these elements, it may not be possible to build a property portfolio that will greatly contribute to your required net worth to fund your lifestyle income goals.
Example
If you have an investment property purchased for $500,000 with an annualised capital growth rate of 7%, how many years will it take to double in value?
72/7 = 10.29 years
Specialist Property Tax Accountants – like Umbrella Property Accountants,
Do the study to learn to determine if you are getting unbiased information to make decisions, test the source against your learning and various other sources to gain confidence to work with team members.
All fees should be fully disclosed and agreed to upfront before team members sign on.
Research and negotiation skills and the potential help of a Buyers Agent
Good Property Manager – select and manage tenants
Good Mortgage Broker – unlock equity as future deposits
Good Conveyancer– deal with any complications for buying/selling
Experienced Real Estate Agent that can sell for the best price.
A Financial Planner that can advise on the property within an SMSF to provide a State of Advice (SOA).
Property investment promoters, or spruikers, invite people to their ‘wealth creation’ seminars or online webinars, often for free, with the promise of investment tips or opportunities. They typically promote a property investment system or market a specific property development
Property spruikers provide wealth advice investing in property that is not regulated in Australia.
To be an Accountant, Lawyer, Mortgage Broker, Real Estate Agent or Financial Planner you are regulated by professional standards and education. Hard to believe but anyone can run a seminar/webinar to promote building wealth by investing in property without any qualifications or regulations in Australia, it’s true!
The reason they are doing that is that there’s an extraordinarily high income on offer for any salesperson who can actually get a muns & dads to invest.
Extraordinarily High Property Sales Commission Paid
Secret or undisclosed commissions paid by developers typically range from $30,000 to $100,000. Generally the higher the commission the harder it is for the developer to sell, which generally implies it’s a bad investor stock. You can guest which properties are being sold first (ones with the highest commission paid by developers)!
Signs your at a property spruikers seminar or online webinar!
https://consumer.gov.au/consumers-and-acl/tips/property-spruikers-and-investment-seminars
So, what is a wealth target you could aim for to generate a potential lifestyle income of around say $100,000 p.a?
Assuming you could achieve a net 3% return, that is –
Note:- Properties with optimal Depreciation Claims create high non-cash expenses, which can equate to tax savings of around 1% towards reducing the required gross returns.
It’s not so much a question of how many properties you need but rather which properties will get you to the net equity position you need to achieve for example a $100,000 p.a lifestyle income.
An Example
You may need to purchase up to 6 + properties for around $500K each, or 12+ around $250,000 with good capital (around 7% annualised) and rental income of around 7% annualised over around 10 years to achieve a net equity position of around $3.3 million.
Will also need to consider what tax structure and state location as part of the strategy to invest.
Either as joint tenants or tenants in common
Joint tenants are typically used for couples, whereby the deceased share will transfer to the survivor.
Tenants in common suits un-related individuals to purchase together, and for tax planning and estate planning.
The most understood property class to invest in by most households.
LVR up to 95%, but not recommended above 80%.
Commercial Residential
Commercial residential properties are taxable supplies, GST treatment will need to be considered.
Property Values are based generally on a 5-7% ROI, with outgoing paid by tenants.
LVR is around 70-80%
Loan rates can be higher, and loan terms shorter.
Lease terms are longer, and the vacancy period between tenants is longer.
Can be subject to GST
Similar to residential, but treat more like a commercial for lending with much higher rental income compared to residential.
High entry investment required, lower LVR, commercial lending, suitable to sophisticated investors only.
GST Free Income
