You won’t get very far as an investor without the ability to secure credit.

Understanding how to finance investment properties is crucial.

A major part of this process is knowing how to make your position attractive to lenders so you can access the finance you need.

It’s not as simple as going to a bank, slapping together an application and Bob’s your uncle. There’s more to it – lenders weigh up dozens of factors to decide whether you’re a safe bet.

Not only do you need to understand the key requirements lenders look at, you also need to know how your finance options fit into your Big Picture investment strategy.

In this article, we’ll explore how investors can leverage loans to build a stronger portfolio and some of the things you can do to improve your position as a borrower when it comes to financing investment property.

Table of Contents

1. How Investment Property Financing Works
2. Raising a Deposit
3. Lenders Mortage Insurance (LMI)
4. What The Bank is Looking For
5. Evaluating Your Investment Finance Application
6. How to Improve Your Finance Application
7. Interest-Only Loans Vs. Principal and Interest

Are You Wondering How To Become a Real Estate Investor?

1. How Investment Property Financing Works

New investors often wonder, “How can I raise finance to invest in property?”

For most people it comes down to lending.

Borrowing money to invest in real estate is a major part of most strategies. Without taking on debt, the average person will rarely advance financially.

We call this “leveraging” finance. That’s where you (the investor) borrows someone else’s money (AKA, the bank) so you can make MORE money. Sounds good, right? It is!

Borrowing money is a great deal for most people. The actual cost and risk of borrowing is very low, but the potential rewards are incredible. The only trick is understanding how to make yourself and your investment strategy an enticing prospect.

The more enticing you are, the easier it will be to secure finance and build your investment portfolio!

2. Raising a Deposit

When an investor buys a property, they generally borrow 80-95% of the property’s value from the bank.

The rest of the money (which is called “capital”) comes from the investor in the form of a deposit.
Raising a deposit can be one of the most challenging aspects of your investing journey.

For most people, the cash required for a deposit comes from the three sources below:

Savings

If you already own your family home, chances are you used savings to pay the deposit.

Many investors continue saving and choose to use some of that money when building their portfolio.

Be mindful that buying a property comes with upfront expenses such as stamp duty, legal fees and inspections. If you’re using your savings, you’ll need to budget for these expenses.

Existing Equity

Using the equity in properties you already own is the best way to expand your portfolio.

Equity is the difference between the market value of a property and the balance owing on your mortgage.

For instance, if your family home is worth $600,000, and you owe the bank $400,000, you have $200,000 of equity. Lenders then calculate the usable equity as 80% of the property’s value ($480,000) minus the outstanding $400,000.

So, in this example, you could use up to $80,000 of the equity in your family home as a downpayment on your next investment.

Using equity allows you to expand your portfolio while preserving your savings.

Inheritance and Gifts

Inheriting money or receiving a cash gift can be a big help when making a deposit on an investment.

Even if you use an inheritance or “gift deposit” to purchase an investment, banks and lenders will still consider whether you are a suitable borrower.

You will need to meet the normal income, credit and savings checks to secure finance for your investment.

3. Lenders Mortgage Insurance (LMI)

Banks and lenders traditionally required a deposit of 20% or more. These days, some lenders offer flexible options that allow you to purchase an investment with a deposit as low as 5%.

That’s a great deal, and it can make it easier to grow your portfolio.

When you borrow more than 80% of a property’s value from a lender, the lender is taking on additional risk. They protect themselves against this risk by requiring investors to take out Lenders Mortgage Insurance (LMI).

LMI is an insurance that protects the lender if you’re unable to repay the loan. As the borrower, you pay a one-off fee to secure the LMI. If you borrow more than 80% of a property’s value, you’ll need to make sure there’s room in your budget to pay the LMI fee.

LMI is affordable and can help you preserve your savings when expanding your portfolio. Plus, it’s possible to refinance your investment down the line and access more favourable loan conditions.

4. How to Finance an Investment Property – What the Bank is Looking For

Because the bank is lending 80-95% of the property’s value, the bank is taking on substantial risk.

If something happens and you can’t repay your loan, there’s a good chance the bank won’t be able to recover all of its money, even if they sell your property.

To prevent that outcome, banks do everything they can to minimise their risk. That means they assess every loan application carefully. Banks look for borrowers with attributes like:

• A solid employment history
• Healthy savings accounts
• A history of saving money
• Good credit scores
• A low debt-to-income ratio
• A low debt-to-equity ratio

These factors tell a bank about your capacity to repay a loan and whether or not you will be able to meet your obligations over the long term.

Of course, your ability to pay is not the only thing banks look at. When you borrow money, the bank holds a “security” over the property you buy. This means the bank has the right to sell your property if you don’t meet the terms of your loan contract.

Banks don’t just assess you as a borrower. They also assess the property you are buying to verify its value. They consider factors like:

• Property location
• Market drivers (population, economy, suburb yield, etc.)
• Market value
• Dwelling size
• Housing density in the area
• Exposure (e.g. how much money the lender has already invested in a particular marketplace)

The takeaway is that banks want to lend to people with a stable income and employment history who have a low debt-to-equity ratio.

The more attractive you are as a borrower, the more money the bank will be willing to lend. Pretty simple, right?

5. Evaluating Your Investment Finance Application

Borrowing money is a simple process when you’re the customer. For banks and lenders, the behind-the-scenes work is a little more complicated.

Lenders use a test called a Debt Service Repayment (DSR) formula to determine your financial stability. DSR formulas are complex and they vary from one bank to another. Most lenders look at factors like:

• Net worth
• Employment stability
• Proof of savings
• Your age
• Other assets
• Income
• Rental income (this includes existing rental income, as well as rental income you may earn from the investment you are looking to purchase)

Take a look at the following tips. If any of them apply to your situation, making the suggested changes will improve your chances of getting your loan approved.

6. How to Improve Your Finance Application

Reduce or Eliminate Unnecessary Debt

Banks want to lend to investors with a low debt-to-income ratio (e.g. someone with plenty of income to service their existing debts).

The less debt you have, the more money they’ll be willing to lend.

The big one for many people is credit cards.

Banks look at credit cards as high-interest, unsecured personal loans. If you have multiple cards and/or a high credit limit, the first thing you should do is cut back.

We recommend limiting yourself to a single credit card with a lower limit, around $2,500 or so.

Why is that?

Even if you owe nothing on your credit cards, lenders consider your credit limit(s) when assessing your eligibility. This can put a stop to your investment goals before you’ve even started.

In the bank’s eyes, having the potential to rack up debt is the same as having already done so. Similarly, other debts (such as car loans and personal loans) can impact your ability to borrow money.

These types of debts should also be minimised before applying for investment loans. You can do that by paying down the loan, refinancing to secure better interest rates, or by paying off the loan entirely.

Good and Bad Debt in Relation to Finance

Okay, so I need to reduce all my debts, right?

Well, no, not all debts.

There are two sides to debt – good debt and bad debt.

Bad debt is the most obvious and easy to accumulate. It’s tied up in your credit cards, your car loan and other consumer debts that do nothing to improve your financial standing.

Bad debt can be hard to shake, and the banks don’t like it! If you’re not convinced, watch this video about how bad debt can really hold you back.

You should reduce your bad debt as much as possible when applying for an investment loan.

Good debt is debt that helps you purchase wealth-building assets. When it comes to property investment, good debt can be an absolute goldmine.

Debt that can be used to purchase appreciating investment (such as real estate) is a great way to leverage finance and grow your own wealth.

As you start paying off your debt through rental income and tax breaks, you’ll widen the gap between the debt and the value of the property.

This is hugely important because it builds equity and frees up funds that can be used to expand your portfolio further.

You can learn more about developing an equity strategy here.

Good debt should be tax deductible. In the case of property, the interest payments, maintenance costs and depreciation on the property may all be claimed as tax deductions.

The biggest benefit of good debt is that it’ll continue to put money in your pocket, rather than taking it away.

The Bank Loves Savings

Along with reducing bad debt, also look at increasing your savings. Savings are a big win in the eyes of banks.

Having a healthy savings account shows the bank that you are saving money consistently. This demonstrates your ability to manage money and set funds aside on a regular basis. In the bank’s eyes, that means you:

• Have a savings buffer that will allow you to continue repaying your debt, even if something unexpected happens (such as losing your income)
• Are more likely to be able to repay the debt over the long term as interest rates and property values fluctuate

If your savings are haphazard, start making regular payments to your savings account. We recommend setting up an automatic transfer that fits within your weekly budget.

This shows potential lenders that you’re smart with money and helps create the savings buffer they’re looking for.

Bad Credit is a Turnoff

Just like bad debt is undesirable, so is a history of bad credit.

Check your credit file and fix any errors or omissions before applying for a loan. If your credit is less than stellar, that doesn’t automatically mean you’ll be turned down. Every lender is different and has different criteria.

Generally speaking though, lower credit scores mean higher interest rates, which can affect the profitability of your investment portfolio.

Your best option is to meet with a mortgage broker who has experience working with property investors.

Mortgage brokers often have access to specialty loan products that are ideal for investors with average credit scores.

There are plenty of things you can do to improve your credit score. You can boost your credit rating by:

• Repaying credit cards and loans on time
• Paying off your credit card balance in full each month
• Consistently paying bills on time and in full (such as utilities and phone bills)
• Reducing the number of credit applications you make
• Lower your total credit card limits to $2,500 or so
• Minimise any unsecured personal loans
• Avoiding changing jobs frequently
• Avoiding moving home frequently

Employment is an Important Factor to Obtain Finance

Lenders like to see stable employment – e.g. being employed in the same role for 12 months or more.

Even if you’re fairly new to your position, roles that are similar to previous jobs might be enough to satisfy a lender.

If you’re self-employed, you’ll need to prove the income you report. A lender will want to see consistent business income.

At a minimum, you’ll need to provide the two most recent years of tax returns. If there is a large disparity in income between those two years, the lender will typically use the lower figure.

Lenders all have their own criteria when it comes to employment. If you’re new to your role (or industry), or if you’re self-employed, that won’t necessarily stop you from being able to obtain finance.

For the best results, find a good mortgage broker to help navigate different lending institutions to find a product that suits your employment status.

Control Your Loans

It’s not just the banks that can say yea or nay – you can too.

As an investor, it’s important to know your rights and learn how to recognise the best types of investment loans for your strategy.

Before signing off on a loan doc, review your options carefully and consider how they fit into your short and long-term investment goals.

Spread Your Risk

Most banks have clauses in their loan documents that allow them to review any of the loans you hold with their bank at any time.

This clause means the bank is entitled to use the equity in any property (that is held by the same bank) to protect themselves against the changing values of other properties. They can do this even when one property is not specifically attached to the loan in question.

In other words, if you have several properties financed by one lender, the lender can use any of your properties as security against your total debt.

This can severely limit your borrowing capacity and investing future.

The best solution to this problem is to use more than one lender.

Don’t just rely on the bank you’ve been with your whole life – explore loan products from other banks and non-bank lenders.

Spreading your loans between multiple lenders helps to protect investment properties from being used as security against unrelated debts.

We typically recommend using a different lender each time you invest. This is a simple way to control your financial future and minimise the risk of your portfolio.

It’s helpful to work with a mortgage broker – they have access to many non-bank lenders and can minimise your risk as much as possible.

Don’t Hold Anything Back From Your Lender

Above all, disclose anything and everything about your financial situation.

If a lender discovers something you failed to disclose, they could decline your loan application based on non-disclosure.

Even if it’s something you know will have a negative impact on your borrowing ability, it’s better to be honest than to be caught in a lie!

7. Interest-Only Loans Vs Principal and Interest – Which Is Better?

The big choice for most investors is interest-only vs principal and interest loans.

If you have the option, it’s always advisable to consider interest-only loans.

The logic is that interest-only repayments are always going to be lower than a principal and interest repayment.

Since most home loans allow you to make additional repayments at any time without penalty, it’s a no-brainer to choose the loan with lowest compulsory repayments.

With an interest-only loan, you could choose to make the same repayment as if the loan was principal and interest. This provides extra flexibility when managing your portfolio and finances.

Keep in mind that interest-only repayments are only available for a set period – usually 10 years or less.

At the end of the interest-only period, you will have to start making repayments on the principal loan value.

With interest-only loans, you need to make sure you’re balancing rental income and the capital growth of the property. This will allow you to minimise your repayments while still accumulating equity that can be used to grow your investment portfolio.

You can typically refinance an interest-only loan into a principal plus interest loan if your strategy changes.

With a principal and interest loan, repayments are higher because you are making repayments against the full value of the loan.

This can affect the profitability of positively-geared investments, but it can also help to grow your equity faster.

The downside is that you will be locked into principal and interest repayments for the life of the loan. You won’t be able to refinance a principal and interest mortgage into an interest-only mortgage.

The choice between the two ultimately depends on your strategy, the property you’re buying, and whether you can balance rental income against long-term capital gains.

That’s why having an experienced finance broker on your team is vital.

BECOME A PROPERTY INVESTING EXPERT

The basics in this blog are a great start, but there are many more ways you can optimise your financial structure for better returns and a stronger portfolio. To learn more, join our free property investing seminar.

When it comes to property investing as the saying goes, if you don’t have a plan, then you could be planning to fail! While there are many factors we can’t control in the market, there are certain facets we can manage to give us the best possible chance of success. In this article we will help you understand the 7 plans every property investor must know.

Starting out in property investment can be overwhelming, and most Australians don’t even embark on the journey because they simply think it is out of reach. Even the most successful property investors will tell you that they are not experts in all things accounting, tax minimisation and property management. The key to building a thriving property portfolio is to plan and do it well. With that being said, here are the 7 plans every property investor must know to go the distance and win at real estate.

THE THREE PHASES OF PROPERTY INVESTMENT 

First though, here’s a broad overview of what a standard investor journey throughout the years looks like.

There are three phases when it comes to building a property portfolio that every investor must navigate. Real estate is a long-term investment strategy and the course of these phases usually spans a 15-20 year period.

Acquisition phase

The acquisition phase is when an investor should be in growth mode. It is generally the stage between three to seven investment properties. Your main goal will be to acquire as many properties as possible in a safe and sensible manner.

During the acquisition stage, you want to be focusing on high growth properties in a variety of locations in order to make the most out of your equity gains. To do this, you will need to understand what drives the market.

Consolidation phase

When you get to the stage where the banks won’t lend you anymore money, you’ll need to begin refining your investment portfolio. In order to secure more lending you will need to reduce your debt and simultaneously increase your income. To move into a positive cash flow phase, you will need to lower the loan-to-value (LVR) ratio of your portfolio. What this means is that you’ll need to reduce the amount of debt you have. You can do this through selling non-performing properties, renovating to add value or reducing the rate at which you purchase properties.

Lifestyle phase

This is the point in your journey where you can truly start benefiting from all your hard work as an investor. Your property portfolio will be at a point where it is generating enough income for you to retire (whatever that looks like for you).

Once you get to the stage where you’re living off the income produced from your assets, you might like to consider a more conversative approach to investing, in order to protect your assets.

THE 7 PLANS EVERY PROPERTY INVESTOR MUST KNOW 

These are the 7 plans every property investor must know if they want to create legacy wealth through real estate. If you’re asking yourself how do I make a property investment plan? You’ve come to the right place.

Acquisition plan

Having a plan that outlines how you are going to grow your property portfolio will be integral to your success. When creating your acquisition plan, the key thing to remember is that you want to grow as fast as possible. Some investors believe that when the market is flat they should stop and wait for another boom. This couldn’t be more wrong. Property is a long-term investment so it doesn’t really matter when you buy in the market cycle, just as long as you get in it.

With new investors, common flawed thinking is to find a market that suits your budget. If your budget doesn’t quite reach the average house price in sought-after areas, then you may start looking as far out of the city as possible in a location with very little prospect for growth.

However, if you want to build lasting wealth then you must focus on high growth properties and in order to do this, you need to understand what drives the market:

• Infrastructure – spending on infrastructure points to a growing economic base
• Yield variation – signals growth
• Supply and demand – indicates need in the marketplace
• Population – fuels growth in an area
• Economics – reveals clues to an area’s capacity for growth
• Demographics – influences growth – as incomes grow, so do property values

Each of these factors will help you identify where you should be investing. As mentioned, you need your money in strong future-proofed economies. For example, in larger cities, you are more likely to achieve consistent capital growth. This is because property prices in cities tend to recover more quickly from economic downturns. Cities also have diversified economies which means there is always going to be jobs which bring people to the area. This will keep demand for housing resilient, making it easier for you to find a tenant.

Once you’ve found a location, the next step is to find a good property. Any successful property investor will tell you that money is made at the time of purchase. This is why you’ll have to learn the art of negotiation.

Of course the market generally dictates what kind of discount you may be able to secure, if the market cycle is at the bottom then you’ve got a great chance of getting a discount – more so than when it’s strong. Here are some proven tips and strategies designed to help you tilt the odds in your favour:

• Speak with authority: those that are well informed make better decisions. This is especially true when it comes to making an offer on a property. By doing proper due diligence, you’ll have more confidence and this will be reflected in the negotiations.

• Listen closely: It’s helpful to understand human nature when negotiating, so it’s worth the effort to learn how to identify both verbal and nonverbal cues that may reveal hidden information.

• Silence is your friend: During negotiations, moments of silence can be unnerving to some individuals. Use this to your advantage. For example, if you’ve received an offer that doesn’t meet your expectations, pause before responding, you might be surprised at what happens next!

Lending plan

In order to conduct business safely during the acquisition stage of your property investing journey, you need to create a lending plan. This plan will detail how you are going to get the funds to finance your purchases.

When it comes to securing lending, a common mistake that many new investors make is that they limit their buying options by only looking at lenders that offer cheap interest rates. What these investors fail to understand is the value in building a portfolio of good properties in growing locations right now.

For example, you could approach a major lender (big banks) and get approved for a $600k loan with a 3.5% interest rate. Depending on the area, lets just say you’re able to purchase 45 minutes out from the city in a small suburb with no prospect for growth. In comparison, if your lending plan allows you to consider second-tier lenders that may offer you $750k at a 5% interest rate you’ll be in a much better position to purchase in a growing economy (closer to the city). Whilst your finance costs more, you will likely make more money through capital growth down the track.

For most investors, their lending plans will have a provision for securing finance from second-tier lenders, because even if the major banks have a cheaper interest rate, their terms are often restrictive. A second-tier lender is a non-bank entity, making them exempt from some of the more rigorous APRA requirements. This doesn’t mean they’re free to do as they please, you can have peace of mind knowing that they are regulated by the Australian Securities and Investments Commission (ASIC). The goal of the ASIC is to protect investors like yourself while enforcing Australian finance law.

Having access to funding is super important when it comes to property investing, and having the cheapest interest rate should be the last thing you consider.

Tax management plan

Owning real estate can actually be incredibly tax effective. When it comes to property investing there are a lot of things that you can’t control such as the market, interest rates, and yields. However one thing you can control is your tax – through managing it.

There are four main taxes that property investors pay:

• PAYG
• Land tax
• Stamp duty
• Capital gains tax

And if a company owns your property portfolio then you will also need to be across goods and services tax (GST) and company taxes.

For many investors, tax breaks make it affordable to own an investment property in the first place. So when it comes to managing your taxes you need to ensure you’re across it. This does not mean you need to understand tax law in depth, but having a basic understanding will help you (and your accountant) in the long run.

A smart investor will have provision in their tax management plan for how they can use tax to pay for their properties. Let’s say you purchase a property for $500k, the rental return is $500 per week and the property expenses are $601 a week. So your property is making a loss, and the great benefit of being a property investor is that you can claim tax back and get depreciation. So on this brand new $500k property you can claim back $152 per week. With a PAYG withholding variation, you can receive the $152 tax break each time you’re paid.

Property management plan

Every investor knows that real estate is a long term game. In order to keep your properties in tip-top condition over this time, you need to invest in an amazing property management company right from the start – at the beginning of the acquisition phase.

Your property manager will spend more time at your property (your biggest asset) than you and therefore you want to ensure you have the right team on your side looking after your properties.

Let’s say you get dumped with an inexperienced property investor, they do an average job of looking after your property, it gets ruined by your tenants and you become fed up. Your property management company refers you to a real estate agent who convinces you to sell, and then you’re out of the game. This is the potential cost of not investing in a good company.

Debt reduction plan

As mentioned above, you move into the consolidation phase once you’ve exhausted your ability to recycle equity. As a quick reminder, equity is the difference between the market value of a property and the mortgage against it. A common strategy in an investor’s lending plan is to borrow against the available equity in a property.

Capital growth in the form of equity is useless, unless you can access it. In order to access it you need to lower your loan-to-value ratio by reducing your debt, or increasing your income (rental yields).

It is completely normal to get to a point in your investment journey where you need to take a break for a year or two whilst sorting out your finances. What you can do during this period is put every single dollar you have into your offset account. An offset account is an account linked to your mortgage that operates like a transaction or savings account. It offsets the balance in that account against the balance of your home loan, so you’ll only be charged interest on the difference.

Financial plan

Your financial plan should be operating in the background throughout each of the phases of your investment journey. Creating a financial plan will set you up to ensure you’re building wealth for the right reasons.

Your financial plan should include the following attributes:

• Specific goals that define what you want to achieve and which are aligned with your values and your personal situation.
• Clear, actionable steps that lead you towards your goals.

Your financial plan will also identify how you are aiming to fund your retirement outside of real estate, such as through your Superannuation or shares.

Wealth acceleration plan

The wealth acceleration plan takes place in the lifestyle phase. The lifestyle phase of an investment property career is the place the property investor is striving towards. You’ve built your portfolio to a point where it is generating enough income for you to retire (in whatever way that is to you).

With capital growth in the market over 15-20 years your portfolio will (hopefully) be worth a lot more than the initial cash you invested. A wealth acceleration plan will map out how you are going to put this equity to work. When you get to this stage it can be easy to fixate on the cost right now, this is where many investors go wrong. In order to quantum leap your wealth to new heights you need to understand the long-term value of your investment.

BUILDING YOUR 7 PLANS WITH THE RIGHT TEAM

A list of 7 plans every property investor must know is all well and good but we all know how hard it can be to stay on top of all the aspects of property investing, particularly in those early stages.

In order to successfully apply these 7 plans across these three stages, it pays to enlist some help. That’s where the TRC-Gorod team comes in. Our team has over 18 years experience in property investment coaching.

Come along to one of our free property investing masterclasses. This two-hour event will give you the opportunity to ask questions to our experts, connect with key people in the industry and develop the support team you need to succeed in real estate.

Register now for the free property investor webinar.

So you want to begin your property investment portfolio but you don’t know where to start? Join the rest of Australia! In today’s society there is still no avenue for teaching children and young adults about wealth creation and financial freedom.

Some may stumble across a business opportunity, or perhaps investing in shares, but our go-to vehicle is real estate. Real estate is a long game that has the potential to provide generational legacy wealth, if done correctly.

To set yourself apart from the 99% of investors who fail, you need to ask these 5 questions before investing in a house.

DO YOU WANT TO BE AN EMPLOYEE OR AN INVESTOR?

Do you have what it takes to be an investor? One of the greatest setbacks that most people experience from the education system is the lack of knowledge about how to become financially abundant. Many people enter adulthood without the understanding of taxes or even a basic budget.

School teaches you to be an employee – you trade your time for income. In comparison, investors dive into the real estate game because it allows them to make a steady and increasing income from their property portfolio.

We need employees, that is how society has been built to function. However, you don’t need to succumb to this ‘majority’ and the fact you are here reading this article is proof that you have what it takes to escape the rat race.

Property investment is a fantastic wealth creation vehicle because it is underpinned by the philosophy that profits are better than wages.

Trading your life for money is okay to some, but for the other side there comes a time in life when they’re ready to work less hours for someone else, to concentrate on other things they love while still getting paid.

The answer to this equation is real estate.

The goal of property investment

The goal of property investors in the market is to target optimistic returns.

If you fully accept that profits are better than wages, it will serve you well for a lifetime. Understand that companies, banks and institutions are all hunting profits and that they’re all hunting in the same safari park as you – the Australian property market.

Yes, learning how to create your own profits comes with time and experience but the payoff is worth it.

Why everyone doesn’t invest in property

If property investing is such a smart and lucrative profit making machine then why don’t more people do it? The reality is that for most, owning multiple properties simply feels out of reach.

On top of this, many don’t know where to begin when it comes to creating long-term sustainable wealth for themselves.

You must seek the knowledge you never got

You would think that in the developed country of Australia, wealth creation would be passed down from one generation to the next and these invaluable lessons would find themselves in the education system!

However, very few people obtain the necessary education to make sound financial decisions. For many Australians, the success that is ‘making money’ is entirely misunderstood and seems unattainable.

So, we actually have to seek the knowledge as we grow.

WHAT IS YOUR FINANCIAL FREEDOM NUMBER?

The next question you want to answer before investing in a house is, ‘what is your number?’ This is the big critical question that everyone needs to answer and that is ‘how much money do you need to die?’

Drilling down to specifics is vital in property investment. Knowing exactly how much money you need to live the life you want – whether that be a shorter working week, giving up work entirely, or being able to have one more holiday a year – will enable you to get there that much quicker.

Decide what kind of life you want. Work out how much it costs. Then you will know how many properties you need, at what rent rates and capital growth, to get there.

Setting yourself up for retirement

If you’re planning to rely on the pension and your superannuation when you retire then you can expect to only be surviving not thriving. The pension is $36,000 per couple or $24,000 if you’re single and that is topped up by about $523,000 (approximate super amount by 65) that will need to last about thirty years.

One in four pensioners are living in poverty. A huge factor that determines those circumstances is the security of housing. Owning your home has shown to be a game changer in retirement as the cost of rent is substantial for someone on a pension.

Of course, the more real estate you own, the more secure you will be in the long term. Setting yourself up with a real estate investment strategy now means you’ll have more bases covered in case things go pear-shaped. By paying down the debts while you’re still working, you’ll be able to focus on living off the passive income throughout retirement.

HAVE YOU SET A BUDGET?

It’s time to get really clear on how you’re going to make your ‘magic number’ a reality and the best way to do this is through budgeting. Budgeting is about getting a clear picture of your incomings and outgoings so that you can determine how much you can save and invest each week. The key here is to get really specific – if you’re wanting to save $100k for a deposit, then break that plan down into bite size steps.

A simple and effective budgeting strategy is the 50/30/20 rule which is the idea that 50% of your income goes towards your needs, (mortgage, bills) 30% of your income goes towards entertainment and 20% needs to be invested into income producing assets.

If that is too conservative for you, then another great budgeting strategy is the 50/50 technique which is where you live off of 50% of your income. If you can do this, you will end up in a place where you can budget for anything.

However, it is important to note that your budget must be realistic so that you aren’t left feeling deprived. A sustainable budget should still allow for you to enjoy the indulgences of life that mean the most to you. You want to set yourself up for success.

Budgeting is an invaluable tool that will prove very useful before you invest in a house and it will become vital once you own that investment property.

ARE YOU RESISTING TO LIFESTYLE CREEP?

Whether you just landed a new job with a higher salary, a promotion at work or even a paid off car loan – it is normal to immediately start spending more money. Maybe now it’s time to order a five course meal or sign up with a personal trainer: you’ve earned it!

If you have ever had an increase in money enter and leave your life then you have become a victim to lifestyle creep. With the increased income you’ve elevated your lifestyle situation to match.

If you are not careful, you may wake up one day and realise you now use 16 different hair care products, you own a second car and you live in an apartment you can’t afford.

Don’t let this happen to you.

How to reverse an escalating lifestyle

• Cut back on the subscriptions – Make a list of your recurring memberships, such as those for streaming, gaming or even dating! Weed out the ones you don’t need.
• Declutter your closet – Go through your clothes and be brutally honest about what you have not worn in the past six months. Get rid of it.
• Replace goods – If it’s possible, replace items that are currently too expensive for you, such as your car (petrol, maintenance) or the place you rent.
• Make mindful choices – Pay attention to where you money goes and ensure you think through a purchase in depth before buying.

ARE YOU PREPARED FOR THE LONG-TERM GAME?

Real estate is a long-term game. The longer you hold onto your property, the more money you will make as you ride the wave of market inflation.

There are too many investors that buy a property and expect it to go up $100k overnight. The property market doesn’t work that way. The saying ‘good things take time’ is relevant to playing the real estate game – the longer you’re in it, the more likely you’ll win it.

The key question you need to ask yourself before investing in a house is, “are you prepared to hold your property for more than just a couple years?” This is the basis to a successful property investment strategy, however it does come with some challenges.

Do the numbers

If you want to be able to hold onto your real estate for long enough to create significant wealth then you will need to understand the financials associated with it. At a basic level, you will need to be across cash flow, rental income, maintenance fees and taxes.

The next step is to ensure you have a significant buffer for unexpected expenses that may arise. Taking time to analyse your real estate and do the maths will ensure you’re prepared for every eventuality and can go the distance.

Rental return is key

Charging enough rent to cover your debt, expenses and to even save to renovate down the track is the ideal solution. This will allow you to hold onto your property for the time it needs to grow in value. It is therefore very important to make sure your rents can continue to increase each year.

The major factors that influence rents are:

• Tenants – Choosing tenants who earn good incomes and are able to sustain rises in rent is vital.
• Location – Ensure you buy in an area that is on the trajectory of growth to ensure there is always a demand for rentals.
• Liveability – If the area offers tenants things like modern, well-maintained services, great outdoor spaces, and convenient, high-end social outlets, people will pay more to live there.
• Being a good landlord – Respond to maintenance needs quickly and give decent notice for inspection tol help make your tenants feel valued. This will make them less likely to object to an annual rent increase.

Invest in your investment

If you’re in it for the long haul then it is important to look after your property. If you do not live close by, you will need to employ a property manager. Take your time to research companies and find one that truly cares about your investment success. Peace of mind that your real estate is being taken care of is invaluable.

ONLY THE EXPERTS CAN ANSWER YOUR INVESTMENT PROPERTY QUESTIONS

So there you have it, the 5 questions to ask before investing in a house. Do not be alarmed if these questions prompted a thousand more. It is said that it takes 10,000 hours to master a skill. No one is expecting you to become an expert after reading this article.

Any successful property investor understands that they don’t need to be an expert in tax law, location scouting or budgets, but they do need to know where to find the people that are experts in those areas.

This is where our team of coaches and mentors can help you on your way to becoming one of the one per cent. The one percent of Australians who are successful property investors.

If you want to start building your own team of experts, then come along to our free real estate investing seminar. This jam-packed two hour event will give you all the information you need to start out in property investment, and you will be able to ask questions to our specialist team.

Register now for the free property investor webinar

It is all well and good to have a property portfolio that delivers good capital growth and positive cash flow but the key principle that will validate your long-term success is asset protection for real estate. 

Protecting your real estate assets is perhaps more important than building them. Obviously we always hope for the best, but there are many things that can go wrong and when they do, you and your assets are at risk. 

Incorporating prevention measures into your investment strategy could be the difference between you continuing to build out your wealth or losing everything you own. 

WHAT IS ASSET PROTECTION? 

In essence, protecting your real estate assets is a means of shielding them from being used to meet creditor’s claims. 

Any business has risks and you need to make sure you are well prepared for anything that gets thrown your way. Here are just a few scenarios in which asset protection would be needed: 

• Market changes dramatically (just look at what Covid did to supply chains). 
• A customer going out of business meaning they’re unable to pay you.
• You get injured and are unable to work.

Asset protection will ensure that any business risk you may experience will remain separate from your family and your personal assets. 

To reduce that vulnerability, it is vital that you implement strategies to protect your property and personal wealth from potential loss of control. 

COMMON ASSET PROTECTION ASSUMPTIONS 

It is fairly common for people to think that they don’t have to protect themselves. It is within our human nature to assume that no one is out to get us. But to tell you the truth, if you own even just one asset, you are at risk of losing it. 

Assumption one: Only the rich protect their assets 

Contrary to popular belief, the rich have less of a need for asset protection because they have a larger capacity to pay the judgement and move on. Whereas an investor who has just started out in their journey would be much more susceptible to losing everything if they were to go up against the creditors tomorrow. 

Assumption two: If you’re sued, you can transfer ownership to a family member

Transferring your assets to your spouse and/or children, especially after something has happened, will not protect your assets. The court will follow the paper trail and it will be deemed that the family member is holding those assets on your behalf. 

Assumption three: Asset protection is expensive 

Protecting your real estate assets is relatively inexpensive. It is a lot cheaper than the legal fees associated with defending yourself in court. So set aside some funds in your budget and invest the time into building an asset protection strategy that works for you. 

CHOOSING THE RIGHT STRUCTURE 

A ‘structure’ refers to the way in which you choose to hold title to your investment property(ies). Most investors choose to buy under their own name – it is the least expensive and least complicated method, however it can leave your assets open to risk.

There are four main structures that are used within real estate: individual name, company, partnership or trust. Each structure brings their own benefits and downfalls to the equation. It is recommended that you seek professional help before determining which structure is right for you as they will all vary depending on your situation. 

Ideally you want to get it sorted from the beginning of your real estate journey because your chosen structure will impact things like debt restructuring and retirement planning.

Individual name 

This is the most common means of ownership. The benefits and drawbacks apply whether the investment property is held solely or jointly.

Partnerships 

Partnership structures do have several advantages in terms of setup and ongoing costs. However, it does not provide any real asset protection. Whilst partners are not subject to directors duties, each partner does owe fiduciary duties towards one other. 

Companies 

A company structure can provide you with good asset protection for your real estate. However, on the downside, they are a bit more costly to set up and operate. 

Trusts 

A trust is not a separate legal entity according to law. It is a relationship where a person (the trustee) is under an obligation to hold property for the benefit of other persons (the beneficiaries).

Trusts are a key strategy that real estate investors use to protect their assets. The beneficiaries do not own the assets which means creditors will have a difficult time making a claim against them. It also protects your assets against potential divorce of your children and grandchildren, keeping the assets within the family. 

A trust structure also benefits from the 50 percent capital gains discount. A tax downside to trusts is that it cannot distribute losses to beneficiaries. Any loss remains within the trust, and this can limit the benefits of negative gearing.

While trusts can be an effective strategy for asset protection, the finer details can be complex and there seeking professional advice is paramount. 

There are 4 main types of trusts:

• Discretionary trust 

The term “discretionary” in reference to a trust involves the powers that the trustee has in deciding which beneficiary(ies) receive the net income from the trust either annually or at one time, depending upon the terms of the trust.

The most common type of discretionary trust used is the Family Trust. This kind of trust will have a trustee which holds the asset(s) in trust for the benefit of the family members (beneficiaries).

For tax purposes, a discretionary trust generally provides the most flexibility when it comes to net income because the trustee has the discretion to distribute different amounts of income to different beneficiaries. Depending on the trust deed, a similar flexibility may also apply to the distribution of any capital gain to the beneficiaries.

• Unit trust

In a unit trust, the beneficiaries’ rights to income and capital in the trust are fixed. In other words, a trustee is required to manage the trust according to the number of units each investor holds. 

The beneficiaries in this kind of a trust are known as “unit holders”. There may be differences in voting rights, income and capital distribution rights, etc depending on the fixed interest each unit holder has. 

• Hybrid trust 

As you might imagine, a hybrid trust takes the best of both worlds (unit trust and a discretionary trust) and combines them to create a powerful and flexible tax planning vehicle. 

• Testamentary trust

A testamentary trust is a trust that is created by your will, it manages your affairs after you’ve passed on. 

Superannuation funds 

It has become increasingly popular for people to manage their own superannuation funds (SMSF) because it allows an investor to have full control of their retirement assets. If the goal of your property portfolio is to save for retirement, then adding real estate to your SMSF might be a part of your strategy. 

The concept is similar to other types of trusts, however this kind of trust is only meant to provide funds for the retirement of the trust members (the beneficiaries).

While having control over your own super can be appealing, it’s a lot of work and comes with risk. While it may protect your assets from potential creditors, you still will be personally liable for all decisions made and if you were to lose money through theft or fraud you wouldn’t have access to any compensation or the Australian Financial Complaints Authority (AFCA).

If an SMSF is something you are interested in, please seek professional advice from a lawyer and tax accountant. 

INSURANCE 

Insurance cannot protect you against every possible scenario but supplemented with the right structure, you can sleep peacefully at night knowing that you’ve got the best strategy in place to reduce the vulnerability of your assets being at risk. 

The main insurance type that would benefit most real estate investors is ‘landlord insurance’.

Landlord insurance

Landlord insurance is a type of home insurance that protects your investment property if it is destroyed or damaged. You also have the option to insure for things like loss of rent, tenant default and malicious damage. If you have leased any of your belongings to your tenants you can protect this with contents insurance. 

Insurance cover will vary by company so it is really important that you always review the relevant Product Disclosure Statement (PDS). That way, you can make sure the policy you’re purchasing covers the events you want protection for.

SPEAK TO AN EXPERT ABOUT HOW TO PROTECT YOUR ASSETS 

Now with this knowledge, you can understand and appreciate the importance of asset protection in regards to your wider investment strategy. The best way to know how to protect your real estate assets is getting the right help. 

Asset protection is not a one size fits all approach. Your strategy needs to be customised to suit your lifestyle needs which will require expert advice. 

With the right team you can develop and execute a master plan that will ensure your property portfolio is well protected. Come along to one of our free real estate investing seminars, ask our team questions and connect with industry experts that can help you streamline your real estate investment strategy. 

Register now for the free property investor webinar

Real estate is the perfect asset structure for wealth building, but it has to be done right – and that means having solid money management skills to back you as you make these major financial decisions. 

Some of these skills may seem obvious – like having a budget – but you’d be surprised how many young investors didn’t get to build this foundation of knowledge through their school or home life. 

You see the idea of having wealth is still very much stigmatised in Australian society, especially in the middle class. And yet who can truly say that life wouldn’t be easier if you knew you and your family were set up nicely to live the lifestyle you truly desire?

HOW TO BUILD YOUR WEALTH

Outside of having terrific money management skills, there are three basic principles to building wealth: Understanding money buckets, learning what grows your wealth vehicle, and knowing your number.

Understanding money buckets 

Money buckets are basically the means of how you grow and accumulate wealth. 

The issue we have in Australia is that a lot of people only have one money bucket, and in there they only put one thing – their wages.

Now we know that wages alone can’t create great wealth. Even if you earn a huge salary, it’s pretty rare that someone has ever ‘saved themselves wealthy’. That’s why we need to have other buckets filled with strategies or assets that accumulate wealth too. 

This could include:

Superannuation: Money we set aside that accumulates money with very little effort from us. The more contributions we make, the more money we make.

Tax: Most Australians pay too much tax and don’t apply for the deductions they’re eligible for. Good money management skills will ensure you get the most out of tax to top up your bucket.

Side hustles: Creating a second income, or side-hustle, is another potential income that will help you accumulate extra wealth. 

Shares: With good financial advice you can buy shares and get a nice dividend at the end of the year. 

BUT what will be your biggest bucket of all? Cmon, it’s real estate!

Learning what grows your wealth vehicle 

Let’s be clear, the vehicle you use to create wealth doesn’t have to be property. It could be shares, businesses – whatever you feel you have the money management skills to do well at.

If you’re here it’s likely you’re either already in the property game or looking to invest, in which case you need to understand what drives it to grow. Once you know that, you will know where and when to invest.

With property, there are six market drivers that grow its value:

• Population growth
• Infrastructure growth
• Supply vs demand
• Economics
• Demographics
• Yield

Basically if you can see population growth in an area where infrastructure is improving and expanding, where you know that people are going to want to live, then that’s a good place to invest.

Get to know what influences and grows your wealth vehicle. By doing this you will make investment decisions based on education and knowledge, not emotions and impulses.

Knowing your number

While most Aussies agree they want to retire comfortably, very few actually work out how much money they’ll need each month to reach that. 

The biggest mistake you can make is believing your super and pension will be enough to live the lifestyle you want. The pension number for a couple today is $36,000 per annum, while the average super balance at retirement is $128,000 if you’re male and $73,000 if you’re female. 

It doesn’t even take an expert to tell us that no-one is living the high life off those numbers.

Nail down how much income you need every month to live the life you want. Once you find that figure you can then start working towards achieving it.

Of course, in order to get there, you’re also going to need the best money management skills to keep you on the right path. 

10 WEALTH MANAGEMENT SKILLS YOU MUST HAVE

1. Say goodbye to instant gratification

Building more wealth is a long term game. Whether you’re buying an investment property or investing in shares it takes real time to grow assets.

A typical real estate cycle lasts anywhere from 10 to 15 years, and yet 99% of people fail in real estate in the first six years – less than a full market cycle! Why?

Well one of the reasons is they expect instant capital growth and strong rental returns, and when they don’t get that gratification they simply give up.

2. Know the difference between a need and want

Do you really need to buy a brand new $50,000 car – or do you want it? 

If you want to know how to build your wealth you should start with a little self reflection. The lifestyle you’re working towards through property investing is within reach as long as you’re not trying to live it too early on an income that can’t afford it. 

Don’t rob your own future by buying everything you want now. Focus on your wealth building plan and honing those money management skills.

3. Learn to automate your savings and investing

Having the right structure for your finances is crucial. One thing that can help keep you on top of your savings and investing is having automated systems in place so you don’t have to worry about moving your money around manually every week, fortnight or month. 

Money sitting in the bank these days is wasted. When putting together your finance plan ensure you’re directing the savings portion of your income in areas where that money will work harder for you like your buffer or offset account.

4. Understand the cost of debt and ownership

When it comes to real estate you have to consider more than just whether or not you can afford a monthly payment. Good money management skills means ensuring you figure out the entire cost of ownership before making a decision.

For instance, if you’re buying an investment property that is geared negatively, are the tax savings you’ll receive more beneficial to your financial situation and your goals than a neutral or positively geared property?

Remember there are a lot of costs you might not have thought about with property ownership such as legal fees, council rates and insurance. Here is a comprehensive guide on the financial commitments to investing in real estate.

5. Set goals

Every decision you make in your property investing journey will fall in line with your strategy. And your strategy? Well that’s based on your goals. So if you haven’t clarified what you want yet, how will you know when you’ve achieved it?

One popular goal setting strategy we use with our clients is the S.M.A.R.T. method, which is designed to help them narrow down what they want and what it will take to achieve their desires.

For example: “I will buy a second investment property by December 31, 2022, and I will negotiate the purchase price to be at least 10% below the fair market value.”

6. Learn to live within your means

One of the best and oldest money management skills is knowing how to budget. In fact, it’s not just knowing how to budget, but having the willpower to stick to it.

When creating a spending plan don’t set yourself up for failure. Consider your financial capacity, what your other life commitments are, and what you still want to enjoy on a regular basis. 

However, don’t forget the basic key of budgeting is to spend less than you earn, so if you need to cut out unnecessary spending in order to build your wealth – do it. 

Here’s another great blog on the five budgeting mistakes you might be making.

7. Be willing to make short-term sacrifices

Often life is about trade-offs. You have to be willing to give up something you want now – like that annual holiday overseas – for something better in the future.

An easy principle to work off? If you want an easy life later, work hard in the beginning. If you want a hard life later, take it easy in the beginning.

8. Seek out the experts

Even with the best money management skills you can’t build wealth alone. A lot of the time you’ll need the help of experts who can guide you through certain decisions and processes. 

In fact, you’ll need help from at least six experts – your six star team – if you want to make it through this long real estate investing journey. Learn more about that here!

Don’t forget, there’s no shame in asking for help when you need it.

9. Remove the bias

Don’t make assumptions about real estate before you look into it further.

Should you buy the new investment property or the older one? Well, ask a seasoned property investor and they’ll tell you that it depends on a lot of factors – your financial situation, your goals, the suburb’s postcode…

There are a lot of things to consider when managing your money and building your wealth and each of them will impact the success of your investing. Just don’t let bias around certain properties or locations push you to make poor money decisions.

10. Take advantage of opportunities

PAYG variations, negative gearing, renting out your principal residence – there are a number of tools and strategies you can use to grow your wealth.

Once you get your money management skills down pat, you’ll open yourself up to a lot more opportunities to get you one step closer to your ultimate goal. 

HONING YOUR MONEY MANAGEMENT SKILLS IS JUST THE FIRST STEP

Now that you know the money management skills you need to succeed as a property investor the real education can begin! 

Having the know-how around finances is just one piece of a much bigger puzzle. Building wealth through real estate takes a lot of planning and a core understanding of how markets work. Without a good team behind you to guide the way, it can be incredibly overwhelming to own property!

If you resonate with that at all, come along to one of our FREE property investing masterclasses. Our coaches and mentors have real life experience as investors and give you the tools, resources and knowledge to help move you through each phase of the investing cycle. 

Register now to join the next masterclass near you.

If you want to become a superstar property investor and be on the path to financial freedom, then you’re going to need this guide to invest in a positive cash flow property!

Investors that follow a positive cash flow strategy understand that living off passive income is the key to an early retirement – and the only way to do that is to make our money work for us, not against us.

Thankfully, putting together a robust plan isn’t rocket science – anyone can do it! You just need to know the fundamentals of investing in income-producing properties, and that starts with knowing your current cash flow.

GET TO KNOW YOUR CASH FLOW

There are three parts to your cash flow as an investor: your wage, your tenant and tax (more on this part later).

Basically, if your tenant can pay the rent which covers your mortgage, you’re already in a solid cash flow position. The longer you own real estate, the more likely this is to happen.

Now the goal with any property is to not be forking money out of your own pay check to hold it. That’s why we need our cash flow to be set up properly with the right systems in place – like buffer accounts.

TIPS FOR MANAGING YOUR CASH FLOW

Here are four tips and strategies for managing your cash flow to help you generate additional income.

One: Measure your incoming and outgoing

The foundation of any good cash flow plan is a tool to measure the money coming in and out each week, fortnight or month.

Naturally we lean towards budgets as the best tracking method, however what this looks like may differ greatly from investor to investor.

For some, a budget may be very detail-oriented with spending allocated down to the last dollar. For others, it might be a simple case of knowing what their expenses are, and how to split up the money they can spend.

The most important part of budgeting is, well…following the budget!

Establishing good financial habits and showing banks and lenders that you a) can stick to a budget, and b) know how to make the most of every cent you invest is paramount to being a successful property investor.

Two: Create an investment strategy

As part of your budgeting, you’ll need to have a plan for the extra money you end up saving.

A good first step is speaking with a financial planner to find out where you’re at right now and what your financial goals are.

You can then work on creating a property investment strategy to help reach those goals – this is where having a real estate coach or mentor will be crucial.

Whatever you do, don’t go into property investing without a plan. Nine out of ten times, you’ll make poor decisions and end up losing money.

Three: Eliminate bad debt

Bad debt is tied to assets that aren’t typically income-producing like flashy cars or jet skis.

Not only are these depreciating assets, you usually acquire them through things like credit cards, car loans and other personal loans – all of which put a strain on your finances.

Wiping out bad debt is key to increasing your cash flow and moving into what we call GOOD debt. Good debt is actually your secret weapon in property investing because it provides an income for you e.g. an investment property.

To claim good debt on an investment property you need three things:

1. The property to appreciate
2. Tax deductions or incentives
3. A passive income in the future

You can dive into this topic more here: Why Debt Is Your Ultimate Secret Weapon To Property Investing Success.

Four: Become tax savvy

You’d be surprised how many property investors pay more tax than they should because they haven’t taken the time to put in place a smart tax plan.

Investing in positive cash flow properties is actually tied to how investors approach their tax (more on this soon). The idea is to claim all your tax benefits AND depreciation so that come tax time you’re actually getting money back into your pocket.

The best way to ensure you’re doing this correctly is to work with an accountant who has experience with investment properties and knows all the deductions you can claim and how.

WHAT IS A POSITIVE CASH FLOW INVESTMENT PROPERTY?

By now we know that a positive cash flow property is pretty much able to pay for itself without you having to chip in more to cover expenses.

However, the caveat is that this only applies AFTER tax. See there is a difference between a positively geared property and a positive cash flow property.

A positively geared property gives you, the investor, extra income each week as the rent is paid (before tax), while a positive cash flow property might generate a loss but then after tax returns are lodged you end up with more money in your pocket.

As explained by On Property, properties with high depreciation options (such as new properties and newly renovated properties) have the greatest potential to be in positive cash flow. This is because their on-paper loss allows you to claim more of your tax refund.

However, older cheaper properties can offer a strong rental return and therefore are more likely to be positively geared. So it kind of works out for you both ways depending on when you need that additional cash flow.

AN EXAMPLE OF A POSITIVE CASH FLOW PROPERTY

Let’s use this example from TRC-Gorod CEO Jason Whitton on how positive cash flow and tax works.

Say you’re earning $100k a year and you know you can purchase another property with the equity you’ve built up in your home, but you don’t have enough leftover in your regular pay packet to actually pay off that property long term.

You’re wondering, how do people do this for multiple properties? Is investing only for the uber wealthy?

Nope! The truth is you just need to learn how to do better with what you have.

Where your money goes

Do you know exactly where your money is going right now?

Of your $100,000 income (on average):

• $9,500 goes to your super
• $25,000 goes to tax
• $35,000 goes to your home (based on what the average Australian homeowner or renter spends on their home)
• $30,500 is what you have left to live off – covering your expenses like groceries, school fees, holidays etc.

Sure, when we break it down that way the prospect of property investing does feel completely out of reach – but that’s where the taxman comes in.

The scenario

You want to buy a brand new investment property for $500,000. You also want to make sure it’s returning rent for around $500 per week – or a five percent yield.

The challenge most investors will face is changing interest rates and expenses. For instance, if there was also an interest rate on the property of five percent it’s now actually costing us $601 per week to own. So, the rent of $500 coming in weekly still has us at a loss of $101 per week.

Here comes the incredible benefit for you as a property investor – you’re able to claim tax back and you get depreciation.

So now on a brand new $500,000 property you can claim tax back of $152 every week – without waiting until the end of the financial year to reap the rewards. With a PAYG withholding variation, you can receive the $152 tax break each time you’re paid.

Where does this leave you? While your output still stays at $601, your combined rent and tax coming in weekly of $652 means you’re now receiving an extra $51 in your pocket each week.

HOW TO FIND POSITIVE CASH FLOW PROPERTIES

Investing in positive cash flow properties is not always easy, in fact they can be hard to find and may not make the most sense for your wider investment strategy.

Historically, these properties are located in more regional or rural areas, where there is high rental yield but lower capital growth. The issue is that these also tend to be high risk areas like mining towns or university areas that rely on one type of economy or tenant.

However, that’s not to say it’s impossible to find positive cash flow properties in major population areas – you just need to be able to spot locations that are poised for growth.

There are also properties that provide multiple incomes that can become positively geared or positively cash flowed if you manage to choose them well.

BUYING MULTIPLE INCOME STREAMS

Buying dual income properties can really be the golden ticket for an investor. Here are some of our favourites:

Duplex

A duplex consists of two adjoining properties that often sit under the same title. Think of it like a block of land that has been subdivided into two townhouses or two flats.

As an investor you’re able to receive income from both residences, which if you’ve chosen the location well, could have projected returns of six to seven percent.

Granny flat

A granny flat is a self-contained, secondary dwelling that is usually the size of a studio apartment built behind your existing property.

These properties are a super fast way for investors or even just homeowners to build equity in real estate.

Shop-top housing

A shop-top property is where a residential dwelling occupies the same lot as a retail space. Generally, you’d see it as an apartment above or behind a shop.

Shop-top housing is one way investors can opt to diversify their portfolio across the residential and commercial property markets.

Room-by-room rentals

Room by room rentals require a lot more research to keep up with compliance but are a great win for investors if you can make it work.

Essentially, you’ll flip rooms on one bigger property into smaller, self-contained living quarters with kitchenettes and bathrooms. These are popular for renting amongst university students.

You could also approach a government agency to rent the rooms as a group, which could make life easier in the long-run as your contract would be with the one provider of tenants rather than multiple individuals.

THE NEXT STEPS OF INVESTING IN POSITIVE CASH FLOW PROPERTY

While this is just a guide to investing in positive cash flow property, the real education comes from connecting with a property mentor or coach.

At TRC-Gorod we have the know-how and the proven experience at finding cash flow positive investment properties around Australia.

We also have the best tips on avoiding negative cash flow properties which we share through our free real estate investing seminars along with our advice on the best markets to invest in, how to get started in investing, and how to invest with minimal risk.

Register now to join the next seminar near you.

Here’s a question for you – when you signed your bank loan agreement to secure funds for a mortgage, did your contract contain an all monies mortgage clause?

Regardless of whether or not the answer is yes or no, all property investors must understand the all monies mortgage meaning, and how they can avoid the risks associated with it.

In most typical cases, getting a mortgage with a bank for personal or investment purposes is fairly straight-forward.

You simply go through a lender or mortgage broker who does all the checks and measures to determine if you qualify for the loan and then BOOM, you sign on the dotted line and suddenly you’re a homeowner – congratulations!

Accept, what did you actually sign? Are you 100 per cent across all of the terms and conditions of the agreement?

For example, did you know that the money in your bank account used for direct debits, or all of the money sitting in your offset or redraw accounts – AND even the funds due to you at settlement or any payments made in advance, can actually be kept by the bank.

Yes, that’s right….the bank can potentially keep it under the all monies mortgage clause.

WHAT IS AN ALL MONIES MORTGAGE CLAUSE?

An all monies mortgage clause in Australia lets your lender use your home as security against any other debts you may have with that lender.

An all monies clause example is that you have a mortgage with a lender. You then apply for a credit card with that same lender. If you happen to default on that credit card, your home could technically be at risk because that mortgage extends over to all debts you have with the bank.

It’s quite common when you start out as a property investor to use the same bank you used for your Primary Place of Residence (PPR), for your property investment loans.

You know them, they know you – they have your savings, you use their credit cards, it’s all one log-in and easy to transfer money between accounts.

Sounds OK right? WRONG.

If you set up your lending like this you may encounter the all monies mortgage clause.

THE RISK OF CROSS-SECURITISATION

What this means is that all your money with the bank can be used to cover any shortfalls on any lending valuation you have with the bank.

So how do they do this? They do it by what is commonly known as cross-securitisation or cross-collateralisation.

What does this mean for you?

It means the bank will use equity in the higher valued property, often your own home, as the security to buy your next property. Sounds good doesn’t it as you don’t have to come up with as much money for a deposit.

Cross-collateralisation could seem attractive for many Aussie homeowners, with recent property values having soared over the last couple of years. That means there’s an abundance of equity sitting in the market place and putting it to good use by buying an investment property is a smart choice for future financial freedom. But tying everything up with one bank is what could lead to later pitfalls.

Here’s what you need to know…

By using this strategy, eventually, you get to a point where the bank will stop lending you money.

In extreme cases, when you sell one of your properties, the all monies clause lets your bank take proceeds of that sale and apply it to your other loans. They do this to decrease their liability so the bank has less financial risk by decreasing their exposure.

HOW THE ALL MONIES MORTGAGE CLAUSE COULD IMPACT YOU

Don’t think this could impact you? The truth is, it could. According to ASIC (the Australian Securities and Investment Commission) between 2012 and 2017 almost 550,000 credit card accounts were in arrears.

An article by the Australian Broker further confirmed that an “additional 930,000 were considered persistent debt and 435,000 account holders were only making ‘small’ repayments”.

The reality is that many Aussie’s carry high levels of debt, and the bank can pounce any time that they want to claim it back if you’ve signed an agreement with an all monies mortgage clause.

If the Covid-19 pandemic taught us anything, it’s that people’s financial position can change very quickly. Almost overnight, many regions around Australia were put into a snap lock down which put hundreds of thousands of people in a predicament where they could not work.

Sadly, because of this, jobs were lost. The hardest part was that so many Australians were caught out financially as they did not have the buffers or savings in place to go the distance required to remain secure throughout this period.

AUSTRALIA’S DEBT CRISIS

Lack of safety buffers combined with the high levels of personal debt that the country carries is putting people at risk.

In fact, according to Finder.com.au, when it comes to global comparisons of household debt, Australians rank fourth highest in the world next to Denmark, the Netherlands and Norway.

Furthermore, the website says that as of 2016, Australia’s total personal debt was around $2 trillion and the average Australian household owed $250,000. This debt can be broken down into the following categories of mortgage and investor debt, personal debt, student debt and credit card debt.

Now of course, there is a big difference between good and bad debt which you can learn all about here. However, the moral of the story is that if something unexpected happens (and in life it does), and you can not service the current debt you hold – under the all monies mortgage clause, you’re left fully exposed and potentially compromised.

HOW TO AVOID FINANCIAL LOSS

Real estate investing can be your biggest asset but also expensive, time-consuming and stressful when you get it wrong. This is why success starts with a strong team who can fully back you to make substantial gains.

These people are specialists who can explain the key areas of risk and how to safely mitigate it in order to build and manage your portfolio.

Areas such as the all monies mortgage clause are just some of the issues people trip up on without properly understanding key aspects of the property process, including areas such contractual agreements that can have a huge impact down the line without people realising.

To avoid these kinds of mistakes, at TRC-Gorod we always advise you have the following people on your team:

– A property strategist expert (the captain of your team – a coach, mentor, investor and advisor who understands your big picture strategy)

– A finance expert

– An acquisitions expert

– A property management expert

– An accounting expert

– A financial planning expert

Whether it’s an all monies mortgage bank clause, or a different area of real estate – you want to know that there are experienced people out there who have your back and can support you throughout the process.

WHAT THE ALL MONIES MORTGAGE CLAUSE CAN TEACH PROPERTY INVESTORS

The lesson?

Know how to be safe with your money. Know when, what and how to cross securitise your portfolio safely OR better still, don’t do it at all.

The way you structure your finances and seek professional help can put you in a position where you’re not vulnerable or at the mercy of the banks. The all monies mortgage clause is just one of many things to watch out for when applying for a loan.

The most important thing you can do today to protect the future of your property investments (or potential ones) is to get educated.

Join our free property investment seminar where you’ll learn the foundations of real estate investing and understand how it can contribute massively to your financial freedom.

Spaces are limited in each session so secure your spot now.

Register now for the free property investor webinar here.

To succeed as a property investor, there is one fundamental component you need – a plan. You need a plan that leaves no bases uncovered that would potentially cause issues in the future.

I often meet people who have done just about every real estate education seminar that’s been offered in Australia or New Zealand. They will explain that they have continuously researched many groups and philosophies yet when questioned on what action they have taken following the event; the answer is a resounding ‘NOTHING’!

This type of behaviour is called analysis paralysis.

IF YOU DON’T PLAN, YOU PLAN TO FAIL

Acquiring knowledge is one thing but if you can’t implement it, it becomes almost useless.

You see, most people will just create a default future and sadly for many Australians and Kiwis, the result is that they end up on the pension. The statistics are, from every 100 people born, 75 will end up in retirement using the pension system to survive.

Alarming!

If you don’t like how things are, change them with the understanding that improving yourself is not a one-time thing, but rather a constant challenge!

I will not let a week go by without some sort of self-improvement. I usually allocate a whole day to work on my goals, ideas and dreams.

It doesn’t matter what our structure looks like or how we go about shaping it, but it’s important we have clear direction around what it is that we’re trying to achieve. Otherwise, we just stay stagnant. We just sort of plod along.

PLAN OR PLOD?

Of course, that’s ok if you are choosing to plod! Some people make a life out of plodding.

The other day, I drove past a surfer’s car that bore the slogan, “If you work, you obviously don’t surf”. What a great habit for those choosing to plod along!

But many of us don’t want to plod, we want to make a difference.

Unfortunately, a lot of people don’t realise that it isn’t difficult to change and start making a difference.

THE FUTURE IS WHAT YOU MAKE IT

You can choose to live any way you wish. In fact, you can make the next decade dramatically different from the previous one, but only if you choose to. You have to accept change and be open to it – even greet it with wide-open arms, because it is what will help you move forward.

We set out in our lives on a particular course, based on what we know. Yet, we cannot rely on loopholes and tight squeezes to get by in life, it is far better to rely on goal setting and good habits.

The truth is, you can map out your future. That may be, for example, retiring on $100,000 passive income per year.

If that’s what you need, you just have to set a goal and create a plan. Sitting on the fence just means you are delaying facing up to the reality that one day you need income to live off beyond your job.

In order to set goals for the future you need to develop habits.

Good habits allow you to break down an unsuccessful routine and reroute yourself to what you should be focusing on. The habits that I continually seek to improve are:

• Investing
• Spending habits
• Education
• Self-motivation
• Health and travel
• Relationships

A BASIC ROAD MAP

Don’t have a plan? Well, you can use my basic road map!

First up, let’s set a goal in real estate, that I call an “automatic acquisition plan”.

When I first started in real estate, my acquisition plan focused on acquiring one property every second year, with the aim of having five properties in 10 years.

It’s like going to the dentist – you create a reminder in your calendar to call your dentist for a check-up, but this time you do it for property. This will allow you to be consistent and consistency allows us to ensure our goals become a reality.

So, what happens when you buy one property every second year for the next 10 years? You end up with a multi-million dollar portfolio. That doesn’t sound too bad, does it?

Let’s say that portfolio is worth two million. Well, then it’s just holding on for the ride.

GET A CUSTOMISED STEP BY STEP FRAMEWORK

Generally, in Australia and New Zealand property grows faster than inflation and, in the past, property has doubled in value from seven to 18 years. Meaning you can become a property millionaire very quickly.

It sounds easy, and to be honest with the right plan it is! Understand the tried and true strategies successful property investors use to grow immense wealth.

Develop a step by step property plan that will lead to passive income at our free property investors’ seminar.

Here you’ll learn how to take advantage of the current market landscape, as well as the chance to have one of our property experts assess your exact situation and establish an actionable road map that’s right for you.

Register now for the free property investor webinar

By Sam Saggers

Buying a winning property and creating a deal that, as we say in the industry “stacks up,” takes endurance and commitment so don’t rush into anything.

Most real estate is sold in the market to illiterate buyers who are impatient, emotional and who consider themselves too time-poor to show persistence and conduct proper due diligence.

Crunching deals will allow you to view real estate in a whole new light and will establish the real ROI of your investment.

When you analyse a deal, it is wise to take it through the following steps to ensure you have a basic level understanding of the property itself and how it fits into its environment.

FEASIBILITY RULE NO#1: RETURN ON DEPOSIT

Cash on cash is a term all investors should acquaint themselves with when they analyse a deal. The return on deposit percentage gives you the most accurate indicator of how fast you can do this. Here, your goal is to ensure your capital is in and out of the market within two years at the latest.

For example, if you were to put $30,000 in the market, accumulate the asset and achieve growth over 12 months to gain a further $30,000, this is considered to be a 100 per cent cash on cash return.

To put even more simply, if you had $30,000 in the bank and at the end of 12 months you had your original $30,000 plus another $30,000, you would have a pretty good deal.

Cash on cash is the same principle, only it’s achieved through the property market. It allows you to secure and retain your asset, but still have a readily available deposit to fund a new investment.

FEASIBILITY RULE NO#2: PROPERTY FINANCE

Make sure you understand what the typical finance requirements for the area are.

It is important to note that mortgage insurers and banks have classifications for various areas in the property market regarding how risky they believe the particular property market actually is and they will adjust their maximum lending criteria based on their risk rating.

The reason why they do this is they are simply protecting themselves as a business in case someone they approve a mortgage for fails to make repayments and then the bank is forced to take the property back and sell it on the local market to reclaim their monies.

If a particular market is very flat or does not look desirable the bank may ask you to put more skin into the game so to speak by lowering their maximum loan to value ratio to 80 per cent for example.

Properties can often look wonderful until you consider how much capital is required as a deposit. You need to run feasibility on lending when you are buying.

FEASIBILITY RULE NO#3: MARKET VALUE

To determine the sale-price range of properties in a particular area, it’s best to organise them by price.

This will identify the lowest priced property compared to others in the suburb which establishes a guide for how much discount to seek or when to walk away. If a property is priced well below others in the area, asking for a discount is not necessary. The best thing to do is snap it up! Money will be made “on the way in” due to good research and knowledge of the market.

FEASIBILITY RULE NO#4: THE RETURNS

Running the numbers is of huge importance. A property could look great on the surface, but until you measure the rental return, the outgoings and associated costs, you won’t know how much the true cost is per week.

No more than 30 per cent of the property income should be lost to outgoings and rents should be no lower than four per cent return at a bare minimum.

The property will still need further clarification, but as a rule, you never want to be too negative with property as it will drop its serviceability, leaving your wage or income to be the major contributor to the property’s upkeep.

This will often lead to being stuck and unable to buy again.

START WITH A PLAN

Before you buy, you should have a plan in place that guides you on what to buy, where and for how much. Your plan should also include the next steps to build out your portfolio and the experts you’ll need on your team to ensure your success is sealed.

Get started on your property investing plan at one of our free property investing seminars.

Here you’ll discover the most crucial components you’ll need to consider when building a booming property portfolio.

Register now for the free property investor webinar. 

Ever wonder how people can save up just one deposit but end up going on to buy multiple properties?

We have the answer! But first…

Buying an investment property and growing a portfolio that is going to generate long-term wealth is a discipline of business. In basic terms, this means you have to have a clear understanding of how you’re going to maximise your profits.

Because of this, every investor needs to be able to develop a cash on cash strategy to help bank roll their property endeavours to ensure they have a functional and profitable business model.

THE CASH ON CASH FORMULA

When buying real estate, you need to find a deposit, which usually isn’t provided by a bank or lender and generally has to come from your own savings.

For a property transaction, it can be anywhere between five and 30 per cent of the loan amount. The deposit is, essentially, your capital and it’s never wise to invest capital unless you’re sure you will get results.

The formula that’s used to measure the likely performance of your deposit is known as cash on cash return.

THE CASH YOU PUT IN…

Essentially, these monetary returns are the fundamental instrument to building a successful property portfolio.

So many property investors are blind to this concept and how it works. To be completely honest, when I purchased my first place, I too was unaware and ended up paying the ultimate price. You see, I bought a property with my life savings and injected $30,000 into the market that I couldn’t afford to lose. When the market didn’t grow, I was unable to get that capital back in the form of equity. As you can imagine this was a tough lesson to learn and one you want to avoid.

Seasoned investors measure cash on cash returns in 12 month increments.

THE CASH YOU GET OUT…

For example, if you were to put $30,000 in the market, accumulate the asset and achieve growth over twelve months to gain a further $30,000, this is considered to be a 100 per cent cash on cash return.

To put even more simply, if you had $30,000 in the bank and at the end of 12 months you had your original $30,000 plus another $30,000, you would have a pretty good deal.

Cash on cash is the same principle, only it’s achieved through the property market. It allows you to secure and retain your asset, but still have a readily available deposit to fund a new investment.

Return on capital is the true cornerstone of advancement. Never buy a property as an investment if you cannot get a high cash on cash result. Cash is king and recycling more of it allows you to re- invest.

BANKROLLING YOUR CASH ON CASH

So how do you stack the deck to ensure you’re going to end up in a cash on cash position to be able to continue to build a strong performing property portfolio?

You need a good understanding of real estate as an investment.

Real estate is one of the only assets that works for you while you’re sleeping. Value of real estate rises in either capital growth or rental growth all day, every day, without any input from you, meaning all you have to do is sit back and watch your bricks and mortar appreciate!

However, it’s not true that you can simply snap up any old property and expect it to have great capital growth. In 2021 and beyond you will have to buy real estate based on a variety of factors such as location and liveability.

LEARN THE ESSENTIAL PROPERTY INVESTOR BASICS

Staying up to date with current market trends and predictions will be key to making sound and sustainable investing decisions that will offer long-term gains in an uncertain and changing future.

Get ahead of the game and arm yourself with the tools and resources to help you thrive as a property investor. We are offering a free a property investing seminar for people serious about learning how they can create a future of security and freedom through the vehicle of real estate.

Don’t leave it to chance. Discover the most important real estate buying fundamentals today.

Register now for the free property investor webinar.