In this day and age, it’s not enough to just buy an investment property and hope that riches will follow. Unless the property is extraordinary, it simply isn’t possible to retire on one piece of real estate – which is where the majority of Australian investors end their portfolio.
That’s why you’ve got to have a strategy in place that focuses on buying several properties over several years, like our 10-in-10 principle.
Key to your successful strategy is optimising your finances. Consulting with an independent financial advisor and a mortgage broker is your best bet for working out the optimal setup for your situation, but I want to give you some ideas to help you get started.
Have a working budget
Creating and working within your budget will assist you to control your spending, ensure you’re saving for a deposit and that you have a buffer for each property you purchase. Once you’ve purchased, don’t sit back and relax – update your budget and keep saving. Being able to prove you have a grip on your money is essential for gaining approval from lenders.
Use the equity in your own home
If your home has some equity in it, you can use that instead of a cash deposit. This might be just what you need to get you into your first or next investment property and give you some time to save for the next one.
Set up an offset account to pay down your home loan
You can manufacture more equity in your home by offsetting it with your savings. Have everything paid into an offset account that’s linked to your mortgage – including incoming rents from any existing investments you have – and your savings will act as a payment on your mortgage. This reduces the interest and dramatically shortens the term of the loan.
Use interest-only loans for your investment properties
You’ll pay less on your monthly repayments if you opt for an interest-only loan, which can reduce the money you outlay if your property is negatively geared.
If you buy a positively geared property, you can save the extra income generated by the rent to use for your next property deposit.
See your tax accountant promptly
Getting your tax refund as quickly as possible means that this amount could be used to contribute to your next deposit; in the meantime, this deposit amount can be placed in your offset account against your mortgage while you continue to save.
You can also ask your accountant to contact the ATO on your behalf to have your estimated tax return portioned out with your weekly pay, which gives you more cash in hand throughout the year. Any adjustments are made when you submit your tax return.
When you buy a property, use these strategies to improve your cashflow and springboard to the next:
1. Look for properties below market value. This gives you instant equity you can access for another property.
2. Find properties that will increase in value with some cosmetic improvements. You might be able to leverage a higher rental yield after some TLC to the property, which means more money to boost your deposit or buffer.
3. Balance negative gearing with positive gearing. Negatively geared investments are great for tax deductions, but it’s up to you to fork out the difference between the loan repayment and rental income. By balancing your buying strategy with some positive cashflow properties, you can reduce or eliminate the negative gap.
4. Increase your borrowing power. Increasing your income, decreasing your spending, having a focus on saving, and lowering your credit card limits are easy ways to look more attractive to lenders.
Whatever strategy you decide on, make sure you don’t lose steam after your first property. Keep up the momentum, keep your finances in order, and keep on track. Before you know it, you’ll be snowballing onto your third, fourth or fifth property, and your financial freedom will start to become well within reach!
Til next time, happy investing!
Helen Collier-Kogtevs is the Managing Director of Real Wealth Australia, a leading education and mentoring company for real estate investors. Not only is she a highly successful property investor and an educator, but also a best-selling author, and a philanthropist.
Helen is particularly passionate about helping people, especially people who are keen to create wealth and make a difference in their lives, and she has been mentoring thousands of new and experienced investors in their pursuit of wealth creation through property.
She founded Real Wealth Australia to mentor investors create wealth and financial freedom by focusing on helping them build an investment strategy to fit their individual goals, rather than focusing on one particular investing method using her successful “10 Properties in 10 Years™” system.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.