The key to improving your cash flow and the serviceability of your loans is simple. “Think of property investment in the same way you would fund a new business,” advises Empire Property CEO Chris Gray.
Gray says that when you buy or start a brand new business is it unlikely to make a profit in the first few years and that is something that entrepreneurs usually prepare for.
“They put in working capital. For example, if it costs $100,000 to buy a business and the business loses $10,000 a year they might borrow $150,000 to have five years of spare cash flow,” Gray says.
Gray adds that if an investor were to apply this business capital mindset to their property portfolio, they would need to borrow additional money on top of the value of the property they are purchasing.
“If a property costs you $500,000 to buy and the difference between the rent and the mortgage is $10-15,000 a year then you should borrow an extra $75,000 so that you can afford to cash-flow the property for the first five years.”
Borrowing more money than you need for the property, but having it stored up to support your mortgage payments is not as complicated as it may sound, according to Gray.
In the August edition of Your Investment Property, Gray provides a detailed rundown of exactly how investors can do it. This includes real life numbers, tax considerations and handy tips for structuring it in such a way that your property can be negatively geared, but not blow a hole in your wallet.
The advice he recommends applies to investors who already own a negatively geared investment, as well as those looking at negative gearing as their purchasing strategy.
The August edition is available here.
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