The capital growth properties will substantially build your wealth and the cash flow properties give you the means to do so. You need a balance of both in a portfolio, and there are a few tricks to doing this successfully, which GRA can show you.
- Cash flow property: These properties provide you with income (cash flow). The rent covers all the costs of owning the property (including loan payments) and provides a surplus above this.
- Capital growth property: These are the properties that increase in value markedly over time due to their location. Usually the rental income does not cover the costs of ownership, so you have to inject money from elsewhere. Your family home should also come under the category of capital growth property.
Two of the techniques property investors like to use for buy and hold properties are:
- Buy at a discount: Buying under market value de-risks your investment, and means you've made instant capital gains. Usually you'll have to manufacture your own discount (meaning they don't actually grow on trees), and GRA can teach you some strategies for doing this.
- Aim for zero cost ownership: By this we mean pay nothing and get the capital gains for free. Another term for zero cost ownership is 'no money down deals'. This means your properties are 100% financed and pay for themselves (rent covering all the costs of ownership including loan repayments).
Let's say you find a property that last year was $330K, but this year at mortgagee sale you can get it for $220K. You borrow 100% of the purchase price using other property you own (say your home) as security for the purchase. Or maybe you use a relative's property, get some vendor finance, or perhaps you borrow the deposit if you need to.
Because you've paid $110K less than what the previous owner paid, you've effectively created a 33% discount off the old value of the property. Generally, property values always recover to their former peak sale price, and continue to grow over time. It's just a waiting game.
Rented at $375 per week with interest at 7%, you have break even cash flow (before any tax refund) and you are 100% financed. Wow! That means as the property recovers and grows in value over time, you get the capital growth for free - and while you wait for the recovery, the rent covers all outgoings including loan interest costs.
Sometimes it won't be possible to borrow the entire purchase price upfront to buy a property, but by implementing your investment strategy correctly, you'll be able to make it a no money down deal in the not to distant future. When the property's value has increased, you refinance your loan, effectively pulling out your deposit, so you have none of your own money left in the deal.
Not every property (e.g. those in high capital growth areas) will generate enough cash flow to be able to pay for itself like the one in our example, but it is possible create a zero cost property portfolio overall, and that's what successful investors aim for.
Zero cost ownership is a great recession strategy, very low risk in our view.
Property trading involves buying a property and then on-selling it for a profit. The main ways investors make such profits are by buying for a discount and then selling at market value, or by increasing a property's value through renovations. Working out the costs involved (including tax and GST) is very important in ensuring you really do make a profit, and GRA can provide expert advice in this area.
Rent by the room:
Buying a property with many rooms and renting it out on a room-by-room basis, is a very effective way of increasing cash flow. As part of the arrangement you provide internet, shared facilities, and agree that each tenant is only liable for their single room. Here are some figures to illustrate how such an arrangement might look.
Say the property is worth $550 per week as a 5-bedroom house. On a rent-by-the-room basis, you can get $180 for each room, or $900 per week, which represents a vast improvement in cash flow.
The rent-by-the-room strategy will not work with every multi-bedroom property and is best suited to those in areas popular with students. You also need to be careful you don't cross over into boarding house territory, which is more complicated with regard to regulations and tax.
Development covers a broad spectrum of activities including subdivision (turning a larger piece of land on one title into two or three lots with their own separate titles), small scale infill housing (subdividing and then building on the new lots), or larger development projects for commercial or residential property.
Matthew Gilligan has developed over 220 sections and built many houses for resale. His expertise in development, strong background in taxation and legal structures, and on-the-job experience in property make him a great advisor to have in your team for planning and conducting property developments and putting your fundamentals in place.
Getting the structures right, getting the banking right, and planning the costing and project management are things GRA can start you off in the right direction with.
Lease options are like rent-to-buy arrangements. You find someone (called a tenant-buyer) who wants to own their first home. You enter into a legal agreement whereby they will purchase the home from you for an agreed price at a specified date in the future, and in the meantime they can live in the property. The lease option contract states that they pay you market value rent plus a second payment, called an 'Option Consideration'. When they are ready or able to, they exercise their option to buy and you credit them with all the option consideration paid to date. If you have a house that cost you $250K and they sign it up at $350K, you pick up the margin and their option consideration payment makes the property well and truly cash flow positive all the way through.
If they do not strike the option, you get to keep the option consideration and can do it again with a new tenant-buyer. While they make excellent opportunities to create both cash flow and capital gain, lease options are complicated and you need expert advice before entering into one, so talk to the GRA team first.
Why have GRA as your property accountant?
The first key to successful property investment is to be set up correctly for asset protection and tax. This is a specialist area for which you need professional advice. GRA are experts in this field, and can help you structure your investments in a way that minimises your exposure to risk and maximises your returns.
The second key to successful property investment is to make sure the numbers work, and running any prospective purchase past an expert property accountant is highly advisable. It's easy to make mistakes when analysing deals, especially when you are first starting out, and this is where the experienced team at GRA can really help.
Key tools we use are:
Our 'Rental Analysis' tool. You can project/forecast your rental properties' results, looking at cash flow, capital growth, yields and all outputs. An essential piece of equipment.
Our 'Property Development Analysis' tool. You can project/forecast your property developments through our projection tool, applying a simple approach of 'filling in the blanks' to get a thumbnail overview of what your development will yield. This helps you avoid costly mistakes by working out in advance whether you will make money or not. Often interest, GST and selling costs, for example, are not factored in. We have all the costs identified.
Contact us today to about talk property portfolio development, how we can help you, and let us fire up your wealth creation programme through property now.