How to think like a seasoned property investor.
Unveiling the Strategies
Congratulations you have won $500,000 in the lotto! Well not really, but what would you do if you won $500,000? Everyone talks about this at some stage, but this little exercise will help you to start thinking like a seasoned property investor right away!
Take a moment to write down what you would do with that money.
Things we would do if we won $500,000:
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Many people would say that they would pay off their house or buy a new house outright with no debt. In fact, the great majority of people would do that. Almost every new client that we help says the same thing to us when they start out.
You can probably hear your parents now in the back of your head. “Buy a home and own it outright” they would say to you. That sounds like very good advice, doesn’t it?
Well actually, it’s not. Let’s look at what would happen if you did follow that advice.
Let’s say you purchased a $480,000 home and used the remaining $20,000 to cover your stamp duty and other costs. In seven years’ time, if the property market stays true to form, the property will be worth $960,000. If we also say that you managed to save $25,000 a year because you didn’t have to pay a mortgage, then you would also have a total savings of $175,000. Therefore, you would be worth about $1.135 million. That sounds like a fantastic result, doesn’t it? Well, a property investor would beg to differ.
An experienced property investor wouldn’t do that. They would buy as many properties as they can handle. Because a property investor understands the difference between ‘Good Debt’ and ‘Bad Debt’.
To put it simply:
Good Debt is debt used to buy an asset that goes up in value.
Bad Debt is debt that is used to buy an asset that goes down in value.
What would a property investor do? Have you ever asked yourself
So what would the property investor do with the $500,000 lotto win? Let’s work through an example. Let’s say the property investor conservatively decides to buy four houses each worth $500,000. They use $100,000 as a 20% deposit, $20,000 to cover the stamp duty etc. and borrow $400,000 from the banks for each of the properties. So each property costs them $120,000 of their own cash, leaving them $20,000 cash ($500K minus 4 x $120K = $20K) to use as a buffer to help them handle the portfolio.
So they start with a portfolio worth $2 million, and $1.6 million of good debt.
They live in the first property and receive $1,500 per week from the three properties they are renting out ($500 per week each). Let’s say they have been really conservative, and acquired older properties in blue-chip locations where the rent returns and tax depreciation benefits aren’t that great; and as such those investment properties don’t initially pay for themselves by about $100 per week after tax.
And guess what? They couldn’t be happier! Because, as Sir Winston Churchill said, ‘They know what’s going to happen in the future because they have studied the past’. Now let’s see what happens in one double cycle’s time. A ‘double cycle’ is the number of years it takes for the market to double in price (historically 7-10 years in Australia depending on location and decade).
After one double cycle, the portfolio will be worth $4 million! If worse case, they haven’t paid off any of the loans and stayed on interest-only throughout, they will still owe $1.6 million. But that’s okay because they are now worth $2.4 million dollars! ($4 million minus the $1.6 million debt) That’s a far better result than the previous course of action where they were worth about half that at $1.35 million.
But that’s not all! As the properties have gone up in value, so has the rent!
If the rent has doubled too, they now receive $1,000 per week on each investment property or a total of $3,000 per week. If we allow for our holding costs to have gone up a little bit with inflation they are probably going to be a total of $2,000 per week. But now instead of breaking even, we now have a surplus of $1,000 per week! And we can spend that on whatever we feel like! Can you see now how property investors manage to retire early?
Think about how much they will be getting in another double-cycle’s time, not to mention the portfolio growth! What were you doing 7-10 years ago? It wasn’t that long ago, was it?
Wipe out your mortgage. It’s a simple strategy called chunking
At this time you may be thinking, “that’s all well and good guys, but I still have a mortgage on my own home”, and that’s a good point!
Now can we show you how to wipe that mortgage out using a simple strategy called ‘chunking’?
Now that each of your properties are worth twice what they were when you acquired them ($1 million each), and you only owe $400,000 on each of them, the banks will let you increase the mortgage on one of them to 80% of its new value (or $800,000).
So you simply go to the first investment property, borrow another $400,000 against it, which you can easily cover with the increased rent you’re now receiving, and use the cash to pay off your own home in one transaction! How fantastic is that? Forget ever trying to pay off your home the old-fashioned way ever again.
You see when you slug away at a mortgage by trying to pay it off with your minimal surplus income, you are ‘working for money’. That’s the hard way to do it. The easy way to do it is to have investment properties working for you by going up in value and rent received, and then using that money to pay off your own home. Take a moment to let that sink in…..because it’s a massive shift in your way of thinking that is going to change your life!
So now you understand the power of property investing and how property investors think. Imagine how much money you could make if you only used 10% deposits and purchased 6 or 7 properties! The result would be far superior again. The leverage power of borrowing money to buy property is amazing!
But there is still one slight problem! You haven’t won the lotto, have you? Sorry about that. What if we can show you how to build a $2 million portfolio from scratch so you can then hold it for one double cycle and make your millions? Would you appreciate that?
Then just keep reading these blogs…
~Integrity Team
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