Hi people, I need clarification with this whole concept of investment property's…. I understand that you buy a property at a good price, add value, have it re valued and use the equity to fund the next property right, and keep going until you have bought enough. One thing I get confused with is that when you refinance you pay exey fees to do so, your loan repayments are higher so you have to find the extra money to cover that, so how do's your wealth increase when basically you are really increasing debt against yourself, how do you actually become wealthy unless you sell the property's at a higher price less capital gains. Please explain in simple terms how you can become wealthy with your methods , thanks in advance……
If you keep buying neg geared properties each time, then yes, your out of pocket expenses keep increasing. The trick is to buy, or create properties that cost nothing to hold, and even return you a profit in cashflow. So, you either have to look for pos geared properties (hard to find now) or pos cashflow after tax properties (much easier to find).
When you run your numbers for each purchase, part of it will be the loan, or debt on the property, but there is also rent and tax deductions and maybe depreciation to offset the loan debt.
So even though there is more debt, there is also more income. It's all relevant, and as you accumulate more properties, the numbers and percentages are the same, just with more zeros on the end.
Also, the increasing number of properties gives you more exposure to the rising values. If you have 5 properties worth $250k each, and they go up in value by 5% per year, then that's $62,500 per year.
That's more than most people earn in a year, and you've done nothing to get it. Even if each property cost you $50 per week out of pocket (which would be a strain for most people to carry), after each year you have spent $13k to earn $62,500. Still a decent return for your money spent, and it's not taxed unless you sell.
Obviously you can't spend this wealth that's been created until you've either sold some of the properties, or are living off the increasing equity (L.O.E).
Once your properties' values have increased enough, you can either sell some of them and pay out the debts, keeping some which are debt free, with a pos cashflow for life. Or, you can tap the equity (L.O.E) and spend some of it for living. This is actually a loan, but the idea is to only use that amount that will be less than the properties are increasing in value each year.
For example; your five $250k properties double in value after 10 years. They are now worth $2.5 mill. You still owe $1.25 mill.
If they continue to increase in value by 5% per year, then you are making $125k per year. If you use L.O.E of say $50k to live off, you still increase your nett worth by $75k, less the interest on the $50k L.O.E. ($4,000). So your nett worth increase would be $71k.
L.O.E is also tax free, as it is a loan – not income. You would only do it if you had considerable equity in your properties, and you are disciplined in your spending.
Thank you >>>>>>>>>
Thanks again Marc for your insight, can you tell me of any one who could review a person's situation and set them on a structured path, I have eight propertys.
John
You have a good start to your portfolio with 8 properties however the structure of the portfolio is important.
If you want to shoot me an email i can have a quick look at your position and make some structured advice.
My concerns are that they are cross collateralised so we might have a bit of a web to untangle.Richard Taylor | Australia's leading private lender
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