How to buy multiple properties that actually make you money
One in 12 Australians own an investment property. That seems like quite a few, right? If you are here, well done on getting this far. I always say the first property is always the hardest. But if the first property is always the hardest why is it that only one in 48 Australians go that one step further and buy two investment properties, or even rarer still, only 1% of Australians own 6 or more properties.
Now I’m not saying that every investor needs to own 6 or more properties to have success in investing. However, with my personal experience and working with many investors over many years at Profolio, I have found that if you want to make real wealth off property, and I mean real wealth, where you work towards replacing your income, pay off debt, and give yourself the lifestyle you want, you need to have at least a few properties working for you. But with so few people getting to the point where they have multiple properties, and multiple properties that are making them money, what should people do?
Buy for Cashflow AND Growth
At Profolio we break properties down into two different categories, cashflow properties and growth properties.
A cashflow property is a property that has a rental yield of 6% or over. As an example, if you had a rental property worth $300,000 which rents for $346pw, that is a yield of 6%. The formula to calculate rental yield is = (Annual Rent / Property Value) *100. A cashflow property usually brings in more money than what it costs to hold it, after tax.
These properties cost you no money out of your pocket to hold. However, the trade off with cashflow properties is usually because they bring in higher rents, they don’t grow in value as much. Albury/Wodonga is usually an area where you get cashflow properties.
A growth property is a property which grows more than 6%pa in value. A growth property are normally the properties that make you wealthy in the long run because a $400,000 growth property in 10 years at 6% growth would be worth $727,759. Whereas a cashflow property with a growth rate of 3% would be worth $539,741.
The trade off with growth properties though is they are most likely what you hear called; negatively geared, which means they cost more to hold than what they bring in through rent, meaning you must contribute money from your budget to hold on to it. The capital cities are usually where you find growth properties.
How does it work?
When I first started investing I invested for cashflow properties, I thought they were great. I could buy them and it would cost me no money out of my pocket to hold them. However, by the time I got to my fourth property I realised one very big problem with this strategy.
Because these properties don’t go up in value as much, I ran out of equity to use for further investments, so I was stuck. It was then that I realised the importance of having a mixture of cashflow and growth properties and why I have taught this method of portfolio building ever since.
I believe to build a sustainable portfolio that keeps your cashflow under control you need to build your portfolio using cashflow and growth properties. You can’t just buy growth properties because instead of running out of equity, you’ll run out of money to contribute to them every week sending you broke. You have to work out what type of property you need based on where your portfolio is sitting now, and purchasing in line with that. As a basic rule, you’ll need one to two cashflow properties for every growth property and the goal is to keep your portfolio with a neutral cashflow, meaning it breaks even after cost whilst you are in the
portfolio building stage.
Our job at Profolio is to look at your current portfolio and work out what you need to purchase next, how much you should spend, how you should structure it, and what you need it to return. We walk our clients through the process of portfolio building to ensure they don’t get stuck with only one property and not seeing the success they were hoping to out of their investment portfolio.
You can find out more by visiting our website at www.profolio.com.au or our Facebook page
For all KS Property Solutions clients, we offer a complimentary Goal Discovery session AND a Strategy session, valued at over $660. This is two appointments where we uncover where you are now, what your goals are, and then discuss strategy ideas for you to meet those goals.
Guest blog by Sarah Rogers, Principal Financial Planner and Property Investment Adviser of Profolio.