“How do you build wealth by investing in property?” asks a hot-headed geezer right off a bad turn in the stock market. “I heard you’re doing well yourself. How do you do it?”
The real estate mogul looks at him quizzically, not to ponder whether to answer this type of question for the thousandth time—he already knows what to say—, but rather how to answer it.
You see, it is important to assess every individual before you tell them what you know.
The answer is always surprisingly simple, whether you already own property or not. Each and every property investor, including that mogul, started exactly where you are now – with no experience. He probably had the same worries.
But he also had a strategy; a strategy that he would later use to build wealth from his real estate dealings.
Starting a property portfolio is not that difficult. Getting above average returns is. When you have an end goal right from the start, making it to wealth status is just a matter of time.
Here’s How to Invest in Property Using a Wealth Building Strategy
What’s Your Strategy?
The topic of building wealth sparks a range of debates. Quirky “get rich quick” schemes thrive on this. In a bid to get rich, people drop worthwhile endeavours in pursuit of transactions that they might otherwise have never considered. This always ends badly.
When you set out to build wealth through property investing, consider the kind of strategy that you’re going to employ. There are a multitude of strategies, but two stand out above all. They come in form of returns—rental income and capital growth.
Rental Income puts money directly in your pockets. This is if there’s any that’s left after costs have been subtracted; an indication of positive cash flow (later on this).
You purchase a low value property. Rent it out. The income received from it not only covers all of the expenses associated with owning it, but also provides you with your profit.
Capital Growth, on the other hand, is for the long haul. Over time, properties usually increase in value and this is what we count on. Australian property prices have doubled every 10 years for the past 100 or so years.
In this case you put down a fixed amount on a property. When its value increases, you make a profit off the difference between your purchase price and sale price.
The big thing here is to make sure you have a good source of cashflow, either from your job or your business to maintain your repayments.
You also need a good tax strategy to minimise your taxes and to take advantage of all the tax benefits property has to offer you.
Wealth Building
It’s important to note that wealth from property investing cannot be derived from only an income. Most property investment professionals recommend capital growth as part of as successful property investment strategy.
Real wealth is achievable through long-term capital appreciation. It’s far more effective for someone that’s trying to build wealth to control a growing property portfolio than to rely on rental returns.
So, How do you Approach Capital Growth?
The basis of this strategy is in purchasing properties that will provide above average growth in the long term. The rental yields on these properties are maybe low. Or somewhat “negatively geared,” which means that expenses such as loan interest, maintenance, and taxes exceed the rental income derived from the property. Even then, the real juice is in capital appreciation over an extended period of time.
A property whose value is growing at a moderate 6% per annum (including the weekly holding costs) will always beat cash flow positive property that brings in say $2,500 every year. We’ve seen house prices grow at much wilder figures than 6%. For example in 2015 up to the third quarter, house prices in Sydney rose by a whopping 19.9%.
As this is a medium- to long-term commitment, with at least a five to ten year haul, you need to give capital a chance to grow or to recover from short-term dips in the market.
Ultimately, the type of property that you choose to buy depends on your circumstances and attitude towards risk. But for a successful wealth creation strategy, you have to incorporate capital growth into your overall approach.
Avoid purchasing one property in isolation. If your real goal is to create the financial freedom, you need a bigger portfolio. And a mentor with a successful track record. Every successful person stands on the shoulders of someone that is more successful.
As an aside, if you are running a portfolio of properties it makes sense to include some high yielding ones. The extra cash can be used to cover net outgoings for the low yielding properties—the capital growth properties. This will help you in balancing your portfolio.
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