‘Leverage’ is the Magic Word
Do you want to accelerate your path to financial freedom? If so, you need to know about the power of leverage and how it applies to investing. Leverage is amplifying the power of your money, time and knowledge.
To illustrate this, let’s make a comparison between investing in the sharemarket using no leverage, and investing in positive cash flow real estate using leverage.
The difference is because the banks won’t normally lend to invest in the sharemarket, but will often lend 80% or more to enable you to purchase real estate.
Sharemarket: $100,000 invested is $100.000 of your own money in shares.
Returns- if the return is 5% your return is just that; 5% on your own money
Property: $100,000 invested, but $80,000 (80%) is borrowed and you put in only $20,000 of your own money.
Returns- 5% return on $100,000 invested = $5000. As only $20,000 of your own money was invested this is a 25% return on your own money.
Using the above figures, the return on your money invested in property (using leverage), is five times greater than the return on your money invested in the sharemarket (no leverage)!
Caution: with any leveraged/geared investment your gains can be increased, but so can your losses. Ensure your property is cash flow positive i.e creates you a profit before tax when all expenses, including borrowings, are included.
There are other types of leverage you might want to utilise. You can leverge your time by getting a good property manager and you can leverage your knowledge by using people who have already done it.
Read Robert Kiyosaki’s book “Retire Young, Retire Rich.” It’s all about leverage.
Disclaimer: this is not intended to be financial advice and is for guidance only. If you are interested in using leverage please consult a professional.
7 Real Estate Negotiating Tips
When we started out investing in real estate, as members of the Property Investors Association we heard an interesting talk by Dolf de Roos who is a well-known, international property investor and author, although he was born in NZ.
You may have already heard of Dolf, as he’s a colleague of Robert Kiyosaki who wrote the “Rich Dad Poor Dad” series.
Keen to get going with a property portfolio, I attended a weekend seminar by Dolf on property investing, and learnt the basics along with a lot of very useful strategies, which gave us a great head start in the game.
Here are Dolf’s Negotiating Tips:
- Don’t fall in love with the property.
- Be prepared to compromise
- Focus on your top priorities and don’t let your emotions get in the way
- Have a maximum figure in mind that you will not exceed before you begin to negotiate
- Offer a reasonable price
- Avoid ‘low-balling’
- Remember good cashflow is your bottom line, not the purchase price of the property.
It is essential to do the figures when you are buying investment property. You need to get a good spreadsheet or alternatively you can purchase property analysis software. See What is Positive Cash Flow property?
Dolf has REAP (Real Estate Aquisistion Program) software available on his site. Also Dolf’s books and courses are a mine of information for those starting out.
Why Positive Cash Flow is Important
If you don’t buy well and your property rental doesn’t cover all your expenses, you’ll have to make up the shortfall from your own pocket.
A positive cash flow property covers all expenses. Any spare income can be used as a deposit on your next property.
Tip: If you want to build a property portfolio it’s a good idea to get a fixed rate ‘interest only’ loan. Paying principal early on will reduce surplus income and is likely to impact on your ability to borrow and expand, as will insufficent equity.
Photo by Free Photos for Websites
Negative gearing, on the other hand, works by making a loss on property and claiming an after-tax refund for this. The trouble with this approach is that you are losing money.
We were making money with someone else’s money and we could’ve kept going except for the fact that there was a downturn in the market and it got progressively harder to purchase properties under market value.
Now the markets have crashed those good times to purchase real estate are here again. Do your sums and happy buying.
Disclaimer: These techniques worked well for us however we would always recommend getting professional advice before proceeding with any purchase.
A Twenty Thousand Dollar Weekend
Another way to make money out of real estate is by buying and selling again for a profit.
If you want to be financially free don’t do this… you need cash flow. A true investor buys and holds.
The only reason we decided to ‘do-up’ and sell our next property was that it was ‘border-line’ positive cash flow and we couldn’t find any way to get more out of it. The section wasn’t big enough to add a minor dwelling to.
It took us a week or so to clean up the house…paint, carpets etc and a bit of landscaping. See the difference! And we sold it for a good profit.
We first heard about this technique from Dolf de Roos. He referred to it as a $20,000 weekend (or week in this case!).
Don’t do this too much or the IRD will regard you as a trader and come after you! (In NZ anyway!)
Not bad, huh?
I Don’t Have Enough Houses!
Still on the search for ‘positive cash flow’ property and the second one was much harder to find. It seemed all of Auckland had been at Dolf de Roos ‘ three day property seminar that I had attended! We would have to be creative.
My husband had a brainwave. He ‘letter dropped’ the area we were interested in and, despite being chased by a crazed man growling like a dog(!), his plan worked.
We had two replies and bought another house just down the road from the first. This one had a large section so we were able to add a three bedroom minor dwelling and ‘hey presto’, another stream of rental income. Having two streams of income like this means less risk. Should one lot of tenants move out unexpectedly, you will still have some money coming in.
A note on this strategy is when you come to sell, the property will mainly be of interest to investors. They will want a bargain! So, don’t sell!!
What is Positive Cash Flow Property?
A positive cash flow property is where the rental income exceeds all associated costs, preferably before tax.
(‘After tax’ returns may well be higher taking allowances for depreciation and tax deductions into account).
To work this out make up your own spreadsheet or download one from the internet. Dolf de Roos is one well known property investor I know of who sells software for doing this.
Your spreadsheet needs to include the following:
- Interest and loan costs
- Insurance
- Maintenance
- Rates
- Bank and accounting fees
- A property manager (if you employ one)
We employed a property manager and she was worth her weight in gold. Many investors end up selling their rentals as they find the upkeep and tenants too much of a hassle. Cost it into your spreadsheet…let a professional deal with the problems! It’s worth it.
Here are some photos of our first purchase. It was a house with a minor dwelling at the back. Two streams of income reduces your risk.
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