Creating a passive income is essential if you want to gain your financial freedom, and property is a great way to generate passive income. In this blog post I want to show you how to create a passive income through property investing.
Property is an exceptional investment for passive income as both rental incomes and the value of your property are almost guaranteed to go up every 10 years. Rental increases provide you with more passive income and the increase in the value of your property provides you with more money to grow your investment portfolio.
There are two major ways to generate a passive income through property.
Positive Geared Property
This is property where the rental income is greater than the expenses. For example, if you received $500/week in rental income and only payed $400/week for all of your expenses (including your mortgage) then you would have a property that was $100/week positive cash flowed.
If you want to generate a passive income through positive cash flowed property then you can fast track your results by buying property that is positive cash flowed or close to positive cash flowed to start with. This way you won’t have to wait as long to start receiving an income from your property.
For cash flow purposes it is often helpful to start off with an interest only loan while the rental income is less than your expenses. This lowers your out of pocket expenses and gives you more cash flow to invest with. Then, when rental incomes increase, you can change your loan from interest only to principle and interest and let the tenants pay off your property for you.
If you bought 10 properties in the next 10-20 years all generating a rental income of $300/week then, when the loans were paid off, you could receive an income of $150,000/year (minus expenses). Obviously buying 10 properties takes time, but it is definitely achievable.
The other way to generate a passive income from property is through accessing the equity as the property increases in value.
When your property increases in value, then that increase is what is known as your equity. If you buy a property for $300,000 and it increases to $400,000 then you have had an equity increase of $100,000.
You can either access this equity by selling the property of by borrowing against the equity.
If you bought 10 properties in the next 10 years and each doubled in value every decade (it is not uncommon for property to double every 7-10 years) then you could almost certainly live indefinitely by borrowing against the equity.
If you bought property #1 for $300,000 ten years ago then today it might be worth $600,000. You would then have $300,000 equity that you could borrow against. If you borrowed just $100,000 then you could take that money and live off it.
It is likely that rental incomes in this time have gone up enough to support the extra $100,000 loan without you having to pay anything out of your pocket.
The next year you borrow against property #2, then the following year property #3 and so on. This strategy relies on all your properties increasing in value and having rental incomes increase so that you can service the increase in your loans.
The Advantage of Property Over Shares
The biggest advantage of property over shares is that the banks will lend you 80-95% of the purchase price. So you can accelerate your growth.
Shares are much harder to borrow against and thus it can take longer to generate a passive income large enough to become financially free.
Shares can still be a great investment strategy, and you can generate passive income through dividends and through capital growth. But the difficulty to borrow against shares makes growing your portfolio quickly harder.
If you can master property, and learn how to do it will then the profits it can bring you will be immense. How many investments allow you to put a down payment of just 5-20% and then get someone else to pay for that investment for you? If you do property well you are literally using other people’s money to buy your investment (the bank’s money) and then you are using other people’s money to pay off your loan (the tenants money.) In the end you end up completely owning the property and you only paid for a small portion of it.
By using positive cash flow property as an investment strategy you can create a passive income. For more information on how to find positive cash flow property sign up for our weekly newsletter and get a free eBook “How To Find Positive Cash Flow Property”.