How Investment Property Works (In The Real World) (Ep206)
Investment property as a way to achieve financial freedom looks great on paper. But how does investment property work in the real world?
The goal when people invest in properties is usually to make money and there are three different ways of doing that:
- Positive Cash Flow–The income coming from a property is greater than the expenses resulting in a surplus of cash every cycle (whether it’s weekly, monthly, yearly, etc.).
- Capital Growth–A property goes up in value and the growth results in a profit.
- Tax Advantages–This could be done through a process like depreciation where you earn a high income, pay a high tax and make an on-paper loss on your property to where you can get some tax back. You are not making a profit on the property but the offset of the tax benefit can make it profitable overall.
When you are investing in the real world it is important to know that the first property is usually going to be the hardest property that you purchase because there is so much to learn such as:
- Lending (and its criteria)
- Types of loans
- Researching areas
- Types of properties
- Investment strategies
The list goes on. That’s often why investing in the first property is the hardest for a lot of people. There is a lot of fear that’s going to hold you back because there is so much to learn and your first time is mostly taking a stab in the dark.
When you invest in a property and you’re negatively geared you feel the pinch right away. A negatively geared property means you are paying more in expenses than you’re getting back from income. Investing is meant to be a way to create a better lifestyle for ourselves but if your property is negatively geared then it’s going to be harder for you to do that.
If your property is positively geared then it pays for itself. However you would most likely need to use that excess money to save up a “kiddy” which is for miscellaneous expenses or unforeseen situations like repairs. So for positive cash flow properties you’re not going to see a big benefit because the extra money has to be put towards other expenses like your mortgage or saving up for another property.
Even after purchasing your first property it’s not all downhill from there. Most people know that owning just one property isn’t enough. Eventually you’re going to start saving another deposit for your next property or take out an equity loan (once your first property increases in value) if you don’t save a deposit (which will put you in more debt). From there your expenses mount so you have to take many factors into account like paying for the property when there are no tenants.
Depending on how much you invest you could feel a lot of stress but I’m confident that you’re going to find some way to do it. When we put ourselves in a situation where we can either sink or swim, most of us are going to find a way to swim and survive tough situations so that we can make a property investment work and help us achieve financial freedom.
From what I’ve seen and read about investing in property people try to find a method that works and repeat it whether it’s investing in negative/positive cash flow properties or developing properties. One of the great things about property is that there are so many different ways to invest and still be successful. But for everyone I’ve spoken to they tend to fumble around in the dark for a few years before they find a method that works. Once they find that method they repeat the process over and over to generate profit in a similar way. Every property deal they do gets better and they learn the ins and outs.
Remember though that property is not a one size fits all. A method that works for one person may not work for you. So like many other people you have to fumble around in the dark for a while before you find your path to success.
I think how investment properties work in the real world is that its hard to get into your first property but if you’re dedicated and keep learning you’ll find a method that brings you financial success.
Until tomorrow remember that your long term success is only achieved one day at a time.