Property That Pays For Itself EXPLAINED
How can property pay for itself, pay itself off and then ultimately deliver you financial freedom?
Hey, are you amazing investors out there? I recently had a really great question from someone on my YouTube channel, asking me a bit more about the two year strategy or the two properties to financial freedom strategy. And asking what is the difference between this and just buying property and being a slave to your job and having to pay it off over 25 years? How can property actually pay for itself? And how can property actually pay itself off. And this is a concept that I guess really clicked in my mind back when I was a teenager. And I could see the long term potential of property to deliver financial freedom and deliver the life that I want. I got really passionate about positive cash flow property. And I guess I haven’t really stopped since. And reading Robert Kiyosaki his books like Rich Dad, Poor Dad, really ingrained this into me. But I understand that not everyone can see this, not everyone understands this. So I’m hopeful that in today’s episode, I can click something in your brain, so that you can start to understand, I guess, the dynamics behind how property can pay for itself and generate positive cash flow, and how it can pay itself off. So the way most people invest in Australia is that they’ll purchase a property, maybe a single income home, or maybe they’ll purchase a unit or something like that. And they get some money coming in in terms of rental income. So let’s just write rent here.
So they get some rental income coming in. But then they have money going out in terms of their expenses, we’ll just write XP for expenses. And so expenses includes everything like your mortgage, your property management fees, any vacancies you have on the property, maintenance on the property council rates, water, insurances, there’s so many things to think about. Now, the way most people invest, it’s called negative gearing. And these expenses are much larger. And so we’ll do a large circle, then the rent. And so what that means is that you use the rent to pay for some of the expenses. But then there’s still a good chunk of the expenses left over. So let’s pretend that this section here is the expenses left over. And now you still need to pay those expenses, that might be your mortgage, it might be some maintenance on the property. And in order to pay those expenses, you’re going to have to have a job or an income source of your own, I just draw a tie there, you’re going to have to have an income source of your own to pay those expenses. And to keep that property going. This continues until that property is paid off completely. In which case, once it’s paid off completely, because you don’t have a mortgage anymore, you’ve now got smaller expenses, and likely your rents going up over time as well. So your rent is now bigger than your expenses. And if we cut the rent in half, and let’s say this bit is the bit left over, well, that actually go ahead and goes into your pocket. Okay? That is the worst I’ve ever drawn in my life, what’s sort of like a happy happy face because you get some passive income coming in. So that’s kind of the way most people do it negative gearing, but it takes a long time in order to get to this situation where your mortgage is paid off. And you can start living off the rental income minus the little expenses you have left. So let’s actually put some numbers behind this and have a look at it. So I’m going to go over the property tools.com.au, which is a calculator that I created years ago. And you can get access to it too, if you want for a small monthly fee. So that’s a property tools.com.au. And let’s use an example here, let’s say we purchase a property for let’s call it $500,000, or a unit, or it could be a house or a unit doesn’t really matter. At this point. Let’s say we get rental income from that property at $400 per week. So that’s a rental yield of 4.16%. That’s kind of even optimistic in cities like Sydney, at the moment, and it might only be $350, or 3.64%. But we’ll leave it at 400. For now, interest rate of 5%. Obviously, interest rates are much lower at the moment around 3%. But let’s just use 5% for this example. And what we can see is that our weekly cash flow before tax is in the negative or negative $111.31. As an estimate. This is assuming we put down a 20% deposit paid for our closing costs. And then it’s looking at property manager fees of 6% vacancies a 5% repairs and maintenance of $1,000 per year insurance of 1000 per year council rates of 2000 and bank fees are 300 per year. You may also need to add in some water rates there. So maybe you need to pay 500 and water rates. If you’re in a unit who knows maybe you’ve got $2,000 a year in body corporate fees as well. So let’s go ahead and add that in. And we can see that our cash flow has actually gone to minus $159.39. So proximately minus $160 per week on this property, or around minus $1,300 per year, that’s money that we need to find out of our own pocket in order to pay for this property. And this calculator does interest only. So this property is not even paying itself off, the mortgage isn’t going down, or anything like that. If we go to a mortgage repayment calculator, I like to use the IMG one, I just find it really simple and easy. And if we use the same example of a loan amount, 400,000, so a 500,000 minus 20%, we’re going to interest rate of 5%. And then principal and interest, we’ll change that to weekly, we can see that our weekly payments of 539. If we want to be paying off the mortgage over 25 years, and interest only, if we go back to interest only, you can say it’s only 384. So the difference between that is what about $150 per week, as well, if we want to be paying it off. So we’re looking at here, minus 160 ad 150, you’re looking at minus $300 or so per week, just to keep this property afloat, and to be paying off the mortgage over 25 years. So that’s going to take you a while before that property is paying for itself and delivering you anything. In fact, it’s negatively affected your lifestyle, you’re hoping that over time, the value will go up and the rents will go up. But at the moment, you know, it’s kind of eating you alive at around minus 160 or minus $300 per week, how much would the rental income need to go up to actually push us above that, you know, minus 300 per week, if we got to 600 per week, then at least were positive cash flow on interest only. But we still got that $160 $150 extra to make up so 700 per week, 800 per week, okay, be somewhere around like $750 per week. So we need to go up from 400 to $750 per week in order for you to be in a situation where that property is paying for itself and paying itself off over that loan term of 25 years. So as you can see, that’s going to take quite a while the brain needs to almost double in order for you to get into that position. And in that time you’re paying for itself. So how can property actually pay for itself or what you want to have is a situation where the rent, even in the beginning is actually bigger than the expenses in the beginning. And that’s what we call positive cash flow.
So when you have that situation, then the property is at least paying for itself, and maybe even paying itself off. So the way that we do this in the two years strategy, or the two properties to financial freedom strategy is we still go ahead and we still purchase this house. But then we go ahead and we build a granny flat on that property as well. So a two bedroom granny flat on the property that we can rent out separately to the house. And this changes things dramatically when we look at the expenses of the property. So let’s go ahead and reset this, we’re going to look at purchasing a property for around $400,000 instead of the $500,000. And then we’re going to add $120,000 on to that for the build of the granny flat. So that’s going to come out to $520,000 in total rental income from the house will probably be around 380 or $400 per week. But then rental income for the granny flat, you’re generally looking at around, you know 280 to around 320 per week. So we add those of you looking at somewhere in the vicinity of $700 per week in terms of rental income, and we’re looking again at a 5% interest rate, which I know is high compared to today’s standards. today’s standards are somewhere around 3% or even lower. So Fine, let’s use today’s standards are 3%. But you know, realistically more looking at five, maybe even looking at 7% sort of long term interest rates. But for the sake of today, let’s look around 3%. Now what we can see is that the rental yield for this property is now 7%. And the weekly cash flow before tax is around $300 positive. So this means Okay, we put a deposit down at 20%. We’re paying our property manager fees, vacancy rates, repairs, insurance council rates, bank fees, there’s no strata because we purchase a house, not a unit, we might need to add in some water rates there. So let’s put in $1,000 of water rates that affects us by 20 bucks a week. So your weekly cash flow before tax. have $281 so what this means is if we go back to this example is that the rent is completely covering the expenses and then over here you’ve got an extra $281 per week left over so if rent crosses out expenses those two just pay for each other then you’ve got this $281 left over now on this property we’ve got a mortgage so let’s write mortgage over here sorry for my bad writing it’s quite difficult to write with a mouse as you probably use the text but that’s okay so we’ve got our mortgage over here so this rent covering expenses is covering the interest of the mortgage so that’s one of the expenses of the interest but it’s not actually paying off the mortgage or making it any less but what we can do with this $291 per week or you know $14,000 nearly $15,000 per year is that we can then pour that back into the mortgage if we so desire or we can put that money into an offset account which then offsets our mortgage which then lowers our interest and lowers our expenses on that mortgage so this extra money the property is paying for itself so you don’t need your job let’s draw the tie here again you don’t need your job in order to pay for the expenses because the rent has already paid for the expenses so your job can go into let’s throw your happy face here because yeah should pay extra money for my property i’m so happy your job can just pay for you and to pay for your life over here okay so you’re kind of let’s draw a line down here you’re in your own silo here where your job needs to pay for your lifestyle and then you’ve purchased the property and kind of put it in its own i like to call it a silo of self contained unit where it’s paying for its expenses completely and then you’ve got this extra money leftover that you’re then pouring back into the mortgage or into the offset account until eventually over time now it takes years maybe 10 1520 years that property has completely paid off the mortgage and these expenses will then become smaller and then the rental income you can then pour into your life and does that make sense so the way this works how does property pay for itself you’ve got rental income that is greater than the expenses so the rent fully covers all the expenses and has a bit left over to pay
off the mortgage the way we achieve that in the two year strategy is by buying a high quality house in a metro market good area set for growth but then we build a granny flat on that to get that cash flow if we just purchased the house then chances are we’d be negatively geared but because we build the granny flat and go that extra income as well it puts us in this positive cash flow situation now you could actually take this turn and $81 and you can do what you want with it you can actually pour that into your life at this point so that you can start to partially live off it or achieve yeah part time financial freedom through this positive cash flow but obviously if you’re using it for your own life then that means you’re not using it in order to pay off the mortgage on the property so if you’re putting it into your own life you’re not paying off the mortgage as fast so you need to kind of make that decision but that’s why an offset account can be so good as well because you can put the money into an offset account which then offsets the mortgage but if you need that money at any point maybe you want to go ahead and invest again or maybe you need that money for some other thing then you actually have access to it so you’re not paying off the mortgage but you’re offsetting it and speak to a mortgage broker or your bank advisor about doing that but that’s how property can pay for itself and over time that’s how property can also completely pay itself off and when the property has completely paid itself off let’s go let’s go back here that means you’ve got no mortgage on the property you’ve got a small amount of expenses but then you’ve got a much larger rent coming in so we look at that situation here we’re just going to put a deposit at 100% because that is going to make our interest zero and then you can start to see how the cash flow dramatically increases on this property so you can say that you know $700 per week and our expenses are you know less than $180 per week on that property and so times that by two let’s say we do 1040 let’s say we do that with two properties you can start to see a yearly cash flow before tax of around $60,000 per year times that by four properties you’re looking at $120,000 per year over time once you’ve pay the mortgage off so down the line so you purchase the property it’s paying for itself paying itself off eventually over time it’s completely paid off you got a little bit of expenses left but the majority of the rent is then going to go ahead and go into your pocket and the difference between this and irregular strategy is you don’t have all those years where you have to work a job in order to pay for the expenses of the property because the property is covering itself so that’s positive cash flow in a nutshell that’s what positive cash flow property is but i hope explaining it in this way has helped to show you how it can pay for itself pay itself off over time and how in just a couple of years you can purchase a foundation of properties so you can purchase one of these two these four of these they’re all paying themselves off and over time eventually you’ll reach this situation but the properties are doing it for you they’re paying off for you so that’s the essence of the two year strategy is that you spent two years or however long it is for you to acquire these assets build the granny flats get them in that positive cash flow position and then you just leave them to do their thing and then you go on being happy person here living your life so if you want to learn more about that strategy if you want to work out okay how can i implement this in my own life to get from where i am now to where i want to be then we do offer free strategy sessions so you can head over to onproperty com au forward slash strategy you can get on the phone to someone and talk about how this strategy might work for you what sort of areas might this work in or maybe you need a completely different strategy altogether and that’s fine as well so that’s a complimentary session again go to onproperty com au forward slash strategy you can book a time get on the phone with someone talk about where you are where you want to go in your property investment journey and they can help you map out a strategy to get you there i wish you the absolute best in your property investment journey and until next time stay positive