This Simple Investment Strategy Can Work Even In A Decling Market
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It’s a really good idea to have a strategy that can work even in a declining market, especially given the current conditions of the Australian property market as a whole. Is there a strategy where you can achieve financial freedom even investing in a potentially declining market?
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0:00 – Introduction
0:30 – You don’t WANT to invest in a declining market, you want to protect yourself from risk
1:40 – We have to admit that yes there is risk of a decline, but there are also chances of the market growing
2:18 – The strategy is…positive cash flow properties
3:18 – The reason positive cash flow properties can work even in a declining market
4:46 – What about rent going backwards?
7:27 – Positive cash flow properties pay themselves off and when you own it outright that cash flow becomes yours
10:03 – It’s so important to do your market research
11:09 – You want to purchase a property where you can manufacture growth
11:47 – Given the current market it’s important to have a strategy that can work if the market goes backwards
12:50 – Something I love about this strategy
15:12 – I lean towards metro markets at the moment over regional markets
15:48 – What you can do if you want to explore this strategy more
Recommended Resources Mentioned In This Video:
Positive Cash Flow Is Underrated – https://www.youtube.com/watch?v=08oBO2C-5_4
Advanced Suburb Research – https://onproperty.com.au/research/
Australian Property Bubble Interview with Steve Keen – https://www.youtube.com/watch?v=brX18YrTPTY
2 Properties To Financial Freedom – https://www.youtube.com/watch?v=Pj8gLiDEz8Y
When investing in property, given current market conditions, it’s a really good idea to have a strategy that can work even in a declining market. So even if the market goes back for a period of time, you can still make money and you can still be successful and you can still achieve financial freedom. So in this episode I want to talk about a strategy that works even in a declining market. Hi, I’m Ryan from on-property, helping you achieve financial freedom. And I just want to say from the outset that this is not me recommending that you, that you invest in a declining market. Obviously we want to invest in property that is going to grow. We don’t want to go out and seek properties that are going to go backwards in value. I’m sure there’s sound strategies out there that can be really successful and make a lot of money from properties going back in value.
But that’s not what I’m talking about. I’m talking about, given the current market conditions, a lot of people out there are nervous to invest because I feel like the market may go backwards for a short period of time. Sydney and Melbourne definitely look like they’re going to go backwards. Brisbane, we’re not so sure about it looks like it may continue to grow, but obviously there’s the chance that Sydney and Melbourne can drag down the entire Australian property market as well as changes with appro. Making it harder to lend could have an effect as well as potentially a global recession could affect the market. So is it possible to invest knowing that there’s these risks out there, but we can still make money even if this worst case scenario does happen? Because we have to admit that yes, there may be a risk of the market is declining, but also there’s the potential for markets growing as well.
So it’s up to you whether you decide that you want to invest or not given current market conditions, but there’s a lot of people out there that realize that the market may still grow, especially somewhere like Brisbane that’s hardly grown over the last 10 years, kind of has more potential than maybe Sydney or Melbourne, which had the big booms. So there’s a lot of people that may want to invest because they can see the potential for growth, but they’re nervous about the downside risks. So let’s get into it and talk about this strategy and the strategy is really simple. Okay. And we’re going to look at positive cashflow properties. Now in the past, in order to find positive cash flow properties, you really had to go out to regional centers in order to find them where her rental yields are higher and find specific properties that have certain characteristics that generate higher until yields.
But by working with Ben Everingham from pumped on property, we’ve now realized that you can quite easily generate a positive cash flow property in a metro market by building a granny flat so you don’t buy it. And it’s positive cash flow, but you can create the positive cashflow through building a granny flat. So we’re not talking about positive cashflow. I’m not talking about properties that are really cheap in some unknown country town because given current market conditions, I don’t think I would feel confident investing in smaller areas. I would want to stick to the metro markets. But obviously what you do is up to you. And so the reason positive cash flow properties can work even in a declining market, is that your making money from day one. So if you’re investing in property that generates more income than you’re paying in expenses, then you’re actually making money through the rental income on the property.
So you’re getting a return on investment from the rental money that’s coming in after you’ve paid all your expenses. So this means that you’re not reliant on capital growth in order to make money. So people who invest in negatively geared properties, they’re actually in the opposite situation where they’re losing money from day one. So when they invest in the property, obviously there put a deposit down, but there’s more expenses than the rental income. That’s coming in. So there are therefore paying money out of their pocket every single week, every single month. In order to keep that property afloat, they need that property to grow and for that growth to exceed the money that they’re putting into it in order to make a profit and to make any money. But in a declining market where the property isn’t growing and is in fact potentially going backwards, you’re both losing money in the cash flow that you have to pay out every single month and you’re losing money in the decline in value of a property.
So if you’re investing in property that’s positive cashflow, if the property is declining in value, you’re still generating that cashflow and you’re still making money. Now when markets do go backwards, rent does go backwards as well. So that’s definitely something to consider. I have recently moved to Sydney. I’m in the Sutherland Shire in Cronulla. Uh, you can see at the moment, right near the beach and then my mom’s place. It’s really good spot filming today, but in Granola rents are currently going backwards. So I’m looking at rentals at the moment and a lot of rentals on the market are listing for a certain price and then a couple of weeks later the dropping by $20 or something like that. And so rents do go backwards when the market goes backwards. But this is the interesting thing and this is something that I learned from Steve Keen when I invested, not when I invested, when I interviewed him and talked about the potential Australian property bubble a couple of years ago, I asked him about when markets crash due, rents go backwards as significantly as prices.
And he suggested that no rent don’t go backwards as much as price falls in an area. And this is because rents are directly tied to how much money people earn, whereas purchasing a property is tied to how much money people learn. But it’s also tied to how much money they can borrow and what the interest rates are at the moment. So when someone’s renting a property like myself, I’m looking to rent a new place at the moment I look at my income and how much I’m earning. And then now we at, okay, how much can I afford to pay in rent? That’s generally around the 30% of someone’s income level is what they’ll pay in rent. But when it comes to purchasing a property, people do the same sort of figure out what can I afford to buy. But they also look at, given current interest rates, how much can they afford to borrow?
So when interest rates are really low, like at the moment, they can borrow a significant amount of money in order to purchase a property and that can drive prices up. And then when lending gets harder or interest rates go up, then people can’t afford it as much. So it drives prices down. So property prices can be tied to lending as well, whereas rent them more directly tied to what people earn. So unless you have a major recession where people are earning a lot less money than rents tend to be more stable than prices, or at least that’s what I gathered from what Steve Keene was telling me. So even when a market’s declining, you rent may go backwards, but you’re still likely going to be in a positive cashflow position and you can still make money. Also, when it comes to investing in positive cashflow properties, you have a, uh, hate using the word guaranteed.
I need another word to explain it. You have an almost certain future ahead of you where that property will be paid off. So if you’re negatively geared, you need to continue working in order to pay that property off over the next 25 years. And it’s going to take many, many years before that property to become positive cashflow. Unless you’ve invented with invested with a good rental yield and you’re nearly there or you pay a lot of that money off yourself. But with positive cashflow property when you purchased that property and it’s positive cashflow, it will go on to pay itself off. And so even in a declining market, if you can stay in that positive cashflow position and you can continue to pay off the principle of your property, maybe over a 25 year period through the rental income that’s coming in as you own that property, over time, that property is going to go ahead and pay itself off.
So even if markets declined a bit before they bounce back, or even if you, let’s say you purchase a property and it never grows in value fr like ever. Okay, we’re talking no inflation, we’re talking no growth in value at all, but what you rent it for today, you stay at and what you purchase it for, it stays at that value so you can never really sell it to access capital growth. What happens if you’re in that bad situation? We’ll have your positive cashflow and you’re paying off the principal of the property with the actual rental income that you’d have. Eventually over the term of that loan, the property will get completely paid off and when the property is completely paid off, what can you do with the extra cashflow that used to go towards the mortgage? Well now that extra cash flow can go into your pocket and so you can still feasibly actually achieve financial freedom through investing in positive cashflow properties even if those properties don’t grow.
Now I want to say again, you want to invest in properties that grow. You want to get the capital growth that’s going to lower your loan to value ratio, which is going to lower your risk significantly, give you more exit plans, more exit strategies that you can implement. Growth in an area also tends to lead to growth in rent as well, which is going to improve your cashflow and allow you to pay off that property faster. So you want to invest in areas that are going to grow. This is why it’s so important to do your market research like me and Ben always talk about and we’ve been talking about for years. You want to look at the Herron, Todd white month in review report, and if this is the first time you’ve heard of it, Google HTW month in review report and have a look at that and shows where the major markets are likely at in their property cycle.
Are they at the peak, are they declining, are they at the bottom of the cycle and likely to be rising in the future. You want to identify markets that are likely to grow. And then once you’ve done that, you want to do your summer research and identify the most promising suburbs within that market that are again likely to outperform surrounding areas. If you need help doing suburb research, go to on-property dot com.au or you forge that suburb. And I do have a course over there on an advanced suburb research where you can start to understand which of these suburbs are most likely to grow. So go ahead and check that out. That’s a paid course if you’re interested. So you want to do your market research, you want to do your suburb research, then you want to purchase a property that has the ability to manufacture growth to create growth through something like a renovation or maybe development or you can create growth and cashflow through building a granny flat.
Now building a granny flat at this point in time doesn’t seem to add equity to a property, especially when we’re talking about bank valuations versus sales because banks don’t seem to know exactly how to value these properties. So building granny flats, there’s not really an equity play that’s more a cashflow play, but you want to invest in properties that are great for the suburb that also had the potential to manufacture growth. So you still want to be looking for that growth. You still want to be trying to get that growth, but I think it’s important given the current market situation to also have a strategy that can work if the market goes backwards. Because none of us have a crystal ball. We can only take control of what we can take control of. We can do our market research, we can do our suburb research, do our property research.
We can invest in the best property, in the best suburb of the best market. We can do that, we can do that, but there’s no guarantees that that market is going to grow. There’s no guarantees in anything because we don’t have a crystal ball. I wish we did. I wish we knew. But the goal is here is to take control, to do everything within your power, to invest in a market that’s going to grow, but to also be prepared and invest using a strategy that if the market doesn’t grow or if the market does slip backwards for a little bit, that you can still continue to make money and you can continue to stay afloat. And what I love about this strategy as well is that not only can it work in a market that goes backwards for a time, it’s probably not going to work in a market where the property is just continued to go backwards forever and ever and vacancy rates go up and you can’t rent the property, then it’s not going to work.
Okay. It’s not going to work in every single situation. That’s not what I’m saying. Talking about markets that may slip back for a bit before they grow, but something that I love about this strategy as well is that it can work even if your life starts to fall apart. Even if you lose your job or your income suffers or you have health issues or things like that. If you’re positive cashflow, then this property is paying for itself and I’ve done a whole video on this about how positive cashflow is underrated and talking about how you have life risks that when you invest in negative geared property, you’re adding extra risks to your investment portfolio because you need to be earning a stable income to keep that portfolio of float and that’s an extra risk because if you lose that stable income, then you lose the portfolio.
Whereas investing with positive cashflow property that’s holding itself up, that’s paying for itself, it is now independent of your life and independent of the stability of your income. It can pay for itself. It doesn’t need you and even in the fact that you do lose your income, it can actually come in to save the day, which my passive income assets, which are online businesses came in to save the day for me. So I’ll link up to that video in the description down below if you want to learn more about that. But I love that this strategy, investing in positive cash flow properties can work even in a market that declines for a bit and it can work regardless of your life circumstances and regardless of the income that you’re generating in your life because it doesn’t need you in order to pay for itself and to stay afloat.
I also love that even if markets don’t grow, and remember we’re doing everything we can to an invest in a market that will grow, but even if it doesn’t, even if it just stays stable and ticks along, eventually it’s going to pay itself off. And that income that was going towards the mortgage can now go in our pocket once it’s completely paid off. So I hope this gets your brain ticking, gets you thinking about positive cashflow property. Again, given the current market, I do lean more heavily towards metro markets at the moment, which is why I’m so excited about the two properties to financial freedom strategy versus looking at regional markets and country towns and small areas like I probably did in the past, so I love the stability of the metro markets. I love investing in those areas now and talking about that and that’s why buying a property that you can manufacture cashflow by building a granny flat on it I feel is a very worthy strategy of consideration at this point in time.
If this resonates with you, if you want to start exploring that two properties to financial freedom strategy, then there’s two things that you can do. Firstly, if you want one on one help, if you need that help, your probably ready to buy in the next maybe three to six months, but you need someone to help you find the right property in that metro market that can generate the cash flow. Then go to on property.com dot Aau and book your Free Strategy Session over there with the team over at pumped on property so you can talk to them about your situation, where you’re at with your financial goals are and they can help you know what the next steps are. You can then go and take those next steps yourself or if you feel like it’s a good fit and you want to hire them to help you find and acquire those properties, then obviously you can go ahead and do that if you let them know you came from on property.
I do get a referral fee for that as well, so I do like to let everyone know about that, but yeah, so we’ve got to on property.com.you book a free strategy session. If you want that one on one help, if you just want to learn more and think about doing it yourself, then check out the two properties to financial freedom video that I did with Ben Everingham. So I will link that up down below or on the side here on Youtube. Or you can just go to youtube and search two properties to financial freedom. If you want to learn more, that goes for about an hour and explains the concept in more details. So go ahead. Either book a Free Strategy Session on property.com.eu or go and watch the video on two properties to financial freedom. I wish you the absolute best in this market. I hope you can take steps to move yourself towards financial freedom and until next time, stay positive.