Financial Success Formula: Master Property Investing Basics To Create Wealth – Part Two

August 25, 2013 Sam Saggers

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The foundation of your property investing business is finances. Without capital your dreams of financial freedom will remain unrealised, so it’s vital that you get a handle on your money.

    Get your financials in order

  • Pay off consumer debt
  • As a property investor, you’ll quickly realise the less consumer debt you have, the better your ability to both purchase and service your investment properties.

  • Create and stick to a budget
  • Be honest with yourself. If you’re not disciplined with your finances your success will be limited at best. Keep close tabs on your ingoing and outgoing expenses, always seeking better ways to manage your money.

  • Obtain a copy of your credit file and have erroneous information removed and/or changed
  • You don’t want to experience any surprises when visiting your mortgage broker or loan officer. Know what your credit report says and keep a watch on it, checking it on a regular basis. If you find erroneous information, have it removed promptly.

  • Take care of any negative information
  • To address negative information, which may be accurate, you can contact the reporting companies directly or engage the services of a reputable credit repair company. There are legal ways to have negative information either removed or the effects mitigated.

    Grasp key concepts

  • What are buffers and why do I need them?
  • A key part of every budget should include funds set aside for legitimate expenses in connection with your investment property(ies). These monies are not to be used for the purchase of a luxury vehicle or extravagant holiday.

    Rather, the funds should sit in an offset account, earning compound interest until such a time as they’re needed for legitimate expenses in connection to your investment property(ies).

  • What is an offset account and why should I use one?
  • An offset account is simply a savings account, which is linked to your loan account. Let’s assume you have a mortgage for $100,000, which is linked to an offset account with a balance of $10,000. In this scenario, you would only accrue interest on $90,000 rather than the entire $100,000. You will still pay back the principal of $100,000, however, the interest will only be calculated on the $90,000.

    Do you see how quickly this can work in your favour? As your savings are reducing your loan, those repayments you make are more effectively reducing both the principal and interest on your mortgage.

    There are two different types of offset accounts: partial and 100% offset. Obviously, as they have grown in popularity, more people opt for the 100% offset account type.

  • What is money migration?
  • Money migration simply means that as investors, we’re looking all across the country for markets which are doing well and then putting our money where it has the greatest chances of growing. This involves all aspects of investing; strategies, timing the markets, setting up our structures and trading, when necessary to achieve our goals.

  • Which is better – positive or negative gearing? Does it matter?
  • A property is negatively geared when the expenses of ownership – including finance and maintenance costs – exceeds the rental income, resulting in a loss. Negative gearing deductions are most beneficial to people in high-income brackets where they are in the top marginal tax rate.

    Losses are then offset against other income (e.g. salary or business income) reducing the tax obligations of the owner. This strategy works very well for high-income individuals as the more money borrowed, the more interest charged, which can then be deducted 100% from the owner’s taxable income.

    A property that is geared positively means that the income derived from owning the property exceeds the financial and maintenance costs incurred. Monies received are then added onto the owner’s income and taxed at the appropriate rate. Both negative and positive gearing have their place in a property investor’s portfolio.

  • Is a positive cashflow property the same as positively geared property?
  • “Positively geared” property means it creates more income than expenses BEFORE tax, whereas positive cash flow property ONLY creates more income than expenses AFTER tax deductions and refunds are calculated.

  • Is one better than the other?
  • Put simply, no. The option you choose depends on your particular financial situation and the goals you’ve set for yourself.

    Typically, positively geared property is best unless you’re able to find property in a high growth area using a positive cashflow strategy. Generally, properties that are either new or newly renovated (high depreciation) hold the greatest potential to be positive cash flowed, because you can claim a greater “on paper” loss, thereby recovering more via tax refund.

    On the other hand, properties that are older and less expensive have the potential to offer a strong rental return, creating a positively geared property.

    It’s your choice to either lose money and recover it through taxes or earn money before taxes and offset the income received through tax deductions, essentially paying little to no tax.

For more of the basics of property investing, click here for part one of our series.

The final installment of our series of the basics of property investing is coming soon.

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