Today I want to talk about how to speed up your path to financial freedom through renovating and property.
So, there are a lot of people coming to us, wanting to change their lives through renovating and property, and generally when they first arrive they’ll say ” I want to do one or two projects a year to replace my income.”
So, what they’re usually referring to is buying and then selling called flipping. First, I need to dispel around some myths around flipping.
It is a very exciting thing to do, but the reality is it’s just like a job.
When you’re not working then you’re not earning.
And if you’re looking at replacing your income for the long term.
You need to build some equity in terms of a portfolio or we call it a money tree so you get that long term wealth building as well.
The other thing about flipping is that it’s the highest risk strategy, because it’s so short term that it relies on the market being stable and when there are fluctuations, you can get into trouble. So, what I would suggest to you if you’re happy with your means of cash flow ( whether its a job or a business, then don’t think about flipping.)
If you’re not happy with your means of cash flow and you want to get out of it straightaway, then obviously that might be the path you choose.
What’s your income goal?
The government tells us that you need to have about $60,000 per annum to live a comfortable life.
I’m pretty sure they were not referring to Sydney or Melbourne when they were saying that.
A lot of people that come to us want to know how to earn about a $100,000. And that’s the scenario I want to talk to you about today.
In this video, I am going to talk about replacing your income for the long term and how you might do that.
Okay, so I hope that defines the process.
What you want to do is build a portfolio that is going to produce for you a minimum of $100,000 cashflow.
Now, the first thing you do before you do anything is to sit down with your property accountant.
Work out the legal structures that you’re going to use to buy the properties. The reason you want to do this, like it or not, you’re running a business.
What you’re doing in that business is exposing your personal assets to risk. You want to quarantine them from the risk.
And how you do that is by using the legal structures and that needs to be done before you buy the properties, because once you buy the properties you can’t change the ownership without having to pay stamp duty. Make sure you set it up right first.
Set Up Finance
The next thing you need to do is to set up your finance.
Most people will set up a line of credit or an equity loan secured against another property, often their family home.
That’s for the deposit, the buying cost, any renovating costs and an investment loan for the actual property.
That’s the common way to set it up .
The problem with that is it’s a 100% borrowed money and most property that are rented out traditionally long term, would yield negatively, at least for the first 3 years and that’s not going to achieve what you want. So, the few things that you need to do when buying your first property is to make sure that they are not negatively geared, they have to be positively geared and that they are producing cashflow for you.
Start In Your Own Back Yard
So, there are lot of ways to do that, the first thing I want you to do is to look at your backyard, what assets you have that are under utilized .
This is the first place that you should be looking.
What investment properties do you have that you could crank up the cashflow on so it produces more income for you?
Do you have an option to create an income from your family home?
So, many empty nesters are able to create a self-contained granny flat under the main roof where their children fly the coup that will produce them a decent income. That’s what we’ve done.
So, we were able to rent out a floor our house. It produces $35,000 per year on the long term market and $50,000 per year the short term market.
That’s a decent start on the $100,000 goal. So, have a go with what you already have and you can really push up the income or just a matter of having a granny flat to produce the cashflow.
So, a granny flat on a land you already have is the lowest hanging fruit, there’s no land cost because you already own the land, and the cost of building a granny flat is around $150,000 . The cash flow potential of that is quite high even with a long term tenant compared to the cost of the property.
So, that would be the first place I will look.
With your $100,000 goal, maybe you are able to produce a $20,000 out of your backyard, your down to needing $80,000.
So, then you’ll start building up your portfolio to be able to produce that amount of positive cash flow.
Buy In An Area Thats Set To Grow
Now, when you buy these properties, a few things that you need to consider.
Firstly, you want to buy in an area that is growing, preferably double digits because that growth will you help you build your portfolio quicker.
The sooner that you can get it growing , the sooner you can refinance to withdraw your deposit to purchase another property, the sooner you can get to your goal.
Renovate For A High Cashflow Strategy
So, buy in area that has growth of at least double digits, the other thing is you can renovate it to improve the cash flow.
Maybe rent it to a better tenant or go for a high cash flow strategy.
You definitely want a cash flow strategy that is going to help you to produce your income.
I mentioned that now we have a property that is part of our family home that we have a renter, and that can produces $35,000 on the long term market, but $50,000 on the short term market.
The other thing that you can do is shared accomodation, that’s another fabulous cash flow strategy and we’ve got lots of students doing it.
The other thing that you want to think about is depreciation, unlike negative gearing where you have no income, positive gearing you have income that you will have to pay tax on. You want to make sure that you keep that tax to a minimum, and how you do that is by using depreciation.
There were changes in depreciation laws in 2017, but as renovators we are still able to depreciate where others can’t because we are actually purchasing the planting equipment. Anyhow, not getting too much into that now.
Lastly, I will give you an example, one member of our community is a young woman and she’s been on this path the couple of years, her first property was a house in Western Sydney, that was a 3 bedder and she renovated and converted it into a 4 bedder and rented out as a shared house.
The second property that she bought, an inner city studio which she has renovated and rented on a short term market, the two properties combined produce a $57,000 positive cashflow per annum. So, she is now at a stage where she is able to cut back half time, because she is already halfway to her goal. The $100,000 goal. And that’s just in two projects.
One thing I would say is just get started and as soon as you start, the sooner you get to your goal.
Use Experts To Speed Up The Process
The last thing I want to say is utilize experts to get there quicker.
I have sought out trustworthy and reliable buyers agents and property strategists to source the right properties for our students, because what I found is that there are people out there with big plans who will spend 6 months looking for a property and in that 6 months you could have a property and it could be growing. So, if you’re in a double digit growth, say you buy a $300,000 property with a growth of 10%, which is $30,000, so if you spend 6 months looking for it you have a loss of $15,000 in the process. So, it would have been better to spend that getting the property and getting an expert to help you, so you can speed out the process and get to your goal quicker.
Okay, so I hope that defines the process.
The first step, set your goal, what’s the cash flow that you need.
The second step, go to your property accountant and set your legal structures.
Third step, get your finance set up, that’s two parts, one part is the deposit where you rent or buy for your renovation cost and the other part is from investment loans for the property.
Next step, look for the low hanging fruit, what do you have already that is under utilized and if you have something already, get that ramped up to crank up your cash flow.
The next step is to buy a property that is set to grow, use experts that will help you do that quicker, renovate the property so that you can maximize the depreciation and you can attract a better, quality tenant.
And lastly, to use high cash flow strategy to produce high income, so you can get to your goal quicker.