Many Australians invest in real estate to improve their cash flow but the truth is, it’s not how residential properties work. It is a high growth, low yield investment and you have to build up a big asset base of investment properties first before you can lower your loan to value ratios and live off the cash flow.
However, the idea is that you borrow to increase your asset base (as long as you can fund the cash flow) and the larger your asset base, the larger your wealth creation ability is.
If you had one property worth $500,000 and it doubled in value you would have a $1 million property. However, if you had 5 properties at a total property worth of $2.5 million and that doubled you would be worth $5 million in the same time period.
At that point you could sell 2 properties and pay off either a significant portion of your debts or all the loans thus leaving you with living off the rental of the remaining properties.
Naturally you should see an accountant who understands property and he or she would work out a plan to meet your personal circumstances.
Remember that you can claim different expenses related to your rental property. Talk to your accountant, who will outline the deductions and help improve your after tax cash flow.
The items in a building will depreciate in value over time and ATO allows investors to claim deductions related to the building, plant and equipment through capital works deductions or plant and equipment depreciation.
It’s ideal to obtain a tax depreciation schedule from your quantity surveyor – cost of which is even tax deductible as well.Your mortgage is one of your biggest expenses so prepare for a rise in interest rates by locking in some, if not all, of your loans to fixed interest rates or set a financial buffer in an offset account in case you incur extra costs or unexpected expenses.
When you budget for your property purchase, you have to include all settlement costs along with the purchase price. This includes legal costs, stamp duty, valuation fees, loan costs, improvements and repairs, insurance, agent’s fees and vacancy period. If you do not include these, it may affect your cash flow.
Don’t forget that your property will not be occupied constantly. It is safe to assume that your property will be vacant for about two weeks a year. If your property becomes vacant, you will not receive rent and have to pay your property manager for reletting it.
There will also be property management costs, which can be a small price to pay for protecting your asset.If you do your research, you’ll find ways to improve your cash flow. You just have to prepare a budget so you won’t be in a tight cash flow position that could impact your wealth creation in the long run.
What can you do?
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