Property investments form part of a powerful business strategy which is highly undervalued by society.
Why do so few investment companies talk about property as a retirement or business solution? Why do economists and financial experts focus all their excitement on shares rather than property investments?
►I believe there are a bunch of reasons, but there are two which stand out for me.
Firstly, investment houses focus on shares, equities and the like because that is their principal business. They profit from selling financial products and services such as retirement planning, mutual funds, retirement annuities and other funds. It doesn’t make sense for them to advise you to go out and start a property business if they are not going to make any commissions out of you.
Secondly, property is viewed by many as a traditional investment. For example, an article appeared not too long ago in the Financial Times following the 2008 credit crunch giving reasons why investors should steer clear of property. Low house prices were cited as a major reason, which obviously meant lower profits if you were trying to sell a few properties. An investment that loses market value is traditionally seen as a bad thing, which unfortunately forms part of the status quo thinking. What the article failed to mention is that lower house prices present excellent opportunities for bargain buys, i.e. profit taking.
In my experience, economists and journalists are very good at analysing market trends and not the business opportunities that accompany them.
If structured as a business, property investments form a powerful passive income opportunity.
►Following is a 7-step-quick-guide on how to set up a conservative ‘stock-standard’ residential property business.
Step 1: Goal setting
Your goal should be to accumulate enough properties so that your total rental income is equal to your current salary on a monthly basis.
For example, if you earn $10,000 each month your goal should be to buy 10 properties with a net rental income of $1,000 each or 20 properties with a net income of $500 each.
Step 2: Select your market
What niche market will you be targeting – families or students for example? What type of property will you be buying – flats or free hold residences for example?
The ‘location location location’ approach must not be your primary concern. Focus only on areas and properties that people want to live in.
These people are your customers and it is essential that you build a consumer centric business.
Step 3: Find the right property
Only look at properties that have suitable rental income to expense ratios. In other words, the higher the rental income and lower the expenses, the better the deal.
Make use of estate agents or other property professionals to do the hunting for you.
Step 4: Finance your property
Your best option is to try and obtain a loan which covers the purchase costs and all other fees. This may not always be possible as banks require some sort of upfront cash commitment from your side.
Step 5: Cover your monthly shortfalls
A shortfall exists when your property expenses exceeds its rental income.
For example, if your monthly rental income is $800 and your expenses $1000, you have a shortfall of $200.You must be able to pay the $200 out of your own pocket until a breakeven situation is reached. This is when the rental income is able to cover all related expenses.
Step 6: Repay the loan faster
Once you reach the breakeven point, your property will be able to pay for itself. The cash that you originally used to cover the shortfalls may now be used to repay the loan faster.
Step 7: Repeat the process
Once your first property is fully paid off, purchase your second property. Now, use the rental income from your first property and other available cash resources to cover any shortfalls on your second property, as well as to repay the new loan faster.
Repeat the process until you reach your passive income goal set is step 1.
By the time you reach your goal, you will own a certain number of properties without any debt. For example, you may land up owning 10 properties, each generating $700 in rental income and valued at $80,000.
That leaves you with an $800,000 property investment business which generates $7,000 passive income every month.
Compare this 7-step process with a normal job situation. After forty years of corporate labour, you inevitably land up in a situation where you are unable to maintain your desired standard of living.
Not the ideal situation to be in!
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