How Do Investors Build Wealth Through Investment Property? (Ep248)

How Do Investors Build Wealth Through Investment Property? (Ep248)


How do investors build wealth through investment
property? If you want to invest in property chances are you want to build wealth and live
a more successful life. So how exactly do investors build wealth through investment
property? There are two main methods that people use
to build wealth through investment property. The first one is Capital Growth and that is
the property going up in value over time. There are different ways to create capital
growth. You can manufacture growth through things like renovation or development, subdivision,
creating duplexes, building unit blocks. All of this sort of stuff comes into manufactured
growth. You are doing something in order to increase the value of that property. Taking
an old house, renovating it and making it into a fully renovated house is adding value
and hopefully going to add value above what you spend on that property. There is also market growth which is growth
that naturally occurs due to supply and demand growing in the fact that there is more demand
than there is supply and therefore prices go up over time. There is also inflation in
the fact that every single year the money that you have is worth less and less because
of inflation. Inflation generally runs, I think around the 2% to 4% mark per year, so
every year $100 is becoming 2% to 4% less valuable. Therefore if you purchase a property
for $100,000, even if you are not getting any market growth chances are that over time
you are going to get some inflation anyway. If your grandparents bought a property 100
years ago or 50 years ago or 60 years ago they probably paid in the range of hundreds
or maybe just thousands of dollars not even $10,000 for a full property and a house. The
same property today would be worth hundreds of thousands if not millions of dollars. That’s
a mix of market growth and inflation at the same time. But what our parents could buy
and what our grandparents could buy for $100 back in the day is not what we can get for
$100 today. So that is inflation at work and that can work in your favour when you own
a property because your mortgage tends to stay the same but your property can go up
in value because of inflation allowing you to make growth on that. The second way that people build wealth through
investment property is Cash Flow. Cash flow is also called passive income and this is
where the income from the property is greater than all of the expenses combined. So the
rent that you are bringing in is more valuable than paying your mortgage, paying for maintenance,
paying your Council rates and everything like that. Cash flow is therefore the difference
between income and expenses. And that cash flow can be used for whatever purposes it
is you want. It might be to pay off your mortgage. It might be to reinvest or it might be for
your lifestyle. The different main strategies with positive
cash flow are generally: The first I would just call a positive cash
flow strategy and that is purchasing a property for the cash flow that it spins off. There’s
no real goal here to pay down your debt. You might have a principal and interest loan and
it pays down over time but your focus is not to pay down debt it is just to get that positive
cash flow and then you build up more and more properties to gain more and more positive
cash flow. The second method would be to pay off your
mortgage. This is either done through hard work or done over time. Or it can be done
by building up a property portfolio, selling off some of your properties and using the
profit from the capital growth to pay off the mortgage on the other properties leaving
you mortgage. And then you can get a positive cash flow because your major expense – your
mortgage has now disappeared. The other method is owner’s finance and this
is a bit more complicated. This is where you sell your property but rather than receiving
cash for the property you actually provide the finance to the buyer and they pay you.
They might pay a slightly higher price than market value and pay a slightly higher interest
rate than market value but it means that you get to get that regular income coming in.
Just like a bank makes money off mortgages you get to make money off a mortgage as well
and so that creates a positive cash flow situation. Therefore the larger your portfolio the larger
the growth opportunities will be. Again, looking at things like market growth
and inflation which happen over time, if you own multiple properties in multiple different
areas chances are you’re going to take advantage of that more so than someone who just owns
one property. And the same with cash flow, as rents go up over time and cash flow improves
if you have one property and rent goes up $10 per week, that’s great, that’s an extra
$520 per year minus expenses. But if you had 10 properties and rents go up $10 per week,
well, that’s an extra $5200 minus the expenses. The larger your portfolio the larger the opportunities
for growth. There are the two main methods that investors
use to build wealth through investment property. There is a third method which is tax savings
and this tends to be a method for the highly rich who are paying a lot of tax on their
property but it is probably to invest in property and the only way that property makes money
is by actually saving you money on your tax bill. This is very complicated and I don’t
really want to go into it in great detail but that is another way to do it. Speak to
an accountant if you’re interested in that. If you want to learn how to find positive
cash flow properties, well sign up for my free newsletter and video series. Go to www.onproperty.com.au/free. Until tomorrow, stay positive! How Do Investors Build Wealth Through Investment
Property Ep248 Page 1 of 3

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