Recently the Weekend Australian newspaper reported that landlords have lost over $43 billion in the last decade on the rental investments. Mostly residential.
So you’d be right in asking what is the point of an investment property? Surely it is to put you on the path to financial freedom?
Yes, I know they say that freedom means different things to different people – but it’s hard to see how taking a loss every year really represents any kind of freedom at all.
I get what the deal is…
These people are of course relying on some of the loss being made up by the tax office by way of the investor getting a tax deduction for the loss.
And they are relying on (with fingers crossed) the capital growth (if any) of the value of the property so that come retirement or some other point in the future that they will make that loss back and more by selling the property.
It can be a great short-term strategy, but many investors fail to plan at the start of the investment to know when the property will provide them with positive cash flow or what they will do if the property is not growing in value the way they had hoped.
The best way to ensure positive cash flow is to buy an investment property that is positive cash flow very early in the investment cycle–or even from day one.
Most residential properties are not like this despite the ongoing obsession of Aussies to keep buying it.
It’s much easier to find a commercial property that is cash flow positive from day one.
You can buy a commercial investment property that is returning 8.5% net…
If your mortgage interest rate is say 5.5% ,it will put money in your bank every month after all costs including your mortgage.
And it will do that from the day of settlement.
Here’s a more detailed example: let’s say you buy a small commercial property for $200,000 and the rent paid to you after all outgoings ( things like rates , insurance and maintenance) is $20,000 per year.
The net return is $20,000
$200,000 = 10%
Out of this net rent you will have to pay your mortgage interest, let’s say that your interest only loan is 5%, your payments would be $10,000 per year, so this property would put $10,000 per year into your bank account.
Often a commercial property is sold on the basis using what is called a “cap rate” To describe the net return that that property will show to the investor who purchases it. By comparing Cap Rates of recent sales it is easy for an investor to quickly compare properties that he may be interested in.
Basically the ones that are going to make you money.
So using the above example this property was sold at a cap rate of 10%.
Owning a positive cashflow commercial property doesn’t preclude you from claiming depreciation of the building and fittings and fixtures, and other tax benefits, this can further boost the return.
Of course if the property is putting cash in your bank account and not taking it out, you may have to pay part of this extra cash to the tax
But really, imagine having a million dollar tax bill… not such a bad problem to have really?
If you allow for this it is much better than having to find money to give them out of your wages… And a good accountant will work it to minimise the tax you have to pay.
Negative Gearing–the opposite of what the commercial property investor looks for.
The choice of a positive cash flow commercial property can be broken down into steps.
Step 1: Decide how much you can spend remembering that you will need 30 to 40% deposit or equity for commercial property. I have successfully used vendor terms to buy commercial property, or even just the deposit.
Step 2: Decide on the type of property that you want to go into. Retail, industrial, office, etc.
Step 3: Decide on the location. I recommend looking first in your local area if there are properties in your price range check these out first, this means you can become knowledgeable about the type of investments available and compare them easily.
Step 4: Focus on the numbers. Once you know all the numbers are right and going to work then move onto the last step before purchase:
Step 5: Complete your due diligence.
There are many strategies available to a commercial investor that can help supercharge the returns it’s essential you get the education you need and actually look for properties that have these potential upsides available so you can get the most back for your buck.
You’ll soon see that commercial property is going to be the best performing assets in your portfolio.