Property Investment Explanation
If you are independently wealthy – go away. Continuing from the previous Property Virgin posting, most of us are normal 8 to 5 slaves that work for a boss that we all passionately hate with a smile, the basic property investment numbers follow.
To understand the financial numbers that follow, wrap your head around equity. The equity in the investments are calculated by taking fair market value and subtracting the outstanding mortgage amount.
Taking an investment property for AU$200,000 with a AU$180000 mortgage.
In a nutshell, $180k is controlling $200k investment. The arrangement has a LVR (loan-to-value ratio) of 90% which is possible and reasonably common. A year later in keeping with trends, the $200k is property valuation will be around $210k or more. After another year the valuation will be $220k or thereabouts and so forth.
With this simple example, equity has grown initially from $20k ($200-$180=$20k) to $30k then onto $40k ($220 – $180 = $40k).
Studying numbers above, you’ll notice the mortgage has stayed fixed at $180k.
A fundamental mental adjustment to wrap your head around is that you don’t want to pay off the property mortgage. Real property investors use interest only mortgage payments. Paying off the principle – reducing the $180k mortgage, hurts your cash flow.
Here in Australia there are also tax implications surrounding principle payments ;-(
If you’ve done your homework – research the investment (more than just location, location, location…) – the property is rented at around 5% of valuation or more.
Initially, 5% of $180k has a rental of $9000 per year and at $220k a rental of $11000. Notice how the increase in property valuation has a corresponding increase in rental.
Here in Brisbane Australia, rentals generally increase every 6 months. I hate rental increases, but such is life – my lot ;-(
But we have a mortgage payments, I hear you say!
Mortgage interest on $180k at 7% (average current rate) is $12600 pa.
There are two schools of thought here in Australia. Positively geared and negatively geared property.
Positively geared means the rental income pays all expenses – mortgage, rates, insurances etc.
Negatively geared the rental income does not meet all the expenses. Whilst this might appear stupid, there are significant tax benefits if choose this path.
How often do you hear tax and benefit used together in one sentence?
The expenses not met by the rental income decrease your 8 to 5 daily grind taxable income. There is also depreciation (visit Depro for a property schedule). Here in Australia, you can also lodge a PAYG income tax withholding variation (ITWV) with the ATO. This reduces your weekly or fortnightly tax giving you the funds required to meet the expenses not met by the rental income.
The current example property will turn cash positive in the sixth – seventh year.
But you don’t want that situation. As a positive income approaches, it should be invested into the next property investment. Acquiring finance – mortgage – for the second, third property etc becomes easier. The banks understand that you are on a mission to acquire multiple properties, so the banks are generally there help so that they get their monthly interest cut.
Once you have acquired couple properties, the mortgage payments rental income positive differential will be sufficient to fund a line of credit (LIC).
The funds that you as investor extract from this LIC (Equity Loan) becomes your tax-free income replacement for the 8 to 5 daily grind. The amount that you can extract or want as an income replacement is determined by the number of investment properties that you’ve accumulated.
Property investment mission accomplished 
One day when you decide to clock-out, kick the bucket and die, your family can sell a property or two to settle the investment mortgages or continue with process as described in this posting.
Become a property investor, use NLP to fix mental childhood your issues – broken thought patterns etc, then take your first property investment step – loose your virginity
