I believe a property is a fantastic investment vehicle for 3 reasons: access to leverage, the ability to improve your asset and passive income.
Leveraging other people's money and time is a whole separate topic and, fortunately, we have already written about it extensively. That link also includes a case study about improving an asset.
Over time investors leverage many factors to buy, improve (if needed), and ultimately pay for an asset that creates a passive income stream for themselves.
Passive income is money that comes into your bank account irrespective of how you spend your time. You might be in a meeting or at the beach, it doesn't matter.
Over time, property investors can see passive income streams become a flood. They stop exchanging hours for dollars and become financially free, perhaps retiring early, or taking several years out of work to follow a pursuit that they love.
Not having to worry about money is liberating; you get your time and energy back, and how you spend every day is up to you. I bid my corporate job adieu several years ago and I believe that anybody with the right approach, mindset and team can do the same.
If you don't wish to go all the way to financial freedom or quit your day job, financial flexibility from even some passive income can be life-changing.
Interestingly many people who are financially free find other projects to work on. The positive mindset and energy that go them to their goal doesn't just disappear, it gets channelled into something else.
That might be a new venture, a charity or NGO, a family project, or a community cause. Early retirement does not mean you sit around and watch re-runs of The Chase all day... it means you own your time again.
Some financially free people still work part-time as a consultant or run a small business, and many say that once they stopped exchanging dollars for hours in order to survive, their incomes increased "post retirement".
In this article, I look at how real estate generates passive income and the steps you can follow to start to create passive income for yourself. However, I want to talk about mindset first, because we can be our own worst enemy when we seek to change. So before we jump into property investment, let's check in on ourselves, and make sure we are ready to accept life's opportunities that are hiding in plain sight...
You will achieve receive as much as you think you should and is fair, so we need to adopt an abundance mindset.
A person with an abundance mindset focuses on the limitless opportunities available in business and life. They choose to focus on the positive things in their life rather than the negative things. ... As a result of this abundant mindset they attract opportunities, people and creativity into their lives.
It is important to be comfortable with the idea of creating wealth and abundance for yourself before you invest. Many people believe that abundance for themselves is taken from someone else, which just isn't true. If you invest time and money into a property, instead of buying a car, who have you disadvantaged except for the car salesman?
Another popular myth is that rich people are bad, which if you believe consciously or subconsciously, will mean you self-sabotage every action and decision to the point of giving up.
Negative attitudes about money and wealth and success are often inherited from our families and friends, or learned from an emotional event that we have been part of or witnessed, such as a bankruptcy, long period of unemployment, or other financial stress.
As your life starts to change financially, be on alert for resentful feelings or emotions. If you don't see them in yourself, you will certainly identify them in others. When those thoughts arise, don't just bury them, acknowledge them and question out loud where they came from. You might have found something you need to address or a relationship that needs to change.
There are hundreds, if not thousands of resources out there for working on mindset and personal development. Successful investors continuously seek self-improvement. Property is not all about numbers and bricks and land... successful investment starts with ourselves.
A property is cashflow positive (creates passive income) when it brings in more income from rent than it costs you to hold on to.
Here is a simple example.
So by investing in this property you have created $4,500 pre-tax income a year, or $90 per week.
Not every property investment is made purely for passive income, some are made for equity gain or to create cash), however, I find it motivating to think of each deal as a % of my cost of living.
So if you worked out that you need to earn $60,000 in passive income to be financially free, then $4,500 is 7.5% of that. 7.5% of financial freedom is better than 0%, good start!
You might have noticed that I haven't included principal repayments here. How you manage your loans is discretionary, as is how much deposit you pay for a property. A property does not become "a better deal" because you paid a 30% deposit and I didn't (because I bought using spare equity in another home for example).
Rule of thumb: When "doing the numbers" to compare properties, we assume interest only loans and a 100% mortgage.
What is Financial Freedom?
I believe you are financially free when you can "stop showing up" and cover your cost of living for the rest of your life. You do this by having enough wealth to simply pay for your costs each year, or by earning an income that more than covers everything.
So financial freedom means either (or a combination) of:
I don't equate financial freedom with excessive amounts of wealth, such as big homes, sports cars, lots of travel, or anything else of the sort. To me, that stuff is extra; fun, but unnecessary. I'm trying to get you to where you don't have to work for the man. If you want to also travel the world non-stop and alternate between a Porsche and a BMW each day, then keep working, set your sights higher, invest more and you will get there... It might take a bit longer, so make sure you've got enough life left to enjoy all those toys.
With all this in mind, you should be able to work out what level of passive income you need to reach a level of financial freedom that gives you back control of your time.
Are you feeling motivated yet?
So far so good? Lets get on with the "how" side of things.
It is time to plan the portfolio you will need to achieve your passive income goal. To reach financial freedom, one property usually isn't going to cut it, unless it is a high-income, multi-unit whopper of a property.
Interestingly, from here everybody's paths will start to differ.
Why? Because when you line up everybody's different goals, timelines, start points, viewpoints, skill-sets, appetites for risk, appetites for effort, family circumstances, available time and plain old financial resources... you will see that every investor is going to go about this in different ways, different speeds, starting from different places, and with different levels of urgency. Not to mention that everybody's end goal is different too.
Pause for a moment and let this sink in... it means that while you can learn from what other investors do and teach, it is important to come up with a plan that works for you.
Fortunately, there is a neat two-part trick to help you do this...
a) Begin with the end in mind and let your goal deadline dictate your strategy.
The "T" in the "SMART" goal system means "time-bound". A goal without a deadline is a "wish"; with a deadline, it becomes a project. "By this date I will do/buy/own/achieve X" creates the declaration, moving from wishful thinking to purposeful action.
A goal of earning $20,000 passive income per year "someday", is a nice thing to look forward to. A goal of earning $20,000 passive income in 2 years starting with $X deposit means you had better get busy.
Decide on "your number" and start to work backwards from that and decide on concrete actions taken today.
How many properties will you need?
Will you need to do a project to add value to go faster, or will a set-and-forget "buy and hold" strategy suit your schedule?
Confused? If you are starting to feel a bit lost, please take a look at our free online property course, which has a more in-depth introduction to the core concepts of property investment.
When deciding what to do today, in order to get results in the future, you need to understand how cumulative gains work, because results accrued over time will play a major part in your outcomes.
B. How time will be your friend
Cumulative gains are one of the great economic miracles of our time and when combined with leverage in property can deliver amazing results. A 2-3% increase in value doesn't look like much, but over several years it will result in hundreds of thousands of dollars in wealth.
Similar increases in rents will lead to a healthy income in the future.
If you are struggling to map your future goals into what you should buy and in what order, we have a cashflow and equity tool that lets you project the numbers on a property up to 15 years out into the future. You can see changes over time as rents increase, mortgages go down and values go up... heady stuff indeed.
If you start with your end goal, understand the role time in the market plays, and backtrack to today, you can confidently choose a property investment strategy to follow today.
You will succeed at property investment if you master leveraging other people's time and money. Again, if you have not read our article on leverage please check it out now.
Get a team in place to make things happen. Broker, accountant, agents, builder, property manager etc.
Whatever you do, look for people who are investors themselves and specialise in property investment in their business.
You are making a 20-year bet with real estate; any extra cost associated with making a good decision will be dwarfed by your results over time. If you would like a referral to an industry professional please get in touch.
As you start to invest, be mindful of managing your risk, particularly with leverage involved, and not having any slack in your financial position. It can be dangerous to expand too quickly and take on debt without "rainy day" funds, even if that is set up as a revolving credit facility (or similar).
With safety buffers in place, I believe the right mindset for an investor is "trust but verify". It is important to be optimistic when out there looking for deals, however, property is buyer-beware so you must do your due diligence and make sure the property fits your own goals, not someone else's.
Don't mistake optimism with recklessness. Optimism is an attitude and recklessness is an approach. Successful investors might appear to be breezing along and having things come easily to them, however you don't see the work that every successful investor has done, or is doing, behind the scenes.
The better the advice you get, the faster you can safely expand. Successful investors surround themselves with seasoned professionals because those who have been in the game for a long time people know what is very important, and what is a minor issue. They are far less likely to get stuck because somebody who has done a similar transaction a dozen times over knows when to move quickly, and when to slow down and get technical specialists in to analyse something.
Visualizing financial freedom can be a rush and it is natural that you want to move fast.
There is just one problem... when you buy a property you need equity or capital to cover your deposit and income to cover debt servicing. So what happens when you hit a limit with the bank on either of these two measures?
Not much.... literally. Many investors have found themselves stuck at some level after they no longer meet the bank's criteria to keep investing.
Below are a few approaches to support your portfolio growth and move forward faster than "save up another deposit". The key is to know when you will reach your limits and put strategies in place before that happens, a good broker in your team is a must.
Our free online course takes about 3 weeks and delivers lessons by email. Topics include a deeper dive into goal-setting, how yield works, how cashflow works, mortgages, structures, property finding, managing and maintenance, and more. Register for free here.
Join your local Property Investors Association (PIA). This is the best tax-deductible bang for your buck you can get. The networking opportunities are beneficial to new investors especially, there are discounts on many trade suppliers and monthly meetings with speakers give you a chance to spend time with like-minded individuals. Learn more here.
Dig into a property book. Expert knowledge, broken down into easily understood chapters for the price of brunch. We sell a few in our online store and more books are frequently available at your library.
Get in touch. We hear from many, many investors and help them plot their next (or first) move. Some have started with property and feel stuck, others are trying to work out where to start. I can be contacted here.
This might be the longest article we have ever published and it still feels like I skimmed the surface.
So don't get bogged down with the details and waste time trying to do everything yourself to save money because you're only as strong as the weakest member on your team. You're trying to save something far more important than money here: your life.
Business Owner & Operations Manager
027 358 3855