IMAGINE PLAYING A GAME OF FOOTBALL … WITHOUT ANY GOAL POSTS. HOW WOULD YOU KNOW WHERE TO RUN WITH THE BALL? HOW WOULD YOU KNOW IF YOU WERE WINNING? THE ANSWER IS – YOU WOULDN’T!
Purchasing investment property is just like a game of football. To be successful, you need to know where you’re going and have a clear plan of how to get there. In short, you need to know exactly what you have to do to be successful. In a game of football, you have a coach to guide you, using the benefit of his knowledge of the game and his experience. Similarly, when it comes to property investment, there are dozens of different strategies and you need a ‘property coach’ with specialist knowledge and experience to explain the benefits and pitfalls of each strategy, based on your personal situation. You also need a coach to help you set clear goals of what you want to achieve. At Equity Gain, we strongly support the ‘Buy and Hold’ strategy. To understand the reason behind this strategy, you need to understand the costs of purchasing and selling a property and the taxes that are relevant for each transaction. When considering property investment, inexperienced investors fail to include the taxes that need to be paid such as Capital Gains Tax, Land Tax and Marginal Tax. If you don’t know or understand how these can affect your strategy, you are not in a position to know if your strategy is going to be effective until it’s too late.
It’s far better to look at your options, consider all the pros and cons of each option, then make an informed choice, long before you purchase any investment. You’ve no doubt heard the age-old claim that property doubles in value every 7 – 10 years? It’s important to remember when using the ‘Buy and Hold’ strategy that it’s a long term strategy and is not to be used for short term gains. Let’s look at an example of the ‘Buy and Hold’ strategy’ and how powerful it can be to generate wealth for your retirement over the long term. Jason and Marie own their own home and the current estimated value is $600,000. They have a mortgage of $250,000 currently and are looking at purchasing their first investment property.
Jason and Marie currently have $350,000 in equity (the difference between the value of the property and the level of the debt owed to the bank).By using their own home to secure the investment property, Jason and Marie are in a position where they have to pay absolutely nothing out of their own pocket to purchase this new property. (Expert advice here is a must as there are different financial structures involved for each individual’s personal situation). Let’s say Jason and Marie purchase an investment property for $400,000, and they wait 12 years (to be ultra conservative). Their own property would now be worth around $1,200,000 and their investment property worth about $800,000. (If we use the rule of thumb that property doubles in value every 7-10 years.)
For the sake of this example, and in the effort to keep this very simple, let's say that the tax benefit of owning an investment property, plus the rent over the 12 years that the property covered all the outgoings that the investment property required (this would include bank loan repayments, rates, insurance, maintenance, rental management, and so on). So, if we look at the position that Jason and Marie were in 12 years ago, (and again keeping this example very simple), they were worth $350,000 in equity (assuming that they had no other debts secured to their home).
Due to the fact that they kept their family home and the investment property for a period of 12 years (a long term investment) they would now be holding a property portfolio worth $2,000,000 with equity of $1,000,000. This would certainly assist with their retirement plans. At Equity Gain we believe that one investment property will not set you free financially. But, it will certainly assist you on your journey to financial freedom. Imagine the results if Jason and Marie had purchased two other investment properties over the 12 year period. They would be able to retire with a high quality lifestyle, free from financial stress and worry. Before investing in property, we recommend that you take the time to educate yourself by speaking to property and finance specialists. Like to know more?
