Make it Rain: Debt Reduction & Cash Flow

We want our clients to invest in a property to become wealthy. In fact, we want them to make bucket loads of cash week in and week out without needing to lift a finger. From our perspective, it makes sense, if our clients get into great financial shape, we can help them acquire a smart investment property each year. But to get to that level of financial freedom, our clients need to do two things:

• Reduce personal debt as soon as humanly possible; and
• Acquire high-yield investment properties that produce consistent positive cash flow.

So, what is personal debt and why is it so catastrophic for building a significant property portfolio? In its simplest form, personal debt is debt that you can’t get any tax benefits from for example a home mortgage, car loan, and credit card. You are using your after-tax earned income to service this debt. The more personal debt you have, the less credit that banks will lend to you. That is because banks allow about 40% of your earned income in their borrowing capacity calculations. However, banks take up to 80% of the rent you receive on a smart investment property for their borrowing capacity calculations. This means that passive income from rental properties is about twice as effective as ordinary earnings from a weekly pay cheque.

We see that typically our client’s biggest personal debt is usually their home mortgage. We have found that our average client is about 55 years old and typically owes around 1/3 of the value of their home to the bank. Take Mr. & Mrs. Jones for example, their home is worth roughly $750,000 today and they still owe around $250,000. This is because they refinanced a few years back to update their property with a pool, and a new kitchen and they took the family to Disneyland. The bad news is that they are still working for the bank to service their personal debt. The good news is that they have lots of lazy equity built up in their home that they can use to acquire a high-yielding, smart investment property. But it is of utmost importance to access this lazy equity while still working age to satisfy bank servicing calculators.      

When crafting a property Strategy for our client’s unique situations, we always address how to reduce their personal debt too. If we didn’t do this, then we would only be working with our clients as a ‘one-off’ transaction because they would hit the glass ceiling imposed by bank servicing calculators. This is not our business model; we want to build long-term win/win relationships that last for years to come and work with our clients to become wealthy.

So how do we reduce our client’s personal debt as soon as humanly possible? The answer is simple, we find the best Australia investment property locations about to undergo a cycle of capital growth. Not all locations perform the same over time because each location is subject to its own micro-market of supply and demand. We focus our investment philosophy on 1) Population growth; 2) Government spending; and 3) Infrastructure spending.

Let’s take Mr. & Mrs. Jones again, we will help them to work with an independent licensed finance broker to extract $200,000 from the available equity from their home and use that as the equity needed to help them acquire a high-yielding smart investment property in a key growth location. Our Co-Living Property Solutions have been designed with the Exit Strategy in mind so that once our clients have benefitted from a wave of capital growth, they can sell the Co-Living home and use that equity to pay down their home mortgage. Assuming a capital growth rate of 5% per annum this will take around five years (possibly sooner). When that key location reaches its market peak, Mr & Mrs. Jones will have doubled their equity and they can sell their Co-Living Property Solution, pay the relevant capital gains tax, and reduce their home mortgage by around $200,000. Don’t forget that they have been making a cool $13,000 per annum passive income for holding their smart investment property and have been receiving great tax benefits along the way too.

Fast forward about five years (possibly sooner) and Mr. & Mrs. Jones have threaded the eye of the needle so to speak and the world is now their oyster. They will have only about $50,000 owing on their home mortgage. Now comes the next key piece, which is to acquire high-yield investment properties to be held for the long term to generate passive income in retirement. Once again Mr. & Mrs. Jones can access the available equity in their home needed to acquire two investment properties.

Our NDIS Property Solutions have been designed to maximise cash flow for our investor clients. Our superior designs maximise the number of participants in a home that ensures they receive the care and privacy needed. We aim to get the highest possible Government credits which translate into more income for our investor clients. The trade-off is that our NDIS homes will likely attract another investor when it comes time to sell, but given the returns, most of our clients will never sell. This differs greatly from our Co-Living Property Solutions which are designed to be sold to larger families who are prepared to pay a premium for emotional equity. Ultimately, we see our NDIS and Co-Living Property Solutions as tools to enhance our investor clients’ property portfolios. It is this combination of debt reduction and positive cash flow that changes the lives of our investor clients.  

Whether you are just getting started in property, looking to reduce your mortgage, or looking to maximise income for retirement, we can help craft a property Strategy that will suit your number and lifestyle goals. Reach out to our team today to get started on your property investment journey.