If you’ve been following my blogs you’ll know there are 3 stages to becoming financially free.
The first is to educate yourself, the next stage is that of asset accumulation – your job as a property investor is to build the biggest asset base you can – in other words build your “cash machine”.
When you have grown a substantial asset base you then transition into the third stage – the cash flow (income) stage of your life.
Sure you need income (cash flow) to service your debts as you grow your property portfolio, but your focus must be on asset growth rather than income growth.
That’s why beginning investors need to keep their day job while the build their property investment business on the side.
But it’s important to understand that there are 4 possible streams of income you receive from your property investments:
1. Capital growth
As I’ve already explained this should be your main focus.
You’ll make far more money out of a great capital growth investment than you will out of one that has a slightly higher rental return (and lower capital growth.)
Of course high growth properties are usually negatively geared so you’d only buy this type of property if the capital growth is greater than the cash you’re putting into it.
This means careful property selection – buying the right type of property in the right location is critical – in maximising your future capital gains.
2. Rental return
Of course your property’s potential rental income is important, but for most investors it’s seen as the primary means of covering in-part or in-full the mortgage repayments on your investment loan.
3. Tax advantages
Now I’m not advocating buying properties for their tax benefits, but if you structure things correctly you’ll benefit form:
- Negative gearing as well as..
- Depreciation benefits that are not only available on new properties but also established properties.
4. Manufactured Capital Growth
Sophisticated investors don’t wait for the market to move, they manufacture capital growth in their properties by undertaking renovations or development.
By now you know that I believe you should treat your property investments like a business.
Unlike buying your home, your purchase should be unemotional and based on the numbers.
While I clearly advocate that your investment strategy should be to build equity (your asset base), you need to watch your cash flow to ensure that you have sufficient income to live on and service any negative gearing. This usually means budgeting and living within your means.
Cash flow will keep you in the game, but it’s capital growth that will build your “cash machine” that will deliver financial independence.