It's no secret that investment properties can often cost you money each week to own.
This is due to the costs (mortgage payments, rates, insurance, etc.) outweighing the rental income you receive every year. Finding cashflow-positive properties can be few and far between, and a lot of investors think this is the end of the road for investing.
But, does a negative cashflow property mean property investment isn't worth it? No.
Let's see why.
The majority of profit that property investors make comes in the form of capital gains over a long period of time, not from short-term cash flow. As long as the forecast gains outweigh the cost to own, then the investment is feasible.
The rebuttal that is most often thrown back is hesitancy around what else could be done with the money that is used to top up the property.
It is hard to fathom that you could potentially be missing out on $150 per week worth of savings or entertainment expenses in order to purchase an investment property, but there is an upside to this sacrifice.
Let's consider an example:
· A property is worth $650,000 now which is expected to grow at 5% year on year. Assume the cost of owning this property equaled $300/w.
· A property that is expected to cost $300/w to own would cost $15,600 to own per year and therefore $156,000 over 10 years.
· Since we expect 5% capital growth every year, we can forecast the profit this property will make over a 10-year period.
Here's the outlook for this property:
Value Now
$650,000
Capital Growth Rate
5%
Future Value (in 10yrs)
$1,058,782
Forecast Profit
$408,782
Even though this investor had to sacrifice $300/w for 10 years, this investment is still feasible because the expected return over 10 years ($408,782) outweighs the expected costs ($156,000).
The cost to own should go down in time as the rental income increases lowering the $156,000 over a 10 year period.
This begs the question, what else could I do with that $300 per week?
Managed funds or small self-managed investing platforms (Sharesies, Hatch, etc.) are popular choices for investors looking for another investment avenue.
Although shares are a good way to grow wealth, they don't offer the same scale that property does.
Scale suggests that a percentage growth in a big asset is better than a percentage growth in a small asset.
In other words, 10% of $100 is not a lot of money, but 10% of $1,000,000 is a lot of money.
Since property is on a large scale (i.e. the purchase price is in the $100's of thousands), even a small percentage return can produce a large dollar return for investors.
For instance, if you started with a $0 balance and invested the same $150 every week into an equities fund that returns 7%, then after 10 years of reinvesting your money, you would have made a profit of approximately $75,000.
$75,000 is not an insignificant amount of money, but if you compare that to the forecast return on a property investment over 10 years, you can see that property stands head & shoulders above this alternative investment.
That largely comes down to one major factor. Scale.
Building wealth through property investment is one of the most tried & trusted methods in New Zealand and for good reason.
Making sacrifices now to your cashflow in order to purchase an investment can be incredibly powerful to your overall financial position and livelihood in the future.
Waiting for the "perfect deal" that is cashflow positive, priced well, and in the best location is never going to happen so you're best to find something now and sacrifice short-term losses for a long-term gain.
The key to building a sustainable property portfolio is to start early and build your assets as efficiently as possible.
Every year spent waiting is another year where you're potentially missing out on crucial equity gains which will ultimately set you up financially.
Talk to the team at The Property Factory to find the right investment property for you.