Some people have been a little confused lately by my saying – “If you can’t get a house for free then there is no point in owning it.” I live by a quote I read in Robert Kiyosaki’s Rich Dad Poor Dad, that goes something like this: “If you are going to have debt make it small debt, if you have to have large debt, make sure someone else is paying it.”
The purpose of property investing is to take CONTROL of an appreciating, income producing asset. This is achieved through LEVERAGE. In property investing the property itself is kind of irrelevant, it is the money involved in investing that is important and the less of your own money in that deal the better. Therefore when I say you should get the property for free, you should be able to control the property without having a single dollar of your own in the deal. I have explained how to do this in previous blogs I.e. Renovating to add value and then releasing your equity, recycling your deposit, placing options on property and so on.
As I have said in previous blogs as an investor you should know what you want and then find property that matches this. To do this you need to decide what sort of returns you are looking for and then figure out the best way to get those returns. I.e. If you are looking for a gross yield of 8% there is no point looking for a property in Ponsonby. On the flip side if you want huge capital; then don’t go searching near Weymouth. Personally, I want a “cash on cash return” of infinity. This means I want a cash flow positive property without any money in the deal. I do this by renovating property to increase the rent and value whereby I can release my deposit and get the cash flow. If I cannot achieve a cash flow positive property after renovating it then there is no point in holding it, I will just sell it to take the profit. NEVER ever hold a property which is costing you money.
What stipulates a good return though? When it comes to property investing you want to make the most amount of money in the least amount of time, with the least amount of risk. If you are going to go through the extra risk of property investing then you need to get a better return than if you had your money sitting in the bank. Currently term deposits are returning around 4.5%, therefore anything above this technically is considered a good return. You must also take into account how fast the deal is getting you to where you want to be.
You may have a property returning 10% cash on cash return. But if it took you 5 years to save the deposit to buy that property and your money is still in it, then how long is it going to take you to save the deposit for the next one. I.e. If you have a property with $100000 equity giving you $10000 per year cash on cash return; it will take you another 4-5 years to save up your next deposit. By recycling your deposit, you have a property helping you towards your goal and you still have all your money in your pocket to do the next deal.