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In This Video:

00:17 Why it’s a mistake to solely focus on investment yield when investing in property
02:58 How do we keep our loan payments down?

G’day. Daimien Patterson from Integrity Property Education. If you’re looking for property investment advice, strategies, general information, you’ve come to the right place.

This week’s blog is about why it’s a mistake to focus solely on rental yield when trying to get your investment property.

Most property investors very quickly work out, the cash flow of your property is really important. You can only own so many properties where you have to tip in the money, so you want to find those properties that pay for themselves. Most investors respond to that by looking for yield. But, today is a caution retell about how looking for yield in isolation can be a mistake. Now, whenever you’re buying an investment property and you want to see whether it pays for itself, yield is only on many considerations in the title equation. This is why you need to think more broadly.

Now, when you buy property, the first thing you must do is put a line down a piece of paper and put income on one side and expenses on the other. There are nine different factors that affect the cashflow of a property. The first factors are on the income side. Rent is one source of income but so is the tax return you’re going to get for that property. If you focus only on rent and you are ignoring all the other eight factors, tax return will be generated from all the claims associated with that property, in particular the deprecation. So what we want to see is we want to get the best yield possible, yes, but we also want to get the best tax return possible. How do we do that? We maximise our depreciation. How do we maximise depreciation? Why is depreciation different from the rest of these expenses. Well, the rest of these expenses, we have to pay for the privilege. Money has to leave our bank account, they will be called cash deductions. We paid for that, and we can claim thirty two and a half or thirty seven percent back on tax but that’s really a false economy. It would be better if we just didn’t pay in the first place. Depreciation however is a totally different cattle of fish. Depreciation is an on paper deduction. For a brand new house these days, you can get anywhere from ten to fifteen grand depreciation claim. The beauty of it though is that no money leaves your bank account. So you get to claim that much money and get a return on it without having to spend any of your own cash. So, that’s very, very important.

Then we got the expenses. There’s a whole heap of expenses like loan payments, body corporate fees, rates, rental management fees, insurance, maintenance. Each of those can blow your cashflow out of the water. You might have a reaper of a yield, you might have seven, eight, even higher percentage yield, but then at the end of the day you’re not making any money. You scratch your head and wonder why. Well, some of these might be the culprit.

How do we keep our loan payments down?

So first of all, how do we keep our loan payments down? Well, most investors will elect to do interest only loans. Some people say “How do I pay the property off?” Well, you don’t really worry about that because you’re going to own the property forever. So if you’re going to own the property forever, interest only is fine, because if you think about this way – in 1970 you can buy a house in Brisbane for eight thousand dollars and if you have a seven thousand mortgage, well, forty five years later in 2015, you wouldn’t care. That would be so irrelevant. So, as prices go up and rents go up, the debt will seem irrelevant. Also, when it comes closer to retirement, you can just restructure your finances to pay out your own home and have the investment properties still servicing their own loans.

Now, body corporate fee – how do we minimise a body corporate fee? Well, the best way I know is to eliminate it all together and not buy units or townhouses. Units or townhouses historically don’t perform as well as houses because they have a greater building content and a smaller content. Whereas, houses have perform better capital growth wise because
they are predominantly land based but also they don’t have any body corporate fees. Don’t buy units, don’t buy townhouses, then you won’t have body corporate fee and you will help your cashflow. Ask anyone who has property with body corporate. They will tell you, they hate the body corporate fee.

Rates. Not too much you can do about rates. Rates generally are just going to be what they are.

Rental Management Fee. Some people would try and screw down the rental manager. I think what you want to do is to be very careful about that. Just be in the market rate and look after your rental manager like gold. You don’t want to screw your rental manager down because if you do that you will become their lowest priority and when you’re their lowest priority, they will give you the worst tenants and they will give you the longest vacancies and that becomes a false economy. Treat your rental managers like gold. Don’t worry too much about rental management fee. Insurance is something where we want to be in the middle of the market and just make sure that we’re covering ourselves with everything we need. Don’t be too tight because you might end up with an insurance policy that’s not worth the paper. It’s written on but doesn’t cover anything.

Maintenance. Maintenance can blow things out. I see this all the time. People buy old properties, trying to be clever, because they’re chasing yield and end up with a really old property. One year, they’re going to replace the carpet, next year they’re going to replace the curtains, next year they going to repaint, next year they going to replace plumbing, and every year there’s massive expense, like five grand a year type of expense and it just wipes their cashflow out. If you buy brand new, you’re not going to have any maintenance cost in the first couple of years. The first six months would be under warranty and so on. So, buying brand new will reduce that as well. And of course, the depreciation, if you buy brand new.

Remember, when you’re buying your properties, piece of paper lined at the middle, see all the factors, don’t just focus on yield because if you focus on yield alone, you’ll end up in the low end market where you get the crappy properties with high maintenance cost and not so good tenants, and you win nothing but grief and you will not achieve your desired goal.

That’s it for me this week. Until next time. I’ll see you later.

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