Capital gains will make you rich but cash flow will liberate you.
Cash flow will set you free and make you feel wealthy. Increasing cash flow is the dream. To increase cash flow on the properties you already own (or plan to buy), then you may consider adding bedrooms or increasing rents in a variety of ways. We will cover more complicated strategies later but let’s start simple.
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House hacking is basically renting out all the spare rooms in your house by the room. (Even if this doesn’t specifically or immediately apply to you, just consider the mindset, and learn that there are many ways to achieve your goals).
Let us assume you own a 4 bedroom house that would rent for $600/week. If you take one of the rooms yourself, and rent the other 3 rooms for an average of $200/week, then you are ‘living for free’.
When house hacking it is quite likely the rental incomes will cover most or all of the mortgage repayments.
If you own a 3 bedroom house, you could put a small cabin in the back yard, make this place your bedroom, and rent the whole house out and again ‘live for free’. This is going to depend on whether you’re a young and early-stage investor or if you have your own family. You could always reverse the process and work with a JV partner willing to live in the rental and manage it but who is short on cash to get started.
I have seen friends execute deals where they are living for $150 or less a week because rent from the property subsidises their living expenses and pays most of their mortgages for them. They own an $800k house and their flatmates pay the mortgage.
To create a massive advantage for yourself when investing, you should look for opportunities for arbitrage. This will allow you to keep investing rather than getting equity locked or running out of borrowing power.
Arbitrage is the purchase and sale (or realisation of equity) of an asset (a property) in order to profit from a difference in the asset’s price between markets.
As an example, this means you see the value at $1.1mn but buy for $1mn and the reason others do not see the same value as they have not done their calculations properly to factor in things like adding a minor dwelling for a low relative cost and generating the cash flow quickly. Because the property generates that cash flow and has landbank potential for subdivision later, it is worth a lot more.
This means spotting things other people do not notice and creating opportunities where others cannot or will not. If you are buying your first investment property and plan to live there, ‘house hacking’ is basically creating as close to free-living for yourself as possible. If your flatmates (boarders, family members, homestay students or whatever) are paying your mortgage off for you, you can often reduce your weekly expense down to a negligible amount.
I have seen scenarios where landlords rent by the room and live in one of the rooms themselves and other examples where they rent by the room but live elsewhere.
You can often turn a 3% yield property into a 6-10% yield or more with creative ‘house-hacking’. You will also see some rentals will charge for things like storage, pets, car parks, furnishing, etc.
Home and Income (2-3 houses on the same site) and Minor Dwellings (the main home and a smaller 1-2 bedroom unit that requires less consent/paperwork) as strategies for building wealth are pretty simple and just need you to spot something existing that is priced fairly or to buy something and quickly get the yield up by getting the extra bedrooms added.
The options for dwellings will depend on the zoning of your property, the size allowed and the process involved will vary depending on the jurisdiction, for the detailed insights you will need to look up the unitary plans and potentially connect with a planner to get things underway for you. We can make suggestions on who to talk with first.
You may charge some of the tenants for the option of a dryer for example at $5/week. You can buy a dryer off TradeMe for $150 (second-hand) and make $1300 in the next 5years… ($5 a week x 5yrs). Small things add up and matter a lot when trying to get more borrowing power for the next property.
Your mortgage adviser will understand where the opportunity is and what the numbers allow you to do for each property.
Not a lot of people know or realise that borrowing for a property is not just determined by your situation, the property’s yield matters too. If you can get the property generating an extra $100-200+ a week then buying it and financing it with a bank should be much easier. You may only be approved for $700k of new lending but be able to borrow more if you can create a higher cash flow scenario.
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Your journey to financial freedom will typically follow a path consisting of 3 Mortgage Lifecycle stages.
Stage 1: Reduction. Main goal: if investing – building $120,000+ of usable equity asap, or getting your home mortgage-free quickly, often in 10 years or less.
Stage 2: Expansion. Main goal: building your first $70,000 of annual rental income while refining your strategy for recycling equity, repeat, repeat, repeat…
Stage 3: Optimisation. Main goal: increase passive income to replace wage income, minimise time requirements, orchestrate big wins.
To take control over your portfolio purchase the relevant masterclass, or purchase all three for a special price of just $37 – this special offer appears when you check out.
P.S. Stay tuned for tomorrow’s email where we cover building up your equity, if you do not have enough to buy right now, using joint ventures, property flips, trades, and getting help from the bank of mum and dad (or family/friends).
Make sure you understand the legal requirements before setting up any rental/tenant agreements. Do your homework and understand the rules.