UNLOCKING IMMEDIATE RETURNS IN PROPERTY INVESTMENT
The age-old saying, “cash flow is king,” couldn’t be more accurate when you invest in property. In the ideal world, when you acquire a property, it will pay for itself from day one. Traditionally, the notion of breaking even on a property investment seems like a distant dream, often taking several years to achieve. But we’re here to challenge this idea and tell you that you can acquire property that pays for itself from day one and breaks even from year one!
While this might sound too good to be true, it is possible with strategic investment opportunities like multi-lets, student housing, short-term rentals, and certain low-cost housing approaches. These strategies are designed to optimise the rental income, reduce expenses, and adapt to market demand more easily, increasing the likelihood of breaking even in the first year.
Break-even is very seldom achieved with a ‘normal’ property investment where you buy a rental property and rent it out to one tenant. Some of the reasons for this difficulty include the high initial costs, the dependence on market conditions, rental competition, lower rental income potential, and high tenant turnover.
WHAT IS BREAK-EVEN?
When you break even on a property, the rent you receive (after the rental agency commission) is equal to your monthly bond payment, the levies, and the rates and taxes. Having a property break-even is a huge milestone as an investor can own as many properties as possible without needing to subsidise the property every month.
Usually, it takes about four to six years for a property to break even, which often discourages investors, but there are ways to purchase a property and have it at the break-even point from year one:
FIND CASH FLOW-POSITIVE PROPERTIES
Besides investing in properties like student housing, identifying cash flow-positive properties is a surefire way to break even within the first year. Focus on locations with high rental demand and growth potential or neighbourhoods close to these locations. You can also explore foreclosures, auctions, etc., to find off-market properties at great prices.
BUY AT A DISCOUNT
The trick to breaking even is buying property at a discount. The price does not have to be far under market value. Even buying a property at a 10% discount makes a massive difference. In a previous article, How To Buy Investment Properties Below Market Value, we discussed how to purchase a property at a discount and all the reasons why someone would sell a property at a discount.
REGISTER A BIGGER BOND
Securing a property at a discount is just the beginning of your break-even journey. For example, when you buy a property at a 10% discount, it is important to register the bond at or even above the market value. This does not mean the bank will give you the amount above the purchase price, only that you can apply for that extra amount at a later stage. This is a huge help when you are planning on buying many properties!
ELEVATE YOUR INVESTMENT THROUGH REFINANCING
Within a year of purchasing a property, a game-changing opportunity arises, namely refinancing. By refinancing the property to its market value and parking the funds made available in the access bond, you can withdraw funds monthly to subsidise the shortfall of the property. And while you do this, your property continues to grow in value. Talk about setting yourself up for financial success! Refinancing can also be done in the future again if required.
Read our article, Maximise your Property Investment with Access Bonds, to learn more about what to do with the funds that you make available.
PURCHASING INVESTMENT PROPERTY THAT WON’T COST YOU A CENT
Now that we know the basics of finding a break-even investment, let’s consider a practical example of the steps involved:
- Property purchase: You acquire a property for R720 000 that is worth R800 000.
- Smart financing: You apply for 100% financing on a 30-year bond to minimise the cash you have to pay out of your pocket.
- Bond registration: You register the bond for R850 000 or more. In a year, the property will be worth about R850 000.
- Strategic refinancing: After a year, you apply to refinance your bond to R850 000, making up to R130 000 available.
- Financial flexibility: You park the R130 000 in the bond (access/flexi bond), so you don’t pay interest on the amount you borrowed. (Only when you take the money out of the bond do you start paying interest on the amount you took).
- Sustainable shortfall solution: This money will be sufficient to pay the monthly shortfall for years to come.
As you follow these steps, a remarkable transformation occurs. The property you’ve bought not only covers its costs but propels you to profitability. With a sustainable strategy in place, the property becomes a self-sustaining entity, setting the stage for a prosperous investment journey.
Read our article, Unveiling the Biggest Myth of Property Returns.
The beauty of this approach is its scalability. You can continue replicating this strategy, buying properties that will break even in the first year, and watch your empire grow. Go ahead and break the ‘rules’ of property ownership. Wave goodbye to waiting years for your investments to balance and say hello to a future where your properties break even and flourish from day one.
Read the entire article in the October/November Edition of Real Estate Investor Magazine.