Property That Pays For Itself EXPLAINED

https://www.youtube.com/watch?v=roWeaTM9S3g How can property pay for itself, pay itself off and then ultimately deliver you financial freedom? Book in a Free Property Strategy Session Recommended Videos: The 2 Year Strategy 2 Properties To Financial Freedom Transcription: Ryan 0:00Hey, are you amazing investors out there? I recently had a really great question from someone on my YouTube channel, asking me a bit more about the two year strategy or the two properties to financial freedom strategy. And asking what is the difference between this and just buying property and being a slave to your job and having to pay it off over 25 years? How can property actually pay for itself? And how can property actually pay itself off. And this is a concept that I guess really clicked in my mind back when I was a teenager. And I could see the long term potential of property to deliver financial freedom and deliver the life that I want. I got really passionate about positive cash flow property. And I guess I haven't really stopped since. And reading Robert Kiyosaki his books like Rich Dad, Poor Dad, really ingrained this into me. But I understand that not everyone can see this, not everyone understands this. So I'm hopeful that in today's episode, I can click something in your brain, so that you can start to understand, I guess, the dynamics behind how property can pay for itself and generate positive cash flow, and how it can pay itself off. So the way most people invest in Australia is that they'll purchase a property, maybe a single income home, or maybe they'll purchase a unit or something like that. And they get some money coming in in terms of rental income. So let's just write rent here. So they get some rental income coming in. But then they have money going out in terms of their expenses, we'll just write XP for expenses. And so expenses includes everything like your mortgage, your property management fees, any vacancies you have on the property, maintenance on the property council rates, water, insurances, there's so many things to think about. Now, the way most people invest, it's called negative gearing. And these expenses are much larger. And so we'll do a large circle, then the rent. And so what that means is that you use the rent to pay for some of the expenses. But then there's still a good chunk of the expenses left over. So let's pretend that this section here is the expenses left over. And now you still need to pay those expenses, that might be your mortgage, it might be some maintenance on the property. And in order to pay those expenses, you're going to have to have a job or an income source of your own, I just draw a tie there, you're going to have to have an income source of your own to pay those expenses. And to keep that property going. This continues until that property is paid off completely. In which case, once it's paid off completely, because you don't have a mortgage anymore, you've now got smaller expenses, and likely your rents going up over time as well. So your rent is now bigger than your expenses. And if we cut the rent in half, and let's say this bit is the bit left over, well, that actually go ahead and goes into your pocket. Okay? That is the worst I've ever drawn in my life, what's sort of like a happy happy face because you get some passive income coming in. So that's kind of the way most people do it negative gearing, but it takes a long time in order to get to this situation where your mortgage is paid off. And you can start living off the rental income minus the little expenses you have left. So let's actually put some numbers behind this and have a look at it. So I'm going to go over the property tools.com.au, which is a calculator that I created years ago. And you can get access to it too, if you want for a small monthly fee. So that's a property tools.com.au. And let's use an example here, let's say we purchase a property for let's call it $500,000, or a unit, or it could be a house or a unit doesn't really matter. At this point. Let's say we get rental income from that property at $400 per week. So that's a rental yield of 4.16%. That's kind of even optimistic in cities like Sydney, at the moment, and it might only be $350, or 3.64%. But we'll leave it at 400. For now, interest rate of 5%. Obviously, interest rates are much lower at the moment around 3%. But let's just use 5% for this example. And what we can see is that our weekly cash flow before tax is in the negative or negative $111.31. As an estimate. This is assuming we put down a 20% deposit paid for our closing costs. And then it's looking at property manager fees of 6% vacancies a 5% repairs and maintenance of $1,000 per year insurance of 1000 per year council rates of 2000 and bank fees are 300 per year. You may also need to add in some water rates there. So maybe you need to pay 500 and water rates. If you're in a unit who knows maybe you've got $2,000 a year in body corporate fees as well. So let's go ahead and add that in. And we can see that our cash flow has actually gone to minus $159.39. So proximately minus $160 per week on this property, or around minus $1,300 per year, that's money that we need to find out of our own pocket in order to pay for this property. And this calculator does interest only. So this property is not even paying itself off, the mortgage isn't going down, or anything like that. If we go to a mortgage repayment calculator, I like to use the IMG one, I just find it really simple and easy. And if we use the same example of a loan amount, 400,000, so a 500,000 minus 20%, we're going to interest rate of 5%. And then principal and interest, we'll change that to weekly, we can see that our weekly payments of 539. If we want to be paying off the mortgage over 25 years, and interest only, if we go back to interest only, you can say it's only 384. So the difference between that is what about $150 per week, as well, if we want to be paying it off. So we're looking at here, minus 160 ad 150, you're looking at minus $300 or so per week, just to keep this property afloat, and to be paying off the mortgage over 25 years. So that's going to take you a while before that property is paying for itself and delivering you anything. In fact, it's negatively affected your lifestyle, you're hoping that over time, the value will go up and the rents will go up. But at the moment, you know, it's kind of eating you alive at around minus 160 or minus $300 per week, how much would the rental income need to go up to actually push us above that, you know, minus 300 per week, if we got to 600 per week, then at least were positive cash flow on interest only. But we still got that $160 $150 extra to make up so 700 per week, 800 per week, okay, be somewhere around like $750 per week. So we need to go up from 400 to $750 per week in order for you to be in a situation where that property is paying for itself and paying itself off over that loan term of 25 years. So as you can see, that's going to take quite a while the brain needs to almost double in order for you to get into that position. And in that time you're paying for itself. So how can property actually pay for itself or what you want to have is a situation where the rent, even in the beginning is actually bigger than the expenses in the beginning. And that's what we call positive cash flow. So when you have that situation, then the property is at least paying for itself, and maybe even paying itself off. So the way that we do this in the two years strategy, or the two properties to financial freedom strategy is we still go ahead and we still purchase this house. But then we go ahead and we build a granny flat on that property as well. So a two bedroom granny flat on the property that we can rent out separately to the house. And this changes things dramatically when we look at the expenses of the property. So let's go ahead and reset this, we're going to look at purchasing a property for around $400,000 instead of the $500,000. And then we're going to add $120,000 on to that for the build of the granny flat. So that's going to come out to $520,000 in total rental income from the house will probably be around 380 or $400 per week. But then rental income for the granny flat, you're generally looking at around, you know 280 to around 320 per week. So we add those of you looking at somewhere in the vicinity of $700 per week in terms of rental income, and we're looking again at a 5% interest rate, which I know is high compared to today's standards. today's standards are somewhere around 3% or even lower. So Fine, let's use today's standards are 3%. But you know, realistically more looking at five, maybe even looking at 7% sort of long term interest rates. But for the sake of today, let's look around 3%. Now what we can see is that the rental yield for this property is now 7%. And the weekly cash flow before tax is around $300 positive. So this means Okay, we put a deposit down at 20%. We're paying our property manager fees, vacancy rates, repairs, insurance council rates, bank fees, there's no strata because we purchase a house, not a unit, we might need to add in some water rates there. So let's put in $1,000 of water rates that affects us by 20 bucks a week. So your weekly cash flow before tax.