Creating Wealth: How To Create Wealth Through Property Investing
I define a passive property investor as a person who buys and holds property without the intention to sell the property
. A passive property investor creates their wealth by building a property portfolio over the long-term.
Our property investment strategy is to build a property portfolio and then hold it for the rest of our lives. Properties may be sold, however they are sold with the intention of buying an alternative property that better fits with our strategy, or to pay down debt.
Passive investing is exciting because it is wealth you are creating without having to work. Yes, it takes work to create the system to create the wealth, but once you have set up the systems, you can start to reap the benefits of your hard work.
Here is my passive property investor model using an example. Let's say Jack and Jill Smith purchased five properties in Queensland over 9 years from 2000 to 2008.
YearPurchase Price2008 Value
2000$180,000$380,000
2002$200,000$400,000
2004$250,000$420,000
2006$300,000$360,000
2008$380,000$380,000
Total$1,310,000$1,940,000
To keep it simple and for the sake of this example assume the total rent they are receiving on the five properties is $1,900 per week. The mortgage costs are $1,300 per week (calculated at a rate of 10%). There are other costs on holding the properties including rates, insurance, body corporate, property management fees, maintenance, etc however there are also tax deductions. The above portfolio would be almost neutrally geared which means it would cost very little to hold.
It's generally said that property purchased in a good location, doubles in value every 7 to 10 years but this depends on the many variables in the economy.
Let's be conservative and use 10 years. Jack and Jill Smith both turned 50 in 2008 and they will both live to the age of 80. Let's now look at how the value of their property portfolio changes over the years.
YearTotal Loan Total ValueEquity
2008$1,310,000$1,940,000$630,000
2018$1,310,000$3,880,000$2,570,000
2028$1,310,000$7,760,000$6,450,000
2038$1,310,000$15,520,000$14,210,000
This example has assumed that Jack and Jill are paying interest only on their loans. If after 2008 they purchase no more properties, their loan will not go up, but the value of their properties will. Assuming the properties are doubling in value every 10 years, and Jack and Jill do not sell the properties, there is an amazing amount of equity available for them to be able to live a very comfortable lifestyle.
Professional advice would be recommended to learn how to tap into the equity, but this is the path a passive property investor may be attracted to. Buy and hold property in a good location, manage your cash-flow so you can hold them for the long-term and see the equity build as property values increase.
by: Suzie Crawford
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