This is a strategy that very few people know about or consider but it makes total sense. It can assist accumulate multiple properties rather than be burdened with a large debt for an owner-occupied property.
If you buy a family home first, you are tying up your income for the next 25 – 30 years while you pay off a mortgage. Not only that, you are learning bad lessons in purchasing a property. You could begin to feel like it is too hard to buy property.
We speak to a lot of people that own a home, have a mortgage and feel it would be too hard to do it again. They have “learned their lesson” about how hard it is to buy a property.
As property prices increase, a lot of the time you cannot afford to buy a property where you want to live, it is a good option to invest first and rent where you want to live.
The investment property can be in an area you don’t want to live in because it’s not being purchased for your residential needs. It’s an investment.
Let’s look at some numbers!
Say for example you wanted to buy a 3 bedroom house in Bondi. You will need at least 5% deposit which is $50,000. Then your mortgage payments for the next 30 years will be $4825 per month. You will end up paying a whopping $787,000 in interest.
Now that does sound like hard work!
But what if you were to put that $50,000 into a $500,000 investment property.
You could get a 4 bedroom house that would rent out for $450 per week and with government assistance, it might end up costing you $30 per week.
This property in 10 years’ time could be worth $1,000,000 and you have a profit of $500,000. Now that doesn’t sound fantastic, however, what if you did that 4 times.
Ok, so let’s look it over.
You buy one property. In two years’ time, you use the gained equity in that property to purchase your next one. You then duplicate that two more times.
So now after 10 years, you have 4 properties with a value of $4,000,000 and you have equity of $1,400,000.
What can you do at that point?
* You could sell them all and buy a family home where you want to live. You could use that $1,400,000 and if that didn’t cover it you may have a small mortgage.
* You could use the equity you now have to buy two more investment properties and continue to create wealth.
* You could just continue to rent where you want to live and realise that you will now have extra income from some of these properties as they will be positively geared. That means that the weekly rental increases and the property now makes you money instead of costing you money.
The obvious advantage of this strategy is that you are now in the property market rather than trying to catch up to it to buy. Increases in property values actually increase your wealth position faster than you could save.