We all know how important it is to have an investment strategy: it’s the blueprint that guides our buying decisions and ensures we buy quality real estate.
But there are actually three other strategies every investor needs to know, and they are just as important as your investment strategy.
They are your entry, exit and debt reductions strategies – and having each one of these in place is crucial for investors who want to create lasting wealth through real estate.
I speak to a lot of clients who want to focus on positive cash-flow property deals under the perception that cash in their pocket means they are making money and therefore, have not purchased a bad investment.
However, the belief of having more money coming in than what is going out equals success can be a trap, as it can often give you a false sense of security.
Of course, receiving $100 per week positive cash-flow on a property is great – but if that property never goes up in value, it is a hard way to work towards your wealth creation. To be truly successful, your properties need to be ‘financially efficient’, both today and also into the future.
To achieve this, you need to invest with a purpose; this is what I have always promoted. For instance, if you are on a high income and you are paying a large amount of your hard earned money in tax, then it makes sense to structure your property investments in an efficient way. This could include adding negatively geared properties to your portfolio to help you reduce your tax and pay off your bad debt as quickly as possible.
This does not mean that any old negatively geared property will do. Rather, it means you need to focus on properties that are going to provide a three-pronged value:The benefit of paying less tax. The ability to divert those tax savings to your bad debt. The leverage to purchase a property that is not so negative in cash-flow that you are choking on debt week to week, but that is neutral or only slightly negatively geared – but that also attracts very high levels of ‘on paper’ losses, such as depreciation.
With this type of investment, you can manufacture a situation where you get to legally keep more of your salary and pay less tax each month, allowing you to aggressively reduce your bad debt faster. You will not only enjoy the growth of your property investment, but you will also save literally thousands of dollars in future bad debt interest costs. This will result in more disposable income left over for more investing or to pay down other debt.
This is just one example of how your investment can and should be customised to specifically suit your needs. Ultimately, it does not matter what your investment strategy specifically involves. In most instances, your success as a property investor will come down to your ability to create and enact clear entry, exit and debt reductions strategies, which make sure that every last dollar is working for you.