The snowball effect

By Slow Dad - November 17, 2016

Rent personally, buy a cash flow positive investment property. The tenants pay the mortgage. Build up equity to fund the next property. And repeat.

It was always easier yesterday. Get over it!

Every day the press is full of “woe is me” stories, people jibber jabbering about how hard it is for 20 somethings to make ends meet, let alone get ahead.

It is true that it can be hard to get started today.

It was just as true 20 years ago.

I’m sure it was also true 20 years before that.

In fact I’m certain it has never felt easy to get started.
Leverage can help your wealth snowball.
Leverage can help your wealth snowball.
However I call bullshit on people whinging that it is impossible to get started today.

I call bullshit on people whinging that it is impossible to get started today.

Rent yourself and buy an investment property

Recently AussieFIREbug wrote an interesting article outlining the approach of buying an investment property to rent out to tenants, while simultaneously renting where you personally live.

Why is this a good idea?

You don’t have to live there.

This is liberating, as it frees you from any personal biases you hold about the relative desirability of a given location or floorplan or colour scheme. The purchasing decision becomes driven by numbers, as it should always be.

You don’t have to afford to live there.

Chances are pretty good you could buy a better located investment property that will be funded by tenants, than you could ever hope to fund occupying it yourself.

Your living location is determined by what you like, not what you can afford to buy.

Your investment properties do not need to be in the same city (or same country) as you choose to live.

The power of leverage.

As the owner of a property you get to enjoy any capital gains that may result from rising property prices.

To illustrate consider the table below highlighting four different funding models for the same property.

The judicious use of leverage can significantly increase your return on investment.

However note the negative impact the servicing of that leverage has on cash flow. Higher borrowing levels reduces the investor’s safety margin. Interest rate rises or falling market rents will really ruin a highly leveraged owner’s day.

If you have analysed thoroughly then you should be able to obtain a self-funding, positive cash flow generating investment property.

If you have researched well then over time that property’s value should grow, increasing your equity.

In time it should become possible to extract some of that accumulated equity, while ensuring the property remains self-funding. If you already own your current home it may also be possible to recycle your mortgage debt by extracting accumulated equity towards the purchase of an investment property.

Use that extracted equity as the deposit for your next self funding investment property.

And repeat.

Get your snowball rolling, it could become an avalanche

Your passive income steams should increase. Over time your wealth should snowball.

Once your portfolio contains sufficient accumulated equity, consolidate. Sell off some properties to clear the debts over the remainder.

If things have gone well you will have achieved the same goal those folks with 25 year owner occupier mortgages strove for. You’ll own a property outright, in which you could comfortably live out your financially independent early retirement days.

So what?

The difference is that you will have been living wherever you wanted to throughout the journey. Also depending on where you live, the mortgage interest you paid along the way may even have been tax deductible.

Alternatively you’ll have a portfolio generating sufficient passive income to cover your own living costs. If things have gone well it may even be possible to do both.

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