Many Australian’s have achieved financial freedom through property investment. So, what is financial freedom and how can you achieve it through property investment?
Financial freedom might mean slightly different things to different people but broadly it means you have enough wealth or passive income to live off without working. Giving you the time to do what you want in life without having to worry about money.
Setting your property goals
The first step is to create a financial goal. Many people go into property investing without any idea where they want to end up financially. This is important because different properties deliver different results and this will help guide your investment strategy. Read more about setting your property investment goals >
Property investment strategies
There are many different strategies when investing in property – buy and hold, renovate, subdivision, development. But in general, there are two main ways property investors actually achieve financial freedom. One is through the income the property generates via rent, the other through the appreciation in the property’s value.
Positive cash flow strategy
A positive cash flow strategy is where the investment property earns more rental income than it costs to own – the mortgage, management, rates and maintenance costs. The income the property generates via rent becomes your passive income. This strategy is good for beginner investors or those nearing retirement.
Because the property is self-supported the positive cash flow can supplement your income, pay down your principal or be used for investment in other properties and it can be used to offset the losses from a negative cash flow property. However, high yielding cash flow properties are usually located in areas where there is slower capital growth which means it takes longer to build equity and there are little to no tax benefits.
Capital growth strategy
A capital growth strategy is where you buy a property with the expectation that it’s value will increase over time. The cash flow could be positive, neutral or negative but your priority is getting maximum capital growth so that you can either get a loan against the equity to keep investing or sell the property in the future to release the equity to live off.
In this strategy the time frame for holding the property is really important so you want to be clear about your objectives. Usually in this situation you’ll enjoy the tax benefits of negative gearing as the property types are usually in highly desirable areas where prices are high compared to rental income but it has potential cash flow constraints as you’ll need to spend more supporting a negatively geared property.
When considered as part of a long-term strategy based on sound investment principles and supported by a comprehensive financial plan, building a property investment portfolio can be a vehicle to financial freedom, enabling you to generate enough passive income to replace or supplement your existing income or retire on.
