The Top Three Basic Investment Strategies
Any sensible investment should be about managing risk and cash flow, looking for maximum upside, but also having an exit strategy.
How many rental properties do you need? Should you make principal or interest only payments? Finally, when should you sell? These are common questions, but the right answer is not the same for all.
With interest rates so low, there are plenty of great property investment options with positive cash returns, but most don’t generate enough cash profit to cover all your expenses, interest payments and principal.
In other words, you can easily cover your minimum costs to hold the investment, but to also reduce your mortgage over a reasonable period of time, you’ll probably need to dip into your own pocket.
For example, a typical $500,000 investment, purchased with no deposit ($500,000 mortgage), might make you a tidy $80 per week profit, after all expenses are covered i.e. Interest, rates, insurance, vacancy, maintenance and management fees, however you will not be reducing your mortgage at all.
The above example is not one of a bad investment. This investor will have invested no cash, made a reasonable cash sum along the way, and expect to sell the property one day for a decent capital gain, at which point they’ll pay off their mortgage in one hit.
Alternatively, they might choose to pay off their mortgage over 20 or 30 years, by reinvesting their cash surplus, as well as some of their own regular income. The sacrifice in the short term will have massive upside in retirement, when they own a freehold property producing ongoing passive income indefinitely.
The third option, if the bank will lend you enough, can be the best of both worlds – minimise your cash investment as well as having a freehold investment throughout retirement – but you’ll need to double down. This scenario would require you to purchase two investment properties, make interest only payments on both, then eventually sell one, using the capital gains to pay off the mortgage on the other.
Summary: There are three basic investment strategies people tend to implement, with long term income being the goal.
Buy one investment property, pay interest only on the mortgage, wait for it to increase in value, then sell at retirement to create balloon cash injection.
Pro: Small scale and requires no weekly cash input.
Con: Not left with any passive income when you retire.
As above, but pay additional cash against the mortgage principle, so the investment eventually has no debt.
Pro: You won’t have to sell, so will have an income generating asset throughout retirement.
Con: Hard on personal cash flow.
Buy two investment properties, pay interest only on the mortgage, wait for both to increase in value, then sell one at retirement to pay off the other mortgage.
Pro: Requires no cash. End result includes ongoing passive income.
Con: Requires much larger investment mortgage.
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