Yet the end user, you the property buyer, will not make money when you negatively gear. Everyone in the property chain profits except you.
Over time I have discovered as a seasoned investor, that it's important to understand some investment fundamentals.
When renting the traditional way, what looks like a good proposition on paper can turn into a negatively geared head ache.
A vacant property can chew up your positive cash flow very quickly. Right now there are market forces impacting uninformed investors. Due to supply and demand of property available to rent, in many capital cities and regional areas, rental returns for investors are down because it's a 'tenant's market'. Which means the cost to hold property is on the rise.
Tenants are paying less rent and requesting more concessions from landlords. Landlords can accept less income or wait for another tenant. It's the waiting game that can take a big mental and financial toll on the landlord.
There are two main reasons why it's a tenants market:
Firstly, the First Home Owner Grant has moved many tenants from renting into buying as first home owners, which over time has shrunk the pool of available tenants.
Secondly, when there is an oversupply of property, whether it's house and land packages or the current over build of inner city home units in Melbourne and Sydney, tenants now have more choice.
That means they can pick and choose where and what they will and will not rent. Their shopping list contains all the latest mod cons, and if your property isn't up to scratch the agent leasing your property may suggest you spend money upgrading to compete.
Plan for Vacancy
Many new investors blindly believe there are always good tenants waiting in line to lease their property who will pay market rent. They forget to build into the equation you want to plan for at least one month's vacancy and leasing fees per year.
Right now, I can relate to the pain that many landlords are feeling holding negatively geared property. Or feeling frustrated by the holding costs of un-rented properties.
Over ten years ago in America, I was a landlord with a lot of vacant investment property. As the marketplace turned in favour to the tenants, it became very apparent that I could not sell my properties fast enough to raise capital or find enough tenants to fill my vacancies in order to stop the financial bleeding. I had to find a solution in order to keep my properties.
As an Aussie transplanted to America, at the time I thought the only exit strategy available was to buy and hold property. Because that's what I did before I left Australia. But while in America, I began to experiment with vendor finance. I noticed this seemed to be a strategy that other investors used along with buy and holds.
Back then I didn't really understand how powerful this investment technique was.
I analysed my finances and noticed that my vendor financed properties had no or low turnover and the positive cash flow was steady and consistent in comparison to my rental property.
For example, with rental properties, if there were maintenance costs I paid them. For the vendor financed property there were no maintenance costs, insurance or rates because the people who bought the property paid.
In the end, I turned around my situation by vendor financing the properties that were vacant. This proved to be a turning point for me. Afterwards, I could sleep at night because I wasn't worried that my properties were empty and therefore couldn't cover my operating costs.
Trading Homeownership for Profits Now
At that time, I discovered during the process that it was easier and took less time to fill my vacant properties using vendor finance. I could not believe that even in a 'tenants market', I had no vacancies. But I knew that the market place was exactly the same as when I advertised for rent.
I couldn't figure out why it took less time (which reduced my holding costs) to vendor finance. Finally I asked the people who I vendor financed my properties to why they chose to buy instead of rent. All of them gave the same answer: to have the opportunity of home ownership. And they were really grateful for the opportunity. Suddenly they wanted me and wife to come around for a barbeque, yet my tenants never invited me!
When you're deciding whether your exit strategy is to rent or vendor finance, take a long hard look at your ability to service the mortgage and pay the holding costs of a vacant property. If you can achieve positive cash flow and rent your property, certainly that's a good plan. But if you're tired of paying holding costs or you're negatively geared and want to turn it around, it may be time to investigate how vendor financing can increase your cash flow.
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