For decades everyday Australians have approached real estate investment as a long term proposition. They purchase a property, perhaps using the equity in their residence as security, and then cross their fingers, hoping to realise capital growth down the track. In the meantime, they -negatively gear'.
The negative gearing concept is when an investor borrows money to buy a property, but the income generated by the property through rent return does not cover the borrowers loan repayments. In essence, you are given a tax break for losing money.
Particularly in challenging economic times this strategy can backfire, especially if the market slumps, property prices fall, and your financial situation necessitates selling the property at a price lower than what you paid. This loss in value, together with the ownership costs that have been incurred, can be devastating.
So when approaching property investment, why not stop focusing on the negative, i.e. how to lose money?
Positively geared properties have the major advantage of generating a passive cashflow, which will supplement, and even ultimately replace, your regular income. This is ideal if you can't afford loan repayments, as the buyer repayments will cover these for you.
Because of this, you are in a position to grow your property portfolio stress-free, with the new income covering your loan repayments. The more positive cash flow properties you have, the more money passive income you will receive each week, or month.
A Mindset Shift To Positive Cashflow
When home owners find that their property is draining their resources, they have a choice: to sell or to keep. Whichever option is chosen, property investment strategist Rick Otton, urges people to think -outside the box' before taking their next steps.
He says that learning how to turn a negatively geared property into one that is cash flow positive requires implementing strategies that are more suited to the current economy.
'For instance, if you want to continue to own the property, then you need to implement a negative gearing turnaround" he explained.
Turning A Negative Into A Positive
When the owner who wants to keep his property, provides the buyer with a loan – usually under better terms than offered by banks for an agreed price (the negative gearing turnaround), the mindset of both buyer and seller shifts.
The seller no longer has the stress of having to meet repayments (the buyer repayment covers them), they receive passive income (the difference between the owners loan repayments and the buyers repayments), and their property is occupied by an installment buyer that has an invested interest in it (aiming to eventually gain full ownership of the property).
The buyer is often someone who does not have a large deposit or is unable to meet other criteria that the traditional lenders impose on property purchasers. It is a great option for them because they will pay Installments to the owner as if making mortgage payments, at similar rates to a loan, but without the pressure of putting down a big deposit.
The Installment buyer is now able to build enough equity or allow any credit impairments disappear off their credit history. With the loan provided to them, it makes it easier for them to refinance when they choose with a new lender.
Changing the real estate investment paradigm in this way, taking a no-bank-involvement approach, can create wins for both seller and buyer.
By Rick Otton
Rick Otton is the author of How to Buy a House for $1(We Buy Houses, $24.95), now available at all good bookstores. For more information visit www.howtobuyahouseforadollar.com
For more information see: How To Buy a House For $1
Interview with Rick Otton
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