Making your money work hard for you should start with your very first home. “Fair enough”, you say, but what should your first home look like? What should it do for you and how can it move up the property ladder?
The fact is, too many people try to buy their dream home straight away, without giving any thought to what they should buy, not just what they want to live in. And believe me, I understand that thought process. When it comes to our homes, our egos tell us one thing: Get the dream house! Get the trophy property!
But is a McMansion what you really need in your first house? Or even your second or third? Probably not. Most people want to buy bigger and bigger homes far sooner than they should. That said, what should your first home really be about?
The cycle of life
If you look at where you are in the cycle of life, it will guide you in your real estate investment decisions. For instance, for a lot of us, when we land our first jobs, it’s all about party time, isn’t it? Spending our paychecks as fast as we earn them…
It’s only after working awhile do we start to get serious and go into accumulation mode. That’s when we start saving money and start to accumulate wealth. After we’ve accumulated enough so that we’re not worried about income—when we’ve replaced our income three or four times over–then we can buy the things we want and do what we really want to do in our lives.
And it just so happens that the cycle of life closely follows the cycle of real estate.
The cycle of real estate
Even when you’re just starting out—or if you’re just renting your home–buying a PPR is a very good idea. You have to live somewhere; it might as well be giving you a tax break along the way. Down the road, only after you’ve replaced your income three, four or even five time over, should you think about acquiring your dream house.
Therefore, the key is to buy the right first home and not blow your hard earned money on a McMansion that will stick you with a high mortgage and make you house poor! That’s the road to bankruptcy. Buy properties that mirror where you are in life.
No “lazy equity”
With that in mind, your first home should be either:
1. Where you can manufacture growth in the property yourself, or
2. In an area where you think will be growing or what I call “lazy equity” where the property grows in value without you doing anything to it…
Now, I’m not a huge fan of relying on “lazy equity” because you really don’t have any control over the growth. You’re betting on outside market forces to work in your favor and I don’t like that one bit. I like to control what my property does for me.
Control value and income
So, focus on buying a PPR that you can control either the income or the value.
Sometimes that might not be a positively geared right property off, but if you do this or that to it, then it becomes positive cash flowing rather quickly. That’s a ‘yes’ to buy—just barely–but once it’s positive, you’re making money.
So buy your first PPR where you can get, or create, extra income from it. Yes, even if it’s your first house and you’re living in it, the first thing you need to think about is what you can do to increase the yield from that property.
How you do that is less important than making it happen. There are lots of way to do this…
For example, can you rent the rooms out? Can you get a boarder in it or rent to a student living there to increase your income right away? Or can you add a granny flat, or convert it to a dual occupancy property? You get the idea…
The second thing to think about is how you can increase the value of that property. Even if you can’t do anything from an income perspective, the property should be doing something for you from a value perspective. You don’t want your equity not performing for you.
That is, you don’t want lazy equity. Whatever savings you managed to scrape together to get into that property, you need it to be working hard and producing equity for you from the very start. Your money is your employee; it needs to work hard for you. You need to be a conscientious employer of your money!
Think of it this way…
If you had an employee that didn’t work for you, you’d give him the sack, wouldn’t you? That’s what your equity is doing if it’s just sitting there in your house, doing nothing. You should be using that equity to acquire your next property!
Buy what your portfolio needs
Which brings me to the next step…
What should your first property also do for you? The first property you acquire needs to set you up for the next one… You need to keep that strategy in mind with every property you acquire thereafter!
And just what kind of property should you buy next? The answer is simple: Don’t buy the property that you want…Buy the property that your portfolio needs. If your portfolio is short on income, your next property should be a positive cash flowing one. If you’ve got plenty of cash flow, you’ll buy a property with built-in equity, in a growth area, or one with solid equity-building opportunities.
No holidays for your money
And by the way, by all means avoid the trophy investment properties! I see this quite a lot; it’s an easy trap to fall into…
You take a vacation, fall in love with rental property in an ideal spot with a high price tag and a low yield…You tell yourself, “It’s an investment” and so you buy it. It’s that ego talking again, isn’t it?
The next thing you know, the darn thing is negatively geared and you’re losing money. Your money has literally gone away on holiday and you’re paying for it! Remember to keep your emotions in check and focus on making your money work the hardest for you. It does that when you acquire properties that your portfolio needs, adding either income or value to your portfolio, or both!