There is good debt and there is bad debt. Fundamentally, we know that tax effective debt is good debt. However, when we struggle to hold debt, it can cost us if we are not structured correctly with a How to Hold strategy.
The ability to hold and retain is what will define you as an investor. Being well structured and having provisions to hold could be the difference in realising your capital gains.
Being well structured for How to Hold and Retain is like the growth of a tree. The roots often go down long before the trunk and canopy are established. In order to grow high and far reaching, you need solid roots as your foundation.
1. Never invest without a buffer, always keep at least 10% of funds available as a buffer. This can be in an offset account or in a line of credit. I have used my buffer on at least four occasions.
2. Have a good mortgage methodology. There are eight key components to good mortgage management:
1. Maintain a separate account for each property.
2. Create a routine direct debit for your tax withholding refund.
3. Create a routine direct debit for your ‘You’ component.
4. Direct your rental payments, fees, rates, owners’ corporation fees and others into your account.
5. Have your mortgage paid from this account.
6. Keep a float of one month’s interest in the account at all times.
7. Set a monthly reminder, 5 days prior to the loan being paid, to ensure all funds are available for that month.
8. If your rental payments are due on or around the same time as your mortgage, then be one month in advance to ensure adequate funds and reduce stress.
3. Cash flow from the tenant is all-important. Hence, tenant selection is important. Be involved with tenant selection. Treat it like a job interview. Look for stability, affordability and always reference check your tenants. People leave clues as to how they behave.
4. Be a good landlord, maintain your property and treat your tenants well. After all, they are an essential component to your Collaborative Investor Partnership.
5. Arrange to have your ‘tax withholding’ upfront; you don’t have to wait until end of year tax time to get your refund. Speak to your accountant about rearranging your refund.
6. Consider insurance for the unexpected. Income protection, TPD (Total and Permanent Disability), landlord and home and contents insurances.
The beauty of negatively geared properties is that we have a ‘collaborative’ investment, whereby we have cash flowing into our investment from tax returns and from tenants.
Interested in learning more and covering the ‘what if’ scenario in the event that something changes?
Call the team at Solid Group on (03) 9500 8000 for a FREE copy of Lynne’s book ‘The Formula – A mentor’s guide to confident property investing’ for this month only!