Property Investment and Lateral Thinking

Once you replace negative thoughts with positive ones, you’ll start having positive results.
— Willie Nelson know that sometimes it’s not always possible to find a high yield property. But there is another way to create positive cashflow from a negatively geared property so that you come out a winner at the end of the day. Property Investment NZ is a tough business and requires that sometimes you need to take a lateral approach.

Use low interest loans to turn a negatively geared property into a high cashflow property

A new loan product has now made it possible to achieve positive cashflow in what used to be negative circumstances. For example, if you were to buy a property for $300,000 and plan to rent it out for $300 per week, this would create a 5% yield. The bank would have lent you 80% or $240,000, and you would have put in $60,000. But what would happen if you were able to borrow that $240,000 at 4.5% interest, even if the banks were charging 6%? You’d probably think you were dreaming, but it would actually result in your getting the equivalent of a 10% yield on the property. This in turn would mean you would have excess cash available, which equals income, and consequently the bank would be prepared to lend you more money. But which bank is going to lend you money at 4.5%, I hear you asking.

The way to get this kind of finance is through a low interest loan (also known as a cashflow loan), and it works like this. On the $240,000 that you borrow, you can nominate your interest rate from about 4.5% upwards. If the best interest rate you are able to negotiate is 6.8% for two years, then the difference between that and your nominated rate of, say, 4.5% will be capitalised and put on top of your mortgage.The total interest rate is the same as for any other loan, but now the property will be generating positive cashflow, which is seen as income by the other trading banks, so you also have more capacity to borrow.

The reason these loans work well for both parties is that property tends to increase in value at about 10% per year, and the capital growth on the property will generally outstrip the capitalisation on the loan by about 75%. If you have a such a loan over two years, in effect your property will have gone up in value by 20%, and after five years by 50%. At the end of five years you would refinance, or set it up for another five years.

If for some reason the value of the property didn’t move over five years, then you would repeat the loan for another five. As already discussed, property usually doubles in value over a 10 year-period, but not necessarily at a steady rate of 10% per annum, in which case all the growth may well occur in the second half of the period.

This is an especially good strategy to use in a market where interest rates are high and it is difficult to find property generating positive cashflow. The moral of the story is that if you can’t get a high yield, at least get cashflow!

The above post is based on the book “The 15 Million Dollar Man” by Sean Wood, to read more click Property Investment and download 2 free chapters.

For further reading on Property Investment NZ, click on the articles below:

Setting Goals for Financial Independence – click here

Tips for Becoming a Property Expert – click here

Buying Rules for Property Investment – click here

5 Tips to Add Value through Renovation – click here

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