Building up passive income with property takes patience, dedication, and reasonable monetary investment, but it has the potential to provide complete financial freedom. You need to know what you’re doing, and how to buy and manage properties that suit your goals, in order to successfully create rental income to replace your salary.
1. Figure out how much you need
Believe it or not, this is more complex than just replacing your income dollar for dollar. How much you are earning now is just one part of the equation, because it is important to consider whether you’re happy with this amount of money. Without a job to fill most of your time, you probably have dreams of taking up new hobbies, travelling, or working on renovations, and you need to run the numbers to find out what those choices will cost.
2. Save your first deposit
If you don’t already own property and don’t have any equity to borrow against, you will have to save for the deposit on your first property. You ideally will want to save 20% of the value of the property to avoid paying lender’s mortgage insurance, which means that this could be the longest and most challenging part of the process. If you are eligible for the first home buyers grant, you could use that to your advantage here and purchase your principal residence first, which will help reduce the costs.
3. Leverage your equity
Once you have one property under your belt, whether it’s your principal residence or not, you can then use the power of leverage, which means that you can continue to take on good debt without paying upfront. If you purchase a property that is self-funding straight away, the equity growth is yours, without any of the holding costs. However, you do need to understand that you will be taking on a significant amount of debt and that there are a whole host of costs associated with property ownership, such as mortgages, council rates, body corporate fees, property management fees, insurance, and all sorts of other expenses.
4. Have an asset protection plan
One of the most important concepts to understand is that the market is going to fluctuate, and the value of your investments is going to go up and down. Your interest rate might change, the amount that you can charge in rent might change, and you have to be prepared to weather any storm that comes your way. Make sure you’re choosing an investment property in the right area so that value won’t be decimated with market changes, and make sure your finances outside of property investing are solid, so you never have to be in the horrible position of having to sell at a loss.
5. Hold for the long-term
Like many other types of investing, the most profitable way to operate in the property market is to think long term. Even if a recession hits and your portfolio loses a significant amount of value, that is temporary, and over the long term, the value will go up if you’ve done your homework and bought the right properties for your goals. Real-estate investing is a great path to becoming financially free, but it won’t make you rich overnight and you have to be in it for the long haul.