As we discussed at the end of last year, there are no big “Auckland effect” surges of growth on the horizon for at least half a decade… so how are we profiting from real estate now?
We have 5 approaches to putting serious wealth into our pockets during this time and you will learn about them at our upcoming Property Investor Nights. Additionally, when you come to one of these educational events this month, we’re giving you an invitation to attend one of our client meetings where these approaches are taught in much greater detail. You can also “get an insider look” and ask our clients face-to-face if we’re any good at what we do too.
Strategy #1: Massive Cash Flow
The strategy I want to talk about today is “massive cash flow”. However, before I go into this, I’m going to tell you straight up that we are not interested in rural centres. Instead, we’re doing this in inner-city, high growth locations. The kind of places you’ll benefit from both cash flow and long-term growth.
For example, a 2-bedroom apartment in Te Aro, Wellington could get you, say, $200 a night (I just went on Airbnb and looked around). The median purchase price for a 2-bedroom apartment/unit in Te Aro is $410,000. So even if you’re only getting 60% occupancy in the year, that’s a 10.68% gross yield*.
Of course, if you want to maximise occupancy, you’ll have some nights cheaper than your standard $200. Say your occupancy is now 80% for the year, and you’re averaging $180 per night, you would achieve a whopping gross yield of 12.82%.
Now compare that the 6.3% median gross yield of a 2-bedroom Te Aro apartment…
Yes, the costs of running short term rentals are higher than long term leases, but if you regularly manage your pricing (as we discussed in the Airbnb guide for investors last year), yields like this, and bigger, are entirely possible.
*For the purposes of this comparison, I factored in the occupancy rate in the gross yield.
Two interesting observations on what this means for you.
Observation #1: Rental yields like these mean this property can potentially pay itself off a lot faster.
Why do I talk about paying off the debt?
Getting the property to pay itself off, effectively buys you another investment property. Follow the logic.
$410,000 apartment and let’s say you borrow 100% because you use equity from your home or another property, that’s a $410,000 mortgage. If you get in the right micro-pocket (more on that next post) and the property doubles in 10 years, it’s now worth $820,000. Sell it, pay out the debt and you have a $410,000 profit. This ignores costs etc. obviously, but remember it’s just a simple example.
Look at the difference if you also paid down the debt during that time. When you sell at the end you have no mortgage to pay out so your cash in the bank is the full sale amount of $820,000. That’s double the money… effectively the same as if you’d bought two investment properties.
Observation #2: The higher rental yields can halve the amount of property you need to hit your wealth goals.
Most people I talk to say that if they are debt free, they want $100,000 a year to live a comfortable life. To get this money in rents from property yielding 5% you need $2 million worth of real estate debt free.
How much real estate do you need if you’re getting a 12% yield to make $100,000? To reach the same cash flow goal, all you need is $834,000 of debt free real estate. That’s much less than half!
Whichever way you look at it, a high yielding inner city property (provided you get the right kind of location), is effectively worth two investment properties.
There’s nuance to getting this right. It’s not a simple case of just buying any old property and throwing it on Airbnb. Come along to a Property Investor Night and see how we’re doing this for clients.
Image Credit: unsplash.
Disclaimer: All information provided is of a general nature only and does not constitute professional advice. Seek advice from licensed professionals to see if advertised results are possible for your situation.