A few things to remember. When you plan your finances in this way and you start out by investing for income first, then every investment increases your income! At first you may not feel the difference or see the income, as you will re-invest the income and add something more to it. But think about this:
You buy a property of R150 000 (we had some of those a month ago) with a net rent of R1 600. Initially you will have to subsidise this property with about R200. But if you now do your income statement, your income has incresed by R2 200. Then you have expenses like levies and taxes and mangement fee. And then there is bond repayment. But the fact is, you have increased your income and very soon you will be able to see the benefits.
Imagine you bought 10 of these? It would initially take about R2 000 per month from your pocket, but you have increased your income by R22 000! Net income increased by R16 000. Even if you do take 20 years to repay these flats, you will start making a profit within 3 years. Perhaps in year 3 you have a profit of R3 000 (R300 x 10). Not bad!
And that is why I keep on emphasizing the benefits of this investment philosophy! If you ensure that the debt is paid when you die or become physically impaired so that you cannot work, you have an income for life.
A simple calculation: If you want to provide an income of R16 000 per month for 20 years, you need capital of R3 640 000. And after 20 years the capital is gone!
Understand me very well: I am NOT saying property is the ONLY investment (or the only investment with cash flow). I am saying: First invest for income and use gearing. Then invest for capital growth. The sooner you have made all these boring income investments, the quicker you can start with the sexy, exciting capital growth investments.
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Piet ek hou van wat jy sê , maar wat sou jy dan defineer as kapitaalgroei (in praktyk) indien jy gearing slegs beskou as inkomste voorsiening?
Q
Quintus, Because of all my non-SA readers, I wil reply in English. It is very difficult to borrow money to buy shares. And it is in fact generallly not advised. The reason being that you buy shares predominantly for capital growth – the dividend yield on shares is normally 1,5-3%. If you buy property to generate an income, you can gear the property easily up to 100% and soon (I hope) 110%. And the you rent the property to a tenant who helps you pay the loan. Yes, the property will also increase in value (capital growth), but the main purpose with buying it is to generate income.
When doing Financial Planning for Financial Freedom, we would have two goals: income we want and a time to achieve this goal. To achieve both these goals, I might buy 12 properties when I need 10. In the “fullness of time” (the dominee raising its head), I will sell two properties, take the profit and repay my bonds.
In a nutshell, it is easier to focus on income generation and build a sufficient income (because of gearing) than it is to buld sufficient capital to “buy” an income at retirement. To see that, read my next post. Another reader asked me to do a few calculations. I will use that as an example to illustrate why I am not mad. I hope you have more clarity.
Please also remember: it is NOT either/or, it is and/and. But the right one should be put in place first. My biggest problem with traditional financial planning.
Anymore questions – shoot, I love it.