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Ben Kingsley Blog post by Ben Kingsley

Cash flow and Provisioning Critical

I am on record pretty much every week, talking about how property investing is a long term play and why would you sell if property values continue to grow and also provide immediate and on-going income via rent payable by tenants.

Yet one of the barriers of entry for some to invest in property is the fear of borrowing money (debt) associated with such a large purchase amount.  The fear stems from their inability to manage their own money now & forecast their cash flow needs into the next 5, 10, 30 years.  Unfortunately budgeting doesn’t really work for most of us, because it is usually based on retrospective spending and it’s hard to forecast future spending without building a very complex model, which has to factor in inflation, wage increases, future education expenses, cost of living, planned holidays, car upgrades, etc. Then, on top of this if you add an investment property, things like capital growth assumptions, rental income, interest costs on the borrowings, maintenance etc.  All complex stuff.  However if I was to say to you the end goal could result in several million dollars in additional wealth, hopefully your reaction would be one of “tell me more!”

Most folk think that the only way to generate cash flow is to work for it, and given that the better performing properties will most likely generate a negative cash flow position when they are first bought, people quickly do the math and believe they don’t have the income or surplus cash flow to support any purchase.   Well, depending on their situation, they could in fact access surplus cash from a variety of ways, and it doesn’t involve stealing it or getting charity or a gift from a third party source.

Restructuring of one’s finances is an excellent way of sourcing ‘unrealised’ funds to invest.

Basically this involves reviewing any current debt and looking at ways to reduce your money commitment on this debt to release this surplus to be invested, and I’m not talking about just getting a better interest rate on your debt, I’m being far more sophisticated here.  In releasing this ‘unrealised’ surplus cash, you are taking a calculated and strategic view that the surplus funds are going to return a superior wealth position against the actual costs of sourcing and meeting the interest commitments of this surplus cash flow.

A simple example – Let’s say you had an asset worth $100,000 and you had a debt of $50,000 and were paying $200 a month in repayments on this debt.  Let’s say you could reduce this to $100, leaving you with a surplus of $100 to invest.  You invest this $100 into another asset worth $100,000.  Both assets grow at 7% per annum so in a years’ time you have assets worth $214,000 and debt of $150,000.

Fast track 20 years from now, your investments have grown from $200,000 to $773,936. Now let’s say you are still holding the debt of $150,000, your overall net position would be $623,936.   If you opted to pay down the loan with your $200 instead of releasing these surplus funds to invest, then you would have no debt but your overall wealth position would be $386,968, based solely on your initial asset worth of $100,000.

By relocating some committed cash flow to invest, you have increased your wealth base by $236,968, without actually generating any new income/cash flow to support this position.  Now imagine if that figure was $1,000,000 that would mean a difference in net wealth of $2.36 million in net worth……..interesting stuff isn’t it?

This basic example doesn’t take into consideration the income your investments may have generated, which would have assisted with meeting the debt commitments and eventually your property/ies will move from negative cash flow to positive cash flow position, which results in on-going passive income.

Other ways to access surplus cash flows you may not know about are; looking at your cost of living, making other investments that are geared towards strong income returns, securing a better borrowing terms and rates, claiming tax deductions (losses) before they occur through your pay, known as an income variation request, consolidating high interest borrowings like car loans, credit card debt, using equity in a asset to release cash, etc.  Basically there are plenty of ways to help you on the cash flow front, but they all require detailed assessment to ensure they are right moves for you.

On the provisioning front, you must forward think about expenses that are going to have an impact on your cash flows, such as the list noted above.  They are all good examples of items that have a large impact on cash flows and given the long term natural trend of property investment returns, your cash flow forecasting cannot afford to go into the red (negative) any time during early period of say 5-10 years of holding your new property investment.

As I’ve seen with our Private Wealth clients who have engaged our services in modelling their cash flows, provisions, borrowings, asset investment selections (properties) to provide them with their wealth plan via forecast modelled wealth at retirement, they move away from the ‘fear’ holding them back and actually do something about building their own or their family’s wealth positions for the long term.  Plus they have the comfort in knowing they are being monitored on a monthly basis to assist them on the right path to a wealthier retirement, that doesn’t involve working harder to generate this wealth as their passive investments are going to do most of the ‘heavy lifting’ for them.

Don’t let fear or lack of understanding your own cash flow and provisioning needs stop you from building wealth.  You do have access to education and professional advice right here – if you choose to use it.  Your first step should be to immediately book into our ABC of Property Investing – Free education session to learn more about your potential.  This month’s session is booked out, but you can register for next months right here – www.empowerwealth.com.au/abc

Remember Knowledge is Empowering……….

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