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So you own a rental property; great, but now what?
How are you going to make money?
What’s your exit strategy?
These days, there are numerous strategies available for landlords and property investors depending on the type of financial goals they want to achieve. Some property investors buy rental properties with the goal to fix them up and flip them. Others buy so they’ll have a nice income stream for retirement. But for new investors and landlords, the decision of whether to go short term or long term might be something to reflect upon.
If we were to ask you the difference between long and short-term stays, the simple answer would be:
“ Long-term renters stay longer than short-term renters. ”
That is true, but it’s only half the story. In reality, deciding which strategy to tackle can be complicated espeacially for new comers.
The current market property seems to be obsessed with making short-term returns and with the introduction to Airbnb business model makes sense. As a business model, with short-term stays you can get dramatically higher returns since in theory you can charge more money for a short-term stay. But what about the next 10, 20 or even 50 years? Is such a short-term approach really the best financial model?
Why short-term rentals might be risky for some landlords.
The simple fact is that not every property is suitable for short-term renting and owners needs to carefully research market demand.
Like every investments, it comes with great risks and consequences.
In many regional holiday destinations, the majority of income is earned during the summer/holiday months. Beachside and holiday locations espeacially attract many people travelling to the city for a short trip, but beyond that, the demand can be very sporadic. In winter, it may not be possible to find a tenant at all for these locations. A good, all-year locations tends to be in central city areas and near reliable transport hubs.
Potential property damage is another risk that owners need to take into account as we’ve all heard horror stories of homes being trashed by people on short-term rental platforms.
There are just way too many factors to consider and can be a headache. Also, property investors thinking of moving into short-term rental provision also need to consider the GST implications if it earns them more than $60,000 per year, as well as the rules, insurer and requirements of their council.
Hold it Indefinitely: Retirement and Beyond- the long term strategy.
Sun Tzu was a Chinese general, strategist and philosopher. He often wrote about the importance of strategy and seamless execution in warfare. His highly revered book, “The Art of War” is still used across business leaders and strategists around the world. For the simple fact that Sun Tzu’s wisdom and knowledge is applicable in today’s world across areas including sports, military and investments.
"One who is prepared and waits for the unprepared will be victorious"- Sun Tzu
With property, having long-term strategy opens door to more possibilities and future options. These include house flipping (making some improvements and then selling it). Most house flippers have a five-year plan. Slowly making improvements while renting the place out. Then, when they (hopefully) see an appreciation in the house value, they sell.
You don’t ever have to sell your rental property, even in a red-hot real estate market.
As long as you have a positive cash flow, you might never want to sell. Having a long-term strategy with long-term tenants means that you can build relationships for long periods of time meaning that you can keep earning passive income well into your retirement years.
Say you purchase a property and you assume a loan that is interest only. You then hopefully generate a passive income from this property. This could happen if you buy a positive cash flow property or even purchase a negatively geared property. But basically over time rent goes up and it becomes positively geared.
This is a long-term strategy and all you do is you hold the properties. You don’t have a huge focus on paying down debt. Sure you may have a principal or interest loan over 25 or 30 years or you may have interest only loans but paying down debt is not your focus. Generating passive income above all the expenses of that property is your focus.
What’s likely to happen over time is that your properties will increase in value. The rents will increase in value but your mortgage amount will stay relatively the same. As these rents go up and your mortgage stays the same your passive income begins to increase.
If you are only making $20 per week in passive income after all of your expenses and your property goes up $20 per week in rent, chances are your expenses won’t change significantly so most of that $10 increase would actually be profit. So you are going from $20 passive income to $30 passive income. Twice as much without paying down any debt. The main focus in this method is to generate a passive income to have financial freedom.
As Sun Tzu greatly puts it: Patience is about preparing ourselves first and then wait for the right opportunity to arise.
Always remember to set your financial goals first before you strategise and invest in property. If you can go and invest with a successful exit strategy in mind then chances are you are going to choose a better property that is more likely to lead you towards your financial goals.
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