The art of achieving big returns on small risk
Warren Buffet’s first rule of investing: Don’t lose money.
Second rule: Don’t forget the first rule.
Tony Robbins talks about the principal of asymmetric risk and reward in his book, MONEY: Master the Game: 7 Simple Steps to Financial Freedom.
In a nutshell: rewards should vastly outweigh the risks.
Most of us fall into the trap of risking R100 to make R10. Let’s be honest, that’s not very smart. Wouldn’t you rather risk R10 to make R100?
That’s smart: Nirvana.
My top 5 tips to property nirvana:
1. Don’t use your own money
- If you must, pay a deposit
- Pay the costs: bond, registration, conveyancing, transfer duties etc.
- Let the bank risk the rest
2. Secure an income
The quickest way to turn nirvana into hell? No income.
Get a lease tied up, ASAP. Ideally, before you risk your R10.
3. Cash-flow is king
Make sure your income, less your expenses, and a contingency, leaves you cash-flow positive: i.e. your rental income covers your bond, plus expenses.
Tip #1: Build in a buffer for potential interest rate increases, which can seriously dampen your cash flow. After your first year or two, the rental increases should more than cover these cash flow hurdles.
- ROI (return on investment) refers to the interest you earn on the money you put in (deposit plus costs).
- Yield refers to annual net income over property value (assumes a cash deal).
- Cash-flow is the difference between income and expenses each month.
They’re all important, but very different. Don’t confuse them.
4. Inflationary love
When you buy a property with a lease that escalates at inflation or more, you have an inflation proof asset.
5. The power of compound interest
Rental escalations are compound in nature: increases on increases.
As rental goes up (compounds), so does your asset value, and your ROI.
That folks, is how you risk R10, and make R100. Sounds like nirvana to me!
For assistance with smart investing and professional property services, contact Kat.