Smart real estate investing is a superpower. Master it and you can have an income to live off for life and enough capital growth to secure your financial future. Learn about investing in apartments for financial freedom in just 10 minutes with out top 8 investing tips.
Let’s hit it!
- Living off rental income
- What to avoid in an investment property
- The problem with negative gearing
- How to quickly identify a cashflow positive property
- Our top tips for investing in apartments to live off the income
- The best advise you’ll ever get on investing in apartments – summary
Living off your rental income
Living off rental income is part of the property investing holy trinity.
It’s when your rent covers all of your costs to hold the property, and then some. In investing terms, this kind of property is known as ‘cashflow positive’. Once your investment is cashflow positive, you get money in your pocket each month. Money you don’t have to earn from a day job. Huzzah!
There are a lot of moving parts to this equation playing out, on both the expense and the income side of your investment.
Firstly, let’s examine your holding costs. Many folks make the mistake of thinking it’s just your mortgage. Without a doubt your mortgage will likely be your largest cost and the biggest determinant of whether a property is cashflow positive. But remember, holding costs also include rental agent fees, city taxes or rates, accounting costs, fixed water supply charges (in Oz), tax accounting costs, advertising costs, vacancy allowances, and repairs and maintenance!
The last three on that list can be a cashflow killer if you haven’t factored them in.
On the income side the most important factor for cashflow is your ability to maximise rent, often by going above and beyond what the average investor is willing to do, or does.
What to avoid in an investment property
The opposite of ‘cashflow positive’ property is ‘negatively geared’ property. Negative gearing is a fancy term to try to make it sound strategic for your property investments to take money out of your pocket each year. You are ‘negatively geared’ when your property produces a loss which can then be used to offset your income tax at the end of the year (producing a tax saving).
Negative gearing may reduce your income tax bill, but that saving is premised on you making a loss on your cashflow at the end of the year! So the question is: why o why would you buy and hold an asset to lose money on it each year? Let’s look at why people buy negatively geared property.
1. Capital gains
The main argument for negative gearing is that the value of the property will grow more than your loss to operate it each year, leaving you net better off. Here’s a demonstration:
|Single story home mortgaged at 80% LVR
|Cost to purchase (excl. stamp duty & other fees)
|Median annual growth (5 years)
|$20,000 (4% / yr)
|Mortgage costs (3.85%)
|Agent fees (8.5%)
|Total operating cost per year
|Owner’s cost to hold
|Tax deductions on loss (@ 37% tax rate)
|Total operating loss
|Total return after capital gains
|$12,072 ((-$7928 + $20,000)
You can see in this example that he owner is $12,072 better off at the end of the year if the property grows by its 4% historical growth. This is after costing $12,583 out of pocket to hold the property over that time. That’s a BIG IF in our view and there are much smarter ways to invest in property & build a property portfolio.
2. Time in the market
The second reason people buy negatively geared property is because they believe by paying down the mortgage and increasing rents, the property will become cashflow positive over time. Over 40% of Australian investment properties are said to be paying their owners an income after holding costs.
But if you dig deeper, many of these properties have been held for at least a few years, most for more than 5. The investments have become positive cashflow over time.
For their first years of ownership however, the vast majority of Australian investment properties are negatively geared and actually cost their owners money! And a lot of first time investors can come unstuck in this period, especially if their personal income, rental income or mortgage situation changes!
Depreciation is an additional tax deduction on building, fittings and fixtures. Depending on the age and condition of your property, depreciation gains can be significant (but generally decline over time). For example, one year we received around $5000 in depreciation benefits on a 1970s brick and tile property we held until recently. To claim depreciation benefits, you need to engage a professional to do a deprecation report. Not all properties are eligible for benefits.
Deprecation lowers your taxable income, so it further reduces operating losses in negatively geared properties. In some cases, depreciation benefits can turn a negatively geared property into a positively geared property. This can happen if your depreciation benefit is > cost to hold – other tax deductions.
In the example above, if your depreciation is > $7928 (-$12,583 + $4655) then the property would be ‘positively geared’ at the end of the year.
In this example, you will have money in your pocket at the end of the year after tax. You will still be out of pocket during the year to hold the property. One problem with depreciation as a strategy is that you don’t know what your deductions are at the time you buy the property (unless you fork out for a report).
The problem with negative gearing
Where to start! We’re not fans of negative gearing as an investment strategy for so many reasons. Here are some of the biggest:
- The out of pocket cost. Can you afford $12,000 out of pocket ($1000 per month) to hold an investment property during the year? A lot of families trying to get ahead just can’t.
- The risk. Your losses can blow out easily – particularly if rents decline, vacancy rates increase or mortgage interest rates go up.
- It’s reliant on historic property market trends. Ever heard the line ‘past performance is not an indicator of future growth’? What if your investment doesn’t grow by 4% per year over the time you hold it?
- It’s harder to grow an investment property portfolio. Losing cash each year will impact your ability to service additional loans, if you want to add to your investment portfolio.
- There are smarter ways to invest in property!
How to quickly identify a cashflow positive property
Cashflow is important in property investing because it helps you hold the property without stress, minimise financial risk, and grow your portfolio. If you’re aiming for financial freedom, a positive cashflow property or two can be a game changer and speed up the time it takes to get your financial freedom.
But how do you quickly identify whether an investment will be cashflow positive?
In Oz, we apply what we call ‘the 10% rule.’ You can apply the 10% rule to a property’s gross rental yield when you’re out looking for your next investment. But it is just a rule of thumb. It’s always best to use it that way and do full due diligence before you invest.
As you do your research, what you will find as you scour through real estate ads and data, is that very few areas (at least on Oz) have rental properties returning a gross yield of 10%!
And this is exactly where apartments come in!
Why invest in apartments?
Firstly, we’re not talking about investing in just any old kind of apartments. We’re talking a specific type of apartment, in certain areas with certain features. If you follow our tips, investing in apartments can definitely be cashflow positive and pay you at the end of each month. They can also appreciate in value and provide options to take equity out of your investment over time.
We know all of this because we invest in these types of apartments and live off the income.
So lets get to the juicy bit 🙂
Our top tips for investing in apartments to live off the income
We’re about to run through the type of apartment investment that we hold and that pays us an income each month Before we start – this is not a straight forward or a passive investment strategy. If it was easy, everyone would be doing it….
So here’s our best advice you’ll get on investing in apartments:
- Buy multiple apartments on a single title
- Go regional
- Buy ‘walk-up’ apartments
- Buy brick or cement
- Find a cosmetic renovator
- Buy occupied apartments under market rent
- Supercharge your income
- Buy in a trust with a company trustee
Now let’s break down what exactly we do and have learned from experience:
1. Buy multiple apartments on a single title
This is critical, so we’ve made it number 1 on the list.
Buy multiple apartments on a single title, ideally on one registered parcel of land (or Lot). We’re talking about investing in a Duplex, a Triplex or Fourplex. Buying multiple apartments on a single title increases your rental and value add opportunities. We’ll get into this further below. It also lowers your buying and holding costs compared to buying single or multiple apartments, each on their own title.
We recommend stopping at four apartments. Anything over four apartments and you start entering the realms of commercial lending (at least in Australia), which can complicate the loan process and make loan criteria harder to meet.
Four key benefits of a single title apartment block
- It’s cheaper to buy – buying multiple apartments on a single title incurs lower buying costs than a block of separately titled apartments. Since buying costs such as title registration, mortgage insurance and stamp duty are all attached to property title, you pay these fees once for multiple properties. Buying multiple apartments on a single title can save tens of thousands of dollars in the buying process.
- It’s cheaper to hold – expenses such as water bills and council rates (city taxes) are much lower with a single title apartment block. Rates are attached to land parcels (lots) in Australia. A block of units on a single title over one lot attracts much lower council rates each year. You also pay less in fixed water charges, which landlords foot the bill for here in Oz. Multiple titles equals multiple water connection points, each with a separate water bill.
- Multiple rental streams – high vacancy rates can kill a good property investment dead in the water. Dual income properties help you manage this risk through diversified income streams. When one is vacant, you have rent from the other and so on.
- House hack and live for free: You could even live in one apartment and have tenants pay your mortgage. A $500,000 duplex with $400,000 loan gets you $1213/month rent. Your principle and interest repayments are $1876/month. Your rent is $153/week! You’d need to be onsite manager to realise this outcome but it’s doable.
- Subdivide – You can subdivide the right duplex, triplex or Fourplex. Subdividing is the process of putting each apartment on a single title (often called ‘strata title’). This allows you to sell one or all apartments separately if you want to. Why would you do this? Firstly, to increase a valuation on your investment. Three separately titled apartments will often reach a higher book valuation than a triplex on a single title. A higher valuation allows you to draw equity and keep investing…. Secondly, to access capital from your investment. If each apartment is on a separate title you can sell one or two apartments and take some cash off the table.
Note, there are certain features a property must have if want to subdivide in the future for a profit. But that’s a whole different article right there 🙂
Together, these 5 factors increase your potential for positive cashflow, organic growth and manufactured value – the property investing ‘holy trinity’.
2. Go regional
Property markets have experienced some pretty wild growth in 2020 and 2021. If you’re looking for an investment property right now, it’s highly likely that Duplex, Triplex or Fourplex apartments in tier one cities are out of reach. Unless you have a cool $1.5M…
The good news is, people still need a place to live in regional areas! Regional areas offer a lower buy in price for these types of properties. A LOT lower! You can still pick up Dduplex or Triplex in regional areas with sound local economies for around $650,000.
Add to that new remote working trends, and you may find that rents in regional locations are on the rise and are even outpacing city rental increases in some areas.
All of this bodes well for your chances of getting into the duplex or triplex market and of achieving a decent rent. In our view, regional areas with diverse and growing economies are great markets for investing in apartments as unit blocks.
3. Buy ‘walk-up’ apartments
A lot of folks were turned off apartment living during the pandemic. Apartments with shared lifts, facilities and common spaces definitely had a stink about them. People wanted distance from their neighbours. This is where ‘walk up’ apartments come in. A ‘walk up’ apartment is an apartment accessed by stairs or located the ground floor, with its own private entrance and facilities. This means they work for social distancing – ‘pandemic proof’ in a sense.
Walk up apartments were mostly built in the 70s in Australia, at a time when there was just more ‘space’ around and less people. They’re often larger internally than contemporary apartments. Updated walk up apartments can be appealing to renters for this reason.
Look for walk up apartments with minimal common areas. Individual rather than shared laundries, parking and outdoor areas is what you’re after.
4. Buy brick or cement
Earlier we mentioned that maintenance and repairs can blow out to your costs to hold a property. Multi-unit properties can exacerbate this as there are more kitchens and bathrooms, which is where the bulk of maintenance and repairs occur. So when you’re looking to buy, opportunities to reduce maintenance and repair bills are the same as money in your pocket.
One way to lower these costs is buy brick veneer properties instead of timber buildings, which require far more maintenance for wood rot, painting etc. Brick buildings typically require less up keep, making it easier to cashflow the property. You’ll also have a greater chance of retaining tenants with brick construction because shared timber walls can make for very noisy living.
5. Find a cosmetic renovator
Cosmetic renovations involve simple upgrades like cleaning, paint, flooring, window furnishings and tidying or landscaping gardens. Cosmetic renos are a great way to add value to an investment property for relatively cheap. They can also lead to higher rents and better cashflow.
When you renovate a Duplex or Triplex, there can be economies of scale in the renovation cost as well as a multiplier affect on rental increases. Win win for both value and cashflow! Just remember you need to have some extra money left in the bank for renovations after buying the property! Also, talk to your account about the timing of your renovation before you buy. According to Upside Accounting you need to be really careful what work you do to a property in the first 12 months of owning it as ‘initial repairs’ are not tax deductible!
6. Buy occupied apartments under market rent
You have to do some market research to get this tip right, but it can be worth it. What we’ve observed is that some landlords are reticent to raise rents on long term tenants that ‘look after the place’. We’ve also found that somewhat dated properties can also be rented at below market rates.
These are exactly the kind of duplexes or triplexes we love! You’re looking for an opportunity to raise rents significantly, without spending a lot extra to do so.
Tips 5 and 6 go hand in hand many times, and can turn a borderline investment into a cashflow positive one. Something to note is that you may need to move existing tenants on for this strategy. Firstly, to renovate. Secondly, because in many states there are limits to rent increases at lease renewal. These limits don’t apply to new tenants and leases. Instead, you’re free to find a new tenant and set your rent at or above market rates.
7. Supercharge your rental income
Renters will pay more rent for certain amenities. Understanding what these are, and the mark-up for them in your area, presents opportunities to supercharge your rental income. Examples include providing furnished rentals, renting to students by the room, or installing amenities like air-conditioning. You might also consider opportunities for short term rental accommodation, which for us has been the ultimate supercharge strategy and helped us get to financial freedom!
8. Buy in a trust with a company trustee
This is a no brainer if you want to build a property portfolio, protect yourself legally, and minimise tax. A properly structured trust with company trustee can help lower your tax bill significantly, protect you from legal liability, and help with estate planning if you want to transfer asset ownership among family members. Be warned, you will need to lodge separate tax returns for the trust. This will cost extra in accounting fees, which you should also add to the cost of holding the property!
For us, the tax advantages of using these vehicles have produced at least a 10x return on our accounting costs… Wooorrth iiiit!
The best advise you’ll ever get on investing in apartments – a summary
To recap, if you want to live off rental income then investing in apartments may be the strategy for you. But you’re not looking for just any apartments. You’re looking for multiple ‘walk up’ apartments on a single title and lot, located in regional areas. Properties that are: brick construction, in need of cosmetic update, and currently rented below market rates. You’ll need to have some money on the side to update the property and the gumption to move long term tenants on as part of this strategy. Oh, and don’t forget to buy in a trust and look for every opportunity available to supercharge the rent!
Always do your own research into the local rental market and economy. Always crunch the numbers before you buy!
We own a triplex in our investment portfolio and live off the income it provides. It’s almost doubled in value in 10 years and we still have the option to subdivide with pretty minimal cost if we want to sell.
This is active investing but if you want above average results, you can’t just do what the average investor does (buy negatively geared property).
We genuinely feel we’ve that this is some of the best information about investing in apartments on the internet. We hope it helps you on your investing journey to financial freedom! If you feel the same, you can help us out by sharing it around. Oh, and happy hunting!