Traditional Ways to Invest in Property

by Wealth Masters Club


Property Investment

This week, we're sharing an excerpt from our famous Wealth Mastery Online Course, which explains traditional ways of property investing and why those methods are very different from the correct Wealth Mastery method of property investment. If you still follow these 2 traditional methods, you may want to read on (and redo the Online Course) to find out why we don't follow them, and why you should be on the Wealth Mastery System.

In this article, the following questions will be answered:

  • What is a buy-to-let investor?
  • What is a shortfall?
  • Can shortfalls be financed?
  • What is a property speculator?

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TRADITIONAL WAYS TO INVEST IN PROPERTY

Before we get deeper into the Wealth Mastery System, it is important to explain what a traditional property investor is and how they invest in property.

What is a buy-to-let investor?

The book Rich Dad, Poor Dad by Robert Kiyosaki is a very good book. Although old-fashioned, the information shared in this book can be invaluable to the new property investor. This book makes you think in a different way, and that is a necessary part of this process. Robert Kiyosaki is probably one of the best-known ordinary buy-to-let property owners in the world.

Although the Wealth Mastery System makes provision for a type of buy-to-let property in a Provider Trust, it is not our main focus. This System is also used to create income essential for finance requirements and, later, it provides us with an excellent replacement for the useless pension funds of the financial industry.

The big difference between how we invest in property at Wealth Masters and how the ordinary buy-to-let investor does it, is that the ordinary buy-to-let investors pay deposits 99% of the time when buying properties. Generally speaking, the only time we will consider paying a deposit is when the bank insists, or when we buy property in a new development and the developer requires a small reservation deposit to reserve the property in our name. Most buy-to-let investors want to pay deposits – sometimes quite substantial deposits – for a different reason; they pay deposits because they are afraid of shortfalls.

What is a shortfall?

A shortfall is the difference between the total expenses on the property and the rental income paid by the tenant. On top of the mortgage repayment, you (the owner) are also responsible for paying levies or rates & taxes on the property and must also have capital available in the event that you're required to do maintenance work on your properties. Let's do the math:

 

Mortgage repayment

 

6,000   per month

Other cost

+

550       per month

Total Expenses

=

6,550    per month

Less: Rental Income

4,500    per month

Shortfall

=

2,050    per month

 

 

Traditional buy-to-let investors choose to pay a large enough deposit so that they won't have a shortfall – the bigger the deposit, the smaller the mortgage repayment. But if you think about the current market with property prices versus rentals, the rentals are relatively low, and therefore, you'd require a substantial deposit to ensure that you'll never have to pay shortfalls. Furthermore, with the traditional property investor, if there is a shortfall on his properties, he covers these shortfalls out of his personal cash flow / pocket.

 

“Buy-to-let investors fear shortfalls while Wealth Masters make money with it!”

Can the shortfalls be financed?

We're not afraid of shortfalls and there is a reason for this – when following the Wealth Mastery System, the shortfalls are financed. You will also notice that your shortfall amount will decrease each year, because we assume that we'll see an increase in rental income each year. Therefore, after a few years, you won't have a shortfall anymore and your rental income will cover all costs.

At this stage in their property cycle, as the property gets to a break-even point and even starts to become profitable, the traditional buy-to-let investor starts ploughing all extra income and cash into the mortgage in order to reduce the mortgage repayments and start making money out of the rental income. It stands to reason that if you pay extra money into your mortgage, then you can pay the mortgage off in a shorter space of time. At this stage, after having paid off their first mortgage, the buy-to-let investor feels he is in a position to purchase a second property. He then uses the rental income from the first property to either subsidise the shortfall on the second property or pay off the second property's mortgage. He can therefore pay the second property off faster than the first one. That is how they continue over the years and it could take 15 to 20 years to build up a decent property portfolio.

What's the problem with the above method? Well, for starters, it's too slow, and secondly, because you're making a profit, there are certain tax implications.

We must say at this stage that we are not against this method, and anyone following this way will be much better off than people not investing in property at all. We actually recommend that you always have an ordinary buy-to-let portfolio on the side because it provides for the continual growing income, which is essential for qualifying for mortgages on the Wealth Mastery System. Keep this method in mind for when we get to the Provider Trust later, as it is the method we use for this specific trust.

What is a property speculator? 

Another traditional way of property investment is speculating. An investor will buy property (probably off-plan) and once the property is built, prior to transfer and registration, he puts it back on the market and sells it, hoping to make profit. Think about it like this: if you buy a small entry-level townhouse, off-plan, at R700 000, then one year later, when the complex has been built, the property may be worth R800 000; if you sell, you make a R100 000 profit. Obviously, you'll then have to buy another property immediately to be able to do it again next year. Thanks to property inflation, a property similar to the one you just sold now costs R800 000.

The problem with this type of investing is that you just roll your money from one property to the next. Furthermore, the Tax Man categorises you as a property trader and will tax you at Income Tax rates, as opposed to Capital Gains Tax rates (income tax being much higher). If you used an estate agent to sell the property, you have to pay them commission as well. If you do all these calculations, you might find that the tax and costs can be as much as 40% of the gross profit you made. Your net profit is therefore only R60 000.

Keep in mind that you are now a trader, and if you sell stock, you have to replace it immediately, otherwise you will have nothing to sell a year later. And as we said, you now have to buy at the current market value – R800 000 – and if you sell a year later at R900 000, and pay the 40% tax and costs again, you're in the same financial position as you were two years ago. As a speculator, you just roll a certain amount of money over and pay tax on it again and again. This method is not tax friendly and it won't get you anywhere.

It's an illusion that you make money, because the buying and selling points are far apart. Discovering this illusion many years ago was the discovery that changed my life and the lives of thousands of people who attended my seminars over the years.

- By Coert Coetzee, The Wealth Mastery Online Course, Chapter 2

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If you'd like to read more, or redo the Online Course (which we recommend you do once a year, as there may be important changes), please click here.

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