Good day. My name’s Ben Everingham, and today we’re gonna talk about how to improve the passive income of an investment property.
Beautiful. So I’m really excited about today’s video because this is something that I’m personally passionate about. I’m always thinking in my personal property portfolio, “How can I add value to my portfolio without breaking the bank and how can I add rental yield to my property portfolio?” because at the end of the day, for me and for many of the people watching this video, I suppose property is a passion but property is also just a vehicle to achieve passive income stream or to replace your current annual salary so that you can live the life and make the choices that you’d like to lead.
So today we’re gonna walk through eight different ideas that I’ve got. Some of these ideas are extremely easy to implement immediately with no money and some of them might take you a little bit more time but they’re just eight different things that I’ve personally done with my portfolio that’s enabled me to obviously create above-average rent returns and increase or improve the passive income associated with a particular property.
The first one is interest rates. If anybody is on today’s video listening and hasn’t looked at their interest rates in the last 12 months, stop what you’re doing right now, pause this video, and ring your mortgage broker, or send me an email by going to www.pumpedonproperty.com and hitting the contact form, because there is massive savings to be made. At the time of recording this video, I know the National Australia Bank, for example, has just started a price war with Commonwealth Bank of Australia to drive interest rates down. So your standard interest rate at the time of shooting this video is around abouts the 4%, 4.5% mark and NA Bank’s come out two days ago and said that we can get a 3.88% standard variable interest rate, which to me is absolutely insane. That is your lowest hanging piece of fruit to save money.
I actually got a little bit lazy a couple years ago and I forgot about the importance of interest rates. And I sat down with my broker and I just systematically looked through the interest rate in terms of fixed and variable interest rates in my portfolio. And we went, “Okay, I’m probably paying a bit too much.” I did a bit of jiggling, a bit of refinancing, a bit of negotiation with my current lenders, and ended up saving myself $12,000 a year just in interest rates alone. My portfolio is not as big as some people’s and for those people who have significant, significant portfolios, you’re talking about $12,000 per year in your pocket. So huge savings to be made. Definitely worth a conversation. Your interest rates should be absolutely as low as possible and often if you threaten your current lender that you’re gonna move to another lender, because the environment is so competitive at the moment you might have an opportunity to even save half a percent, a quarter of a percent, or even full percent with some of these banks at the moment on your standard rates. So massive money to be saved.
The second one is looking at your actual holding costs of the property. How long has it been since you reviewed the property management fees that you’re paying and agency that you’re managing your properties with? How long has it been since you looked at your water rates? For example, in most states in Australia now you might pay the administration component of your water bill, but the usage component can be a charge to your tenants.
I sat down with a client of mine recently who had bought four properties within New South Wales and Queensland in the last 12 months, and we actually found there was about $10,000 across a number of properties of savings just in the holding-related costs. He wanted to buy another property with me. I said, “Before we do that, let’s look at what we can save you in your existing portfolio so that you can leverage off that and move forward.” And that’s, again, $10,000 per year in four properties of savings for him.
Another example outside of fees and the water-side of things is insurance. Most people choose one insurance company and stay with it. I recently sat down with my mom, who was paying about $1300 per year in insurance with her provider. We rung up my provider and now she’s getting her insurance for 800 bucks a year. It’s $500 after tax out of her income per annum that she’s saving on one property. Roll that across a portfolio of a few properties, and again, it’s big money that can turn a negatively-geared property into a positive one and improve the passive income of an investment property.
The third one is looking at an offset account. Most people are familiar with an offset account. If you’re not, basically it works like this: You buy an investment property, and you have a home loan sitting here, and that home loan is basically the debt against the property. So let’s say you buy a home for 400 grand, you pay 10% deposit, so $40,000. Your home loan is $360,000 sitting here. The cool thing about offsets is I can set up an offset account here, which sits directly next to that $360,000 in debt, and any money that I put in there reduces the interest that I pay on the home loan. So let’s say I’ve got a $360,000 loan here, I’ve got $20,000 in available cash sitting here. Basically, the bank only charges my interest on 360 grand minus the 20, so 340 grand. Again, an incredible way to save money in terms of your interest repayment situation. So if you haven’t got an offset account set up, definitely go and set one up. Amazing little way to save some money. Again, people often have their savings account and then their offset accounts. I personally just dump all of my money that I have in savings against my offset, and again, that can result in significant savings, if you’ve got a little bit of accumulated money there.
The fourth thing I wanted to talk about is actually selling a property in your portfolio to potentially repay some debt on another property. This is probably a more advanced strategy. For those of you that are just getting started, you may not have enough equity or you may not want to sell a property because it’s a great marketplace at the moment in parts of Australia and it would be the wrong thing to do. But for some people that have five, or six, or seven properties like a lot of our clients, you may actually be in a position where you’ve held these two properties for 15 years and you’ve got these other three, four properties over here. These properties have amazing equity in them; why not sell a couple of those properties and repay big chunks of debt off these properties over here and then just get that passive income coming in? Again, that’s a really, really good strategy in terms of replacing your income.
A lot of people I talk to every day think the only way to replace that income is to go buy positively-geared properties that give them that trickle feed of anywhere between $50 and $200 a week before tax from that property, after costs in their pocket. A much easier way to do that is to just own properties outright, if you can potentially do that and get significant chunks of cash. So let’s say the property is renting for $700 a week, maybe $500 for the house and $200 for the granny flat. Owning that property outright is $35,000 per year in passive income straight away and you might already be in a position where you can sell some debt to pay some high-performing assets off outright or sell some debt and reinvest in some better-performing assets that give you a better gross return on investment, which is again, what it’s all about.
Property’s definitely liquid so it doesn’t mean you have to buy and hold for the rest of your life. If you look at the videos by some of the smartest investors in Australia, like Steve McKnight, he’s been to positively-geared property, then he went to America, he’s been to commercial property and now he’s in the higher-value end of the market. It doesn’t mean that just because you did one thing once that you have to repeat that same thing for the rest of your investing career, if there’s a better way to invest your money.
The fifth thing I wanted to talk about is something that most people would be familiar with and that’s a quick cosmetic renovation. There’s two types of cosmetic renovations. There’s the partial renovation and then there’s the full renovation.
The partial reno might be you buy a $350,000 property, 20 ks away from Brisbane. Say you bought a house on like a 600 square-meter piece of land. You pick up the property for 350, it’s currently renting for $320 a week, but if you replace the flooring, for example, replace the carpet, and maybe paint the walls, which would cost you $5,000 or $6,000 — unless you do it yourself, you might save three or four grand out of that off the top — you’re now getting $350 a week rent. That’s a really good return on your investment and a really smart way to add some value in terms of passive income to a property as well, and can turn a property that’s currently in the red into a property that might be in the green and that pays for itself, or at very least is neutrally-geared, which is what you should always be aiming for as an investor. Not neutrally-geared on today’s interest rates, but neutrally-geared based on a 7% interest rate, which is the historical average over the last 50 years in Australia here.
The sixth thing I would like to talk about is the structural renovations. For example, I just recently bought a property for a guy that was living on the Gold Coast on the north side of Brisbane. It was a two-bedroom, one-bathroom house that was renting for $300 per week in a pretty average condition. Our plan is basically to convert the two-bedroom house into a three-bedroom, one-bathroom house and that will lift the rent immediately from $300 per week to $350-$360 per week, giving him a much better return on his investment. And all he had to do was literally shade up two internal walls because the house was originally set up for a three-bedroom home.
So finding a place where you can do that basic cosmetic renovation or that small structural renovation using the existing floor plan might be a way to add significant value to your portfolio. So you don’t necessarily have to be buying a brand new property or a property right now to be applying these things. You can really look back at your existing portfolio and go, “How can I improve the passive income of my portfolio?” and systematically look at each of the properties, or the one property in your portfolio, and really get an idea about your options by applying the things we’ve talked about in this video.
The last one that I wanted to talk about which is very close to my heart, as my clients know, I absolutely love passive cash flow and achieving above-average rent return. A really good way to do that at the moment is through granny flats. For those of you listening in different parts of Australia and around the world, just to give you a quick summary, you can legally build and rent out granny flats in parts of the ACT or Canberra, definitely in Adelaide, definitely in WA, all the way throughout New South Wales, as long as you meet the requirements. In terms of Southeast Queensland, you can do them in the Ipswich Council area, the Logan Council area, the Moreton Bay Council area, and the Sunshine Coast Council area. So there’s really good opportunities to buy the right-size piece of land, or maybe you already have the right-size piece of land with your existing house on it. Quick planning check for a couple of hundred dollars with your town planner will tell you if you can do something or not.
And again, you might have an investment at the moment in Sydney or Melbourne, sorry, not Melbourne, but Sydney that’s only giving you a 2.5% rent return, but if you added a granny flat to the back, you might rent it out for another $350-$400 per week in that marketplace. That could take your yield up to 5%, which is fantastic for Sydney and well above average. In other parts of Australia, for example the southeast Queensland market, you might look at something in the Moreton Bay region and your standard rent return would be 4% or 5% but you add your granny flat and all of a sudden it’s 5.5%, 6%, 7%, so you’re putting yourself in a much safer position. You’re getting yourself better cashflow and ultimately you’re improving the passive income of your current portfolio.
I hope these ideas today shed some light on all of the different options you’ve got. This is only scraping the surface of the tip of the iceberg. There’s so many different ways you can do things but these are some of the things that I’ve done personally. I’ll tell you what, it feels amazing owning investment property where you never have to pull money out of your own pocket to continue to grow the portfolio.
Until next time, stay hungry and thank you so much for your time today. Bye.