There are three financial reasons to invest!

I was born to the typical migrant parents we always hear about. They were hard-working and taught us to apply ourselves at school, get a good job, buy a house, and pay it off. In fact, I remember very vividly the day my parents finally paid the mortgage off on the family home. It was 1982. It was a big deal, and we celebrated it as a family. In 1983, the very next year, without a mortgage tying them down, they took us all on a trip to Europe!

Life is different now.

As a generation, we’re more willing to borrow money, to take calculated risks – something my migrant parents took a while to get their heads around. “What do you mean you’re going on a holiday before you pay your mortgage off?”, “How can you think of even buying an investment property when you don’t have a home?”, “Have you even paid your home mortgage off?”.

But lucky for me, I have had positive influences around me, who encouraged me, as a 22-year-old, to buy my first investment property. And then my second at age 23 and then my third.

These amazing influences in my life, have taught me that there are three financial reasons to invest.

The first is of course GROWTH.

This one is the most obvious one. You buy a property, you hold it long-term and then you sell it for more than you paid for it. The difference is the growth, and that is where you’ll hopefully make the most profit. Property in Australia has grown 5.6% every year for the last 30 years, so that’s not a bad return. If you invested in a $300,000 property in Melbourne in 2003 (the median price back then), it would be worth $892,000 today. The longer you hold, the more money you make.

The second is CASH FLOW.

Your cash flow comes from rental income. Depending on how much you borrow and what your expenses are, a good investment property can provide you with an income, every week.

If you’ve been keeping in touch with our blogs, or listening to any media outlet, you’ll know that we’re in the middle of a rental crisis, with vacancy rates at all-time lows and rental amounts increasing. This all increases any investor’s cash flow.

The third is the one that most investors benefit from, but tend to forget about as an investment strategy is TAX DEDUCTIONS.

We’re all earning an income, and as a result, we’re all paying income tax. Most of us would like to pay less tax, and property investment is a great way to do that.

Put very simply, when you own an investment property, the income you receive from rent is added to your taxable income. That should make you pay more tax, yes? Well not necessarily. Because all of the costs related to that investment are considered deductions against that income, effectively reducing your income, recalculating the income tax you should pay, and resulting in a refund to you.

Let me explain it in numbers.

James earns $100,000. He pays an income tax of $22,967.

James also owns an investment property, for which his tenant pays him $500 p/wk. This income of $26,000 per year is added to his income.

When lodging his tax return, James’s income is now a combined $126,000.

However, James’s investment property has cost him around $14,000 in interest on the mortgage, and property management fees.

And, because James bought a brand-new property, he can also claim depreciation on the building and its fixtures & fittings. He hasn’t actually paid for any of this in cash, but it is considered an expense, which in the first year on a $500,000 equates to $55,000!

This total expense cost reduces James’s taxable income from $126,000 to $57,000!

Now, let’s go back to James’s tax. He paid $22,967, but this is now re-calculated on his new income of $57,000, which reduces his tax payable to $8,982.

What does all this mean? A refund of $13,985!

So, when I think about why I invest, it is absolutely for the first reason – I invest to make money through property growth in the long term. This growth will help me fund us in retirement, so we can continue to live the same lifestyle that we do now.

However, cash flow and tax deductions are what help us to fund our investment property and pay for holidays that we love to go on now.

What do our migrant parents think now? Well, I’m super proud that after they paid off their mortgage, and took us on our family holiday, and with our influence, they invested in property too! In retirement, my mum doesn’t have the income to benefit from tax deductions anymore, but she has created a passive income that helps her in her retirement – which is exactly the plan we are working towards!

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