There are many reasons people go into business, and there’s a good chance that yours included a desire for freedom and flexibility, and the opportunity to make a good income.
Business can certainly do that for you. But after almost 20 years as a business owner and financial advisor, I’m still alarmed by the fact that approximately 75% of the business owners I come across have all of their wealth in their businesses.
Many hope that if they work hard or smart enough that at some point in the future they will be able to sell their business for enough money to provide financial security for themselves and their family.
Unfortunately in my experience, this is rarely the reality.
Why do business owners tend to keep all their wealth in their business? Usually it’s the belief that the business is where the best returns are, and that you need all your resources to maximise this. Plus, as busy business owners it can also be due to a perceived lack of time.
As a business owner myself I agree that you need to put most of your resources into your business. However, it’s good to have a back up plan just in case the business doesn’t deliver the high returns that you’re relying on.
The answer isn’t to divert large amounts of precious capital. It’s to gradually take some money out, and invest elsewhere. The challenge is to work out how much is prudent to invest elsewhere.
Most investment options require you to have the actual cash to invest, but with property investment you can borrow all or most of the value of the asset.
Why invest in property
Leverage is when you buy an investment property using borrowed money instead of using your own. Leverage can accelerate your investment return as you get your return based on the amount invested, not just the money you put it.
There are very few investments where you can borrow as much as you can against property, as bankers see it as one of the most secure types of investments.
2. You can use the equity in your home
If you have equity in your own home, then you can use this to borrow against to purchase an investment property. This means you don’t have to save a deposit, and you don’t have to take money out of your business to get started.
Depending on the rent you receive, you may need to add a small top up each month to cover the costs. But when you have spare cashflow, you can pay down the mortgage faster which means you can build wealth faster, and possibly have enough equity to purchase more property over time.
3. Tax benefits
There are several tax benefits for investing in residential property. For example the expenses you incur to generate your rental income will most likely be tax deductible.
4. Rental income
If your rental income is over and above the expenses you incur to own that property then you will make an income. It’s a wonderful thing that your tenant can pay all or most of your costs of owning the property.
5. Capital growth
The majority of time property values increase, but sometimes they go down. For this reason it’s ideal to be thinking ahead at least 10 – 15 years.
The great thing about capital growth is that you get the growth on the entire value of the investment, not just a return on your deposit. You may have even put “nothing down” if you used the equity in something else as your deposit.
6. You can have control over most parts of your investment
One of the biggest advantages of buying an investment property is the control you have unlike other investments. Ideally you would want to use a professional property manager to manage the day to day running of the property, but you can be involved in the decision making process with them if you want.
7. The security of bricks and mortar
When you buy an investment property you’re buying a physical asset. Banks really like property as a security, and property almost always goes up in value over the long term.
So now we have looked at the advantages of property and why it can be a great option for business owners let’s look at the how.
How to invest in property
We mentioned that one of the main reasons business owners don’t invest outside of their business is lack of time. There are two options to manage this.
Make investing important. I believe if something is important to you, then time is far less of barrier.
Outsource the purchase and management of the investment to a professional. What about the cost of this? Yes there is a cost of outsourcing, but there’s a greater cost to not investing as a result of not having the time or skills to invest.
Being in a strong financial position gives you freedom of choice and this is a key driver for most people. The question is, is your business going to provide you with this? If there’s even a chance that it won’t – what is plan B? All successful people consider risk.
What if Plan A (your business) doesn’t work out the way you hope?