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My Triple R Principle of Investing
Don’t kill the goose that lays the golden egg
Today we are talking about the Triple R principle of investing in buy-to-let property, and how anyone can build a multi-million rand asset base by following these three simple steps to wealth creation.
I know you have great ambitions, goals and aspirations in life, just as I do. And one of them is to become a successful investor, to build your wealth so that you are able to leave a legacy to your loved ones in the future.
But all of that is impossible without a strategic approach to building wealth through real estate. If you don’t have a strategy or understand the bigger moving parts and what the overall pathway is towards building a real property investment business it’s going to be tough to ever achieve your goals.
Many investors don’t understand how to structure their portfolio to the point where they can achieve the lifestyle and level of income they desire.
So I am going to share my very simple Triple R investment strategy with you. It’s a strategy that you can implement practically to become a successful investor, using a minimum of your own money and taking the least amount of risk.
By focusing on buying the right assets (being A-grade investment properties) that generate capital growth, you will create equity. We want to create equity because the equity will be converted to cash flow or ‘passive income’ at a later stage of the game.
- You first retain the asset – don’t sell it, this is a long-term investment
- Refinance – access the equity within the asset
- Reinvest – roll over the equity to buy more assets
That’s how you are able to build a substantial asset base, free of taxation.
Let’s delve a little deeper into these three principles:
The biggest mistake an investor can make is to sell their properties when their properties are starting to perform and producing positive cash flow. Investors tend to think the only way to make money is by selling their property. How wrong they are.
There are five serious consequences when investors sell their property:
- They don’t build a portfolio, ending up with only one or two properties
- They pay Capital Gains Tax to SARS
- They pay estate agent’s commission
- They pay bond cancellation fees
- Because they usually sell their best performers, never again will those properties produce rental income or capital growth for the investor.
The investor’s asset has essentially died. So please be a smart investor and don’t kill the goose that lays the golden egg.
To expand on the geese metaphor, we don’t want to eat the goose meat. We want that golden egg. We want the ‘egguity’ of the goose. So, if we are after multiple golden eggs we need many geese to lay these golden eggs for us, isn’t that so? We need to buy many geese so that they can produce multiple golden eggs for us, and then grow our investment using those golden eggs to buy a goose farm with many geese producing more golden eggs. And so on, and so on.
The message here is: never kill the goose that lays the golden egg. You don’t sell your asset, you retain your asset.
Strategically unlock the equity within your portfolio by means of a second bond and getting your financing strategist to advise you on the next steps is a wise move. Using software to do a financial analysis is vital to make the correct calculations for provisional cash reserves.
My general rule of refinancing is to only refinance when you are at the breakeven point, to avoid paying tax. If your property breaks even every month that’s great, but if it makes a profit, tax will be paid. So, to avoid paying tax you refinance to eliminate profit and you eliminate tax simultaneously.
Your goal should be to build your property portfolio tax-free until retirement. The rental income (profit) that you would have paid tax on is now strategically used to repay extra debt.
Now that you have calculated exactly how much refinanced money you will need for the existing property, you are ready to reinvest and roll the equity over into the deposit, shortfalls and acquisition costs of the next property you buy. (The simple definition of equity is your property’s market value minus your outstanding bond amount.)
One property can literally buy multiple properties depending on the amount of money you have available to refinance.
So the question is: Who is paying for my property?
With the aid of your financing strategist (also called the bond originator) you will be using other people’s money (OPM), time (OPT) and knowledge, effort and experience (OPK) to build your multi-million rand asset base:
- You will strategically leverage the bank’s money to buy the property.
- You will leverage the tenant to pay the bank (the mortgage).
- You will leverage the equity in your current property to reinvest and roll over towards the deposits of your next investment.
- You will leverage your bond originator and tax accounts’ experience and time to take you through these strategic steps, to ensure that you create the correct cash flow provisions and tax efficiency.
So there it is, the secret to building your multi-million rand property portfolio is:
You can do this. Go out there invest strategically invest intelligently become financially free and leave a legacy.