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Forced Savings

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Transcript

When looking to invest in property, you can actually get yourself to a position where you’re having forced savings, which is only nothing but good for you.

Now forced savings is basically you being in a position where you’re being forced to saved thanks to mortgage payments or repayments that are coming out or outgoings. Now, You might firstly think well wait Arjun, those are expenses. Yes. They are expenses that come out of your bank account. However, if you have the certain amount of rents coming in the rest of it doesn’t actually become an expense to you because it’s being paid out that paid by the tenant. Let me explain this in more detail. Imagine, If you have a scenario where the rent is enough to cover the mortgage interest, rates, water, landlord, insurance and Property Management.

Ideally, that’s all your outgoings cost to people in government departments, insurance companies and property managers and then your interest cost to the bank. So now if you have a principal and interest repayment and you say “well all these things are covered who’s getting that principle and interest repayment” Physically, it goes to the bank but think of it as a transfer from yourself to your savings account and instead of seeing a savings account balance move up. You just see your mortgage balance come down. This is being a P & I scenario.

Now with this for savings concept your then basically saying “Well if by properties that I have I start adding each property at a certain level of cash flow, I’m going to then start to have a forced savings amount for the principal portion and not really be paying anyone but myself. So every single property you add from there with the sort of level of cash flow is actually just building up your forced savings amount. Now the concept can be difficult to grasp at the start because you’re still like “I know I’ve got to afford this P & I repayment” but just think of how much that you had to pay into your savings account before you got your first investment property When you’re putting all this money towards the deposit how much a month was that? It’s very likely that this P & I portion is actually going to be less than that amount.

So if that’s the case, you’re actually putting out for savings that are more or so less than what you even saved for your deposit to begin with. So when you start getting to this state you start adding property 1 2 3 4 and onwards without even having any sort of money being lost to anyone. It’s just coming back to your property value and your property mortgage coming down. They can also be other ways to set this up where you go, Well, let me keep my property interest only and then start doing that same forced savings concept pretend you’re paying the principal but instead paid to an offset account. Now doing it that way you’ll get that same concept of a savings account where you see the balance move up except it’s in your offset account for the balance moving up and offsetting the mortgage that you have. Both options will have their pros and cons and can be discussed further with the mortgage broker, but Forced Savings is a great way to look at it to say ”Hey, you know what? I’m investing in property. I’m getting forced savings repayments to happen and at the end of the day it’s coming to myself if I get those cash flow levels right.

That’s it from us here at InvestorKit, The Experts in Wealth Creation helping you take action.