In Part 1 of this series we reiterated that we believe business is the Number 1 asset class for building real wealth. It is also the very best vehicle for acquiring true financial freedom.
Coming in second, is property.
However, that does not mean we view each of business and property as wealth building vehicles in isolation.
The truth is, they can complement each other extremely well. And will very often come together to produce a sum greater than their individual parts.
We discussed the importance of getting into the property market early, ideally before you start your business journey, because the modern world of business and finance will view you significantly more favourably if you own property.
But the synergy of property ownership and business doesn’t end there.
…the modern world of business and finance will view you significantly more favourably if you own property.
Owning an investment property can be viewed as a taster of life as a business owner. Sure, there are huge differences, but the concepts of finding tenants (customers), negotiating a sale (the rent), collecting payment and managing payment terms (debtors), meeting debt repayments (managing cash flow) and paying associated expenses (creditors) are all good lessons for what will come in the future.
Further, when business opportunities arise, having a property backing behind you improves your chances of taking advantage.
Similarly, when business difficulties emerge, having a property backing also greatly increases your ability to weather the storm.
A negatively geared investment property, particularly one where the prime contributor to the negative gear is non-cash deductions like building allowance and depreciation, can be an important tax minimiser, particularly in the early stages of a business where working capital is so crucial.
Finally owning the premises from which you operate is also far preferable to having a landlord.
One of the reasons you go into business is to take control, and personal responsibility, for your affairs and your successes (and your failures). Having a landlord is akin to having your mother checking in on you every so often.
The nature of commercial leases provides that whether you are the tenant or the owner, you the occupier pay the variable outgoings. So from that perspective the decision is neutral. However, very often, the market value of the rent for the premises will be very close to, if not equal to, the amount of both principal AND interest you would pay if you owned the property with the assistance of bank debt. It means for the same cash outlay each month you would pay as a tenant, you could instead see some of that money (the principal component) going towards paying down your debt and increasing your equity within the property instead.
A quick review of The Australian Financial Review’s Rich List for 2018, being the list of the 200 wealthiest Australians, shows that the largest category upon which the rich listers built their wealth, was property! 51 of the 200 built the bulk of their wealth through their property endeavours.
And while not intrinsic in the information provided, there can be little doubt that virtually all of them have complemented their business and other wealth building activities via a portfolio of property ownership.
…when business difficulties emerge, having a property backing also greatly increases your ability to weather the storm.
You can revisit Part 1 in this series below –