Treat your property investment like a business

September 27, 2011, 3:45 pm By Michael Yardney Yahoo!7

Despite living in one of the most affluent countries in the world, most Australians never achieve financial independence.

Michael Yardney is a director of Metropole Property Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. Michael has often been called Australia's leading expert in wealth creation through property and his opinions have been featured in major newspapers and magazines throughout Australia.Full Bio »

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Most of us want financial freedom and the extra choices in life this brings, yet when you think about it, despite living in one of the most affluent countries in the world, most Australians never achieve financial independence.
Despite working for around forty years, and having earned two or three million dollars over their lifetimes ($50 -$70,000 a year for 40 years), very few people become financially free. In fact most retire just above broke. The latest Meryl Lynch Capgemini Wealth Report estimates that there are just over 190,000 high net worth individuals in Australia.
That is less than 1 percent of the population in one of the wealthiest countries in the world have a net worth of more than one million dollars on top of their home.
Escape the rat race
My point is that the desire to get out of the rat race, to have more choices and to develop financial freedom is the main reason many Australians give up their jobs and start their own small business. Yet very few actually make a financial success of it.
The desire for financial freedom is also the reason close to 1.7 million Australians became involved in property investment. However 90% of property investors own never get to own more than two properties and less than 1% of property investors own six properties.
So the inconvenient truth is that the majority of property investors never achieve financial freedom either.
Interestingly of those high net worth individuals quoted in the Meryl Lynch survey, close to 80% created their wealth as business owners. Most of the others were employees with strong financial discipline and who invested wisely, and there was a smattering of high-income earners such as celebrities and sports people who had also invested wisely.
Achieve financial freedom
So let's clarify this… most business owners, self-employed people, employees and property investors never become financially free. And of those who do achieve financial freedom the majority are successful business owners. Then there is a significant number who are employees and treat their investments like a business.
What it all boils down to is that one of the best ways to earn more and work less is by owning a business, because the "the tax system" favours business people and disadvantages employees. Successful business owners understand the system of finance, tax and the law and have it working for them. They realize that it's not how much money you make that is important. It's how hard that money works for you and how much you keep that counts.
You see…the average employee earns money, pays tax and spends what is left over; while a business owner earns income, spends money and pays tax on what is left. That makes a big, big difference.
Have you ever wondered why so many business people and successful property investors drive nice cars? It's a great example of the point I'm trying to make.
Paying for life's pleasures
As an employee you have to pay for many of life's pleasures with after-tax dollars. For example, most employees have to pay for their car with after-tax dollars. On the other hand a business owner is allowed to pay for his car with before-tax dollars if it is used for business and meets certain requirements.
A business owner can even pay for such things as trips, magazines, movie tickets and other benefits with before-tax dollars while an employee pays for them with after-tax dollars. Of course they must qualify as legitimate business expenses.
Does that mean you are going to have to set up a business?
Well sort of – but probably not the type of business you may have in mind.
Make your money work for you
As a business person you could own a hardware store and have a team of employees working for you, or a McDonald's franchise and have a group of teenagers serving Big Macs and making you money for you. Or you could have a portfolio of investment properties working hard for you.
Just to make things clear, I'm not advocating you open up a conventional business - it's just too hard to make money that way. Most small business go broke in the first five years and many of those that survive close down in the next five years.
However, I've seen some property investors, those who treat their investments like a business, become very, very rich by growing a multi-million dollar investment property portfolio. They do this understanding "the system" and getting the right type of finance, setting up the correct ownership and asset protection structures and knowing how to legally use the taxation system to their advantage.
The bottom line
Let's face it; the majority of Australians will be always be employees - and that's a good thing. We need policemen, nurses in our hospitals and politicians. O.K. maybe we don't need politicians.
But the truth is that we all have the ability to become financially free by becoming property investors who treats their investments like a business. And you can set up your own property investment business while you are still an employee or self-employed.
In fact that's what I did and what almost every wealthy property investor I know has done. They built their wealth by growing their real estate portfolio one property at a time. While this was going on they lived off the income they earned from their day job. They started off with one property, then leveraged off its capital growth to invest in another and another until one day they found themselves with a true property investment business. One that gave them financial freedom and choices in their lives.
Michael Yardney is a director of Metropole Property Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He is best-selling author, one of Australia's leading experts in wealth creation through property and writes the Property Update blog. Subscribe today and you'll receive a free video training – The Golden Rules of Property Investment.