The engine fund for property portfolios

Brett Alegre-Wood
December 10, 2008

The engine fund. . .

I was chatting to one of our clients who is also a pilot the other day. He was telling me about the fact that he owns an aeroplane with 4 other guys. It's a small Cessna twin engine that they use for family holidays and occasionally for business meetings.

Now before you jump up and down about the excesses of owning an aircraft and the carbon footprint it may produce, the interesting thing that I got from the conversation was the fact that they had an engine fund.

The engine fund…

Now as you can imagine an aircraft is quite an expensive purchase but its not so much the purchase costs that kill you as much as the running costs. You normally allow about 10% of the value of a plane (or a boat for that matter) per year as running costs.

One of the major costs is when the engine needs replacing it is one of the biggest expenses besides the actual air frame.

Now the problem presents itself that if you fly the aircraft for say 10,000 hours and then the engine needs replacing you will need to come up with the full cost of the replacement engine. So the solution to the problem is that rather than pay a big deal of money after 10,000 hours you simply put some money aside each hour (or month) into an engine fund.

The engine fund means that once the engines need replacing you already have the capital to go out and buy it. No stress, you just get it replaced.

The engine fund for building a property portfolio…
The engine fund is essentially the same concept for aeroplanes as we use in building an investment property portfolio. The provision account is a classic example of this, we put aside money upfront rather than waiting until we have to pay for the expense. Mortgage cost averaging so that we have plenty of allowance for changes in interest rates. The 2 year cash flow rule which means that we have two years of allowance on an investment property.

It's these and the many other principles that I talk about that effectively mean that when its time to buy a new engine you don't have to stretch and scrap to pay for it.

If you are reading this and you don't understand fully the provision account, mortgage cost averaging, or the 2 year cash flow rule or any of the other principles and their function in building a portfolio then give the team a call and we'll explain each concept in detail.

Live with passion,
Brett Alegre-Wood


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