If you think you can’t create a property portfolio think again
PROPERTY OWNERSHIP THE PATHWAY TO WEALTH
Smart Property Investment
Monday, 12 December 2016
The Westpac 2016 Home Ownership Report found that home ownership is still considered the Australian dream. In fact 86 per cent of Australians believe that owning a property is the pathway to wealth, an increase of five points since 2015.
The report found that 44 per cent of investors turn to investing because they see it as their only path to property ownership.
“As the Australian property market becomes increasingly tough, first home buyers are looking for different ways to achieve their home ownership dream,” said Chris Screen, Westpac Group head of home ownership.
The report found that Australians see property ownership as representing stability (65 per cent) and financial security (64 per cent), and say it gives them a sense of achievement (56 per cent).
Sixty-nine per cent of those committed to buying property in the next two years said it would be an investment property, compared to 20 per cent of current home owners.
by Hannah Blackiston, Smart Property Investment.
So how can you create wealth through property?
When you start investing and you buy a safe, conservative property, it usually starts off negatively geared. This just means it costs more than it earns. A common mistake people make is to think they need more rental income to help with the holding costs so they buy a positively geared property. Unfortunately, when you choose properties based on high income, they are usually also high in risk and high incomes usually don’t last. High rents are usually based on supply and demand, which can change, just look at the mining industry. This means there can be a lot of volatility. Buying properties in conservative areas with the normal growth patterns means less volatility.
The value of the property goes up and so does the rent and eventually over time the property turns from negatively to positively geared. That’s where your income comes from in retirement. Remember debt is money. As well as money devaluing over time, debt devalues over time as well, which is really important.
Once the rent is higher than the costs it can start reducing the debt, as the debt reduces you have more income, which means you have more income to live on in retirement.
The 4 Rules of creating wealth through property
SEPARATE YOUR LIFE FROM YOUR INVESTMENTS
The most important part of successfully investing in property is the organisation of your money. By getting control of your income and personal mortgage, getting debt reduction and money control happening, you can confidently launch into property investment. We teach our clients to separate their personal side from the investment side and build a property investment portfolio.
Many investors fail from the financial pressure when the rental property expenses and income flow in and out of their personal accounts. By managing their investments and not having the holding costs affect their personal income, our clients increase their wealth, without decreasing their lifestyle.
BUY NEW NOT OLD
There is quite a difference to wealth creation by buying new properties instead of old. Over the years, the drain on cash flow from constant maintenance and repairs of old properties can really hold back your ability to buy more investment properties.
However by buying new property, the benefits are not only increased cash flow but also being able to attract better tenants. And importantly, the bonus of receiving tax deductions from depreciation. With all of these financial benefits, you are able to go from negatively geared to positively geared much faster, thus enabling you the freedom to grow more quickly.
INTEREST ONLY LOAN!
Interest only loans always spark debate in both the home owner and property investment circles. We use interest only loans but pay extra, assisting in massive debt reduction against your home mortgage. Most clients reduce their debts in record amounts –more than $30-$40,000 in the first year.
On the investment side there are big benefits. Interest is tax deductible, principal payments aren’t. It’s easier to manage the investment holding costs if you minimize the cost of payments during the ‘negatively geared’ period.
As the property goes up in value, so does the rental income.
The property should go from negatively geared to positively geared and then the extra rent reduces the investment debt. So it is all about the timing, and maximizing the tax.
Over the past 100 years, Australian property has grown in value on average 10% pa. It’s not 10% every year, it works in cycles, usually 2 or 3 years of really good growth, 5 or 6 of flat and a couple of years of negative growth or retraction; meaning that a property can have flat or even negative growth over an 8 year period. The property growth cycle is often debated, but history shows this as fact. Though no one has a crystal ball for the future.
There are many benefits of keeping property - you incur buying costs only once, and pay no commissions on selling or capital gains tax. But by selling, taking profit and buying again you maximise the costs and minimise the profits. These costs can equate to $50 or $60,000 even before capital gains tax. By not selling, this money can be utilized as equity to purchase more property, and your existing property continues to grow as well as the new one.
The 7 things I wish I'd learnt at school
1. Where to go for advice
Most people go to a bank for advice on the right bank accounts and loans to have. A bit of a laugh really when you consider their profit margins.
It’s like asking the mouse where to put the cheese! I wish I had been taught to ask someone who has money the best way of handling it.
2. Credit cards are like fast cars
A fast car driven recklessly is dangerous, but treated correctly it isn’t. Credit cards are the same. Most of us just use them to help the banks, but you can turn the tables and use the banks money for free and use your money to reduce your interest. This secret could have saved me thousands!
3. More organised = more money!!
It is a fact that if you get organised with your money, you have more of it. Bills get paid on time, you don’t waste precious money on fines, fees and overdue payments, and you
make your money work for you instead of against you. A cash management program accelerates your debt reduction and wealth creation.
4. You can make compound interest work for you or against you
Saving to buy something instead of borrowing can halve the price you pay for most items. This sounds boring to us in this ‘have it now’ world, however, compound interest working for you instead of for the loan company saves you thousands. I wish someone had told me that ‘interest free’ isn’t free at all. The interest has been tacked
onto the price – ask for the ‘cash’ price and see.
5. Debt consolidation can be your best friend or your worst enemy
Consolidating credit card and consumer debt onto your home loan can reduce your repayments each month and lower the amount of interest you pay. I wish I had been told to use this extra money to then reduce the home loan much faster, and not fall into the same trap again and again – burning up precious equity that could have been used for investing.
6. The power of separating your life from your investments
There are 1.7 million people in Australia who invest in property, less than 2 per cent get to five properties or more. Why? They don’t keep their personal and investment money separate. I wish I had learned that the key to successful investing and stress-free living was to keep these sides quite separate from each other.
7. Don't assume a home loan is a long term debt
I wish I had been taught that a home loan doesn’t have to be a stone around my neck for 25 years, or best case, if I paid weekly or fortnightly, 17 years. What most people don’t know is that if handled correctly, a mortgage should be paid off in five to seven years just by doing your banking differently.
Chris continues to cover each of the 7 things about money over the next editions of Wealthy and Wise.
#3 More organised = More money!!
Step 1 Analyse your starting position
Getting your personal money organised is vital. Knowing what money comes in and goes out and ensuring that there is a surplus is a good way to start.
Filling in a budget is the first step, but the secret of a healthy financial life is to actually use a cash management system. A true budget or cash management system requires the tracking of your spending against income to ensure the budget is staying on track.
Step 2 Review your current loan structure
There are many different banking options. Getting advice on what would work best for you rather than just doing what the banks say is an important part of setting up a successful finance platform.
Learning how to reduce your debt fast, the ups-and-downs of debt consolidation and learning to use a credit card properly are just a few things to help accelerate your debt reduction and get you on the road to investing.
Step 3 Separating your personal and investing lives
It’s important to set up your investment finances totally separate from your personal side. Many property investors fail from financial pressures when the rental property expenses and income flow in and out of their personal accounts. When the rent comes in it is often tempting to use it for personal expenses, leaving financial pressure when the mortgage payment is due.
Worse still if there’s a problem, such as a tenant kicking a door in, the financial burden of the investment weighs heavily on the personal lifestyle of the investor. This can be overcome by creating an investment pot or buffer fund to allow breathing space during these times of crisis.
Step 4 Getting your money working for you
Banking your money straight into your home loan is like going straight to the wholesaler – saving you a fortune! Your line of credit is just like a bank account. You can bank money in, set up direct debits and you can use an Eftpos card to withdraw cash. All the while your cash is sitting on your loan, reducing the principal and you are paying much less interest. Your spending is being done on your credit card, and you are paying no interest as the credit card can be paid out in full on the due date from the line of credit.
Step 5 The power of equity
Equity in your own home is the quickest and easiest way to get started. Many people fear using their property as leverage to purchase an investment property as they fear risking their own home. By having a clear plan and exit strategy, as the investment property increases in value, the bank would no longer require your home to form part of the security and the investment would be able to stand alone.
For those people wanting to quickly build their property portfolios, using existing equity allows for faster accumulation of properties. It is a simple matter of getting the right advice.
Step 6 Diversification, Risk and SMSF
Diversification: If, for example, you buy all of your properties in your own back yard, you will eventually go into a flat market. One of the secrets of building a portfolio is to diversify in the areas you buy in, and the type of investments.
Risk Management: Having the right insurances is vital to success. Not only do you need to make sure the physical things in your life are insured, you also need to ensure you have adequate life, trauma and income protection.
SMSF: Self-managed super funds are becoming quite popular as part of property investing. Taking control of your super can be an exciting way of breaking into the investment property market. Obviously before going down this path, a review of your current situation with a financial planner would certainly be a place to start.
The complete e-book is available online at thinkmoney.com.au or call 07 5430 4777 to get your copy.
Life’s Better for these Think Money clients
Meeting Chris Childs has been one of the best things that has happened to us. Since meeting Chris we've gone from being unsure of what our future might hold to now being excited and looking forward to building a property portfolio and choices for a fun and exciting future.
A couple of years ago we could never have imagined such a life!
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ph: 5430 4777
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It's all about the numbers
Yes, I know it sounds impossible, but that is exactly what our clients tell us we can do. We look at things differently than you do and we can do that in one meeting.
When you look at your finances you may get overwhelmed or fearful of what appears to be never ending debt and no way out of it, or just not know how to utilise your money and equity to retire earlier. We look for the opportunity to use your money differently and take away the financial pressure you feel to maintain, or even improve your lifestyle.
The secret is to do your banking differently
We specialise in teaching people just like you to do your banking differently, managing your money to reduce debt not your lifestyle and help you take back control of your life.
Have you been paying your mortgage off for years and seem to be getting nowhere fast? Once you have the knowledge of how to beat the banks at their own game you will be surprised to watch the years fall off your mortgage.
Learn how to reduce debt and create wealth through property
How would you feel if you were able to reduce your mortgage by $20,000 and purchase two investment properties in just 12 months?
We have clients who have done that and more. They are well on their way to creating the lifestyle they want in their retirement, just by changing the way they look at their money.
It doesn’t have to be hard. We teach you to treat your money right, learn the benefits of how loans should work and set up the right financial platform for both fast debt reduction and smart wealth creation.
If you feel like you have lost control of your financial direction, are just treading water, or worse even, you are fearful of what your life looks like in retirement, then maybe it’s time to change what you’re doing.
If you are serious about reducing debt, creating wealth and setting up your future for retirement, call us today.
We guarantee it will change your life for the better.