It probably goes without saying, but every property investment you plan to purchase should be profitable. Yet a recent press release noted that 12% of all Australian properties were sold at a loss (and as many as 40% in Darwin!). How can this be?

Well, I believe many investors make a loss simply because they don’t have a plan to make a profit. That is, they buy something and hope it will be profitable, rather than having a profit goal and then buying a property that will be best placed to provide it.

I’ve done up a little flow diagram for you that reveals the different kinds of profit that an investment can make.

Starting at the ‘Profit’ rectangle at the top, there are only two types of profit that an investment can produce: realised and unrealised.

For a profit to become real (i.e. ‘real’ised) it has to hit your bank account. Otherwise any gain remains ‘unreal’ised and only exits in theory and on paper.

Consider capital appreciation. While the property is owned, what it might be worth is anyone’s guess at best, so the profit is an opinion and only exists ‘on paper’ (hence the arrow pointing down to the ‘Paper’ rectangle).

Consider Anne. Using simple numbers, she bought an investment property for $520,000 and she thinks it is now worth $600,000. She therefore thinks she is sitting on $80,000 of capital gain. She won’t know for sure though until the property is sold, so for the moment it exists only in her mind, or on paper, and hence is not real nor taxable. Even if Anne had a sworn valuation for $600,000, the profit will still only be an unrealised best guess.

For Anne’s gain to become real the property would need to be sold. For instance, if she sold it for $600,000 then she would now have ‘real’ised her gain, and on closing the amount would be able to be banked.

(Of course, in real life Anne’s actual gain would need to be adjusted for purchase and sale costs, taxes, etc.)

Why is all of this theory important? Well, because different properties will return different types and amounts of profit, and the right property for you is the one that is likely to give you the highest likelihood of delivering the type of profit you desire, in a quantity that is sufficient for your needs, that will be realised in a manner that is in harmony with your broader tax planning goals.

That is, you don’t just want any type of profit, you want a specific profit – and hence you need to make a plan to accomplish it, otherwise you’ll get what you get and you might get upset!

For example, you might say that you want to purchase a property that will provide an unrealised profit (from capital appreciation) of $200,000. Great! The next question is ‘how’ will that happen. That is, what property will do this, and on what basis? Answering those questions will begin to help you scope out what kind of property and location you should focus on.

The alternative is to buy a property and hope it delivers an acceptable profit. This isn’t what I call investing though – it’s speculating, or gambling, which is unnecessarily risky.

Now, let’s talk about losses for a moment. The same flow diagram as provided above for profits also holds true for losses. That is, a loss can be unrealised or realised, and a realised loss can be a lump sum amount (i.e. cash), or it can be periodic (i.e. cash flow).

Consider Colin. He has an investment property that has monthly expenses of $500, and monthly rent of $400. He therefore makes a monthly cashflow loss of $100. Colin doesn’t mind though, because he is hoping to make an unrealised capital gain via capital appreciation of $250 a month, thereby leaving him better off overall by $150 per month, plus he can use the realised loss to reduce his income tax burden. This is the classic ‘negative gearing’ situation.

Colin’s strategy will be effective if he achieves the expected capital appreciation. If he doesn’t then he might suffer the double whammy of owning a property that loses money both ways – cash and cashflow.

Take a moment and answer these questions:

1. Do you want your investment to make a profit or a loss?
   
   
2. Do you want that profit to be realised or unrealised (if unrealised, when do you want it to become realised)?
   
   
3. If realised, are you aiming for a cash or cashflow profit (or both)?
   
   
4. How much profit do you want, and how do you wish to receive it (in cash i.e. a lump sum, or cashflow, i.e. in periodic amounts)?

As I’ve said, once you have answers to these four questions then you have the beginnings of a plan for what sort of property would be suitable (and indeed not suitable) for you to purchase.

The post Theory: Taking A Closer Look At Profit appeared first on PropertyInvesting.com.

While a big price reduction is sure to tickle your greed gland, the discount may not really be genuine. It could be ‘deal bait’ – something savvy sellers use to attract buyers.  

For instance, one of the deals I’m weighing up purchasing at the moment is a 500 square metre office and warehouse commercial property. It was originally listed for $600k+, but the agent let me know on the sly that his seller is becoming more and more motivated and that $425k would probably buy it now. Oh! Oh! Oh! A $175,000 discount! That’s got my attention.

Loading up my due diligence number-crunching spreadsheet (find out how you can get a copy here) I quickly inserted the variables. I was a little crushed when the ‘bottom line’ revealed the most I should pay and still expect my desired profit is $400,000. So I wrote back to the real estate agent saying that I was close, but that the best I could do was still $25,000 less than what his seller might accept. He said that that was too low for his seller to consider favourably.

This short case study reveals the following six learning points:

1. A discount does not guarantee a great deal.

Property sharks love to smell blood in the water, but a discount in and of itself doesn’t guarantee a good deal. In most cases, a big discount simply reflects that the seller started at an unrealistically high list price and the subsequent adjustment is the equivalent of the market saying, “Tell him he’s dreaming.”

2. A discount should not stop further negotiation.

Just because a property has already fallen in value shouldn’t stop you trying to negotiate an even bigger price reduction. Yes, you may hear the agent say “But they’ve already dropped their price by <insert amount>!” However, the price you pay should be what you need in order to make your desired profit, not what the seller needs to feel good about their sale.

When I make an offer that is less than the asking price I often say, “Don’t make it personal and don’t take it personally.”

3. A discount does not subvert the need for due diligence.

If you think you’re getting a great deal, you may be tempted to fast-track or hijack your pre-purchase due diligence in your haste to stitch up the sale. Don’t! You may think you’re buying cheap, but if you rush and miss something important, then once you’ve paid to fix it the deal might not be nearly as good as first thought. As the old adage says: Hasten slowly!

4. A discount does not mean you’re buying under market value.

Sometimes a buyer will mistakenly think a big discount means they are buying below market value. Oh please! Think about that for a minute… you are the market, so what you pay will be the market price. While you can purchase below replacement cost, or below the independently appraised price, you cannot ever buy below market price.

5. A discount does not mean you’ve made money from day one.

A discount is not the same as a cash profit. Think of buying as opening the investment position and selling as closing the investment position. It’s what you do after you’ve bought and before you on-sell that unlocks the profit. In order to convert your discount to cash, you will need to find someone willing to pay more for it than you did. Being able to do that requires that you know a thing or two about the art of investing.

6. A discount does not mean the deal is problem free.

On the contrary – a property that must be discounted tends to have one or more problems that need to be fixed before the property will be profitable. A good example that comes to mind is a large discount I negotiated (equivalent to one year’s rent) on a two-tenant commercial property. When I purchased the property, it was 50% occupied. A year later and, despite my best efforts, it is still 50% vacant. It seems I overestimated how easy it would be to fix the problem.

Don’t misunderstand me… getting a discount is usually better than having to pay a premium. Just be careful that you aren’t being distracted by pretty plumage on what is otherwise an ugly property duck.

Have you ever received or negotiated a big discount on a property that you thought was great, only to later discover it wasn’t as good as you hoped?

Be brave and share your story by posting a comment.

Steve McKnight will soon be releasing a brand new product he has been working on for the past two years – something so valuable that it will be a total game changer for every property investor. <Find out more here>.

The post Why Big Price Discounts Don’t Always Make Great Deals appeared first on PropertyInvesting.com.

Why do some people attract wealth and others repel it?

Have you ever noticed that some people just seem to keep winning financially, making steady progress toward their goals? Others, however, continue to struggle and face setbacks. They never can seem to get ahead. 

I believe the answer to “Why?” is found in an ancient Hebrew proverb from King Solomon of Israel. In the following 10-minute video clip from the beginning of the webinar, I use Solomon to explain the distinction between two types of investors: the “prudent” and the “simpleton.” 

Then at the end of the clip, I pose some thought-provoking questions to challenge you to develop a plan for becoming more prudent in your investing decisions.

So, what’s your plan for becoming more prudent?

After watching, take a moment to share your thoughts in the comment section below.

The post The Prudent or the Simpleton –
Which One Are You? appeared first on PropertyInvesting.com.

You may not know it, but for the past 18 months I’ve been working on a brand new product – Buyer Beware – that is surely the most comprehensive resource ever written on the topic of due diligence as it relates to real estate.

Included in it is my step-by-step methodology for completing due diligence, forged on the back of completing hundreds of property transactions over 15 years, that will help you to comprehensively analyse your next property purchase like a pro.

It won’t be ready for public release for a little while yet, but I wanted to share one useful tip that’s mentioned in it.

Area Analysis

As you’d expect, what you buy (i.e. the “bricks and sticks” – aka the dwelling) is very important. So too is where you buy (i.e. the suburb or location).

Perhaps the best and most succinct piece of real estate advice I can give about selecting an area is: buy the best house you can afford, in the best area you can afford. If you have to sacrifice one or the other, sacrifice the quality of the house rather than the area.

In Buyer Beware I explain fifteen critically important factors to consider when assessing an area. One of those is ‘Social Demographics’, and one of the key statistics to examine under this heading is the percentage of people who own in an area versus those who rent.

A suburb where more people rent indicates a higher percentage of housing owned by investors. In the event of a sudden downturn, these areas will be harder hit than those where home-ownership is higher – for at least two reasons:

1. On the supply side, investors will undercut each other in the rush to exit while they can, before their equity evaporates.
2. On the demand side, without many homeowners to mop up the extra stock, the only buyers for those on sale would be other investors who will likely be reticent to buy given the freefalling of prices in the area.

Conversely, a suburb with a higher percentage of homeowners than renters provides a cushion against sudden price shocks, given that homeowners are more emotionally attached to their homes. Also, in all likelihood, they will probably be carrying less debt and can afford to “hold on” right through to recovery in the future. So long as they keep their income, there is little need to sell – instead, they “batten down the hatches” and wait it out. Thus values won’t be as likely to plunge in their area.

When you drill down further by splitting between homeowners who have a mortgage and those that own their homes outright, the results can be very interesting.

Take Moranbah in Queensland for example. Prices exploded there during the mining boom, before spectacularly collapsing. One thought may be whether or not now, with commodity prices on the rise, Moranbah might be a good suburb to target.

Let’s see what the home ownership metric has to say about it. Rounded up, the stats look like this – 15% are fully owned, 16% are purchasing, and a whopping 70% are renting. In other words, 7 out of every 10 homes in Moranbah are rented.

Compare that with Canterbury in Victoria where 46% are fully owned, 30% are purchasing and 24% renting. With such a high percentage owning, Canterbury would be expected to have much less inherent risk of a price decline because of a sudden downside shock to demand or supply.

When an area has more than 50% of houses that are rented rather than owned, then it should not necessarily be avoided completely, but it is a red flag that is seen by wise investors as a reason to be cautious.

Applying this theory to Moranbah, even though prices are low, considerable risk remains given the high percentage of renters. Personally, if I wanted to target a mining town, I’d look for another location that had a higher percentage of homeowners.

If you’ve enjoyed this discussion you can watch the following short training video where I show you how to access the statistics:

Conclusion

As you’ll discover, if you invest in acquiring and using Buyer Beware, there is much you can do to protect yourself from buying a lemon. As far as today’s lesson is concerned though, remember this rhyme:

Beware a sudden price descent
In areas where more people rent

Do you have a favourite saying or investing tip? Please share it with the world by posting a comment below.

Stay happy and remember that success comes from doing things differently.

– Steve McKnight

P.S. If you want to pre-register your interest (no-obligation) in accessing the full power of my comprehensive due diligence system, and at the same time qualify for a special one-time discount, then click here to be added to a special Buyer Beware database. You’ll receive more information by email once it is available.

The post Watch Out For This Simple Stat appeared first on PropertyInvesting.com.

In his latest installment of “Tips & Tricks for Developers,” Dean Parker shares his five critical steps of site acquisition – from submitting an offer subject to due diligence to making a decision on whether or not to proceed with the purchase.

Video Transcript:

Hi. Welcome to the latest PropertyInvesting.com video blog. Today I’m going to talk about site acquisitions. Our business, “Your Style Homes”, operates out of Brisbane, up here in Queensland. Today I’m standing in Newmarket, in front of a site that we’ve just acquired.

I’m going to summarize this into five steps that we follow: from signing a contract with a due diligence clause, through to actually proceeding with that contract.

The first step is to talk to our town planner. He’s the first person that we would call when looking at a site like this. He will do a desktop analysis and identify any risks and issues with a particular site. He’ll do all of the searches. He will check for easements. He’ll check for the planning zones. He’ll check for anything relating to the site, and let us know so we can make decisions from his report.

He’ll also ensure we can get storm water in and out of the site, and check that sewer is available. All of those sort of issues, he will go off and address those. He will also then advise us of any items we need to prepare in our plans, which takes us to step two.

Step two will be talking to an Architect. We’ll get the feedback from our town planner, and then create a basic mud map of what we can achieve on the site. There is no real detail of the internal of the dwellings at this time, so it’s really just high-level boxes with a layout of the apartment or townhouse we want to build.

Then, there is a whole heap of other details we need to work out to meet the town planning requirements. For example, that will include setbacks to boundaries, car-parking allocations, making sure our drive ways are wide enough, and whether we can get the bins on the site, or if they will be on the street.

There is a whole league of town planning issues that we need to address. As I said, this is initially just a mud map of what can be achieved on the site, and from there we can work out our yield. The yield means how many apartments or townhouses can we fit on that particular site.

Once we’ve got that, we can then talk to builders or a quantity surveyor about working out some basic numbers around construction, giving us a reasonably good idea of what that particular building will cost to construct.

Once we’ve got all of that information, then we go back to our town planner. We get him to review all of those plans and assess whether we can actually do it or not. He’ll then identify the risks. Up here in Brisbane they call it either “impact assessable” or “code assessable.” If the town planner says its “code assessable,” we’re basically ticking all of the boxes, and can proceed. If it’s “impact assessable,” we’re not ticking all the boxes and we’ll need to negotiate with council on some of those items.

Now that we’ve dealt with our town planner, our architect who has drawn up our plans, and the builder to get some pricing, we need to come up with a feasibility report. We’ll put all of those numbers into the feasibility, we’ll identify our acquisition costs, and all our other costs associated with the build, any council fees, any holding costs, any selling costs, any marketing costs. We’ll put that all into a feasibility analysis, which will produce a number at the end – the profit that we can make. That number needs to be around 18 to 22 percent for the projects that we’re doing.

If we can tick that box, the last step really is just making a decision on the project, whether we’re going to proceed or not.

To summarize the five steps… Step one is talk to your town planner. He will identify risks of the site. Step two is talk to your architect to get some basic plans done; a mud map. Step three is to talk to your builder to make sure you’ve got your construction prices sorted and that you can build what you’re proposing.

You then get all those people together and be sure that you’re happy through those first three phases. Step four is prepare your feasibility. Make sure your numbers stack up. Step five is to make a decision to either proceed with the contract or walk away.

You must make sure that you do these five steps really accurately. There is no point getting into a contract, and then figuring this information out and being stuck with a lemon.

Due diligence is really the most important process in any development. You make your money when you buy and obviously this stage is where you avoid all of your mistakes. You must make sure you cover everything off.

I hope you got some value out of this update. I’ll see you on the next one.


This transcript has been edited slightly to improve readability.

The post Tips & Tricks For Developers: 5 Critical Steps of Site Acquisition appeared first on PropertyInvesting.com.

How serious are you about becoming a successful property investor? Before you answer this question, think about it for a minute. Investing in property is a big commitment and like anything worthwhile, it takes time to acquire the skills to become successful at it. Now think about these questions: How quickly do you give up when things get tough? How often do you make excuses when challenges appear?

I remember Steve McKnight asking me early on in my property investing career if my desire to succeed in property was a “must” or a “maybe.” At the time, I didn’t fully understand the clarity my answer would bring to my own journey.

Now I pose the same question to my own community of fellow property investors and it’s always interesting to see who follows through and makes their commitment to succeed a “must.”

It’s a common theme and in fact, according to Australian Tax Office’s own data, out of Australia’s entire population of over 23 million people, only 1.8 million people own two or less investment properties. What’s even more surprising is that two out of every three of those investors are generating a loss from those investments.

This leads us to the next question: Why is it that so few Australians generate a profit from property investing?

It can’t be from a lack of knowledge, as there are strategies galore out there, both free and paid, to create a substantial supplemental income from property investing.

It can’t be a lack of affordability, available capital or servicing ability. There are countless opportunities to create joint venture arrangements to compliment skill and resources between property investors.

What I’ve come to believe is that it’s your commitment to the task to succeed at all costs. I’m talking about seeing your success in property investing as a serious, pressing life and death situation.

You might say that’s a bit too dramatic, but in reality there are retirees out there right now who must choose whether to buy food or medicine this week with their pensions.

For me, that’s a life and death situation I don’t want to be in, so I plan to ensure that’s not the reality for me or for those around me, as well.

When you make a decision and commit to becoming a property investor, or anything else for that matter, you’ll be tested and that’s where most people fall over.

The Testing Phenomenon: Is It a “Must” or a “Maybe” for You?

Whenever you create a plan, schedule a task, or commit to achieving something, the universe will test you to see if you’re truly serious.

I’m not kidding. Call it what you want, but there is a force out there that wants to know how committed you are. Most people who set an intention never seem to have the commitment to follow through. You’ll often hear the excuse, “Life just got in the way” or “I ran out of time.”

If you want to achieve anything in life, you need to prove how serious you are. The funny thing is that this “testing phenomenon” applies to almost anything, no matter how small or how big the intention is. Let me share a less serious version of how this happened to me when I made a random commitment a few months ago.

I decided to set the intention not to drink alcohol for 30 days. Now I’m not a particularly big drinker – maybe an occasional glass of wine with dinner or a couple of beers on the weekend – but that’s about it. I just felt like I could do without alcohol for a month to cleanse my system, so I made the commitment to do that.

That afternoon I went to the supermarket to buy some groceries. I should mention we were living in France at the time and they buy all their alcohol at the supermarket. The glass sliding doors opened and I was met with eight pallets of beer that stood six feet high, plastered with discount signs all over them.

There was a 30-day sale on boutique beers from the region – Bingo. The universe was testing my commitment to my intentions, and I’m happy to say I passed the test with flying colours.

Now you could pass this off as a coincidence, but this happens to me all the time. I’m a big fan of setting clear intentions with everything in my life, and each one is tested in the most unexpected ways.

In fact, I’ve learned to love the challenge that is presented each time, because it strengthens my belief that I am on the right track for success.

A Lesson in Property Investing That Also Applies to Life

The lesson is twofold:

1. To succeed in anything, you need to set the intention in the first place and commit to achieving that goal, no matter what. Ask yourself, is it a “must” or a “maybe”?
2. When challenges arise, and they will, don’t see them as an excuse to deviate from the path or recoil into a position of procrastination. Embrace the test and be grateful you have proof now that you’re on the right path.

There is one more point that I need to add here that you could see as an extension to the belief that is created when you are tested with a challenge of your commitment:

You don’t know how close you are to success.

In life and of course, in property investing, you are never presented with a checkered flag waving wildly as you approach the finish line. The universe replaces that flag with a sea of fog that distorts your vision. It is designed to provide that final test before you finally achieve your goal.

At that moment, when you are on your last legs, taking your final knock on the chin, literally about to throw in the towel and give up – then and only then – will the finish line reveal itself.

Has your resolve been tested yet? The next time you notice the testing phenomenon is happening to you, remember to dig in your heels and persist. You may be pleasantly surprised at the rewards waiting for you at the finish line.

The post Being Tested: Finding Your Investing Muscles appeared first on PropertyInvesting.com.

Last weekend in Kew, a leafy inner-eastern Melbourne suburb, a house sold for $4.8 million. That’s not particularly remarkable on its own, as the area is well regarded. It’s near great schools and has many classy homes in it.

What did catch my eye though was:

1. It wasn’t a McMansion but rather a pull-down job; and
2. It sold for $1,700,000 over reserve.

Think about that for a moment… $1.7 MILLION over reserve.

That’s a crazy amount of money and it is easy to be blasé about it. Yet $1.7 million is about $2.8 million in before-tax salary, and at Melbourne’s current average annual salary of $60,000, it equates to more than 46 years of work – a literal lifetime. Wow.

This is just one example of how the Aussie real estate market, particularly in Melbourne and Sydney, continues to defy expectations. How high can it go? Will it crash? How will anyone under 30 ever afford a home?

A simple measure applied the world over is ‘when the average person can’t afford the average house, then a correction is coming.’  Yet many local and international experts have prophesied a dramatic fall in house prices. All have been wrong, so far.

Supported by generous tax concessions for owning loss-making property, and fuelled by low interest rates, property prices keep going up, and up, and up in most capital cities (Perth being a notable exception).

Is It a Bubble? Probably. But so What?

So long as the price bubble keeps inflating then the property party rocks on, unless you’re out of the bubble and can only watch your housing hopes float away.

Some people are hoping for a correction so they’ll be able to buy a bargain. This is populist foolishness. A housing correction will lead to lenders all but ending new loans as they manage their bad debts. Unless you plan to buy for cash, you might see a bargain, but you won’t be able to buy it.

Also, imagine a situation where your boss, co-workers, family members and friends all have mortgages on property worth less than they owe. This is what happened in certain places in the US in 2009. It wasn’t good. Depression rates spiked, as did suicides. Unemployment went into double digits. It was horrible.

How Do You Invest With Certainty in a Market that Doesn’t Make Sense?

For the past few years, optimists, risk-takers, and speculators have been making easy money. The press has been featuring the next batch of lucky property millionaires who have done little more than take on debt, and buy as much as they could.

All ships float up with a rising tide. But momentum will shift, sooner or later, and when it does, the words of Warren Buffet will ring true – when the tide turns you will find out who’s been swimming naked.

Here are five pieces of advice to help ensure you don’t get caught out:

1. Don’t Bet Big

Only invest with what you can afford to lose. This applies to both your money and your sanity. It is always unwise to bet the bank on a market you don’t understand and can’t control. For instance, I wouldn’t recommend having a home loan on your principal place of residence that has a LVR of more than 60 percent.

2. Secure Your Income Supply

Contemplate how life would look if you lost your job. I hope this never happens, but if it does, you will feel the financial pinch of having responsibilities without a regular income. Carry at least three months total expenditure in a separate ’emergency’ account and seriously consider income protection insurance to help you in the short term until you can find something else.

3. Have a “Plan B”

If things turn hairy, most investors think they can just exit by selling their property. But what if you can’t sell it? One of the biggest assumptions property owner’s make is that there will be someone to buy their property when they want to sell, and at a price they want to sell at.

But what if you couldn’t sell it? Could you move into the property? Rent it out? What’s your Plan B? If the Plan B looks dire now, consider selling while you can – maybe even right away.

4. Stay Educated

Those who don’t know what they’re doing and can’t read the market signs are always at greatest risk of being caught in a financially compromised position when conditions change for the worse. Pay attention to what is going on generally, and in particular, shifts in trends impacting jobs and interest rates.

5. Don’t Be Afraid To Buy

If you see a great deal that stacks up and you can afford it, then buy it.  It’s always a great time to buy a great deal – just be sure you do your due diligence, and have strategies and plans to cope in a market downturn.  More than ever, knowing HOW you will exit any new investment before you even buy it, will be paramount.

Though what seems safest in a crazy market is to “sit it out”, this isn’t necessarily the case as the comparative value of your cash versus real estate values will diminish if property prices continue to rise while you’re sitting on the sidelines. As an example, those who have held cash while the Sydney property market rose higher and higher have the same amount of cash, but it buys a whole lot less Sydney property today than it did before.

It is wiser to keep a toe, perhaps a foot, and maybe even a leg or two, in the property investing water. Just be sure to swim in investing waters that are suitable for your level of skill and experience, lest you go out of your depth, and end up under water.

And keep an eye out for imminent changes in the weather….

The post When Crazy Becomes “The New Normal” appeared first on PropertyInvesting.com.

Mortgage interest rates in Australia are at an all-time low. Even so, a recent study revealed that seven out of 10 Australian households are having trouble meeting their monthly mortgage repayments.

As investors, it’s crucial that we wisely manage both our cash flow and debt levels. There are a lot of varying opinions regarding which loan payment options best accomplish this objective.

This topic is often hotly argued about in media opinion pieces relating to property investing, mortgages and the finance industry in general. For the most part, the pros and cons both sides of the argument present are accurate, but they are irrelevant because they do not take into account all the various considerations, including the personal circumstances that go into designing an effective loan structure.

Interest-Only Payments: The Pros and Cons

To start with, let’s have a look at what most people believe are the benefits of the interest-only option:

• Lower Monthly Payments: Because you are paying only the interest component on your home loan, your monthly payment will be comparatively lower
• May Maximize Tax Deductions: If the loan is for investment purposes, then the interest you pay on it could potentially be tax deductible.

The commonly-claimed disadvantages of interest-only loans include:

• Availability: Interest-only loans are not available from every lender, even for investors.
• Higher Interest Rates: You will want to shop around, but many lenders charge higher interest rates for interest-only loans.
• Affordability: You will need to pay off the loan at some point. When the loan reverts to a principal and interest (P&I) loan, the repayments usually rise, so there is a concern regarding affordability.
• Falling Value: If the property falls in value, you may end up owing more than the property is worth because the outstanding loan amount may exceed the value of the property.
• Changing Rates: Interest rates are currently low, so while there is no guarantee that they won’t go even lower, this means now is a good time to pay off some of the home loan principal, just in case rates rise in the future.
• Temptation: Lower repayments could tempt you to spend more money than you can really afford.

Designing a Loan Structure: Key Factors to Consider

Before addressing these points in turn, let’s digress and consider which factors are the most important in designing a loan structure. Here are the three main factors that are non-negotiable:

1. The loan must provide the quantum of money you need.
2. It must be possible to choose which debt you pay off first.
3. The loan should not require cross collaterisation.

These factors will dictate what features you require from a loan product to allow for optimising your loan structure, including the importance of an interest-only option. You need to address these factors first before considering interest rate and fees.

Next, you need to address these factors in the context of cost. To most people this is a subject of interest rate and/or fees, but cost is far more complex than this. These factors determine the before-tax costs of a loan, but we live in a society where we are required to pay income tax, so real cash costs must be determined in after-tax dollars in order to make an informed decision.

This is where the flexibility to choose which loan to pay off first becomes most important, because for most investors personal debt is far more expensive after tax than investment debts.

You also cannot properly address cost without considering opportunity cost. We all have finite resources and borrowing capacity, so every time you make a purchase or take out a loan you give up the opportunity to spend capital and/or debt on something else. This includes paying down loans or simply accumulating money, not just buying new investments or using the money to fund personal consumption.

When making an investment decision, you need to think about how much of your own money you wish to contribute and/or how much debt you want to incur. In cases where a lender will not provide the level of debt you have budgeted when making your investment decision, you should consider whether it is better to provide more funds from elsewhere, or to use an alternative lender.

The immediate loss of control of capital, through making principal repayments, also comes with an opportunity cost. You can use any available funds immediately, while accessing capital tied up in equity requires a finance application with all the associated time and hassle, as well as further exposing you to risks relating to changes in lending policies and valuations. Cross collaterisation is not an immediate issue, but it also exposes you to the same risks relating to lending policies and valuations, with no gain to yourself.

Now let’s go back to the pros and cons of interest-only loans and consider them in the context of creating a robust and efficient loan structure. The pros that are most commonly mentioned are unambiguously true, and the cons are less so:

• Some Do, Some Don’t: It is true that some lenders do not offer an interest-only option, but most do. This is a good way to filter out some lenders, and not to change your proposed loan structure.
• Check Premiums: Many lenders charge a premium for interest-only loans, which is yet another factor in your choice of lender, as is the headline rate itself, but it should be one of your final considerations.
• Understanding How Loans Work: The other stated cons are all related and brought up because most people, including industry commentators, lack a basic knowledge of how loans work. There is a big difference between choosing to pay interest-only and not paying down the loan. The existence of Offset Accounts and Lines of Credit (LOC) mean you do not have to pay more interest on a loan if you accumulate cash and choose not to pay down a loan balance. Paying down the principal of a loan simply reduces your access to cash, it does not save you money and does not change your risk profile

Offset Accounts and LOC Help

Those of you who do not understand how Offset Accounts and/or LOC’s work please feel free to contact me directly by filling out the linked form for a no obligation, free consultation. This topic is important and you are probably costing yourself money needlessly, or you will, if you do not have a basic understanding of how different loans and features work.

There are reasons why someone might choose to pay principal and interest. For example, if there is an interest rate saving that outweighs their requirement for available cash, or if they believe that they will spend any cash that remains available.

Servicing may also be an issue because lenders frequently use shorter amortisation periods when considering interest only applications. This increases theoretical repayments in their calculations and can affect the amount you are able to borrow; however, in the vast majority of cases, choosing the interest-only option provides greater utility and flexibility in handling your finances and, where there are loans with different after-tax costs, some real savings.

The post Money Loan Matters: Principal and Interest Vs Interest-Only Payments appeared first on PropertyInvesting.com.

I had some time before I was due on stage and decided to take a walk. It was just after 5 p.m. I knew it would be busy on the city streets. As I approached the train station at Wynyard I realized ‘busy’ didn’t come close to the mayhem in progress.

I could see two of my promoters busily distributing flyers about that night’s event but that wasn’t what caught my attention. I was reminded of those terrible B-movie, zombie horror flicks from the 1960s. I’d just stumbled into the Dead Zone – only this was real life!

Thousands of tired, disinterested, miserable-looking people filed past me. There was no life in their eyes, no conversation, no gentleness or kindness and certainly no smiles or laughter. Everyone seemed to be operating on autopilot, focused solely on getting to the couch and the remote control as quickly as possible. And this was them leaving work – I dread to think how thrilled they must have looked in the morning!

Wynyard train station is not unique. I could have been standing in any station in any town or city around the world. The Dead Zone is ironically alive and well everywhere from New York to London to Budapest and Singapore. The Dead Zone is where people feel trapped by the circumstances of their life with no hope for a better solution, where wealth and freedom are a lifetime away – nothing more than a figment of Hollywood’s vivid imagination, or a desperate hope that they might win Lotto.

Often when I see it, I feel a wave of genuine empathy. I feel fortunate that I no longer have to work for money. Even when I was working full tilt, I used to average 3 months holiday a year in some of the most exotic locations in the world. How I got there and how YOU get there – well that is the purpose of this article.

STEP 1. The Great Myth

After more than a quarter of a century, training tens of thousands of people on three continents, I have uncovered a myth. The myth goes like this: If I want to massively change and achieve my dream life, then I need a moment of inspiration.

It’s a big fat myth. You need pain. A point where you have totally had enough of your life, and your current situation. A point when you feel like screaming, “I can’t stand this anymore and I want …(fill in your dream life).”

The problem is that most people may not like their situation but are willing to put up with it. I believe that after we reach this point of no return, then the inspiration often comes. Trust me I wish it wasn’t this way. But after decades of seeing so many people change, it nearly always comes down to this.

I Call It, THE SNAP POINT.

Everybody has a snap point. It’s the point that you reach where something happens in your mind and you say ‘enough is enough’. It can happen in any part of your life and from the thousands of people I’ve met over the years it seems to take an infinite number of forms.

For example, there’s one client I had – who initially came to me when he first started in business. He wasn’t doing well. A few years later at 23 years of age he was making an average profit of $20,000 a month.

Or another client who within 18 months went from zero income to over $300,000 profit a year. His snap point was being sick of working hard, he wanted to work smart.

I wasn’t always successful. If I hadn’t had a snap point, I too might have been confined to the dead zone. I have had several very successful businesses and as I mentioned I no longer have to work for money. However my teachers at school thought I was destined for the scrapheap. For quite a few years after leaving school it must have looked like they were going to be right. Then one day I’d had enough. I didn’t want to waste my time any more. That first snap point was the day my life began to change.

Your dream life … that life that you really want?  It starts with a single decision. It’s a small, committed step into a bigger world.

The post How to Get Out Of The Dead Zone and Start Making Money appeared first on PropertyInvesting.com.

Would you like to hear the most painful investing mistake I ever made?

I had recently finished a degree in finance and was working as an intern for a large investment bank. Considering myself to be a sophisticated stock market professional, I borrowed big off my credit card to go all in on a technology company I knew was going to make me rich.

The Dotcom Bubble of 1999 had just burst, and I was sure the market would soon be climbing back up after taking such a big hit. After all, the professional analysts and Wall Street media gurus were all saying a new rally was just around the corner.

Having watched these shares trade for months between $100 and $120, I picked them up for $55 per share. As a gullible and naive young investor gambler, I believed the hyped analyst projections saying these shares were headed for $500+.

I still remember the call from my broker about a month after buying. These shares had climbed back up to $75, so he advised me to sell in order to lock in my 36 percent gain. Having laid in bed at night dreaming about what I would do with all my money once they hit $500 per share, I simply replied, “No, we’ll let it ride.”

My emotions soon swung from greed and exhilaration to alarm and panic, then to horror as I watched my shares drop back to $55, then $45, then $35, and then $25. At this point, I made the only logical choice, one that any other investor gambler would make.

I maxed out my credit card to buy more of the exact same shares, and lower my cost basis. If they would only climb back up to $33 per share, I could sell, break even and chalk this all up as a painful learning experience.

I sold three years later for $2 per share.

I learned a valuable but painful lesson over those horrifying months: I was a gambler, not an investor. In hopes that I might save you from learning a similar lesson the hard way, here are six signs that you might be a gambler and not an investor.

1. You Speculate.

Speculation is defined as the forming of a belief or assumption without firm evidence or knowledge of the facts.

My first big foray into share investing was nothing more than speculation. I formed a belief, or rather an assumption, that my shares would rise to $500 per share, based only on their current price relative to a historical price, and the confident assertion of an investment bank analyst.

I did not investigate the company, nor fully understand its core business. I did not even seek to understand the basis on which the analyst was making his assertions about the company’s future value. I chose to blindly trust his opinion, failing to consider how he might benefit from making such a bold recommendation.

These exact same mistakes are made each and every day in the property market. Investors blindly follow the opinions of others, failing to investigate the facts behind the assertions that the so-called “experts” make.

Here are a few of the most common assertions I hear:

• “This area is projected to grow by 10 percent per year.”
• “This property could easily rent for an additional $50 per month.”
• “You could easily fit four or perhaps even five units on this block.”

Speculation is grounded in hope, not fact. What is your system for separating fact from hope and opinion? If you don’t have one, you’re a gambler, not an investor.

2. You’re Driven by Emotion.

The value of residential property is in part driven by emotion. For the owner-occupier, the decision to buy a home is based on lifestyle emotions. People are willing to pay more to live in an area that makes them feel happy.

Investors can get caught up in emotion, as well. In greed, they might chase ever-increasing gains, regardless of market fundamentals. Conversely, they may fearfully chase losses, hoping to turn around a deal that’s clearly gone bad. Either way, they rely on feelings, not knowledge.

Legendary investor, businessman and poker aficionado John Templeton famously said, “Bull markets are born on pessimism, grow on skepticism, peak on optimism and die on euphoria.” Markets are emotional, but investors shouldn‘t be.

When my shares were climbing, I felt euphoric. I thought I was the smartest 23-year-old on the planet.

Once they started falling and reached my buy price of $55, my pride prevented me from acknowledging the safe option to break even. I was greedy and held onto my dream.

At $45 per share, I started to get scared, and began regretting not taking my winnings off the table earlier. At $35 per share, I felt awful and began imagining the pain of making interest payments on this credit card debt. At $25 per share, my ego led me to chase my losses even lower by doubling down. At $15 per share, I stuck my head in the sand and tried to forget about my defeat. It was all too painful.

There was no strategy and no plan. Every decision was guided by emotion.

Having worked personally with hundreds of property investors, I’ve seen greed motivate people to buy when and where they shouldn’t have bought, and I’ve seen fear and ego prevent people from selling, still long after they should have sold.

Betting big on real estate may be thrilling, but your financial future is too important to gamble with for the sake of a cheap, or a not-so-cheap, thrill.

3. You Rely Primarily on Chance.

Photo by Mark Hirschey / CC BY-SA

Chance is defined as the occurrence of events in the absence of any obvious intention or cause. When something happens, it does so randomly or by accident.

Chance is not skill-based. Because the cause of the event is unknown, the outcome, no matter how desirable, cannot be duplicated.

The benefit of getting results that can be traced back to skill is you can do the same thing again and get the same results. You can duplicate it over and over again. That’s what smart investors do.

Relying on chance rather than skill brings a low probably of success. Warren Buffett once said, “Risk comes from not knowing what you are doing.”

When you don’t know what you’re doing, you have little choice but to buy, hang on, and hope for the best. This adds an immense amount of risk to your investing.

Unless you have a skill-base from which you make your investing decisions, you are a gambler, not an investor.

4. You Have Little Control Over Your Outcome.

The most common strategy of property speculators in Australia is negative gearing. This is a strategy that provides immediate tax benefits with the hope of achieving long-term gains in the form of capital appreciation.

The Australian Taxation Office (ATO) allows property investors to offset the income loss of a rental property against any other personal income. Negative gearing, when the costs of owning and operating the asset are greater than the income it produces, provides this tax benefit.

Unfortunately, a negatively geared investor has little-to-no control over the investing outcome. This strategy amounts to little more than a gamble on the future direction of the market.

The only way to win is when annual capital gain after inflation is consistently greater than annual income loss after tax savings. Otherwise, it’s a waste of time and money.

Negative gearing, a purely speculative strategy, is the most common form of property investor gambling.

5. You’re more Likely to Lose Than Win.

When you gamble, the odds are not in your favour. The house wins most of the time. You might get lucky and win in the beginning, but the probabilities are such that the longer you play, the more likely you are to lose.

One of my greatest concerns for the future of Australia is the massive debt load we have taken on as a nation. Home prices continue to rise and we continue to borrow, but how are we going to pay back all of this debt if interest rates rise.

Many investors erroneously believe they are smart investors because they’ve stumbled into success by chance. They’ve gotten lucky. Lacking skill, they do all they know to do – keep buying.

I’m encouraged when people join our mentoring program and say, “I know I got lucky before, but I can’t rely on that to happen again.” They accept responsibility for their future and take steps to increase their knowledge before they rush out and buy again. This makes them more likely to win.

6. You Exhibit Signs of Addiction.

One of the traits of problem gamblers is that winning becomes the most important thing in the world. They compromise their values, and all of life begins to revolve around winning. They often end up sacrificing the more important things to satisfy their addiction.

King Solomon of Israel, one of the richest men to have ever lived, once wrote, “Those who love money will never have enough. How meaningless to think that wealth brings true happiness!”

Achieving your wealth creation goal will never meet the deepest need of your soul. If you rely on investing wins to provide you with feelings of importance and significance, it could be a sign that you’re a gambler and not an investor. It may also drive you to make some really dumb decisions.

I’m convinced that one of my motivations in going all in on that tech company in my early 20’s was because I was chasing feelings of validation. I was insecure and thought that making a lot of money would make me feel more important.

The starting point of true happiness, and therefore successful investing, is a contentment with and gratitude for the more important things that one already has – like family, friendships, health, meaningful work, and life’s basic necessities.

From this place of contentment, without needing investing wins to help you feel better about yourself, you are in a much better frame of mind to establish worthy goals based on a meaningful “why” and systematically work toward them using a proven system and plan.

That is investing.

Break Your Gambling Habit

Property gamblers acquire assets and hope for the best. They have little or no control over their outcomes, they fail to plan, and they do little homework before buying.

Property investors are outcome-driven. They begin with the end in mind, and work backwards to establish a clear and thorough plan for making their profits. They are prudent and buy only on fact. They skillfully and actively manage their properties, and only sell when appropriate.

If you could use some help breaking your gambling habit, check out Steve McKnight’s Property Apprenticeship training course.

The post 6 Signs You’re a Gambler and Not an Investor appeared first on PropertyInvesting.com.