A CONSUMER’S GUIDE
Little Cash. Big Profits Learn how to make big profits in real estate. The secret is under your feet!
The secret is under your feet We want to share the secret to making some real money in property investment; free up the investment you have in your current home (commonly called “equity”) and use it to finance a second property. It’s that simple. And it works. And more than a million ordinary working Australians have done so.
Over the past 70 years, property in major Australian cities has grown at an average rate of 7.5%, compounding every year. Just think of your own home. Chances are it has doubled in value over the past 10 years. And it could well re-double in the next 10 years. Just imagine how much you would be worth if you had bought two properties when you started out. At the time the bank or building society probably wouldn’t have lent you the money needed. But all that has changed.
Banks are now eager to help you own a second home because they know, • that investment properties have reliable income streams • that property values continue to rise • that few things are as safe and secure as bricks and mortar. You probably know all this already. You know that owning is better than renting, and that owning two or three houses instead of one would set you up for life. But you haven’t acted yet, and are missing a big opportunity.
Your second property is easier Most people are amazed to learn that it’s far easier to own a second property than it is to buy the first. How is that possible? It’s hard enough meeting your existing mortgage payments on your current home. How can you afford a second one?
The answer is that the tenant contributes about a third of the cost of the mortgage repayments. The tax office then chips in with a similar amount in tax rebates. Which means you only have to find the difference.
Why does the tax office do that? The government makes this generous concession because it decided that private investors would be the preferred suppliers of rental property, which takes the pressure off the government to provide it.
Consequently, many years ago the tax office worked out a plan to incentivise private property investment. All things considered, it’s been a great move.
Why bother? There are lots of reasons why people just like you decide to buy a rental property. Some are motivated for tax reasons. Others want to retire early. Then there are those who just want to enjoy the feeling of creating wealth for themselves over and above their normal income. However, most people make a move when they discover how little money they’ll actually receive through normal channels when their working days are over.
Even with superannuation, 70% of retired Australians live on less than $300 per week. The trouble is they don’t discover this until it’s too late! “Are you sure?” you’re probably wondering. “That sounds like an awfully small amount to live on.” But it’s true. No-one is pulling your leg. And it doesn’t only apply to blue-collar workers. Some people simply cannot afford to buy a rental property. So what happens to them? In reality there’s always the Age Pension to fall back on after super runs out. People get by. They survive. But certainly not with the level of income and comfort that they’d hoped for all their working lives.
Why do people invest? The 5 main reasons for doing so
Key Secure Long-term Investment Obtain Income from Rent Reduce Taxable Income Invest for Retirement Other
Source: Australian Bureau of Statistics
It’s not that bad if they own a family home. But $300 scarcely covers the weekly groceries, which leaves them in a situation of permanent struggle. When work stops and the income with it, people in this position are forced to make sacrifices they never imagined. No more luxuries. Even birthday and Christmas gifts become a problem. Lots of things are simply no longer affordable.
It’s not pleasant thinking, is it? Which is why lots of people try not to think about it as they get older, until finally, it’s too late.
There is a way out The good news is that there can be a happy ending after a lifetime of hard work. But only for people who have the courage to face up to reality, who accept responsibility for the situation that confronts them, and who devise a plan and act on it.
This is how it works. Provided you can fulfil certain basic conditions, it is possible to design a lifestyle plan that will help you to have enough money when you need it most.
You need to • have equity in your own home or apartment • have regular employment, with a minimum household income of $80 000 if both partners are working, or $65 000 if you are single • have a sound credit record. It’s that easy!
How much will I need? How much will you need to live on once your income stops? Let’s say $40 000 a year. If we assume a safe return on your investment of 5%, how much capital would you need to generate earnings of $40 000 per annum? The maths is simple: $800 000. “Just forget it”, you’re probably thinking. “We could never save $800 000. There’s already too much month left at the end of the money”. But before you dismiss the idea, just think about the value of your own home. Chances are that if you bought it ten years ago for around $250 000, it could be worth at least $500 000 today.
Government statistics show that real estate generally doubles in value every ten years. That boils down to an average growth rate of 7.5% compounded every year. So if you keep the property that’s now worth $500 000 for another ten years, bingo! It’s now worth $1 million. And everyone – including the banks – would be very surprised if this were not the case. So why not do this with another property? This is the way to profit through property.
Leverage and time are the keys The secret to wealth development is borrowing the money that you have in equity to invest in an asset that history has shown grows and doubles in value every seven to ten years. Banks and building societies are aware of this. They place great trust in the growing value of property in Australia.
Provided you have a regular job and want to buy real estate, they will lend you up to 100% or more of the value of the selected property for a period of 25 to 30 years. This time factor is important. The sooner you act, the sooner you can achieve gains! Most people buy their first home and then stop. When they have reached 60 or 65, it might occur to them that their house that is now worth a million dollars could easily have turned into two properties worth two million dollars! That’s what you call a real missed opportunity. Don’t let this happen to you.
Pay off your home loan with your investment property profit Many people believe that they should wait until their house is paid off before buying another. That’s called “conventional wisdom”. But times change, and so do conventions. Today the bank will lend you the money to buy an additional property while you pay off the first one. This means that you can hold two properties at the same time and enjoy the compounding value increase on two properties rather than one. Once their homes have doubled in value, many couples then “think outside the square” and sell the investment property and pay off their original mortgage. This is an approach called “back burning”, and it is highly effective in creating a mortgagefree result.
Time is running out Time is one of the key ingredients in the recipe of successful investment. You need time to let asset values and rentals grow. The longer you leave the decision, the less time you have to reap the benefits. And if you are not careful, you may reach the point of no return, and face the kind of unsatisfactory retirement experienced by the majority of Australians today.
You need to make sure that when your work stops, your income doesn’t. And the only way to do that is to develop a sound investment plan, and act on it. You’ll kick yourself if you ever come to realise that there was a solution, and you simply never sought out or discovered the knowledge that would have enabled you to retire in relative comfort with financial freedom and independence.
How do I do it? For many people the starting point has been the McCarthy Lifestyle Planning Workbook. It’s a simple six-step guide that starts out by helping you to calculate where you are right now in terms of your current assets and income and where you are likely to end up using current projections.
You then work out how much income you’ll need to retire in the kind of lifestyle that you’ve enjoyed while working and that you plan to continue to enjoy once you’ve stopped. The workbook is essentially a roadmap of the path to investment success, and it can be worked through in the comfort of your own home, leaving you with a clear picture of what you need to do.
Act now Don’t put the decision off any longer. Make the first move towards becoming one of the thousands of investors whose lives have been changed forever through discovering the benefits of investment property. For a free consultation with absolutely no obligation, contact McCarthy Group today on (02) 9687 3601, or email us at info@mccarthygroup.com.au It could be the most valuable call you’ll ever make.
This guide is intended to provide general information of an educational nature only. Any information contained in this guide does not have regard to the investment objectives, financial situation or individual needs of the reader. Neither McCarthy Group Pty Ltd nor its affiliates intend by this guide to provide any financial product advice, and information in the guide cannot be relied upon as such. All readers should consider obtaining independent advice before making any financial decision concerning property or any other investment product.
© McCarthy Group 2008
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