Realwealth

REAL WEALTH THROUGH REAL ESTATE 2nd edition

A selection of some of the most popular articles from Property Update

by Australia’s top property experts BUYING … SELLING … WHEN …

WHERE … AND HOW!

Hosted By Michael Yardney www.PropertyUpdate.com.au

Real Wealth through Real Estate

Copyright © 2007-8 Michael Yardney All rights reserved.

Published by PropertyUpdate.com.au nd 2 floor, 181 Bay Street Brighton Victoria 3186 Phone: 1300 20 30 30 also at Brisbane: 20 Mayneview St, Milton Qld 4064 Sydney: 203 - 233 New South Head Rd, Edgecliff NSW 2027, Email: info@metropole.com.au Web site: www.PropertyUpdate.com.au This e-book is brought to you by PropertyUpdate.com.au and Metropole Property Investment Strategists (Helping people who are (or plan to be) high net worth investors acquire, develop and manage their investment properties for maximum return.)

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Real Wealth through Real Estate

Real Wealth through Real Estate The articles in this e-book were previously published in Property Update – Australia’s leading investment property e-magazine. You can subscribe for free at www.PropertyUpdate.com.au

About our Authors Your E-Book host, Michael Yardney Michael is a successful Melbourne-based property developer and investor. As a director of Metropole - Property Investment Strategists, he is a highly regarded property commentator, a regular keynote speaker at property seminars in Australia and SE Asia and publisher of Australia’s leading property investment e-magazine, “Property Update”.

He also has authored two property books: the best-selling How to grow a multi-million dollar property portfolio … in your spare time, and All You need to Know about Buying and Selling Your Home, co-authored with his wife, Pamela Yardney.

Michael bought his first investment property in his early 20s - without a deposit and not understanding the rules of the game - and went on to build a multi-million dollar investment property portfolio in his spare time. He then became a property developer; with his team at Metropole Properties, he has bought, sold, advised, invested in, negotiated for, developed, built or project managed hundreds of million of dollars worth of property to create wealth for their clients.

Contributing Authors Pamela Yardney Pamela is a director of Metropole Property Investment Strategists; and heads the Property Management departments in Melbourne & Brisbane. Pamela co-authored All You need to Know about Buying and Selling Your Home, and is an active property investor and property developer. She is a respected property expert and her articles are frequently published in the press. www.metropole.com.au

Jack Henderson Jack is the Melbourne director of Metropole Buyers’ Agency, Melbourne’s leading buyer’s advocacy. His experience as a licensed estate agent, property investor and developer help him source top-performing investment properties for his clients. www.metropoleproperties.com.au

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Ed Chan A principal of Chan and Naylor, accountants. Ed is co-author of the top-selling books, How to Legally Reduce your Tax without losing any money, Wealth for Life and How to Control your Super. Ed is widely regarded as one of Australia’s top property tax experts. www.chan-naylor.com.au

Bryce Holdaway Bryce is a property investment strategist at Metropole – Property Investment Strategists.

His background as an accountant and property investor gives Bryce the experience and depth of knowledge to assist his clients in selecting a top-performing property investment. www.metropole.com.au

Bronwyn Davis Bronwyn is a freelance journalist, a contributor to Australian Property Investor magazine, and contributing editor for All You Need to Know about Buying and Selling Your Home.

Bill Zheng Bill is founder of Investors Direct Financial Group, a leading property finance company providing financial solutions for property investors and developers. Bill is a keynote speaker at many property and finance conferences throughout Australia. www.investorsdirect.com.au

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How to take advantage of the forthcoming Property Boom

By Michael Yardney “Capital growth is highest in an area where there is a demand for property and the land is scarce…”

Property booms never last, but neither do property busts. So how can investors make the most of the next property boom that is currently developing on the east coast of Australia?

The answer is simple. The investment strategy that has worked well for the most successful investors - and will work just as well as the next property cycle rolls on - is to invest in real estate for long-term capital growth. And capital growth will always occur in our major capital cities in Australia with median property prices increasing by about 10 per cent per annum over a 10-year period.

Why? It's all to do with the value of the land, which is related to the supply and demand for that land. I remember many years ago reading an article written by John Edwards of Residex, www.residex.com.au. It went something like this …

Imagine someone discovered a new island just off the coast of Northern Queensland, and a number of smart entrepreneurs decided to set up business there. Land was cheap, as no-one else really wanted to live or work there. Over time, people would want to move to the island because there were jobs available there. These new residents would need to build houses.

Remember … it was just a small island, so after a few years the island would be full and there would be no room to build more houses. The island was now thriving, and more people wanted to move and live there, but there would be no more land left to build houses.

What could they do?

With no vacant land left, they could only buy a piece of land that was already occupied. They would have to pay the people already living there for the privilege of moving to that island, and if there were lots of people wanting to move there those willing to pay the highest price would get to live there. The more people that wanted to live on that island, the higher the cost of housing would be.

This causes capital growth.

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Capital growth is highest in an area where there is a demand for property and the land is scarce. If you look at Melbourne, Brisbane and Sydney you can instantly see why house prices grow faster there than they do in regional Australia.

Sydney has almost run out of land because of its geographic boundaries. In Melbourne, the perimeters of the city cannot expand because of town planning boundaries. While there is a huge demand for property in Queensland - in particular, South East Queensland - there is still quite a bit of land available for new housing. But as most people want to live near Brisbane or near the water, much of the most sought-after land has been taken.

One thing to remember about scarcity is that most people want to live in the most desirable locations. In Melbourne, for instance, it is the inner south-east suburbs and near the water. In Sydney, the most desirable areas are in the harbour side and water suburbs. In Brisbane, they like to live near the CBD or near the water.

As our next property cycle arrives, as it already has in some parts of Melbourne and Brisbane, it will be the most desirable, the most sought-after areas that start growing first. These are usually the most affluent areas. People living in these areas can usually afford to upgrade or improve their houses.

At the beginning of the property cycle these are the houses that will grow in value first.

What happens to those people who cannot afford to buy in the most desirable areas? They buy in the next most desirable suburbs. This has been well documented in previous property cycles. Prices will start to increase in the more affluent and desirable areas and then start to ripple outwards to adjoining suburbs.

So, how can investors take advantage of this knowledge?

First: understand the big picture. Comprehend where we are in the general property cycle.

We are hovering around the bottom of the slump stage of the cycle in Sydney; well-located properties are definitely selling well in Melbourne and Brisbane, where the cycle is in its early upturn phase.

Next: become an expert in the suburbs that are going to grow in value first. Get to know those areas so you can pick the bargains in those suburbs near the city, near the water or in the more affluent, the more desirable suburbs. If you buy a good property in those areas, you are likely to achieve excellent capital growth in the next five years.

Then: over the next few years the suburbs one ring further out will start to make good investment sense. It is only near the end of the cycle that the outer suburbs, those that have traditionally been first home-owner areas, get good capital growth.

This spread of capital growth from the inner to the outer suburbs is called the ripple effect.

Learn it, know it, and you are on your way to being a savvy investor.

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What we can learn from past property cycles?

By Michael Yardney

“The bottom line is that, as a long-term investment, property is hard to beat.”

Many investors are receiving mixed messages in the press and are wondering where our property markets are heading.

Despite 3 interest rate rises, a media obsessed with low housing affordability, a change of government and uncertainty about the state of the American economy which may be heading for a recession that could affect us over here; the price of properties in some inner suburbs in Melbourne and Brisbane rose by over 30% last year.

While there have been reports of a flat Sydney property market and of mortgagee’s auctions in Sydney’s western suburbs, the value of some Sydney properties, particularly in the more affluent eastern and north shore suburbs, have risen strongly over the last year.

At the same time Adelaide and Hobart, with minimal population growth, have surprised everybody with the growth in their median property values. The Darwin market has performed strongly in 2007 but Perth’s property market languished with minimal growth in the value of most properties.

With increasing concern about a possible economic melt down in America and uncertainty about its affect on the Australian property markets plus reports of further interest rate rises on the horizon - no wonder so many investors are wondering what comes next?

The problem is that many of these investors have not invested in or owned properties during a complete property cycle and this makes them uncomfortable as the various stage of the property cycle move on.

To help you understand where our markets are heading, I thought I would delve back into my memory and see what we can learn from how our property markets performed over the last few property cycles.

The bottom line is that as a long-term investment, property is hard to beat.

I recently read a research report from Massey University suggesting that Australian residential property has been the best performing asset class over the long haul. The study dated back to 1920 and showed that property produced an average return of around 15% per annum (combining rental income and price gains) over all those years These figures don't really reflect how good property is as an investment as they don't take into account the higher returns you achieve when you leverage your equity by borrowing to buy investment properties. When you factor in the power of leverage, property far outperforms all other asset classes.

Investors must remember that, although there's little doubt that property is a potent wealthbuilder in the long term, it does go through the same kinds of cycles as other investments, including the share market. This means that those reported high long term average returns take into account periods of very high growth and also periods when property went nowhere for a few years.

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People who invested in the Melbourne or Sydney property market at their peaks in 1989 would have seen the value of their properties stagnate, or even fall, over the next four or five years.

Back in the early 1980's house prices across most of the capital cities were stagnating for a couple of years. Melbourne's median house price languished at about $50,000 from 1980 to 1983 then grew steadily but unspectacularly before really taking off in1987.

In Sydney, the median house price reached about $80,000 in 1981 and stayed there for the next four years. Perth prices were falling in 1983, and Brisbane house prices were going nowhere after a year or two of 25% returns in the early 80's. It took until 1987 before these property markets all began to boom again.

In Adelaide, there was a major rise in property prices between 1982 and 1984 before they went sideways again until 2000.

After crashing in 1990, property prices in Sydney and Melbourne stayed flat until 1995 and then they started moving slowly upwards.

And it wasn't until 2000 that prices in Brisbane finally took off again after a decade of growing at 5% or less per year. Interestingly this was despite a huge influx of immigrants from other states, particularly Victoria, coming to the Sunshine state Similarly property values only grew around 5% in Adelaide for most of the 90’s.

In Perth, a short recovery followed the boom and bust of the late 1980s and early 1990s. The market there has ambled along, with annual returns at about 6% until its recent boom, where Perth’s median property price overtook all capital cities other than Sydney.

This brings us up to the last year or two where the capital city property markets on the east coast of Australia have all performed strongly other than Sydney. Melbourne and Brisbane were of course the shining stars with median property price growth of over 20% and 18% respectively in 2007 The lesson to learn from all of this is that as a property investor you must be aware of these cycles.

Sure, it's hard when you are in the middle of the flat period of the property cycle, as Sydney was for almost four years. But look at the property prices that prevailed 10 and 20 years ago and look at property prices today.

Property investment is a long-term play - you need to be patient, as values in our major capital cities have doubled every seven to 10 years.

What were the factors behind those cycles?

It's the old story of supply and demand.

Property prices are pushed up by the demand created by a healthy economy, by high levels of employment and by population movements caused by migration and immigration.

They are dragged down when the economy performs poorly, when interest rates rise, when employment and immigration figures fall and when supply exceeds demand.

This was the basic pattern of the property booms and busts of the early 1980s and the early 1990s and 2000’s that I have just outlined.

Spectacular growth and a 12% inflation rate in the late 1970s were nipped in the bud when mortgage rates rose from 9.5% in 1978 to 13.5% in 1982. The government increased interest rates at the time and successfully brought inflation rates back down to just over five%.

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In 1990, interest rates rose to 17% to bring down inflation from about 7% to around 3%. This also brought on Paul Keating's "recession we had to have".

Things are no different this time around.

Consumers are spending freely and property values are rising rapidly as is inflation. To help keep inflation under control, the Reserve Bank increased interest rates three times last year and as many times the year before. And it is now hinting that it may increase interest rates again over the next few months.

All this shows that cycles are an inevitable part of any investment market, and our property markets are behaving normally.

Remember that there are local, as well as national, property cycles.

Each state is at a different stage of its property cycle. Perth reached the peak of its property boom in early 2007 and its median property value only increased just over 2% in 2007.

Sydney is at the other extreme, just emerging from a four year slump and property values in the more affluent suburbs of our harbour city are starting to increase strongly.

The Melbourne and Brisbane property markets moved into the early upturn stage of their property cycles in 2006 and over the last year (2007) Melbourne’s median property price grew over 23% while Brisbane’s median price increased by almost 19% according to Residex www.Residex.com.au %.

In the meantime, Adelaide(17.84% growth), Canberra(13.62%), Darwin (13.71%) and Hobart (11.2%) have all exhibited strong capital growth.

And within each state there are cycles within the various suburbs.

Traditionally the more affluent suburbs perform well at the beginning of the property cycle and that’s exactly what has happened this time around.

A sound economy and (until recently) strongly performing share markets has meant that the more affluent have been upgrading their homes with a large number of people chasing the same small group of properties pushing up values in some of the east coast’s more affluent suburbs by over 30% last year.

This began in Melbourne, Brisbane, Adelaide, Hobart and Canberra in 2006 and this trend has emerged in Sydney over the last year.

As the inner ring suburbs perform well, the price differential between these suburbs and their neighbouring suburbs increases.

Soon buyers looked for ‘bargains” in these adjoining suburbs and the increase in property values ripples out to the middle ring suburbs. This trend has been evident in Melbourne and Brisbane over the last year or so with property values increasing in the middle ring suburbs.

The increase in property values also drew astute property investors back into the markets over the last year or so.

However many beginning investors are still hesitant at this early stage of the property cycle, and are waiting for more signs of certainty.

Of course while they are waiting many have missed out on significant property price growth over the last year. If they would have bought a well located house or apartment in any capital city other than Perth the value of their property would have risen significantly over the last year.

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In summary, our property markets are behaving normally working their way through their individual property cycles.

Within each state the property markets are fragmented with some suburbs, in particular the more affluent near city and bayside suburbs, performing strongly while other suburbs, particularly the outer “mortgage belt” suburbs, languish.

These cycles mean there are great opportunities out there for property investors who are selective and think long-term.

INVESTORS: WHY USE METROPOLE BUYERS AGENCY? BECAUSE YOUR CAN’T AFFORD NOT TO! With all the property marketers, developers and agents out there looking after their own interest, it’s a great feeling having an agent working for you and not the seller.

We have offices in Melbourne, Sydney and Brisbane and have no properties for sale, but we do have access to every property on the market.

Our independent network of solicitors, accountants and consultants ensures you get solid impartial advice.

Call us today on 1300 20 30 30 to discuss your options.

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Understanding the FOUR ways to make your profits in property

By Michael Yardney “The lesson one can learn from successful investors is to buy the best quality properties you can, in the best location you can reasonably afford, and never sell them.”

In Australia, well-located properties tend to have good capital growth but poor cash flow. Those properties offering good cash flow, tend to have poor capital growth.

I can understand why many beginning investors want to get involved in positive cash flow properties. They are much easier to buy and keep because you don’t have to put your hand in your pocket every month. That is all well and good if you want income. But income alone doesn't make you wealthy - it just provides you with spending money, and after tax there isn't really that much money to spend.

Over the last couple of years I have seen many beginning investors rushing out into regional Australia to buy property that barely show positive cash flow. Unfortunately, I think some of these properties will create problems for them in the long term.

You see … there has been a swarm of investors doing this, which has pushed up prices in these regional areas, giving these investors a false impression that they have bought well; that their properties are performing well and they are becoming rich.

What most of these investors don't realise is that many of these areas in regional Australia are experiencing no growth or negative population growth. Some of these new property owners are having difficulty finding tenants and their properties remain vacant for many months. They also find that when their properties require repairs it takes a large chunk of money. Often a roof repair will equate to a quarter of their whole house value.

I am not saying that positively geared properties are bad. I am just saying, be well informed about where you buy and why you buy your property. There are other ways to get money out of property than positively gearing.

Investors must to understand there are 4 ways to make money out of property investments and most of the time they only look at one or two of these. Let's look at them: 1. Passive Appreciation That's when the property value goes up in line with the general property market. Over time, well-located properties in Australia double in value every 7-10 years.

2. Active Appreciation This is when you add value to your property. For example, if you buy well – i.e.; buy below market price - and revalue at the correct figure, or when you renovate or redevelop your property.

3. Rental Return Rentals from property provide cash flow, but this is only one component of your overall investment return.

4. Tax Benefits

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It has often been said that it’s not how much money you make that is important, but how much you keep after tax. In their simplest form, these are things like depreciation allowances.

Investors who own a number of properties and have a “property business” can take advantage of some interesting tax loopholes only available to business owners. I have outlined these in my book, How to Grow a Multi-Million Dollar Property Portfolio … in your spare time.

To invest in a top-performing property you need a balance all four of the above elements.

Don't focus too strongly on cash flow. Well-located residential properties are inherently high growth, low-yielding investments. You really can't get high growth, high-yielding residential properties without taking a risk.

So when investors look at residential property investment for strong cash flow, as a highyielding investment, this is really bastardising the type of investment that residential property is. If you are looking for high-yielding investments, maybe you should consider investing in shares or managed funds.

Over the 30 years I have been in property, the investors I have come across who have been the most successful in the long term, and have done so safely and without speculating, are the ones who bought quality properties in good locations and allowed them to grow in value.

They bought them for their strong capital growth and they never or rarely sold their properties.

Instead, they would refinance their investments as their equity increased.

The lesson one can learn from these successful investors is to buy the best quality properties you can, in the best location you can reasonably afford, and never sell them.

Your investment property will perform better when you take advantage of the opportunities created by purchasing at the right time in the property cycle. A great time to buy is at the end of the property slump or the beginning of the upturn stage of the cycle. The downturn phase of the cycle started more than three years ago, in November 2003, when interest rates rose.

Now, many parts of the Melbourne market have turned around and are showing signs of recovery, as are parts of Brisbane. Sydney should follow later this year unless interest rates rise too much.

You further boost the returns on your investment by purchasing well. Never overpay - buy at or below 'fair market price’. During the last few years it was relatively easy to find bargains on the east coast of Australia, where the property markets were in their cyclical downturn and were buyer's markets. Things have changed. Bargains are much harder to find, especially in the more affluent suburbs in Melbourne, Brisbane and Sydney. Here, the shortage of supply and strong buyer demand means that there are multiple potential purchasers for each property for sale and prices are moving up.

But these markets are patchy and buyers with a long-term perspective should take advantage of any short-term upsets such as the proposed interest rate rise, which may flush out some nervous sellers. You then add even more value to your investment properties by renovating or redeveloping your properties.

Cycles are an inevitable part of any investment market, and our property markets are behaving normally.

This is a good time for long-term investors to consider getting a foothold in the property markets and taking advantage of the next property cycle on the east coast of Australia. (The West Australian and Darwin markets are nearing their peaks and do not present as many obvious investment opportunities.)

This is a time to be selective and to think long term. Remember the 4 ways you make your profit our of property investment.

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The Habits of Successful Property Investors

By Michael Yardney “Super successful investors build a competent team around themselves. They don't expect to do everything themselves and they are not afraid to pay for good advice. I've often said 'If you're the smartest person in your team, you are in trouble.�

Over the 30 years I have been involved in real estate, I have had the privilege of working with many successful property investors. In that time I have seen some who I thought smarter than me fall by the wayside when their decisions proved to be wrong, and I have carefully observed those who have maintained and grown their long-term wealth.

In particular, in the last five years, as I have been presenting at property seminars throughout Australia and South East Asia, I have had many lengthy discussions with successful property investors to look for points they had in common. It has been very informative to discover they had very similar habits and attributes which contributed to their ongoing success.

If you want to become a successful property investor, I suggest you consider putting these ideas or concepts into action. They have worked for others so they should work wonders for you.

1. Take full responsibility for your life What happens to you is a result of your thoughts, your feelings and your actions. So take responsibility for both the good and the bad things that happen to you.

I don't believe in circumstances or luck. People create their own circumstances or luck by putting themselves in the right frame of mind to accept success. Successful people know they are the pilot of their own lives. The less successful people feel they are just a passenger going along for a ride.

Become a pilot - not a passenger.

By taking responsibility for both the good and bad things that happen in your life you will reduce the number of bad situations that occur and increase the number of good things that happen to you.

I find that underachievers love taking responsibility for good results but always seem to blame others for their bad results. Overachievers know that both the good and the bad occur and that there is no-one else is to blame for either.

2. Become Decisive Once you have made a decision, stand by it. We all make decisions in different ways. Some of us just make decisions intuitively. Others must think through all the ramifications before they make a decision. Yet others of us make our decisions on gut feel; we just know what feels right.

Whichever way you make a decision. Once it is made, stick to it and don't question it, even if others around you do. You will never only make good decisions. That's impossible. Just accept your decision. Follow through. Then deal with any problems that arise immediately.

Don't let problems sit around and fester, they never disappear. So don't beat yourself up over it, deal with it and move on.

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3. Embrace change It is often been said 'the only constant thing in life is change.' So look forward to change and see it as an opportunity - take advantage of these opportunities while others are frozen in the past.

Property markets change, interest rates change, supply and demand changes. Market sentiment certainly changes. The great thing is that whenever change occurs it opens up fantastic opportunities. If you are committed to moving forward, you will have to move out of your comfort zone.

This is change and initially feels uncomfortable, but if things stay the same you will find you are really moving backwards.

4. Find opportunities where others see problems Some people see the cup half full; others see it as half empty.

When confronted with opportunities, the average person finds reasons why not to do something, yet successful people look for reasons why they should take action. Find ways to make the situation work, rather than not work. This is particularly true in property, where you will find vendors with problem properties. If you find a way to solve those problems you will be adding value and making money.

5. Successful property investors invest. They don't speculate Speculation is based on hope. Investment is based on fact. Speculators look for the things like the next 'hot spot' or the next big thing, or the latest fad. Then they hope things will work out.

Investors recognise that property investment can be boring. They know it’s not very exciting just buying a good property and waiting for it to increase in value, but they don't look for excitement in their investments. They don't want to speculate. Investors ask questions like, ‘What has worked well over the last 20 to 30 years?’ They don't try to pick the next hot spot.

Instead, they follow a strong longstanding trend.

While successful investors avoid risk by looking for predictable returns, speculators would say 'Well, this area hasn't performed for a long time and it is about time for it to perform', or 'Now must be time for things to change'. Many speculative investors live in the world of fantasy; hoping luck will solve their problems.

Super successful investors know that no matter how much they wish for something to happen it is not luck that's going to make it happen. They look at the reality of every situation and realise that they make their own luck by working hard and focusing on facts.

6. Super successful investors build a competent team around themselves They don't expect to do everything themselves and they are not afraid to pay for good advice.

Successful investors surround themselves with people they trust who know more than they do. I've often said 'If you're the smartest person in your team, you are in trouble.'

So be honest with yourself about your abilities.

You can't be good at everything but you have the potential to be great at one thing. So choose your one or two things to focus on. Then find others that are better than you at the things you aren't good at and make them part of your team.

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7. Successful property investors have learned to use debt wisely They are not scared of taking on debt. They have learnt how to use other people's money to grow their own substantial property portfolio.

While most beginning investors use finance to buy properties, experienced property investors understand that once they have a property portfolio they will be able to borrow against it and use finance to fund their lifestyle.

8. Successful investors belong to a Mastermind Group They have learned to hang out with 'winners', not 'whingers’. Find a group of like-minded people and meet with them regularly to help you in your investment endeavours. Learn what makes winners and copy their habits.

9. Successful investors act with integrity If you commit to do something, always make sure you do it.

I have seen so many people in the investment business that are full of ‘wind.’ They tell you they will do something and create all these sort of excuses why it hasn't happened. Some of them are acting as honestly as they can. Some of them never had any intention of keeping their commitments.

To stand out from the crowd you must do what you commit to do. It will get you a great reputation in the real estate investing world.

10. Super successful investors think very differently to average investors They have a different mindset and think of the big picture; underachievers tend to get lost in fine detail.

For example, successful investors recognise that the value of their property, if well positioned, will double every 7-10 years.

Yet the average investor will worry about fluctuation in interest rates or land tax changes or other minor details. They tend to get lost in the detail and often get paralysed while analysing the situation and they never take action.

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The keys to building a substantial property portfolio

By Michael Yardney

“Constantly think like a developer and look for ways to add or create value, in order to maximise the return on your investment.�

You know you want to build a substantial property portfolio and you want to take advantage of the next property boom. You recognise this has already started in Melbourne and Brisbane and will follow in Sydney later this year, or in 2008. Let's take a look at how you go about creating a substantial portfolio that will one day lead to your financial independence.

The basic steps are: 1. Buy a well located property at or below market value and take out a loan for 80 to 90 per cent loan-to-value ratio (LVR).

2. Add value to your property through renovations or refurbishment or redevelopment.

3. Lease the property. This should now be at a better rent as you have improved and added value to your property.

4. Re-finance your property taking advantage of its increased value because you have bought well and added value. Even though you have improved your property, it is unlikely that valuers or banks will be prepared to recognise this increase in value straight away. You may have to wait six months or more to revalue it.

5. Extract your new equity and do it all again!

6. Never sell!

Over and above these six stages there are two fundamental strategies that will help you grow your portfolio more even quickly, but still securely: Strategy 1 Think like a Developer Here I'm talking about having a developer's mindset. Just to be clear, this doesn't necessarily mean literally being a developer, because that just doesn't suit everyone.

What I mean is to constantly 'think like a developer' and look for ways to add or create value, in order to maximise the return on your investment.

There are a number of ways to achieve this, including: -

Buying a property that needs work, then fix it up and immediately increase its market value. There are always rundown properties on the market and they scare off the average buyer who is just looking for a place to live. But they could be just perfect for you.

-

Buying a property at below market value by finding a motivated vendor. These are much, much harder to find nowadays. In fact, there is strong competition for welllocated properties with strong upside potential in the more affluent areas.

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Buying a property with development potential – maybe an old house on a good block of land - at close to land value. You then get development approval for multiple units on the site.

If you don’t want to proceed with the development you could just sell the property at its now higher value as it is now a development site with approved plans and permits (DA) and no longer a rundown house. Or you could proceed with the development yourself. (This is exactly the type of property we source for clients at Metropole Projects. Give me a call on 1300 20 30 30).

Strategy 2 Sensible use of Finance The second key, re-financing, relates to items 4 and 5 of the initial list: re-finance and never sell. Most developers I come across have the wrong mindset. They like to trade their properties. They buy, add value and sell. By selling they kill the goose that lays the golden egg. Someone else now owns the property and gets all the benefit of the long-term capital gain.

My suggested strategy is to buy, add value and re-finance.

Let's say, for example, that you release $80,000 of equity from your home and buy an investment property for $300,000. You use $45,000 as a deposit, and get an 85 per cent mortgage (for $255,000), then spend your remaining $35,000 on purchase costs, stamp duty and on a renovation including a new kitchen and bathroom.

If you have done a substantial renovation, and done it well, this could easily increase your properties value to $360,000 and should considerably increase its rental return. Down the track you could refinance your newly refurbished property, again to 85 per cent of its value, which gives you $306,000. You pay off your original loan of $255,000, leaving you with around $45-$50,000 after financing costs to go and do it all again.

By extracting your deposit, and possibly some or all of your refurbishment costs through smart refinancing, you are effectively using the same money, over and over again, to buy and develop a series of properties. The great thing is you don't even need to sell the properties at the end. They remain as part of your property portfolio growing in value over the years.

One of the major limitations of this strategy is your ability to make repayments on the mortgage of your property. But because your properties will be refurbished, or new properties that you develop, they easily attract tenants, achieve high rents, have good depreciation allowances and therefore have a low net cost of ownership.

Rapid Growth through Re-financing In other words, what you have done is to realise the value you've locked in through buying below market value, adding further value (through refurbishment or redevelopment) and renting the property out at a top rent by re-financing, taking your investment back out, and using it to finance the next property.

Your first development property allows you to raise the deposit for your second one, and then you then go down the same route again. You buy a property with development potential below market value, adding value through redevelopment or refurbishment, letting it to tenants at a top rent and refinance your second property against its new higher value ‌ and raise money for your third property.

If you want to learn how you can use these techniques to help grow your own significant property portfolio, please give me a call on 1300 20 30 30. With offices in Melbourne and Brisbane, the team at Metropole we can help you get started in property development, whether it is a simple refurbishment or a multi-unit town house development.

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The benefits of becoming a property developer

By Michael Yardney “Most people think that property development is too hard and only suitable for the professionals. In fact, most don't have the time, knowledge, skills or contacts to become developers.�

Many investors have become wealthy through property investment. Very wealthy. But the real profits in the property market are at the wholesale end, in property development.

Let's look at some of the benefits of becoming a property developer: 1. Savings Rather than buying properties at retail, you can acquire your investments 15-20 per cent below their market cost. This is because you don't pay developer's margin, agent's commission, GST, marketing and other costs usually included in the price of buying real estate.

2. Profits At the right time in the property market you can make good profits selling your development projects.

3. Easier finance Once you have completed your development project you can approach banks to re-mortgage your properties. They will usually lend you 80 per cent or more of their retail value when completed. In many instances this is about what it cost you to develop your project, and you can take out your initial equity. In other words, it's a bit like borrowing 100 per cent of the cost of the property, or having nothing down.

4. Leverage Following on from the above point, you get massive leverage when you have completed the development project. Often you control a substantial property or even two or three townhouses, with little capital in the properties as equity.

5. Tax benefits Owning new properties gives you all the benefits of depreciation allowances, giving you a great after tax return.

6. Higher rental return Your tenants will pay the retail rents. They won't know that the cost of your property was substantially below the retail price. This means your rental yields will be higher than for someone who bought their property at market value.

7. Security If undertaken correctly, property development can be very lucrative. If you buy your development site well, your investment will always be underpinned by the security of real estate in a prime position.

All these benefits of becoming a property developer allow you to grow your property portfolio faster and safer than most investors. This is, of course, a strategy that I have used personally to make fantastic returns on property.

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Most people think that property development is too hard and only suitable for the professionals. In fact, most don't have the time, knowledge, skills or contacts to become developers.

That's where Metropole Projects can help you. Metropole takes the worry out of investment by assisting you with all the development expertise, from concept to completion.

Metropole's Property Developer Program allows ordinary investors like you to safely develop residential property. We allow you to become an armchair developer. You can potentially make a significant profit by developing a residential site and capturing the increased equity - you can become a property developer without getting your hands dirty.

If you want to find out more about how you can take advantage of the opportunity to become a property developer, call Metropole Projects on 1300 20 30 30 and ask for a special report: How to get started in Property Development, or click on www.metropoleprojects.com.au

Have you ever considered becoming a property developer?

Using Metropole’s project management services you can become a property developer and you don’t need to be a millionaire or get your hands dirty.

Your project will be in the secure hands of the Metropole team who have created substantial wealth for clients form all over Australia since 1979.

Never developed property? Give us a call us today on 1300 20 30 30 and discover how easy it is to get started.

Metropole Property Investment Strategists KNOWN│PROVEN│TRUSTED

www.metropole.com.au

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Where to Buy?

By Jack Henderson

“To be a successful investor it is best to identify areas that have finished their correction phase - the slump phase of the property cycle and are now starting to move forward.�

It is becoming more apparent that the Melbourne and Brisbane property markets are now in the upturn stage of the next property cycle and values are moving up in selected suburbs. Sydney is hovering around the bottom of its cycle; it is unlikely for the Sydney market to perform strongly before 2008.

If you are looking to buy an investment property, the problem in this market is that you can't just buy any property. Not all properties will go up in value; some suburbs will strongly outperform others. This has been very evident in Melbourne, where selected suburbs have exhibited double-digit growth, but many suburbs had no growth in 2007.

Similarly, only 10 Brisbane suburbs had more than 10 per cent growth last year, compared with more than 140 suburbs exhibiting double-digit growth in 2002, 2003 and 2004.

So which areas are likely to increase in value in the future?

With investors and first home owners not currently represented strongly in our property markets it is most likely that price recovery will be led by owner-occupiers looking to upgrade.

Premium suburbs within 10-12 kilometres of the CDB, or near water, or those that have scarcity, are likely to perform well.

The best predictor for future property price growth is past growth. Once you have found such an area you should look at long-term historical data and look at the trends to see where this suburb is in its own property cycle. Has it gone through its correction phase? Has it bottomed out? Moved forward, or is it still correcting?

To be a successful investor it is best to identify areas that have finished their correction phase - the slump phase of the property cycle - and are now starting to move forward. This should lead to strong capital growth of any property you buy.

At Metropole – Property Investment Strategists, when looking for investments for our clients, we try and find areas that are just starting to turn because at this point the market is still nervous. Most purchasers will not have realised that the property prices in the area have turned, so they will not be chasing properties. The vendors are still likely to give you a bargain.

At this point in the property cycle it is critical to do the appropriate research. At Metropole we find this is easy - we are in the market place every day and can see which properties sell (and which don't) and for what prices. This is evident to us several months before the research is available to the general public.

When choosing an area in which to invest, we select an area that will continue to perform well. By doing this we increase the chances of our clients making money, but caution all our clients that the days of buying property and making a quick overnight dollar are over. That's why we look for properties that we can add value, creating our own capital growth.

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Like the older style apartment we bought for a client at in Beaconsfield Parade, St. Kilda, right opposite the beach. The apartment block was "tired", but the Body Corporate was undertaking an external renovation; our client spent just under $30,000 upgrading the interior of his apartment.

The property was bought for just over $300,000 and, to our client’s delight; a similar, partially renovated property was sold at auction in the same apartment block a few weeks ago for $380,000, making his apartment worth in the order of $400,000.

The lesson: find an area with a long history of strong capital growth, and then buy a good property below market price. Preferably one to which you can add value.

Would you like to own an investment like this? Maybe we can help you - that's what we do each and every day: buy top-performing investment properties in Melbourne and Brisbane for clients from all over Australia.

Please give us a call on 1300 20 30 30 to discuss your options. You may be able to buy an apartment like this with only $60-80,000 in funds. This should cover your deposit, stamp duty and our buyer's agent’s fees.

Considering an investment property?

Whether you are just getting started in property investment, or are looking to increase your existing portfolio, you should attend one of our investor briefings in Melbourne, Sydney, Perth or Brisbane, where our Buyer's Advocates reveal their property buying strategies.

Please call 1300 20 30 30 to reserve your place at one of our FREE Property Briefings.

Delivered by Jack Henderson in Melbourne, Pino Tedesco in Sydney George Kafantaris in Brisbane, and Bryce Holdaway in Perth these 90-minute sessions boardroom briefings are for limited numbers only as they are held in our board rooms.

Learn from our experts, who discuss their thoughts on the current property markets and explain how they source top-performing properties with strong potential. And discover how Jack and George’s years of experience as estate agents level the playing fields when they act as a buyer's advocates to find great investments for their clients.

To attend, or for more information, please call us on 1300 20 30 30 to find out the date of the next session

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The Insider’s Guide to predictable real estate profits in property renovations

By Jack Henderson

“it is very, very difficult to make money out of a buy, renovate and sell strategy. ... there is so little profit left that many renovators wonder why they took the risk of undertaking a renovation project.”

Many investors are turning to renovations to add value to their properties, but when they do the sums at the end of the project, some are disappointed with their lack of profit.

Over the years I have been personally involved in many successful property renovations; in the last few years I have specialised in acquiring properties with renovation potential for our clients at Metropole – Property Investment Strategists, so I would like to share some "insider tips" on how to make predictable renovation profits.

First, I would like to explain that it is very difficult to make money out of a buy, renovate and sell strategy. When you take into account all the costs (including agent's commission, GST and tax), there is so little profit left that many renovators wonder why they took the risk of undertaking a renovation project.

What works really well, if done correctly, is a buy, renovate and hold strategy. Here, you buy a property with renovation potential, do your renovations and keep the property as a longterm investment, having added value. This added value will give you improved rentability, a higher rent and you will have "manufactured" some equity. In time you can re-finance against this extra equity, pull out some, or all, of your funds, and use them to buy your next property … and start all over again.

As I have already explained, most renovators don't ultimately do well out of their projects. This often occurs because they pay too much for their property in the first place. In our rising markets (not only in Perth and Darwin), including the suburbs we specialise in, especially in Melbourne and Brisbane, there are few bargains to be found, but you still need to buy well to underpin your renovation project's profit.

When you ask most renovators how much they are willing to pay for a property, they usually say something like, "Well, the asking price is $375,000, so maybe I can bargain that down to $350,000."

That's how they decide how much they are willing to pay for the property. That kind of thinking makes no sense. To make sure you make a profit from your renovation project, you need to work backwards to arrive at a fair purchase price.

First: determine your estimated end value after the renovation. This will be the new value of your property for after you have improved it. Look at comparable sales in your area, determine whether the market is going up or down, and understand exactly how much your property will be worth.

Next: total up your projected expenses. These generally include: -

Purchasing costs, including stamp duty, solicitor's costs and loan fees.

The cost of the renovation. Stick to cosmetic work that can easily be seen, rather than structural works that tend to be expensive.

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-

Outgoings during the renovation process, including rates, electricity, insurance and interest.

Hidden costs. Depending on the age and condition of your property, you can expect that something unexpected will go wrong - that's why we stick to buying apartments in sound buildings that tend to only need cosmetic makeovers.

Finally, subtract your projected expenses from your estimated sales price.

For example, let's say that you realistically expect the end value of your renovated property to be $400,000, and your projected costs are $40,000. That means the maximum sum you should pay for the property is $360,000. Otherwise, the deal makes no sense.

Actually, you should buy the property for far less than that. After all, you are investing in real estate to make money. If you are not making money, what is the point of going to the trouble to undertake the renovations? Of course the renovation process also needs careful planning. We have seen so many seemingly simple renovations come unstuck when the renovator doesn't carefully plan and cost the renovation prior to starting.

Ensuring that your costs are minimised and your program is tightly controlled are essential elements of any renovation. Careful scrutiny of suppliers and supply times; availability of skilled trades to keep the job on track and on time; maintaining quality and finish standards; and eliminating reworking and delays are also critical to ensure the renovation actually works.

A recent case study of just this type of renovation project is a property the team at Metropole – Property Investment Strategists bought for a client in Ormond, a southeastern Melbourne suburb.

We bought this property for Sergio. This was his first investment property and, as he had never done a renovation before, we handled all the details for him. The apartment was a neat, ground floor two-bedroom apartment in a 1970s built block of eight apartments several minutes’ walk from the local shopping centre, train and bus. The block was structurally sound, but the apartment was tired.

We snared the property for a great price: $270,000, then we organised all the renovations.

For around $25,000 the builder gutted the kitchen and installed a modern new kitchen with stainless steel appliances, including a dishwasher. The apartment was painted and recarpeted, and all light fittings were replaced. All the door knobs and cupboard handles were replaced and a new heater was installed. The bathroom was in good condition, so we kept the tiles and just replaced the vanity.

We don't know exactly how much profit our client made in doing the renovation, as it has just been completed (the works took about four weeks) and the banks are unlikely to revalue the property for a few months yet. We do know that Pamela Yardney's team at Metropole Property Management let the property before the renovations were completed for just over $50 per week more than the previous tenant paid. I would suggest that Sergio probably added $1.50 in value for every dollar he spent on the renovations. He now owns a topperforming investment property with good rental returns and some depreciation benefits.

Would you like to own a property like this?

Well, you could - Metropole – Property Investment Strategists specialises in helping investors identify, acquire and manage top-performing investment properties in Melbourne and Brisbane. By the way, many of our clients are from interstate, so give Warren a call on 1300 20 30 30 to discuss your options.

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Critical factors ignored by investors when buying

By Pamela Yardney

“A number of factors impact on tenantability, including condition, rent and seasonality. For instance, with winter approaching, the rental market slows. Existing tenants tend to move less and therefore demand comes off the boil.”

Most property investors go through some sort of ‘due diligence’ process when they buy their investments. The most common include obtaining a valuation, investigating the long-term growth of the area, a building inspection and, of course, they undertake some sort of financial evaluation, based on their investment criteria (possibly using a program like PIA.) It worth is considering 3 other factors when making a buying decision.

1. Independent rental appraisal If you are buying from a real estate agent, they will probably provide you with some sort of current rental appraisal. This could be in the form of a written rental appraisal from the property management division of the selling company, a verbal estimate given by the real estate sales person selling you the property or a copy of the existing tenancy agreement.

I have seen many investors disappointed by the reality of the ‘true’ market rent for their investment properties. That is why I rate an independent rental appraisal as a must for investors.

I know you would think that a written appraisal from the selling company's property management division would be reliable, but this is not always the case. Factors to consider include the experience of the person giving the appraisal, and if they are truly independent of the selling side of the company.

Clients of Metropole Property Management are aware that we do not sell properties.

Verbal estimates given by the selling salesperson may not be worth the paper they are written on. Salespeople vary considerably in their expertise in property management and awareness of rents and, of course, they have a financial interest in you purchasing the property, which could affect their judgment.

It is critical to obtain a copy of the existing lease - if there is one - but that only tells you what the property is rented for now, not what its current market rent is. It may be too high in the current market, too low in the current market, or as I have seen in some instances, ‘jacked up’ for the sale process.

So I recommend you obtain a written independent rental appraisal from a reputable source.

2. ‘Tenantability’ A second factor to consider when buying an investment property is what I call "tenantability"; the likelihood of getting a tenant into that property in its current condition, at the particular time of the year.

A number of factors impact on tenantability, including condition, rent and seasonality. For instance, with winter approaching, the rental market slows. Existing tenants tend to move less and therefore demand comes off the boil.

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Most investors include a "vacancy factor" when preparing their financial model. I find that some investors, particularly those with inner city apartments of which there is a surplus, do not allow a long enough vacancy factor.

3. Tenant Turnover The third factor is tenant turnover. This is a different element from tenantability. This factor is affected in the main by external influences on the property.

Some types of property tend to attract tenants who move on after their lease expires. This particularly happens to modern inner city apartments which cater to the 18- to 30-year-olds.

They will move into your apartment but they seem to get bored quickly and need a change.

They will move to the latest and greatest apartment they can afford at the first opportunity.

This contrasts to my experience in leasing houses and townhouses to families, where in general they tend to stay for a number of years.

Remember, we don't sell properties - we can give you truly independent advice. More than 5000 agents around Australia specialise in selling property. At Metropole Property Management, we specialise in the complex field of property management. Give me a call on 1300 20 30 30

Melbourne & Brisbane Landlords: You deserve a property manager who cares as much about your property as you do.

Give Pamela Yardney a call on 1300 20 30 30 to find out how we can maximise the returns on your property. After all we’re property investors also.

It’s easier to change property managers than you think. We’ll do all the paper work for you!

Call us today on 1300 20 30 30 to discuss your options.

Metropole Property Investment Strategists KNOWN│PROVEN│TRUSTED

www.metropole.com.au

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Common financial mistakes with lines of credit

By Ed Chan “Here's where they make a mistake: they put your wages into that line of credit, because their bank or their broker says, "Yeah, it's a great idea, because it will save you interest."

There is a critical mistake made by many people who have lines of credit and who have investment properties. This mistake is common and you've got to be aware of this because it's costly to fix up.

Now, I assume you know what a line of credit is? It’s like a big credit card. The banks give you approval for a limit on how much you can spend, and you can spend it anywhere you want.

You can even use it to pay the interest on the line of credit itself.

Let's imagine someone gets a line of credit of $100,000, and they've used that $100,000 as the 20 per cent deposit to purchase a property. So it's a now business expense. It's taxdeductible. The interest on that loan is a tax deduction, because the money went towards the investment property.

Here's where they make a mistake: they put your wages into that line of credit, because their bank or their broker says, "Yeah, it's a great idea, because it will save you interest."

Isn't that what most people get told? Many people are also told to get a "credit card" and put all your expenses on the credit card, and pay it off once a month. So you've got your money, your wages, sitting in your line of credit, earning you interest, and then you put all your expenses on your credit card. This gives you 55 days interest free, and on the 54th day or 55th day, you transfer the money from your line of credit and pay your credit card.

The problem with that is that you just changed the purpose of your loan. The original purpose of the loan was a tax deduction.

Okay. Let's say over 12 months you put your wages into your line of credit. And let's say your wages came to $50,000. Let's look at the big picture here: you've reduced your line of credit down to $50,000, and let's assume over 12 months your credit card payments totalled $50,000. Once you pay this off your line of credit is now back up to $100,000. But you saved the interest on that $50,000 whilst your money is sitting in line of credit which is now back up to $100,000.

Now, can you see that this money here is private? Can you see that you've just changed the purpose of your loan? The tax department looks at where your money went to, and what was the purpose of that loan. Even though your $100,000 liability is still there and you're claiming 100 per cent of the interest; here you can only claim 50 per cent of it. To make things worse, your accountant will probably spend $2,000 in trying to work out all the little bits and pieces going back and forth in the last 12 months.

Does that make sense? You need to be very careful with this. So what should you do? Have two lines of credit.

For example, if you have a business or an investment line of credit, and that's $100,000, you don't touch that. You leave it alone. You might also have a private line of credit for your private mortgage, and it might also for $100,000. This is where you put your wages and you pay your credit cards from.

Ed Chan is a top selling author and leading tax accountant at Chan & Naylor – This article is for educational purposes and is not specific advice.

Chan & Naylor have offices around Australia and specialise in property tax. For more details check out there website - www.chan-naylor.com.au

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Should a property be held in trust?

By Ed Chan “Our Property Investors Trust is the perfect Trust – indeed, the only Trust to be used for properties. We have trademarked it because we have spent many years (16, in fact) and many thousands of dollars to perfect this structure for properties.”

The word "Trusts" is used very loosely by some people and when someone says to me that one should or should not use a Trust it's like saying should you or should you not use a "Motor Vehicle."

The answer is simply what are you trying to do?

For example when someone says to me that you should not use a Trust because it traps the negative gearing inside a Trust and cannot offset the interest against your salary than they are referring to a Family or Discretionary Trust.

Well that's only because you used the WRONG Trust.

It's a bit like saying that Motor Vehicles cannot carry rubbish to the tip. Well a truck can take rubbish to the tip. It simply depends on what type of Motor Vehicle you are talking about.

This is the same in the use of Trusts. There are dozens of different types of Trust and they all do different things. Just like there are all different types of motor vehicles and they all do different things.

You really need to understand what they all are and what they are used for.

The common types of Trusts that people are familiar with are Discretionary or Family Trusts and the less familiar ones are Unit Trust and Hybrid Trusts. There are dozens of other less known Trusts such as Testamentary Trusts, Absolutely Entitled Trusts, Bare Trusts, Blind Trusts, etc,etc. They are all used for different things.

For example a Superannuation Fund is a Trust but is not a variant of either a Unit, Discretionary and Hybrid Trust.

It's in fact a whole new type of a Trust which has its own rules but has none of the traits of the other Trusts.

There is our "Property Investors Trust" which is built specifically for properties taking into account the different land tax rules around the different states. It also allows the rental to be passed onto the spouse who is on the lower tax rate or the negative gearing can be claimed in the individual’s name.

Our "Property Investors Trust" (P.I.T.) is the perfect Trust and the only Trust to be used for properties. The reason why we have trade marked it, is because we have spent many years (over 16 years) and many thousands of dollars to perfect this structure for properties.

Let’s look at some of the advantages of this type of trust.

It does not have an 80 year Vesting Date which most other Trusts Deeds have. The 80 year vesting date simply means that the assets in the Trust vests after 80 years to the beneficiaries

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causing a capital gains tax and stamp duty liability for your beneficiaries. Imagine what a problem that would cause your children or grandchildren. Our Property Investors Trust Deed does not have that problem.

It also allows Trust Splitting so you can move your properties into another Property Investor’s Trust without stamp duty and capital gains concerns. You may need this feature when you want to pass on properties to your children’s own Property Investors Trust’s.

The P.I.T. allows anonymity with your assets held by a Corporation as Trustee and is designed for Property Investing only hence reducing the ATO's argument for Part IVA (Part IVA) is where the ATO can exercise their discretion to deny a tax deduction if in the ATO's opinion that activity was simply to reduce tax only) The P.I.T. has the capacity to have different trustees for different assets held in the Trust allowing easier (a) Trust Splitting (b) Transfer of assets to another Trust with a different vesting date.

It also has the capacity to ensure that no stamp duty is payable when there is a change of Trustees. If this is required there is a nominal fee for the resulting paperwork instead of triggering stamp duty We have included a Descendants Lineage Clause in the P.I.T. to only allow final distribution of assets to bloodline Beneficiaries saving against marriage break-ups.

There is the flexibility for Non Taxable distribution of funds if the Trust is in a tax loss position due to depreciation charges and the capacity to enter Joint Venture and Life Tenancy arrangements.

Also there are general rights of the trustee to alter Trust Deed thereby reducing claims by the ATO of resettlement which triggers Capital Gains Tax. The Unit/Discretionary/Hybrid Trusts are standard Trusts which accountants and solicitors have tried to adapt to properties but they were not initially developed to hold properties in.

This means they all have some disadvantages or short comings when used for owning properties. For example Discretionary Trusts are bad for negatively geared properties or to own properties in NSW as they lose their land tax thresholds.

The Unit Trust loses its cost base after the depreciation of the property is passed through to the unit holder and a Hybrid Trust is unusable for properties in NSW as they lose their land tax threshold unlike a Fixed Trust retains its land tax threshold in NSW and so on.

These standard Trusts were set up for use in other things such as Businesses and to protect assets such as shares etc but when adapted to property had their shortcomings.

Our Property Investors Trust was developed just for properties and in fact we do not use them to hold other assets in as they are not developed for this.

We recommend the usual Unit/Discretionary/Hybrid Trust to hold other assets other than property. Again it simply depends on what you are trying to do as they all do different things.

For example if you ran a service business such as a Cleaning Business its always best to run that through a Discretionary Trust with a Company as a Trustee because it gives you asset protection and allows you to distribute the income to anyone you want who maybe on a lower tax bracket to yourself. However if you were planning to negative gear some shares or property you simply would not use this type of a Trust as it traps the losses in the Trust.

A Discretionary Trust is not good for a business if that business was made up of a few different people/principles hence a Company or a Unit Trust maybe better to help identify the different ownership percentages.

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We never purchase a property in a company because when you come to sell the property you miss out on the 50% exemption for capital gains tax and also if the property was negatively geared the losses would also be trapped inside a Company.

You would however use a company to run a business through because a Company has the advantage of limited Liability i.e. has a limited amount of asset protection but it allows you to retain the profits in the Company and limit your tax rate to 30%.

The tax that is paid by a Company is not lost as it is if the tax was paid by an individual because it simply goes into a "holding account" called a Franking Account where sometimes in the future you can withdraw those funds (like a pension) totally tax free as long as your income at that time is taxed at 30%. In fact if your tax rate was under 30% e.g. say 20% you would receive a 10% refund.

You would not however put the shareholders of that company as yourself. We would hold the shares in the company under a Discretionary Trust to protect your assets since shares in a Company is considered assets and someone could try and sue you to get at them.

You can see that it's a mine field and one should get proper advice before one purchases anything let alone a property as it’s extremely expensive to try and unwind a structure that was incorrectly set up.

An example is a property bought in the wrong entity would require another payment of stamp duty e.g. average property of $500,000 attracts stamp duty of around $25,000. You would be required to pay this twice if you tried to fix the problem.

My best advice to people is to take advice before the transaction and not after the transaction.

An ounce of prevention is.........you know the rest.

Ed Chan is a top selling author and leading tax accountant at Chan & Naylor – This article is for educational purposes and is not specific advice.

Chan & Naylor have offices around Australia and specialise in property tax. For more details check out there website - www.chan-naylor.com.au

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What fuelled the last property boom?

By Bryce Holdaway “Houses in the 5 inner municipalities Maribyrnong, Melbourne, Yarra, Stonnington and Port Phillip rose in value of around 195 per cent during the last decade.�

New population figures show Melbourne is Australia's fastest growing capital city.

Melbourne attracted 49,000 new residents in the year to June 2006, eclipsing the growth in Sydney (37,000), Brisbane (29,500) and Perth (30,000), Australian Bureau of Statistics figures found.

This is good news for Victorian property owners and investors as is the recent release of the Valuer General's annual review of Victorian property prices which confirmed that real estate prices have soared throughout Victoria over the past decade. But not all properties performed well. While some properties quadrupled in value between 1995 and 2005, others did not even double in value.

So what makes some properties increase in value so much more than others?

Digging deeper into the many pages of figures in the Guide to Property Values showed that two things determined how much a suburb rose in price over the last decade - how close it was to the Melbourne CBD and how close it was to the coast.

Over that decade the median price of a house in Victoria jumped from $117,000 to $280,500 showing the biggest losers were actually those who did not buy a house or did not buy an investment property - those that didn't then buy a property now have to pay a 140 per cent more than they would have had to 10 years ago.

But there were also relative losers: those who bought their homes or their investment properties in the wrong place. The biggest winners were owners of properties in Melbourne's inner or bayside suburbs, and along the coast (especially within a couple hours drive of the city.)

The biggest losers were owners of properties in Melbourne's outer suburbs, and many regional areas where prices rose much more slowly.

Within Melbourne the fastest growing suburbs were those going through transition. Old suburbs where run-down houses were replaced by new townhouses or apartments. These fashionable transitional suburbs attracted a wave of new owner occupiers and investors.

The study showed that, except for those suburbs along the bay, there were few suburbs more than 12kms from town that increased strongly in value. On average, properties increased in value in rings, depending upon the distance from the CBD. Houses in the five inner municipalities (Maribyrnong, Melbourne, Yarra, Stonnington and Port Phillip) rose in value of around 195 per cent during the last decade.

The next ring of inner to middle ring suburbs rose in value 179 per cent over 10 years, but the increases were far less in the outer suburbs and lowest in the urban fringe regions. This shows that people want to live close to the CBD, near the water, or both.

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Melbourne suburbs where house prices went up more than trebled over the decade fell in mostly four clusters: The inner to middle south east suburbs, including Elwood, Glenhuntly, and Murrumbeena.

The southern bayside suburbs, including Carrum, Bonbeach, Chelsea and Edithvale. In the middle northern suburbs of Fairfield, Heidelberg, West Coburg and Preston, and the inner western suburbs of Newport, Spotswood, Yarraville and Footscray.

When looking for a suburb in which to invest, at Metropole we look at the suburb’s past performance and its history of capital growth. But you cannot just look at the figures - they need some interpretation. For example the suburb of Heatherton recorded the biggest jump in prices over the last decade increasing 317 per cent from $110,200 in 1995 to $459,000 in 2005.

But that does not mean Heatherton would be a great place to invest. The increase in median property values in that suburb is mainly due to its changing nature. The development of a large new housing estate meant that the prices at the beginning of the last decade related to older houses and vacant land; today, they relate to a totally different type of property in the area: new, modern houses.

When selecting an area in which to invest, it is important to select a good suburb but it is equally important to select the right property. You need to find a property that will be in continuous strong demand by both owner occupiers and tenants.

Owners of the right properties can look forward to the same level of capital growth as they would have experienced last decade, if not better. The fundamentals are set for the next property upturn - in fact, we have been experiencing it in Melbourne's more affluent suburbs for more than a year.

Now is the time to selectively buy good properties to take advantage of the next wave of the property cycle.

Become a better informed property investor. Visit our online store for a recommend a range of products that have been proven to help both beginner and advanced property investors. www.PropertyUpdate.com.au

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A Strategy most people use to avoid wealth

By Bill Zheng In this article I will look at one of the main reasons many people go through life working so hard and not getting anywhere, and be warned - the idea may be contradictory to what you have been told in the past.

Let's consider the following statement: An average person does 100 things only one time; a master does only one thing 100 times.

At Investors Direct, we have over 7,000 investors and developers on our database, so I believe we have a sizeable sample to talk about whether the above statement is true or not.

What I have found is that the most successful clients normally do the same thing over and over again, and they do it better every time as they have formulated some kind of efficient system to achieve better results. This not only shows up in their investment portfolio, but also in their professional life and business as well.

Whereas the less successful investors are always looking for different things or better things to do before they even build up a system and get good at what they started, so everything they do remains average.

We all know that being consistently average in anything these days doesn't get us very far financially. Some people may blame their industry, boss, colleagues, etc for their lack of financial success, but the fact is there are hugely successful people in any industry or any profession.

In my observation, all the people who have accumulated great wealth give 100% commitment to one area first, and they stick to it for as long as it takes to get them to at least the top 10% in whatever they're doing. They don't run around doing 100 things at the same time in the hope that one of them will work out one day.

Most wealthy people know how to build the momentum in whatever they're doing to generate wealth, they don't get distracted easily as they know that you don't become wealthy by being just OK in many areas. The truth is you can only become wealthy by being one of the best in one specific area first.

If you think you can do two things exceptionally well and make a fortune from them both at the same time, consider this question: can you beat Lleyton Hewitt at tennis or Tiger Woods at golf?

The answer is obviously NO otherwise you wouldn't be reading this article. Let's say Lleyton and Tiger decided to diversify into each other's game, dropping their individual ability by 50% in their own profession, can you imagine what kind of money they will be making?

You and I are obviously not making the same money these guys are making right now. So if they didn't have the chance to try to be good at two things at once in the hope that one of them would work out alright, what chance do you and I have?

I know the following statement may sound controversial to some of you, it's only my opinion and you don't have to believe a word I say…prove it to yourself. If it's good, use it, if it's not, throw it away.

Diversification before we accumulate real wealth is a fear based strategy. People diversify their money or energy hoping that when the worst happens they can still hang on to

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something. The problem is hanging on to a percentage of nothing gives you nothing.

90% of people don't become wealthy because fear runs their lives; diversification is music to their ears. How often do we let our fear of loss stop us from getting what we truly desire?

Diversification can appear in a few different forms; •

For employees - they are working for someone and doing the minimum just to keep their job, whilst putting the rest of their energy into preparing for their next job or their own business opportunity; The interesting thing is almost every employer can see right through that, and employees with a diversification mindset will carry this habit from one job to another.

If they do have their own business one day, they will be working on this business and preparing themselves for the next business – our habits run our lives.

The only employees who can be successful in any job or future business opportunities, are the ones who devote 100% to their current job, and work like it's their own business; I have been asked many times by my clients how they can have their own business one day or become a partner of a successful business. Almost every successful employer will tell you this: devote 100% of your time and energy to your current employer like the business is yours, this is because if you can't do it for others, you won't be able to do it for yourself either; If you're currently an employee, do you know that very few employers will ever tell the truth like I did here? This is because if every employee knows this secret, there will be too many employers and not enough employees!

•

• •

For employers - they get bored with what they do and start to look for other business opportunities, or they get greedy and think they can take easy money from somewhere else. For example, many accountants want to get into finance, insurance or property development, thinking that the grass is greener on the other side. If someone can't make serious money from their core business, why would they be able to do so from another business? If they have already worked out how to make good money from their core business, they should spend their energy duplicating that instead of building something new from scratch.

GE, arguably the most successful business in the last few decades, has a rule that if one of the business units doesn't make it to the top two in their industry, it will either be sold or shut down.

For investors - before they make any serious money, they start to diversify into shares, property, bonds, gold, etc, hoping people who invest on their behalf can do better than they can for themselves.

You don't have to like what I say here, but how's it sound so far?

You are the only person who cares about your money…if you don't care, no one else does. Some investors would ask; if diversification before we accumulate serious wealth from one area of investment is no good, then why are we told to diversify?

•

The answer is to this is really dependant on who told you this and what you want for yourself - you know what I mean.

For our target market - aspiring property investors and developers will try buy and hold, renovation, positive cash flow, wraps, small redevelopment, house and land packages, land development, syndication, strata title single title buildings, commercials, retails, offices, industrial properties, property trading, etc.

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Most people will try some of these strategies once, then complain that there's not enough money in it. How often do we get it right the first time? Until you develop a system of some kind and make the whole process as efficient as possible, your portfolio is not going to be impressive.

Let's check in with "yourself" for a minute here: if you are doing many things to make money at the same time right now, unless you're already extremely wealthy, my guess is that you're broke (or you're broke in comparison to where you could be by concentrating all of your attention on the one thing you do best).

In my opinion, only truly wealthy people earn the right to diversify their money and attention.

Many people hand over their money to others to manage before they have gained the necessary experience to handle money themselves. I believe that you're only given the amount of money you can handle, anything more than that will go to someone else who can handle it better.

Some people may ask, "What if I choose the wrong thing, should I still stick to it?" How do you know if you have chosen the wrong thing? In my observation, you can't really choose the "wrong thing" to do, whatever you're doing right now is what you are meant to be doing, sometimes for a reason that you may not be aware of.

All things are neutral for everyone; it's only our perception that makes them right or wrong.

There is really nothing wrong out there, we can pretty much pick up anything we feel passionate about and make good money from it. If you don't believe me, just take a look at who's making a fortune in doing what you're doing or what you would love to do.

By the way wondering, "Is this right for me?" normally occurs when we are only 10% away from making serious money. 90% of people give up when they're 90% of the way there, because the last 10% normally shows very little improvement for a long period of time and the silence is deafening! Just take a look at how many professional tennis and golf players never make it to the top 100. At this point, most people believe they have gone as far as they can and think it's time to move on and start something with "better potential" or "less competition".

The truth is that there is no "wrong thing" to do, there is only the wrong "me". If we keep walking away when we're 90% there, we haven't developed in ourselves the necessary attribute to go all the way to serious wealth. We remain the same person with the same capacity and our limitations will show up in our next "opportunity" again and again, when we once more quit at the last 10% of the battle and miss the chance to make serious money.

We've all heard the saying, "It's always hardest to make the first million". Of course it is‌it takes time to make someone a "million dollar person" and it doesn't take much time for a "million dollar person" to make another million dollars.

After seeing so many people do well in different industries with different opportunities, I have come to a simple conclusion; There is no "better opportunity" out there, there is only a better "me" in here. Do the best in whatever we are doing right here, right now and go all the way before we diversify our attention.

So the strategy to avoid wealth is: keep looking for better opportunities before you truly reap the rewards from the one you have started & keep doing many things at the same time hoping one of them will eventually work out.

Question: Why would most people use this strategy, that doesn't create serious wealth, by default? The

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answer is obvious…when most of us get to the 90% mark and can't move forward quickly, it's a lot easier to blame our current circumstances such as our job, boss, workmates, industry, etc.

To say I don't have what it takes to make it work in my current circumstances and be willing to work on ourselves first, almost goes against human nature.

Most of us reach our personal capacity or the edge of our comfort zone when we're 90% there, and we back off before taking it all the way to make some serious money. Every time we back off from that last 10%, we plant a seed of doubt in our minds that we will ever make anything really happen at all. This becomes the main reason why so many people just can't get started with anything after a while, because they have tried so many things and feel they've failed in the past.

So going all the way to complete the last 10% can not only make us some serious money on our first attempt, it's also absolutely critical for that next opportunity, because you know that you have what it takes and you can make a quicker and more confident decision when the next opportunity comes along.

People who are not doing the best in what they are doing right now don't know that they are killing off their opportunity for future success little by little, every day, as their confidence erodes a bit more every time they know they didn't do their best.

How many of us change from job to job, profession to profession, business to business, opportunity to opportunity, spouse to spouse, and it has always been someone else's fault that we didn't make it. Really the only thing in common through all of those circumstances is us. Let's face it, what we don't like about others, we don't like about ourselves. What we say about others tells us a lot more about ourselves than them.

That's why it's a lot easier to stay poor and unsuccessful, whereas it takes a very strong individual to become wealthy and successful.

The day we decide to take responsibility for our current situation: our income, our net worth, our relationships, our opportunities, will be the day we are on our way to financial freedom.

Until then nothing will set us free financially.

Yes, you hear me right, nothing, nothing at all; not our next opportunity, not our next boss, not our next job, not our next spouse, not our next business partner, not our next team, nothing.

We are the only thing that counts in the whole wealth creation process. When we become someone with more substance, better opportunities will present themselves to reflect this, not the other way around. Once we take full responsibility for our circumstances, we become the co-creator of our reality.

Final thought Have you ever wondered why poor and unsuccessful people all have a To Do List, and rich and successful people all have a Not To Do List?

Once we take full responsibility for our financial situation, deciding what not to do is the next step to serious wealth. So, what is on your Not To Do List today?

This article was written by Bill Zheng, founder of Investors Direct Financial Group, a leading property finance company providing financial solutions for property investors and developers. Bill is a keynote speaker at many property and finance conferences throughout Australia. www.InvestorsDirect.com.au

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How to achieve financial independence through property

By Bronwyn Davis, Editor PropertyUpdate.com.au “The battle is - how do you protect your equity while making that equity provide income to live off? So investors should be aiming to build equity and then make that equity spin off as much cash as possible to provide a very comfortable lifestyle.�

All of us yearn for financial freedom, the power to leave our day jobs and enjoy a long, leisurely retirement.

In reality, we all know that working hard, plying extra cash into our super fund and banking on a nice hefty payout at the end of our career isn't necessarily going to provide enough wealth for us to retire on. Sure, it might give us some spending money in the short term, but many of us will live well beyond our 60s and 70s. So what do we do when our super dries up?

There's the pension, but after living on $50,000 to $60,000 a year, will you be happy settling for an $18,000 or so handout from the government?

The good news is that with a bit of foresight, some smart strategies and the old reliable bricks and mortar, we all have the capacity to make our golden years even more comfortable - and a lot more prosperous!

Why property?

"Property is a basic commodity," asserts Monique Wakelin of Wakelin Property Advisory.

"We have 70 per cent home ownership in this country, so it stands to reason that around 30 per cent of the population rents at any given time. This means you have a consistently significant large pool of people requiring rental accommodation."

Property has certain advantages over other asset classes, such as shares. It's less volatile than the stock market and, historically, real estate has always increased in value. It has its ups and downs but it's relatively dependable if investors are wise enough to understand that this commodity requires a long-term commitment to pay decent dividends.

Wakelin advises, "Property is illiquid and carries a high cost for entry and exit. This is why it has to be a long-term strategy and why the bias has to be toward capital growth." But she assures us that "because it's a basic commodity, it has a level of inbuilt stability in terms of demand and that underpins its capital value.�

Bill Zheng of Investors Direct Financial Group likes property because it allows investors to leverage other people's money fairly safely, "which means higher returns at lower risk compared to other asset classes."

He adds, "The average person retires with $140K superannuation in Australia. You don't see too many people with more than $300K super, but you can find plenty of people with more than $300K equity in their home or investment properties."

Because well-bought property will continue to generate capital growth throughout the years, financial planner and property writer Margaret Lomas cites it as a favoured asset class and notes that if you're careful about where and what you buy, you'll always end up with more than what you begin with.

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"Providing it's bought well, a property can become an asset that continues to grow for you into retirement," says Lomas. "If you have a portfolio which by the time you retire gives you $20,000 a year income, that's the lowest it's going to give you because traditionally property will grow over time, as does its rent return."

The power of equity Savvy homeowners across the country have learnt that the appreciating value of their own home generates equity. Rather than selling up to release their equity, this astute bunch thinks about the future and accesses it by re-financing and putting it into other forms of wealth generation, primarily property investment.

Zheng notes, "In Australia, most property investors started out by leveraging their own home.

If you're not willing to do this, it's very unlikely that you can get ahead unless you've managed to make a lot more money from other things."

Wakelin is another proponent of utilising one's growing equity, firstly in your own home and then in your budding property portfolio.

She says, "The more equity you can control and the sooner you can control it, the greater your level of financial independence. Your increasing equity adds to your asset base because it allows you to use that equity as leverage to buy further assets. Further acquisitions are typically made by accessing part of the equity in pre-existing assets and cross-collateralising."

Once you reach retirement, your equity begins to work in a different way. After using it to build a generous portfolio, consisting of property alone or a mix of property, shares and other investments, given enough of the stuff, it can start to provide an income that replaces your working-life salary.

Mark Armstrong, CPA with Property Planning Australia, warns however that investors need to adopt some savoir-fare when they swap their day job for a life lived on "equitable" indulgence.

He says the smart approach is all about "getting your equity to generate income for you, so that you're not actually reducing your equity. Investors should think, 'I've got $1 million worth of equity - where can I now put it to start making it work for me in terms of an income?"

He suggests, "That's where they might look to the share market or commercial property trusts - a nice diversified portfolio." Armstrong says these forms of investment can generate surplus cash flow while protecting the primary property portfolio.

"The battle is - how do you protect your equity while making that equity provide income to live off? So investors should be aiming to build equity and then make that equity spin off as much cash as possible to provide a very comfortable lifestyle."

How much is enough?

So if equity is the golden goose that will provide for us in retirement, how much is enough?

And for that matter, exactly how much money makes for a comfortable retirement income?

Lomas warns those with rose-coloured glasses that property investment will make few people into millionaires. In reality, though, how many of us are raking in a seven-figure salary from our day jobs?

Most financial planners such as Lomas will advise their clients that "a good comfortable goal is to aim to replace your own working income". To achieve this, you need to calculate the number of properties and the combined worth of a portfolio that will see you end up in this ideal financial position. Depending on the strategy you intend to use, there are a number of

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ways you can work out how much property you'll need and the equity you should be holding in your portfolio to put you in a position where you can finally bid your boss farewell.

These deductions are largely based on the rate of return you can expect to achieve from your property portfolio - both with regard to rental yield and long-term capital gains. Advice varies depending on who you talk to, but the overall consensus remains fairly similar.

Michael Yardney of Metropole – Property Investment Strategists takes a reasonably simple angle on how much is enough. Yardney theorises that five median-priced properties paid out completely can provide investors with the ability to replace their annual working income.

"In Australia the average rent for median-priced property is about a quarter of the average weekly income," Yardney explains. "Therefore, if you want to replace your average weekly income, you'll need at least four properties owned outright, each giving you the equivalent of a quarter of the average weekly income in rent. Plus a fifth to pay for rates, maintenance, outgoings and so forth."

Zheng's formula is just as easy to work with: "Currently, if a property doesn't have a mortgage, it returns roughly 14 per cent a year (10 per cent growth and 4 per cent rent). If you only spend the return every year through finance (reverse mortgage or other means), $1 million worth of investment properties can give you $140,000 per annum."

Armstrong is not so comfortable with the idea of retirees using reverse mortgages and lines of credit to live off their growing equity. He prefers the idea of refinancing and using equity to generate positive cash flow from other asset classes, and the potential for a healthy five per cent rent return providing adequate income from a well-built property portfolio.

He deduces, "If you require an income of $50,000 a year, you'll require a residential portfolio with $1 million equity, which will give you that five per cent return. Whereas if you have $1 million in equity and decide to flip that over into a more cash flow-driven property sector, like commercial for instance, you may well find that can generate $70,000 to $100,000 a year income. So people need to review their portfolio annually, review their lifestyle requirements and set very clear goals."

Property that pays The next step is to consider what type of property provides this kind of return and can generate the level of income we're talking about. Most experts say acquiring decent capital growth should be the primary aim of all property investment endeavours.

Traditionally, it has been held that high-growth properties will produce low rental yield and vice versa. So if capital growth is of the utmost importance, yet living off the rental income stream that investment properties can provide is the long-term goal, how do we achieve both outcomes with the one portfolio?

The answer is that properties that begin as negatively geared investments should, if selected carefully and managed proactively, become positive cash flow producing assets in the long run.

Although many investors may be tempted to reach for higher rental returns in favour of having to make up a cash flow shortfall with negatively geared investments, it's important to realise that it's the capital growth that makes it possible to retire on property - not just rental yields.

Lomas is a staunch advocate of positive cash flow property investment. However, she qualifies that this strategy isn't about going into the middle of nowhere and buying in a town that relies on one industry for its economic wellbeing, thereby providing property that pays dividends in rent, but returns very little capital growth.

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"Positive cash flow is about on-paper deductions and making the bottom line positive," says Lomas. "Once I get back those on-paper deductions through my tax, it makes up the hole between what I'm getting in and what I'm paying out and I'm very careful to choose properties that more than make up the difference.

"Buying positive cash flow property is about finding a single property that will deliver that cash flow for you. Positively geared property is where you get higher rent returns and low purchase price and you may not get as much growth from that."

While this might seem feasible, there are those who would suggest that on-paper deductions aren't the best way to go when trying to make property pay.

Armstrong cautions, "We see too many people go into positive cash flow properties and rely on things like depreciation benefits to generate income. They have very high gearing levels and they actually find that by the time they get to retirement, their gearing levels are still too high and the income they could be earning is being drained away by interest payments."

"Depreciation benefits have a limited lifespan. Although a property depreciates over 40 years, most of the depreciation is used up in the first five to 10, so investors may well find that by the time most of the depreciation's used up, their portfolio's not as positively geared as they thought. You can actually find property going from a positively geared position back into a negatively geared position as depreciation is used up. They need to be focusing on reducing debt in some other way to make that positive cash flow more powerful."

Belinda Robinson, financial planning technical adviser with CPA Australia, puts forward a similar case and says that, ultimately, "whether you're claiming money back or getting it back as a tax break you still have to spend it - so you don't get rich with tax deductions. Tax needs to be the secondary issue, not what your portfolio is based on."

Lomas counters by suggesting that it's all about how you use positive cash flow property in the first instance and making sure you don't squander what comes your way.

She says, "The detractors are going to say that on-paper deductions are going to run out, and yes, they do, but the plan is that while you have those deductions, you plough your extra cash flow back into the debt so that once they've run out your debt is more manageable. Your rents will probably increase a little over time and the property then becomes really positively geared because you've got low debt and good income. So you've reduced your expenses by using your cash flow to do that. It's a big picture view."

Most property advisers will suggest that rental income should only become your primary focus when you're nearing retirement, while during the accumulation phase of a property investment career, it's more important to keep your eyes on the real prize - strong capital growth.

As Wakelin says, "Strong capital growth leads to compound growth that, in turn, multiplies the overall return. Compounding capital growth achieves this more quickly and effectively than after-tax debt reduction derived from the rental or other sources of income.

"Furthermore (as evidenced in the table below) the income generated by the higher-growth scenario far outstrips that of the high-yielding, low-growth option on a timeline that coincides with retirement for most investors."

Wakelin also argues that while rental income-reliant positive cash flow properties might look better in percentage terms, the figures don't necessarily add up when it comes to counting the actual dollars and cents.

She says, "Let's consider a $300,000 purchase delivering five per cent capital growth and 10 per cent gross rental return. In 20 years, the property will be valued at nearly $800,000 and rental income will be just under $80,000. A similar priced property showing 10 per cent capital growth and five per cent rental return will be valued at just over $2 million and rental income

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will be more than $100,000 at the end of the same time period. That's a difference of over $1.2 million in lost capital growth!

"Rather than thinking so much in percentage terms, people need to focus more on dollars we live on dollars and we're taxed on dollars, not percentages."

Capital growth vs rental income on a $300,000 purchase

Year 1 Year 5 Year 10 Year 15 Year 20

10% Capital growth

5% Rent growth

5% capital growth

10% rent growth

$330,000 $483,153 $778,123 $1,253,174 $2,018,250

$16,500 $24,158 $38,906 $62,659 $100,913

$315,000 $382,884 $488,668 $623,678 $795,989

$31,500 $38,288 $48,867 $62,368 $79,599

Source: Wakelin Property Advisory c 2006

Staging your success There are various stages within the process of successful property investing that go hand in hand with where you’re at financially.

In the beginning, your primary focus should be on asset accumulation. There's not necessarily an age restriction on when you should start out with property investment, but ideally the younger the better - this gives you time to grow your portfolio while you're still deriving an income from paid employment, which has a number of advantages in the asset accumulation phase.

As Zheng points out, "If you're younger, you may consider taking on larger debt, as you don't have a lot of equity and you can work harder to hang onto mortgages while your properties are increasing in value. Plus, you can afford to make a mistake and you'll still have time to fix it."

Wakelin says investors need to realise exactly what the primary aim of the growth or accumulation stage is all about.

"Achieving a stupendous rental income is often not as important as capital growth (at this time) because the aim is to amass a sizeable asset base capable of generating substantial equity," she says.

If you buy good property in high growth areas, you can leverage off the equity that your first investment will naturally accumulate over time to continue to build your portfolio.

Yardney explains that getting the fundamental building blocks right will ensure you have room to move and can continue to grow your asset base.

"You buy a well-located, high-growth property, wait for a few years for that to increase in value and then leverage off the equity in that to buy your next one. Then you have two properties increasing in value to borrow against, so in a few years' time, you can buy even more properties."

This is where the true magic of holding onto your assets becomes evident. Only with property can you leverage your burgeoning equity to help you leapfrog into your next purchase and create more and more potential future wealth.

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Wakelin also points out, "As the value of property goes up, the proportion of your rental income is to some extent tied to that increasing value. Added to that you have the effects of inflation and levels of supply and demand in the rental market contributing to increasing income.

"Over time that slowly increasing level of rental income helps to ease cash flow. It's always those first couple of years that are the most challenging from a cash flow point of view, but as time passes and you get into year three, four and five, it becomes a little easier."

When you reach this point, you then enter the consolidation (or debt reduction) phase. This is the time to look at reducing your debt as much as possible to prepare for your imminent departure from the workforce.

Armstrong says, "Money is the most powerful commodity known to man - no other commodity generates more money than money itself. The only way to get that money in the first place is by building equity. You do that by growing real estate on the one hand and reducing debt on the other."

Many property investors have been taught that negative gearing is an excellent way to go when it comes to tax breaks and building a portfolio, and this is certainly true to a large extent.

However, if you're heading into retirement too negatively geared, you could end up creating a financial noose around your neck rather than finding the financial freedom we all seek.

First, you won't have a working income to claim any tax against. Second, you'll have to find other forms of surplus cash to make up the shortfall between what you owe and what you own.

The third and final stage to successfully creating a property portfolio is the cash flow phase where, as Armstrong says, "you're heading towards retirement and your rent is starting to supplement your income."

Armstrong suggests that this should be the time when investors consider flipping their strategy from building equity to acquiring cash flow.

"They might look at the commercial property market or commercial property trusts, where cash flows are a lot stronger and returns are closer to 10 per cent rather than the five per cent you get from residential."

Structure right and save Most property investors hold their assets in a single name or partnership (husband and wife for instance) structure throughout the life of their portfolio. While this is often the best way to go during the initial accumulation phase, it's not necessarily ideal to carry right through for the term of your investment career.

Armstrong says it has its place in the beginning as, "in this stage you might be looking at negative gearing benefits, so you're better off holding your assets in a personal or partnership structure."

However, he also warns investors that "once you have equity, protecting it is really important".

This is where becoming proactive, really understanding your taxation obligations and knowing where you’re at every step of the way comes into effect.

Armstrong observes, "One of the biggest mistakes we find people making is within the structuring of their portfolio. It's so important to maximise your income through the right structure and there's no doubt that when you've got a lot of equity and you're looking to generate income, a Trust structure is a really efficient way to do that."

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Armstrong cautions to steer clear of a Trust structure in the growth phase, as you can't negatively gear through a trust, but recommends it once you have enough equity in your portfolio to live off.

He says, "You can channel that money down through more avenues (through a husband and wife, kids and a family) and that can effectively reduce your tax bills each year. You can even channel income down through a corporation or company and just pay a flat 30 per cent tax rate through the company."

He does warn, however, that, "In restructuring your portfolio, there are considerable costs via stamp duty and crystallising any capital gains - so we need to work out whether those costs justify a restructure, but quite often if we set up the right structure and give it enough time, that time will justify restructuring the portfolio."

For this reason, it's vital to consider the structure of your portfolio at the start of your property investing journey.

Retiring your debt The debt reduction (consolidation) phase is of utmost importance and will determine how much income you are able to derive from your portfolio in retirement. There are a number of ways to go about reducing your debt. Zheng suggests, "If you have held a few properties for many years, you can probably sell one to clear all of your debt."

Although many advisers caution against selling off your portfolio to generate income, selling one or two properties to go into retirement debt-free is a strategy that many support.

Wakelin provides an example of how an investor might simply achieve debt reduction using this scenario.

"A Victorian cottage that was worth say $65,000 in 1983 would very easily be worth $600,000 today," she says. "If the original debt on that property was $50,000, assuming that the investor had made interest-only payments for the past 23 years, realistically you'd have to sell very few assets to be able to retire the $50,000 debt on that investment."

Yardney suggests some other methods of retiring debt could include using a lump sum super payout to put toward your mortgages or just applying some logical forward planning.

"As you're getting closer to retirement age, you stop growing your portfolio as quickly - you stop adding properties, so your loan to value ratio slowly drops, you have more equity and in time you have more positive cash flow. Or maybe you convert your loans to principal and interest, so rather than paying interest only in the last few years you slowly repay some debt.

The whole aim of these strategies is to make your portfolio less highly geared and more cash flow positive."

Lomas believes that adopting a sound strategy for debt reduction is of the utmost importance - not just as you get closer to retirement age, but right throughout your property investing career.

She counsels, "People have to understand the best way to use debt, the best way to offset interest and the best way to put every single cent that they have into reducing debt, because for every $1of loan that you repay, that's essentially another $1 of property you own and $5 of property that you can purchase by leveraging and borrowing again.

"The quicker we can reduce debt and gain leverage in our portfolio, the quicker we can gain more growth assets - which when combined together in retirement are going to create that retirement income for us."

Managing cash flow

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To be in a position where you can reduce debt so that your property portfolio ends up neutrally or, even better, positively geared as you reach retirement, you need to be able to adopt effective cash flow management techniques.

Zheng affirms that, "Cash flow management has a lot to do with financial disciplines. Making cash flow management high priority is the first thing an investor must do."

Hopefully you've attained enough discipline saving for your own home to understand how important it is to take a proactive and regimented approach to managing your money.

As Lomas says, "When you're looking to make an income from your portfolio it's really important to make the difference between what you owe and the total value of your portfolio as big as you can, because for any return you're getting, the portion you own is the bit that you'll get back as income. I think of all of my debt as one debt, so I'm always ploughing my cash flow and every spare cent I have into reducing it."

Cash flow management should be a part of your overall approach to how you invest.

Armstrong believes it's essential that investors are aware of their re-financing options from the beginning and that they use all resources available to them to ensure they remain in control of their debt, rather than their debt controlling them.

He says, "The banking industry is hyper-competitive. They're now talking about things like 30to 50-year loans, which can reduce pressure on cash flow and may provide more cash flow to apply into other areas.

"Banks are also very competitive with interest rates now. So we'd recommend that people look at reviewing their loan structure every two to three years and consider how they can tweak it to save money."

To give investors some incentive to really take the reins when it comes to their cash flow management, Armstrong declares: "By saving as little as $50 a week in your loan structure, you can save around $120,000 to $130,000 over the life of your loan - that's on a $200,000 loan over a 30-year timeframe.

"You can easily do this by negotiating a better interest rate. Instead of negotiating a 0.7 per cent decrease, negotiate a 0.8 or 0.9 per cent decrease. Instead of having four or five loans all over the place, all incurring a $300 annual fee, consolidate them into a structure where you only incur one $300 fee each year. There's a whole range of strategies people can use within the financing industry to take the pressure off cash flow and reduce debt."

How to achieve financial independence through property So, how do I live off my portfolio? There does seem to be some contention in finance and property circles as to the best formula for retiring comfortably on a property portfolio.

In reality, as Robinson succinctly concludes, "You have three ways of getting money back out of your investment - you have ongoing income, or the net rent the property's paying you; there's the possibility of borrowing against the equity; or you can sell the investment to release the equity."

While Robinson believes the simple solution is to sell up and live off the capital you've built, many property advisers and financial planners will tell you otherwise.

The first issue they have with this option is that you'll be paying capital gains tax on any profit you make. But the main concern is that while this may seem like a logical short-term fix, it could leave you with an ever-shrinking income as years go by and you eat up the equity you released.

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Many investors might think that offloading property is the easiest way to go when they need to make some money. Living off increasing equity can seem too confusing to contemplate.

Really though, it doesn't need to be so hard.

Yardney explains, "The concept of living off equity is one that very few people adopt because it's foreign to what they've been taught. What you have to do to live off equity is to live off increased borrowings.

"The principle is: I've got $2 million worth of properties in good locations across capital cities so therefore every year I'm worth $200,000 more. If I live on $100,000 of that I'm still going to be worth another $100,000 every year, so even if I'm eating away $100,000 capital, at the end of the first year I'll be worth $2.1 million, at the end of the next year I'll be worth $2.2 million and so on."

He does caution though, "You really can't count on that 10 per cent increase each and every year because we know property doesn't achieve that rate of growth consistently, so every year you have to leave yourself a 'safety buffer'.

"You probably shouldn't be using up any more than 50 per cent of what you think your increasing equity will be. You have to leave 20 per cent of it for the bank anyway and the rest as your cash flow buffer, because you'll have good and bad years as well as some unforeseen expenses."

He continues, "Your income should come from two sources - partly from rent and partly from capital growth. Make sure you've got more than enough to cover what you want, plus some, because you'll always have a couple of lean years."

Lomas isn't so keen on the idea of re-financing and drawing on increasing equity to generate income. For her, the more capital you own outright, the less you have to pay back and, therefore, the greater your share of the income derived purely from rental returns will be.

Lomas' calculations of what an investor can expect to get back from their portfolio as income goes something like this: "The portion of the portfolio you own, multiplied by whatever the rent return is considered to be, is your share of the income it makes - the rest of it goes to the bank and expenses. So if I owned $2 million worth of property but I owed $1 million on it, it's feasible to say I would generate about a $40,000 to $50,000 income per year (based on $1 million times 4-5 per cent rent return)."

Wakelin also considers rent returns a good solid means for retirees to replace the weekly wage they enjoyed when working full time. She feels investors should take a more proactive stance with their portfolio though and use their increasing equity to not only retire any debt, but also invest in other means of wealth creation.

She explains, "If you've been smart you've amassed a bit of superannuation, you've got some good shares and you've got four or five properties, so you sit down with your financial adviser and say, ‘I need to minimise my income tax and I have all these assets that I need to generate a retirement income from so I can live in a reasonable fashion.

"At this point, you move from increasing your store of equity to maintaining good levels of equity and using that equity to generate income."

"That doesn't mean that you go out and sell all of your assets and buy high-yield properties that generate large rents, because the fact that they won't hold their value will over time diminish the income they generate. You have to maintain your high-growth properties because they actually generate more dollars in terms of income than their high-yield, lowgrowth counterparts.

"So hold onto your good-quality properties and retire your debt by whatever means possible, whether that's using your super or selling one of your properties, then basically live on the rental income and other income you have from super, shares or whatever else."

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Real Wealth through Real Estate

Don't sell yourself short Armstrong says one of the biggest mistakes people make is to sell down their entire portfolio purely to generate income, without giving any thought to their future. He describes a concept known as the "headless fish", whereby retirees put all of their equity into an annuity stream (or complying annuity), and in doing so, offload their entire investment portfolio.

The problem being, as Armstrong clarifies, that "your equity is reducing in value every year as you draw more income out of it and you have compound growth working against you�.

He adds, "That's fine, as long as people are still holding property that's compounding in growth. They need to have a balance, they need to take out some equity to generate income, but they also need to have a portfolio that's still growing. The reality is that our cost of living is always compounding, so you must have assets into retirement that are compounding as well."

In this way, when your cash flow begins to dry up from that initial amount of equity you drew on to use as income, you've still retained a portion of your portfolio that's been growing and growing to give you a kick along and allow you to continue living comfortably.

As Armstrong puts it, "So that when you hit 75, you can sell that compounding asset again and flip the profit over into a cash flow-driven strategy to give you another 10 or 15 years of retirement money."

This article was originally published in Australian Property Investor Magazinewww.apimagazine.com.au and is copyright and produced with their permission.

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DISCLAIMER: PropertyUpdate.com.au, Metropole Properties and their related businesses makes no representation and gives no warranty as to the accuracy of the information in this document and accepts no liability for any errors, misprints or omission herein (whether negligent or otherwise). The publisher, editor and authors shall not be liable for any loss or damage whatsoever arising as a result of any person acting or refraining from acting in reliance on any information contained therein.

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