Think Money - Wealthy 'n' Wise - September 2015

Wealthy’n’Wise

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INSIDE THIS EDITION The 4 rules of property investment Understanding the 'real' value of money How to change your life in 35 minutes

thinkmoney.com.au

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Wealthy’n’Wise

How to retire on a property portfolio...

The one thing that my husband Jack and I learned a while back is we don’t actually want to retire. What we want is to have the choice to do whatever it is we want to do.

Jack and I have the absolute ideal life now because we’re at that point. Do we want to actually retire? No, where’s the fun in that? We actually enjoy being productive. The choice to do whatever we want to do is actually our goal.

Meet Chris Childs Chris was a financial planner for 10 years prior to becoming a mortgage broker specialising in debt reduction. Following on with her passion for property, Chris’s clients wanted to follow her lead and learn how to build a property portfolio, thus Think Money Wealth Through Property was born. Chris’s passions are property, people and business. She has had the privilege of transforming peoples’ lives on a daily basis by teaching them to change the way they manage their finances. Chris says “ The look of amazement when people realise what they can actually achieve is priceless’.“

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The right time to plan is now!

Using Property to create Wealth!

Most people actually leave planning for their retirement far too late and so many people come into my office on the wrong side of 50 and they’re starting to seriously think about retirement. They’re thinking ‘how am I going to do this, how am I going to retire?’ And it’s often not until that part of their lives that they actually start thinking about it.

Retiring on a property portfolio means navigating the 3 stages of wealth creation.

Accumulation – when you begin to use your equity and income to buy property.

Acceleration – when you’re using the investment property income and equity to buy more property.

And Maturity – when you get to sit However, most find thankfully, that back, kick back and wait because it isn’t too late. No matter when you once you’ve held the start, you’re property long term, going to be the values and rents are better off than if you don’t The best thing about going up and eventually start at all. creating wealth for you’re actually going to be living from your Every single your retirement isn’t property investments. person who retirement itself, Until you retire your sits down has different wants it’s having the property portfolio will, and needs choices it gives you. over time, be increasing in value. Rent will also and they all be going up, meaning have different incomes, they are different ages, they you will eventually be accumulating money and paying off debt without have different timelines. Yet when any effort from you. we come down to it everyone wants a comfortable retirement, a stress So how do you actually retire on a free life, they want to help their kids, property portfolio? You start buying they want to be able to relax and do property. Having the right plans whatever it is that they want to. They and systems in place to help make want to have choices. it as easy as possible is where Think Money can help! Why not call and make a time to chat about a plan that would help you retire comfortably.

Chris Childs

The four rules of creating wealth through property Rule #1 Separate your life from your investments The most important part of successfully investing in property is the organisation of your money. By getting control of your income and personal mortgage, getting debt reduction and money control happening, you can confidently launch into property investment. We teach our clients to separate their personal side from the investment side and build a property investment portfolio.

Many investors fail from the financial pressure when the rental property expenses and income flow in and out of their personal accounts. By managing their investments and not having the holding costs affect their personal income, our clients increase their wealth, without decreasing their lifestyle.

Rule #2 Buy new, not old It makes a big difference to wealth creation by buying new properties instead of old. Over the years, the drain on cash flow from constant maintenance and repairs of old properties can really hold back your ability to buy more investment properties and retire on enough income. However, by buying new property, the benefits are not only increased cash flow but also being able to attract better tenants, and more importantly, the bonus of receiving tax deductions from depreciation. With all of these financial benefits, you are able to transition from negatively to positively geared investing much faster, thus enabling you the freedom to retire sooner.

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Rule #3 Interest only loan Interest only loans always spark debate in both the home owner and property investment circles. We use interest only loans but pay extra, assisting in massive debt reduction against your home mortgage.

Most clients reduce their debts in record amounts –more than $30-$40,000 in the first year.

On the investment side there are big benefits. Interest is tax Most clients deductible, principal payments aren’t. It’s easier to manage the reduce their investment holding costs if you debts in record minimize the cost of payments amounts – more during the ‘negatively geared’ than $30-$40,000 period. As the property goes in the first year. up in value, so does the rental income. The property should go from negatively geared to positively geared and then the extra rent reduces the investment debt. So, where possible it is all about timing and maximising the tax deductions.

Rule #4 Never sell!

Over the past 100 years, Australian property has grown in value on average 5%-10% pa. It’s not 10% every year, it works in cycles, usually 2 or 3 years of really good growth, 5 or 6 of flat and a couple of years of negative growth or retraction; meaning that a property can have flat or even negative growth over an 8 year period. The property growth cycle is often debated, but history shows this as fact, although no one has a crystal ball to see the future.

There are many benefits of keeping property - you incur buying costs only once, and pay no commissions on selling or capital gains tax. But by selling, taking profit and buying again you maximise the costs and minimise the profits.

These costs can equate to $50-$60,000 even before capital gains tax. By not selling, this money can be utilised as equity to purchase more property, and your existing property continues to grow as well as the new one.

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Wealthy’n’Wise

Understanding the 'real’ value of money.

If you want choices in retirement, you’re going to need to put a plan in place.

And this isn’t the sort of plan you may have been told before. You know the one that goes like this: You have to work hard, you have to save hard, you have to invest in super, you have to invest in shares and in retirement you have to sell your property to get cash to live off.

Who’s been told that time and time again? Well that’s not actually correct. It is more about being smart with your money and separating your life from your investments. At the same time it is important that you are enjoying life all the way through because you don’t want to be the richest man in the graveyard. What happens if the ‘big red bus’ comes along and you haven’t made it to retirement but you haven’t lived because you’re doing everything to save towards retirement?

Where is the fun in that? It is important to have balance.

I was a financial planner for 10 years and we taught people to save for retirement like this: During the build up to retirement, we advised to invest in balanced or higher growth funds, which was important because it gave higher returns during the growth phase. Five years before retirement, we advised to move from the highrisk funds to cash based investments to retire with cash.

The reason being it is lower risk, but it is also lower return. If you don’t change and you are in high-risk funds and let’s say a week before you retire the market crashes (which it can do) you can end up losing more than half your money. So there’s a problem having high-risk investments when you retire, however, there is also a risk

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to being invested in cash. This is because of the way that money works.

The problem with cash is because money works like this: Money devalues over time! As a financial planner, I would actually point out to clients how much money they had, and how long it would probably last because the cost of living goes up which makes the value of money go down.

Let’s say you retire with $500,000 cash invested and imagine you miraculously received a 10% return on the cash investment. This would give you $50,000 per annum income. We are taught that we should be living off the interest. But when you start to live off the interest, guess what happens? The cost of living goes up so you start spending more than the interest and start to eat into the capital and then you earn less interest because the cost of living goes up and the cycle continues with the money depleting itself until you run out of money. That’s why cash doesn’t work in retirement.

I’ve never met anyone who has saved themselves rich

Jack and I chose property for our retirement plan because property values go up over time and so does rent. The reason we don’t sell property is because if you sell property, you’re going to end up with cash.

It’s a fact that money de-values over time. If you just hold money in retirement you’ll have less to spend. You can use money or better still equity to create a property portfolio. Property values go up over time, putting your money in property should keep your wealth growing in line with the cost of living.

What’s more, your rent goes up and your debts reduce, so the more income you will have in retirement. It’s this NPI ‘non-perspiration income’ that helps you to retire comfortably.

While property values usually go up, it doesn’t matter if they don’t. People often worry the property market might not continue to grow at 5% or 10%. The reason it doesn’t matter is because you should never sell. If you don’t sell the value of property in retirement is irrelevant. You don’t use the equity in retirement, you live off the property ‘return’ (rent) and rent normally increases with the cost of living, thus giving you an ongoing and increasing income for the rest of your life.

So how can you retire on a property portfolio?

rvative property, it usually When you start investing and you buy a safe, conse more than it earns. A costs starts off negatively geared. This just means it more rental income to help need common mistake people make is to think they property. Unfortunately, d geare with the holding costs so they buy a positively are usually also high in they e, when you choose properties based on high incom ly based on supply usual are risk and high incomes usually don’t last. High rents try. This means indus g minin and demand, which can change, just look at the e areas with the rvativ conse in s there can be a lot of volatility. Buying propertie normal grow th patterns means less volatility. turns from the rent and eventually over time the property The value of the property goes up and so does debt is mber Reme . ment income comes from in retire negatively to positively geared. That’s where your rtant . impo really is h whic debt devalues over time as well, money. As well as money devaluing over time, more reducing the debt, as the debt reduces you have Once the rent is higher than the costs it can start live on in retirement . income, which means you have more income to

The 3 phases to retirement on a property portfolio 1. ACCUMULATION PHASE We start with the accumulation phase. The accumulation phase is when we use your income and equity in your home to buy a property. As property values increase and your income increases you can buy again and you are on the way to building a property portfolio.

MONEY (AND DEBT) OVER TIME

NEGATIVELY DEVALUES GEARED NEGATIVELY GEARED

3. MATURITY PHASE Then we get to the maturity phase. And this is the great phase when you just sit back, kick back and wait. Because if you hold property long term, the value is going to go up, the rent is going to go up and eventually, you are actually going to be living off your property investment.

POSITIVELY GEARED

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2. ACCELERATION PHASE The acceleration phase is great because as the values of your investment properties increase, you are actually using the investment property income and equity to get the bank to say yes. Bottom line, if your income is positive in the property investment side and your properties have increased in equity, you can borrow to buy more.

POSITIVELY GEARED

PROPERTY VALUE COST OF LIVING

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RENT PROPERTY VALUE

However, until you retire, two things are happening.

COST OF LIVING Your wealth is increasing and your debt is being paid off RENT any effort from you. This is what I call ‘NPI’, without non perspiration income.

Don’t be afraid of debt. And don’t be afraid of using equity. It’s these fears that hold us back and why some people retire poor. We teach people how to break out of their current situation and set themselves up for a comfortable retirement.

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Finding the perfect properties to retire on A good property portfolio should include a mix of property types and areas. No matter where you are starting or your situation, age or experience, balance is important to help you maximise your profit and minimise your risk. You definitely need to factor balance into your portfolio if you want to succeed as an investor and build a portfolio you can retire on.

What does a balanced portfolio look like?

Cash flow properties or positive geared properties are those that are earning you enough rental income to cover the mortgage.

These properties tend to have a high gross yield of around 7%. Negative geared properties essentially mean you’re making a loss in the short term in the view that the rental income from the property will increase in the future when the property turns positively geared.

It could be that you need a range of properties that are achieving solid capital growth and good rental income. As an investor, this should be your ultimate goal: A property portfolio that pays for itself each month, while also growing in value.

For some investors, this could include owning properties in different geographic areas. For example, there are many differently performing areas just in South East Queensland alone, such as Brisbane, Toowoomba and the Sunshine Coast, that can help to make up your portfolio.

A balanced portfolio can also be a mix of new house and land, newly completed houses, units or townhouses, existing houses or off the plan units or townhouses. Units and townhouses may meet inner city requirements where house and land could be uneconomical. In some markets house and land may deliver the best return.

The type of property is often less relevant than its appeal to tenants, its cash flow or its capital growth potential. In the end, the perfect portfolio is not static but evolves over time as your life, objectives and circumstances change. Changing demographics and market changes can also have a significant impact on any portfolio.

Capital growth versus rental return.

Capital growth properties are those that grow in value over time. Ideally, you want properties with long-term historical growth.

This would mean you could potentially double your money within seven to ten years. Properties that have achieved strong long-term growth are often located in high population growth areas with strong infrastructure growth.

6 INVESTMENT REALTY

m e fro g a s s a me hilds...

C Jack

p: 07 5451 1080 f: 07 5335 1219 55 Sugar Rd Maroochydore Q 4558

thinkinvestmentrealty.com.au

Buying new versus old.

After years of experience, and making enough mistakes myself, the most important thing I have learned is to buy new not old. There are quite a few reasons for making this decision – one of the most important is the huge difference the tax benefits can make.

Properties that are new often are also more attractive to tenants. The maintenance costs are close to non-existent as the builder is responsible for correcting any faults for six years. And the growth in the value of a new property often exceeds older properties in the same area. Newer properties are also generally well presented with an appealing design and high quality tenant-ready features.

Comparing expenses & returns. It’s always interesting to compare houses versus units and townhouses. Houses seemingly have less cost compared to units or townhouses due to the latter properties having Body Corporate fees. However, there is a maintenance component not factored into houses that is allowed for and covered in Body Corporate expenses. Council rates are also calculated differently for the different property types. All have their benefits and we generally find that over time, costs and returns are often equal.

Doing the right research.

Research is the key to identifying the best property options for your portfolio. Property types should match demographics and the area e.g. units / townhouses may not be required in smaller regional markets where house and land on the other hand may have strong demand. The majority of investors don’t do enough research, or worse still, get incorrect information from the huge amount of data available online. Good research can take weeks to put together to hone down from the right state, the right town, the right suburb and the right property. It is vital to know what is happening with infrastructure spending, demographics, employment, economic growth and supply and demand, to name just a few. Be wary when you do your own research as often when someone does too much research, they end up getting so confused they do nothing… paralysis by analysis is a common end result.

Change your life in 35 minutes

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Real people share their real success stories With 3 years to retirement, I approached Think Money.

I only had a vague hope that I might be able to receive advice as to how to reduce debt and manage my financial future (yes my sceptical side was definitely showing!)

Now I have direction and focus that would never have been possible on my own. Think Money education and support has changed my thinking and my life. I have paid more off my mortgage in 8 months than I had in 10 years AND bought an investment property AND this is only the beginning!

Find out more about how we have helped others retire on a property portfolio by checking out our client testimonials on our website at thinkmoney.com.au

I now have absolutely no fear of the future. I am loving every day of this journey and am looking forward to retirement in grand style! The words “thank you” are so inadequate for the gratitude I feel.

Katrina, Think Money Client

Events Learn more, book into a FREE wealth coaching session or come along to one of our special events.

Each month we hold Free events to help you learn more about Think Money and also to show you how you can build and then retire on a Property portfolio. At our events you will learn: The Secret to buying 10 properties in 10 years How to manage the holding costs The right financial platform for investors Proven strategies to property wealth How to reduce your debt, not your lifestyle Getting control of your money

Visit thinkmoney.com.au or call us on 07 5430 4777 8

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