Leverage makes a huge difference to the Growth of a Super Fund…

I am often asked, “What are the advantages of buying property in Super?”

We are all different and while there are actually many reason and I have listed some of the more common ones at the end of this document for me I think that the most significant is…

Leverage.

Let me give you an example of the significant difference leverage makes to a super fund growth.

Let’s assume your Super Fund has $120,000 in it, and it earns 8% each year after expenses.

(NOTE: That is hard to do nowadays…)

Ignoring fees, MERs and other expenses it will grow at $9,600p.a. plus yours and your employer’s contributions.

Alternative:

You use that $120,000 to buy a property for $400,000, borrowing $300,000. You would use $100,000 from the fund as deposit and the $20,000 to cover Stamp duty and other costs (approx. only).

That property only has to increase in value by 2.4% pa to get the same $9,600.

Which do you think is more likely 8% every year from your existing investment or 2.4% from a well located property?

History has shown that properties average above 7% in growth over the long term so if that continues then your fund would have an average growth of at least $28,000. Some well-located properties will exceed this (over the long term).

But there is more…

The property would be cash-flow positive from day one:

Mortgage on $300k @ 5% = $15,000 (may increase in the future but unlikely for a couple of years)

Rent on $400k @ 4.5% = $18,000 (rent will increase over time)

So growth of $28,000 + (18,000 –15,000) + Tax Deductions for depreciation = over $31,000 per annum + your and your employers contributions.

Your Super Fund growth would be in excess of $31,000 per year (on average) compared to $9,600 under the existing scheme.

The excess of funds can be used to reduce the principle of the loan so you should be able to pay off the loan in about 12-15 years or less. Then the rent and growth are positive cash-flow into the fund.

Then after retirement the growth and rent from the property are CGT and Tax free.

Because property is a less volatile asset this strategy is a “set and forget” strategy.

Other reasons are:

•       You might want a more stable asset in your Super

•       You might not have enough equity for the deposit the Bank requires as an ordinary investment (10% for most lenders).

•       You might have existing properties already and the Bank won’t lend you anymore money.

•       You might want to minimise CGT on the growth of the property.

•       You might not want to have any more properties affecting your personal cash-flow.

•       And there is another very big reason… Property continues to grow in value even after you have retired and ceased contributions. It may even be possible that the growth alone exceeds your income requirements in retirement.

For more information about Property investment within Super consult your Accountant, Financial Planner or give us a call 1300 13 10 99

 

Is Property Investment like Monopoly or Snakes and Ladders nowadays?

I remember when property investment was easy…

Buy a house in the street you live in and put a tenant in to help pay the mortgage.

Then sometime in the next few years the rent would have increased to the point where it was paying the mortgage so the property was paying for itself.

Over time the property increased in value so you were creating wealth without it costing you any money.

Simple!

 

That was called negative gearing and it worked.

But now we have Property Marketers and it seems that they are all Australia’s #1 property educator, and it has all got a little bit more complicated.

The big thing nowadays is Positive Cash-flow, whether that be through NRAS or buying “Smart” or buying in an area where rents have gone through the roof due to lack of supply eg. mining areas.

So does all this new complication actually work? Do we have better investment opportunities today?

The truth is, with interest rate where they are at present it is not too hard for a property to be positive cash-flow but where will that property be in 10 years in value and what will be the current interest rates then?

Well, I was having lunch the other day with a couple of clients that have each bought a number of properties with my help over the last 10 years.

One of them said that he had met a person that was a Property Manager for NRAS properties. She manages about 200 properties for her employer.

For those that don’t know NRAS stands for National Rental Affordability Scheme so it stands to reason that the tenants are getting lower (more affordable) rent. Well that is the intention of NRAS.

You would think that those tenants would appreciate the benefit they are getting but according to this Property Manager the tenants don’t appreciate it at all and many are significantly in arrears with their rent and many of the properties have been substantially damaged… some have been trashed. These were brand new properties in the last few years.

About 3 or 4 years ago I had told both of these clients that I didn’t think NRAS properties would turn out to be good investments, so you can imagine how my credibility rose after those comments from the Property Manager.

 

But it goes further than that…

 

A couple of years ago an Accountant that I was working with at the time had suggested to me that according to his research, mining towns were a great investment with house prices rising quickly and rent going through the roof. These were properties that were substantially Positively Geared. Rents for example in Moranbah Qld had recently risen to $2000 per week.

My advice to him and to our mutual clients was that the situation was both unsustainable and likely to attract too much attention from Builders wanting to cash in.  That attention would create an over-supply of properties and hence cause a catastrophe of price collapse.

Well I saw the other day that rents in Moranbah were down to about $300 per week for a house that depending when in the boom you bought it, you might have paid between $500,000 and $1m to buy.

The going price for such a house today is under $400,000 if you can find a buyer.

So what does all this tell us?

And more importantly what lessons can we learn from this experience?

Property investment can be easy but just as easily it can be quite complicated. We all feel we know property because we have all grown up with it. We have all played Monopoly and we think it is that simple. Throw the dice, land on a property, buy it and collect the rent.

I would say that from my experience property investment today is more like Snakes and Ladders.

 

Property is a great investment vehicle with many advantages over other investments but wherever there is a great opportunity there are even greater opportunists.

 

There are some good property investments out there that will help you grow your wealth but there are also some Snakes that if you land on one will take you back to start all over again.

 

My final word on this subject is "Be careful what you buy and who you get advice from..."

 

Graeme Clark

www.ipfinders.com.au

1300 131099

 

 

 

 

 

Life expectancy is one of my pet subjects and I read an interesting article the other day about medical advances to watch in 2014.

They include making body parts in a 3D printer and in the fight against cancer, cancer immunotherapy, where our body’s immune system is taught to fight the cancer without chemotherapy. Read the full article here, it’s very interesting…read more

I am fascinated not only by how dramatically our life expectancy is changing, but how far behind our collective thinking is to this. We are going to live a lot longer than any other generation.

Every generation lives longer than the previous but in the past that has been by just a few years. But now we are looking at medical advances that will have us living 20 -30 years longer.

It is one thing to live longer but that brings in a huge problem that everyone seems to be ignoring… Our money needs to last longer, too! Or we will simply run out of money and the current pension scheme won’t be able to handle it.

Many of us will live into our 90s and some well beyond that. So how can we build up enough reserves for these decades in retirement?

If Joe Hockey gets his way and we retire at 70 and we live beyond 90 with a modest income of $50,000 that means we need to have more than $1,000,000 in savings or super. Make that retire at 65 and live to 95 and it becomes $1.5M… and if you would like more than $50,000 a year to live on, well it becomes a very big number indeed.

How can we make the money last that long?

The importance and significance of these questions is amplified when you consider that our entire retirement system is built on a superannuation system that pretty much stops growing in value the day we retire and start drawing on it.

Even more interesting is the fact that high profile researchers openly talk about the possibility of a 20 year bear share market where our life savings would not grow at all for that time.

It’s not all bad news though… If you plan to LIVE more than 10 years then it’s not too late. We can still do something about it!

Some of our clients were over 60 when they started.

We all need to consider “Future Proofing” our retirement plan and to do that we need to take more control over it.

Our next few seminars will be about just that:

How to Future Proof your financial future?

What you will learn:

1. How much money do you need?
2. Why is property totally different to shares when it comes to your retirement income?
3. Investing in property inside and outside of Super.
4. What is the difference between a normal super account and SMSF?
5. Who should consider an SMSF?
6. How to set up your own SMSF?
7. What are your responsibilities?
8. What are the risks?
9. Why invest in property in a SMSF?
10. Case Studies

There will be a FREE Information Bulletin (hand out) available at the end of the seminar “Why use your SUPERANNUATION to buy and INVESTMENT PROPETY”.

This seminar should give you the knowledge you need to decide whether a property in a SMSF is right for you.

These seminars are 1hour 45 minutes (incl Q&A) and based in our Adelaide office boardroom.

Call 1300 131099 if you would like to attend.

For more information about property investment go to:

www.investmentpropertyfinders.com.au

THE ABOLITION OF THE MINING TAX AND WHAT THAT MIGHT DO FOR PROPERTY INVESTMENT...

If you look at the successful investors of our time, the Warren Buffets, Donald Trumps and others you will notice a number of common attributes. The most obvious of which is that they are able to find investments that are under-priced.

Some people describe that as the “Contrarian Principle” of investment. That is that they invest in what the popular opinion says is not a good investment.

But if you think that through you will come to the conclusion that that is not a good strategy for making money because there are plenty of investments that are not good investments today and will still not be good investments in the future. Just as there are investment that we could have made 10 years ago that are still not good investments today.

I don’t think that what successful investors do is “contrarian” at all. What they have is the ability to recognise change before it happens and have the self confidence in their ability to back themselves and to make a move before others and before the situation starts to improve.

That ability to recognise change comes from keeping themselves informed and thinking through what is a likely outcome from the information they are receiving.

One thing I find interesting about the investments that successful investors make is that if you look at their decisions objectively and with the benefit of hindsight, they seem quite obvious.

On that basis what do you think is the likely outcome of this information?

What that says to me is that the mining boom is likely to be “on again” sometime in the next few years. The follow on from that is likely to be that property prices in towns that are benefiting from any such mining boom might increase and perhaps substantially.

But then mining towns are high risk because they are too dependent on one industry for their long term viability. If the mine closes then the town dies. However there are towns that are benefiting from substantial infrastructure spending to allow for the processing and export of the various resources that are being mined.

These towns are likely to survive the ups and downs of a “Boom or bust” industry because the infrastructure that has been put in place like hospitals, schools, shopping centres, roads and housing subdivisions will remain. Other businesses will grow and thrive within the town because of the infrastructure that has been provided.

Food for thought…

Give us a call if you are considering investing in property sometime in the next 12 months.

1300 131099

or email <Click Here>

 

The most common mistakes people make when considering property investment!

One of the most common mistake people make when considering an investment property is:

They think that all property is the same or at the very least they don't adequately consider the differences between one property and another and what effect that will have on their ability to create wealth.

They think that all they have to do is to invest in property and they will make money...

And to some extent that is true... all property will eventually double in value, so they will make money. We all look at our family home and remember what we paid for it all those years ago and think that every property will do that.

Property experts will tell you that property doubles every 10 years...

But that is the average of all properties, so it stands to reason that some will do better than that and some will do worse. The fact is that some will do much worse.

 

The real trick to successful property investment is finding those properties that will double in less than 10 years.

If your investment was to take 20 years to double, then it is not necessarily a great investment and it won’t make you rich... in fact at that rate of growth it won't even keep pace with inflation. (We can show properties where that has been the case)

 EXAMPLES:

Eg. Worse than average (ie. in poor locations):

With a portfolio of 6 properties at $300,000ea. (equals $1.8m in loans)

If that portfolio double in value in 20 years (ie worse than average)

Then in 10 years you have made $900,000 profit. (not bad but...)

Eg. Better than average (ie in good locations):

With a portfolio of only 4 properties at $450,000ea. (still equals $1.8 in loans)

If that portfolio doubled in value in 7 years (ie better than average)

Then in 10 years you would have made $2,570,000 profit.

*Nearly 3 times as much for the same outlay.

 

Note: These examples are just used to show the relative difference and are not intended as guarantees that any property will perform as predicted.

 

A lot of people also believe that Property Marketers all tell the truth... all the time.

Think about it… they want to sell you a property because that is how they get paid.

Are they likely to say to you that the property they have is not suitable to you or that it might not capitally appreciate as quickly as you would like?
 
What I have found is that most don’t actually lie...
They tell a very good story or present compelling information by leaving out crucial facts.

What is common is for them to distract you from the real purpose of investing in real estate which is making money over the long term. They do that by focusing your attention on what I call “Hot Buttons”.

Typical “Hot Buttons” would be things like:

·         High rental yields or Rental Guarantees

·         National Rental Affordability Scheme (NRAS)

·         Government Grants

·         And pretty much anything called a scheme.

*Note: All of those can be very helpful, but they should not distract you from the real purpose.

The first question you should ask yourself should always be:

Would I buy that property, in that location and at that price if it did not have (whatever the offer is)?

In other words; Is it a good investment without the offer?

Then and only then, should you consider what other benefits or “schemes” can make it easier or more attractive to buy or to hold on to for the length of time that you need for it to increase in value to achieve your goals.

If you allow yourself to get distracted by the “Hot Buttons” then you risk overlooking key factors that might mean that you:

·         Pay too much

·         Buy in the wrong location

·         Or have a higher chance of getting the tenant from hell

Most importantly your investment in property might not grow in value quickly enough to achieve your goals and aspirations. And by the time you realise that you have made a mistake, it is likely too late to change or correct your financial position.

Absolutely I think property is a great investment vehicle. It has shown to be one of the safest investment classes particularly through the GFC (see graph above) but always “keep your eye on the prize”, ie the long term creation of wealth through the capital growth of your property portfolio.

But as I have said many times before:
"Where ever there is a great opportunity these is an even greater opportunist"
So be wary...

Call us if we can help… we have been creating wealth through property investment for our clients for nearly 15 years.

 

1300 131099

 

Apartments or houses: which is the better investment?

By Nila Sweeney - 7^th June 2013

Ask anyone who invests in property – and even those who don’t – and they’ll likely have an opinion on the old “houses versus apartments” debate. If this is a question in your mind then read on...

 

When the topic of conversation drifts towards investing in apartments or houses, it usually generates some debate amongst landlords!

It’s often a firmly divided camp, with those who believe that a property’s value is in the land on one side. On the other side, you’ll find those who believe that a property’s individual characteristics – such as location and number of bedrooms – are far more important than simply the dwelling type.

“Many first-time investors assume that houses are always better as investments as they have more accommodation and land,” says Monique Sasson Wakelin, director of Wakelin Property Advisory.

“This may have been true once, but as a growing number of Australians have come to prefer living closer to the centre of town, the patterns of growth in property values has changed.”

She believes that investors who are stuck on this question are often focusing on the wrong thing, as the question you need to be asking is not, “Should I invest in a unit or a house?” but rather, “What type of property will deliver a bigger return on investment in the long term?”

According to the Real Estate Institute of Australia (REIA), there’s not much of a difference in price growth between each dwelling type. Over the past ten years, median house prices have increased by 81 percent, while median apartment prices increased by 72 percent.

"Historically, over a longer time frame, price rises for houses are greater than that for units, [but] this is not always the case over a shorter to medium time frame," a REIA spokesperson says.

"Houses generally, however, require more attention in terms of ongoing maintenance than units do and thus do not always suit all investors. Units have much of the maintenance and care of the building and surrounds undertaken through the body corporate."

Ultimately, there are pro’s and con’s attached to any dwelling type, and the right investment for you will depend on your risk profile, investment strategy and financial position.

It’s also vital that you pay attention to lifestyle trends, adds Wakelin, so you can tailor your investment to suit the area you’re looking to buy in.

“As more people choose to live in inner precincts, closer to work and the attractions of urban life, the land that inner urban properties sit on has become increasingly valuable,” she says.

“Apartments are most likely to be built in the inner urban areas, as they take up a higher share of the land there than anywhere else, and owners of apartments are sharing in the rising value of the land that their buildings stand on… Apartment investors therefore benefit from the appreciating land values, even though they don’t have a direct landholding.”

NRAS - "To buy or not to buy"

Thinking about buying an NRAS investment property... think long and hard first.

In principle NRAS sounds like a great investment...

You buy a property with NRAS approval and place a tenant from a service industry like a Teacher, Fireman or Police Officer at a reduced rent of 20% below market.
In exchange the Govt will give you about $10,000 p.a. (Tax Free) for the next 10 years.

You dont have to be a mathematical genius to work out that a 20% discount is about $60 - $80 per week and the Govt $10,000 pa is about $200 pw before taking into account the Tax benefit. So it is more like being about $260+ before Tax. Sounds too good to be true... that is nearly $200 pw positive cash-flow, so what is the catch?

Well there are some catches, that they don't necessarily tell you about when you are lining up to buy one...

The first one is, there are some fees that you are going to be charged because it is a scheme that needs to be reported to the Govt regularly. Those fees will vary greatly from one organisation to another but let's ignore that for the moment.

Let's start with the type of tenant because it is the tenant that helps you pay the mortgage.

They say that they are aimed at servive industry workers like Teachers etc. but when you look at the maximum income that the tenant can earn under the NRAS rules, you could only get a Teacher, Fireman or Police officer that was working part-time... and only about 50% of a week at that.

So what sort of tenant are you really going to attract?
The answer is unfortunately, in many cases a social housing tenant. And realistically that makes sense... the Govt are not doing this to make the investor rich. They are doing it to provide affordable housing to those people that cannot afford to rent a home for standard rent.

We are getting reports from Property Managers (admittedly in Qld because there are more NRAS houses in Qld) that tenants in NRAS houses are less likely to pay the rent and more likely to do damage. But it will likely be that case in SA and other states equally.
Crazy isnt it... you give people a great deal with lower rent and they abuse it. That is unfortunately human nature.

But that is not the end of the problems with these NRAS houses.
Some of the people that have invested have decided that because of the non payment of rent and other hassles it is not worth the hassle so they have decided to sell the property... only to find that the house is not worth what they paid for it.
We are hearing stories that some of these houses are now worth $50,000 - $100,000 less than was paid to buy them. How can that be?

"Whenever there is a great opportunity there is an even greater opportunist."

What has been happening in some cases is Property Marketers and/or Builders have inflated the price because the deal is so attractive that people will pay more to buy it....
And of course these houses are often in areas that are already either over supplied with properties or in areas that are more affected by recessions and periodic slow downs in property prices.
Hence there may be a higher turnover of properties and therefore a lowering of prices, to make sales.

Prediction: We have all seen the stories of the tenant from hell is a Housing Commission house. Well look forward 10 or so years and i think we will be seeing those stories about people in NRAS houses.
If you have already bought one i hope, for your sake, that i am wrong... at least with yours.

The moral to this story is:
If you want to make money out of property investment you need to buy the best house you can afford and put in the best tenant that can afford your rent. Then will get consistent growth.
Where are those houses?
Generally closer to the CBD of the major cities. It is those areas that are less affected by the economics of downturns because the people that live there are in higher paying jobs and less likely to be laid off. Therefore they are in a better position to pay your rent. That means that you have less hassles and will make more profit over time.

If you would like more information on how to find a property that will make money for your future give us a call...

On 1300 131099