SEVEN CRITICAL MISTAKES IN PROPERTY INVESTMENT

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1 SEVEN CRITICAL MISTAKES IN PROPERTY INVESTMENT Introduction Seven critical property investment mistakes There are some incredible property investment opportunities in 2014; with key growth areas positioned to experience strong capital growth. Property investment is not just for the rich; it is how everyday Australian s become wealthy. It is timing in the correct locations and time-in the market that has proven to be a safe and secure investment for over 100 years. It is a supply and demand problem, with Australia s 300,000 house shortage expected to be 600,000 within 5 years due to population growth in key locations along with a shortage of developed land, and house prices and rents continuing to rise. We know property is the answer to secure our financial future, but many people make common mistakes:

2 Seven (7) Critical Mistakes in Property Investment 1. Incorrect Financial structures 2. Lack of planning and the decision process 3. 65% of people buy at the top of a property cycle 4. People get sold over priced apartments on hype and glossy brochures 5. Lack of Education on the 6 critical elements for maximum returns 6. Buying old established properties 7. Invest into regional areas with low capital growth criteria 1. Incorrect Financial Structure Finance is the key to property investment, although this is the first mistake most people make, their belief is that they cannot do it, they cannot afford to invest in Property. The fact is we all cannot afford to NOT invest in property. Most Australians do not have enough money in their super for retirement, compounded by the fact that Australians are the laziest investors in the world. Canberra University research found in 2010 that 86.6% of Australian s will retire on a poverty income of $16,000 per annum. I don t know about you, but I certainly cannot live on $16,000 per annum, while having a fun and comfortable retirement with enough left over to give to my children and grandchildren. Australian Bureau of Statistics found that out of 100 people at retirement age:- 17 will be Dead 75 will be Dead broke 4 will be in the rat race still trying to survive 3 will be comfortable 1 will be living the dream, with financial freedom Ask yourself these questions today: Where do you want to be when at retirement age? Would you like to retire sooner? Well based on history there is no doubt property is the answer, it has doubled in value every 7 to 10 years for over 100 years. With the population growth in Australia and the shortage of places to live, how can this change? The disbelief that most people make is when they see the money left over from their pay packet they think, how can I possibly invest in property? If you had to save the money each week it would be incredibly hard, as you cannot save yourself to wealth. The beauty of Property Investment is someone else pays. The Government pay approximately 23% per week through tax benefits once the correct ATO forms are completed and given to your employer. This means you can get the tax benefit each pay packet rather than at the end of each financial year.

3 The tenant pays approximately 72%. This is based on the investment property being in the correct location to return a strong rental yield. This leaves you with approximately 5% to cover. These figures are a general example and we recommend you talk to a financial advisor and your accountant to get the correct figure for you, as everyone circumstances are different. This is based on things such as your income, Marginal Tax Rate, Rental income, Property Value and Interest Rates. The fact is nearly everyone who has equity in their family home or cash for a 5% or 10% deposit plus costs can afford to invest with little out of pocket expense from the family budget. In most cases everyday Australian s can do it on a lunch money budget. Safe and Secure Financial Structures Financial structures can keep your family home safe and secure, incorrect structures can put it at risk. If you have equity in your home, we would advise you speak to a Mortgage Broker to create a financial structure, such as a line of credit out of the equity in your home. If you have equity in your home of for example, $100,000, and are not using it, it is like burying the money in the back yard. If someone came up to you and said here s $100,000. What would you do with it? I hope you would invest it, rather than go on a long holiday, buy a big TV or a new car. Your own home is a non deductable debt, so why not transfer the equity into an investment property and have two assets growing for you. Importantly though if you have used your Line of Credit for the 5% or 10% deposit and costs for an investment property and you borrow the 95% or 90% from a different bank, with the investment property as security for itself, not your family home - we call that a firewall between the investment property and your family home. It is very important you use an Investment property focused Mortgage Broker, as Banks and basic Brokers will cross collateralise your family home with the investment property because it is easy for them and they use your family home and the investment property for security. What this means in plain terms is if you default on the investment loan the banks can sell whichever home sells first. If you set it up with a firewall they will sell the investment property and leave your family home safe and secure. Interest Only loans are the answer for investment properties, as the debt is good debt and is fully tax deductable. Your debt stays constant and as the investment property gains capital growth you gain equity, which = profit. Summary We all need to take action if we are going to secure our own financial future Everyday Australians on an average income and above can afford to invest Someone else pays Tax Benefits and Tenants Use the equity in your home to build your wealth Use little to none of your own money, lunch money budget Safe and Secure with a Firewall loan structure

4 We recommend you sit down with one of our Mortgage Brokers/Financial Planners for a free (Normally $350) no obligation consultation. They will look at your personal situation, lifestyle and most importantly your Cash flow to work out; 1) What is your current facility, is it what you require and will it work best for you and your financial situation. 2) How to pay off your home in record time using your Cash flow, taxes and income. 3) How can you save money? Is there a way to improve your current financial position? 4) How much money can they save you by just looking at your bank fees and Interest Rate? 5) Are you maximising your potential tax benefits using the ATO s policies? 6) How can you utilise your tax to build you wealth? 2) Lack of planning and the decision process The first step to investment is the decision process. You first need to know why you want to invest, what your financial goals are, when you would like to retire, how much you would like to retire with, where you would go, what you would do, what you have. Without a known outcome it is hard to make a plan and then stay on track to achieve your goals. Let s have a bit of fun. Give yourself 3 minutes and write down 10 things you would do and own if you had unlimited funds. When would you like to stop working, or at least living a life of choice not chance? When would you like to retire or have a life of choice not chance? Put a date on it, not just an age.

5 Fantastic- once you have a date in mind and an idea of what you want you can start planning your strategy for success. You can do it - do one thing and do it well. If you invest in the correct properties over a 10 to 15 year period you can have up to 6 investment properties passively, using the 8.5% capital growth that Australia s property market has achieved for over 100 years and you could be worth over $3,000,000 in equity and have an annual income of $60,000 to $70,000. All on a lunch money budget.. If this sounds good to you then start today, get committed to your financial future and follow the three steps to success: 1) Decide you want to do it 2) Get educated 3) Invest and duplicate You can do it; property investment can be easier than you may think. For a Personal P rosperity P lan talk to one of our consultants and we can look at your individual circumstances, importantly educate you in the inner knowledge of Property Investment. We can surround you with property focused financial advisors, mortgage brokers, property managers, solicitors and accountants. Our associated professionals make it easy for you and save you time and money.

6 3. 65% of people buy at the top of a property cycle There are two expressions in Property, Timing and Time-in the property market. Most Australian s wait until the top of the property cycle once they have heard how so many others have done well, and then they advance. The problem here is they miss out on the exponential growth which normally occurs in the first 65% of the cycle. For those who do invest before the herds, they often gain up to $100,000 to $200,000 in a short period of time which enables them to duplicate sooner and invest in their next property. Often each major city cycles at different times due to their economy, population growth, Government infrastructure etc. You need to ensure you invest in the correct location at the correct time. At Prosperity we have a research team in the key capital cities for growth, to ensure you have the optimal opportunity for capital growth. The Time-in the market expression is simple, get in the market today or as soon as possible and let time work for you. The wealthy become this way from buying and holding. If you want to buy a house, renovate it then sell it then we can also help you, with our building consultancy service however, this is not investing this is being an entrepreneur. The strategy that is lower in risk, a lot less stressful, does not use up your most important asset - your time - is a buy and hold strategy. Use the power of compounding growth (Einstein said Compound growth was the 8 th wonder of the world) and build passive wealth If your goals are higher you can do this more aggressively and skyrocket your investment plan by investing in two or three properties from the get go. This is only advised if you have sufficient income and equity in your home or you have cash up front for deposit and costs. Again we would advise you speak to a professional first, after the GFC the banks are much harder on investment loans, therefore if they believe your Debt to Service Ratio (DSR) meets their criteria then you can afford the investment. 4. People get sold over priced apartments on hype and glossy brochures One thing that stops people from really achieving their financial goals is investing poorly to start with and not achieving the results they were promised. This happens when they buy in poor locations, with a poor quality build and therefore attract poor quality tenants. All of this ends up being a disaster and they lose their traction and sell the property for a financial loss and resulting heartache. This is where getting the correct education is crucial, so you can make astute, informed decisions. We see so many people who get sold properties (specifically apartments), at inflated retail prices due to glossy brochures, a good sales pitch, inflated rental returns and pressure sales. There is no doubt the correct apartment in the correct location, at wholesale prices can make a good investment, and has strong depreciation tax benefits. Although by saying that we all know land appreciates and buildings depreciate.

7 You want to have a minimum of 35% to 40% land content in your investment, which is found in most house land investments. You will find high rise apartments are only 5% to 8% land content, therefore your appreciable investment is minimal. Don t get sold an investment, do your due diligence and invest in property that is house and land. By saying that there is some apartments that do stack up to being a quality investment, you just need to drill down on the ingredients to maximum returns before jumping in on all the hype sales agencies have to say. 5. Lack of Education on the 8 critical elements for maximum returns As mentioned above most people invest on hype and emotion. Before you invest get yourself educated on the inner knowledge of property investment. Then you can make informed decisions, have success, duplicate and gain traction, experience the power of compounding capital growth and retire sooner with real wealth. There are 8 critical elements one must understand to have success. There are many aspects to the six elements, and if you make the time to come in and see one of our advisors, attend a weekly workshop, Webinar or Monthly information night we can provide everything in full detail. So what are the eight elements for success? To gain maximum returns, Maximum capital growth, Maximum rental income and demand and Maximum tax benefits you need to have all the following six elements in place: 1) Land 2) Timing 3) Location 4) Affordability 5) Demand 6) Finance 7) Quality built properties 8) Demographic Please get yourself educated, read books, use and attend our free, no obligation educational services before you do anything. You would be surprised, most people spend more time researching on a TV purchase then they do on property they invest in, and wonder why things did not work out for them. 6. Buying old established properties Many investors jump in and buy an old property in an established area. Again you can make money, but it can be a much higher risk which comes with less benefits and a high chance of potential problems. When you invest in a property pre 1987 you cannot depreciate it, so there are minimal tax benefits, your interest, costs and the money you had to spend renovating, extending etc. This also takes a lot of your personal time and money, which you need to come up with, and you also have to hold the cost of the interest on the entire property while you renovate it.

8 When you buy an older house, you are often buying maintenance issues. Like all older assets they cost you money, which again is affecting your returns. Older affordable properties are often in poorer locations therefore having less rental demand which can = less rental yield and problem tenants. When investing in older properties you are relying on Median house price growth to provide you with capital growth. Stamp duty on an existing property is for the total value of the property, this is another unwanted cost. In reflection when you invest in new properties (house and land packages) you only pay stamp duty on the land, saving you thousands. In the correct Blue Ribbon Estates you gain with median house price growth catapulted by infrastructure growth and population growth, new large homes setting high Established Capital Bench Mark around you all driving up the growth in your investment. New homes in beautiful locations attract a high demand for tenants. You can have a choice of who is renting your property, they look after it, and you can ask for higher rents. Buying new there are no maintenance issues or very minimal that are normally covered by the builders warranty period which in our case is in the first six months after the build - not the BCA s (Building Code of Australia) 4 months, which is standard. Importantly you do not waste your precious time and money, it is stress free, safe and secure so you can sleep at night, when you choose the right builders and developers. This again is where we can help you out with our unique network. 7. Invest into regional area s with low capital growth criteria s Often people want to invest in their home town, so they can drive by their house. You do not drive by BHP if you have shares in BHP. Property Investment is a business and it should not be emotional. Often people want to manage the Property themselves - this is another no no. All this does is cause you problems and take up your time. If you use quality Property Managers and negotiate a respectable fee, then it is money well spent and is fully tax deductable. Another mistake people make is they invest in a mining town again sold on hype, but if that one mine cuts half their staff or dries up, their property is un-rentable and can be valued at less than the debt they owe. Invest in Australia s major cities in affordable, key growth areas with major infrastructure planned and with diversified industries to maintain short term and sustainable capital growth.

9 Conclusion These are just some of the common mistakes. To learn more and to educate yourself on techniques for safe, secure investments for maximum returns with minimal outlay, we welcome you to take up our offer of a free no obligation Personal Prosperity Plan, or attend a weekly workshop/webinar or Monthly information night. Or if you like, call us for a chat. We love to help people! Prosperity Property Advisors Wealth with Certainty Canberra@prosperitygroup.com.au