Webinar Outline Property Apprenticeship Webinar Notes: Session 8 Wheel Of Wealth Positive Cashflow WoW Outline Three Stages Application & Limitations Homework & Reminders Key message from webinar 7 As your sophistication increases, so too does your ability to make higher profits without accepting higher inherent risk. Audit Risk Model AR = IR CR DR Where: AR: Audit Risk IR: Inherent Risk CR: Control Risk DR: Detection Risk Inherent: Existing in something as a permanent, essential, or characteristic attribute: "inherent dangers". (c) PropertyInvesting.com Pty Ltd 1
Inherent Risk: is the susceptibility of an assertion to a misstatement that could be material, either individually or when aggregated with other misstatements, assuming that there are no related controls. Solution Potential Skill Based Profit Problem Level Of Inherent Risk How do you overcome high inherent risk? Control risk Detection risk Investor Sophistication Key reflection from webinar 7 It s hard to fly like an eagle when you are surrounded by turkeys? Are you the turkey or the eagle? Webinar 8: How Many Houses? Key application from webinar 7 (c) PropertyInvesting.com Pty Ltd 2
Step 1: Set Target x number of properties y income per property 100k = 100 properties @ 20 per week net Part One: 11 Second Solution Max Purchase Price = (Weekly Rent 2) 1000 Where did all the positive cashflow properties go? Step 2: Acquire Them! Principle Year 0 Year 1 However, with Australian property prices Annual Rent 10,400 10,400 increasing faster than rents (and causing yields to drop) [Page 8-1] Market Value Yield 100,000 100 10.4% 120,000 100 8.7% Part 2: Make It! If you can t buy it, make it! Creative investing Multi step Part Three: 1% Rule Min ROI = (Interest Rate + 1%) Where ROI = (Annual Rent Purchase Price) 100 Go get em! Retire debt (c) PropertyInvesting.com Pty Ltd 3
Model Concept Explains how to quantify the number of houses, and profit per house, needed to acquire your required investing kitty. Reveals the relationship between working, investing and passive income generation. Model Quick Recap Leverage Low resistance friction Rolling movement Model Model Model Model Earned Income The Start Trading labour and expertise for income Personal finite resource (time) Limited leverage (business) Y-E=S (c) PropertyInvesting.com Pty Ltd 4
Model Model Model Quick Growth Active investment Identifying and exploiting inefficiencies Requires skill, time and capital Use leverage to overcome constraints Y-E=S Shares Or Property? Knowledge Risk Liquidity Transaction costs Time Shares or Property, or Shares and Property? Model (c) PropertyInvesting.com Pty Ltd 5
Model Passive Income: Dividend Yields (Dividend per share share price) 100 Franking credits benefit ANZ: 5.82% BHP: 2.74% TLS: 8.30% Model Passive Income: Commercial Property Debt free Stable tenant Long lease Recession proof industry Y-E=S 2. Wheel of Wealth Principle A dollar of commercial rent buys more than a dollar of residential rent [Page 8-6] Application: Step One Application: Step Two Need To Survive Desired Pre-Tax Income (Step 1) Need To Be Comfortable Commercial Yield % Need For Extravagance = Req. Investment Kitty (c) PropertyInvesting.com Pty Ltd 6
Application: Step Two Application: Step Three Desired Pre-Tax Income (Step 1) 100,000 = Required Investment Kitty (Step 2) Commercial Yield 8% - Current Savings = Req. Investment Kitty 1,250,000 = Investment Kitty Shortfall Application: Step Three Application: Step Four = Required Investment Kitty (Step 2) 1,250,000 Investment Kitty Shortfall (Step 3) - Current Savings 50,000 Avg. A/Tax Profit Per Deal = Investment Kitty Shortfall 1,200,000 = # Req. Quick Turn Deals deals Application: Step Four Application: Step Five Investment Kitty Shortfall (Step 3) 1,200,000 # Req. Quick Turn Deals (Step 4) deals Avg. A/Tax Profit Per Deal 50,000 Desired Timeframe (in yrs) years = # Req. Quick Turn Deals 24 deals = # Quick Turn Deals p.a. deals (c) PropertyInvesting.com Pty Ltd 7
Application: Step Five # Req. Quick Turn Deals (Step 4) Desired Timeframe (in yrs) = # Quick Turn Deals p.a. 24 deals 10 years 2.4 deals Limitations Less skill, confidence, capital and experience is earlier years Investing is not linear Markets change Impact of taxation Brendan Kelly s ½ Life ⅓ Capital Requirement Time Intervals Required Capital Half the time & Third capital requirement until you get down to 1 year Added in extra capital for lifestyle needs (home, car, etc) End Goal Spilt 1 Split 2 Split 3 10 years ½: 5 years ½: 2.5 years ½: 1.25 years 1,350,000 ⅓: 450,000 ⅓: 150,000 ⅓: 50,000 Split 4 1 year : 40,000 Variables & Reality Check If it seems too remote, reconsider: Profit Per Deal Number Of Deals Bigger Picture Your Overall Money Goal Your Overall Time Goal Spreadsheet Calculator (c) PropertyInvesting.com Pty Ltd 8
Homework Forum Post Explain the Wheel of Wealth concept, and explain how it works to three people. What has been your biggest A-Ha moment from this webinar / study?; or Write a message of encouragement to someone who has made a post Take Aways Spend five minutes thinking through: What you have learned? What will you change? What will you do? Who will you engage? Make at least one forum post each week! Next Webinar Topic Session 9: Monopoly Theory See you then! (c) PropertyInvesting.com Pty Ltd 9