Glossary

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Your Current Position

This describes your current net worth. To calculate your net worth, list all your assets then subtract your liabilities. Net worth is the true measure of wealth. Until you know exactly where you stand, it is very hard to build on that and measure your progress. As a free gift, you can download our net worth worksheet by clicking on the following link: net worth worksheet

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Your Future Goals

The mind is a goal-seeking device; with no goals there is no direction, with no direction there is no motivation, with no motivation there is no determination, with no determination there is no achievement, non-achievement causes frustration, procrastination and depression.

Here are some tips for goal setting:

1        If its not in writing, its not a goal 
An unwritten want is a wish, a dream, a never-happen. The day you put your goal in writing is the day it becomes a commitment.

2        If its not specific, its not a goal
Financial independence is a goal that most of us have but just saying you want to be financially independent is too broad a definition. It needs to be more specific. It’s commonly accepted that the deadline for financial independence is at least by retirement (if not earlier!)

Now, the best definition of financial independence I have heard is to have enough money to do the things that you want to do without having to work for it. Of course, that figure is different for everybody.

So, if you earn $50,000 today and believe you could comfortably live on 80% of that when you stop work ($40,000), therefore your specific goal would be “When I stop work I want to have the equivalent of $40,000 per year.”

As a free gift, you can download our financial goals and objectives worksheet by clicking on the following link: financial goals worksheet

“We choose to go to the moon not because it is easy, but because it is hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win.”

-- John F Kennedy-

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Invest in the Right Place

In analysing which property areas will have the best potential for total returns, we have attempted to balance both short and long term factors. ‘Total returns’ is a blend of capital growth (which we refer to as the invisible), and the combined returns of rental income and tax benefits (which we measure as the visible).

Naturally, the visible returns are one of the most important aspects of a successful property investment. Since it is rare for capital growth to happen overnight, an investor will need to be in a position to cashflow the property or ‘hold’ it until such time as it develops a positive cash flow, Consequently, if the visible returns are low, the property may be too expensive for the investor to hold the property long enough to benefit from the capital growth.

In the case of an investor who has not analysed the ‘numbers’ on their property, they may find themselves having to sell prematurely and possibly lose some of their hard-earned money. Investors may take heed from a simple builders rule “measure twice, cut once!” – advice that is equally sound for property investment!

Most successful investors allow themselves a minimum timeframe of 5 to 7 years to allow for a property to ‘mature’.

At the time of writing, it is unusual to find a property that offers both a high rental return and a high capital growth. Most high priced upper market suburbs are historically top capital growth performers; however, rental returns from these areas are abysmal. As a contrast, country properties or suburbs on the outskirts of a city historically have higher rentals but lower growth rates.

If you agree that the best property is one that is in the most demand, then the largest, most consistent demand exists in the market sector that appeals to what demographers call ‘Middle Income Australia’. Typically defined as mum, dad, two kids and their pets, which we will call “Ditk” (Double income two kids). Through their sheer weight of numbers they create both rental demand and capital growth for their property of preference.

The next component of this Rubik’s Cube of successful investing is selecting the right price range.

The rental market is mainly driven by affordability with the rule of thumb suggesting that the asking rental should not exceed one-third of this group’s income. Banks use this guideline when assessing loan applications; they allow 1/3rd of income for taxes, 1/3rd for living expenses and 1/3rd for mortgage or rental payments.

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Invest in the Right Type of Property

The next component is the type of property for our target market.

This market sector has a definite preference for detached housing that is a house with a backyard for the kids to run around in, this is the safe and secure environment most Australians enjoyed when they were growing up and there is a nesting instinct that wants parents to provide the same for their own children.

This market has a strong preference for a house with its own backyard

When given the choice, most home hunters in this sector have a further preference for new or at least modern homes.

As well as this type of property being more attractive to the target market, there are two further advantages a newer property has over an older property. Firstly, an older property may require heavy ongoing maintenance which can seriously diminish the rental returns - items such as replacement of hot water systems, carpets, etc can be expensive. In addition the cost of major repairs or renovations such as a new roof, kitchen or bathroom are regarded by the Tax Office as capital items and therefore the cost of these are only deductible on the sale of the property. Older properties can also be at a disadvantage from obsolete construction materials (ie asbestos) or design.

The third major factor in the age of the property is the “sleeper” return, that is, that newly constructed properties qualify for additional tax incentives for building write-off and depreciation of fixtures and fittings. Essentially, what this means is the larger the property the larger the tax deductions, ie a large four bedroom home would qualify for larger deductions than say a studio apartment. 

These two components can mean thousands of tax dllars being refunded to the investor and further maximising their returns.

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Your investment strategy

When building an investment property portfolio it is of vital importance that a plan or strategy is thought about before any irreversible decisions are made. This will allow you to maximise current and future opportunities

The main considerations are:

1. What is the most appropriate vehicle to place the property in, whether it be in your own name/s or in a trust?
2. Financial structure and types of loans. 

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Leverage and Compounding Returns

There is a very simple principle behind successful real estate investment. The principle is explained here courtesy of Wikipedia.

Leverage is a factor by which lever multiplies a force - it is therefore related to mechanical advantage. The useful work done is the energy applied, which is force times distance. Therefore a small force applied over a long distance is the same amount of work as a large force applied over a small distance. The trick is converting the one into the other. The requisite mathematics was developed in the third century B.C. by Archimedes.

The simplest device for creating leverage is the lever. A lever is a stick which rests on a fulcrum near one end. When you push the long end of the stick down a long way, the short end moves a small distance up with great force. With this device a man can easily lift several times his own weight.

In the investment world leverage, or gearing as it is also known, is applied by using borrowed funds. These borrowings are paid for in turn by the investor, the tenant and the Tax Office. This concept allows you to hold one or  even multiple properties for a relatively small investment. The real return for the investor comes from the capital growth of the property where even a small percentage increase in capital value can mean quite significant overall return on investment.

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A Unique and Proven Formula

Over the years, through trial and error, we have a developed a process that has worked exceptionally well for all participants. It involves what we call looking at the inverted triangle which takes into consideration location, property type, property value, types of suburbs, community facilities, ownership structures and financial structures.

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Why does the Government give tax concessions to investors?

Property investors play a very important role in the Australian economy. With property prices rising to all –time highs, it has never been harder or more expensive for people to own their own home. This can create pressure on the Government to provide more affordable housing.

With the public housing waiting list growing each year, and a contracting federal budget, it makes sound economic sense for the Government to provide incentives for the private sector to invest in this area.

Whilst borrowings to purchase any investment property are fully tax deductible, the Government provides additional generous tax benefits that favour investors who purchase new housing as a new property adds to the existing rental supply.

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