Steve book 2017 Final Print Version PDF

GETTING STARTED Resort style facilities: • gymnasium, • swimming pools, - 99 -

GETTING STARTED • spas, • lifts and concierge. - 100 -

GETTING STARTED This is fantastic if you are a tenant. But as an owner, the downside is high Body Corporate fees12 and the cost of insurance. The cost of running and maintaining the building can also get out of control – in some cases costing each owner up to $6,000 per year. The other concern I have is that if the building is under construction, all the units will settle13 at about the same time. 12 Body Corporate fees: the fees paid to the governing body of a block of units or townhouses usually made up of the owners, used to cover the running expenses, insurances and maintenance of the complex. 13 settle: Settlement simply means “to have something finalized”. In the case of a property purchase it means to finalize the purchase. The property is then transferred to your name and the property is now yours. - 101 -

GETTING STARTED Now think of this, if 100 to 200 units are settling at the same time and say 50% of those units had been sold to investors and they all require tenants, then you could find yourself waiting up to 6 months to get your first tenant. - 102 -

GETTING STARTED Why House and land Everybody loves house and land packages. They grow well in value and are great to live in with your family. In some cities of Australia where you can still purchase house and land packages within 40 km of the CBD at a reasonable price – I would say go for it. What are you waiting for? House and land packages are usually built in new estates. Normally about 40 minutes to one hour or more out of the CBD. - 103 -

GETTING STARTED New land estates are created, In most cases, close to work, shopping centres, cafes, gyms, schools, railways, buses and night life House and Land package. - 104 -

GETTING STARTED Renovation There is a fantastic surge in would-be renovators due to the hit TV shows ‘The Block’, ‘DIY Rescue’, etc and it seems to have become the flavour of the month. Yes, you can make great money renovating. It can also become a nightmare if you don’t know what you are doing. - 105 -

GETTING STARTED Budgets can blow out and often do. It’s also very time consuming. So, before you consider doing any renovations really study and get the skills required. It’s much easier to purchase a property someone else has already professionally built. - 106 -

GETTING STARTED Commercial Most investors, including me, are drawn to commercial property because of the higher rental returns at 8 to 10% of the purchase price. But with the higher rental return can be the possibility of a longer vacancy period. Even though we have one of the best economies in the world, still 80% of businesses go broke in Australia within the first five years of operation. That means commercial property investors have an 80% possibility that the tenants will go broke. Scary odds. - 107 -

GETTING STARTED How many times have you seen a commercial property vacant for months, or even years? Think back in your own life, how long has a residential property next to you stayed vacant? Usually, not very long. So, as opposed to the above, why do I recommend you start with either, a house and land package, town house, villa or duplex? - 108 -

GETTING STARTED They have the lowest risk factors for you, as an investment; • Easy maintenance. • No lifts, gymnasiums, pools, concierges to generate high Body Corporate fees. • Small complexes are easier to rent when completed and usually easy to keep consistently rented. • No long term vacancy periods. • Located closer to the CBD where the rental market is stronger. • A stronger secondary market if you need to resell. What about an old property versus a new property? - 109 -

GETTING STARTED I’m not saying that you can’t make a lot of money investing in an old property, but buying a second hand property comes with a slightly higher risk and is more suited if you are a property trader or a more experienced investor. Firstly, when it comes to investing in an old property there is no warranty on the building. Although you can arrange a building inspection and a pest inspection, it does not totally protect you. Stoves can pack up. - 110 -

GETTING STARTED Hot water systems, gutters and plumbing may need maintenance, and generally second-hand properties can cost you thousands of dollars unexpectedly. Note: • A new property comes with a six year builder’s warranty for any major defects. • Termite warranty. • Normally a 1 to 3 year warranty on items such as stoves, dishwashers, air conditioners and hot water systems. - 111 -

GETTING STARTED Therefore you can feel relatively safe that you won’t have to spend very much money on maintenance for the first 5 to 10 years. Secondly, you will increase your market of potential tenants as most people would prefer to rent a new property compared to second hand if given a choice. Ask yourself what you would prefer, if you were renting. Thirdly, and very importantly, the tax benefits on a second-hand property, are greatly reduced. The extra money you have to pay out of your pocket each week may make it too expensive for you to purchase. The extra tax benefits achieved from the ability to claim depreciation14 on the cost of building construction and fixtures of a new property goes a long way to help you fund your investment. And in most cases, can make the difference of being able to become a property investor or not. 14 depreciation: the reduction in value of property building plus fixture and fittings due to wear, tear, and decay. The tax department allows certain tax deductions on the depreciation amount. Conditions apply. - 112 -

Chapter Eight Understanding Finance Another key factor of why 94% of Australians retire broke is, I believe, their lack of understanding of finance. When I was growing up, the general education about money and finance was to: • leave school, • get a job, • buy a home, • pay it off, • stay out of debt and • save what’s left. Sound familiar? Little did I know it was this finance education that was sending me, along with the other 94% of Australians, to financial ruin. It worked back in the post-war years, of the late ’40s and early ’50s and was probably the right thing to do then. - 113 -

UNDERSTANDING FINANCE But unfortunately, this type of financial education is still being passed down, from generation to generation and is not a successful method of living life today. Just saving money to become wealthy is all but impossible. If you don’t believe me, just look at all those people who are retiring today, who have contributed to their superannuation for the past 20 to 30 years, who are now retiring with barely enough superannuation to last between 5 to 10 years in their retirement. - 114 -

UNDERSTANDING FINANCE Actually, the opposite is true. In this day and age, it’s borrowing money that will help you create wealth – not saving! But it’s also the purpose of the borrowed funds that counts. Most people have mastered bad debt, such as credit cards, cars, furniture, etc. These things have no income and no tax benefits. So you repay 100 % of the loan plus all the interest by yourself. Once you’ve paid it off, the value of those purchases can be worth between 10 to 50% of their initial cost. As most people have had years of experience with bad debt, they start to classify all debt as bad. Learning to master debt is a major factor in how much wealth you can create for your family and yourself. Borrowed money should be used for income-producing assets, like property, that will give you an income to help repay the debt. The asset should also have the potential to grow in value (capital growth15). 15 capital growth: increased value of a property over a period of time. - 115 -

UNDERSTANDING FINANCE Have you ever heard the saying: “Money makes money”? Whoever said that it had to be your money? It can be the bank’s money. - 116 -

UNDERSTANDING FINANCE The wealthy people in this country have mastered finance. You see, they understand finance is their greatest friend in their quest to build wealth. Poor people think finance is their worst enemy. Can you see why 94% of people stay broke? They are operating on wrong information and never questioned what they’ve been taught about finance. It’s your borrowing capacity that can make you wealthy. It’s that simple. Let’s say you could borrow 10 million dollars from the bank today to invest in property and you could comfortably afford the monthly interest payments. If property continues to double in value every 7 to 10 years, then you can see that the properties will be worth 20 million dollars at that time and your profit, if you sold those properties then, would be around 10 million dollars. That’s a lot of money! Well, the banks may not lend you ten million dollars right away, but if you wish to, you can build up to it on a gradient. You see, going to work and making money will give you a certain borrowing capacity. If you are not using this - 117 -

UNDERSTANDING FINANCE opportunity to borrow and are staying out of debt, based on false information, you could be costing your family and yourself dearly. Now there are some very strict rules to follow. Just don’t go on willy-nilly borrowing money either. Get some good financial advice from an experienced advisor on how much you can comfortably afford to borrow. I recommend you use an experienced finance broker when you require a loan, as they deal with most of the money lenders (banks) and can help you locate the bank that will give you the best deal. The key is to build your property portfolio comfortably, not in a mad rush. Don’t take wild risks. Find out how much you can borrow and easily repay and don’t go in over your head. Be conservative and start there. As the property value and rental increase, review your financial position and if it’s comfortable then add another property to your portfolio. - 118 -

Chapter Nine What is Negative Gearing? By now, you have heard of the terms negative gearing, positive gearing and neutral gearing. But what do these terms really mean? Let’s take the key word “gearing”. The word gearing refers to how much money you have borrowed for your investment purchase, compared to how much money you have personally put in, which is called your equity. If you borrowed 100% of the cost of the investment, you would say you are highly geared or another way of saying it is, you are highly financed. Now put the words “negative”, “positive”, and “neutral” in front of the word “gearing” and it tells us how you have structured your finance from a personal weekly cash flow position. Put simply, “negative gearing” is: when the costs of owning your investment property, are higher than the rental income received, so you have to put some of your own money in to make up the shortfall difference. - 119 -

WHAT IS NEGATIVE GEARING? Therefore, your income is “negative”. “Neutral gearing” is when income coming in from the rental of the investment property, is equal to the total costs incurred in ownership. - 120 -

WHAT IS NEGATIVE GEARING? “Positive gearing” is when the rent received on your investment property is higher than what it costs you to own. Therefore, you are making money. Over the next few pages, we will go through an example of negative gearing. This will give you a basic idea of how most of your investment property is paid for by the tenant and the tax man. We will use a sample property at say $500,000 with a purchaser’s annual income of $90,000. - 121 -

WHAT IS NEGATIVE GEARING? Let’s see how your new partners - the tenant and the tax office - can help you to own an investment property. The cost of property investment is broken down into two parts: 1. The purchase costs: How much money you will require to acquire your investment property, and; 2. The ongoing costs: Now that you own the property, how much will you, personally, need to pay each week, after the rental and tax rebates have been received? Let’s look at the approximate purchase costs first: 1. Property Purchase price $500,000 2. Stamp Duty16 $ 18,000 3. Solicitors’ fees $ 1,500 4. Loan costs $ 1,000 Total purchase costs $520,500 You will require a $520,500 loan to purchase a $500,000 investment property, including all costs. 16 stamp duty: is a State Government tax on the purchase of property. The amount due will vary slightly from State to State. - 122 -

WHAT IS NEGATIVE GEARING? The following are the approximate annual costs you could expect to incur on a $500,000 investment property: (Based on an interest-only loan of $520,500 x 4.5%) 1. Interest on the loan $23,423 2. Council rates $ 2,500 3. Water rates $ 1,000 4. Property management fees $ 1,500 5. Property building insurance $ 900 6. Landlord insurance $ 350 Total yearly costs: $29,673 - 123 -

WHAT IS NEGATIVE GEARING? Now, if this was your family home, you would have to pay 100% of those costs, but as an investor you have two other partners who are pitching in financially. Firstly, you will receive a weekly rental on the property from the tenant. Let’s say $442 per week over 50 weeks, to allow for some vacancy. - 124 -

WHAT IS NEGATIVE GEARING? Total yearly rental would be approximately $23,000. Now deduct the total rental received, from expenses to find the yearly cash shortfall; Total Expense $29,673 Minus Rent Received — $23,000 _______________________________________ Shortfall $6,673 The yearly cash shortfall, on the cost of ownership of an investment property is 100% tax deductible. - 125 -

WHAT IS NEGATIVE GEARING? In addition, on a new property, you can also claim the depreciation on the cost of building construction and on the fixtures and fittings. Tax deductions: $6,673 $4,500 1. Yearly shortfall $4,000 2. Depreciation on building construction 3. Depreciation of fixtures and fittings $15,173 Total Tax deductions - 126 -

WHAT IS NEGATIVE GEARING? Okay, you now have a $15,173 tax deduction you can claim from your current taxable income. Current salary $90,000 Current tax payable $22,000 Current salary MINUS $15,000 in Tax deductions New taxable salary $75,000 New tax payable $15,922 Your tax refund $6,078 Note: Current tax payable - New tax payable = your tax refund. If you are an employee paying your tax as you get paid, you can claim your refund of $6,078 in advance, using a Tax Variation Form, you will receive your tax refund in your paycheck each week, fortnight or month, depending on how often you receive your pay. - 127 -

WHAT IS NEGATIVE GEARING? If you are paid weekly simply divide your tax refund of $6,078 by 52, which should approximate to $116 per week extra dollars in your pay packet. In summary: $29,673 $23,000 Total yearly costs $ 6,078 Total yearly rental Tax rebate $595 Total yearly shortfall Divide the total shortfall by 52 weeks = $11 per week, in this example. This is how much you will need to contribute from your pocket each week, to the total cost of this property. - 128 -

Chapter Eleven A Step by Step Guide to Purchasing Hopefully by now you should be excited about the benefits of property investment and are planning to purchase an investment property. So what happens next? In this chapter I have outlined a simple step by step guide to what you should expect to happen during the different stages of your purchase. Step 1: Finance I recommend your first port of call is your finance specialist to find out how much you can comfortably afford to borrow. - 129 -

A STEP BY STEP GUIDE TO PURCHASING Unconditional finance approval can take from 1 to 6 weeks depending on how busy the lenders are, so get your finance application in straight away. There is nothing worse than finding the perfect investment property and losing it because you can’t get finance approval in time or the banks won’t lend you the required funds. So be prepared and have your finance application at least submitted with your selected lender. Your finance specialist will usually be able to give you an estimate of how much you can borrow, what amount of money you will have to put in each week out of your own pocket and when the loan is likely to be unconditionally approved. Your lender may require some of the following documents for each person on the finance application form: - 130 -

A STEP BY STEP GUIDE TO PURCHASING • Driver’s Licence • Passport • Birth Certificate • Last 3 years’ group certificates • Employment verification letter • Last 3 years’ income tax group certificates • Last 2 years’ tax returns if self-employed • Current home rates notice • Last 6 months’ home loan statements Make sure you take original documents with you to your finance interview, as this will speed up the loan approval process and save time in double handling. You will usually also need to pay a finance application fee, this can vary from $0 to $1,000 depending on which lender you select. Step 2: Property selection Armed with your borrowing capacity, it is now time to go looking for your investment property. - 131 -

A STEP BY STEP GUIDE TO PURCHASING If you are purchasing through a real estate agent that specialises in investment real estate, they will normally show you between 3 to 4 property developments in your price range in different growth suburbs. You will normally have a range of choices within those developments. Any more property inspections on the one day can create confusion and we all know what happens when confusion sets in – “we think about it” and there go your dreams. - 132 -

A STEP BY STEP GUIDE TO PURCHASING If you are selecting your own investment property, I recommend you use the strategies in Chapter Seven, “Getting Started”. In any case have fun property hunting. - 133 -

A STEP BY STEP GUIDE TO PURCHASING Step 3: Contract Exchange17 Once you have selected your investment property, the real estate agent will supply you with a copy of the purchase contract which, in NSW, is called “Contract for Sale of Land.” This is an interim agreement which spells out the terms under which you have agreed to purchase the property. 18 exchanging contracts: An exchanged contract simply means you and the Vendor have an agreement that he will sell you the property and you have agreed to purchase the property on the terms contained in the Contract for Sale of Land. You have signed one copy, the Vendor has signed another, and you exchange signed copies. You now have the copy he signed and he has yours. - 134 -

A STEP BY STEP GUIDE TO PURCHASING Before exchanging contracts with the Vendor18, I recommend you take the purchase contract to your legal advisor to review. He will ensure the contract is fair for both parties. 18 Vendor: the person selling the property. - 135 -

A STEP BY STEP GUIDE TO PURCHASING Once you are satisfied with the purchase contract, your solicitor will send a signed copy of it with your 10% deposit to the Vendor’s solicitor for exchange. If your finance hasn’t been approved at the time you locate your investment property, you can request that exchange takes place with a 28 day “subject to finance” clause included, so that if your loan is not approved in that time, you can cancel the purchase contract and walk away with only a minimal outlay. Solicitors’ fees will normally range from $1,000 to $2,000, depending on the complexities of purchase. In most cases the solicitor will charge 50% up front and 50% at settlement. - 136 -

A STEP BY STEP GUIDE TO PURCHASING Step 4: Once the exchange of the contract has taken place there will be a quiet period until it is nearly time for settlement. If the property is complete at the time of exchange, the settlement will normally take place in 42 days (6 weeks). If you have purchased a property off-the-plan19, the settlement is normally due 14 to 21 days after the property is completed and registered with the Land 19 off-the-plan: The Property is purchased before it is completed, using the building plans to select the property. - 137 -

A STEP BY STEP GUIDE TO PURCHASING and Property Information Service NSW, formerly known as the Land Titles Office. There is an office in each State. Keep in touch with your real estate sales consultant regarding the completion date of an off-the-plan purchase. Approximately one month before completion of the building, contact your finance specialist and inform him or her that settlement will take place within the month. It’s their job to then re-activate your finance file and ensure your finance is in place for settlement. All property purchased in Australia is subject to the payment of Stamp Duty in the State of purchase. - 138 -

A STEP BY STEP GUIDE TO PURCHASING This is normally due after exchange of the property and before settlement. 1. If the property is already built and the strata plan20 is registered with the Land and Property Information Service in your State, then the Stamp Duty will be due before settlement. 2. If the property is off-the-plan, then the Stamp Duty is payable twelve months from the date of exchange of contracts. You can apply for a further three months extension if the property is not completed at the end of the first twelve months. In many cases you can speak to your solicitor and request that the Stamp Duty be paid from your loan on settlement. It’s easier that way. Step 5: Pre-settlement Inspection On an off-the-plan purchase, you should complete a pre-settlement inspection approximately 1 to 2 weeks before settlement. At the pre-settlement inspection you will walk through the property and insure it’s completed with the fixtures and fittings listed in the purchase contract, bring a pad and pen with you to note any defects that may need attention. 20 strata plan: (strata title): Only a particular unit is owned within the development. - 139 -

A STEP BY STEP GUIDE TO PURCHASING Remember, even the crown jewels are not flawless, properties are subject to movement and hair line cracks may appear. Don’t worry too much as they are easily fixed, so don’t lose sleep over minor defects. I observed one property investor climb into a built-in wardrobe with a torch and close the door. He came out spitting chips because there was a scratch on the inside of the sliding door. He was so stressed he wanted to re-sell the property. - 140 -

A STEP BY STEP GUIDE TO PURCHASING You see he got so caught up in the significance of the minor defects he lost sight of the big picture. He had made $25,000 in capital growth on the property before settlement and was ready to throw it all away plus more, because of a scratch no one would ever see. I have watched this sort of thing happen on many occasions. The defects were minor costing less than $200 to fix, yet the purchasers were losing sleep and wanting to sell the property because they couldn’t cope with the stress of having some minor defects. I would simply suggest you allow an extra $2,000 in your loan amount as a slush fund, to use for any small defects that are not covered by your builder’s warranty. In most cases the tenants won’t even notice them. - 141 -

A STEP BY STEP GUIDE TO PURCHASING If the defect is major, affecting your ability to rent the property, simply request your solicitor does not settle until it has been fixed. Remember it’s not the building itself that increases in value; it’s the location of the property. That’s why old dumps in the right location are selling for millions. Step 6: Property Management Approximately one month before settlement you will also need to select a real estate agent as your property manager21 to arrange a tenant and to collect the rent for you for your investment property. Don’t hand your property management over to the first real estate agent you speak to. Remember they are baby-sitting one of your biggest investments, so you really want someone you can trust. Look at how professional their business is. Do they look genuinely interested in your business? Ask them what they will do to lease your property; how they will screen the potential tenant; how often they will give you a property report. After 3 or 4 interviews with property managers you will get a feeling for who you can trust and work with. 21 property manager: One who professionally takes care of another’s property, including rental collection and property maintenance. - 142 -

A STEP BY STEP GUIDE TO PURCHASING Your property manager should provide you with a comprehensive property management service. Including: 1. Tenant selection & screening 2. Collection of rental bond 3. Collection of rental 4. Lease agreements 5. Quarterly property inspection reports (if you wish) 6. Payment of the following accounts: • Body corporate fees • Council rates • Water board rates • Various insurances, etc. - 143 -

A STEP BY STEP GUIDE TO PURCHASING 7. Supply you with rental statements each month 8. Direct deposit of rental monies into your nominated bank account each month. I recommend you don’t manage your own rental properties. You want to build your property portfolio as easily as possible. Set and forget; let the professionals do what they are good at. Your job is to work out when you can add another property to your portfolio, keep it that simple. Step 7: Arranging Insurance A day or two before settlement you need to arrange contents and rental insurance for your property. The Real Estate Institute (REI) has a fairly good combined contents and rental insurance policy. Contents insurance will cover items such as stove, dryer, hot water system, air conditioners. These are prime targets for thieves on new properties, especially if they are vacant, so just protect yourself until a tenant is in place by getting the items insured. - 144 -

A STEP BY STEP GUIDE TO PURCHASING Step 8: Settlement Settlement simply means “to have something finalised”. In the case of a property purchase it means to finalise the purchase. The property is then transferred to your name and the property is now yours. - 145 -

A STEP BY STEP GUIDE TO PURCHASING How this works: There are normally three solicitors or their agents involved. They will co-ordinate a time and place for the settlement to take place. Once the solicitors meet, the bank’s solicitor will give the Vendor’s solicitor a bank cheque for the property. - 146 -

A STEP BY STEP GUIDE TO PURCHASING The Vendor’s solicitor will then hand over the Title Deeds for the property to the banks solicitor. Your solicitor will verify that it’s registered to your name and the correct funds are transferring hands, - 147 -

A STEP BY STEP GUIDE TO PURCHASING and in most cases, will collect the keys to your new investment property for you. It’s as simple as that. Congratulations you are now the proud owner of an investment property and well on your way to joining the 6% of Australian’s who have achieved financial independence. I know what you are thinking: I’ve got the keys to this new investment property. What do I do now? - 148 -