Recent figures from RPData inspired me to hit the keyboard again.

The capital growth figures for last year (median prices up to November 2009) show that Australia wide units showed better growth over the 12 months than houses.

Yes that’s right… in 2009, based on median prices, houses with the big land content did not grow in value as much as units with minimal land content.

It was close nationally, houses grew 9.9% last year and units 11.9%. In Brisbane units grew at double the rate of houses, in Darwin nearly 3 times the rate of houses, Sydney and Adelaide were the only cities where the growth on units and houses were similar.

Is this surprising? Not to me as I have said over and over again its not the property that grows in value it’s the position.

Generally to get really close to the CBD, the shops, the hospitals, the transport, the river or beach the land is so expensive you don’t get houses you get townhouses or units. We believe, as do many others , that to get capital growth long term you need to be close to all the infrastructure and houses generally don’t achieve that (Lily Rise 800mt from the new Coomera Town Centre is one exception).

Some people get hung up on land content or look at a house to be “better” than a townhouse or unit . Better how? In my experience the position of a house generally means slower growth, its harder to look after and for people who don’t like body corporate fees associated with units etc – you end up paying for the same things in houses. Body corporate fees include building insurance, a sinking fund for future maintenance etc – all costs you will eventually incur with houses anyway.

I recently had discussions with a friend over property types and I think often people miss the point. Bottom line is, as Nick says often, you don’t want a property you want an outcome. You want to use a strategy that has minimal risk, with minimal effect on your current lifestyle, and gives you access to the funds you need to retire comfortably (whatever that means to you) when the time comes.

I have over the past few years bought houses, units and townhouses. In most circumstances (never say never) I would not consider a house again. I am looking for an outcome (after 10 years I have pretty much achieved that) and I will consider whatever provides it for me with minimal risk and minimal effort from me (I am very lazy….ask my wife).

Our Complimentary, No Obligation Offer

Are you just starting out or someway advanced on your property investment journey? Perhaps you don’t yet have the knowledge to even get started. Wherever you are right now (let’s call it “Point A”), moving to “Point B” (the realisation of your dreams and goals) will require right action and probably the responsible use of debt (the right kind of debt).

Our property mentors, who are all investors themselves (doers, not theorists) are committed to supporting you in the pursuit of your financial goals. With the support of our propriety software and an mrd property mentor running many “what if” scenarios we can help you to take much of the guess work out of your planning and decision making.

To explore the possible alternatives available to you… or to seek help to develop your own tailored investment plan; just ask! Our offer of support is both complimentary and without obligation; that’s an unconditional promise!

YES PLEASE!

I would like an mrd property mentor to make contact with me to assist me in creating a plan for my financial future >>>more

I would like mrd to assess my borrowing capacity >>>more

I just want to know if it’s possible to reduce the amount my mortgage is currently costing me >>>more

Happy Investing,

Martin Bell
mrd Customer Care Program… because investing is personal

Many have read my earlier contributions to the housing affordability debate; which are at odds with the populist view that ‘Australian housing is very expensive by international standards’.  Christopher Joye is the managing director of Rismark and the arguments he puts forward  in his article ‘Is Australian Housing Expensive’ are quite compelling, in my opinion.

• Australia has a very high rate of home ownership internationally (around 70 per cent at the time of the 2006 Census). How so if housing is so expensive?
• Another indicator that our housing is not internationally expensive – we also have amongst the lowest mortgage default rates in the world with just 0.66 per cent of the five million borrowers with a loan, materially behind on their repayments. This is just 10% of the US figure and 25% of the UK data!
• Based on the RBA’s preferred benchmark, housing affordability is no worse than it has been on average over the last 28 years.

mrd’s Property Selection Bias

Clients and subscribers alike would notice that it is the exception to the rule, that we recommend house and land; our featured property of the past few weeks, Lily Rise, is one such exception.

The issue is not so much what to buy as it is where to buy (or invest). Freestanding houses are generally located in areas remote to essential infrastructure such as transportation, shops, hospitals, employment and so on. New subdivisions developed on the fringe of capital cities mean (busy) residents must spend more time stuck in traffic burning fuel. Looking forward, with an understanding of changing demographics, I believe these areas are likely to experience a slower rate of capital growth. Regional towns where the population base is small are also likely to produce slower capital gain, in my opinion.

NB: Investing is personal and one size doesn’t fit all. My comments are to support a broad-brush philosophy, not offer advice to any individual. There are times when investing further away from an infrastructure hub may best serve your particular situation; as property mentors our job is to thoroughly explore all options and their impact for you.

Attractive rental returns may initially seem enticing, however, based on my 10 years experience the success I have enjoyed from my property portfolio has been a “capital growth story”, I was never going to get rich on rents.

Christopher Joye Commented

After reading Christopher Joye’s comment it should become apparent as to why I was so interested:

The supply that is coming online is also a poor substitute for existing homes because it does not have the same ‘amenity’ value (think location, schools, hospitals, transport etc). This creates additional risks for investors since the high cost and poor location of new supply means that it has questionable demand prospects, which is one reason why the finance available for development has dried-up.

So when you see us recommending units in places such as Robina Town Centre it is because the infrastructure (new rail line, new hospitals, new shops, highway extensions etc; in fact over $7,000,000,000 worth – that’s seven billion dollars) has meant demand has pushed land prices to a point where units and townhouses are the only viable options. You simply cannot buy house and land and remain in the “centre of the bullseye”.

Lily Rise Is The Exception

I mentioned Lily Rise as an exception. WHY? Because these are house and land, but just 800 metres from the “bullseye” of Coomera Town Centre. The state government is pushing for this Town Centre to complete within four years, reportedly creating 20,000 new construction jobs. Lily Rise is, therefore, one case where it is possible for you to buy as the town centre is developing, in an area which is expected to boom with a population of 83,000 by 2016 and 100,000 by 2026.

To again quote what I once heard Michael Matusik say at a conference:

If you want capital growth, remember this, infrastructure rules, you go where the infrastructure is going.

Our Complimentary, No Obligation Offer

Would you like to join the many others who each week take advantage of our complimentary no obligation offers? Perhaps you would like to speak with an mrd property mentor about your property investment journey or request a cashflow analysis on Lily Rise. Alternatively you may want us to arrange to have your borrowing capacity assessed with the view of having our help in developing your own tailored investment plan.

Whatever your situation, question or need… we are committed to ethically, responsibly and respectfully supporting you in the pursuit of your financial goals. Our Customer Care Program recognises that investing is personal. It is our point of difference and your peace of mind.

YES PLEASE!

• I would like a property mentor to make contact with me >>>more
• I would like mrd to have my borrowing capacity assessed >>>more
• I would like a complimentary cash flow analysis prepared for me on the Lily Rise project >>>more

Happy Investing,

Martin Bell,
mrd Customer Care Program… because investing is personal

Read: Is Australian Housing Expensive
Read and View: Steve Bracks and Bob Carr discuss population growth

About this time last year many Australians were at the height of hysteria and panic. Fuelled by pessimistic and often irresponsible journalism, it looked to many as though the global economy would slip into the abyss and take Australia with it.

Lehmann Brothers, a large US investment bank had just collapsed, stock markets were plunging and the numerous ‘prophets of doom’ were being interviewed on primetime TV, scaring Australians into believing that their homes were about to plummet in value by 40%.

It now seems that the Rudd Government’s fiscal stimulus package was an overreaction. Certainly the Reserve Bank of Australia (RBA) began their massive monetary stimulus by slashing interest rates to 50 year record lows.

In amongst all this, we did our best to remain sober in our assessment of the economy and the property market. What we said then is still on the record now, via blogs and recorded webinars. In a nutshell we said that there were great buying opportunities for those that were informed and felt they could tough out the negatives. We said that Australia’s house prices would stall and perhaps soften due to a lack of household and investor confidence… but they would not fall by anywhere near 40% (except perhaps those executive homes at the top-end where demand is limited). We said that by mid to end 2009 we would see the market actually take off again and that 2010 would be a great year for those who hold an investment property portfolio. Might I add that we picked every interest rate cut ahead of time (with the exception of suggesting the RBA would go one more .25% down, which they didn’t).

I say all this not to ‘blow my own trumpet’ but rather to reinforce the seriousness with which we take what we do. We are not merely selling real estate but rather mentoring people to safely and responsibly navigate a wealth creation journey towards the realisation of whatever it is that is important to them and their family.

Unexpected Bumps

There have been some unexpected speed bumps along the way. I was not expecting the rental market to be so affected by the Rudd government’s boost to the first home owners scheme. I did not see rents softening as much as they have and I did not see the prolonged rental vacancies that have occurred; albeit just for a minority of our clients.

Looking Forward Over A Year

In the series of webinars (web seminars) that I held; not sure if it was the November ‘08 or the August ‘09 ones (link to ‘09 recording below), I said that it is a great thing to follow a trend but it is a great thing to lead one. What do I mean by that?

There are those who over this past year have been actively adding to their property portfolios as well as those imminently about to. I believe that in Queensland we are now coming out of the back of a prolonged period of little or no growth… and catch up is just around the corner. I see 2010 as a very good year and would encourage those who pass our three point safety checklist to seriously consider acting sooner rather than later. There is still some already completed stock around and there are some deals that we have secured (due to developers being pressured by their lenders), but there is not that much. As far as new stock coming online there is a lot less available than what the groundswell of demand will require; this WILL push prices higher.

Prices Are Going To Go Up

Given prices are going to go up we have three choices:

1. Secure at today’s price and own the capital gain
2. Wait until we see the market take off, pay more and carry additional debt equal to that capital gain
3. Do nothing (as 95% of Australians will)

Action Requirements

Anyone wanting to take (careful, considered and responsible) action to ensure they have more financial choices in the future, needs to right now consider three things:

1. Do I have the Borrowing Capacity in the first place?
2. Do I have the capacity to hold onto the property going forward? Will there be an initial cost to hold the property… and if so, how long will that take to turn around so that the income from the property is more for me than the total cost of holding it?
3. Do I have the mental toughness capacity? Will I be able to sleep at night… or are there so many unanswered questions in my mind right now that I am just really not sure?

Our Complimentary, No Obligation Offer

Every week our team of Property Mentors are engaging with readers of my newsletter, from all around the country, who are having these questions (above) and many others answered. An mrd Property mentor is not a salesperson, we don’t have any. They are investors, finance broking specialists and all-round nice people who have a heart for others.

I invite you to take me up on my complimentary and no obligation offers to speak with an mrd property mentor about the questions you have. Perhaps you would like us to arrange to have your borrowing capacity assessed with the view of having our help in developing your own tailored investment plan.

Whatever your situation, question or need… we are committed to ethically, responsibly and respectfully supporting you in the pursuit of your financial goals. Our Customer Care Program recognises that investing is personal. It is our point of difference and your peace of mind.

YES PLEASE!

• I would like a property mentor to make contact with me >>>more
• I would like mrd to have my borrowing capacity assessed >>>more

Happy Investing,

Nick Lockhart,
mrd Customer Care Program… because investing is personal

The best thing we can do with a problem is rename it! It’s not a problem, it’s a “challenge”… and with every challenge comes an opportunity to grow!

“Those who remain flexible rarely get bent out of shape”!

When Katrina and I settled our last property purchase we were without a tenant for almost 4 weeks! Given the housing shortage, we were very surprised.

So why did it take that long for us to secure a tenant?

Probably a combination of:

• Just an aberration at that time
• A result of the global economic downturn
• Reaction to the frenzy the media has whipped up by those who can move back home with mum & dad… or share accommodation when they would normally live separately

Whatever the reason, it doesn’t really matter.

Those few weeks seemed to go on forever. Looking back, they actually passed quickly and the “challenge” we faced was nothing more than a glitch in yet another successful attempt to convince a bank to let us leverage into another appreciating asset; using their money rather than ours!

Finding A Tenant

So what did we do to ensure we secured a tenant?

We did what any self respecting new vendor would do when he/she did not secure a tenant quickly… we dropped the rent! Twice!

You what???

We dropped the rent we were asking twice! If we are going to make a success of our financial position over time… then it is a given that we are going to have to stay fluid… or remain flexible. It is imperative that we meet the market where it is.

OK, I admit that the events of the past 18 or so months have seen real estate prices and rents soften a little in many places… but the overwhelming reality over many decades has been and will continue to be that prices rise. Property prices and rents will double again over the next property cycle… so why sweat the small stuff?

Six months before we settled the rental market would have paid more to lease our new purchase. However by the time we settled, not only did we have to accept less weekly rent, we had to absorb a few weeks of no rent.

Was I worried?

Like anyone who has just settled a property I wanted a tenant ASAP; but no I wasn’t worried. I saw my empty property as a challenge that needed addressing, so we did and “problem” fixed.

Had we secured a tenant from day 1 and for the higher/expected rental figure and had interest rates still been where they were six months earlier, we would have been (significantly) worse off  anyway. The saving we made with greatly reduced interest rates has left us a lot better off.

Don’t freak out if your tenant moves out and you property manager suggests you may need to reduce the rent to “meet the market”. While it is not common; sometimes prices move down temporarily… even though they are trending up. This is all part of normal cycles and adds argument to why we promote a set ‘n’ forget… for busy people approach to property investing. With the ‘buy & hold’ strategy a dip in values will only affect my ability to borrow as much again, in the short term. It will not impact on me, however, in any significant way at all.

So, Am I Better Off Now Than I Was 6 Months Ago… Even Though I Am Collecting Less Rent Now Than I Was Then?

Absolutely! An investor with a $350,000 mortgage pays $215 a week less in interest payments than they did six months ago… so even if they take $20 or $30 a week less in rent they are still ahead by a country mile! In our case we paid a lot more than $350,000, so our savings are even greater!

Add to that the expected capital growth over time.  If a property worth $350,000 doubles in 8 years for example, it will average $840 a week in growth.

Why would I be concerned about losing $20 or $30 a week for 6 or 12 months?

I guess my message here is to say that in the process of wealth creation:

• Don’t sweat the small stuff
• Remain flexible (and don’t get bent out of shape if something doesn’t go exactlty to plan)
• Meet the market where it is
• Understand the BIG picture
• Buy to hold
• Don’t be alarmed if your properties attract marginally less rent for a season. The savings you have had in interest more than compensate for this many times over!

Send us your property investment questions (and or requests) by replying to this article (blog), below.

Happy Investing,

Nick Lockhart
mrd Customer Care Program… because investing is personal

Australia is experiencing a Sea Change. Large numbers of people are moving to be closer to the coast. Referred to as “The Great Southern Exodus”, just how does this impact on property values?

Family and friends from Sydney used to tell me that one day they would sell their Sydney home and with their profit move to the Gold Coast and pay cash for their dream home. The problem with that theory is that the value of real estate (like bananas and oil) is determined by supply and demand. Where there is no available land to develop new residential estates, such as is the case on the Gold Coast, and you have an ever growing population… property prices rise quickly!

The great Australian dream to own a home on a quarter acre block in the suburbs no longer exists. Today the dream it is to live as close as possible to the infrastructure, services and the beach. On a week end morning you  will see more people eating breakfast at a restaurant or beach-side café, reading the paper and enjoying a cappuccino than you will mowing their lawns and weeding their gardens.

This is all part of the research you as a property investor need to consider. What are the future demographics of the society in which we live and how will they impact on property values 5, 10 and 20 years from now?

Consider this, the Gold Coast offers everything you’d expect to find in a capital city and then some. With close proximity to a capital city job market, good transportation and infrastructure, world class shopping, theme parks, numerous five star golf courses, awesome beaches and a stable sub-tropical climate. It is no wonder why so many are making this place home.

Demographer and Author, Bernard Salt said “…Australians are moving to coastal strips at a remarkable pace, making the Gold Coast the fastest growing and most desirable region…

Sydney and Melbourne have done their stuff, they’ve built all they can build,’ he said. ‘They can’t pull any more rabbits out of their hats to entice people there. The big winners are the coastal towns”.

Gold Coast ‘Capital’ Growth

An article, titled Gold Coast ‘Capital’ Growth, appeared in today’s press said “THE hordes of interstate migrants flocking to the Gold Coast could turn the city into Australia’s de facto fifth ‘capital’ behind Sydney, Melbourne, Brisbane and Perth…” continue reading here

A 10 Year Plan For Retirement

To speak one on one with an mrd Property Mentor about any aspect of the property market or to request help in developing your very own plan that will allow you to retire in under 10 years; click here. Remember we are a team of property educators, not salespeople and all our services are complimentary and without obligation! Click here

Happy Investing,

Nick Lockhart
mrd Customer Care Program… because investing is personal

The local population is predicted to double by 2050 to 1.2 million thanks to record interstate migration, unprecedented births and the nation’s lowest death rate.

Social demographer Mark McCrindle said Australia would reach 22 million people by December, with cities like the Gold Coast leading the way.

Mr McCrindle said the Coast, with 630,000 people could eventually overtake Adelaide, which has 1.2 million people.

The Coast is already much bigger than Canberra/ACT (350,000), Hobart (215,000) and Darwin (124,000).

Mr McCrindle’s population snapshot of the nation released yesterday shows a country exceeding earlier predictions of growth and population.

>>> Gold Coast ‘capital’ growth – Local News – Gold Coast, QLD, Australia.

While the global financial crisis has wiped at least 45 per cent off the value of equity portfolios in the past year, the value of most residential real estate – excluding top end houses and coastal apartments – has fallen only about 3 per cent……

The ATO’s just released Taxation Statistics 2006-07 show that 1.6 million Australians … – one in every 10 adults in the country – included rental income in their tax returns….. Most – 72.5 per cent – held only one rental property.

…. Two clear groups of investors prefer residential property. One is professionals such as doctors and lawyers, who use negative gearing to manage their tax affairs and benefit from tax sheltered capital growth….. another group of investors was becoming even more important – the “mums and dads” investing for their future…..

Not only have property values generally withstood the financial storm but also the income has kept rising. Melbourne rents increased between 9 and 15 per cent in 2008, according to Victorian government figures released on Thursday. And the outlook in Australia – a housing shortage, low mortgage rates and a sound banking system – remains sound, unlike the situations in the US and UK.

Reserve Bank of Australia head of economic analysis Anthony Richards, in a speech during the week, said that “there are a number of reasons to think that [housing] outcomes here might remain better than elsewhere.”   The Weekend Australian Financial Review

• Bad drivers don’t know they are bad drivers
• Pigs don’t know that pigs stink
• And you don’t know what you don’t know about finance structure

The following “Horror Finance Stories” took their victims by as much surprise as the person who had someone pull out in front of their car and cause an accident.

At least when you get behind the wheel of a car you are (mostly) in control. Sure there are other drivers on the road and then there’s things we rely upon – like brakes etc. When it comes to arranging and structuring your finances; you will become a passenger and your broker/banker a taxi driver.

Assuming your broker/banker properly understands the mrd Advanced Finance Strategies we promote, is akin to assuming a taxi driver will always take you to your destination by the shortest route… safely!

You would have probably noticed of late that we have been offering readers and clients alike a no obligation, complimentary “Finance Structure & Cash Flow Health Check”. Many have responded and taken up this Customer Care initiative and as such, we are exposing more and more “crash victims”.

Good people unwittingly letting unskilled drivers take control of their financial vehicle.

CASE 1 – BARRY:

Barry is nearing the settlement of an investment property sourced through mrd. He chose not to use an mrd preferred broker (one familiar with the mrd Advanced Finance Strategies), preferring to use his local credit union. This is completely understandable as he had a long term relationship with his credit union. Barry was comfortable with their service, found them to be friendly and conveniently located near his home.

While friendliness and customer care are essential, there’s so much more to correct finance structure than familiarity and a warm smile.

Barry took up our “financial health check” offer; which was fortunate for him as he was quickly headed for a wreck! His local credit union had initially not allowed any funds for settlement costs, such as stamp duty and legal fees. If we had not intervened he would have arrived at settlement about $12,000 short; that is with just enough funds to cover the property purchase only. This could have resulted in him being charged penalty interest while he madly rushed around trying to find the extra funds required.

It doesn’t end there; the credit union was also…

In the process of mixing private credit card debt with Barry’s home loan

Refinancing an existing loan back to themselves; i.e. replacing an existing loan with an identical loan. This added no benefit to the client but would have incurred another round of establishment fees etc… payable to the credit union

With Barry’s permission, we sent the credit union instructions (in “chapter and verse”) as to how to set the loans up… and they still got it wrong.

Someone from this office then had to educate the loans officer just to ensure Barry was given the correct finance structure!

It didn’t end there…

Round 2! The credit union then planned to mix investment debt and business debt in with his private home debt… and continued insisting on (unnecessarily) rewriting their home loan with an identical loan.

Throwing petrol onto the fire… they had cross collateralised their home and the investment property. With a pending settlement on his doorstep, Barry had no time to lose.

The instructions back to the credit union were simple:

Leave the existing loans as they were and create a single new loan to take to settlement that would have been sufficient to settle leaving about $4,000 in the buffer for their next year’s expenses.  Once the year is passed and the break fees reduced they will be looking to finance away from their local credit union; this time accepting our friendly suggestion that they use one of our preferred brokers.

This story had a happy ending, thanks to Doug… and a potential crash victim was saved!

CASE 2 – MARK:

Mark also chose to use a broker he was familiar with; someone who had an ongoing relationship with his place of employment and offered a bonus interest rate discount, due to this relationship. As it turned out, the discounted rates were similar to the big banks rates anyway.

Much to Mark’s disadvantage the broker encouraged Mark to take out fixed rates; some as high as 8.78% for 3 years.  mrd, knowing the dangers of fixed rates discouraged Mark from using them… but we failed in our attempts to overcome his brokers persuasion. The odds are really against you winning with the use of fixed rates; 87% of the time according to statistics. The benefit of fixed rates for the broker of course is that they are locking in their commission for 3 years as it is too expensive for most clients to escape from.

The total cost of cutting this victim out of the wreckage (moving him from a fixed to a variable rate) is in excess of $50,000! This was a very expensive crash!

This broker advised Mark that he had the borrowing capacity for two investment properties. So, armed with that professional advice, Mark proceeded to unconditional status on two properties. Some months on, interest rates have dropped rapidly… yet Mark is left paying more than $20,000 a year interest above what he would be paying had he accepted our guidance up front. He can swap from his fixed loans to variable… but it will cost him in excess of $50,000 up front to do so.

The fight continues! We have no happy ending here just yet… Doug is busy trying to cut this victim free from a mangled wreck.

CASE 3 – LAURIE:

When Laurie approached mrd he was trying to refinance an existing (non mrd) investment purchase and was looking for additional funding to buy another through us.

When Laurie financed his 1st investment property, he fell victim to a type of loan referred to as a “cash flow mortgage”.  These loans capitalise part of the interest back into the loan, reducing the initial cashflow requirements. The loans rely on continued capital growth.  After a few years people with these types of loans have to start paying the full interest rate. The early years of capitalised interest means they are now paying full interest and off a higher base. Obviously, this can place a heavy burden on some. Capital growth is predictable long term but less predictable short term.

NB: The overall interest rate associated with these types of loans is higher than you can find elsewhere… so “buyer beware”!

To assist with cash flow, Laurie had converted his existing investment property to student accommodation… but this made it undesirable in the sight of lenders. Struggling to find a way forward and build wealth for his family and wanting to please his wife who had her heart set on finishing the renovations on their home… Laurie asked for an mrd Finance Structure & Cash Flow Health Check

Next step… Doug and the mrd preferred broker go to work…

The broker worked tirelessly to find a lender who would accept the (student accommodation) property; eventually succeeding to refinance this loan with a mainstream lender. Laurie’s new loan came with a greatly reduced interest rate and a provision of funds so that he and his wife can complete their home renovations.

• Their expenses are now much lower than before
• They can breathe easy
• His wife is happy that the renovations are again on the radar
• With the added value these renovations will add to their home, Laurie will soon qualify to consider his next investment property; should that remain his goal
• With the lesson learned from this experience, Laurie has now converted his property back to a “normal” residential house

Thanks Doug… another crash victim has been saved!

CASE 4 – CRAIG:

Craig had been a student of various investment strategies for some time. Having taken some steps of his own, he secured a few cheap, older properties. Initially coming to us curious as to what the mrd Advanced Finance Strategies may reveal, one of our preferred brokers worked with Craig and put forward a proposal to deliver the objectives Craig was looking for:- Remove the cash flow strain associated with supporting his property portfolio from his family, so as to allow him to continue to build wealth for his family… without having to live like a pauper.

In reviewing his situation, Doug identified huge opportunities that Craig was not taking advantage of.  We put together a proposal that allowed Craig:

• The ability to meet his initial objectives
• Add more than $1 million dollars worth of property to his portfolio

While Craig was yet another victim of a poor finance structure… the greater loss was an opportunity cost.  Assuming that the $1 million additional value to his property portfolio doubles over 7 years (historical average), their wealth will now increase by an average of more than $142,000 per year each year for the next 7 years*!

* NB: A property that doubles in value over seven years, will probably experience five years of little and no growth, followed by two years of phenomenal growth; that is growth is normally not linear.

Craig is already better off… but the real gains are still ahead of him. This all came about without costing Craig a single dollar:

• mrd undertook this as a part of our Customer Care Program
• The new properties will settle without the need of a cash injection
• The mrd Advanced Financing Strategies have positioned Craig such that he will soon hold an extra million dollars worth of property in his portfolio for less money than it cost him before the $1 million was added

This was a massive wealth creation opportunity that only came to Craig’s attention because he responded to our offer of a no obligation, complimentary Finance Structure and Cash Flow Health Check.

Well done Doug! Not only have we saved another crash victim, you topped up his fuel tank allowing his (property) vehicle to take him further!

CASE 5 – Peter:

Peter had never had any dealings with mrd. He was referred to us when he was wanting to sell a property.  This one was a sad case of injustice… Peter was not just a victim of poor finance structure… but of ruthless financiers and predatory marketers!

Peter and his wife live in country NSW (probably under water right now). To us they are typical of hard working, honest (‘as the day is long’) country people; the backbone of this wonderful country!

Peter had developed a skill-set over his working life… but that skill-set did not include knowledge about property investing or finance.

His goal was to build a retirement fund through property investment, to provide an income for his family that did not rely on government assistance. To achieve this, Peter needed the support of someone who would supply the knowledge and experience that he lacked.

Guess What?

Rather than finding support from someone who cared… Peter ran into some of the rogues that are prevalent in the real estate and finance industries. Would you believe me if I told you that Peter “fell for” a group whose guidance served their own interests; rather than Peter’s?

Of course you do… they’re everywhere unfortunately!

Peter settled on a property that was sold to him at an inflated price. I can say that because mrd was actually offered these very same properties when they were first released to the market by the developer. We turned them down; based on price only!

The property was fantastic and in a great location… just not good value! To have lost a bit to an overpriced property would not have been so bad. It would not have caused him to crash… rather slow him down a little (property is very forgiving if you just wait).

His real crash came from the finance arrangements.  The marketers and the finance company combined to get every cent they could out of Peter; whose existing loan was with the CBA.  It would have been very simple to finance the investment property also through CBA on a good interest rate… allowing Peter to achieve his goals. This is exactly what should have happened! That wasn’t good enough for these vultures (sorry, I have no idea how to be gracious in these unjustifiable situations!).

They refinanced his own home; which was of itself completely unnecessary… and tied the two properties together with high interest rates and heavy break fees.

Peter was a goner the moment he signed the paperwork!!!!

It was only a matter of time before Peter got into trouble with the loans.  Anyone with a conscience would have tried to help these “Aussie battlers”… but instead they all lined up to make sure they got their commissions and fees out of Peter.  The final straw was them taking over the property and evicting the tenant to ensure Peter could not recover. Not only was his investment property in danger but also his own home. The vultures were circling.

It was at this time that mrd became aware of his plight. Along with our experienced brokers and Peter’s solicitors, Doug and I worked tirelessly trying to rescue Peter’s investment property (i.e. help him to hang onto it)… but he was too far down the legal path for it to be saved. The best we could do is counter the remaining blows being thrown at Peter and ensure he salvaged whatever he could from the wreckage.

We were able to minimise his losses and ensure he kept his home; something he very nearly lost also! We were also able to assist Peter in lodging a formal complaint with the regulatory authority about the finance company involved.

In this case, Peter lost the investment property and was (temporarily) derailed from his financial goals… but his home was saved… and he is still alive to have another go at a later time. Had Peter come to us earlier and requested a complimentary Finance Structure and Cash Flow Health Check, we would have been able to identify the issues involved and intercept them before the crash. This was not to be!

Peter’s was a story with “as happy an ending as was possible”; in the 11th hour… thanks again Doug!

If you have not had personal dealings with mrd… you would be forgiven for thinking we are “just another mob out of Queensland flogging any old property to whatever sucker comes along”. I challenge you to test us. We know we’re different, but you never will know until you experience the mrd difference. I am so proud of the wonderful and dedicated team that I lead. If you suspect that mrd may be able to add some value to your wealth creation journey, then click here to request a no-obligation, complimentary “Finance Structure & Cash Flow Health Check” for yourself.

Happy Investing,

Nick Lockhart
mrd Customer Care Program… because investing is personal

How times have changed.

To demonstrate how the changes in interest rates affect your holding costs I will use the properties at Endeavour Gardens as an example…

When rates peaked, the property would have cost you about $210 a week to hold after tax, based on a 30% tax rate. For the majority of people that is a significant amount to find each week. Holding a property such as this was difficult and fewer people were able or willing to get involved and wait for the capital growth to repay their holding costs.

With more advanced financing strategies such as the capitalising of most property expenses you may have been able to bring the holding costs down to a little over $100 a week. Even at these higher rates it was still a very good investment as the expected capital growth would have dwarfed the holding costs but few people would have been able to see that.

What is the holding cost now?

That initial $210 a week to hold after tax has dropped to a tiny $32 a week.

Using the mrd advanced financing strategies the property actually becomes cash flow positive by $75 a week.

The Hidden Bonus is that not only is the property now not dependent on a contribution from your hard earned wages but it is actually paying you back, contributing to your weekly savings, helping you pay down your own home loan and creating wealth for you through capital growth.

What is rarely understood is that by using these same mrd advanced finance strategies it may be possible to have the tax man contribute to paying off your home loan by changing home mortgage debt into tax deductible investment debt.  For more information about how this may work for you please ask one of our team.

You can now have a property that pays you every week. In addition, it generates huge equity pools for future investments or lifestyle choices. As an example, if this Endeavour Gardens property grows by an average of 9% a year (8 year doubling cycle) then in that 8 years it will average $805 a week in equity growth for very little time and effort.

This complies with our “set ‘n’ forget” for busy people ™ strategy.

It is only a matter of time before the masses realise what a bargain this property is.

My question to you is… are you going to be ahead of the herd or following in its wake?

So if in the midst of financial turmoil, negative media and confusion you are wondering what actions will best serve your medium to long term interests; I challenge you to test us.

You can make one of two choices:

• Take us up on our offer for a no obligation, complimentary “Financial Structure & Cashflow Health Check” click here to email us.
  
• Find out what your Borrowing Capacity is now that rates have dropped so quickly. Click here to submit your form today.

Regards,

Doug Wroe
mrd customer care program… because investing is personal

People insistent on seeing and touching a property before contemplating a purchase may be missing out on the benefits associated with an off the plan purchase. Off the plan is simply property not yet registered with the Land Titles office; either near completion or perhaps before construction has begun. There are numerous advantages buying off the plan but you need to understand the potential pitfalls.

Our initial research is to identify affordable areas with strong capital growth potential. Where demand for housing is strong and growing but available land is limited (the irrefutable law of supply and demand). Land value in areas of strong capital growth will generally make the construction of a single dwelling prohibitive. It’s in these areas located around infrastructure, employment and services that we tend to see more dense housing under construction; such as apartments and townhouses. With such development comes the opportunities to purchase off the plan.

Profiting From An Off The Plan Purchase

• Developers of medium to high density projects typically secure construction funding from banks and institutional lenders
• Any finance approval will generally be conditional on a percentage of pre sales first being achieved
• Price incentives may be offered to aid in securing quicker pre sales. This normally results in the first handful of purchasers buying at below market value
• Incremental price rises are commonplace after the required number of initial pre sales has been achieved
• Incremental price rises throughout the construction period are not unusual. This means that although all purchasers may ultimately settle on the same day, those who contracted early will pay less than someone who committed to their purchase later in the timeline

In a rising market it is not unusual for people who purchased off the plan to settle their property at well below market value (tomorrow’s property at yesterday’s prices). Developers often hold back some property sales in a project until the very end… when they expect to realise a premium sell price. As a rule of thumb, land values are rising and construction materials and labour costs are steadily increasing. That’s why property bought tomorrow will almost always cost more than property bought today. Once you have your name(s) on a fully executed contract of sale, the purchase price is fixed and any capital growth the property experiences throughout the construction phase  is yours to keep!

Buying Off The Plan Benefit Summary

• Commit to purchasing a property today
• Will not have to pay for it for months or even years
• NO cash flow shortfall to subsidise pre settlement
• NO rates payable pre settlement
• NO body corporate fees payable pre settlement
• NO need for a tenant pre tenant
• NO maintenance pre tenant
• NO wear and tear pre tenant
• Property will still be brand new at settlement (maybe 2 years away)
• Settle tomorrow at today’s (or perhaps yesterday’s) price

WARNING: In my considered opinion, based on much experience… any investment property worth owning will initially be negatively geared. Prior to the recent interest rate falls, the cash flow shortfall on the best buys was often in excess of $200 a week.  Someone buying off the plan would effectively be saving this $200 a week shortfall until the day of settlement (rent plus tax refund… less interest, council rates, body corporate, maintenance, insurance, management fees etc). That’s about $10,000 a year! Many times people mistakenly set out to purchase an already completed property to secure an immediate tax benefit. As important as a tax deduction is to a property investor, it is  just one part of the equation and should never be the sole driver of any investment decision.

By Way Of Example

• A property costs $300 a week (before tax) to hold
• The negative gearing benefit produces a $100 tax saving
• Your net cost (after tax) would be $200 a week
• Buying off the plan means you would not save the $100 in tax while the property was under construction (negative)
• Buying off the plan means you would not be paying the $200 a week shortfall (positive)
• So therefore, buying off the plan means that my $100 a week still goes to the tax man but I don’t have my $300 a week holding costs
• Buying a completed property means I will have $300 a week in holding costs; less $100 tax savings
• Even though you are not saving your tax you are still $200 a week better off having an off the plan property that has not yet settled

When A Project Runs Over Time

Another advantage of an off the plan purchase that is often overlooked is that many of them run over the scheduled time and complete long after they were originally supposed to. Why is this an advantage? Because it means the savings in the example above are multiplied.  Given the price is fixed, the longer it takes a developer to complete a project that I have bought into the better.  My capital gains clock is still ticking away in my favour as it’s MY NAME that will appear on the title post settlement, yet I am avoiding that cashflow shortfall in the meantime. The longer a project takes to complete… the more money I save.  I could end up settling on a property with two years capital growth already in it, yet my carpets etc are still brand new. This allows me to ask a better rent than if the property was already two years old.

Some of my off the plan purchases have simply been because that was all that was available. Brand new projects are normally sold out well before construction completes; so the person waiting to see it and touch it will miss out completely. Due to the current climate we have been able to secure on behalf of clients some great developer offerings on completed stock.

The Other (Negative) Side To Off The Plan Purchasing

While I freely subscribe to the many positives that result from an Off the Plan purchase, there are pitfalls that you need to be aware of. The biggest PLUS in buying off the plan is also the biggest MINUS; the time frames involved!  While these time frames can work to your advantage (as outlined above) they can also work to your detriment when it comes to dealing with banks.  Any finance assessment and approval done with your lender will expire after 3 to 6 months; which is really of little good to someone not needing the funds for say 12 or 24 months. 

You will need to satisfy your finance clause and go unconditional on your contract at the front end of the process (normally 21 days from the date of contract) but you will not have unconditional finance approval from your bank until the end part of the construction timeline.

The way to approach this is to ensure your broker assesses your borrowing capacity now to ensure you would qualify for the necessary finance under the current lending criteria and with consideration for your ongoing financial and family situation.  As completion of the new property draws near a formal application will then be lodged with your lender to secure the funds required at settlement.

Unconditional Without Unconditional Finance

Once the finance clause has been satisfied, your contract normally becomes unconditional. However, for the most part of the construction phase you will not have unconditional finance approval from your lender. In almost all cases this is not a problem, however, responsibility and care need to be shown in a few areas:

1. Changes to your financial situation. Changes to your financial situation will change your borrowing capacity. You need to ensure that any changes you are contemplating will not disqualify your ability to secure the settlement funds required. Don’t quit a job or cut back your spouse’s hours or borrow money to renovate your home etc without first having your broker assess how such a change will impact on your ability to secure the funds required for the new purchase.

2. Bank lending criteria. In response to the global credit crunch our banks have greatly tightened their lending criteria. Someone who previously qualified for funding could now find themselves outside their bank’s lending parameters. If you are currently contracted to buy an off the plan property and you have any doubts whatsoever as to how the recent changes to the bank’s lending rules may impact on you, I suggest you speak with your broker and have him/her reassess your borrowing capacity. Of course we are here to help too; but not until Monday 5th January.

3. Valuations. The Valuer is potentially another “curve ball” for you to consider.  Valuations generally come in at between 5% and 7% under contract price; therefore it is vitally important to keep a little “up your sleeve” for a contingency. Where possible I suggest you consider having your home valued and lines of credit set up against the unused equity during the initial 21 days finance clause. This will eliminate the nasty surprise of having a low valuation also applied to your own home later on. For these reasons we discourage people from going to contract on a property that would require all of their borrowing capacity. For more on valuations see my article “Valuations; Will Somebody Please Explain” click here.

4. Sunset Clauses. Where a project is delayed and titles have not issued by the sunset clause date, either party can terminate the contract. I have heard of instances on a few occasions where a developer has cancelled contracts and reissued them at a higher price; either because of greed or to recoup the additional costs he has incurred because of the delays to his project. I only know of one instance where this has happened to mrd clients back in 2003. Normal practise is that the solicitors will arrange to have the sunset clause extended to cover any delays.

In Summary

• There are pros and cons for buying already constructed property as there are with those off the plan.  Whatever choice you make ought to be after you have identified the ongoing strategy necessary to manage your portfolio:
  - With an already completed property purchase you will need to manage any weekly cash flow shortfall and be mindful of your tenants needs
  - With off the plan property you need to manage your personal finance situation until settlement
• Obligations and entitlements are imposed upon all that are party to a contract. Just as a developer has his obligations to you that he must meet, so too do you as the purchaser need to ensure that you meet your obligations
• Buying off the plan offers great advantages but you need to understand your obligations and address them with responsibility and discipline
• Off the Plan purchases are most suited to those who have a strong employment history and/or strong equity backing them
• When buying off the plan ensure you consult with your broker before making any employment or family changes that may affect your ability to secure funding.  If you expect a change to your situation, such as adding a little person to your family, please advise your broker upfront so they can factor that into the initial calculations
• If you know your situation will be changing down the track, speak with us ahead of time about helping you plan a strategy that will work for you both now and when your situation changes

From all the team @ mrd have a wonderful Christmas break; we look forward to helping you make 2009 your year of financial possibility.

Happy Investing,

Nick Lockhart
mrd customer care program… because investing is personal