Some people are simply confused right now. They have heard so many mixed messages in the past 18 months that they are unsure if now is a good time to step out and invest… or hold back and minimise their commitments.

If that’s you, don’t stay confused. It’s only when we have the right information that we can make fully informed decisions.

• Keep asking questions
• “Lash out” and have us prepare a Finance Structure & Cash Flow Health Check (there’s no cost anyway)
• Explore your retirement possibilities; not based on what you have done to date but what is possible in the next 7 to 10 years

To have us assist you, click here

Happy Investing,

Nick Lockhart
mrd Customer Care Program… because investing is personal

In the current round of Web Seminars we are offering, I highlight four key factors that are a MUST… if you expect to draw any credible conclusions.

1.    Record Population Growth
2.    Investors Have Fled The Market
3.    Home Ownership Unattractive
4.    New Construction Has Stalled Badly

1. RECORD POPULATION GROWTH

Australia is currently experiencing the fastest population growth in 200 years. Our population is predicted to grow by 350,000 this year for the first time in over 200 years. That represents approximately the combined total population of Geelong, Cairns & Bunbury; or the whole of Canberra.

The 1850’s Gold Rush years, Post World War 1 (1919 onwards) and post World War 2 (1946 onwards) saw our 3 previous population explosions. Today we see a similar pattern emerging; i.e. rapid and prolonged growth, too few workers and pro-immigration government policies.

Record population growth means a significantly stronger demand for new housing! Given our record numbers of new migrants will generally rent for a season, demand for rental properties will continue to strengthen.

2. INVESTORS HAVE FLED THE MARKET

Rising interest rates in recent years have squeezed rental yields making property look unaffordable. Add to the mix a booming stock market (averaged over 20% per year between 2004 and 2007) and one can see why property has not been the preferred investment vehicle of recent years.

Since becoming familiar with the term “subprime”, seeing the global credit crisis unfold… and hearing of property values in the US & UK falling by 30 & 40%, many would-be-investors have opted to stay on “strike”. It’s fair to say that since the highs of mid 2004 only the ‘brave’ have continued to invest in property.

Investor demand accounts for about 50% of all new housing starts and about 70% of unit starts. Therefore, that investors have fled the market means significant negative impact on the supply of new housing and increased demand on existing rental accommodation.

3. HOME OWNERSHIP HAS BEEN UNATTRACTIVE

As with investors. the housing affordability barrier, rising interest rates (& general living costs) and of course the US initiated subprime crisis has left many would-be home owners lacking the confidence to purchase.

Scared, priced out of the market, unable to secure funding or unable to service a loan? regardless of the reason why new home ownership has been unattractive; the result has been that many renters in recent years have simply continued to rent. This has placed further pressure on existing rental housing stock

4. NEW CONSTRUCTION HAS STALLED BADLY

Since 2005 the absolute number of completed residential properties has fallen and they are forecast to continue falling in 2009. The US subprime crisis cemented this downward trend in demand for new properties. Add to that, in recent years we have seen the high profile bankruptcy of some large developers along with massive financial pressure on many smaller developers. The cost of finance has skyrocketed for developers… i.e. if they can find a lender who will back them. Understandably, developers are very nervous… many have simply shelved their new projects until such time as they see clear evidence that investors have returned to the market.

Developers going broke, developers shelving projects and/or developers unable to secure funding means new construction has stalled badly and as a result greatly reduced the supply of new property further adding to pressures on existing housing stocks.

DISSECTING THE EVIDENCE

• FACT: We are experiencing the greatest housing shortage in 200 years
• FACT: Because of the new Federal Government’s immigration policy, we are experiencing the strongest population growth in 200 years
• FACT: Since about mid 2004, broadly speaking investors have fled the market
• FACT: Since about mid 2004, broadly speaking home ownership has remained unattractive and renters have continued renting
• FACT: Since about mid 2004 the construction of new dwellings has stalled badly
• FACT: In mid 2004, national rental vacancy levels were about 3.5%. This level is considered a balanced market. Rental vacancy levels have dropped to below 1.5% now and are expected to continue to drop to historical lows of between 0.5% and 1% in 2009. These levels represent a stressed market
• FACT: When the demand for rental housing grows at a faster pace than supply, increased demand can be offset by diminishing vacancy levels
• FACT: When vacancy levels reach just 1% it is said that we have NO VACANCY, as the 1% represents the few days between tenants moving and carpets being cleaned etc… prior to a new tenant moving in
• FACT: Therefore, once vacancy levels fall to 1%… there is no room left to offset increasing demand by diminishing vacancy levels
• FACT: When demand increases and supply decreases and vacancy levels are already stressed; i.e. no vacancy… market forces mean rents have to go up… and significantly where population growth is significant
• FACT: Interest rates are the lowest they have been in years and are expected to reach (near) record lows by mid 2009

Now you have the FACTS, rather than simply “opinions”; may I suggest you draw your own conclusions as to what might happen with Australian property in mid to late 2009?

• With the cost of renting about to soar and the cost of ownership dropping significantly (i.e. rental incomes up and interest charges down), what do you expect the market will do?
• With stock market volatility and uncertainty and interest earned on cash deposited dropping away, what do you expect the market will do?
• With serious increases to the first home owners grant, what do you expect this group to do?
• Given rental properties vacated by first home owners will not produce a glut… because vacancy levels are at an all time low (stressed market) and the population is growing by the size of Canberra each year, what do you think the market will do?

Can I go out on a limb and tell you what I think; I may be wrong, but I don’t think I am?

1. I expect rents to soar in 2009
2. I expect interest rates to continue to drop next month and in 2009
3. I expect confidence to come back to the market, drawing back owners and renters alike
4. Given there is a lag of a few years from when developers decide to build again and new stock being ready to live in… I see no relief for the poor tenant for at least a few years
5. I also believe that the combination of all that I have just outlined will result in the next property price surge

So, in summary…

Those who have been building a property portfolio as their preferred vehicle for funding their retirements (NB: assuming they bought the right residential property in the right areas) are soon going to experience the property investors trifecta:

1. Rising incomes (rents)
2. Falling costs (interest)
3. Increasing equity (values)

I would love to address the subject “We are not the USA” and compare the FACTS relating to how we are different and why what happened there will not happen here; but I will save that for another day.

May I invite you to register your interest for either our next FREE Web Seminar this Wednesday evening… or if you let us know what other time(s) best work for you, we will run them according to demand CLICK HERE.

Happy Investing,

Nick Lockhart
mrd customer care program… because investing is personal

You can register for next Wednesday evening; December 3rd… or nominate a preferred time when you would like us to host one… and if enough people want a lunch time or weekend one e.g. we’ll arrange it!

CLICK HERE TO REGISTER FOR THIS FREE EVENT NOW!

You will learn…

• Four important factors that must be considered if you want to accurately analyse the state of our property market
• Rental market equilibrium; how is it reached and what does it mean
• What are balanced and stressed rental markets and what must follow
• Changing property cycle and fresh wealth creation opportunities
• How the US property market works and why they got themselves into so much trouble
• Why the value of your home will NOT follow that of Europe and the USA
• Plus much more (including answers to YOUR questions, at the end)

Risk is avoided by right knowledge. Don’t assume that you will not learn anything and don’t assume this is a veiled disguise to sell property. mrd is and remains committed to mentoring and providing quality education to those hungry to learn… FREE of charge!

This is an opportunity to INNOCULATE yourself against small mindedness, fear and negativity… or just get a hold of the FACTS so your financial decisions will not be the result of confusing opinions but rather considered reasoning. CONFUSION can produce NO good thing but understanding will empower you to make those decisions that are right for you!

• Register NOW
• Join in our “Virtual Conference Room”
• Gain knowledge
• Dispel confusion
• Eliminate unnecessary risk
• Secure a competitive edge for 2009

The presentation takes about 90 minutes, followed by Q’s & A’s. Hang around and ask a Q or sit back and listen to those asked by other people.

Feedback from our previous 3 Web Seminars: testimonies from attendees

So may I respectfully encourage you to put aside 90 minutes and from the comfort of your own home allow me to take you beyond opinion to economic analysis. I’ll focus on a comprehensive market analysis; from an economics paradigm.

“What In The World Is Going On With Property” Web Seminar

WHERE:
- Online (Broadband connection & Speakers or headphones required)

WHEN:
- Wednesday 3rd December 2008

TIME:
- 6:00pm in WA
- 6:30pm in NT
- 7:00pm in QLD
- 7:30pm in SA
- 8:00pm (NSW, ACT, VIC & TAS)

DURATION:
90 minutes (or less); plus time for questions at the end

PLEASE NOTE:

1. Registrations are essential as we need to send you an invitation link that you click at the allotted time to bring you in on the event
2. In keeping with our policy of keeping education FREE, mrd will be picking up the entire cost of this event; so register now by either phoning or using our secure online link

• Telephone Registration: 0424 144 103
• Register Online – CLICK HERE

CLIENT FEEDBACK FROM EARLIER WEB SEMINARS – Click Here

Thanks, I look forward to “seeing” you there.

Happy Investing,

Nick Lockhart
mrd customer care program… because investing is personal

That means that aside from those 20 who missed out last time, we can accommodate another 30 people; actually 27 now as 3 of those spots have already been taken up.

At The Conclusion Of This Event You Will Understand

• The current state of the Australian property market
• Which way property rents & values are likely to head, when… and why?
• What impact the current economic global slowdown will have on the value of your home and your investments

Nothing good is produced by confusion! So when it comes to you successfully navigating your way forward; in these more turbulent times… DON’T BE CONFUSED; it is a sure recipe for disaster!!!

So if:

• The constant negativity in the media has left you unsettled… even a little; or
• You question where things are at… and what the future may look like; or
• You have been told that Australian property values could fall by up to 40%; then…

It’s time for your inoculation!

My goal for this event is simple:

“DISPEL CONFUSION“

Gaining well researched and sound KNOWLEDGE will position your to make the very best financial decisions in 2009 and beyond. So may I respectfully suggest you place a PRIORITY on participating in this event at this time?

Put aside 90 minutes and, from the comfort of your own home, allow me to move beyond opinion to economic analysis. I want to focus specifically on an analyse of market rents and market values… from an economics paradigm.

MY PROMISE is simple. This “value add” evening will not resemble what I am seeing a bit of lately… desperate real estate agents “pushing their thing”, any way they can. That’s simply not in the DNA of mrd!

BE WARNED:

• There are a lot of “mixed messages” and numerous opinions being bandied right now
• Without sound research and clear understanding this will produce confusion
• Where confusion reigns nothing good is produced
• RIGHT NOW people are making financial decisions, from a position of confusion
• Mistakes are being made every daily

By participating in this FREE event, you will discover that I agree with some of the claims being made by various economists and analysts (some claims line up with warnings that mrd has been sounding for years). You will also learn that I strongly refute other claims being made by some… and I will show you exactly why.

I am not suggesting that you suffer through 90 minutes listening of my subjective (biased) opinions. NO! I will objectively unravel economic reality and look at the ACTUAL current state of our property market. Then, based on solid research and indisputable economic laws… suggest the most likely outcomes for property values and rentals moving forward.

Thanks for the encouraging feedback from those who participated this week. It seems everybody was pleasantly surprised and found the information more relevant and more beneficial than expected.

“What In The World Is Going On With Property” Web Seminar

WHERE:
- Online (Broadband connection & Speakers or headphones required)

WHEN:
- Wednesday 19th November 2008

TIME:
- 6:00pm in WA
- 7:00pm in Qld
- 7:30pm in SA & NT
- 8:00pm (NSW, ACT, VIC & TA)

DURATION:
90 minutes (or less); plus time for questions at the end

Registrations are essential as we need to send you an invitation link that you click at the allotted time to bring you in on the event.

In keeping with our policy of keeping education FREE, mrd will be picking up the entire cost of this event; so register now by either phoning or using our secure online link.

• Telephone Registration: 0424 144 103
• Register Online – CLICK HERE
• Find Out More About This Event – CLICK HERE

CLIENT FEEDBACK FROM EARLIER WEB SEMINARS:
Click Here

Thanks {SPOUSES_SALUTATION}, I hope to “see” you there.

Kind regards,

Nick Lockhart
mrd; Keeping Education FREE!

Do you have questions about buying, selling, or managing your existing debt… don’t despair; you’re not alone? Dissecting fact from opinion and protecting that which you have worked so hard to accumulate can be like navigating through a mine field. Many of my readers feel the same way.

To help you to understand where the property market is positioned right now and teach you ways to protect your asset base, I am hosting a property market briefing night next month in Melbourne.

This round table event will be held in the boardroom of my accountants office (on Tuesday 19th August) and only open to the first 18 people to register. Sorry, but space is very limited.

If you would benefit from participating in an open discussion that addresses those relevant questions most of us have right now simply click here or call 0424-144-103 to reserve your seat.

Subject to the popularity of this evening we may hold similar evenings in other capital cities. If you are from outside Melbourne but would attend something like this in your city, please send an email with your best contact details (including your address, email & mobile phone number); click here if outside Melbourne.

Westpac say rates will stay on hold this year, while the Commonwealth Bank is tipping one 0.25 of a per cent rise.

TD Securities global chief strategist Stephen Koukoulas has forecast the Australian economy has now started to slow enough to prompt interest rate reductions over the next year. The investment bank has predicted 125 to 175 basis points; between five and seven rate cuts may be lopped from the official cash rate of 7.25% by the end of next year!

Somewhat supporting that view, the National Australia Bank’s chief economist, Alan Oster, said there was a 30% chance the Reserve Bank would begin cutting rates this year as economic growth deteriorated. An interest rate cut this year is a possibility, but there may not be enough of a slowdown,” he said. “But we think that by the late 2009 they will be down to about 6 per cent.”

With so much “background noise”, do you find yourself confused… and wonder who to listen to?

Possibly that question can be better answered by looking back into history. Let’s consider the past 34 years, highlighting just some of those “dramas” that screamed “NO” to those considering an investment throughout the 70’s, 80’s, 90’s and 00’s:

• 1974 World Oil Reserves “Running Out”; Prices through the Roof
• 1979 Oil Shortage Produces Petrol Rationing & Spiraling Prices
• 1982 Discovery of AIDS
• 1983 Tax Deductions on Property Depreciation Abolished
• 1985 Capital Gains Tax Introduced
• 1985 Average Home Loan Rates Hit a Whopping 13%
• 1987 Stock Market Collapse
• 1988 Pilot Strike – Hawke sacked them
• 1989 Interest Rates Hit 17%
• 1991 1st Gulf War
• 1991 Australia Enters Two Year Recession
• 1992 Interest Rates Fall To 7%
• 1998 Asian economic melt down
• 2000 Introduction of GST then 5 Interest Rate Rises
• 2002 SARS health epidemic
• 2001 New Era of War & Terrorism
• 2002 2nd Gulf War
• 2002 Bali Bombing
• 2004 Tsunami
• 2008 Subprime credit crisis
• 2008 12 Interest Rate Rises in a row since 2002

Despite interest rate highs & lows, times when inflation is high or low, unemployment high or labour shortages… In times of uncertainty & fear… residential real estate (unlike any other type of investment) has insulated itself against any and all external conditions that at the time seemed a threat!

Why is it that, against all odds, residential property has been able to consistently insulate itself against such ‘adversely climatic times’?

I believe it’s because, regardless of whatever else may be happening , everybody needs a place to live! They may buy or they may rent… but as with food/water and shelter; we all have to have a roof over our head.

With the many challenges listed above, how has residential property performed over the past 37 years? Using Brisbane as an example:

• Brisbane Median House Price 1970: $8,500
• Brisbane Median House Price 1980: $34,500
• Brisbane Median House Price 2005: $350,000
• Brisbane Median House Price 2007: $448,500
  Source REIA

That’s an average of better than 10% P.A. growth; or less than 7 years to double… for 37 years!

Remembering these figures are based on median prices; i.e. those carefully selected properties (close to shops, schools, hospitals and infrastructure) AND those poorly selected/located, “bad” properties. Careful research should allow us to discriminately invest in the better, higher yielding properties.

What the papers say and the analysts predict is in my opinion just noise… static that makes it hard to hear the real story. Don’t let confusion rule in your world… or you will lose every time! Focus on the big picture – your goals, where you want to “arrive in 5, 7 or 10 years”.

These properties are usually negatively geared, leaving a cashflow shortfall between rental income and outgoings; covered by tax savings and owner contributions.

Contributions from investment property owners are often the subject of misunderstanding by those less informed investors.

I believe building an investment property portfolio ought to be viewed much the same way as one would building a business; with a defined strategy to manage overheads and any cashflow shortfall.

Let’s look at 3 ways to attack this shortfall, so as to allow you to not lose sight of the main goal – Capital Growth!

Strategy 1.

All Investment Property Income Goes Into, And All Investment Property Expenditure Is Taken From… Personal Funds

It could be argued that this is the strategy of the less informed and less financially organised investor; who underestimate the importance of cashflow. Funding the overheads of your investment property from personal income may suit those with healthy incomes/cashflow; however, it is not my preferred option.

Strategy 2.

Capitalise Your Investment Property Expenses

These expenses include body corporate, rates, maintenance, repairs, insurances and so on. This strategy, commonly adopted by those more educated and organised investors, will significantly reduce the financial shortfall associated with an investment property.

The culture associated with property management, particularly in Western Australia, is to pay council rates, body corporate contributions and costs associated with repairs & maintenance, from rental income, on an owners behalf… banking into an owners account the net rent left over each month.

Following this strategy means those expenses are being taken from income, or cashflow. My preferred option is to have a facility such as a line of credit (or redraw account) and borrow the expenses… paying only the interest component rather than the capital component of such bills. Time does not permit me (in this blog) to fully explain all the benefits of ‘running up a little extra debt’ so as to preserve cashflow… but the figures will speak for themselves when presented.

Strategy 3.

Capitalise All Expenses And All Interest

Don’t be confused by the terminology. This is a fancy way of saying that the difference between your investment property’s inflow (rental income and tax savings) and outflow (interest, body corporate, council rates, repairs, maintenance, property management fees and so on) are “flushed” through a line of credit, for example… resulting in a zero impact on your weekly budget. Doing this means that any and all cashflow shortfall your property produces is taken up by existing equity… rather than impacting on your cashflow and lifestyle. That is, you contribute nothing to the shortfall.

If you are still with me, you would by now be starting to understand why I say that “having the right financial structure is almost as important as having the right property in your portfolio”

The mrd “set ‘n’ forget” approach to property investing is further enhanced by this strategy. Your lifestyle is not impacted by cutting into your weekly cashflow and, assuming you buy the right investment property, your equity growth year by year will be significantly more than any equity used to make the property affordable in the first place. Of course over time rents will rise and the property will become neutral… and then positive; putting $’s back into your pocket.

Put simply, this strategy is one where we are replacing our cash input with an input of equity (or yet to be realised capital gain).

NB: To claim as a tax deduction the capitalised shortfall on interest is a “grey area”, given different accountants have differing opinions. Generally the ATO will (subjectively) look at the intent behind any tax effective strategy you follow (please speak with your accountant).

While it is can be an effective “cashflow preservation” strategy, my preference is to err on the side of caution and not claim as a tax deduction any capitalised interest.

Horses For Courses

There are differences associated with individual properties… and individual investors. As a broad-brushed “rule of thumb”, the shortfall on a typical investment property will be around 2%. We should take the attitude of a business owner and divorce ourselves of subjectivity and emotion. Doing this allows us to calculate our “break-even point”; and determine if a potential investment will result in us taking a step forward financially… or backwards. This is not mystical or weird; neither should you be left uncertain or fearful.

Put simply, for a 2% shortfall to be an unwise decision… an investment property purchased would have to have a 36 year doubling cycle! Therefore, if you expected your investment property to double in under 36 years you would be ahead! This assumes you have zero rent rises over that time frame. The likelihood of this is laughable and based on history, one could expect (the right) property to double in value 5 or 6 times!

Related blog post to further explain this;
Reading This Will Cost You Five Minutes; Not Reading This Could Cost You Years!

Happy Investing,

Nick Lockhart