We have had a fantastic response from last week to part 1 of “The Secret To Becoming A Property Millionaire; Effortlessly”. Today, in Part 2, I use specific examples to demonstrate exactly how leveraging and compounding work and how you can harness these very powerful forces so as to make your dreams your reality.
In case you missed part 1, check it out here
It’s not just in the books you read or the seminars you attend. While they may be a huge help, The Secret To Becoming A Property Millionaire; Effortlessly depends more on your understanding of and participation in two distinctly different financial worlds.
Many meander along and accept the status quo in life.
Others, hungry to find the shortest path to their financial success, often search long and hard for answers… everywhere but in the right place.
Australia has about 1.6 million individual residential property investors, according to the Australian Taxation Office – and most of them would be pretty happy.
Over the past 8 years or so speaking with all types of people on the subject of investing in property, many, generally new to investing, ask me the “what if” questions. My broad base of experience has meant my answers have generally put their minds at ease. Two questions, however, that I lacked a good solid answer for were:
Well, with regards to Q 1, I still have no concrete answer for, and hopefully never will. With respect to Q 2, however, I can now (i.e. only now) say from experience… “It’s all ok”!
At the peak of the interest rate cycle the standard variable of the big 4 banks was 9.57%. Assuming you took up the offer of a professional package with the banks and qualified for the full 0.7% discount your interest rate would have been 8.87%. For a peak rate, that isn’t too bad considering long term history. I recall buying my first home in 1994 when the rates had come down to a low 10.5%. They then dropped to 9.5% and I was dancing with joy at how much money I was saving and how cheap interest rates were.
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…
The Reserve Bank of Australia (RBA) will meet for the first time this year, next Tuesday. While it’s difficult to know exactly what they will do with official interest rates, I expect another generous reduction to be handed out; probably 1%; but certainly at least 0.75%.
Question Time @ mrd
Julie & Peter write:
Thanks for all the interesting information over this year. We think MRD do a fantastic job….you have great commitment to your investors.
I have just watched Nicks video again and have a question about the “set and forget” strategy. No urgency to this, given the season but would appreciate your thoughts eventually..
The question is, what do you do as an investor if your portfolio is not increasing in value through a proportion of the cycle..and it can be some years bumping along the bottom..how do you then capitalize expenses if your equity becomes maxed out?
For example, we are in a position of a 60 -70 % lend on three new WA houses and we do not think the bank will increase our equity line in the near future. They have said they will not, based on their previous valuations (2007), which may be even higher than new bank valuations would now be within the current market. We have enough funds to hold for 2 years before we would have to sell one of them. We are topping them up from equity as suggested, but the see the writing on the wall and wonder if we should sell. So our situation is prompting the question.
We would love to buy more property if we could see our way past this. The thing we cannot yet understand is how people can hold 10 “windmills” at 80%? How come the banks let them? And how does it not fall in a heap during those lean years when the wind is not blowing?
We plan to finally do our finances with you in the New Year and will go through the process you suggest. Meanwhile, any thoughts re the above much appreciated.
Thanks once again for all the clear thinking and anti-hype/media frenzy info you have sent our way, its been so helpful to our capacity to think about our situation and not become reactive.
Sincerely Julie and Peter.
Reply @ mrd:
Hi Julie-Anne and Peter,
While you are building your portfolio there will be a weekly shortfall to manage by either using your personal exertion income or your available equity.With either of these there is a risk of not having enough. Your cash flow from wages may change dramatically and unexpectantly leaving you in trouble just as the equity growth can stop periodically. The key to risk management is to not use all your resources. How close you get to the limits depends on your own comfort levels and your perception of the risk involved. Some people have strong cash flows and are impatient to build a portfolio so use all their available equity. Others are more conservative or less certain of their regular incomes and therefore build their portfolios slower. Each person finds their own limit. I call it a SANF ( Sleep at Night Factor ).
We recommend keeping 2 to 3 years shortfall up your sleeve to ride out the slow times such as we are having now. This is one of the worst global financial situations in history and personally I expect it to have worked through the system within a couple of years from when it started in mid 2007. Then we can get back to a more normal property cycle. In fact due to the reluctance of people to invest in anything over the last year there is now a pent up demand that I expect to launch us into another boom time for property prices.
To have 10 windmills at 80% is quite an achievement. Once you get to 5 or 6 the banks start wanting you to operate on lower LVR’s unless you have a strong income to back it up. Personally I would need to keep a strong Line of Credit behind me if I had 10 windmills. I know people who do this but they have good incomes from their businesses.
Depending on your personal situation banks are usually happy to lend out to 80% at least. If you are having trouble getting past 70% then I would recommend you talk to a competent broker rather than directly to the bank.
I trust my thoughts and opinions will add to your knowledge as an investor and help you to make your own investment related decisions. Should you have any uncertainty or concern it may be wise to first seek your own independent advice.
Sincerly, mrd.
>>>> For more on “Windmills” watch Nick’s Video online here.
Reply from Julie & Peter:
Thank you so much for your reply to our question, which was easy to understand and very detailed. The info you provided was very helpful to us. We are going ahead with a finance review with mrd and hope to restructure.
WHEN: Tomorrow – Thursday July 30th
WHERE: Online from anywhere in the world
HOSTS: Nick Lockhart and Martin Bell
COST: Zero | FREE
REGISTRATION: One click - here
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There is nothing technical required from you; simply plug in a set of headphones or turn up your speakers!
Enjoy an information packed hour being shown your five real estate equity retirement options.
Thursday 30th July 2009
1:00pm – 2:00pm: Qld, NSW, ACT, Vic & Tas
12:30pm – 1:30pm: NT & SA
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- Overseas & want to join in?
- Session starts @ 1:00pm Sydney time
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Nick Lockhart
mrd Customer Care Program… because investing is personal
A $34,000 a year shortfall across 4 investment properties was proving a serious drag on the lifestyle of Michael and Sam. When this couple, whom I consider friends as well as valued mrd clients, telephoned to say they needed to sell a property, I suggested we first undertake an analysis of their situation. Selling an asset should be your last option… and in their case it turned out to be completely unnecessary.
Remember Michael and Sam’s story. Chances are you too will one day be faced with what I call an avoidable disaster.
To make sense of the property market we must separate opinion from fact. Opinions will always be heard… just in greater numbers now perhaps. If you are prepared to “drill deeper” and dissect the evidence available; the facts will speak for themselves. There’s no reason for allowing the conflicting voices of opinion to keep you confused!
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
The first step to financial independence is determining how much you can borrow! This all important first step is provided free of charge after you complete our brand new, simplified, secure online form.
