In case you missed part 1, check it out here

While there are different ways for people to get started in property investing, the most common way is that people:

1. Buy a home
2. Pay down the mortgage over time
3. The property appreciates (capital growth) over time
4. Resulting in equity

Leveraging

• To get started as an investor you will need to demonstrate sufficient equity & income, as determined by your lender
• Use the banks money to purchase an investment property
• You now have both your home and your investment property increasing in value (capital growth) over time

Compounding

If the growth in your home allowed you to leverage into a second property after a couple of years, then having two “at work” for you will allow you to reach number four in a similar timeframe. Assuming your income supports your applications (remembering that your increasing rents form part of your overall income) four properties can grow into a portfolio of eight in a relatively short timeframe.

With enough real estate in your portfolio, just a small annual increase in values can be enough to multiply the assets you hold.

For example, five properties worth a total of $2m only needs to grow by 3.25% to give you another $65,000 in equity; enough for a 10% deposit, plus stamp duty and purchasing costs (including mortgage insurance) to secure another $400,000 property. If your portfolio grew by 10% in a year, your worth would have grown by $200,000… or enough to secure three more $400,000 properties (again subject to the bank’s lending criteria).

Which World Do You Think In?

While the strategy is simple and effective, how it works for you in practise depends on which of the two worlds you mentally reside in (see part 1 for more explanation …here)

Cash World Thinking

• Think in terms of income and expenditure
• Believe financial success is on the other side of harder work or working longer
• Trade in shares, commodities or property etc in the hope they will make a profit (more cash)
• Put money into superannuation
• Use loans up to 80% loan to value ratio (LVR) to avoid Lenders Mortgage Insurance (LMI)
• Chase cash, as it is visible
• Tend to have a week to week focus

I have met financial planners and fund managers with Cash World Thinking. They spend years studying… some would say to prove the theory that making money is difficult and complicated.

If you were to invest $20,000, what would you consider an acceptable rate of return?

A random selection of cash management accounts:

• AMP, 3.5%
• Macquarie, 3.15%
• Bankwest, 1.25%

Random selection of 1 year term deposit rates:

• NAB, 4.2%
• Bank of Queensland, 4.25%
• Westpac 3.75%

Highest rated Australian fund I can find on Morningstar web site is an ING fund that has returned 17.6% over a 5 year period.  Negative 30% for the last 1 year.

Average super fund returns over the last 5 year period range from 4.4% to 9.9% per annum
Source: ASIC

If I said that a return of 20% per annum would cause me to hang my head in shame… how would you react? Some would call me arrogant, others stupid. Some would just shake their heads and wonder.

Well I stick by the above statement because the return I look for is not a cash return but an equity return.

Cash is visible and calculated over shorter time frames. Equity is invisible and needs to be calculated over a five to ten year timeframe.

If you want a quick return then property is probably not the answer.

The Higher The Risk The Higher The Return

• And the world is flat! I am not saying to seek out high risk investments but I am saying low risk can give the best returns… however; you need to be an Equity World Thinker.
• “Low risk equals low return” can be a cop-out or alibi for a poorly performing investment (in my opinion).

How To Average A 50% Return On Investment In The Safest Asset Class Available

It is widely accepted that property is the safest investment type. This is evidenced by the banks willingness to loan more against the value of property than against anything else.

Please Note: When I refer to property or “bricks & mortar” as an investment vehicle, I am not referring to all property; rather just that which fits our criteria:

• Residential
• Permanently let
• Well researched
• Median priced
• Positioned close to infrastructure, services & employment
• Areas of increasing demand and limited supply

Assuming a 10% deposit that is not taken from your after tax cash flow (although it can be); but from a line of credit (or similar) that has been secured against existing equity in another property (your family home, another investment property, or someone else’s property; such as parents).

Let’s call this an equity deposit, to differentiate from a cash deposit

If your property only averaged a 5% per annum capital gain (or 14.4 years to double); which is ultra conservative… your return, or profit, on equity invested would be a massive 50%.

If your property increased in value at the doubling rate of 10 years (or 7.2% average annual growth) the profit would represent a 72% return on investment!

A well researched property, in the right location etc, which increased in value at the doubling rate of 7 years (representing a 10.29% annual growth rate), is equal to a MASSIVE 102.9% return on the initial $10,000 of investment from your existing equity.

… and done right, 7 years to double is achievable!

Can you see how it is possible to receive high returns with low risk? This is The Secret To Becoming A Property Millionaire; Effortlessly.

Cash World Thinkers tend to over focus on things such as negative cashflow, interest and vacancy rates, paying back the bank etc. These are legitimate factors needing consideration; but they ought not be the main drivers in an investor’s decision making process.

Equity World thinkers tend to see things in a far more simplistic manner. They ask:

1. “How much available equity do I need to (1) purchase and then (2) hold this new asset, or property?”
2. “How much new equity will this investment return back to me?”

That’s really it… and as I said last week, everything else is just superfluous noise!

For Example

• New property investment purchase costing $400,000
• Average annual growth rate 10.29% (or 7 years to double)
• Average annual capital gain will be $57,142 ($400,000 gain / 7)
• Average weekly capital gain of $1,100
• Weekly shortfall in 1st year of $75 a week

If you were drawing down on the existing equity in your family home to pay the $75 a week shortfall on your new investment property (which is tax deductible by the way); to create a new equity pool of $1,100 a week… would you care?

Q) Yes, but what if interest rates rise and my shortfall blows out to $200 a week?

A) Firstly that will generally flow through to a higher rental income… not to mention a bigger tax deduction; nevertheless, that aside – big deal! Would it be worth seeing one equity pool diminish by $200 a week to see another increase by $1,100?

Yes, absolutely!

Q) But what if it takes me 6 weeks to find a tenant because numerous properties in my development all came onto the rental market at the same time?

A) Seriously, if these are the questions that plague your thinking my suggestion is to “renew your mind”. Your thinking is in the wrong world. This is how a Cash World Thinker thinks.

Let’s Look At How An Equity World Thinker Would Answer This Question…

Assuming rental income was $400 a week, you would need to dip into your equity to the tune of another $2,400. This would equate to $46 a week over the year.

Adding $46 a week to the $75 a week out of pocket expenses means you would now be spending $121 (from equity) a week to make $1,100… or if we added it to the $200 a week out of pocket expense figure (above), you would be spending $246 a week to make $1,100. No matter how you view it, a great deal!

Remember that in these examples I am assuming that no cash from your take home pay is used in either the purchase transaction or the cost of holding the property… but you can use cash if you prefer.

Borrowing money from a line of credit against your home to invest into property is tax deductible; I have not factored that in. Yes… the interest on the borrowings has not been factored in either (for simplicity); however, it’s quite insignificant (between $4 & $10 a week). It too is tax deductible.

Are you now beginning to understand The Secret To Becoming A Property Millionaire; Effortlessly? This is how many wealthy people create wealth while they sleep.

Let me ask you a question…

How much overtime would you need to work to make another $800, $900 or $1,100 a week? I bet it is a lot harder than our “Set ‘n’ Forget… for busy people“™ system of leveraging and compounding. Remember these results are with just ONE investment property.

What if over the next handful of years you invested in a few properties? What if you secured seven in a ten year period?

Would an asset base that grew by $5,000 a week be exciting?

Do you struggle to believe this is possible? Maybe you have believed a common lie that says average wage & salary workers can’t create great wealth in under ten years.

I am convinced that those who don’t follow this strategy… don’t, because they fail to understand it.

Those who do understand what I have written find a way to do “this stuff”. Having no available equity is a temporary delay. They will find a way to get the equity; somehow.

When the dream is big enough… the (temporary) facts don’t count!

Upcoming mrd Web Seminars

Next month I will be hosting a series of web seminars to better explain how you can build an equity pool, across a portfolio of properties, to underpin your retirement needs.

I am not going to simply show one way for you to use your equity to retire on; but five!

I will explain what options are available and the exact steps you need to take.

As always, I will place an emphasis on the responsible use of debt.

Remember… debt is like a scalpel. In the hands of a skilled surgeon it can save a life but in the hands of a mad man it can take a life.

Debt is not to be feared but understood. When you do you will be able to use it to your advantage to create a lifestyle that others will only ever dream of.

Please register your interest to be part of one of our web seminars; we will confirm details with you shortly …click here

Financial Health Check

To request a complimentary Financial Health Check …click here

Happy Investing,

Nick Lockhart
mrd Customer Care Program… because investing is personal

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.

If I were a betting man I would back the person with the right attitude who lacked equity and cash flow, over someone with equity and cash flow… but wrong thinking. I believe it’s those with millionaire mentality that win financial marathons.

Two Distinctly Different Financial Worlds

There are two distinctly different financial worlds. While we all physically live in one, we need to be like mental squatters in the other… and refuse to be moved out.

The Cash World

I like to call the world in which we physically live “The Cash World”. This is where we daily transact… food, clothing, shelter, entertainment, transport and so on.

Everybody lives and transacts in this Cash World… but not everybody thinks there!

Many who venture into business do so with a wrong mindset. With a cash-flow-only focus, they lose sight of the bigger objective; building equity.

It could be more accurately said that while these people thought they were buying a business… they really bought themselves a job.

The Equity World

In saying that we all operate in the Cash World, not all have their thinking there. The business owner who thinks according to “The Equity World” tends to buy or build businesses for the purpose of creating equity.

It is this (significantly smaller) group that will one day enjoy choices that most will only ever dream of. They may choose to sell their business for many times the annual cash flow, perhaps list it on the stock exchange… or simply leverage against its increased value to invest further.

Cash World thinkers spend most of their time working in a business. Equity World thinkers spend the bulk of theirs working on a business.

McDonalds As An Example

McDonalds is a great example. Ray Crock may have started out working in his first store but he quickly developed systems that allowed his business to grow while he went and did other things.

The opening of a new McDonalds “restaurant” is not to help the Crock family improve their cash flow.

This family is not in the hamburger business… they are in the property business.

By finding a suitable site and whacking up a new “restaurant”, they immediately increase the value of their property holdings. Each time they do this, they create new equity which empowers them to leverage into yet another store… and so their empire grows.

The Interchangeable Value Of Both Cash And Equity

Did you know that cash and equity are interchangeable?

They are! We can work for cash and buy equity; by either purchasing new property or reducing the debt on existing property. Equally, using equity, we can set up lines of credit (or similar) to provide us with cash.

The Secret Of Wealth Creation

The secret is… there is no secret! I find that just about anyone who has succeeded in their chosen field; be it finance, business, sport, health, relationships or whatever; is happy to share their story if you were interested and bothered to ask!

When it comes to wealth creation the tools you need were actually taught to you at school; they are leveraging and compounding.

Albert Einstein once said:

“The most powerful force in the universe is compound interest”

It’s so very simple.  Using a relatively small measure of your equity, combined with a large contribution from your bank, you can control an asset that increases in value over time. This in turn generates more equity allowing you to repeat the process over and over and become a property millionaire; effortlessly.

In essence, that’s it… anything else is simply superfluous noise!

Next week I will continue this topic, unravelling exactly how leveraging and compounding works.

I will show you specific examples of how to harness the powers of leveraging and compounding to become a property millionaire; effortlessly.

In life,we all desire to realise our dreams and goals and learning this stuff is something anyone can do.

To request a complimentary Financial Health Check… click here

To view last week’s article: “How The Wealthy Create Money From Thin Air”… click here

Happy Investing,

Nick Lockhart
mrd Customer Care Program… because investing is personal

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

1. How good will your portfolio be if we have another world war?
2. How good will your portfolio be if we have a worldwide recession or depression?

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”!

My portfolio now numbers 13 properties. When interest rates were 9% plus it was of some concern. We would have remained OK for a couple of years at those high rates because the equity we have built up provided us with a buffer (safety net).

Now every 1%  rate cut puts an additional $35,000 a year in my pocket. We’ve had 4% slashed from our rates in recent months (less what the banks failed to pass on) and the season of low interest seems set to continue for some time.

I use a separate line of credit for my property expenses (i.e. rates, body corp and so on); only paying interest charges from my cashflow. Interest rates are falling and rents are rising so cashflow is looking better and better. I don’t have to work, so while the world “financial crisis” works its way through the system; affecting us all, I remain content and comfortable holding a large property portfolio.

Increasing Population + Shortage of Rental Properties
= Low Vacancy Rates = Rental Increases

OK; ’so far so good’. With cashflow under control, there’s no stress in us holding a portfolio of 13 properties. BUT, what about growth and the lenders?

Certainly, growth has been flat over recent months but prices have not dropped in most areas. An article in The Australian last month said:

“In fact, the latest RP Data-Rismark Index results show that Australian house prices declined by just 0.8 per cent in the 12 months to October this year, and increased during the most recent three months”.

They are talking about the country as a whole (the good, the bad & the ugly); whereas certain areas have outperformed others. As an investor I discriminate against much property and only accept that which I believe will perform better for me.

I have always accepted that property values travel through cycles. I have every confidence that the short supply of property will mean that the growth in prices will/must kick in again. NB: We were about 80,000 dwellings short for 2008 and the Australian Bureau of Statistics  expect around 100,000 too few to be built this year; with the undersupply continuing around those annual figures till 2018 at least.

The mrd set ‘n’ forget, for busy people TM system that Nick promotes has worked for me personally; in good times and in bad and I have no reason to believe my ongoing confidence will be met with any disappointment! Why? Because I believe the fundamental law of “supply and demand” will ensure any outcome other than that which I expect, will be nothing more than a short term aberration.

For the benefit of those who have not spoken with me, let me explain a little of my personal strategy. It revolves around drawing on equity from my portfolio. For those of us in “retirement”, that means using low-doc or no-doc loans; not easy to secure with competitive rate at the moment.

What next?

My plan; or perhaps “flukish luck” (ha, ha) when Marion and I contracted to buy our 13th investment property; included an “ulterior motive”. We bought a top floor, 3 bedroom apartment adjacent to the Robina Town Centre. We thought we may eventually like to downsize and move into this ourselves.

We are now very close to having a number of our properties revalued so as to clear the security from our owner occupier. This is to allow us to then change the security supporting some of my loans away from my own home onto some of my earlier investment properties. With our own home unencumbered (and debt free), we will sell up, pocket the lot and move into the 3 bedroom apartment.

I accept new valuations at this point in time will not be great; but that’s fine, our goal is to simply clear the security from our owner occupier so when we sell we remain in control of all the cash we receive. We will do this without having to qualify for any new loans. No need to be concerned about the availability of a low-doc or no-doc offers – we won’t need either!

I already have an offset account set up for our 3 bedroom apartment. Therefore, after selling we will have $550,000 clear (conservatively) to put into an offset account that sits against (what will be) our new principal place of residence. NB: Selling is something we encourage you rarely ever do. In this instance, it allows us to fund the retirement we want. Because it has been our principal place of residence there will be no capital gain tax. A tailored solution that works for us, even in the face of the global credit crisis!

Some may ask: “Why don’t you simply pay out the loan on your new apartment instead of keeping the debt and putting what funds you get from the sale into an offset account”?

Good question! “Because to do so would mean that I would immediately lose control of the $550,000. If I wanted to get at any of the equity created in the new unit (by paying it off), I would have to go through the exercise of making a fresh loan application; and risk being knocked back etc, etc.

My strategy to have the existing debt on the unit 100% offset still ensures we have a $ZERO (non tax deductible) interest bill, while still allowing us the freedom to draw on the $550,000 as I need it over the next “however many years”; without the need to prove serviceability! Now when you add to that the two hundred plus thousand dollars we currently have available in other lines of credit, one can begin to see that no matter how tight credit for a retiree may become, we will be pretty much set for a number of years to come.

The “crisis” will pass, however, in the meantime a clever strategy and proper financial structuring will allow us to avert any interruption our retirement plans may have otherwise suffered. Then, when things get back to normal and my property portfolio  AND RENTS double in value again we will revalue the lot, increase our credit lines and continue to enjoy our retirement (with growing asset & income base). I am a month off 59 now. When Marion & I started on this journey I was about to turn 50 and I have been self-funded now for 3 years.

7 years + 13 Properties + A Financial Crisis = Never Work Again!

I can hear the voices screaming from all around cyber space “It’s ok for you! You have a significant property portfolio”. Compared to most maybe, compared to others… I’m crawling! Guess how you get hold of a large property portfolio yourself?

Start with a small one… but START!

Now is a good time to do it. Did I say “good”? I see the current “Perfect Storm” as being a ‘once-in-a-lifetime’ opportunity. Interest rates the lowest in 45 years (and falling); with property prices very affordable AND a rental crisis that’s only going to get worse.

My message to anybody who over the past years, didn’t get started because of their “WHAT IF” questions is: This works; so get started!

If your “WHAT IFS” are still plaguing you then maybe you should do nothing but sit tight for a few years and ask me again. I suspect, however, that I will have the same answer for you then.

* Please note: I am not a financial advisor, accountant or a finance broker – I’m just a very comfortable self funded retiree. The examples and opinions above are a compilation based on my own personal experiences, both in creating a $4.5mil property portfolio, starting with only $50k equity and also in helping a large number of people achieve similar goals of million dollar property portfolios. If unsure then consult your own accountant; hopefully one with some property experience and a personal retirement plan that is working. Financial advisors, in my opinion, rarely understand or recommend property, as their commissions come from other investment products. It should be a case of “don’t believe what people say, believe what they do!”

To ask me any questions or arrange a chat regarding how my chosen retirement plan may work for you, click here

Would you like me to guide you through an mrd complimentary & no obligation “Finance Structure & Cashflow Health Check”? Then simply complete the online secure form and I’ll be in touch with you next week; click here

Happy Investing,

Martin Bell
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

Now things could happen over the next few days to change that. For example, the Federal Government announcement concerning the next round of stimulus to be announced. Factors such as this cannot be properly considered at the time I am writing this.

Initial evidence suggests the Federal Government’s cash handouts in December ‘08 fell short of having the desired effect. It needs to be noted, however, that official reporting on Christmas spending last month has not yet been released.

Assuming the cash rate will move down by another 1.25% (to 3%) by early March… I see two options before the RBA when they meet next Tuesday:

1. Move rates down by just 0.5% in February while waiting for official figures to indicate exactly how much impact the 1st stimulus package had on Christmas spending. This option would also allow the RBA time to digest the detail of the 2nd stimulus package and assess its likely impact. NB: 2nd stimulus package will be announced soon… possibly this week end.
2. Move rates down by a full 1.0% in February and not risk losing another month whereby the economy could be further stimulated. If they take this option and risk “over cutting” rates next Tuesday they can then put the brakes on a little and do less the following month.

Of course there could be any number of other options and the net effect is that the next two months could see the official cash rate fall below 3%; that is certainly not out of the question.

Personally I suspect the RBA will view their responsibility of overseeing monetary policy with much caution next week and attempt to make a significant contribution to boosting both business and consumer confidence quickly.

At this time our economy is quite fragile and to ‘play it safe’ would seem the most responsible course of action the RBA could take. Managing inflation is no longer of primary concern. Even so, inflation has been taken care of anyway. Falling commodity and labour prices has rectified any inflation problems we were considered to have a year ago… adding to the argument for lowering interest rates.

Have you heard it said that “in every adversity lies the seeds of a bigger and better opportunity”?

This is not just a string of nice words, but a profound truth. The bigger the adversity, the bigger the opportunity. Assuming we understand that influences of “supply & demand” and “herd mentality” on values (even though in the short term aberrations may occur); we will be better positioned to SEE the bigger and better opportunities available now.

• I believe there are more pessimists than optimists; it’s easier to be negative just as it’s easier to grow weeds than flowers
• When it comes to matters of finances, more people are more influenced by their emotions than facts
• If “everyone else” is doing it… so will we
• In Australia we have a growing demand for housing continuing, with a very limited supply
• Confidence is at an all time low; albeit without justification in many instances
• Some developers have gone out of business, others have put the brakes on until they see the property market pick up… many of the rest would still construct if they could find a bank to lend to them
• If the source of this supply problem was fixed overnight, it would take years before the solution worked through the system resulting in sufficient numbers of additional completed housing
• Those who hold property today can look forward to the benefits of significant capital gain… resulting from the next up-cycle
• Up-cycles follow seasons where housing is considered affordable
• With interest rates quickly falling (and to levels most Australians have never seen in their lifetime) and rents being forced up by the growing demand (with lack of supply for years to come) housing will soon be considered VERY affordable

The numbers look really good now and are only going to get better. This gives me confidence that broadly appealing residential property, in sought after locations… will, over the next few years, grow significantly in value. The doomsayers and their followers will have about as much credibility as a cult leader and his key disciples.

My Suggestion:

Assuming you have had an analysis run on your personal situation and understand the associated costs and responsibilities of both buying and holding real estate… now is a fantastic time to buy – i.e. for those who subscribe to the mrd buy/hold strategy (if you’re a property speculator, trader and/or renovator – “good luck & may the force be with you” – ha, ha)

My property portfolio is just about always adding to my wealth. Either my property values are increasing; and adding to the amount of equity I have to work with… or the rents are increasing; and adding to my income base. Remembering that to acquire more property we must demonstrate to our lender sufficient equity and income… I am always winning with real estate.

Safety In Numbers:

People feel safer in numbers; that’s why the herd mentality is so prevalent… but recent history has shown that if you followed what was popular you may have lost half your super or shares etc. I believe real opportunity (like risk) comes from our knowledge (or lack thereof) and our willingness to “swim against the tide” of popular opinion.

Interest Rates & Holding Costs:

Currently the CBA offers the lowest professional package interest rate; just 6.04%. If I am right and rates come down by another 1.25% (or more) over the next 5 weeks… and even if it were not all passed on, we would be looking at being able to borrow for about 5%!

That means the total interest bill on a property that cost $400,000 (assuming you borrowed 100%) would be more than covered by a weekly rent of $385. Now I know that there are council rates, body corporate and rental management fees etc to come from this… but so too there are tax deductions and the strong likelihood of more rent than $385 a week. Watch how, when the numbers change so much in such little time, even the herd will see the opportunity! And when they do… we will have our next up-cycle.

Click here to take us up on our complimentary, no obligation offer of an mrd “Finance Structure & Cash Flow Health Check”.

Happy Investing,

Nick Lockhart

mrd customer care program… because investing is personal

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.

“How To Prosper And Retire On Your Real Estate Equity – One Hour Lunchtime Webinar”

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

Please note:

1. One click registration to the webinar is simple click here
2. You will receive an auto response email confirming your registration
3. You will receive an auto response email reminding you an hour before the event
4. Five or ten minutes before the event simply click the link in your email inbox to be automatically added to the meeting

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.

Times Of One Hour Lunchtime Webinar

Thursday 30th July 2009

One Click Registration

1:00pm – 2:00pm: Qld, NSW, ACT, Vic & Tas

12:30pm – 1:30pm: NT & SA

11:00am – 12 noon: WA

• Overseas & want to join in?
• Session starts @ 1:00pm Sydney time
• Sydney time is GMT + 10 hours

I’ll see you online! Click here to register

Nick Lockhart
mrd Customer Care Program… because investing is personal

Remember Michael and Sam’s story. Chances are you too will one day be faced with what I call an avoidable disaster.

mrd is made great by the fantastic, competent team that I have the privilege of working with. One team member with a strong analytical ability is both an experienced property investor and licensed finance broker. After just a few hours, he was able to identify and demonstrate a way for Michael and Sam to eliminate their $34,000 shortfall; without selling a property. That means over the next property cycle Michael and Sam will be $350,000 wealthier; just by hanging onto the property they had planned to sell.

Michael and Sam, not their real names, have about $2m in property value with just $800,000 of debt (40% LVR). Their broker, one outside the mrd network, did not understand loan structuring for property investors as we do. This jeopardised them seeing their property portfolio double to $4m in value… over the next property cycle.

Property investors are business owners and cashflow shortfall is simply a business overhead. Michael and Sam’s shortfall of about $34,000 a year was insignificant; given it represented just 1.7% of their current property portfolio value.

***********************************

Michael and Sam’s Problem

Michael and Sam had been structured in such a way that they were left personally funding most of their business overheads… and this understandably put a huge strain on their lifestyle.

Michael and Sam’s Solution

• A more “investor friendly” way for them to structure their finances
• Point out that they were paying a higher interest rate than they qualified for from their lender
• Point out that Sam was receiving significantly more deductions than her income allowed her to use
• Recommend their accountant look at ways of altering their income distribution so as to allow Sam the tax deductions she was missing
• Give them a suggested alternative financial structure to have their broker establish for them

Michael and Sam’s Break Even Point

Even if they never saw another rent increase and it took all of 42 years before their property values doubled (their break even point), Michael and Sam could comfortably service the entire $34,000 shortfall from their existing equity. They had thought their only option was to sell (and in a buyer’s market too) in order to reduce outgoings. The knowledge to reorganise loan structures and income distribution proved their best option; allowing them to eradicate the entire $34,000 drain on their family while holding onto an appreciating asset!

***********************************

Don’t Perish From A Lack Of Knowledge

Selling property because of a cashflow shortfall is akin to closing a business because it has overheads. Not understanding how to isolate investment property expenditure from personal exertion income drives many people to unnecessarily sell.

Your Retirement Realities

This story had a happy ending. Sadly, many don’t. Do you question why after a lifetime of work, most people can’t fund a dignified retirement? Outside of the pension, your retirement funding options will come from one of the following:

1. Inherit it
2. Steal it
3. Learn to manage debt properly

Sadly for many, the need to understand responsible and proper debt management is not matched by the priority most people put on it. Therefore, history will continue to repeat itself and most people will continue to retire broke. If anything you read from me provokes a question or challenges you in some way… or if you are concerned that your finances have not been structured to best meet your requirements; then add a reply to the bottom of this article… or email us.

…Over To You

Each situation is uniquely different and no one persons best option will necessarily be another’s. A “Financial Structure and Cashflow Health Check” is in my opinion essential… and the starting point forward for all property investors; especially those feeling financially constrained.

If we can possibly help you like we did for Michael and Sam, please let us know. Benefit measured in many hundreds of thousands of dollars will cost you nothing more than the effort to ask and the willingness to learn.

Yes, I would like to take up your complimentary offer of a “Financial Structure and Cashflow Health Check” – 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