The 7 Pillars of Financial Freedom FREE eBOOK
Written on the 19 May 2016 by James Cagney
Increase your Financial IQ and beat the Banks
About the Author
The author of this eBook, James Cagney, maintains that you should only seek out people who have experience and have achieved success in a specific field of endeavor. James says when requesting financial and property advice you should ensure that you only take advice from someone who has successfully invested. James and Shelagh (his spouse) and their five children migrated to Australia from South Africa in 1998. They have made a success of their lives in Australia. James and Shelagh now have ten grandchildren who were all born in Australia.
James has been a real estate agent for over 13 years and has helped many international and local investors to build a profitable property portfolio. James is a credit representative with Asset Financial Services Pty Ltd and has assisted investors to obtain the best loan for their individual circumstances and the formulated a strategy so his clients can achieve their financial goals.
James has obtained the following qualifications over the years to equip himself to help you:
James can be contacted by mobile: 0416 137 645 or through via his website: www.jamescagney.com.au
The information below should be taught in every school. If they did our country would have the wherewith all to progress into the 22nd century and compete with other 1st world countries. However, I chose to fight the battles I can win and arguing with all the public servants in the Education department is not a task I am going to do. Therefore I leave it to you the present and future parents to do. If you do not understand and use the principles in "The 7 Strategies you need to Create Wealth" how on earth are you going to teach your children. Children learn what they live and, live what they learn so now it is entirely up to you. I trust you will accept this responsibility and not abdicate the responsibility of the future of your children to the Department of Education.
PILLAR No. 1 - HAVING A LONG TERM FINANCIAL STRATEGY
I am going to show you the"Secrets of the Rich". Unfortunately most of the rich do not want to share their secrets. Why do you think that is? Because they want to control the wealth in the country and let the middle class pay the majority of income taxes. We will cover the following secrets i.e. Leverage; using Other Peoples' Money (OPM); Compound Growth; Financial Structure; Hold and Control; Rapid Mortgage Reduction plus much more. Are you interested? Are you excited that I am going to share these secrets with you? After all why should we let 10% of the population control 90% of the wealth? This is your opportunity to become wealthy. I have covered goal setting and having a long term view about your financial future in detail in Strategy 1 "Develop the mindset of the wealthy". I would highly recommend that you read this strategy before you go any further reading more. Click >>> HERE to go to this strategy. I am weary of all the "Get rich quick " schemes that are offered over the Internet today. It is so easy and inexpensive to market over the Internet today and there are so many con artists out there take advantage of consumers. Be wary of these schemes because they come with believable graphs, phony evidence and testimonials. I prefer the "Get rich slow" strategy because I am not a big risk taker. Let's look at what we all have to do in determining a long term financial strategy.
What are your Motivations to become wealthy?
Some people have hang-up's about money and need to "Develop the mind-set of the wealthy". If you have self-limiting beliefs about money and wealth these secrets will only give you knowledge, which, if not applied, is of no benefit to you at all. It's all about money because it is better to have it and not need it - than to need it and not have it.
Write down your personal goals / motivations for wanting to be wealthy. The reason I use the word " Motivation" because when the word is split it becomes MOTIVE for ACTION. Write the following headings and then let your imagination go. Do not let any self-limiting thoughts enter your mind whilst you list your motivations:
FAMILY: How will wealth affect your family. Who would you help financially. Who would you not give money to. The lack of money distorts a lot of families. But a lot of money can do the same. You need to be a good Stewart of your money. It is a big responsibility so protect your family.
BUSINESS: This is essential because money can disappear like water in a bucket full of holes. I have run businesses that have made lots of money and it so easy to spend and waste resources. I have also run businesses that are losing money and and it is extremely stressful. This often has a detrimental affect on your FAMILY goals.
PERSONAL: How wealth affects your personal life. I have heard people say that money makes you a nasty, arrogant, unfaithful, proud (the list goes on) person - I disagree. Those people had these flaws in their character to start with and money has just given them a means to show who they really are. Money can be a force for good and a force for evil. This is our choice alone.
SPIRITUAL / CHARITY: A secret of the many of the wealthy is they know that money you give away most times comes back with great dividends . Catherine Ponder wrote a book " The Dynamic Laws of Prosperity" and she shows many examples of how the principle of giving has prospered many people and made them more wealthy. The principle of tithing is originates in the Bible - God's law of prosperity.
LEISURE: You must enjoy your money and there are places to see, roads to travel and seas to cross.
Set these goals/ motivations above and most important cut out pictures of the places you want to travel to, and place them in a pocket photo album or onto your dream board. You have to visualize something before you can attain it. Paul J. Meyer, the founder of Success Motivation Institute, said 'Success is the progressive realisation of worthwhile personal goals". What he taught me was that you must commit your goal to writing and put a deadline for it's attainment. It does not mater if you have to change your deadlines. If there is no deadline it is nothing more than a pipe dream. The more often you read your goals out loud the quicker you will achieve them.
What are your Concerns?
Concerns could also be termed the obstacles preventing you from achieving your goals. You need to confront these Concern otherwise you may not achieve what you want in life. Once you have written these concerns down you can then devise a strategy to conquer them. There are always challenges and risks in achieving lofty goals. If there are no obstacles then perhaps your goals are not high enough. When faced with a business or investment decision there are bound to be concerns. If you did not have concerns you might be at risk of being a fool. Do not let these concerns stop you from achieving your goals. Be careful who you share your goals with. Walt Disney said " Don't let anyone steal your dream" These negative, non-achievers, failures, dole bludgers will try and steal your dreams to become what you can be and achieve what you can do. So when you have butterflies in your stomach before you take action know that is normal. Just get the butterflies flying in formation and you will be right. There are three common concerns that will stop you from doing something about your financial future:
Another major concern I have come across which inhibits people from investing is "Job Security". The fact is that nobody's job today is 'safe'. In Queensland in 2013 approximately 14,000 Government workers lost their jobs. Ford and Holden, icons in our country, are closing their manufacturing down? Many established mines are closing down. Arium Steel in Wyalla is in administration. Banks are reducing staff? The fact is no one has a secure job these days - so stop stressing. The question to ask yourself is "if you lost your job would you be able to find another". You need to multi-skill yourself so you can easily find a job if you are retrenched. Because you have a job do not fall into a comfort zone. Companies will close, industries will become redundant, shares will cease to change, companies will restructure but it is not what happens to you but how you handle what happens to you that makes the difference. .
The fact is if you are willing to work you will always find a job. Could you work in construction, hospitality, as a cleaner, or anything else? It does not matter what you do and sometimes we have to get off our high pedestal and take a lower job less money until we can find something better or re skill ourselves. Alternatively, you can open your own business or become a contractor. Opportunities are always available in Australia so there is no reason why you can't find work. The famous army general Douglas MacArthur said "There is no security on this earth. There is only opportunity". The problem is that opportunities are often disguised as hard work so many people avoid them.
Another concern for many is - Is it the right time to invest? There will never be the perfect time to invest. There will always be something to be concerned about especially if you regularly watch the news every day. Bad news sells. You need to overcome your concerns until they are reasonably met, but don't lose them entirely. What we should to do is train our minds to focus on solutions rather than the problems. Would it be fair to say that the CEO of a company has to solve more problems every day than the cleaner? That why the CEO is paid more than the cleaner. The ability to solve problems is crucial to your success and practice makes perfect.
Procrastination is natural as most people dislike making decisions. The best thing to do is to learn how to solve problems by letting logic take precedence over your emotions. Most people make decisions emotionally and then attempt to justify it logically. This is so apparent when you have "buyer's remorse". Have you ever bought that pair of shoes; suit; dress; television etc. which cost you more than you could comfortably afford? Then on the way home you justified your decision. You say to yourself and others "Oh it is better quality; it will last longer; it has a guarantee" etc. etc. to calm those emotions and justify your decision. Train yourself to make informed decisions and to put your emotions on hold. The little general, Napoleon Bonaparte said "Nothing is more difficult, and therefore more precious than to be able to decide". And that is why he took on larger armies and whipped them. Whilst the generals of his enemies were pushing lead soldiers around the battlefields on a table playing war Napoleon was in the battle field making decisions and beat these armies time and time again.
Be conscious of your Time Line
We all have the same amount of time in a day i.e. 24 hours (and if you have more please show me how you did it because I would like a few more hours in my day). However, we all have a limited amount of time to create your wealth before we retire. After we complete our education or apprenticeship we soon find ourselves in the hamster wheel. We go to work. We have families which are expensive. We buy homes and pay and off the mortgage. We buy cars. We pay our taxes. And ............the bills never seem to come to an end. If you continue in the hamster wheel you get nowhere. To be successful you must plan the time line of your life. Below is an example of what I am saying:
Most economists believe if you retired today you will need a $1 million to enjoy a comfortable retirement. Therefore, using a simple calculation for the Time line above - you have another 18 years left to create another $850,000 before you turn 65. This is $47,222 per year, and $2,623 every week you need to invest to enjoy a comfortable retirement. This is impossible for 90% of the population. It is very hard to save or contribute sufficient money into Superannuation in the 18 years you have left before you retire. Therefore we have to use another strategy to make up the shortfall and the best way to do this is invest in property.
Superannuation (Super) is there to protect the government and to replace the pension and not to create wealth for you. Super is a collection mechanism that the government set up for employers to pay for your retirement so the politicians don't have to provide it for you in retirement. Not fair is it after you have paid your income taxes and all the other taxes all your life. In addition, rarely do Australians contribute anything into their Super themselves so there is never enough tor retire on for 20 plus years. Do the maths!
Obviously, people will draw as much as they can from Superannuation in an attempt to maintain their lifestyle and then go on the Pension, which is not the reason the government set up Super in the first place. Therefore the government ischanging the ability for us towithdraw large sums from Super. This means that your Super is there to prop up the pension amount until your Super runs out and the government hopes the two will coincide with each other and they do not have to pay you a cent. . And, we thought it was there for us to enjoy our life after 45 years slog in the work force? The pension needs to be propped up by Super because the current $24,000 per Annam is below the poverty line even though it is indexed it simply is not enough.
Most people I have spoken to over the years are totally unrealistic about how much money they are going to need in retirement. Think about it. What bills do you have now that you won't have in retirement? When you retire:
Over the 20 years plus in retirement you will you have to replace white goods, motor cars, television sets, mobile phones etc. Besides ask yourself the question - do you spend more money when you are holiday than when you are working? Of course you do. Think about your 20 year holiday in retirement because money devalues by half every 20 years with 3.5% inflation. So if you think you can safely live off your Super or the pension throughout your retirement think again - $50, 000 per year today is only worth $25, 0000 in 20 years' time. Inflation will continue to rise in the medium to long term and pensions will keep pace.
Well what is retirement going to be for you - looking at four walls, cleaning the yard, pottering around the garden day after day, year after year, for 20 years. How boring and unfulfilled after slogging away for 45 years of your life. Many of the men I talk to about retirement say they do not need a lot of money because they are happy to play around in the shed or go fishing. I do have to remind them they have spouses and they may not have the same boring goals for the next 20 plus years. Will you be able to enjoy the 20 year plus year holiday doing what you want, how you want and when you want? Your choice - so start investing now for the future.
Some of the couples I talk to are always having a go at each other who is spending the household money. very rarely do they have a formal budget they work to and revise where necessary. This often leads to conflict and worse still divorce. Let's look at how much you are currently spending: Take your "Current Income" and multiply by the number of years left to work i.e. 18 years (to 65) x $100,000 income = $1.8 million. Ask yourself the tough questions - where is that money going and can we cut back on unnecessary spending? Stop pointing fingers at each other and work towards a common goal. If you do not invest some of the money you earn it's like fairy dust easily blown away. That is why you must invest 10% of your income first before you pay the bills. Unfortunately expenses usually rise to the amount of money you earn. Think back on what you earned 5 years, 10 years ago. How did you survive on that amount?
The difference between us and our grandparents is our higher expectations in life, our higher standard of living and an unquenchable thirst for technology i.e. multiple TV's, computers, surround sound stereos, Smartphones, iPads, Androids, X-boxes, Nintendo etc. etc. etc. We are offered no interest loans from the furniture and white good retail stores. So we buy the latest appliances, the most comfortable lounge suites and whatever makes us feel good its interest free! These toys and luxuries have added to our cost of living and our standard of living and our expectations and entitlements keep rising year after year. They are all bad debt (non-income generating debt). Let's look at how much we are spending today compared to our parents:1978 2015
HOUSE MEDIAN PRICE $30,000 $450,000
HOUSE HOLD INCOME /YR $5,000 $100,000
The only reason we can't afford an investment property is - we spend too much on bad debt. What Options do we have to plan for our future? Here are some options:
1. Do nothing - This is not going to help you because you will be part of the 95% of the population which will be broke at retirement.
2. Superannuation - Collects money and is subject to the fluctuations of the volatile share market. Imagine having to retire and another GFC happens when you are about to retire. During 2007 to 2008 the Share market in Australia lost $650 billion and worth only 54% of it's value pre GFC. Better not rely on something that is not under your control. The trend today is that many people are forming Self- Managed Super Funds (SMSF) so they can have more control over their funds. This is a specialized area for Financial Planners and I am not going to cover this to any great extent in this eBook. If you decide to speak to an accountant and they want to do the work for you they are still going to need a licensed Financial Planner. If you decide to go with your accountant ask them if they are getting a referral fee from the financial planners and how much because this may eventuate in a much higher costs for you. Business is business but let's be frank, forming and maintaining an SMSF is not cheap and many accountants have made good money in the past for referring people to Financial Planners. Another way to do this is to speak to a few people who alreadyy have a SMSF. Seek out specialist in the SMSF area and ask them for referrals who you can talk to about the service they provided. Get at least five referrals and make sure that there are some from at least three years ago to see if the financial planner has made them money. Avoid going onto the Internet to form your own from a standard format. The underlying principle is you can not pay a little and expect a lot. If you place an investment into a SMSF and it has not been set up correctly you will pay plenty to have it changed. Do it right from the start and get a professional to do it for you.
3. Cash savings - Not a good return and no leverage. Cash is king in a high Interest environment. In the low interest environment of 2016 it is not worth holding onto money. The return is dismal.
4. Speculative - Do not chase "Get rich quick" schemes. You invariably lose money. Lotto is the answer for a minuscule few. Think of it this way: the chance of you wining Lotto or any other windfall is less than being struck by lightning 3 times. Have you ever been struck by lightning? If yes, start running around in thunderstorms you have another two lightning strikes to go. Rather chose property which is a "Get rich slow" strategy but is safe and secure if you follow good advice from reputable agents and mortgage brokers.5. Residential property - RP Data / Corelogic shows since 1980 residential property has achieved a growth of 8.4 on average every decade. Choose the safe route and even if it does not double every 10 years in the future, say every 12 to 15 years you will be better off in the long term. Get expert advice because the growth is dependentwhere the market is in the property cycle in that specific area or suburb. If you talk to the local real estate agent they will be pushing the properties that are in their area only and worse the properties that are coming to a close of their "Sole" or "exclusive" agency and they are under pressure to sell them. The area and the property may not be the right property to give you what you want. Avoid at all costs the idea that you will live close by and you can keep an eye on it. It is not the right reason to buy a property. You buy investment property to make money!.
6. Commercial / industrial property - This is more risky especially if you are a beginner to property investment. Cut your teeth on residential property first because everyone needs a place to live and most young people today cannot afford the deposit to buy a home.
7. Shares, futures, commodities etc. - This is an area I will not cover in this article I do not know enough about it neither do I have the stomach for this type of investment. In my opinion, you need to get yourself a reputable stock broker or spend a great deal of time every day studying the market before investing to make money.
PILLAR No. 2 - UNDERSTANDING DEBT
How do you feel about debt? It is about understanding the difference between Good Debt, Useless Debt and Bad Debt. Let's talk about 'Useless Debt" first. Your home is "Useless Debt" because we will trade our home for our nursing bed because the coming 8 million Baby Boomers on the pension and Medicare are going to ransack the coffers of the treasury. There are not enough nursing beds in the public health system now and many of the elderly who need specialised care are going to privately run nursing homes. So if you have any assets when you need to go into care in your old age your home are going to be sold to pay for the nursing care you will need. These private nursing homes are demanding hundreds of thousands of dollars in a bond before they will accept you. They take up to 80% of your pension to look after you plus they help themselves to your bond, which whittles away over time.
Now I am an entrepreneur and I have no issue with the investors who have put their hard earned money into nursing home facilities to get a good return. My issue is with the politicians who taxed these elderly and then rob them of the asset they worked 30 years to pay off. Once again self-serving bureaucrats with no conscience lining their own pockets at the tax payers' expense.
Lets look at useless debt. Useless debt is debt that devalues the moment you buy it. Cars, boats, television sets, furniture, white goods are all useless debts. The moment your new car his the tarmac it has lost thousands of dollars. Try and sell a used fridge for what you paid for it! And we buy these on credit so the interest compounded is paid first and only then do we pay down the debt. Ludicrous to say the least. Of course you bought all these on interest free! The fact is most retailers have factored the debt to finance companies and the retailer pays a percentage of the purchase price, which means you have paid a premium for the product you have bought. So the retailer makes money and the finance company has made money at your expense. Make sure you pay off whatever you have bought before the interest free period expires because the interest payable to the finance company thereafter is prohibitive. Credit cards are the bottomless pit and the banks made huge profits on the interest charged. It is the cashless society the banks have been working towards for years. It is so easy to pay by credit card. I have heard people justify their purchases because they get "Reward Points" when they buy by credit card. Suckered in once again by the banks. The rewards in comparison to the interest we pay is pitiful. I go through peoples assets and liabilities and they have huge credit card debt and as long as they are paying the minimum payment they feel good about it. This belief has become the norm and the four major banks made $50 billion last year. Get back into the habit of paying cash. It hurts a lot more when you see how fast your money disappears at the grocery store. And prices are supposed to be going "Down....Down". About 800 investors in Australia buy investment property every week and 18,000 buy cars and boats every week. That is indicative of the self indulgent, instant gratification society we have become. What a laugh. Elbert Einstein called compound interest the "8th Wonder of the World". You will find out why in the information in this ebook under "Compound Interest".
Now we have covered "Useless Debt" and 'Bad Debt" let's look at "Good Debt", which is income producing debt. Let's look at purchasing an investment property. How much will the bank lend you is determined by what is considered 'safe' for them. This is the only debt we should be accumulating. That is why we borrow the deposit and costs from the equity in your home and separate the loans. The banks want to cross- securitise the investment property with your home investment to reduce their risk, which is definitely not in your best interest. Try and make "Fire Walls" between your home and your investments. and do not expose your home to to much risk.
We recommend you split your loan between different lenders. When you buy the investment property you borrow the deposit and costs from one bank using the equity from an existing property. This could be your home or another investment property. We then borrow 80% of the value of the new investment property from another bank. This method gives you far more flexibility as you build your property portfolio. If you cross securitise through the same bank you may well limit your opportunity to borrow again when you want to add another property to your portfolio.
In other words if you had two properties and you want to buy another the banks will lump all the total loans together and determine if you have sufficient equity to buy another. Then the banks assess their risk to lend you money which is determined by numerous factors i.e. their loan commitment in the area, the potential of the area etc.. however, if you had several loans with different banks you could choose the property with the most equity and use that to borrow the 80% from another bank. Having mortgages with different banks also helps when you want to sell as well as buy propertyy. If you have all your loans with one bank and you sell one property hoping to use the profit for a holiday, wedding, medical expenses do not be surprised the bank takes the profit you have made and pay down your debt on that property plus other properties you have with them if they believe that they are at risk. Then you have sold a valuable asset and the money you hoped for is not immediately available for the use you intended. You will have to go cap in hand and try and borrow more money. And, good luck. There is a reason why the saying goes "Do not put all your eggs into one basket".
This is not in your bank's best interest they want you to borrow all the money from them so they can make more money for their shareholders. Let's give you a scenario, If you went into your bank and spoke to the loan officer and that person suggested you split your loan, and borrow 20% plus costs from them and go next door to an opposition bank and borrow the balance of the money you needed. Do you think the loan officer would have their job for much longer? But a mortgage broker can do this without repercussions because his / her boss is not the bank.
By the way when you have structured your mortgage as we suggest the banks may be prepared to negotiate payment. You can always apply for "Hardship" and the banks may give you a concession on the amount you have to pay per month until you are in a better financial position. They will add the shortfall to the interest you pay in the long term but you pay what you can afford to for a stipulated time period . Please bear in mind that this will be written against your file so when you go back to your bank to borrow money they will scrutinize your loan application more carefully. The fundamental rule here is banks do not like to have to take your property from you. They are in the business of lending money and not in the real estate business. Plus if they get too ruthless and it gets to the media it's bad publicity and the"greedy" banks do not need any more bad publicity than they have already.
Don't worry about the Banks they know how to protect themselves. They have to squeeze as much money from you as they can to keep their shareholders happy. That is why they made $50 billion dollars last year from unsuspecting home owners. Have you any idea how much $50 billion is? Banks and big business tend to gloss over these large amount of profits and the unsuspecting public days. We start to lose the value because these are such large numbers. Let me show you how much $50 billion dollars is and the unsuspecting public just gloss it off as normal. On the subject of profits the four major banks and AMP took 44% of the $30 billion dollars in Superannuation fees last year. Trying to explain how to structure loans is not simple so I hope I have given you some idea how the banks work. make sure you get specialisd help in this regard from a reputable mortgage broker who is more interested in your long term strategy than getting quick fees from a bank. Contact James Cagney who is a licensed credit representative with asset Financial Services Pty Ltd (see page 13 for more details on the company) on 0416 137 645 or click HERE .
And we thought the Superannuation company's had our interest at heart. Superannuation companies take their fees regardless of the rise and fall of the amount of Super you have. It is daylight robbery what they take from you! Much of Superannuation is in the local and international share market. During the Global Financial Crises (GFC) the Australian share market lost $550 billion. People saw their Super decrease at an alarming rate. Some retirees went back to work because they could not afford to live on the pension. Did the Superannuation funds still take their fees? You bet they did. who would like to work for a company where you did not have to make money for the shareholders and still get paid your large salary. Well that's what the executives of these Superannuation Funds did - they took your money! Have a look at the illustration below.
PILLAR No.3 - UNDERSTANDING COMPOUND INTEREST
Stop giving away your hard earned money so easily. You are paying almost double for your home by the time you pay your mortgage off. Look at the illustration below. The loan is $300,000. The interest you pay over 30 years at 5.5% interest is $313,416. You are paying $616,413 plus the money you could have earned on compound interest on your initial deposit plus the costs (stamp duty, legal fees, bank mortgage fees etc.) you paid to buy your home. Then who has paid the maintenance of the garden and on the structure for the property? Who has paid the rates and taxes on the property? You have! It's depressing because you have paid so much money to hold onto your home for 20 to 30 years and when you sell the bank has making more money than you have on your home!
In the diagrams below we made the following assumptions: you borrowed $300,000 over 30 years at 5.5% interest rate, investment property value $350K, rental income $375/wk, single household income of $90K pa, couple with one child, living expenses from Genworth Mortgage Insurance National standards as at 9 Jan 2013. We also allows $5,000 for restructure costs
You need to acquire knowledge to successfully invest or find an expert or someone who has experience. If you find a reputable mortgage broker you don't really need to have all the knowledge before you take ACTION because they should do most of the leg work for you. You will learn as you go step by step in the process. It is like when you learned to swim as a kid. Most of us got into the water and walked in up to our knees at first, then we walked up to our waist and then our chest and it got a bit scary as the water reached our chin. Most of us did not dive into the deep end and hope we could swim did we? So find a mortgage broker that will take you step by step through the process. A mortgage broker does not have a barrow to push on a specific property a real estate agent wants to sell you. That property that the real estate agents wants you to buy could be one they make the most commission on. Or it could be one where their sole agency is about to expire and they need to sell it or lose the contract. If you want to find out about the tactics and the games real estate agents play click >>> HERE. So go step by step through the process and find a broker you can trust.
I don't know how many times over the years I heard the phrase "I will speak to my accountant and get back to you". Frankly most of these people are procrastinators and they use their accountant as an excuse not to make a decision. Many accountants that I have come across have no concept of wealth creation. They are number crushers. . Accountants are trained to look at hard facts not assumptions. They look on the dark side and any form of risk is scary - a "No, No". Besides many accountants do not want to give you advice about property in case it goes wrong. If your purchase does go wrong they fear you may sue them for giving you the wrong advice and their professional indemnity fees go up. I have not met an accountant who likes paying more fees than they have to - have you? Rather take advice from the popular economist, Miss Piggy, who said " I know you wouldn't think of putting fresh asparagus in the back drawer and eating it three months later, and yet otherwise sensible people do take sizeable amounts of money and pretty much let it rot" . What a wise Muppet she is!
I have found that accountants are rarely creative and to be wealthy you have to be creative because everyone else is following the herd. They are mostly "reactive" not "proactive". For example, Richard Branson the founder of the Virgin Franchise is a creative thinker, a 'stick to it and get the job done' type of person. His greatest asset was that he was dyslexic so he could not become a typical analytical academic accountant. The amazing thing is some accountants I know have broken the mold, gone into the telephone booth and changed into a "Super property investor" Hero. If you want advice from an accountant ask them what they invest in and why? Ask them how many investment properties they have because an accountant who is worth hi salt will have multiple properties because that is the way you create wealth. One investment property is not going to do it for you. No offense to you accountants out there because you know it's true.
In the meantime whilst you are working hard paying the bills and the mortgage off month after month year after year for 30 years and you decide to sell to downgrade to a smaller home the banks have made more money than you because you have had to maintain the property, pay the rates and taxes and pay then pay the agent to sell it. Look at the amount you make using the Banks system of a Traditional Mortgage verse the Rapid Repay System we recommend below. If you are not motivated to take ACTION and call James Cagney on 0146 127 645 or click >>> HERE as Kerry Packer said "You need your head read".
Why you should use a Mortgage BrokerWhat we need to do is pay your home off as quickly as you can because you will pay more than double the amount of money in principle and interest over the lifetime of the loan.You will notice that the bank takes all profits upfront. So in the first 10 years you mostly pay interest and very little capital. Interest is calculated on daily balance so you need pay it off as quickly as possible. Most homeowners don't know that an investment property can help you to pay your home loan off quicker provided that you structure it correctly.
Most people use equity their home and/or another investment property they have to buy another investment property. However you want to separate your investment property loans from your home loan otherwise the bank has too much control over your assets. You should be looking for safety, security and longevity. How do you feel about buying $400,000 of shares and use your home as security for the shares you buy? I have not met too many people who will do this. Banks will lend you money and don't unduly care whether you make money or not from the investment you purchase.
However, because the banks know the "Safe as houses" principal they will lend you money based on the equity in your properties. If the market corrects, and it always does, they usually do not ask you to pay the difference in the value if it has gone down - do they? Nor do they ask you to sell your home and pay out the loan. They know that property is "Time" in the market and if the market is in the "Correction Phase" it will grow again. To see how the property cycles work click >>> HERE.
However, if the banks lends you money for shares on a marginal loan and the share market declines dramatically (as it did in the GFC), they may call in your marginal loan and you then may be forced to sell those shares at a loss. If proceeds from the sale do not cover the loss or you do not want to sell these shares at a loss you may have to borrow the shortfall against the equity in your home!
Investing in Property
If you don't fit into the banks mold you just don't get a loan. If you are able to borrow money you must do it because there will come a time when you won't be able to borrow. Money has never been this cheap. Interest rates are the lowest in over 65 years. However, if the mortgage broker can't get you a loan after they have exhausted all avenues you need to start with a strategy so you can borrow money in the future. Mortgage brokers are prohibited from putting your assets at risk or putting you into a disadvantaged financial position. .Ensure whatever structure you decide on does not tie you down so you can't borrow for those rainy days and enjoy the lifestyle that you want to have. Build in buffers to do this. Please do not only focus on your current lifestyle because "The chief cause of failure and unhappiness is trading what you want most for what you want right now". This means that we all have a wish list but it is often better to invest the 10% of your income first (the Rules of Gold), then, then buy those luxuries with the spare cash (not on credit). If you want to know more about the "Rules of Gold" click >>> HERE. Remember the banks make huge profits out of consumers who want everything now with the best intentions to pay it off quickly to avoid interest. However, the reality is that we eventually pay the huge interest because those pesky bills keep cropping up all the time. The fact is that the rich invest first and then spend, whilst the poor and middle classes spend first and more than often do not have money to invest
People are too concerned about interest rates and make the biggest mistakes structuring the loan for the property.. They also buy the wrong type of property like older houses and units that have no or minimal depreciation to claim. In many cases they buy wrong type of property like high rise units that have huge strata fees(body corporate) and expenses. If you can't afford these fees you may find it hard to sell because high rise buildings are subject to frequent oversupply. Capital cities and holiday destinations like the Gold Coast and Sunshine Coast in Queensland are subject to frequent oversupply of high rise units. These units are a favorite amongst interstate and foreign investors as unscrupulous real estate agents promise high capital growth and rents. Think about it when these high rise units are finally completed the owners are competing with hundreds of other landlords for renters. To sell a high rise unit when there is an oversupply at a profit is virtually impossible.
To top it all purchases buy in the wrong area because they do not have the financial resources to buy sufficient research nor do they have the time to scrutinize property research. Find a real estate company which specializes in investment property and ask for sound research before you buy. Do not rely on newspaper articles real estate agents love to send you. Newspapers need advertisers and property developers have influence over the articles they publish. Regional newspapers are notorious for 'talking up' the market when developers and builders throw money at them for advertising space. I know that journalists will say that you are independent of the advertisers and I am not questioning their integrity. It is the editor who decides what articles gets published and one of the reasons that person is the editor is because they are business minded and the publication under their control must make profit or they go out of business. So much for journalistic freedom!
Tom and David Gardner editors of The Motly Fools wrote " those who understand compound interest are destined to collect it.Those who don't are doomed to pay it". Stop paying the banks so much of your hard earned money. In the remaining "Pillars of Financial Freedom" below you are going to learn about how to increase your financial IQ and beat the banks. However if you don't take ACTION on the information don't waste your time reading any further. Rather go and watch television and that will make you as smart as howdy doody.
PILLAR No.4 - UNDERSTANDING GEARING, OPM AND LEVERAGE
Most people talk about "Negative" and "Positive Gearing" and lose the principle behind the term. "Gearing" - is is simply like gears on a bicycle. You use a small cog that propels a large weight on two wheels.Gearing helps you move forward quickly towards your goals. I hope that gives you a clue why it is one of the SECRETS of the rich. When folk invest in real estate any losses incurred as a result of the losses being greater than the income are claimed back from your current income tax. The amount that can be claimed is dependent on the investors' nominal tax rate in the year that the losses are incurred.
The same rules apply with investing in the stock market. The difference is that the losses incurred can only be claimed against the actual value of your shares in the market. So in order to claim a rebate from the taxman your shares have to be valued at less than you paid for them. This is some conciliation but who wants to invest to make a loss. With investment property you are simply claiming effective losses of the running costs, even though the property value may have increased over TIME. If there is a shortfall after you have claimed the running costs and the income tax rebate (more about this later) the property is "Negatively Geared" and there is nothing wrong with that. Obviously with "Neutral Gearing" and "Positive Gearing" you are still claiming the cost of running the property and the tax rebate from the Taxman but at the end of that you have a "Neutral" or "Positive" cash flow. It is done through "Gearing"
Obviously the end goal is to have positive geared properties but that is often not possible when you are claiming all the expenses, included bank interest, maintenance, rates and taxes, insurance etc. The astute investor borrow the cost of purchasing the property including stamp duty, legal costs, bank costs, lenders mortgage insurance (LMI) and that way you can claim the maximum tax rebate. Some of these costs are written off over 5 to 10 years and that gives you the cash flow to extend your property portfolio. You need to speak to a reputable mortgage broker who will explain this further.You are still "Gearing'"and that is the SECRET of the wealthy so do not get hung up by the word 'Negative". There are many property spreukers out there using this to persuade people to buy their education programs and the properties they have listed, because they claim they are positively geared. Gearing is not the be all and end all. You need to look at other factors like the potential for sustainable capital growth. For example property developers and builders desperate to sell their stock offer rental guarantees which are generally way over the median rental for an area. They claim their properties are positively geared but they certainly will not be after the rental guarantee period is over. You had better prepare for the shock after the guarantee period id over during your guarantee period.
With negative gearing you are maximising the tax rebates from the Australian Tax Office (ATO) but you need to be able to pay the holding costs. The lender will be checking your ability to pay the loan because they take your current debts and all your living expenses into consideration before they give you the loan. If negative gearing is what you have to do to get into the market you do it. If you buy in a decent area rents will increase and the potential to positively gear in the future exists. Notice I said good area. You get the tenant you deserve if you buy in sub-economic areas because the property is cheap and you can't resist a bargain. Always be wary when an real estate agent advertises "cheap", "bargain", "owners have to sell" or "Divorced urgent sale" because you could be buying the previous owners lemon (problem). Plus what capital growth can you expect when you buy in a doggy area. Would any self respecting person who wants to make a go of his life and create wealth live there? Would you live there? What type of schools would your kids be going to? Or most important would your spouse want to live in the area?
When you consider gearing an investment property you need to have a short term, medium term and long term strategy. It is good to be able to claw back your income tax through negative gearing. However, you need to be in a position to continue to earn the income to be able to do this. For example, if you are in your sixties be realistic in terms of your earning capacity. Also be realistic about the capital growth you can receive in the few years before your retirement. If you purchase a property today plan for 12 years plus for the property to double in value rather than the 8.2 years we have had in the past. If your income declines you may have to sell and hopefully and make a loss. Make sure you calculate the agents commission when selling a property. You did not buy investment property to make a loss. Agents fees are negotiable so negotiate hard.
Neither do you need the stress of drowning in debt to pay the costs for a negative geared property. Entrepreneur Henry Firestone said " A person with a surplus can control circumstances, one without a surplus is controlled by the circumstances". A professional and experienced advisor can help you plan your short to long term strategy to maximise your potential through investing in property. James Cagney can be contacted on 0416 137 645 or click >>> HERE to contact him.
Neutral and Positive Gearing
This arises when the costs and expenses of the property are being met by the combined rental and the tax rebate. This is not possible In most capital cities today unless you pay a large deposit which will reduce the interest payment you pay the bank. This way you are not claiming the maximum tax rebate and not being smart. Some claim they get the positive gearing from the exceptionally high rental yield. Most of the wealthy in Australia have made their money from capital growth and rental yield is a secondary consideration. Always keep the end goal in mind which is to have sufficient money to enjoy a good lifestyle in retirement.Too many people get caught up with the "Negative" versus "Positive Gearing" terminology. Gearing is there to get you where you want to go. You need to find out what the best strategy for your situation right now. For example, if you are starting off on your investment journeyy you have to look for an area that has growth potential.because you need to have more equity to buy the next property. That property might be negatively geared but it suits your strategy and you can afford the shortfall. As you buy more properties you may find that you cannot afford another shortfall. Then you look for properties that can give you positive cash flow. You may have to sacrifice growth but once again it suits your personal situation.
A universal law is the law of "Cause" and "Effect". Interest rates are the lowest in over 60 years. When When interest rates go down (Cause) do you think more people will be able to afford to buy investment property (Effect). Yes! Opportunities come to those who dare to attack and not to those who sit back and wait for the market to "get better" before they invest. Wake up! Smell the roses! People are making money through investing in property today whilst you are waiting for "better days". If you would like more explanation on how you can make gearing work for you call James on 0416 137 645 or click >>> HERE .
Otherwise just keep working for the government. because many of us pay well over 60% of our income taxes in Australia. Ask yourself if you pay these taxes:
Born free and taxed to death in Australia. so effectively you are working for the government three days a week and you don't get paid. We shrug our shoulders and say there is nothing you can do about it. Well Kerry Packer was not prepared to pay so much tax and this is what he said at the Senate inquiry into Media "I am not evading tax in any way, shape or form. Of course, I am minimising my tax. Anybody in this country who does not minimise his tax wants his head read. I can tell you as a government that you are not spending it so well that we should be donating extra".
I know many people do not like Kerry Packer for numerous reasons one of which is he was a "Tall Poppy" and we have a habit of cutting down tall poppies in Australia. It comes from the belief that we should all be equal. Well, I believe we all have an equal opportunity to become unequal. If you want to be Mr & Mrs average that is your decision but it is not mine. However, no matter what your belief is understand that it is the middle class in Australia that pay most of the income tax and thereby keep donating more and more to the tax coffers. Kerry Packer told the senate commitee that he did not write the tax laws but he was smart enough to read them. A smart man, so get over what you think about him Packer and find someone who can help you save tax and stop donating more than you should to the government. Contact James and he will certainly do his best to help you minimise your tax and click >>> HERE.. Otherwise remember this "A fool and his money are soon parted. The rest of us wait until income tax time". Will that be you donating more than you should to those who have no idea how to spend it!
Some of the investors I have spoken to only claim their income tax rebate on your investment property and or properties on a yearly basis. Do not listen to the uninformed or the lazy accountant because they can't be bothered to fill out a Tax Variation Form - you can claim your rebate from the taxman every time you are paid. This is your cash flow and helps you to buy your next property. Besides if you owe the taxman money he will charge you interest if you want to pay it off over a period of time. How much interest does the taxman pay you when he holds your money for a year.
If you are not claiming income tax rebate every week you need to contact James Cagney on 0416 137 645 or click HERE and he will show you how to do get your money back every time you are paid. Albert Einstein, one of the smartest men of all time, said "The hardest thing in the world to understand is income tax". So get advice from someone who understands how to claw back your income tax. Now I do know we need strong government and the stregth of any government is dependant on its ability to collect taxes. However, it is worth listening to what one of the most famous American presidents said, "A government big enough to give you everything you want, is strong enough to take everything you have" Thomas Jefferson .
Some of the people I speak to cannot understand why the government would give you tax rebates on investment property. It's really simple. If they gave that money as a subsidy to renters most of them would spend it in an instant gratification on bad debt. However when the ATO gives the investor the rebate the government wants to help you invest for your future so you don't claim the pension and at the same time it is reducing the rents for renters country wide because you get a tax rebate. to pay the shortfall instead of having to charge more rent.
If you do not take advantage of the tax concessions that the government has offered you you only have yourself to blame. Mark Twain the American humourist said "The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin".
Do you only want to be successful in the short term? Why then do we go for "get rich quick schemes"? What about being successful in the long term? Wouldn't that be better? The problem is we want everything NOW! I am going to show you the "get rich slow strategy". Sorry I can't help the instant gratification society that we live in today. What I do is help you help yourself and to invest safely and securely. This said it amazes me when people say that owning investment property is too hard. Frankly, it is easier to own an investment property than own your own home. With your own home you pay for all the costs of:
Why not get "Other People's Money" (OPM) to pay for the home. When you own an investment property the Tenant and the Taxman pay most of the costs for you. (see: diagram). If you invest wisely you will pay the smallest amount to "Hold" and "Control" property. Isn't this great news?
So what you need to do is ask your mortgage brokers to calculate what the property costs you out of your pocket after the Tenant and the Taxman have contributed to your property. If they don't know how to do this find a mortgage broker who knows how. Not all mortgage brokers are created equal. They can create your own spreadsheet to work this out but the easiest method is to use the Property Investment Analysis from Somersoft. This is a specifically designed computer program that calculates the out of pocket expenses of an investment property for you and also shows you how quickly you can pay your home off by investing in property. It is like turbo-charging the payments on your home and any reputable mortgage company should have this program to calculate this for you.
By structuring your finances correctly you pay your home off quicker saving you thousands of dollars in bank interest fees. If you want to beat the banks you need to use your money smartly. James Cagney has a certificate IV in Finance and Mortgage Broking and is a credit representative (No.462890) with Asset Financial Services Pty Ltd (No. 389402) and is able to give you sound advice with regard to your personal situation. Frankly, if you have not reviewed your loan in the last 6 months you need to do it right away. Contact James Cagney NOW on 0416 137 645 or click >>> HERE and he will show you how to turbo-charge your mortgage payments by purchasing investment property.
Using Leverage to build wealth
The best way to think of using leverage to make money is to give you a simple example. Don't get caught up in too much detail in the example below - try and understand the principle of leverage. Leverage is using a small amount of money to "Hold" and "Control" a bigger amount of money (see diagram). Most people think the wealthy own lots of properties. Most of the rich understand the principle of "hold" and "control" and not ownership. They leverage themselves and borrow money to buy their multiple properties and get maximum tax rebates. They take out "Interest Only" loans not "Principal and Interest" loans for their investment properties because that gives them the opportunity to get more income relief to fund their investments.Let's assume that the investment property that cost you $50 per week to "hold and control". By using Other Peoples' Money (OPM) and a shortfall of $50 per week on your investment property this is the scenario compared to if you saved that money in a bank at compound interest:.
Lets say you use your equity and put down only 10% on a $350,000 property. That $35,000 which "Holds and Controls" the property. Let's assume a 5% growth. That means you have made $17,500 per year. If you had put the $35,000 in a bank and at 5% simple interest means you have made $1,794.36 per Annam on compound interest and that will be taxed at your marginal rate.
Now ask yourself - do you want to make $1,794.36 (taxed) or $17,500 per year?
INVESTMENT PROPERTY: A shortfall of $50 x 52 weeks = $2,600 per Annam x 20 years = $52,000. This shortfall of $50 per week "Holds and Controls" the property (not taking interest rates,rent and costs into consideration) of $350,000. if the value of the property doubles every 10 years (at 7.25% growth per Annam) in 20 years you have made $1.400,000 less $52,000 which is $998,000 in profit before taxes and costs.BANK: Save $50 x 52 weeks = $2600 per Annam x 20 years = $52,000 in the bank at 5% you have made $19,972 profit before taxes.
Now ask yourself - would you like to make $19,972 or $998,000? No comparison is there! Do you see why it is hard to save or Super your way to retirement.
Knowing this - why is it that only 10 % of Australians' own investment properties? Of the 10% investors only 20 % of them have more than 1 property. Then only 1% of those who own have more than 4 investment properties. The way to become wealthy is to hold multiple properties and not just one investment property.
People refer to "Retirement" as if it has something to do with "Age". It is not about age it is more about having enough "Assets" which will give you sufficient passive income so you can retire comfortably. It's about investing to get passive income through rental income to obtain financial freedom at any age. How would you feel if you could retire early so you can enjoy life? Not much point being incapacitated and traveling around Australia or overseas and not being able to enjoy yourself.
Most folk are working for money instead of making money work for you - through leverage, OPM and compound growth. The wealthy banker John D Rockefeller said "If you want to become wealthy you must have money work for you. The amount you get paid for your personal effort is relatively small compared with the amount you can earn by having your money make money".
There are a number of ways the government and councils collect taxes. They can get it from the mining companies in royalties and profits and as you know the boom is over, revenues are down and the Federal and State government is now drastically short in their budget. Another more convenient way is to extract income taxes from the working folk. This has been going on for centuries nothing new. We need to prepare ourselves for more taxes. Unfortunately it is the middle class that pays most of the income taxes. The rich and the poor don't so you will just have to keep paying more and more tax unless you start using the strategies in this eBook. The successful American wealthy entrepreneur Pierre Du Pont also understood the principles of wealth when he said "If you want to avoid paying tax become rich".
Now I know all the readers who look at the glass half empty and not half full - will argue that capital growth and rental return only happens in a perfect world. They argue that if the property value may go down? May be vacant? What if the tenant absconds without paying rent? These 'Doom Sayers' are called the "What if's" - always trying to make an excuse rather than make an effort. Many of them have "analysis paralysis" and will never make a decision to invest. There is always an excuse as to why they can't invest now. They are all marching to the same drum and headed to an impoverished retirement. So don't listen to them.People are too worried about what the taxman will take from them in capital gains when they sell their investment property. As the legislation currently stands if you hold an investment property for longer than a year the capital gains reduces to 50% of the profit you make after you have deducted all your initial purchasing cost, the real estate agents commission and legal cost. This substantially reduces the amount of capital gains you pay especially if you sell when you are retired and your income is the lowest. If you would like more information in this regard click >>> HERE.
Would it be the best use of your money if you had $100, 000 and you put it under your mattress and slept on it every night for the next five years . No, you are losing money by not making your money work for you. However, many people I speak to have equity in their home and they hide it under their mattress instead of using leverage and investing it in property. Well all I can say is they are not financially smart by doing this Are you sleeping on your money? Use leverage to give you the returns you need to enjoy a comfortable lifestyle now and into retirement. If you would like us to explain how you can use leverage to increase your property portfolio call James on 0416 137 645 or click >>> HERE .
PILLAR No. 5 - UNDERSTANDING COMPOUND GROWTH
The banks make millions of dollars per year using the principle of "Compound Interest". Unless you have structured your mortgage correctly you will pay more than double the amount you borrowed in interest to the bank. Most home and mortgage holders are oblivious to this. That is why the home loan is called a 'Mortgage" which is French and translated means "A contract to Death". The professional who takes care of the dead bodies is called a "Mortician". In the table below you can easily see that compound growth will make you rich. I am saying you have to be diligent and prudent with your money and if you sit on the railway line you are going to get run over by the train. You can't just sit and do nothing.
In the diagram below we assume you have two investment properties.For simplicity we have not added the purchase cost because we want you to understand the principle of compound growth. You have two properties worth $350,000 and you borrow 100%. You therefore start up with zero equity. We assume a 7% growth which means the property doubles every 10 years. In actual fact property has done better than this over the past 30 years growing by 8.3% on average every decade. Therefore the value of the two properties is $700, 000 each which gives you $700,000 in equity. In 20 years your equity is $2.1 million which is what you are going to need to fund your retirement.
If you have been following the media you may well have been convinced that there is a "Property Bubble in Australia" and the market is about to crash. Well some suburbs in Sydney and Melbourne are overpriced and due for a correction but look at the rest of the country there certainly is no property bubble. Property prices in Perth are falling. Property prices in Regional Queensland have fallen. However if you understand that property is a long term investment when property prices will grow, fall and stay stagnant for periods you have the right strategy. Therefore Profitable Property Investment is more about TIME in the market rather than TIMING the market. The property market is controlled by SUPPLY and DEMAND and this is subject to local, State and Federal monetary policy and economic climate. Take Canberra as an example, every three years the market goes into hold as people are fearful about a change of government.
However have a look at how property has done over the last 80 years and you will see over time property prices double approximately every 10 years.If you say that this is all good for other areas but it has not double every 10 years in my area! Then buy an investment property in a growth area. Sometimes lifestyle properties do take longer to double. Also consider what you paid for your first property and compare it to what it is worth today. Better still ask your parents how much they paid for their first property and compare it to today. Einstein said "We are boxed in by the boundary conditions of our thinking". We sometimes need to take the horse blinkers off and have a broader view of what is happening in the property market and not only in what is happening to our family home or investment property.
Have you ever sold a property to find that the prices went up shortly afterward? How did that make you feel? Well I have done that and you feel you could kick yourself. It is water under the bridge and learn from it. Think about it as leaving money on the table for somebody else. Consider it a gift to the new owner. and don't beat yourself up about it there are other opportunities out there, Besides there normally is enough people beating you up already you don't have to add to it!
The negative and sensationalized media has made a lot of people worried about the property market. Think about it, even if property prices correct (as they always do) if it is your home or even an investment property and if you do not need to sell right now - then it is unimportant? It is only relevant if you have to sell in an unfavorable market. So what is more important than the price of the property - it's what you buy it for and what you sell it for over TIME. So if you have a "Hold and "Control" strategy then why would you be concerned about a property bubble? Property after all follows a cycle and everybody in Australia needs a place to live. If they can't afford it the government gives them money so they can have a roof over their heads. As an investor myself - I love Australia!
The alternative is do nothing or put your money in the bank. With interest rates the lowest in 65 years you will earn less than the inflation rate and you will be going backwards. yet we sleep every night on our money. Think about it. If you won $300,000 in lotto would you put the moner under your matrass and sleep on it. Well that is what you are doing with your equity. Sleeping on it and it is not making you a red cent. Not wise money management!
Who would like to be a millionaire? Simple own three investment properties worth $334,000 and you are a millionaire i.e. 3 x $350,000 = $1,050,000. How easy is that! But only if you use the principles of wealth contained in "The 7 Pillars of Financial Freedom" .
PILLAR No. 6 - UNDERSTANDING HOW BANKS DETERMINE YOUR BORROWING CAPACITY
You need an understanding of how the banks view your application for a loan so that you know how to use your money to get the best returns. It is based on two criteria "Loan to Value Ratio" (LVR) and "Debt Serviceability Ratio" (DSR). For example, if your home and investment property are valued at $800,000 and your mortgages are $400,000 - the bank will take 80% of this value as your LVR i.e. $400,000 @ 80% means that you have $360,000 in equity.
Let's cover "Loan to Value" ratio first. There are two types of valuations - a market valuation and a bank valuation. Valuations are a "perception" or an "opinion" of a Valuer and they sometimes get it wrong. The objective of the bank is to value at "fire sale" prices because the banks do not want to carry risk. So don't get upset if the Valuer values your home at less than what you believe it is worth. You can expect a 5% to 10% variance on what a reputable real estate agent in your area thinks your home is worth. Valuers and lenders look at investment properties as a higher risk because the banks know if you fall on hard times you will pay your home loan before you pay the investment loan. This often happens in new estates where there is higher numbers of First Home Buyers and investors. Valuers look for comparable sales to base their on. Somtimes there are no properties that are comparable in the area and then the chances are you will get a lower valuation. For example:
The valuers carry huge professional indemnity because the banks will sue them if they get the value of the property wrong. Therfore valuers will err on the side of caution. It is about your strategy and not what the valuer or the banks think!
The banks want to minimise their exposure in these new property estates and so the banks will only accept a value on the property closer to a 5% variance of selling price. A good mortgage broker will dispute an unjust valuation report providing sound evidence and research. Do not be over concerned if at the end you have to tip in a little more equity to buy an investment property. You have to start this process with the end goal in mind - a comfortable lifestyle extending into retirement. You are collecting money boxes where the tenant, the tax man and you put money into. In the game of monopoly the person who has the most houses and assets is the winner!
Do your due diligence to make sure you get you the most suitable finance on your home and future investment properties. It is about structure and strategy and not the interest rate. Build in "Buffers" for those rainy day events in life i.e. renovation, kids' education, replacing motor cars, expenses etc. You do this by borrowing more than you need to settle the property and put that money into an offset account and that way you don't pay interest unless you draw it down. This buffer is a safety net and not your expense account for luxuries.
If the property does not value and the investor does not want to use more equity in their home they need to take out Lenders Mortgage Insurance (LMI). It is only a tool for you to get into the market because the equity in your home and /or investment property available is less than 20%. There are two companies which specialize in LMI and these are Genworth and QBE. Some banks cover their own LMI for which you also pay for. The lender gets you to pay for the LMI to cover them that in the event that you can not pay your investment property mortgage they will try and recover the money from you you first. If the investment property is resold to recover the money and the bank receives less than the money they lent you, they will sue you for the the balance and only if theu can't recover the money they will then make a claim to the LMI insurance company.
This LMI cost becomes part of your loan and part of the tax rebate you get from the Australian Tax Office (ATO). You need to compare how much you estimate you will make on the investment property over time as opposed to worrying about the upfront cost of LMI. Once you look at it this way it becomes part of your investment strategy. So if LMI costs you $10,000 and you believe the property you are about to buy will make you $20,000 plus in the first year it probably worth while paying the morgage insurance.
At the end of the day it is whether we can borrow the money or not to invest. Mortgage brokers have at there disposal numerous lenders they can chose to apply for a loan on your behalf. Do not simply let your mortgage broker rely only on the four major banks for a loan. There are over 50 banks and lending institutions prepared to lend you money. That is their business and if they don't lend money at a profit to consumers they go broke. Do you know that the Government lends some of these institutions money at discounted rates to create competition to the major banks?
Some of these institutions are insurance companies, Superannuation funds and investment bankers who need to make profit from your loan. Most times the iinterest rates from these second tier lenders are competitive with the major banks. Even if the interest is slightly higher if you are approved take the loan whilst you can. As mentioned over and over again the structure of the loan is more important than the interest rate you get. At least you have your toe in the water and you are making money work for you. You can always refinance later when your financial position improves and the lenders regard you as less of a risk and give you a better rate. That is why you need a mortgage broker to put the best case forward to the lender so you can borrow the money. So do not stress if a bank declines your loan. There is life beyond the four major banks!
My rule of thumb is - if the banks / Lender institution will lend you money take it because lending policies change and it gets harder to borrow money the older you get and the more money you owe. Property investment is simple - If you borrow money at 5% interest and you make 5% on capital growth and 5% rental yield you have made a profit using the banks or second tier lenders money. So borrow money and stop worrying about the interest rate discount and use the principles of wealth outlined in this eBook.
The other criteria used by lenders before they give you a loan is the Debt Service Ratio (DSR). The current Finance Regulations demand that you must be able to service the new debt taking into consideration your living expenses and your existing debt. Mortgage brokers use a servicing calculator to determine this ratio. It is illegal for lenders to put you into a position where you cannot pay the new debt or disadvantage you with the new debt. Lenders have vastly different policies in terms of what can be added back into your income i.e. rental income, salary sacrifice etc. An astute mortgage broker will know the policies of the many different lenders. Obviously, the bigger the brokerage the more institutions they are able to have at their disposal because lenders require brokers to understand their policies and require them to attend regular training. With so many lenders smaller brokerages cannot spend all their time in training. They need to be out there getting loans to pay the bills. So ask your broker who his / her major lenders are. If they only use a limited number of lenders you may not be getting the most suitable loan for your strategy. Regardless of which brokerage you use, ask for the names of past clients and existing clients so you check their level of service and success rate.
There are a number of organisations called Aggregators who are like a wholesalers and general dealers for money. They have a large number of mortgage brokers who use their services. That way these Aggregators go to the banks and lenders with far larger loan requirements and therefore are in a better position to negotiate. Some of these Aggregators are owned by the major banks whilst advertising that they provide loans from many institutions. Aussie Home Loans; Rams and Homeside are owned by one of the major banks so form your own conclusion. Look for a broker who has an arrangement with an independent Aggregator like AFG. The largest independent Aggregator is AFG and Asset Financial Services Pty Ltd are a member of the group. Asset has won awards year after year within the group (see page 13 for their achievements).
Pay off your mortgage quickly
One of the major reasons investors buy investment property because it turbo-charges the mortgage payments on your home loan. Refer to the illustrations below entitled "Traditional Home Loan" (THL) and compare this to the "Home Loan Reduction Strategy" (HLRS). To understand this strategy we have to re-structure the way you pay your mortgage and expenses every month. In the "Traditional Home Loan" your pay goes into a bank account from which you pay your home loan, credit cards and other bills. This is not the way you should do it.
Now let's look at the Rapid Repay System. In the diagram below we do it differently to turbo-charge your mortgage payments which will reduce the number of years you pay off your mortgage. This can save you hundreds or thousands of dollars of your hard earned money. This way we have a "Linked Savings Account' (sometimes called an "Offset" account) linked to your home loan. Your wages, rent, tax rebates and any savings or surplus you have every week into this account. Then you have a 55 day interest free credit card which you pay all the bills, groceries and living expenses. You organise a direct debit from your linked account to pay your credit card and the home loan and the investment property loan when it becomes due. This strategy leaves all income in a linked account which reduces your mortgage interest because interest is calculated on a daily basis and the extra money in your linked account is reducing your mortgage. By paying all your bills on an interest free credit card you are using the banks money. Make sure you pay your credit card on a monthly basis through an automatic debit to avoid credit card interest.
In the diagrams below we made the following assumptions: you borrowed $300,000 over 30 years at 5.5% interest rate, investment property value $350K, rental income $375/wk, single household income of $90K pa, couple with one child, living expenses from Genworth Mortgage Insurance National standards as at 9 Jan 2013. We also allows $5,000 for restructure costs You will see that a traditional home loan over 30 years will cost you $313,415 in interest. In the Rapid Repay System you pay $141,765 in interest. Sorry we still have to pay the bank interest but you are now turbo-charging the payments on your home loan and in this example you save $171,650 in interest and you pay your mortgage off in 14.4 years which is 14.6 years sooner. What a great benefit and one every Australian can do this but only 10% of the population do it. Go figure!
Knowing this I am staggered when a client says they are waiting for the property to grow before they will invest again. It would be like raising a family and you say to your spouse after you have had your first child "Let's wait 18 years until Johnny is grown up and when we will have the experience and we will have another child". Would you do that? No we have one child, then in a year or so we have another and then maybe another. You want your kids to grow up together. You don't wait until you know everything about child rearing before you have another. Exactly the same with property investment. You don't wait years before you invest again. You don't wait to buy a property - you buy a property and wait. Invest as soon as you can. With the interest rates as low as they are today you have a great opportunity to invest. So do not wait start building your portfolio. If you would like to speak to James about reducing your mortgage interest call 0416 137 646 or click >>> HERE .
James Cagney has a Certificate IV Finance and Mortgage Broking qualification and is a Credit Representative (No. 462890) under the license of Asset Financial Services Pty Ltd, Australian Credit License (No. 389402). Talk to James about your investment plans call 0416 137 646 or click >>> HERE .
The information provided in the information is not financial advice.Please note that the information herein is of a general nature only and is not intended as specific advice for any particular person or entity. You should not act solely on the basis of the material contained in this article for your investment strategies. Changes in government and legislation occur frequently and without prior notice and financial markets are unpredictable.
PILLAR No. 6 - CHOOSING A GOOD MORTGAGE BROKER AND REAL ESTATE AGENT
Choosing a good Mortgage Broker
When you use a mortgage broker you have local help and not someone processing your loan from overseas like India, Indonesia the Philippians, where many of the banks have their call centres these days.
What are the chances of getting a loan if you broke both legs and limped into the bank on crutches? Not good! Therefore, borrow money whilst you can and interest rates are the lowest in over 60 years. A good broker will structure your loans and add buffers so that you will have money for unexpected expenses and tough times. Going to the bank and asking them to show you how to look after your money is rather like asking an alcoholic to look after your whiskey. The banks strategy is to look after their profits first for their shareholders first and then assist you. Use a mortgage broker who will help you build safety nets and firewalls to protect your home.
What most people do not know is that the banks have in their fine print something called the "All Monies Clause". This gives the banks permission to seize all your assets if you get into financial strife. If you do not build the firewalls which we suggest you put into place they will have no mercy on you if you fail to pay your mortgage. Banks don't like mortgage brokers because most of them are more interested in your welfare and not the bank manager's salary and bonus or the profits for their shareholders. Mortgage brokers get paid a fee and a trail commission by the lender when you take out a loan through the lenders. They are not paid a salary like a loan officer in the bank. . If they do the wrong thing by you and you you will probably refinance with another broker or bank and they lose their trail commission. So the wise mortgage broker makes sure he gets you the most appropriate loan for your personal situation and your investment strategy. They also make sure they hold your hand through the loan to settlement. The broker knows that if your first loan goes through with the least amount of fuss and you are happy they will most likely get your next loan. Ask these brokers what after sales service they give before giving them your business.
Choosing a good Real Estate Agent and Property Manager
Real Estate Agents
Here is a brief overview of the real estate industry in Australia:
In general real estate agents are not well liked or trusted. The stigma around real estate agents may be well founded because it tends to attract people who are money orientated rather than service orientated. It is the lure of "Big Bucks" which draws many unsavory and unscrupulous individuals to the industry. Expensive suits, dresses, jewelery, cars are part of the image they must have to show people you are successful they are. It is the 'Fake it until you Make it" philosophy. Unfortunately these people who tarnish the industry are in the minority. Most real estate agents are hard working family men and women. However, the big chains dominate the industry and you do it their way or the highway. It's about getting listings and deals over the line and the sales tactics and games they teach border on unethical. For more information on this click >>> HERE .
The above statistics also means that apart from the owner of the real estate agency not many agents are around long enough to give you sustainable service and advice to property owners and investor. Use local agents when buying your home but they are often not experienced enough to talk to you about a good investment outside their immediate local area. Seek out real estate agents that are experienced in investment property. Talk to a reputable mortgage broker who will know good real estate agents. Make sure that there is no r4referral fees between the mortgage broker and the real estate agent otherwise you may not be getting independent advice from both of them.
To protect yourself from unscrupulous real estate agents don't believe their big talk about what they have sold in the past ask for referrals from the agents. Find out who their last five sales were and phone the vendors to find out what their experience was with that agent and the agency they work. If it is an investment property that you are after ask the agents for the names and contact details of three of their last clients in the past 12 months and three clients they sold to 3 years ago. This will give you the level of their expertise and if the investors have made money on the property and what their experience was with the rental of these property. This homework on your part will give you the insight into who you should chose to sell your home or help you to purchase a property.
A deterrent to investing in real estate is the stigma around bad property managers. Unfortunately, most of these property managers are underpaid for the job they do. It is a stressful job looking after the interest of both the owner and the tenant. In general most of the good property managers have far too many properties to look after which makes doing a good job for owners and tenants almost impossible. It is a very competitive industry and good property managers are often poached by competitors because the boss of the real estate agency believes he or she will bring more business to the agency. Therefore, the turnover of people in the industry is horrific. Interview your property manager before you take them on. Find out how long they have worked for the company. Ask them if they intend to stay. Find out what support they have when they are on sick leave or on annual leave. Interview the owner of the real estate agency. Ask for referrals in the area and you call them. Don't be fooled by a few written testimonials.
To top it all there are the stories about about bad tenants mostly from the media, reality television shows like "A Current Affair", "Today Tonight" and newspapers give you the worst cases and extreme cases. They love to sensationalize everything because that 'ups' their ratings and readership so they can charge more money for advertising. However, they often do not show the true reality. Do you know how inexpensive Landlord Protection insurance is? For an average $400,000 property it is around $1 a day. The reason it is so cheap is because very few people claim because most tenants are decent folk. Most would prefer to live in their own home but do not have sufficient deposit to put down. If you have a good property manager who does regular property inspections you will minimise any damage to your rental property. Ask yourself these questions to alleviate the worry about renters.
James Cagney is the principal of IRPS associates T/A Australia Hot Property. He is an eexperienced property investor and qualified to assist you to buy an investment property in high growth areas around Australia. If you have any questions regarding an area or a property you are thinking of buying or you are wanting to buy an investment property please call him on 0416 137 645 or click >>> HERE .
PILLAR No.7 - UNDERSTANDING YOUR RISK CAPACITY
Superannuation versus Superannuation plus passive income
What amazes me is that people believe that they can live on the smell of an oil rag when they retire. The 'rule of thumb' is that you will need two thirds of your current income prior to retiring. Ask yourself these questions. When you retire do the following expenses go down?:
In the illustration below let's say that you have an investment property that gives you $20,000 net rent in retirement. Let's say that you will need $60,000 per year in retirement. Please keep in mind that money devalues by half every 20 years at 3% inflation. So $60,000 is only worth $30,000 in twenty years' time. Let's also assume that you are fortunate enough to have $300,000 in Superannuation by the time you retire. In the table below you will see that your money soon disappears as you draw down your $60,000 every year and after approximately 5 years you have nothing and hope there is still a pension for you. Frankly with the government already in $1 Trillion dollars in national debt and 8 million Baby Boomers coming through the system there will be nothing left over for the next generation.However you don't pay capital gains tax if you don't sell and you keep the property to provide passive income in retirement. Rents continue to rise. However, Superannuation declines every time you draw down. Below is a table which shows the benefit of having investment properties which helps to reduce the amount you draw from your Superannuation every year. In the example you are drawing $60,000 per year. In the "Super Only" column
You can see how quickly the Super amount reduces i.e. approximately 5 years and Super is gone and now you are having to go on the pension. That is of course if the pension is still there for you as I explained in "Develop the Mindset of the Wealthy" . Click >>> HERE for the information as it is highly unlikely the pension will still be available in a few years time.
In the 2nd column "Super Plus Rent" you are only drawing down $20,000 because you will estimate you get $40,000 nett per year in passive income form the rental of your investment properties.This way we estimate you will have sufficient money for 13 years in retirement. After that you have two options rely on the rental income because it would have increased over the 13 years since you retired or sell one or more of the properties and live off the capital. At least you have choices and that is what investing in property is all about - choices.
Iinflation is the friend of the wealthy and the enemy of the middle class. If you do nothing because you are too scared to invest you are going backwards because inflation is dwindling away your savings and Super. Inflation is your friend when you are a landlord because research has shown rents increase over time above inflation. Imagine you are retired today with your home paid off and three investment properties each netting you $35,000 a year in rent. That is gives you over $100,000 with your Super. You could then do what you want, when you want and how you want without having to worry about money. Make inflation your friend.
Investing in shares and other financial markets
I do not profess to be an expert in stocks and shares. I do have friends and colleagues that have made money and some have lost money. When I discuss the results with those who have made money they fall under two categories:
1) Those that study the market and spend approximately eight hours a day watching the market and using their best guess to buy and sell.
2) Those that have good stock brokers who play the market for them. These investors are prepared to pay the fees because brokers make money when you buy and sell shares.
I know people who dabble in the Futures and Commodities market. Most of the ones I know which are not too many (so this is not indicative of the market) are always doing courses, attending webinars and spend hours a day watching the rise and fall of the market. However, most of them have yet to make money and it is a good way to pass their days for them in retirement.
When I think of the share market I always remember the experiment conducted in the United Kingdom and reported in the The Observer on 13 January 2013 :
"Stock market professionals in the UK have been beaten in an annual money-making challenge by a cat. The challenge, undertaken by British newspaper The Observer, put together three teams consisting of stock market professionals, a class of secondary-school students and a cat named Orlando, and asked them to invest £5,000 in five companies of their choice.
Orlando made his investment decisions by throwing his favorite toy mouse on a grid of numbers allocated to different companies, while the professionals drew on decades of experience. The stock market professionals who command anything upwards of £150,000 ($228,000) showed early promise, earning their clients a £497 profit by the end of the third quarter. But a fourth-quarter decline shifted the market in Orlando's favour and by the end of the challenge the cat had made a profit of £542 and the professionals a mere £176. The students boasted the strongest fourth-quarter gains but ended with a net loss of £160. The surprise outcome may lend weight to the 'random walk hypothesis' promoted by economist Burton Malkiel, which holds that share prices move at random, making markets unpredictable. To celebrate Orlando's success, owner Jill Insley, bought him a red collar".
If you are interested in stocks and shares and other financial products you need to talk to a Financial Planner. They are not licensed to give you advice on property. The Australian Investment Property Network has a number of Financial Planners they can refer you to. Contact James for a company in your area on 0416 137 645 or click >>> HERE .
There are so many "Get rich quick" schemes but they rarely do work. Rather concentrate on "Get rich slow" strategies and you will steadily increase your wealth. I take comfort knowing that jobs will become redundant, businesses will close , shares will cease to trade but property is forever.This information was written and compiled by James Cagney. The opinions expressed herein do not necessarily represent the views and opinions of his associates including Asset Financial Services Pty Ltd. who are experienced and qualified mortgage brokers who will help you to obtain the most suitable loan for your personal circumstances. They will ensure that you get sound and independent advice regarding your holding costs and affordability. They are full members of the Mortgage & Finance Association of Australia (MFAA). Susanne Temperley and Angela Del Marco are the founders of Asset Financial Services. They have guided the company since 1997 and the company has received numerous 'service awards'. They understand that clients want to be financially secure and ultimately debt free.
To this end the Award Winning Team at Asset Financial Services are there to assist you through every step on your wealth creation journey by providing in-depth guidance, assistance and advice on most finance related strategies. The team of highly trained professionals will 'hold your hand' through the process which will give you the peace of mind that you have made the right decision. Asset Financial Services Pty Ltd are proud to be recognized as one of the best in mortgage lending having earned that reputation from professional relationships they have with our wide panel of lenders. They offer their client's access to over 40 lenders offering more than 700 financial products saving you time and effort in sifting through them all to find what loan package best suits you.
CONCLUSION AND DISCLAIMERThere are three types of people:
These Strategies have evolved through the knowledge and experience that James Cagney has gained over the years. Most of f the information in this eBook he has learned from other successful investors. Some of the information has come from blood, sweat and tears after years of experience That was much harder to bear William Hazlitt said "Prosperity is a great teacher; adversity is a greater one". What you now do with the information is entirely up to you. I urge you to take ACTION and invest because you will blink and the years will be gone before you know it. My biggest regret is having to find the secrets of the rich later in life. I purchased my first property in Australia when i was 52 years old. For health reasons my spouse and I moved to the Gold Coast in Queensland. Because I did not know the secrets of the rich I sold my property in Sydney. That property is worth three times what I sold it for in just over 12 years. I did not know about "Hold" and "Control". I did not know about the secrets of the wealthy. I was ignorant. You have the benefit of my knowledge and experience. I had an excuse. You have no where to hide because I have given you more knowledge in this eBook than I had when i started on my investment journey. If I had known what I have given you in this eBook I would have made much more money over the years.I have another eBooks "The 7 Pitfalls to avoid when buying an investment property" that will be of benefit to you in your journey towards profitable property Investing which you can download:>>>> HERE .
James is presently writing "The 7 Strategies you need to create Wealth" and many of the principles in this eBook will be included in his book to be published in October 2016 and retail for $30. I wish you every success in your quest to take charge of your financial goals. Being able to adequately provide for your family and be in the financial position to donate to charity.is a great achievement enjoyed by so few in Australia. If you would like to speak to James give him a call on 0416 137 645 or click >>> HERE .
This is not financial advice. You should not act solely on the basis of the material contained in this eBook for your investment strategies. Changes in government and legislation occur frequently and without prior notice and financial markets are unpredictable. Please note that the information herein is of a general nature only and is not intended as specific advice for any particular person or entity.
This information was written and compiled by James Cagney. The opinions expressed herein do not necessarily represent the views and opinions of his associates including Asset Financial Services Pty Ltd.