Cash flow positive properties…the term gets thrown around a lot and every person has a different definition for it. I am going to come out and say that my understanding is that a cash flow positive property is a property where the rental income covers ALL costs, not just the mortgage. Anyone who says that their property is cash flow positive because their rent covers the mortgage is kidding themselves. The number of costs involved in property these days, after interest on the loan, can be astronomical – maintenance, body corporate, insurances, property management fees, rates, land tax, water etc. This is just the tip of the ice berg and when taken into consideration I’d be interested to see how many people think their property is still cash flow positive.

I recently handed over a spread sheet to my accountant which outlines every expense and income I have accumulated during the last financial year. I have no shame in saying that I made a loss of approximately $2,500. This takes into account EVERY cent I spent on it and every cent I made back. When you then take into consideration negative gearing this loss will, obviously, become less, but I’ll leave that handy work to my accountant. What I will do however is make a record of the amount I received back (directly apportioned to the property) so that I can ascertain the final year end result in its entirety.

Whilst people will argue that, like a business, any property that isn’t putting money in the pocket is not worth having – I argue that most business’ don’t make a profit in their first year (sometimes the first couple) and most people would be happy with such a small overrun at the end of the first year of operating. What is important is understanding the ongoing  costs of the property and the long term prospects in offering a return on investment through both yield and capital growth. The area I have invested in has averaged 11% return over the last 10 years and whilst the market has dropped somewhat I still believe there is an opportunity for growth over the next 10 years, albeit lower than the previous.

I have attached for our followers a fantastic property cost tracking spread sheet that I have been utilising and which I found at Investment Property Calculator. There’s no shortage of programs and software you can purchase for managing properties but I find this works perfectly. Use this and update it regularly.

Emma

Please note, as with all information provided on this website, just because it works for me does not mean it will work for you. Take into consideration your own circumstances and seek professional advice where appropriate when undertaking your tax return.

Jocasta Norman

Jane Cavanagh

Sean Toohey

Elad Adamon

John Fairs

Please email your address and details to: emma@mypropertyjourney.com

Enjoy!

Emma

As some of you would remember, last month I wrote an entry entitled “Should you manage your investment property?” which outlined some of the issues I was having with my property manager at the time and subsequently resulted in a list of pros and cons associated with self-management. There have been a lot of comments via mypropertyjourney.com, facebook and twitter with people keen to share their wisdom and experiences and I have taken all of these into consideration when making my final decision.

Why did I ultimately decide to take control of the manasgement of my investment property? The main reasons are as follows:

1)      The relationship with my tenant – Over the last 6-8 weeks my tenant and I have formed a really great relationship, he contacts me whenever there is an issue with the property and I endeavour to deal with the issue as soon as possible. He always pays his rent on time and has kept the property in a great condition.

2)      The Middle Man – I’ve come to realise that the property manager is just a middle man, a conduit of sorts, who feeds information from my tenant to me. If my tenant is already contacting me directly then why should I pay for this service?

3)      Saving money – The obvious one. I actually gave my property manager the opportunity to negotiate their fee, which may or may not have had any effect on the outcome of my decision to self-manage the property, but I wanted to see if there was any flexibility. There wasn’t. The property manager was adamant that the fee I was paying was the lowest they could go because of the quality of their service – HA.

4)      Control – I’m a control freak, especially when it comes to my hard earned money. Having said that, I have realised that over time I am going to have to lessen the grip I have on my property portfolio as it grows mainly because the whole point is to enjoy PASSIVE income. While my portfolio is still small and manageable, however, I will be as hands on and learn as much as I can to be able to take a back seat in the future.

The aforementioned are a few of the reasons I decided to self-manage my property. The decision has not been an easy one, I’ve had to evaluate and assess the risks involved with taking this step but I believe for me, right now, this is the best option.

With the decision made I decided to write an action list of things I needed to check off to ensure a smooth transition for both myself and my tenant.

These are the steps I took:

1)      Discussed and agreed with the tenant that self-managing the property would be the best option for both of us moving forward. I also negotiated a 24mth lease with rental increases every 12 months (including a rental increase in December 2012 when his original lease would have expired).

2)      Visited the RTBA website and printed off an Agent/Landlord transfer form. You will need the bond number and the tenant’s details to have access to this document. The property manager will be able to provide the necessary information.  Don’t explain why it is needed just ask for it, they don’t tend to ask questions.

3)      Printed off the tenancy agreement form from the Consumer Affairs Website and filled it out. Added some additional clauses (pertaining to rental increases every 12mths over the 24mth lease period – including a rental increase at the end of the year when his initial lease would have been ready to expire) and emailed it to my tenant so that he could have a few days to look over it before I visited him with the paper work for signing. I also included a copy of Renting a home: a guide for tenants which legally the landlord/property manager must provide.

4)      Visited my tenant, signed the tenancy agreement, signed the additional clauses and agreed that the current property condition report as per his initial lease would stand as the foundation for inspections during the tenancy but mainly for the final inspection upon vacating the property – we both signed and dated this.

5)      Filled out the RTBA Agent/Landlord Transfer Form and emailed it to my property manager to sign. We agreed a date for the transfer to become official and final payments outstanding to be paid into my account – I also requested a full ledger of every payment made over the course of my tenants lease to date for my records. Once she completed the form and sent it back to me, I mailed it to the RTBA.

6)      Called my insurance company to let me them know that I would be self-managing the property. They advised me of an additional payment of $2 per month – much better than what I thought it was going to be given some of the information I had received in the past!

7)      Set up my property management spreadsheet for the new financial year. As I will be taking care of the money side of things from now on I am going to have to be more on top of the property finances than ever before.

There you have it, my 7 steps to self-managing your own investment property.

Please keep in mind that everyone’s circumstances are different and need to be taken into consideration. Just because the above is working for me does not mean it will work for you. There are risks involved in self-managing property and readers need to be aware of this prior to any action.

Emma

P.S For those of wondering who the winners are from our “Get a Financial Grip” Promo – I will be announcing them this week. Stay tuned!

What is the difference between Fixed Rate and Variable Rate Home Loans?

A fixed rate home loan is “fixed” for a certain period of time with a set interest rate. When this period of time ends the homeowner has the opportunity to either fix the rate again or switch to a variable interest rate. A variable interest rate is the opposite of a fixed home loan rate in that it fluctuates with the market.

Advantages & Disadvantages of Fixed Rate Home Loans

The major advantage of fixed rate over variable is that there is certainty in mortgage repayments which invariably makes the budgeting process a lot easier; it also protects the homeowner from interest rate rises. The flip side to this, of course, is that fixed rate home loans cannot take advantage of interest rates declining.

Homeowners wishing to lock in fixed rates for an extended period of time will notice that rates become less and less competitive. Currently Westpac has fixed interest rates for 1 year at 6.19%, for 4 years this jumps to 6.69% and for 10 years it burgeons to 7.99%. Whilst certainty is a wonderful thing, the question is, at what cost? For homeowners looking at fixing rates for 3 years, which is the average fixed rate home loan period in Australia, the current rate is 6.09% (figures are as at 18/6/12 courtesy of Westpac.com.au).

Fixed rate home loans can lack flexibility when it comes to making additional repayments, redrawing funds and not providing offset facilities yet this is starting to change amongst some lending institutions. With this in mind it is important to ascertain what features are, or can be, included as part of the fixed rate home loan prior to signing any documents.

Fixed interest rate home loans can also be less competitive, at the time of purchase, when compared to variable interest rate home loans. However, this can be negligible over the long term, depending on what the price is fixed at and how much interest rates have risen over the life of the investment.

Advantages & Disadvantages of Variable Rate Home Loans

Before I go into the advantages and disadvantages of variable rates it is important to understand the difference between a basic variable rate and a standard variable rate.

Whilst both basic and standard variable rates are subject to market fluctuations the differences come mainly in the features available for each of the loans and the interest rate offered. Basic variable interest rates are usually lower than those offered for standard variable home loans because they don’t offer the same set of features, such as: the flexibility of being able to set up and use an offset facility, ability to drawn down on the mortgage (although some do allow this it can be costly) and split loans. As a homeowner it will need to be determined whether any of these features are actually necessary. If they’re not, then perhaps a basic variable rate home loan is best to help keep costs to a minimum.

For the basis of comparing variable rates to fixed rates let’s look, in more depth, at the advantages and disadvantages of the standard variable rate home loan.

The main advantages of a variable rate home loan is that mortgage repayments become lower every month when interest rates are cut which means there is an opportunity to reduce the balance of the home loan by continuing to pay a set amount of money each month into the mortgage or an offset facility. The offset facility is a wonderful feature that lets the home owner pay money into an account which is connected to the home loan and reduces the amount of interest paid. For example a home loan of $200,000 with an offset facility that has $50,000 in it will only pay interest on $150,000. As the interest on a home loan is calculated daily, every cent helps, and a lot of homeowners are opting to pay their income into the offset facility, and use only what is required for living expenses, to take advantage of this. The other benefit of an offset facility is the ability to have access to the funds if needed without having to re-finance or draw down on the mortgage. The offset facility will operate like any other bank account which can be accessed via bank card or the internet.

For the most part, as previously mentioned, variable interest rates are generally lower than a fixed rate home loan due to the uncertainty of rates increasing and this is the major disadvantage of a variable rate loan. As interest rates rise the cost of servicing the mortgage will too. A perfect example of this is during the 1980s when interest rates hit 17%! It is safe to assume that the average person will struggle to make repayments with interest rates this high and even more so those with a high LVR. Situations such as these may result in homeowners needing to sell their property in a distressed environment – something none of us want to do.

Still Unsure?

There is the opportunity for fence sitters to take advantage of splitting home loans. You can split loans 50/50 or 60/40 depending on preference and this can give homeowners the advantage of additional repayments, offset facilities and mortgage redraw without being exposed in full to the fluctuations of interest rates that having a variable home loan is subject to.

Be wary though, whilst it may seem the logical choice to split the loan, and take advantage of what both the fixed rate and variable home loan rates have to offer, there may be increased set up fees, account fees and discharge fees on both portions. There may also be penalties for additional repayments so be sure to do due diligence and research prior to making any decisions.

What I Will Be Doing

I don’t believe we’ve seen the last of interest rate cuts for the year, but predicting what the RBA will do is like taking a punt on the footy – and funnily enough patrons can now do just that! According to Sports Bet the RBA interest rates remaining unchanged is odds on favourite at $1.73 with a rate cut of between 1-25 basis points in at $2. It will be interesting to see how the odds change as we get closer to the announcement on the 7^th August 2012.

As the time to purchase my second property is nearly upon me (most likely after August 2012) I’ll be opting to continue to choose the variable rate route and taking the opportunity to pay down debt as quickly as possible while rates remain low.

Emma

As most of you know by now I am a huge advocate of the book and I had the opportunity to interview Pete on its impending release last month, which you can check out here.

Entries close 5pm Friday 13th July 2012.

Good luck!

Emma

In a nut shell ‘The Rule of 72’ is a method used to determine how long an investment will take to double based on the expected rate of return.

For example, many people are opting to keep their money in the bank, during these volatile economic times, and as a consequence will likely achieve an approx. 5% rate of return per annum. This means that a sum of $10,000 which is kept in the bank over the course of a year will end up equating to $10,500 by the years end. If the $10,500 is then kept in the bank for an additional year this will grow to $11,052 by the end of the second year, and so and so forth.

The below table illustrates how the ‘Rule of 72’ can be applied to varying rates of return.

Most people have heard the saying that ‘property doubles every 7-10 years’ and this is true if the investment is accruing an average 7-10% return over that 7-10 year period.  It is important to remember that the property market is subject to highs and lows, like any other investment, and that the average return over the length of the investment is what matters, not what happens on a year to year basis. Take for example the suburb of Bondi in Sydney: Between 2003 and 2011 there has been, on average, 7% growth per year for houses, however during this period there have been highs of up to 42% and lows of -29.7% (figures from realestate.com.au). Based on the ‘Rule of 72′ and a rate of return of 7% it would take 10.2 years to double an investment in Bondi.

Obviously the rate of return on property is subject to many variables such as location, supply and demand etc. so it is important to take this into consideration. Not all properties are going to provide a 7-10% return, some will provide more and some will provide less. It ultimately comes down to strategy. Some may opt for high rental yields (rental income which provides positive cash flow) over capital growth and vice versa. There is no right or wrong strategy, it merely comes down to the individual and their clear understanding of the direction they are taking to become a successful property investor.

Emma

My first contributor is Darryl; he’s a 33 year old full time investor who started out delivering pizza, earning an income of approx. $20k per annum. He first became interested in investing after reading Steve McKnight’s “0-130 Properties in 3.5 Years.” Most budding investors will be familiar with Steve McKnight, but for those of you who aren’t, he is an extremely well-known figure in property investing circles for having amassed a huge portfolio based on cash flow positive properties.

Darryl currently owns 13 properties (another 2 are presently under contract) throughout NSW and QLD. He has accumulated this tidy property portfolio over the last 12 months with his first property purchase in Broken Hill costing him a whopping $44,000. It is currently rented out for $180k (yield of approx. 19% before costs) and valued at $89,000, doubling the purchase price.

The best performer in his portfolio to date is another property in Broken Hill which is achieving an incredible yield of 36%! It would seem that whilst regional areas can get a bad reputation in terms of offering poor capital growth, yields like this can certainly make it worthwhile. Darryl certainly seems to have an affinity with regional properties but is not averse to purchasing closer to the city if there is the opportunity to make quick capital gains on a property with renovation potential. However, like many other investors, cash flow is high on the priority list and for many reasons, the main one being that it provides income to support his lifestyle. Purchasing multiple cash flow positive properties has afforded this young man a life of freedom, something most of us can only dream of. In fact an average week for Darryl involves “a few hours a week looking for new properties; the existing ones don’t need any additional work and if a new property needs renovating it will take about 2-3 weeks if you’re doing it yourself.”

So, how does one become a full time investor? When given the opportunity to ask Darryl just that he replied “(you’ll need) 20%+ of your current income. Don’t touch your normal pay for 6 months, and then you know you’re full time.”

For Darryl, property investing is one of the best investments going around because “there is no glass ceiling on how much you can earn and it’s a royalty based income” and his number one rule? Always buy below market cost, highlighting the fact that “money is made in the purchase not in what you do with it. Don’t listen to friends and family with no investing experience on where to invest.”

There you have it: Pizza delivery boy to investor extraordinaire in as little as 12 months. It just goes to show that it doesn’t matter how much you earn, it’s what you do with it that counts.

Emma

I recently visited my investment property in Geelong only to discover that a minor maintenance issue had not been rectified appropriately and as such has resulted in, what will most likely be, a costly revamp of the bathroom. Don’t get me wrong, I had every intention of renovating the bathroom in the future and by that, I mean the distant future!

Up until this encounter I had been led to believe the property manager was looking after my investment; she came across as both thoughtful and attentive and on face value appeared to be competent. There haven’t been many moments in my life when I’ve had to admit naivety but this is definitely one of them. As someone who works in project management I know how hard it can be to juggle multiple projects, and I can only imagine that this young lady is managing copious amounts of rental properties with a limited ability to provide all of them the attention they deserve, and that her clients expect. Needless to say I wasn’t very happy and neither, it turned out, was the tenant. Apparently the property manager has been taking weeks to respond to basic requests and has made several errors when it comes to depositing payments. I made a decision there and then to give the tenant my phone number and should any issues arise in the future he should call me direct. There’s something about having control over a situation that makes me feel better and in that moment I questioned why I had given it away so freely to a person I didn’t know and who clearly didn’t have my best interests at heart.

Presently I am paying the real estate agency, the property manager works for, 7% of the total weekly rental income. Whilst it doesn’t seem like much it works out to about $50 a month. Add that up over a year and it works out to $600! I know where I’d rather see that money going.

But is it as simple as that? I have spoken to numerous people about whether or not to self-manage, and it was a topic of conversation on both my twitter and facebook accounts not long after the event. A lot of people are all for pocketing the cash, and having the peace of mind of always knowing what is going on with their property, but in the interest of being diplomatic I decided to investigate the pros and cons of self-managing an  investment property.

Positives:

•  Saving Money – This is an obvious one, and as previously noted, works out to approx. $600 per annum at 7% of the rental income (in my case). Depending on where the investor lives money can be saved on property conditions reports, quarterly inspection costs, bond inspection, letting fee, corporate costs, annual rental statements etc. Some real estate agencies will include a lot of these costs as part of their management fee so it’s a good idea to double check the agreement prior to signing to ascertain what is being included and excluded.
• Choosing Tenants/Relationships with Tenants – Whilst there is some control in choosing the ultimate tenant, going through the screening process provides an opportunity for a face to face meeting. It also means that there is a potential to create a relationship with the tenant, hopefully one built on trust and respect!
• Knowledge – Home maintenance is not for the faint hearted and DIY is not as easy as people make it out to be on TV; however being hands on can provide a wealth of knowledge in the long run. Learning how much things should cost and how much time is involved is invaluable. When it comes time to get trades people in to do work on a third or fourth investment property, this knowledge will no doubt save money.   
• Best Interests of the Property – No one is going to care more about the investment property than the person who owns it. Maintenance issues won’t go unattended, rent will not go unpaid. Control is a wonderfully reassuring feeling.  
• Letting Price – Property Manager’s aren’t always going to get the best price. By doing research and understanding the local clientele and potential market value of the property, the rental income can be maximised.  Property owners are also going to be cognisant of any special features and may highlight these better than the property manager.

 Negatives: 

• Time – Just as saving money is obvious, saving time by having someone else manage an investment property is a given. This is obviously subject to many variables such as maintenance of the property, how diligent the tenant is and how many properties there are in the portfolio etc. Many people may start out self-managing their property/properties but as the number grows over time it becomes far more time consuming. 
• Geography – Self-managing is a lot easier when the property is in close proximity to the owner so what happens when the investment portfolio expands and properties are being purchased interstate or even internationally? Of course there is always can opportunity to engage a team of trade’s people but there’s nothing like being local and hands on.  
• Landlord Insurance – It’s a must have for any investor but word on the street is it can be hard to obtain from the more “respectable” well-known companies when there is no professional property manager appointed. Regardless of this, for peace of mind, do the due diligence and find a company that offers insurance for self-managed properties. It’s generally not an expensive item, approx. $250 per annum, and like all costs associated with an investment property, it is tax deductable. 
• Knowledge/Experience – Not everyone is handy with a hammer so chances are trade’s people are going to need to get involved to take care of maintenance issues etc. The property manager will have a list of go-to people they rely on to service all their properties, and one would expect a strong relationship that goes with providing on-going work. Also, whilst earlier I mentioned DIY can be a great learning experience, on the flip side, it can also be extremely costly. If home repairs are not done correctly it could involve a trade’s person coming into to do rectification works which means double the time and money spent. 
• Disputes – What happens when the tenant doesn’t pay their rent or trashes the property? VCAT happens. For those that don’t know what VCAT is, it stands for the Victorian Civil and Administrative Tribunal, and whilst this is specific to Victoria (where I live) there will be an equivalent judicial system in all states. VCAT can be a long and arduous process at the best of times and if there is a lack of knowledge and expertise in handling disputes in this regard it can end up leaving the property owner out of pocket.  
• Paperwork/Tenancy Agreement – Setting up the tenancy agreement and all the paperwork that goes with it can be time consuming. Any mistakes made during this process could end up being costly as it sets the basis for the entire agreement. A bond will also need to be obtained and issued to the Residential Tenancy Bond Authority who will hold it in trust until the term of the lease expires. If there is a claim made against the Bond it could possibly end up in dispute, which leads us back to the aforementioned note on VCAT.
• Advertising – Whilst doing it yourself can be cheaper than advertising through a property manager the disadvantage is not having access  to their networks and sites like realestate.com.au which, let’s face it, everyone uses these days. However, there are real estate agencies who will kindly take over this task and lease the property for a one-off fee. It can be more expensive than usual but it can take a lot of the stress out of the process.
• Tax Deductions – Choosing to self-manage an investment portfolio is great for saving money but remember in doing so any potential tax deductions associated with appointing a property manager are forfeited.
• The Human Factor – There may be times when a tenant cannot pay their rent and being only human this can be “ignored” and let slide…once…twice…get the picture? The advantage of having a property manager, as a middle man, is that emotions don’t come into play.

It may seem from the outset that there are more negatives than positives, when it comes to self-managing property, but it ultimately comes down to the weight each of these items holds for the investor. For some, getting their hands dirty and being organised is part and parcel of who they are and as such self-managing an investment property is within their realm of capabilities. Unfortunately, like most things, it’s not a one-size-fits-all situation and will need to be evaluated with each person’s own circumstances in mind.

For those of you who are keen to know more about the process involved with self-managing an investment property, and the step-by-step process to making it happen, I will be posting an entry later in the week that outlines everything you need to know to successfully set up a self-managed property.

Emma

What is NRAS?

NRAS is short for the National Rental Affordability Scheme and it was legislated by the Government in 2008 in an effort to provide affordable rental properties for low to middle-income households. With the population of Australia growing at such a rapid rate, and the prices of homes out of reach of most Australians, there has been an increased demand for rental properties which is consequently creating a shortfall between available properties and those wishing to rent them. The Commonwealth and State Governments have acknowledged this as a serious issue and as such are aiming to provide, through NRAS, 50,000 new affordable rental properties by June 2012. There is speculation presently about whether the initiative will continue past this point, however, regardless of whether it does or not those investors who have opted to participate in the NRAS initiative will continue to receive the benefits for the next 10 years.

You’re probably wondering at this point (as I did) how something as significant as NRAS has managed to fly under the radar. The main reason is that to implement an initiative such as this takes time and resources but furthermore the main target of NRAS was initially larger development companies who could buy and provide rental properties in bulk. It is only recently that smaller and individual developers/investors have been targeted to participate in the initiative.

How will NRAS support the Australian Community and what are the benefits for Investors:

NRAS will provide rental properties that are 25% below the market value. This means that investors who have a property that could be rented out for $400pw, at market value, are now faced with a property that will return $300pw to be eligible for the tax offsets.

Why would anyone in their right mind do this? Well, besides having a social conscious, investors  now have the potential to turn a negatively geared property into a positively geared property through the use of tax offsets (sometimes referred to as rebates) which work as a direct reduction in tax payable. In other words for each dollar of tax offset investors are eligible for their tax payable will be reduced by a dollar, regardless of their taxable income. For example, under NRAS investors will be eligible for approx. $10,000 in tax offsets per annum which means each investor’s tax payable will be reduced by $10,000 per annum.

In most cases tax offsets can only reduce the amount of tax paid to zero which means that investors generally don’t get a refund if the offsets are greater than the tax that is payable, however in this instance the Australian Tax Office (ATO) has nominated NRAS as a refundable tax offset which means that it can reduce the amount being paid to LESS than zero which results in a refundable amount and subsequently provides a positive return on the investment.

Investors also have the advantage of still being able to claim property expenses, deductions and allowances just like any other investment property as well as having the added bonus of applying these deductions against a lower assessable rental income which increases the benefit of negative gearing. This is what people like to call having your cake and eating it too.

Crunching the numbers and costs involved:

Costs are as per all investment properties and will include interest payable on the loan, maintenance costs, rates, insurance, capital gains tax (when/if the property is sold), insurance etc.

An audit process is also undertaken every 12 months which ensures that the property is being rented out in accordance with NRAS guidelines and policies. This will cost approx. $700 per annum but will vary from incentive to incentive. There is also a 10% management fee which compared to the usual 6-8% seems high, however, as part of the management fee there is a guarantee that the property will not be vacant for more than 2 weeks at time which offers peace of mind.

As for returns, currently the Commonwealth government initiative is indexed for 10 years (as per an average of 3.9% based on an annual average CPI for rent) and provides tax offsets of $6,855 per dwelling per year as a refundable tax offset or payment. The state government is providing a tax free incentive indexed for 10 years and currently $2,285 per dwelling per year. Taking all this into consideration the current incentive indexed at 3.9% over ten years equates to $109,228.

Who is eligible to rent the property?

There has been a lot of discussion surrounding the calibre of potential tenants considering NRAS is targeted towards middle-to-low income earners. Whilst it is a generalisation that low income earners don’t make great tenants, especially those going into brand new properties, it is a concern for most investors when looking at NRAS. Having said that, the normal parameters for any tenant still apply; the only difference is those who are now eligible to rent the property. The below table courtesy of Queensland Affordable Housing Consortium outlines the basic income requirements for those eligible to rent NRAS properties.

Any other requirements:

NRAS properties must be close to transport, schools, shops etc. making them desirable for tenants. There are also specified guidelines for the management of NRAS properties, namely that the manager is responsible for ensuring that the tenants meet the income criteria and that they are reviewed against the criteria every two years. If it is found, at any time, that the tenants residing in the property do not meet the strict NRAS criteria investors will forfeit any right to tax offsets and will have to pay back any money accumulated through the tax offsets to the government. This will also occur if investors have been found to not have been reducing the rental costs by the required 25% as per the NRAS agreement. The option to self-manage the property is available, however, the risk of not adhering to strict guidelines is very risky and probably very likely.

The Negatives:

Finding negatives for NRAS seemed daunting at first until I stumbled across some of the more popular property investing forums where I found endless amounts of information on why people think NRAS is not a good investment opportunity, regardless of the endless supposed benefits.

The main topics of conversation circulated around lending and finance. Lending in the current market is getting increasingly difficult and most banks will not lend against NRAS properties. For those that do a larger deposit (at least 20%) is generally required making it extremely difficult for every day Australians to purchase an NRAS property. Whilst NRAS was initially targeted towards developers and larger investment companies the fact that it is now available to the general public goes to the show that the initiative has not been as successful as the Government first anticipated.

Another downfall for NRAS investors is that if at any point in time during the 10 years they should need to opt out of the agreement they can, however, only on the proviso that another NRAS property is available. This means that investors will either need to sell their NRAS property to someone willing to take on the remainder of the agreement OR they will need someone to purchase another NRAS property to fill the gap. Whilst for most investors this isn’t a problem, mainly because they tend to hold for the long term, if something should happen and the investor needed to sell the property it creates more headaches than it is worth.

The majority of NRAS properties, if not all, are bought off the plan which generally means that there is an increased up front sale cost because the property is brand new, a high risker of damage and the capital growth is never guaranteed. In fact one of the biggest arguments against NRAS properties is that while you may be achieving tax incentives for 10 years (and only 10 years) the capital growth will be negligible when compared to non-NRAS properties. How people can know this with the initiative only having been around for 4 years, I don’t know, I can only assume it is due to the stigma attached to NRAS properties. It will be interesting to see the stats on sale values once some of these properties start selling both during and after the 10 year agreement.

Higher admin fees for property management, the complicated tenant process and strict requirements were also seen as negatives by many and whilst these, and the aforementioned are all valid points, my main quandary with the whole process is as follows:

What happens to the tenants renting out these properties when the 10 year agreement expires? Surely once the tax incentives run out investors are not going to continue to rent out their properties for 25% below market value? Whilst the initiative seems good at first glance, it hardly seems thought through for the long term.

Emma

If you haven’t already done so you can read my review here – ‘Get a Financial Grip’ – Must read book of 2012.

* * *

1)  You wrote “Get a Financial Grip” whilst you were travelling around the world. Can you tell me what compelled you to do so? Was it on a whim or something you had been thinking about for some time?

Firstly, I have come to realise that we should do what we are passionate about, and for me, that means writing and investing.  I’m always writing anyway, be it letters, emails, postcards, my Blog, magazine articles…so it seemed a logical extension to write a book.

Secondly, I felt that there was a significant gap in the finance and investment market for a book like mine.  There are plenty of finance titles on the shelves but I felt that there was a genuine need for a comprehensive personal finance and investment book that is specific to Australia and to 2012 (and the current economic environment).

Thirdly, I was always saying to my wife that I could write a better book than the ones currently available, so I felt that I should put up or shut up.  Hopefully, I’ve achieved what I set out to do.  Writing a book was not something that I had necessarily planned to do, but I found that while travelling, I had plenty of spare time, so it seemed like a great opportunity.

2) I find it interesting that you poke fun at some of the more well-known wealth “gurus.” What do you think sets you (and this book in particular) apart from those that are as equally, if not more, successful than you are.

I should say that while I might be critical of some other writing, I never do so purely to undermine the viewpoints of others.  It’s a simple fact of life that we don’t all agree on the best strategies – it would be a very boring world if we all agreed on everything.  Writing a book myself has certainly given me a new insight into just how much work is involved in writing a text, finding a publisher, editing and re-editing an edition for release.

That said, I do have an issue with a number of books that are written in America for American investors but sold in Australia without any adaptation.  It’s a small wonder that many become confused over the best course of action when the advice out there is often conflicting.  Australia has different demographics, industries, economic trends and taxation law from the USA, yet we are frequently sold information that is written for another jurisdiction.  At best this is confusing; at worst, it is downright misleading.

Unlike a large percentage of finance authors, I have several top financial qualifications – plenty have none at all – and I’ve backed that up with a sound track record of investment.  Perhaps more importantly, having worked in the finance industry for nearly a decade-and-a-half, this has afforded me the experience to know which viewpoints to place a great deal of importance on, and which viewpoints to place less value on.  The internet has given a mouthpiece to the masses and if you believed everything you read you would probably believe that the sky was falling, and you would almost certainly never invest.

A good case in point was during the US debt crisis of the second half of 2011.  There was panic and a lot of scaremongering talk of a double dip recession and the coming stock market meltdown.  I stayed invested throughout because I placed more value on the views of some (e.g. Buffett) than others.

As to what sets the content of my book apart from others – my book is a comprehensive, Australia-specific financial plan that considers all asset classes and which of those are likely to take you to a goal of financial freedom.  While some asset classes are more suitable than others, I believe a balanced portfolio of shares, funds and property can get you to your goals quickly enough.

I’ve read plenty of investment strategy books that read like University theses covering every conceivable facet of investment theory – and it’s not uncommon to come away more confused than you were before picking up the book.  My book avoids this trap, instead being presented in a simple, direct and logical fashion, and concluding with a specific plan for achieving financial freedom in Australia.

I also accept that there are very few ‘new’ ideas in the investment arena – what I have done is bring together ideas from a very large range of sources (which I have referenced) to bring you just one book that can lead you on the path to financial success.

3) What was the turning point for you when you decided you were going to concentrate on accumulating wealth rather than labouring through the regular “9-5” that most Australians are accustomed too? Was there a particular light bulb moment?

The major turning point for me was when I first met and got to know my wife through work at the accounting firm, Deloitte.  Although we weren’t seeing each other at the time, we worked together a lot.  The hours were tough (if it was just ‘9-5’ that would have been OK!) and the work was intense, but we were well compensated, both being top-bracket taxpayers at the time.

The first ‘light-bulb’ moment for me was when Heather and I discussed our plans for the future.  I was focussed on my likely career path, while Heather had far less interest in the corporate ladder, instead planning to move on and follow her own interests.

When we talked about our own personal finances, the difference in what we had achieved was almost laughable.  Heather had bought her first house at 21 and paid off a huge chunk of the mortgage.  She’d also been very sensibly investing a balance in ISA’s, shares and index funds every month for years.  I, on the other hand, partied a lot, had a student debt and some cash in the bank.  I was absolutely nowhere by comparison.

The second ‘light-bulb’ moment for me came when Heather bought me a couple of finance books about the merits of investing in shares and property.  Looking back, she had obviously realised that I needed a nudge in the right direction.  From that very day forward I have read voraciously anything and everything related to wealth creation and investment I can get my hands on from the library, the bookstores and the internet.  All the information we need to take control of our finances is out there, we just need to go out and find it!

4) What was your very first investment? Why did you choose it? Was it successful?

Being brought up in England, many of us who had building society accounts were issued with shares so I had some shareholdings when I was very young, but, to be frank, I didn’t take an awful lot of interest in them.  I probably cashed them in for a holiday, most likely, as a lot of young people did!  I couldn’t even tell you if they had gone up or down in value post-issue.  Now I think about it, I also had a Post Office Savings account that probably ended up getting spent the same way.

I started out conservatively in ‘real’ share investing and the first shares I bought included a portfolio of blue chips like BHP Billiton and Commonwealth Bank, which performed solidly if not spectacularly.  I was rather green so I wanted to pick relatively safe stocks.  I also picked a portfolio of 12 stocks, which gives a fair indication of my level of confidence in the individual selections, which was fairly low.

With respect to properties, although my wife had invested before, my own first investment properties were in Sydney, where I bought several investment units in the Eastern Suburbs, the inner west and on the harbourside at Pyrmont.  They have performed very well over the years.

5) What is the biggest investing mistake you have made and what did you learn from it?

Without question, the biggest mistake I made in investing was not starting when I was 18, because, unlike my wife, I missed out on the longest UK property bull market imaginable!  I probably couldn’t have afforded to buy anything too expensive back then, but I wish I had at least tried.  Investing just was not on my radar then, I was only interested in playing sport, socialising and the other distractions of being a young bloke.

With regards to the investments I have made, having never sold a property and mainly being a buy-and-hold investor in shares and index funds, I’m glad to say that I haven’t to date made a significant financial loss.  At times, my dabbling in speculative shares has been a little too cavalier, but I’m glad to say I haven’t been badly burned by that.

6) Do you have a vision board? If so what is on it? How have your goals/desires changed since you first started investing?

I do actually!  Absolutely my goals have changed over time, too.  When I first did the exercise many years ago, two of the things I included on the list were a photo of a Ferrari and one of an enormous beach-side mansion.  The funny thing is that now I have a portfolio of shares and funds that I could cash in to spend on a flash car, I have absolutely no desire to do so!  I just couldn’t bring myself to part with that much cash, especially with the insurance and ongoing costs of owning another sports car (we have one convertible already, and we don’t even use that very much).  I’d far rather reinvest gains in other investments now.

More recently, I put together a new list of goals and I’m glad to say that there was no Ferrari on the list.  My attitude towards extravagant spending is very different to how it was in my early twenties.  My wife and I are really keen on buying a house in the north of England as a place to go and visit each year.  Although we’ve lived in Australia for years, our families still live in England and we want to spend more time with them.  So that is one thing on my list for the next few years.  We’d also like to buy a house as a place of residence in Sydney at some point.  Having been travelling for 18 months, we have nowhere to return to at the moment, so will probably be staying in a serviced apartment for a while yet!

From an investment perspective, our goals are fairly straightforward – to keep building our share/equities portfolio and keep acquiring investment properties in areas with strong population growth.

7) How much do you believe attitude plays a part in wealth creation? Do you think that ANYONE can become wealthy as long as they have the right attitude or does circumstance play a part in it as well?

I certainly believe that attitude is the most important aspect of wealth creation.  With the wrong attitude, failure is virtually guaranteed.  Investors with the right mindset, on the other hand, will almost always be successful.  Circumstance must surely play a part, but in wealth creation as in life, the way we respond to events is often far more important than the actual events themselves.

8) Warren Buffett has a buy and hold strategy when it comes to shares otherwise known as value investing. With properties you can use the equity to reinvest or create a line of credit to cover living expenses. How does this work when it comes to shares? Is it the same? How does it differ?

Using leverage to invest in property has been a very effective wealth creation strategy over the decades.   It is also possible to use leverage to invest in shares, either through the use of options, trading CFD’s or through the use of margin loans.

Taking on large loans to invest in shares can be, in my opinion, a dangerous strategy – as in recent years the collapse of some of the most renowned investment vehicles demonstrated.  Margin loans can help to magnify gains in shares during bull markets, but when values fall, leveraged investors may be subjected to margin calls whereby some of the shares may have to be sold or extra cash injected.  This can result in investors abandoning their strategy when prices are low, which obviously is not a great outcome.

Margin loans can be particularly troublesome in a sideways moving market too.  How long should a leveraged investor (who is being charged, say, 9% interest on the loan) hold on to a leveraged share investment that is not moving in value?  It becomes a very difficult choice.  The finest investors are often those with the clearest heads – margin loans can cloud the thought processes and the measurement of results becomes more difficult.

Over time, I have come to realise that margin loans can be as much a hindrance as they are a help.  Buffett himself said that if you are smart you shouldn’t need leverage to invest in shares…and if you are dumb, you definitely shouldn’t use it!  Another analogy Buffett used was that you only find out who is swimming naked when the tide goes out.

A better strategy for share investing might be to continue to build your share portfolio when values are relatively cheap, and to invest in companies that make healthy profits and pay strong dividends.  You can then opt to take the dividends as cash for living expenses or reinvest the dividends through a company’s dividend reinvestment plan (DRP).

9) Do you plan to sell any of your properties to pay down the debt on your portfolio and use rent as a form of passive income or are you content with continuing to invest and accumulate more properties?

At the moment, being in my mid-thirties, I am still accumulating properties.  I have a mixture of interest only loans and principal and interest loans, so I am reducing the debt on a number of my properties as I go along.  I may well look at selling properties down the track to repay some debt, but not just at the moment.

10) What attracts you to buying units? A lot of real estate experts state that the actual value of a property is in the dirt underneath it, not in the property itself and that the larger the lands content the more value there is in the property. Do you think this is still true in today’s market?

Good question.  The idea that land appreciates and that buildings depreciate is a neat one, and it does have some merit.  However, if you think about the replacement cost of a building, it is not necessarily true that the building depreciates (think of how may beautiful Federation homes were built for just a few thousand dollars, for example).

Another consideration is whether the small area of land under a prime location unit may appreciate more than a large block of land located in a more remote location.  There are many thousands of acres of land in Australia with almost no value attached at all, so all land is not created equal.

Ultimately, what drives property values is supply and demand.  Houses have been a superior investment in decades gone by, but the affordability of houses has become a major issue in our capital cities, and this has seen a move towards units for the younger generations.

Units tend to generate stronger rental yields – a plus for investors – and the average household size has decreased over recent years.  Personally, I believe that one and two bedroom units located in great suburbs and near to transport links will be outstanding performers over the next three decades, which is the time horizon I consider when buying an investment property.

Of course, houses are in strong demand in some areas too, and houses can also represent a great investment.  Other strategies that can be successful with houses include renovations, subdivision and land banking – or even obtaining approval to demolish and build blocks of units.  It’s not a case of “one size fits all” when it comes to property investment.

11) Negative gearing is often compared to a failing business i.e. Why would you invest in a property that takes money out of your pocket every week? Do you think it is wise to have some negative geared and some cash flow positive properties? Or do you focus purely on the expected capital growth? It’s often a double edged sword!

When I first started investing in Australia, my wife and I were both earning high salaries and paying heck of a lot in tax, so we didn’t consider the rental yield of the properties we bought to be the most important consideration.  Obviously losing money on an investment is never a good thing, but the tax we saved was welcome.  Our primary focus was on capital growth, for simple mathematics dictates that it is capital growth that creates wealth for property investors.

However, when we left our full time jobs, an interest shift did occur, and that was that we began to see our positive cash-flow properties as golden investments that needed little or no attention from us – whereas those that were negatively geared suddenly became more of a pain to service.

Now we consider the cash flow of a property to be of more importance to us.  As we also invest in England (where interest rates have been stuck at just 0.5% for three years now) the strong positive cash flow on our UK properties neatly offsets the outflow on our negatively geared properties in Australia.

Positive cash flow is a great thing and something that ultimately all property investors should aspire to.  However, I don’t mind taking some moderate cash-flow losses in the early years of property ownership as rents tend to increase over time with inflation.

My wife often cites the example of a property she bought in 1997 that was negatively geared at the time – today the rental income is well over double the mortgage and she has refinanced the property three times to date!  So do remember that a negatively geared property need not remain negatively geared forever.

12) Will you be buying property in 2012 and if so where will you be focusing your attention?

My plan for 2012 is to buy one property in Australia and one in England.  For Australia, I will be looking at Newcastle, NSW.  I don’t normally buy outside of Australian capital cities but I do really like Newcastle.  In England, the major property shortages are forecast to be most acute in the south-east so I will be looking at London, or the surrounds of London.

13) People often refer to investors as risk takers; however from all reports your accumulation of wealth to date, for the most part, has been through patience, diligence and resourcefulness. Would you say that the wealthy are often misconstrued? Do you think the media plays a large part in this misconception?

It is true that investing usually involves some risk.  However, if you take a look at the average superannuation balances in Australia, you might argue the biggest risk of all lies in not investing.  The majority of Aussies who live to retirement age end up drawing some or all of the Age Pension allowance.  If you live to be 65, you might expect to live for a further 20 years in retirement today, which is far too long for the average pension balance to cope with.

Personally, I have a long-term inflation bias, and I feel that it is important to invest in asset classes that represent an inflation hedge.  Piling up money in a bank account is not necessarily smart.  Inflation in Australia has until recently been hovering around the high end of the Reserve Bank’s target range of 2-3%, while inflation in the UK is tearing along at well above 4% (with more quantitative easing likely to be on the way).  This is particularly harsh on net savers and pensioners, who find that their funds are worth less with every passing year.

While investing does tend to involve risk, taking a longer term view reduces the risk of financial loss significantly.  I mentioned that I look on property as a 30 year investment.  The same principle applies to share investing.  If you buy a share with the intention of selling it tomorrow your odds are no better than a coin flip (in fact, they are worse if you take in to account transaction costs).  On the other hand, if you acquire shares in outstanding companies when they are trading at cheap values and plan to hold for the long term, the risk is reduced very significantly.

Are the wealthy misconstrued?  To some extent, yes.  Some wealthy people are greedy, but then, so are some poor people.  In Britain, there is an awful lot of media debate at the moment about the scrapping of the 50% income tax rate and a proposed ‘tycoon tax’.  I don’t think it’s easy to generalise, but it is worth nothing that for every greedy ‘tycoon’, there are others who donate generously to charities.

14) One thing I took away immediately from your book was to constantly keep investing as much as you can. As we know the value of cash is decreasing every year, however people seem to either forget this or are ignorant to the fact completely. Why do you think people are so averse to investing their money, even in safer options such as index funds?

A number of reasons spring to mind.  There are those who believe it is risky, but I think the prime reason is one of mindset.  Many of us are brought up to believe that getting the highest paid job we can is the route to wealth and success.  But while getting paid more is useful, if we don’t invest the money, half of it goes to the taxman and the other half is spent on lifestyle expenditure and consumer goods.  It is very, very difficult to save your way to wealth.

People give all kinds of reasons for not investing.  Here are some of them:

• Don’t have time
• Can’t afford it
• Too young – I’ll invest later
• Doing fine without investing
• Don’t understand investments
• Investing is too risky

For each of these points, though, there is a corresponding and obvious rebut.  Our financial education often starts with our parents’ attitude to money.  If you are from a family where your parents never invested, perhaps it will follow that you won’t too.  Unfortunately, while many of the Baby Boomer generation had defined benefit pension schemes, for most of us in Generation X and Generation Y we are responsible for our retirement balances, and therefore investment for the future is very important.

15) Why do you think the average Australian is so negative to the idea of a young person striving to be in a position to retire by 40? Is it jealousy or is there a genuine belief among people that wealth is unattainable?

Jealousy plays a very significant part, I think.  Human nature dictates that we often don’t like to see people taking a different path to our own, particularly if it proves to be a successful one, for this challenges our own beliefs.

An interesting statistic is that migrants to developed countries are significantly more likely to be millionaires than the average person.  Why is that?  We can’t be 100% sure, but I believe this is because migrants are less inclined to worry about what their peers say about them, are not daunted by taking a different path and are far more concerned with delivering results than how they will be perceived by others.  Taking the safe route is easy – no individual lemming receives a bad press for following the others off the cliff, as they say.

As previously noted, too, there is a common belief that a high-paying job is the one true route to success.  In Australia, we certainly seem to have a less entrepreneurial mindset than our American counterparts.  People relate status to their job titles and ‘what they do’.  There also appears to be an in-built mindset for most of us that dictates that we should be working in full-time employment until around the retirement age.

It can be quite confusing and disconcerting for young high-flyers who have all the conspicuous signs of ‘wealth’ – two new financed cars, a big house, expensive holidays – when those whom they felt were inferior to them from an earnings perspective proceed to grow a large portfolio of appreciating assets and are able to contemplate life away from the rat race of full-time employment.  They may have always felt that their high-paid jobs automatically made them successful, and yet, if it is not invested the salary gets spent on depreciating assets which ultimately destroy wealth.

16) What is next for Pete Wargent? If you could crystal ball the next 10 years what would you see?

I’ll definitely always continue writing, for that is what I love doing.  I’m currently working on a second book and I’d like to write more magazine and press articles going forward.  In terms of other income, I’m not exactly sure what I will do for the next 10 years.  I don’t plan on returning to full-time employment, but I also don’t think it is smart to sacrifice our peak earning years completely.

I’m currently studying for a Property Buyers Agent licence, which I hope to finish in the next month or so.  I don’t yet know if I will do much in the way of Buyers Agency work, but I definitely feel that I have a lot to offer as an educator in the personal finance and investment sphere.   Whether or not I’ll do more accounting work, I’m not sure about that – perhaps I’d consider doing some a short-term contract if the right role came along.  Overall, I will continue to build my network of contacts, raise my profile and assess what opportunities come along – it is exciting to me to not know exactly what the future holds.

As I mentioned before, my wife and I are keen to spend a bit more time in England going forward, something we haven’t done enough of for the last 7 years or so.  So we’d definitely like to split our time a bit more between the UK and Australia if we can manage that.  Travel is obviously something that is important to me too.  I’d like to spend some more time in India at some point.

Finally, I’m really keen on the idea of setting up a charitable foundation over the coming years.  Since I quit my job, I’ve become far more interested in charity work, my wife and I having spent some very rewarding time working for BlazeAid up in Queensland, clearing up the devastating effects of Cyclone Yasi.  Cancer research is a charity that is particularly important to me for personal reasons, and I’m donating 10% of my proceeds from the sale of my book to Glenn McGrath’s charity, The McGrath Foundation (for breast cancer research and support).

17) And last but not least, if you could offer one piece of advice to young investors starting out what would it be?

Start learning TODAY and never, ever, ever stop!

To pre-order your copy of “Get a Financial Grip” please visit Blue Sky Publishing otherwise you can find more information about Pete and his book at his blog Escape the Rat Race.

Emma