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Investors Direct Financial Group P/L ABN: 52 097 697 820 Level 2, 391 St Kilda Road Melbourne VIC 3004 T: 61 3 9868 7500 F: 61 3 9868 9600 Email: mail@investorsdirect.com.au Website: www.investorsdirect.com.au

Sep 05, 2011

A New Way to Invest in Property By Bill Zheng, December 2011

Bill Zheng is the founder of the Investors Direct Financial Group, which is headquartered in Melbourne with an office in Sydney. The company comprises 5 divisions: 1) Investor Education 2) Property Advisory 3) Financial Planning 4) Mortgage Solutions and 5) Property Management. Bill was educated in China, Australia & USA and is fluent in both English and Chinese. His tertiary education includes Civil Engineering at South China University of Technology, Computer Science at RMIT, MBA at Monash University, Finance at the Securities Institute of Australia and numerous investment related courses in Australia, China, Hong Kong & USA. After a long corporate career spanning positions in Australia, Hong Kong, China, USA, Canada & Northern Europe, Bill left PricewaterhouseCoopers Melbourne in 2000 to found Investors Direct, initially as a mortgage broking business solely servicing property investors. In 2005, Bill became the highest ranked mortgage broker in Victoria during the first ever national survey of mortgage brokers, before then becoming a mentor to many of the MPA Top 100 mortgage brokers in Australia. He holds an Australian Credit Licence (No. 402950). Bill soon became known for his unconventional views on property and finance. He not only personally executed numerous property strategies himself but also actively educated tens of thousands of property investors across Australia. Bill was given the honour of being the Chief Judge for the inaugural Australian Property Investor of the Year Awards in 2008. With his practical knowledge and hands-on experience in real estate investment and finance, Bill has been invited to appear on property shows on TV and radio in Australia. He regularly writes for a variety of property investment magazines, newspapers and online investment portals and is one of the most sought after presenters on property and finance in Australia and South East Asia.

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A New Way to Invest in Property By Bill Zheng, December 2011

The two most frequently asked questions by investors are: 1. What investment should I buy? 2. Is now the right time to buy it? Most people want to know how to spot the right investment at the right time, because they believe that is the key to successful investing. Let me tell you that is far from the truth: even if you could get the answers to those questions right, you would only have a 50% chance to make your investment successful. Let me explain. There are two key influencers that can lead to the success or failure of any investment: 1. External factors: these are the markets and investment performance in general. For example: o

The likely performance of that particular investment over time;

o

Whether that market will go up or down, and when it will change from one direction to another.

2. Internal factors: these are the investor’s own preference, experience and capacity. For example: o

Which investment you have more affinity with and have a track record of making good money in;

o

What capacity you have to hold on to an investment during bad times;

o

What tax advantages do you have which can help manage cash flow;

o

What level of risk you can tolerate without tending to make panic decisions.

When we are looking at any particular investment, we can’t simply look at the charts or research reports to decide what to invest and when to invest, we need to look at ourselves and find out what works for us as an individual. Let’s look at a few examples to demonstrate my viewpoint here. These can show you why investment theories often don’t work in real life because they are an analysis of the external factors, and investors can usually make or break these theories themselves due to their individual differences (i.e. internal factors).

Example 1: Pick the best investment at the time. Most investment advisors I have seen make an assumption that if the investment performs well, then any investor can definitely make good money out of it. In other words, the external factors alone determine the return. I beg to differ. Consider these for example: ©2001-2011 Investors Direct Financial Group

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Have you ever heard of an instance where two property investors bought identical properties side by side in the same street at the same time? One makes good money in rent with a good tenant and sells it at a good profit later; the other has much lower rent with a bad tenant and sells it at a loss later. They can be both using the same property management agent, the same selling agent, the same bank for finance, and getting the same advice from the same investment advisor.

You may have also seen share investors who bought the same shares at the same time, one is forced to sell theirs at a loss due to personal circumstances and the other sells them for a profit at a better time.

I have even seen the same builder building 5 identical houses side by side for 5 investors. One took 6 months longer to build than the other 4, and he ended up having to sell it at the wrong time due to personal cash flow pressures whereas others are doing much better financially.

What is the sole difference in the above cases? The investors themselves (i.e. the internal factors). Over the years I have reviewed the financial positions of a few thousand investors personally. When people ask me what investment they should get into at any particular moment, they expect me to compare shares, properties, and other asset classes to advise them how to allocate their money. My answer to them is to always ask them to go back over their track record first. I would ask them to list down all the investments they have ever made: cash, shares, options, futures, properties, property development, property renovation, etc. and ask them to tell me which one made them the most money and which one didn’t. Then I suggest to them to stick to the winners and cut the losers. In other words, I tell them to invest more in what has made them good money in the past and stop investing in what has not made them any money in the past (assuming their money will get a 5% return per year sitting in the bank, they need to at least beat that when doing the comparison). If you take time to do that exercise for yourself, you will very quickly discover your favourite investment to invest in, so that you can concentrate your resources on getting the best return rather than allocating any of them to the losers. You may ask for my rationale in choosing investments this way rather than looking at the theories of diversification or portfolio management, like most others do. I simply believe the law of nature governs many things beyond our scientific understanding; and it is not smart to go against the law of nature. For example, have you ever noticed that sardines swim together in the ocean? And similarly so do the sharks. In a natural forest, similar trees grow together too. This is the idea that similar things attract each other as they have affinity with each other. You can look around at the people you know. The people you like to spend more time with are probably people who are in some ways similar to you. It seems that there is a law of affinity at work that says that similar things beget similar things; whether they are animals, trees, rocks or humans. Why do you think there would be any difference between an investor and their investments? So in my opinion, the question is not necessarily about which investment works. Rather it is about which investment works for you. If you have affinity with properties, properties are likely to be attracted to you. If you have affinity with shares, shares are likely to be attracted to you. If you have affinity with good cash flow, good cash flow is likely to be attracted to you. If you have affinity with good capital gain, good capital growth is likely to be attracted to you (but not necessary good cash flow ). ©2001-2011 Investors Direct Financial Group

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You can improve your affinity with anything to a degree by spending more time and effort on it, but there are things that you naturally have affinity with. These are the things you should go with as they are effortless for you. Can you imagine the effort required for a shark to work on himself to become sardine-like or vice versa ? One of the reasons why our company has spent a lot of time lately to work on our client’s cash flow management, is because if our clients have low affinity with their own family cash flow, they are unlikely to have good cash flow with their investment properties. Remember, it is a natural law that similar things beget similar things. Investors who have poor cash flow management at home, usually end up with investments (or businesses) with poor cash flow. Have you ever wondered why the world’s greatest investors, such as Warren Buffet, tend only to invest in a few very concentrated areas they have great affinity with? While he has more money than most of us and could afford to diversify into many different things, he sticks to only the few things that he has successfully made his money from in the past and cut off the ones which didn’t (such as the airline business). What if you haven’t done any investing and you have no track record to go by? In this case I would suggest you first look at your parents’ track record in investing. The chances are you are somehow similar to your parents (even when you don’t like to admit it ). If you think your parents never invested in anything successfully, then look at whether they have done well with their family home. Alternatively you will need to do your own testing to find out what works for you. Obviously there will be exceptions to this rule. Ultimately your results will be the only judge for what investment works for you.

Example 2: Picking the bottom of the market to invest. When the news in any market is not positive, many investors automatically go into a “waiting mode”. What are they waiting for? The market to bottom out! This is because they believe investing is about buying low and selling high - pretty simple right? But why do most people fail to do even that? Here are a few reasons: 

When investors have the money to invest safely in a market, that market may not be at its bottom yet, so they choose to wait. By the time the market hits the bottom; their money has already been taken up by other things, as money rarely sits still. If it is not going to some sort of investment, it will tend to go to expenses or other silly things such as get-rich-quick scheme, repairs and other “life dramas”.

Investors who are used to waiting for when the market is not very positive before they act are usually driven either by a fear of losing money or the greed of gaining more. Let’s look at the impact of each of them: o

If their behaviour was due to the fear of losing money, they are less likely to get into the market when it hits rock bottom as you can imagine how bad the news would be then. If they couldn’t act when the news was less negative, how do you expect them to have the courage to act when it is really negative? So usually they miss out on the bottom anyway.

o

If their behaviour was driven by the greed of hoping to make more money on the way up when it reaches the bottom, they are more likely to find other “get-rich-quick schemes” to put their money in before the market hits the bottom, by the time the market hits the bottom, their money won’t be around to invest. Hence you would

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notice that the get-rich-quick schemes are usually heavily promoted during a time of negative market sentiment as they can easily capture money from this type of investor. 

Very often, something negative begets something else negative. People who are fearful to get into the market when their capacity allows them to do so, will spend most of their time looking at all the bad news to confirm their decision. Not only they will miss the bottom, but they are likely to also miss the opportunities on the way up as well, because they see any market upward movement as a preparation for a further and bigger dive the next day.

Hence it is my observation that most people who are too fearful or too greedy to get into the market during a slow market have rarely been able to benefit financially from waiting. They usually end up getting into the market after it has had its bull run for far too long when there is very little negative news left. But that is actually often the time when things are over-valued, so they get into the market then, and get slaughtered on the way down. So my advice to our clients is to first start from your internal factors, check your own track records and financial viability to invest. Decide whether you are in a position to invest safely, regardless of the external factors (i.e. the market): 

If the answer is yes, then go to the market and find the best value you can find at that time;

If the answer is no, then wait.

Unfortunately, most investors do it the other way around. They tend to let the market (an external factor) decide what they should do, regardless of their own situation, and they end up wasting time and resources within their capacity. I hope, from the above 2 examples, that you can see that investing is not necessarily about picking the right investment and the right market timing, but it is more about picking the investment that works for you and sticking to your own investment timetable, within your own capacity.

A new way to invest in properties During a consultation last month with a client who has been with us for 6 years, I suddenly realised they didn’t know anything about our Property Advisory Service which has been around since April 2010. I thought I’d better fix this oversight and explain what it is and why it is unique and unprecedented in Australia. But before I do, I would like to give you some data you simply don’t get from investment books and seminars, so you can see where I am coming from. Over the last 10 years of running a mortgage business for property investors: 

We have executed more than 7,000 individual investment mortgages with around 60 different lenders;

Myself and our mortgage team have reviewed the financial positions of approximately 6,000 individual property investors and developers;

I have enjoyed privileged access to vital data including the original purchase price, value of property improvements and the current valuation of close to 30,000 individual investment properties all around Australia from our considerable client base.

When you have such a large sample size to do your research on and make observations, you are bound to discover something unknown to most people. ©2001-2011 Investors Direct Financial Group

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I have discovered many things that may surprise you as much as they surprised me, some of which are against conventional wisdom: 

Just about every property strategy works. It just depends on who does it, how it is done, when it is done and where it is done. When I first started investing, I went and read many property investment books and attended many investment educational seminars. Just about every one of them was convincing and this confused the hell out of me. Just when I was about to form an opinion against a particular property strategy, someone would show up in one of my client consultations and prove that it worked for them! After testing many of these strategies myself, I came to realise that it is not about the strategy,(which is only a tool) but rather it is about whether the person is using the tool appropriately at the right time, in the right place and in the right way.

There is no such thing as the best suburb to invest in, forever. If you randomly pick a particular property in what you think is the best suburb over a 30 year window, you will find that there are periods during which this property will outperform the market average, and there are periods when this property will underperform the market average. Many property investors find themselves jumping into historically high growth suburbs at the end of the period when it is outperforming the average, and then stay there for 5-7 years during the underperforming period. (Naturally this can taint their view of property investing as a whole!)

There is no such thing as the worst suburb to invest in, forever. If you pick a property in the worst suburb you can think of from 40 years ago, and pitch that against the best suburb you can think of over the same period of time, you will find they both grew at about 7-9% a year on average over the long term. Hence in the 1960s, a median house in Melbourne and Sydney was valued at $10k. The worst property around that time may have been 30% of the median price for then, which was say about $3k. Today, the median house price in these cities is about $600k. The worst suburb you can find is still around 30% of that price which is say $200k a house. If you believe a bad suburb will never grow, then show me where you can find a house today in these cities, that is still worth around $3k.

Median Price growth is very misleading. Many beginner property investors look at median price growth as the guidance for suburb selection. A few points worth mentioning on median price are: o

We understand the way median price is calculated as the middle price point based on the number of sales during a period. We can talk about the median price for a particular suburb on a particular day, week, month, year, or even longer. So an influx of new stocks or low sales volume can severely distort the median price.

o

In an older suburb, median price growth tends to be higher than it really is. This is because it does not reflect the large sum of money people put into renovating their properties nor does it reflect the subdivision of large blocks of land into multiple dwellings which can be a substantial percentage of the entire suburb.

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o

In a newer suburb, median price growth tend to be lower than it really is. This is because it does not reflect the fact that the land and buildings are both getting smaller. For example, you could buy a block of land of 650sqm for $120k in 2006 in a newer suburb of Melbourne, but 5 years later, half the size block (i.e.325sqm) will cost you $260k. That’s a whopping 34% annual growth rate per year for 5 years, but median price growth will never reflect that, as median prices today are calculated on much smaller properties.

o

Median price growth takes away people’s focus from looking at the cost of carrying the property. When you have a net 2-3% rental yield against interest rates of 7-8%, you are out of pocket by 5% a year. This is not including the money you have to put in to fix and maintain your property from time to time.

Buying and holding the same property forever doesn’t give you the best returns on your money. o

The longer you hold a property, the more likely you will achieve an average growth of 7-9%. But you will be bound to hit periods where your property outperforms the 7-9% growth and periods where it underperforms the 7-9% growth.

o

The longer you hold a property, if its growth is at or above average, the lower its rental yields will become.

o

The longer you hold a property, the higher the capital gains tax you will need to pay when you sell, and the less likely you will be able to sell it.

o

The longer you hold a property, the more likely there will be a need for an expensive upgrade of the property.

o

The longer you hold a property, the more likely you will forget which part of the equity actually belongs to the tax man, AND the more likely you will be to try and leverage the equity that doesn’t belong to you. This can get you into a negative equity position with a negative cashflow forever, unless you have proper financial guidance.

Paying more tax can be financially good for you. This one took me years to swallow, but I can’t deny the facts. The clients who have managed to get into a positive cashflow position have paid a lot of tax and will continue to pay a lot of tax, whether it is capital gains, income tax or stamp duty. They don’t have an issue with the tax man making some money as long as they continue to make more themselves! They regularly cash in the profits from their properties and reduce their debt, but always continue to invest and park their money where the return is best. In fact, I can almost say that the only people who enjoy positive cashflow from their investment properties are the people who have little concern about paying taxes as they treat them as the cost of doing business.

Introducing Investors Direct Property Advisory As a property investor, you are likely to face the following time-consuming and challenging tasks during the life cycle of any investment property: 1. Keeping up to date with the market so you can confidently select which are the highest performing locations in the country; 2. Ensuring that future trends for demographics, population growth, affordability and future government planning in your selected areas align with your investment preferences; ©2001-2011 Investors Direct Financial Group

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3. Researching all available properties in your selected areas down to the street level to identify potential purchase targets; 4. Analysing the suitability of each property’s design and features to ensure it will continue to be in demand in that area during good times and bad; 5. Spending multiple weekends personally inspecting lots of properties (average 50-200 properties per purchase) before considering an offer; 6. Negotiating with the vendor and fighting off other bidders to ensure you get the best deal possible at the time; 7. Performing building inspections and obtaining finance approval for your chosen property to ensure you avoid costly mistakes; 8. Finding a good property manager to manage the property on your behalf and hoping they will find you a good tenant; 9. Performing investment analysis on your property regularly to decide whether it is a hold or a sell opportunity; 10. Finding the best selling real estate agent in the area or other effective marketing channels to dispose of the property when it is no longer a hold opportunity; For investors who don't buy properties themselves on a very frequent basis, it is very hard to do all the above well without taking your focus off your work and family. Hence people use a property advisory service to help them with such an important decision. Investors Direct Property Advisory is set up to help our clients complete the 10 steps above, within a fraction of the normal time required. Very often we can deliver a much better outcome than what a single property investor could normally achieve because of our economies of scale and long standing relationships with vendors and other market participants. Also, our extensive inside knowledge of the finance industry enables us to understand the true worth of properties and areas and predict property trends ahead of their time.

The unique services offered by Investors Direct Property Advisory Property Acquisition Service While Investors Direct Property Advisory service sources investment properties for our clients, it operates quite differently from other services in the following ways: 

Although we have substantial experience in property development ourselves, we choose not to be either a property developer or a land developer ourselves, so we don't have any of our own properties which we are then pressured to sell to our clients. This helps us to avoid the conflict of interests that others have when they know an area is no longer giving the best return but they still have to offer their clients their own properties because they have a vested interest in selling them.

While we hold a full real estate licence in both Victoria and New South Wales, we don't operate like your local real estate agent or your local buyer's advocate, which are usually bound to find you properties only within their existing operating areas. This leaves us free to choose any suburb we feel offers the best returns in the current market without having to force our clients to buy in those suburbs which were "once high performing but are now over-valued".

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Our property advisory service is built on our in-depth understanding of finance, hence risk management against market fluctuation and lender preference is built into our selection criteria. Although it is part of our job to source the best growth investment properties for our clients, we also recognize the need for balance in delivering assets which can achieve your overall financial objectives with the minimum downside risk and within manageable cash flow limits.

We have no fixed ideas about whether certain types of properties will “always” be better than other types of properties, or which locations will “always” be better than other locations. We remain agile enough to tap into our inside knowledge of the finance industry and other networks to find you the best possible opportunities.

We get paid by the vendors only, so there is no charge to our clients.

Property Portfolio Review We also assist clients with some of the most common issues that property investors with multiple properties find themselves facing, including: 

Their instinct tells them that they have some properties they should get rid of, but they can’t seem to find the time or courage to do so, and so they often leave the decision too late which costs them more in the long run;

They find themselves with properties sold to them by reputable advisors that are currently underperforming, leaving them unsure about whether they should act on the current facts of the situation or keep their hopes for the future alive;

They do not know how to measure real performance in terms of growth, cashflow and risk to ensure that their property portfolio remains in great shape;

They do not know if they have bought too many or too few properties based on their current financial position and the market conditions;

They do not know what actually makes money and what doesn’t, and how to let the winners run and cut out the losers fast;

Some just never pay attention to the performance of their properties after they have bought them, turning a “buy and hold” strategy into a “buy and hope” strategy.

Investing is about getting the best return from your financial resources, safely. Your investment portfolio is no different to a physical body which requires constant attention and care to maintain its vitality. Our Property Portfolio Review service combines our experience in finance, real estate, planning, risk management and best investment practice to help our clients get a better return for their money. We can also assist you in obtaining advice and contacts in the following areas: rental comparison, suburb performance, cash flow analysis, tax depreciation schedule, town planning, building and renovation. The Property Portfolio Review service is complimentary to our clients as one of our Added Value Services. Property Disposal Service We have found that most property investors tend to have a lot more experience in acquiring a property than disposing of one. Here are some of the most common issues they face when needing to dispose of a property asset: ©2001-2011 Investors Direct Financial Group

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They don’t understand the difference between a listing agent and a selling agent, and often offer their property to the most convincing listing agent but the selling is handled by an incompetent selling agent.

They don’t know how to structure a commission with an incentive to weed out the agents who have no ability to sell their property at the price they want, and also convince the ones who can sell to put all their best buyers onto selling their property instead of other people’s property.

They don’t know which particular selling agent (i.e. the actual salesperson) has the best track record in selling their type of properties in the area, and end up getting their property sold by an inexperienced agent in a potentially reputable real estate agency.

They don’t know which real estate agents to trust when it comes to pricing their property, and whether their type of property is best to be offered for auction or private sale in the existing market conditions.

They don’t know whether the advertising package being offered to them by the real estate agent is really for their benefit or simply the one that generates the best rebate for the agency.

They don’t know if there is possibly a better time to sell their property than the one they are considering based on interest rate movements, or the supply and demand situation in the market.

Our Property Disposal Service is designed to help you resolve the above issues, plus any other issues in regard to disposing of property that our experience can assist you with. We can also refer the best selling agents in certain areas to help you dispose of your properties quickly and at the best possible price. This service is complimentary to you as we will be paid a listing fee by the agent/s selling your property.

Summary Investors Direct Property Advisory is headed by Ross Martiensen, I am also an active director of the business. I have known Ross for more than 7 years now. He is a very grounded man with a loving family of 3 young kids. He has been sourcing and building properties for me personally since 2005, he understands my property strategies very well. I asked him to join me in 2010 to head up the property division as I knew if he was good enough to source properties for me personally, most of you will find him the same. For those who have met Ross, you would probably agree with me that Ross is not much of a “salesman”. Most of the time you have to make the buying decision yourself, but he is exceptionally talented in networking and finding great investment opportunities under our selection criteria. His staggering results speak for themselves. For those who haven’t met Ross, here is a snapshot of his bio:

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Ross Martiensen is a director of Investors Direct Property Advisory. He holds a full licence in Real Estate in Victoria and New South Wales (Licence No. 071792L). Ross's tertiary education includes a Bachelor of Applied Science at RMIT, and a Diploma of Property at Academic Pavilion, and a Certificate IV in Mortgage Broking from AAMC. Ross began his outstanding career in the Real Estate industry in 2001 after travelling around the world extensively for more than 3 years. He was the head of the Property Investment Division for one of the largest building groups in Victoria and directed a number of land subdivision and property development projects within his own business before heading up Investors Direct Property Advisory in 2010. Ross has a remarkable track record in delivering high performing investment properties to property investors and his expertise is well sought after by property investors across Australia. In the last few years alone, Ross was personally responsible for securing and delivering over $400m worth of residential property transactions to individual property investors, a record very few people have ever achieved in the history of real estate in Australia.

For those who’ve only known about our mortgage business for the last 10 years, our business still has the same focus on getting you, the best financial outcome as a property investor. However with our newer, more refined and holistic approach we can help you achieve a more clearly defined financial objective. You can check out our new website www.investorsdirect.com.au to see how we may be of service to you, or simply call our new Client Relationship Manager Rachel for a chat on 03 9868 7500 or email her at mail@investorsdirect.com.au.

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A New way to Invest in Property