A Guide to Property Inves ng
Who is Wealth Works ? Wealth Works provides Investment property educa on and advice to the Australian public. We have representa ves throughout Australia who are all licensed Real Estate agents. Where we diﬀer is that we won’t just sell you any property in any area. We hand select prime property from a number of suppliers who provide high quality property specifically aimed at the investor market. Builders must meet a very high level of quality before we will accept their products and must be able to provide suﬃcient warran es on their proper es. For loca ons we target areas with predicted high capital growth over the next 10 years in areas where demand for rental proper es is also expected to be high. With these 2 combina ons we can provide a property that can be accurately predicted to grow in value but also achieve the highest rent return for your money. This means that with our help we can show you when you can invest in the next property. We work closely with specific professionals in all areas of the business to bring to you the highest standards in not only property, but advice as well. Wealth Works is a member of the following governing bodies.
Did You Know ? Did you know that 1 in every 5 Australians living in poverty derive their main source of income through salary and wages. That’s around 465,000 workers living in poverty. So why not learn to become self-suﬃcient, it’s really not that hard and won’t cost you a great deal of money to get started. The idea of property inves ng is to create a selfsuﬃcient and wealthy future for you and your family. By inves ng in property today you know that you will be securing not only a passive income in the future but also wealth. The simple way to look at it is to understand the basic rule of property and that is “Property doubles in value every 7 to 12 years.” So anything we purchase today should be worth double its value in 10 years or so. Now if we financed that property to the full value we have an exit strategy if we need it and that is to sell the property at that point in me and payout the debt whilst retaining the profit. Or we build a por olio of investment proper es meaning that at our intended re rement age we only need to sell oﬀ enough proper es to pay out the finance, whilst retaining a number of proper es for their rental income. Another important point to note is that “Property inves ng is a long term strategy”. There are very few get rich quick schemes in property and that is why it is important to know this rule and are prepared to abide by this rule. The property market fluctuates but the rule of the value doubling every 7 to 12 years s ll remains true. It is a long term investment.
Why Invest in Property? The 3 main benefits are: Capital Growth relates to the increased value of the property from when you first purchased it. This is why when looking for a good investment property it is important to note the predicted capital growth and a major part of our research into finding the right property for you. Tax Advantages relate to the many areas where you can gain a financial benefit from various areas of the investment property. These would typically be deprecia on, finance costs and ongoing costs and nega ve gearing. Re rement Planning means ensuring you have enough income or capital throughout your non working years to live comfortably.
Before We Continue - a word on debt There are really only 2 types of debt, good debt and bad debt. Good Debt in any finance arrangement that can be used to minimise the amount of tax you pay or to purchase an apprecia ng asset. Bad Debt is any loan you have that has no apprecia ng asset associated with it or there is no tax benefit. An important point to note here is that even though no one likes debt, we can use debt to make us wealthy. So good debt is beneficial to us if used correctly.
Wealth Creation & Retirement Planning Using Property Property investment has been one of the most consistent investment performers in Australia for more than 60 years and con nues to be the investment of choice for those looking for a safe and secure investment with high growth. This safety and security are enhanced by excellent tax minimisa on provisions and the high capital growth of an apprecia ng asset. Why would you invest in anything else? Property is the investment op on that makes sense! For safety and security, property investment is the core element of all Wealth Works wealth crea on strategies and we spend a lot of eﬀort loca ng and sourcing suitable proper es, designed and built to certain specifica ons, in loca ons capable of providing high capital growth for the foreseeable future. How many proper es you may need to provide the future income you want, is up to you. It depends on the income you need to support the re rement lifestyle you choose and the contribu on to that lifestyle from other income sources such as superannua on.
One of the primary functions of property investing is to:
create a source of addi onal tax deduc ons
purchase an apprecia ng and income producing asset
leverage oﬀ the income produced to reduce your personal debt
The Sad Reality and Where Do You Want To Be
6% of all Australians will re re comfortably
84% will require a government pension
It’s a shocking fact, but just 6% of all Australians are likely to be in a posi on where they can re re on a comfortable amount of money. Many believe their superannua on contribu ons will be enough but our census data shows that up to 84% of us will be living on or below the poverty line. Have you ever sat down and considered how much money you will really need to fund your re rement? Most Australians won’t have enough in their superannua on to cover the basic living expenses of health care, food, transport, u li es and accommoda on when they reach re rement age.
How Much Do You Need To Retire On Lets say you re re at 65 and you want to live ll your around 90 years of age or more What are the actual costs of living
Essen als Food: Three meals a day for 2 people at $10 per meal ($60 per day) for 365 days a year = $21,900 per year or a total of $547,500 to eat every day of your re rement.
Accommoda on: Hopefully you have paid oﬀ your home so you will not have ongoing rent or mortgage payments but you s ll have to pay council rates of around $2000 per year. Then there’s home and building insurance at around $1000 per year. That’s another $75,000 you will need to fund.
Car and Travel: Insurance $1500 per year Registra on $600 per year Maintenance $500 per year Fuel $60 per week or $3120 per year There’s another $143,000 you will need to come up with.
Health Care: Health insurance is around $50 per week which adds up to another $65,000.
So in total and just looking at the basic cost of living you will need at least $830,500 to re re on.
Real Estate Wealth Building wealth requires a plan and a realis c, robust wealth crea on strategy to drive that plan, a strategy that addresses your current requirements, future goals, your financial capacity and your lifestyle. Wealth Works has years of experience in structuring, implemen ng and monitoring these strategies. Our job is to ensure that the strategy is personalised, achievable and one that can accommodate your needs and goals as they evolve and that the strategy addresses the needs of the plan. As diﬀerent people have diﬀerent needs, goals and capacity, so each plan needs to be tailored to those individual circumstances. No one plan fits everyone. A core element of all Wealth Works wealth crea on strategies is choosing an investment property with high capital growth, maximum allowable tax deduc bility, long term security and minimum risk. To achieve this, at Wealth Works we base our wealth crea on strategies on income producing proper es focussing on new residen al proper es in areas with high capital growth and excellent rental returns. Our role is to help you make the most of growing your wealth by providing the financial and investment solu ons and support you need to posi on yourself where you want to be for the future. That’s what we do – and we do it well. These solu ons include: · rapid reduc on of personal debt · managed growth of an income producing property por olio · redistribu on of income to minimise tax burden of personal income · maximise the tax deduc bility from investments for eﬀec ve debt conversion
The 4 Step Process Step 1 : Why Invest in Property? Inves ng in property gives you a number of financial advantages. Firstly there are the tax benefits associated with investment proper es and their relevant costs. Also if buying a brand new home there are addi onal depriva on tax benefits. Then there are the wealth building benefits of buying property. As the property grows in value so does your wealth. So the 2 main benefits are Tax Advantages and Capital Growth. Capital Growth relates to the increased value of the property from the me when you first purchased it. This is why when looking for a good investment property it is important to note the predicted capital growth and is a major part of our research into finding the right property for you. Tax Advantages relate to the many areas where you can gain a financial benefit from various areas of the investment property, these would typically be deprecia on, finance costs and ongoing costs. Our advisors can give you a very good and accurate indica on of your future financial posi on by taking into account the tax benefits, es mated rental income and your salary plus living costs. Nega ve gearing is another common tern when talking about the tax advantages of an investment property and simply means that the cost of funding the investment property is higher than the rental return, meaning you have to allocate money each month to maintain the mortgage. You will get tax benefits from nega ve gearing as you are able to oﬀset the costs of owning an investment property against your overall income.
Step 2 : What and Where to buy? There is one simple important rule to note before we proceed here and that is “An Investment Property Is Not for You to Live In.” Now that we know that we can then start to look at the types of investment proper es, their loca ons and the factors that support them. For example your borrowing capacity will limit you as to how much you can spend. It may be that you can only aﬀord a unit or you might be able to aﬀord a 4 bedroom house. Either way it does not ma er, the important point to note is that it is a vehicle to wealth crea on and not for you to live in. Some of the important points that we look at when finding the right home for you are:
Predicted Capital Growth for the region — by this we mean the expected rate of increase to a property’s value over a given me frame.
Local Infrastructure — which relates to the amount and type of public resources available to poten al residents. We are looking for good public transport, local schools and medical facili es and then shopping centres etc. What we want to do is find a property in an area that can support a resident or family’s needs without them having to travel too far. This will make the property far more a rac ve to people looking for a rental property. We may go even further to look at employment opportuni es as well when looking at mining towns and the future or given life of a mine in that region.
Renters Versus Owners — relates to the number of rental proper es in an area as to the number of owner occupied proper es. What we are looking for here is an under supply of investment proper es rather than an oversupply. All this is rela ng to the rent-ability of a property as we are not only concerned with selling you an investment property but also ren ng it out. Our reputa on revolves around a complete service not just one part of it.
Step 3 : Financing I won’t go in to great detail here other than to outline a very important point. Even though there is not much diﬀerence between an Investment Home Loan and a Standard Home Loan, it is the structuring of the financing that is very important. Our advisors are trained in the correct manor of se ng up an investment home loan and do it in such a way that your home will be protected should anything go wrong in the future. We have a proven method that will ensure your home will always be safe. Another key point to note when se ng up investment loans is fixed interest rate versus variable rates. Here’s a very quick explana on. If interest rates rise, your repayments will increase but not the rental income from the investment property. Whereas if you fixed your investment loan then you are not subject to any budget changes in the future for a given period of me. A very simple but good rule to note.
Step 4: Management and Ongoing Support Once you have your new investment property there are some important tasks to finalise. The first and most obvious is to get the property rented out and part of our service is to ensure you are provided with a very good property manager. A good property manager will know what rent to charge for the property and handle all the day to day issues. Insurances are required when inves ng in property. We make sure you have adequate income protec on insurance and the relevant land lord and property protec on all in place. This service is provided free of charge as we consider it to be part of our duty of care. The next important event is to get your tax in order to ensure you receive the maximum deduc ons you are en tled to. Again, part of our service will introduce you to a highly qualified tax accountant who is very experienced in investment proper es. Get your tax refunds early if you need to. Many investors who have taken a nega ve gearing program can get extra cash in their pay packet immediately. If you can reliably predict your es mated income and expenses for the next 12 months you can have less tax deducted from your pay packet each week rather than wai ng 12 months for a full tax refund. I hope this has given you an insight into property inves ng and the processes involved. It really is that simple but we are here to help you every step of the way. Please feel free to call upon us if you would like to discuss your op ons and how we can help you create wealth in your life and reduce your tax.
Real Estate Wealth - How to it works How does it actually work in prac ce ? Lets say you have your own home with a mortgage and want to buy an investment property. The example below would be fairly average and will give you the basic under‐ standings of how the purchase and finance process works. We are going to look at buying an investment property for $400,000.
Combined Por olio Value $850,000 Combined Debt Level Owner Occupier
Value = $450,000
Investment property Value = $400,000
Debt = $300,000
The first issue is that we have to arrange finance but we don't want the bank to lend us 100% of the purchase price plus the costs in one loan. We need to secure ourselves as best as possible and for that reason we setup the loans up in a specific manner in order to maximise the addi onal rental income received to help reduce our other debts, specifically our home loan. We need equity over the 2 proper es to ensure the bank will finance your new purchase but instead of le ng the bank give us one big loan for the new property, a more safe and eﬃcient method is to u lise a line of credit facility against your home that will provide the deposit and fees for the new property. The real benefit of this is that the bank will not cross securi se the 2 proper es together and you have more control over your financial situa on. Another point to note is that if things go bad in the future and the bank is forced to sell you up, your 2 proper es are not connected to each other for security purposes giving you much more control to sell oﬀ the investment property with li le harm to your own property or equity.
How To Finance An Investment Property Professionally
Your Current Home
Non Tax Deductable
Usually Fixed Interest Only
Oﬀset Account Used to reduce the amount of interest charged to home loan
The idea of this finance setup is to limit your exposure to each property and
Money Coming In goes into this account Rent from investment Pay from individuals
Credit Card A ached to the oﬀset account, this facility allows you to leave more cash in the oﬀset account. It Is 55 Day Interest free
Line Of Credit Tax Deductable Used to access equity for purchase of investment property. Keeps proper es separated and secure.
How To Build a Portfolio of Properties Crea ng wealth or building assets is the result of eﬀec vely using your financial resources to build an asset base of income producing products. Whether these be share market or property, the results can be the same for both. However we at Wealth Works promote wealth crea on through inves ng in property. It is far less vola le than the share market and the capital gains are far more easy to predict. The key to the success of your plan is choosing the right property in the right area that will yield a good capital growth. if you can do this then you know that in 12 months me your investments should be worth a predetermined es mated value. With this knowledge on hand you can the plan for the purchase of your next property. With any apprecia ng asset, it’s value grows whilst the level of debt is maintained which it makes predic ng your future equity posi on much easier. Lets take the same example as before but travel into the future 2 years and see where we are at. Because you bought smart and worked with a professional group like Wealth Works you know that the investment property you purchased received it’s predicted growth rate of 6%, plus your own home experienced the same increase. Now your por olio looks like this:
Combined Por olio Value $955,060 Combined Debt Level $680,000 Owner Occupier
Value = $505.620
Value = $449,440
Debt = $280,000
Debt = $500000
As you can see your por olio has grown in value over the 2 year period and you will have created enough equity to buy another property. This can be repeated every 1 to 2 years. It’s me to buy another one
Real Estate Wealth The Potential Future So you spent your life building a por olio of investment proper es and it’s me to re re. What do you do? This example simply shows your own home with 6 investment proper es that you have purchased and their present values plus debt. To truly understand what you can do with these you need to look into the future and work out what they will be worth and how much you will owe.
V = $450,000
V = $500,000
V = $500,000
D = $460,000
D = $510,000
D = $510,000
V = $450,000 D = $360,000
V = $550,000
V = $560,000
V = $600,000
D = $560,000
D = $570,000
D = $610,000
Combined Por olio Value $3,610,000 Combined Debt Level $3,590,000
The Exit Strategy Continued…. Now lets look ahead say 15 years and assume we have had a 6% capital growth over all our proper es. Your new values and debt would be as follows:
V = $1,078,000
V = $1,078,000
V = $1,198,000
V = $1,198,000
D = $460,000
D = $510,000
D = $510,000
D = $100,000
V = $1,318,000
V = $1,342,000
V = $1,538,000
D = $560,000
D = $570,000
D = $610,000
Combined Por olio Value $8,750,000 Combined Debt Level $3,332,000
The Goal here is to reach this point in me and sell oﬀ a number of proper es in order to payout all debt. Buy selling 3 of our investment proper es we will be le with our own home fully paid oﬀ and 3 investment proper es with no debt. Let’s say each property rented for $380 per week when we bought them then based on an average infla on rate of 3% you should be receiving an income of $87,873 from the remaining 3 proper es.
Your New Income With No Debt Here’s how everything looks now that we have sold oﬀ some of our investment proper‐ es to pay out our debts
V = $1,078,000
V = $1,198,000
V = $1,198,000
V = $1,078,000
D = $ 0
D = $ 0
D = $ 0
D = $ 0
Summary 3 proper es sold All loans paid out $878,000 in surplus cash Income from remaining proper es = $87,973 per annum
This is meant purely as an example however, the figures used are actua l and should be correct if infla on and capital growth con nue as predicted. It is reasonable to assume that this scenario is accurate. Please note this scenario does not take into account your personal circumstances or other areas outside of our control.
Why Australia Does Not Have a Property Bubble These are True Facts from the Bureau of Statistics
Ra o of house to income is 4.5 X (from Rizmark)
Australia has a high popula on growth
No over supply in fact 25000 dwellings short
Low mortgage default rate 0.05%
Most mortgages have posi ve equity
Housing Price Stats from RPData
Source: RP Data Sept 2010
Two Things That Will Stop You Achieving Wealth
1. Fear—lack of knowledge 2. Inability to make decisions It does not ma er how hard you work or how much you earn, your income can make you comfortable, but income alone cannot make you wealthy. You do NOT have to be wealthy to invest. Therefore you have 2 choices : 1. Take an educated punt and try to do it yourself, or 2. Surround yourself with an experienced , integrated group of professionals who will assist in helping you reach your financial goals.
The Process — How We Work With Our Clients This is the set by step process we follow to help our clients find the right investment property for them.
One on one
Coolingg Oﬀ &
Land Se lement
Preliminary Plans & Soil Test
Plans to Council
10 Questions about Investing in Property 1. What is Residential Investment Property ? A residen al property is a house, townhouse, terrace or unit which the owner does not use as a personal residence, but rents it out. This allows the investor to benefit from both tax advantages and rental income and capital growth from the property. 2. What is Negative Gearing ? The term Nega ve Gearing simply refers to a situa on where your tax deduc ons exceed your taxable income from the investment itself. For example, a residen al investment property is said to be nega vely geared if the mortgage payment, deprecia on and costs on your property exceed the rental income. In other words, over and above the investment income, you claim interest on your mortgage, deprecia on and costs as a complete tax deduc on. 3. What if I don’t feel comfortable about going into debt ? While the concept of debt may seem disturbing, the reality is we live with debt in one form or another, and few people a ain true financial independence without some form of leveraging. In fact, most Australians are actually more comfortable with debt than they realise, through the mortgage on their own home, or perhaps the loan on their motor vehicle or furniture. Many of us are “in debt” to the tax man by virtue of the fact that we earn an income. There are two key principles that will ensue security when it comes to borrowings :
Only borrow to purchase apprecia ng assets
Make sure your debt is manageable
4. What if I lose my job ? Should you loose your income, you will also your ability to pay tax and make your own small contribu on. For most people there is some form of compensa on or payout for lost employment, allowing me to find another source of income. Alterna vely, you may wish to consider some from of income protec on insurance, which can replace up to 75% of your regular income while you are unable to work and in some cases is tax deductable. Remember: The only amount needed to maintain an investment for 12 months without an income is your contribu on, not the total loan amount. 5. Why am I using collateral security instead of a cash deposit ? Your property will not increase in value any faster by pu ng your own cash into it. Because it is a tax eﬀec ve investment, you should borrow the full amount (in most cases) for the property, plus any associated costs, to maximise the tax returns that you generate. This also allows you to use your cash for other purposes or investments. Some people only use their own property for shelter, you are using yours to provide a basis for building a property por olio and future wealth.
6. What happens if interest rates rise ? Being in a long term investment strategy, one would expect the interest rates of the associated loans to change. If this is a concern you can choose to fix the rate of your home loan for as many years as you like. As interest is completely tax deductable, any increase in interest rates will also increase your tax returns. (You may no ce a period of low interest rates is usually followed by an increase in property prices) 7. What happens if I can’t find a tenant for my property ? Short term vacancy is a normal part of property investment. To cater for vacancies between tenants your budget includes a vacancy factor of at least 20%, meaning you are assuming 41 weeks worth of rental income each year. Long term vacancy is generally created in one of two and is avoidable. The property becomes uninhabitable due to damage or tenants depar ng without no ce. In this case your landlord protec on insurance will meet the rent whilst the property is being repaired or the next suitable tenant is being sourced (subject to the terms and condi ons of your par cular policy). You are trying to achieve a rent in excess of what the market will bear. Your property manager will ensure the property is posi oned in the market to maintain the maximum occupancy. 8. What if the Government changes the rules ? Any change to the rules is generally to ensure that people are not abusing the system and are working within the guidelines provided. Changes in law and tax are not generally made retrospec ve. Governments are interested in s mula ng the economy, not just collec ng revenue. Property investment provides many areas of benefit for the economy, such as: The Crea on of jobs through the development, construc on and sale of property. The crea on of taxes such as stamp duty and income paid tax by all relevant industries such as builders, electricians, plumbers, etc. providing housing which Governments do not need to fund or maintain, posi oning you for re rement without having to rely on the welfare system. 9. What if I don’t have me to manage my investment ? The use of an eﬀec ve Property Manager will save you me, money and tenancy headaches. They will take care of some or all of the following du es associated with managing an investment property. These include maintenance and repairs, screening of tenants, rent collec on, lease prepara on, adver sing and regular inspec ons of your investment property. 10. Why hasn’t my accountant told me everything about investment property ? Generally, accountants are not pro-ac ve and we probably expect too much from them. Can you remember the last me your accountant contacted you with an idea or a sugges on? Accountants are specialists in their field, but generally they are not specialists in property investment. Some however, do specialise and have rental proper es of their own.
Tax Deductions Here is a list of the deductable items for investment proper es. Maximising your property investment tax benefits will make an important contribu on to the profitability of your property investment. This is a simple guide to help you understand of some of the ways you can use your property investment tax benefits to increase your earnings. Mortgage Expenses Mortgage interest is usually your biggest deduc ble tax expense. As a landlord you can deduct mortgage interest payments on all your borrowing expenses as well as stamp duty bank fees. This also includes loans to improve your investment property and interest on credit cards for goods or services related to maintenance and other rental costs. Deprecia on is the decrease in value of your property’s fixtures and fi ngs due to wear and tear, and is an eligible property investment tax deduc on. Insurance all the insurance premiums you pay for your property investment including your landlords’ liability insurance and employee workers compensa on insurance are legi mate tax deduc ons. Maintenance and Repairs Maintenance costs and repairs to your investment property are claimable. These include body corporate fees, land tax rates, gardening and landscape maintenance. Maintenance repairs can include pain ng and plastering, plumbing and the replacement of locks or broken windows. Travel expenses related to the management of your rental property collec on such as the collec on of rent and property maintenance are tax deduc ble. Agents Fees Any payments you make to contractors in the course of managing your property, including agent’s commissions are tax deduc ble Examples of Investment Property Tax Benefit Deduc ons • Interest on mortgage and credit cards related to your property investment • Deprecia on on furniture and fi ngs • General & landlord liability insurance • Agent fees • Body corporate fees • Maintenance and repairs • Bank fees & charges • Gardening & cleaning • State & local government taxes & fees • Oﬃce expenses • Travel • Agent, accountant & contractor fees.
Contacts Details Wealth Works
Ph : 1300 645 888
PO Box 2448
Fx : 07 3009 0529
W : www.wealthworks.com.au
E : firstname.lastname@example.org
Copyright Wealth Works 2012 Not to be reproduced or distributed
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