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INFORMATION

WEALTH CREATION

(This section has been written for those who are relatively new or inexperienced at property investments to help explain the basic wealth creation tactics)

For most people their home will become their most valuable asset. Most Australians who own their own home will only ever own that one property. However some may invest in a holiday home or a rental property that they hope will one day bring in some additional income for their retirement, or give them a place to retire to when they downsize and sell the family home.

There is another type of property investor who will own a large number of homes or properties, and they are the risk takers and speculators who hope to profit from large investments in real estate. I often get asked to explain how a wealth creation strategy works, so I have tried to explain the basic facts of this subject in as few words as possible.

I do not suggest that you embark on a financial strategy that uses this method, but with moderation and commonsense you could enhance your life style, and build greater wealth by using some aspects of the strategy in moderation.

How Does It Work?

The strategy uses basic mathematics. The following scenario should demonstrate how you could achieve gains:

Scenario 1: If you have $100,000 and buy a house for $200,000 you have a property holding of $200,000. If over a year the property market increases in value by 10%, then you have made a capital gain of $20,000 or 20% profit on the $100,000 that you invested. Not a bad investment.

Scenario 2: If you have the same $100,000 but place $10,000 deposit on 10 houses at an average cost of $200,000 then you have a total holding in the property market of $2,000,000. If the property market again increases in value by 10% then you have made a capital gain of $200,000 which is a 200% profit on your investment of $100,000. Wow! - You can't make that much at a bank!!!

Simple - No Not Really apart from the fact that we haven't factored into account the State Government stamp duties, real estate agents commission if you sell, interest on the loans, solicitors fees, lenders costs, mortgage insurance, and on the plus side any rentals that you may get from the property you can never absolutely count on getting increases in values in the short term in property. The market since the Second World War has been relatively stable, but it still has a history of large percentage gains, followed by a period when prices will come back a little, and then gradually increase over a longer period. Many investors have lost large sums of money in the supposedly safe property market.

Scenario 3: If you have the same $100,000 and again place $10,000 deposit on 10 houses at an average cost of $200,000 then you have a total holding in the property market of $2,000,000. But this time the property market decreases in value by 10% then you have made a capital loss of $200,000, which is a 200% loss on your investment of $100,000. You now own $1,800,000 worth of property, and owe lenders the sum of $1,900,000 or in other words you will be technically bankrupt unless you have other funds or assets. Wow! - You won't lose that much at a bank!!!

This is the casino end of the property market where large sums are either made or lost. If the market is surging you will always see a number advocates for the riskier end of the strategy espousing the virtues of leaping into the market boots and all. They will be paraded by the media, interviewed on TV and Radio, and we will all marvel at how they took a modest amount of money and turned it into a $5M property portfolio in just 3 years, and became millionaires in the process. They make it look so easy.

When the market takes a downturn you will see the many property losers being paraded and interviewed on Current Affairs Programs and they will always blame a bank, real estate agent, solicitor, mortgage broker, or in fact anyone but themselves. The same media that previously sang a different tune will make a big thing of it, politicians will beat their chests promising legislative changes and so on, but the fact remains that all markets have risks, and they all have their winners and losers.

Tips

Please note the following are our TIPS, and NOT RULES that you can blindly follow:

Tips for reducing risk in investing in real estate (reducing risk does not mean absolutely no risk):

1. Experience - you must get it but you can't learn it all from a book. Sometimes you will suffer a loss before you learn the hard lessons.

2. Don't buy in a falling market. Make sure that the market is stable, or values are increasing gradually. If values are increasing rapidly take care that you are not buying at the market peak.

3. If you don't feel comfortable - don't do it. Any investment that causes you to lie awake all night is not for you. You must be confident in what you are doing, and be able to follow your plan through to the end.

4. Buy Well - you must buy at below market value to have any chance of making a profit in tougher markets.

5. Learn how to walk away - if an offer or deal isn't going well then walk away. There are more properties available.

6. Solicitors - don't sign without a solicitor checking the contract first.

7. Building and Pest Inspections - Cost is minimal and it could save you thousands.

8. Value Add - must be done at minimal cost. EG paint and mow the lawn etc. If you can enhance the appearance of the property for a low cost then you will increase the market value if the market is stable. Otherwise buy well-maintained property and do nothing.

9. Don't Over-Capitalise. Expensive renovations often add little value. You must spend your money wisely.

10. Don't buy high maintenance property unless you are a builder or otherwise qualified to take on large upgrades or alterations.

11. Finance - get loans that have competitive interest rates and low costs. If you intend to sell within 4 years then check the exit fee cost.

12. Other Loans - other loans such as car loans and credit cards will severely inhibit your ability to maximise your borrowings for a house. Don't make the mistake that most school leavers make of buying a great new car and then they have no savings for a house a few years later. Cars lose value whilst property over a period of time increases in value.

13. Costs - think of Murphy's Laws on engineering and adapt them. Especially the one that goes "everything costs more that you think it will"

14. Employment - yes, if you want to buy a house, then you will need an income. Once you commit to a home loan, make sure that you look after your job.

15. Hold the property for as long as possible - This can reduce capital gains tax (hold for at least 12 months) and loan exit fees. You must consult your accountant on your tax situation as each of us may be affected differently, often depending on whether the property is an investment or for your own use.

16. Keep your tenants happy - if you are renting out the property try to ensure that your tenants' requests and complaints are satisfactorily dealt with.

17. DONT BE GREEDY - this is probably the most important thing to remember. Think twice before saying no to a profit. It may be a long time before it comes again. We've all seen examples of people who thought that they could get just a little bit more only to lose it all.

18. If you live in the house - it is still an investment. Treat it that way and maintain it well.

19. When Selling - present your property well and choose your selling agent carefully. You must sell at the best price attainable in the prevailing market.

These tips won't guarantee you a profit, or even guarantee that you won't lose money in the property market (or for that matter in any market) But you may be a littler wiser or better informed by having read them. There are some very good books available at bookstores and newsagencies written by experienced investors who have done well in various markets, and they will all contain some information that you may benefit from.

In Summary, watch others and learn from their successes and failures, read some of the investment advice books available, use your commonsense, don't be greedy, don't get too confident, read the above tips again and again, and take responsibility for your own actions.

The rest is entirely up to you.

The Author

Questions you may want to ask:

Has the Author made profits from the property market? ABSOLUTELY YES!

Has the Author made losses from the property market? ABSOLUTELY YES!

I like the property market, I always have, but lets get serious. If everyone in Australia owned several houses there would be a lot of cheap rentals and vacant property on the market. Like every market there are risks and benefits. Take care in all forms of investments, and don't be reluctant to pay for the advice of professionals such as solicitors and accountants. Over a period of time, their advice will save you more money than it will cost.

Peter Fraser

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