Why invest in residential property?
* Most investors prefer to invest in residential real estate
* Familiarity with residential real estate.
* Potential to reduce personal income tax / obtain tax savings through the investment property vehicle
* Potential for the investment to keep pace with or out- pace inflation
* Regular income stream from weekly rent, which usually grows with inflation
* Low percentage of equity required to invest compared with the total value of the investment
* Similar tax advantages as operating a business. Depreciation ( a non cash item) is accorded to the investor for his deduction
* You control your investment
* Security of property – always respected as collateral security
* Opportunity to build a portfolio of investment property by leveraging through a smaller deposit or through accumulated equity
* Simplicity – buying an investment property is similar to purchasing a property for your own use
Can I use the equity in my home as a deposit?
Investors make their money work harder.
If you own a home for a few years, you would have built up equity in your property. Equity is the value of an asset not subject to any lender’s interest. For example, a property worth $500,000 with a mortgage loan of $150,000 has equity of $350,000. Instead of finding a cash deposit to buy an investment property, you could use this equity as the deposit.
So, instead of the equity ‘being lazy’, ithe investor deploys it to create another property.
What’s negative gearing?
A property is negatively geared when the costs of owning it ( cash flow going out ) – interest on the loan, maintenance, repairs, rates, insurance, body corporate fees, – exceeds the rental income it produces.
The shortfall is submitted as a tax deduction, therefore reducing taxable income.
If you are negatively geared, you are deploying less or the minimum of cash deposit to purchase the property.
Investors use negative gearing to maximize tax savings and / or to leverage on bank’s lending.
What’s positive gearing?
When the rental income exceeds your expenses to hold the property, you are positive geared.
The surplus is subject to income tax.
If I want to retire on at least half my current salary, what percentage of my income do I need to set aside?
If you want to retire on the equivalent of only half your current salary, 12 per cent of your wages every year of your working life (40 years) must be set aside. That’s a long way short of the 9.5% contributed under the current superannuation guarantee charge. Remember, half your current salary would result in a considerable change to your lifestyle.
Superannuation, the Pension, What are my options looking like at Retirement ?
Over the past 10 years the Federal Government has made it harder to qualify for the aged pension and has indicated it will make it even tougher in the future.
The introduction of the assets test, deeming on savings accounts and changes to the treatment of shares and unit trusts have all ensured that fewer retirees will get the pension.
Retirement used to be a time to enjoy. Today it is a time to fear. Australia’s retirees are fast becoming the nation’s poor, squeezed by lower interest rates which is slashing the income of their investments and starving them of funds to pay bills.
Today’s retirees are providing a sobering lesson for future generations. Poor retirement planning has cost them their lifestyle. Retiring rich means starting to plan early and building a separate retirement nest egg on top of superannuation.
Historically, what happens investment-wise with residential real estate?
If we go way back in history to the year 1086, we can review the Doomsday Book, commissioned by William I, King of England – and it did not herald the end of the world, even though it sounded that way! It was a schedule of land values across Britain at that time. It has been calculated from that base, that values have increased in England over the last 900 or so years, strangely enough, at around 10% per annum.
It is that compounding effect of property value increases which is so powerful. As each year passes growth occurs on top of growth. If a property is worth $100,000 today, and next year it increases in value to $110,000, then the year after that it increases at 10% again, that is $100,000 plus 10% (or $11,000), taking its new value to $121,000, and on goes the escalation. It’s exponential growth accelerating at a faster rate as each year passes.
To use a well worn gardening analogy, it is a little like planting a tree. Early growth is slow, but as it establishes itself it grows faster, and starts to fruit. The fruit drops, and more trees grow and start bearing fruit. Before we know it, we have an orchard. It is a similar kind of compounding effect with property. Property wealth comes ever so slowly at first, but eventually arrives in abundance. But you have to make a start, no matter now small. With prudent property investment all you need is time, the right information, and patience.
We’ve only got about 9 years to retirement, have we “missed the boat”?
Definitely not, no matter what stage of life you are at, by setting goals now and planning ahead, you will prepare yourself for whatever opportunities and obstacles that may present themselves along the way.
For most mature people, the greatest fear is that they will live longer than their money. Fear of poverty is the number one fear from which the majority of people suffer. Sadly, so few take any action to prevent poverty or are blissfully ignorant of what the future holds for them.
There are six main reasons why 93% of the population do nothing about tackling their fear of poverty and they are: indifference, indecision, doubt, worry, overcaution, procrastination.
People don’t plan to fail, they fail to plan!
Most people wish for wealth, but few have a definite plan and the burning desire which pave the road to wealth.
We have absolute confidence that by joining us in the next stages of your learning and planning program, you will increase your knowledge and ability to be among the 7% of the population who plan the road to independent wealth.
What if I don’t feel comfortable about going in to debt?
While the concept of debt may seem disturbing, the reality is we live with debt in one form or another, and few attain true financial independence without some form of leveraging. In fact, most Australians are actually more comfortable with debt than they realize, 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.
What happens if my income stops and I can’t service my debt?
There are two key principles that will ensure security when it comes to borrowing:
1. Only borrow to purchase appreciating assets
2. Make sure your debt is manageable
The answer to this question can best be demonstrated by looking at the financial circumstances of the average Australian family. With interest rates the lowest they have been for years, many families are focused on paying off their own home as quickly as possible. For example, a couple may be trying to reduce the term of their loan by paying an extra sixty dollars each week. If one partner gets sick or loses their job, they may be placed in the position where there is no redeemable asset base to turn to but their own home. If that same sixty dollars a week were invested in a second house, the risk may actually be diminished.
The advantage of investing in a redeemable asset base is that, if something happens, the family house is not put on the line – there is something else to turn to. Life or trauma insurance and income protection policy will replace 75% of a person’s regular income while that person in unable to work.
Security of Long Term Capital Gain?
Real property has always been considered a prime investment for long term capital gain (7-15 years)
What is Leveraging?
Because real estate is considered one of the most secure forms of investments, banks and building societies will lend a high percentage of the purchase price on residential investment properties. This allows investors to “leverage” a small amount of deposit into sufficient funds to purchase real estate.
Get Return on Investment?
In the long term a small deposit (investment) in an investment property can produce a large percentage (%) return on the investment because of the power of leveraging
Because owning an investment property is an income producing activity, property owners are taxed on the income produced, but all the costs of producing the income can be offset against any profits earned.