Steve McKnight book launch tonight - Melbourne

[Garry K]

Anyone else going?

(not that I will recognise anyone, as I don't know anyone face to face...tonight may be the night :p )

GarryK

[sbe]

I went last night.

Thought it was quite alright.

Haven't bought the book yet though - haven't got time to read it !!!

Simon.

[Spiderman]

Have just got back from McKnight tonight.

Well worth attending and included material not covered in either of his two books. A lot of substance and very little hype.

There was no mention of the two aspects that McKnight has been most famous for - ie wraps and 10.4% rental yields (ie 11 sec formula). However there was coverage given to his experiences when mentoring the MAP participants.

Most interesting were some insights about making your money working harder (increasing its velocity, which Kiyosaki also touches on).

The most interesting aspect to me was to do with if or when to sell.

This is where McKnight differs dramatically from Somers (and latterly, Spann) who advocate buying and holding for the longer term.

Somers favours holding for the longer term. When there's capital growth you can redraw the equity and use it to finance additional property purchases with no cash payment from you. Thus you're funding the purchases through debt. Serviceability could be an issue here if the properties are not cashflow positive (which is likely given that you might be borrowing 100%+), and it might be harder to get finance.

McKnight suggests that unrealised capital gain in unsold properties constitutes lazy money, and that selling those properties that have appreciated allows the portfolio to expand (eg from the capital gains of one property, buy two others and then four and then eight) without increasing debt as much as if you never sold. This, along with his espousal of P&I loans, would keep debt levels down and aid serviceability.

In what appears to be some acknowledgement of the views of those who invest for capital gains, this method allows property purchases to be made quicker than if you were merely relying on maybe $30-50pw positive cashflow to save up for a deposit. However it also accords with the results of the MAP exercise, where even in the 2003-2004 market, participants made more out of capital gains than they did through cashflow.

The risk of McKnight's approach is that by selling the properties that have increased in value fastest, the 'quality' of the portfolio is decreasing. In effect, you are selling Brighton (or even Ballarat) to buy Moe. Also what he calls 'lazy' equity that is in your faster growing properties could be a buffer to keep your LVR low or available for redraw (maybe even to buy +cf IPs).

However he is right to say that there could be an opportunity cost if you have a property that might have yielded 8% on your purchase price, but is only yielding 5% on its current value. If you sold it, you might be able to get 8% on its current value if used to buy a higher yielding property elsewhere. This will increase serviceabilty, possibly at the cost of capital growth if you're selling your 'quality' properties along the way.

Portfolio expansion seems to mainly an issue of juggling LVR and serviceability, and planning for an appropriate mix of capital growth and cashflow, related to your current job income and when you wish to become financially independent.

Though I haven't done detailed analysis, to me the concept of a core of growth properties throwing off sufficient growth to allow the purchase of cashflow properties every now through loan redraws appears to have merit, provided LVRs are kept down (maybe through capital growth on both IPs and shares?). Though there are effects of compounding to consider, it probably doesn't matter too much if your first IPs are mainly growth or cashflow, provided you have a reasonable mix by the time you're up to IP #4 or 5.

More numbers would beed to be done but I would lean more towards the Somers/Spann strategy, especially where my fastest growing IP is in a market where I consider there is reasonable prospect of future growth and I'd rather hold than sell (though to be fair responses to various market conditions are covered in McKnight's book).

Regards, Peter

[helen]

Thanks Spiderman for the great summary. :) Unfortunately I couldn't attend the Melbourne launch. Your post certainly provided an overview of the content presented. Thanks for taking the time out to keep everyone in the loop. :)

Helen

[Monopoly]

Hi Spiderman,

I'll second the thanks from Helen for your brilliant summary of the evenings discussions. As you know I don't hide the fact that I see flaws in much of McKnight's theories, but nonetheless, you have to admire the man for his past achievements; he has done very well. IMO, the true light of his success, has yet to be established as his theories become tested over the long haul by the roller coaster of (several) property cycles, of which Mr McK has not yet invested through!!! ;)

Jo

[Garry K]

I went and I'm back.

Great summary Spiderman.

I have not seen him speak before and was pleasantly suprised.
Little hype, but a challenge given to act.
Took wife along (who was a little relucant) and Steve won her over quickly when he revealed he was a chartered accountant, but actually hated the job, and changed direction. Wife was exactly he same, now she's in IT.

I liked his challenge about how we are obsessed with not paying tax eg CGT.
He turned it around to say we are actually getting a 50% saving on CGT. Also, how would we feel if the 50% exeption was going to reduce to 25%.Our attitude to selling would quickly change.

His key messages for me;
1. To increase your ability to invest, don't spend so much (he claims to live off $400 a month) and they have only one car, a mazda 323, and live in an "average" suburb (Blackburn) in a basic house.
2. Have a clear goal/passion of why you are doing this, and it needs to be more than just to make money or retire early. Passion.
3.Be prepared to pay for expert assistance
4.Sell underperforming properties.
5.Be passionate about investing, not just set and forget.
6. Fully utilise lazy money eg money sitting in a bank account.
7. Pay off some debt.
8. If you are going to write a book, don't say that all the profits are going to a charitable trust.


And....one of the best bits at the end...Dr Zuess story...


Garry

[Monopoly]

Thanks Garry,

After reading your post, I take back my admiration for his success!!! :p Just kidding, but seriously......$400 a month??? :eek: Food, petrol, milk (for his small baby), bills.......!!!

Jo

[Garry K]

At the end, after he thanked god and jesus, he also mention Les (Underwood or something) from Somersoft.

Is that our Les the moderator?

GarryK

[Monopoly]

Reckon if I thank them too (with the exception of Les.....) they'll pay my bills so that I can live on $400 a month too??? :p

[MopTop]

6. Fully utilise lazy money eg money sitting in a bank account.

It used to be recommended that a certain amount of emergency funds be readily available. I've seen suggestions ranging from a fixed amount eg $10K, to say 3 months income.. or expenses.

Does this idea about keeping a safe stash aside sit well with the Steve McKnight pearl above? He's certainly not the only one who advocates working lazy money.

How "fully" do you utilise lazy money? Got any deposit accounts?

cheers
MT

[Sim]

An offset account is a good way of getting at least some benefit out of emergency funds. Alternatively, an ING Direct account (or similar) is better than a regular bank account.

[MJK]

St George has come to the ING party now offering their "unadvertised direct saver account" to their "Gold Clients". Its a 5% savings account that is fully accessable for deposits or withdrawals via internet banking and the best thing is NO FEES!:D :D :D

MJK

[Garry K]

It used to be recommended that a certain amount of emergency funds be readily available. I've seen suggestions ranging from a fixed amount eg $10K, to say 3 months income.. or expenses.

Does this idea about keeping a safe stash aside sit well with the Steve McKnight pearl above? He's certainly not the only one who advocates working lazy money.

How "fully" do you utilise lazy money? Got any deposit accounts?

cheers
MT


He uses a loan offset account as well as looking for another IP.

GarryK

[geoffw]

At the end, after he thanked god and jesus, he also mention Les (Underwood or something) from Somersoft.

Is that our Les the moderator?

GarryKThat would be Moderator Les (http://www.somersoft.com/forums/member.php?u=11) at a guess- I understand Les did proofread Steve's book.

[likewow]

St George has come to the ING party now offering their "unadvertised direct saver account" to their "Gold Clients". Its a 5% savings account that is fully accessable for deposits or withdrawals via internet banking and the best thing is NO FEES!:D :D :D

MJK

If youre receiving 5% on your cash, its not as good as you think. You probabaly lose about half in tax at your top rate (48%) and the rest is eroded with inflation so you are really going nowhere with this one.

If youre not into shares and like a bit of security, you're better off putting the cash in a redraw loan on one of your IPs or PPOR.

Then you are receiving an effective 9%-10% return on it. (6% youre saving on your interest payments and the rest by not having to pay tax on that saving)

[Twitch]

At the end, after he thanked god and jesus

Which is a bit funny when you think about it since Jesus was an itinerant preacher without a house of his own (let alone some IPs on the shores of galilee).

[Sim]

If youre receiving 5% on your cash, its not as good as you think. You probabaly lose about half in tax at your top rate (48%) and the rest is eroded with inflation so you are really going nowhere with this one.

If youre not into shares and like a bit of security, you're better off putting the cash in a redraw loan on one of your IPs or PPOR.

Then you are receiving an effective 9%-10% return on it. (6% youre saving on your interest payments and the rest by not having to pay tax on that saving)

Actually likewow, that's not strictly true.

With an IP, since you were going to be claiming the interest on the IP loan on tax, you are only saving half of what you expect by offsetting it.

Basically, assuming you earn the same rate of interest with the money in the bank as you pay in interest on the loan, then there is no net difference in returns between money in an offset acount against an IP and money in the bank. Of course, since your loan interest rates are generally a bit higher than what you can earn with money in the bank, you will indeed be better off with the money in the offset account... but only by around half the difference between the two interest rates (ignoring other expenses).

For a PPOR, of course, you weren't going to be able to claim interest on the loan anyway, so you do get the full (tax free) savings by using an offset account (or by just paying it straight into the loan account !). This is why it is always more effective to pay off non-deductible debt first - the after-tax returns are better.

However, your assertion that you also get addtional returns "the rest by not having to pay tax on that saving" is actually not true ... you don't pay tax on savings, you pay tax on interest earned. You have to actually earn the interest to pay the tax ... and since you are not earning any interest, you don't pay any tax.

It's almost like a "glass half full / glass half empty" argument.

(Assume top tax bracket, rounded up to 50% tax rate)

A. You earn $100, you pay $50 in tax, net total $50.

B. You earn $0 (becuse you didn't make the investment - you did something else with the money), you pay $0 tax, net total $0.

It's wrong to claim that your returns in scenario B are $50 better just because you paid $50 less tax !!! Your returns are actually $50 worse, $0 for B versus $50 for A.

So in summary: (assuming 5% interest earned in bank, or 6% interest on loan, and ignoring other fees, and assume top tax bracket, rounded up to 50% tax rate)

X. Cash in bank: 5% gross, or 2.5% net after tax return

Y. Cash in offset account for IP: 6% gross, or 3% net after loss of tax deductions.

Z. Cash in offset account for PPOR: 6% net return.

Option Z (PPOR offset) is best, followed by Y (IP offset), followed by X (bank account)

[Spiderman]

So in summary: (assuming 5% interest earned in bank, or 6% interest on loan, and ignoring other fees, and assume top tax bracket, rounded up to 50% tax rate)

X. Cash in bank: 5% gross, or 2.5% net after tax return

Y. Cash in offset account for IP: 6% gross, or 3% net after loss of tax deductions.

Z. Cash in offset account for PPOR: 6% net return.

Option Z (PPOR offset) is best, followed by Y (IP offset), followed by X (bank account)

This is very topical, given it's tax time and those of us (who haven't got around to getting 15-15s) will have a 'windfall' soon.

Possibly more attractive alternatives include:

W. Buying high-yielding fully-franked Australian shares to diversify the portfolio and get tax-effective income and (possibly) long-term capital gain

V. Value-adding maintenance (eg painting) to IPs, either to increase rent for cashflow/serviceability or value for LVR/redraw reasons.

U. Work to IPs which don't add value but are preventative and/or keep the building worthy (eg repairs to gutters)

And maybe some others.

Which would you choose (maybe this should be a poll)?

Peter

[MJK]

Likewow,

You shouldn't judge people you don't know. Thanks Geoff for saving me a heap of one fingered typing.

I have no debt on my PPOR.
If you must know I have money in managed share funds with a +10% expectation.
I have money in capital growth property.
I have money on positive cash flow property.
And with regards to my tax rate I gross over $140,000 pa including rents but my taxable income last year was $35,000 so my top marginal rate is 30%.

And guess what I've got some savings earning 5% because it suits my wife to have a little stash.

MJK

[Sim]

Possibly more attractive alternatives include

Spiderman, the original question was actually asking for what to do with a stash of "emergency funds"...

It used to be recommended that a certain amount of emergency funds be readily available. I've seen suggestions ranging from a fixed amount eg $10K, to say 3 months income.. or expenses.

... and while investing the money as you described is certainly an option, I believe it kind of defeats the purpose of the emergency stash ... it needs to be effectively capital guaranteed, and as such, your extra suggestions don't actually fit the criteria.

[MopTop]

... and while investing the money as you described is certainly an option, I believe it kind of defeats the purpose of the emergency stash ... it needs to be effectively capital guaranteed, and as such, your extra suggestions don't actually fit the criteria.

Yes Sim that's true. Given the nature of the funds I wouldn't want them subject to terrorist acts and other vagaries.

Using an offset is a great idea. One question..

.. if the offset is against an interest only investment loan, and I do need to withdraw for some kind of private emergency situation, is there any impact on the deductibility of loan interest (which will now be increased due to less in the offset)?

Thanks a lot.

cheers
MT

[Sim]

The offset account is separate from the loan account, and as such, withdrawals from the offset account (for any reason) should not affect the deductibility of the interest on the loan.

This is why offset accounts are much more preferable (to me) than a standard loan-redraw facility, or even an LOC, whenever there is a possiblity that the funds redrawn might be for personal use (eg in an emergency).

[MopTop]

Thanks Sim. I now know where my emergency funds will live. And also where pay and other inflows will go..

cheers
MT