Back To Basics

From: Steve McKnight


Hi,

As a chartered accountant and successful property investor I have to say I am becoming more and more annoyed at all the hype merchants pushing high-priced property as answer to everyone's wealth dreams.

It's time to set the record straight.

Who am I? Well, I'm just an ordinary guy who used to work as a chartered accountant but now co-own (with my business partner) more than 50 income producing properties (which we purchased in under two years.)

I make about $70 per week per house or about $182,000 per annum of nett income. It's not that hard and doesn't involve any cheating or swindling. I was on 'A Current Affair' recently and they couldn't find any dirt at all...in the end they gave it an amazing plug and called me 'Melbourne's Housing Hero'!

My property strategy is a mixture of wraps and rentals.

I don't own high priced city apartments. No, I invest in single family houses located within one hours drive of the Melbourne metro area.

In this post I'm going to outline my thoughts about property investing and why 99% of investors get it wrong from the start. This will be revision for those who know my work, but for others it will be potentially the most important e-mail you read for weeks!

Let's get into it...

From my experience 99 out of 100 investors make two fundamental errors:

Error #1: They invest for capital returns; and

Error #2: They invest in properties that are negatively geared

Let's look at each error in turn.

Investing in property for capital gains is a bad idea. Yes, you read right! Here's why:

What strikes me as inexplicable is seemingly professional investors almost always invest without a specific goal other than to make money. Once the magic figure is reached then these investors believe that everything will change and life will once again be worthwhile.

This is a fantastic myth, because the answer to 'how much money is enough money' is like trying to figure out 'how long is a piece of string'.

A monetary goal by itself is irrelevant...what I encourage you to think about is what will the money goal provide (i.e. think in non-monetary terms).

A windfall capital gain of $100,000 might buy a fancy new toy, yet $2,000 per week might allow you to work two days a week less.

My goal was not to stop work. My goal was to win back control of when, where and how hard I work. To do this I needed regular income to flow into my bank account to act as a substitute to the salary I'd otherwise earn if I was at work.

I looked at all the different options available and finally decided on real estate. But not in the way 'normal' investors look at it. No, I knew I couldn't buy my weekly groceries with unrealised capital gains - I needed regular income!

Today I believe biggest investment lie of all time is that people should invest in property for capital gains.

Surely investing a dollar now in the hope of making a dollar in the future is a fingers-crossed approach; pure speculation at best!

I wanted to retain control of when I made money and I wanted to make money from day one.

As I see it, successful investing is all about how quickly you get your money working for you. If all you did was invest in properties that made money from day one then you'd become wealthy pretty quickly.

Don't worry about investing for returns in the future...worry about investing for returns today!

The second error most people make is they use property as a tool to obtain tax benefits.

There seems to be a free seminar you can go to every night outlining how the tenant and the taxman can fund an investment property for you. Speaking as a chartered accountant, this is a classic smoke and mirrors trick.

To have the taxman fund your investment you must be getting a deduction. In the case of a negatively geared property, the deduction comes in the form of a loss incurred when your expenses are more than your revenue.

Negative gearing unlocks a double-whammy!

First, for every $1 you lose, the taxman will only refund you a maximum of $0.485 cents back. The other $0.515 is lost...forever!

Second, the result of this so-called benefit is you have to work harder to earn more income to fund the $0.515 loss.

If I tried to peddle as a good idea an investment which lost money and made you have to work harder, I'd be laughed out of the profession, yet it seems that people's obsession with avoiding paying tax at all causes logical thought to fly out the window.

So how am I different?

I believe in only investing in positive cashflow properties. No, I don't have a seminar for you to come to and I'm not a real estate agent. I'm not even at my goal of complete control of when, where and how hard I work...but I am very close to it.

What I hate is all the hype that just results in innocent investors being burned so that sales people can earn a large commission. I believe education is the answer, which is what I created my web site and publish a free monthly newsletter (with close to 1,000 subscribers).

I hope this post has outlined the two biggest errors that you should try to avoid as a property investor.

My final comment is to suggest to you that shares (particularly international shares) are a far better vehicle for capital growth than property. But, if you want to work less, all the potential capital gains in the world won't add up to enough to buy your weekly groceries.

Sincerely,

Steve McKnight
http://wealthtipsonline.com.au
 
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Reply: 1
From: Mike .


Hi Steve,

Good to see you drop in from time to time. Always look forward to what you have to say.

In your post you said: "Who am I? Well, I'm just an ordinary guy..." Me again: Ordinary, Steve? If you're ordinary, then I'm still learning to tie my shoelaces! Thanks for being humble, anyway.

Regards, Mike
 
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Reply: 1.1
From: Jack Moro


Hi Steve,

Thanks for the post.

It comes as a timely reminder to me, what I should be looking for in I.Ps.

I am about to buy shortly and were becoming caught up in the hype of
"must buy inner city mentality".

Which was going to be a pain as I live out East (Melbourne) here I can easily identify +ve cash flow property as I know the area
and its market so thanks for the focus injection

P.S
Saw you on ACA and felt you came across rally well.
Congratulations!!

Jack
 
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Reply: 1.1.1
From: Kristine .


Congratulations, Steve

Very sensible advice

Good to hear you speak on your own behalf, as you are often quoted 'chinese whisper' style.

Cheers

Kristine
 
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Topic: Back To Basics (1 of 3), Read 48 times
Conf: Property Investor Forum
From: Steve McKnight stevemcknight@bigpond.com
Date: Friday, April 06, 2001 05:33 PM
Hi,

SM As a chartered accountant and successful property investor I have to say I am becoming more and more annoyed at all the hype merchants pushing high-priced property as answer to everyone's wealth dreams.

It's time to set the record straight.

Who am I? Well, I'm just an ordinary guy who used to work as a chartered accountant but now co-own (with my business partner) more than 50 income producing properties (which we purchased in under two years.)

GD Hey Steve you are not an ordinary guy and I know not everyone can do it?
SM I make about $70 per week per house or about $182,000 per annum of nett income.
GD Is that you AND you partner …$91K each?…Gross?
GD I would estimate John Burley makes more from seminars each year than from all the wrapped properties?
GD Lets look at the numbers 50 houses x $70 per week x 52 weeks is …$182,000 GROSS? You did say more than 50 but not how much more? Am I missing something…Hey is not this gross? …not nett I manage 16 rentals and I do have some advertising and some phone bills and some management expenses (I self manage) and some travel expenses… do you do all the management yourself …do you have a P.A. If so what is his/her salary?
I love capital gain … cash flow pays the bills Capital gain makes you rich… !
Steve did you know…There are ways to turn capital gain into tax free income! Without the hassell of 55 houses AND a partner.
SM It's not that hard and doesn't involve any cheating or swindling.
GD I very much hope not!
SM I was on 'A Current Affair' recently and they couldn't find any dirt at all...in the end they gave it an amazing plug and called me 'Melbourne's Housing Hero'!
GD Yeah right A Current Affair know a heap about property investment…of any type!

SM My property strategy is a mixture of wraps and rentals.
GD Why some rentals?

SM I don't own high priced city apartments. No, I invest in single family houses located within one hours drive of the Melbourne metro area.
GD I invest in hi capital gain and hi cashflow properties within 15minutes drive of Brisbane CBD

SM In this post I'm going to outline my thoughts about property investing and why 99% of investors get it wrong from the start. This will be revision for those who know my work, but for others it will be potentially the most important e-mail you read for weeks!

Let's get into it...

SM From my experience 99 out of 100 investors make two fundamental errors:

Error #1: They invest for capital returns; and
GD Disagree… it is critical to get capital gains

SM Error #2: They invest in properties that are negatively geared
GD Agreed

SM Let's look at each error in turn.

SM Investing in property for capital gains is a bad idea. Yes, you read right! Here's why:

SM What strikes me as inexplicable is seemingly professional investors almost always invest without a specific goal other than to make money. Once the magic figure is reached then these investors believe that everything will change and life will once again be worthwhile.
GD What is this all about? Life will change when you have assets and cashflow and a choice to do what you want to do!

SM This is a fantastic myth, because the answer to 'how much money is enough money' is like trying to figure out 'how long is a piece of string'.
GD Yeah like …that’s a problem… get the right assets in place and the money will follow…
GD Getting rid of the money is easy…

SM A monetary goal by itself is irrelevant...what I encourage you to think about is what will the money goal provide (i.e. think in non-monetary terms).
GD A monetary goal is great when you don’t have any then you can think about the more esoteric things after….I agree with a balance.

SM A windfall capital gain of $100,000 might buy a fancy new toy, yet $2,000 per week might allow you to work two days a week less.
GD are you talking about selling to realize the capital gain…this is NOT necessary!
A windfall capital gain of $100k …you can borrow 80% of $100k= $80k
Use that as a 20% deposit and you can buy property worth 5x $80k= $400k
Hardly a toy…we buy 10%+ returns so $40k PA thank you very much.
Get a 7% growth and that’s another $280k cap gain….cap gain I Luv it!

SM My goal was not to stop work. My goal was to win back control of when, where and how hard I work. To do this I needed regular income to flow into my bank account to act as a substitute to the salary I'd otherwise earn if I was at work.
GD Agreed but only so the banks would lend you money to buy more property!

SM I looked at all the different options available and finally decided on real estate. But not in the way 'normal' investors look at it. No, I knew I couldn't buy my weekly groceries with unrealised capital gains - I needed regular income!
GD I get FREE FOOD through my rental properties!! Its easy!

SM Today I believe biggest investment lie of all time is that people should invest in property for capital gains.
GD You haven’t heard half of the lies I’ve heard over the last 29 years…but you will!!

SM Surely investing a dollar now in the hope of making a dollar in the future is a fingers-crossed approach; pure speculation at best!
GD Think lateral Steve… Cap gain AND cash flow… get it …you can have your cake …and eat it!

SM I wanted to retain control of when I made money and I wanted to make money from day one.
GD Excuse me… haven’t you sold your cap gain for a tiny $70 pw who now has control… tell me steve… if interest rates go back to 15% …How many of your purchasers would walk away? Sure you could resell …to…?
GD Could you handle 20 vacancies in those lo socio areas and no cap gain what if they revalue as they did to a friend of mine a multi millionaire and almost sent him broke…he had to go back to work.
GD How many of my tenants would walk …zero ..in fact there would be more tenants…interest rates don’t affect tenants …they affect owners.
GD USA with their 30 year fixed don’t have this problem…

SM As I see it, successful investing is all about how quickly you get your money working for you. If all you did was invest in properties that made money from day one then you'd become wealthy pretty quickly.

SM Don't worry about investing for returns in the future...worry about investing for returns today!
GD Get the returns today but make sure you set yourself up more the potental massive cap gain…no g’tee but plan for it.

SM The second error most people make is they use property as a tool to obtain tax benefits.

SM There seems to be a free seminar you can go to every night outlining how the tenant and the taxman can fund an investment property for you. Speaking as a chartered accountant, this is a classic smoke and mirrors trick.

SM To have the taxman fund your investment you must be getting a deduction. In the case of a negatively geared property, the deduction comes in the form of a loss incurred when your expenses are more than your revenue.

SMNegative gearing unlocks a double-whammy!

SM First, for every $1 you lose, the taxman will only refund you a maximum of $0.485 cents back. The other $0.515 is lost...forever!

SM Second, the result of this so-called benefit is you have to work harder to earn more income to fund the $0.515 loss.

SM If I tried to peddle as a good idea an investment which lost money and made you have to work harder, I'd be laughed out of the profession, yet it seems that people's obsession with avoiding paying tax at all causes logical thought to fly out the window.
GD Hang on you are an accountant …I know very few businesses that made a substantial profit in the first year in fact most struggle til they find what works and then tweak it to make better returns…property is no different you can affect the return in a number of ways …if you own it and control it!!
GD I often turn a loss making property into cash flow positive & I get the cap gain & I have the control

SM So how am I different?

SM I believe in only investing in positive cash flow properties. No, I don't have a seminar for you to come to and I'm not a real estate agent.
GD Pardon me Steve…didn’t you run a seminar (or 2) for 60 + people at $700 pr head …that’s $42000 (beats wraps…) and don’t you have your inner circle at $197 per head (first 50 people) …
I'm not even at my goal of complete control of when, where and how hard I work...but I am very close to it.

What I hate is all the hype that just results in innocent investors being burned so that sales people can earn a large commission. I believe education is the answer, which is what I created my web site and publish a free monthly newsletter (with close to 1,000 subscribers).
GD GOOD newsletter too

I hope this post has outlined the two biggest errors that you should try to avoid as a property investor.

My final comment is to suggest to you that shares (particularly international shares) are a far better vehicle for capital growth than property. But, if you want to work less, all the potential capital gains in the world won't add up to enough to buy your weekly groceries.
GD Whaaat..international shares…this must be another seminar!!

Sincerely,

Steve McKnight
http://wealthtipsonline.com.au
GD…please take this being just a different point of view…I know what has… and hasn’t worked for me over 29 years…I believe Steve…is still finding out!
I hope there a not too many more of these long posts…Im too old for this.
Steve is a goer and I congratulate him for that I suspect he will make more out of wraps and the seminars than the majority of his clients.
We will see?
Geoff Doidge
http://www.financialsuccesssystems.com/
 
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Reply: 2.1
From: Mike .


Hi Geoff,

You've gotta watch those quiet ones, every now and again they errupt. Geoff, I wish you wouldn't pick posts to reply to as carefully as your investments. Would like to hear from you more often. Thanks for The Ten Golden Rules. Great read.

Regards, Mike
 
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Reply: 2.1.1
From: GoAnna !


Hi Steve

I think what you are doing is fantastic and inspirational....but it is not for everyone.

Sure, we should have goals other than a magical money number. After all money is freedom. If we have a passive income we can choose how we spend our time. If we know how we want to spend that time we will be so much more motivated to get there and more fulfilled when we do.

I think however that the goal and the strategy are two different things. It is possible to do wraps WITHOUT a clear goal. It is possible to have a capital gain strategy WITH a clear goal. I congratulate you on your quick success. Nearly 200K a year income is something to feel very proud of. Likewise I am proud of the capital gain of 100k to 200k I currently create each year. That is not to mention the cash flow I also enjoy from these properties. And tax deductions. As they say in the US "It's all good!"

I understand the cash flow theory and each week i change my mind on what strategy to follow. I guess it is all part of learning. This week capital gains is looking pretty good. Sell a property and pay out my home mortgage. Free up nearly $1000 per month in repayments. (bad debt) In one move. Think I might do it.

A realised capital gain does not need to be blown. Capital gain does not even need to be realised. Depends on your strategy.

Good luck Steve, look forward to hearing about you reaching new heights of success. You inspire me to be more creative.

Anna
 
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Reply: 2.1.1.1
From: Martin Dorney


Although levels of rental income are important for cashflow purposes and repayments,it is the capital qrowth that determines the performance of any investment property for the long term, which in turn facilitates purchasing more property for a investment portfolio.

Far too often people place far too much emphasis on how many properties they have;
It's not about how many you have, whether it's 50, 100, or 200 for that matter, it's all about accumulating NETT ASSESTS!

It's the capital growth that builds NETT EQUITY and PERSONAL WEALTH, understand this!

1. Capital growth
A high level of land value is a must.

2. Yield

3. Tax minimization, in that order.
 
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Reply To Geoff (Long)

Reply: 2.2
From: Steve McKnight


Hi Geoff,

Thanks for your post. Healthy debate is good for all. Let me try to be a little more specific since I sense you have a few concerns about my post.

First let me say that the post was designed to be informative. It seems the majority of posts here remain people with questions, which is fine, but I also wanted to put in my thoughts from an educational point of view.

I note you said "I hope there are not too many more of these long posts…Im too old for this." I'm not sure if you're implying my post was too long? If so, then I make no apologies for writing long posts with the aim of helping people.

I appreciate writing posts of a detailed but general nature provides the opportunity for people to learn at the same time as it opens me up to criticism. Thankfully, unlike The Wife, I haven't yet been threatened with legal action.

In any event, I'm proud to be trying to help people understand more about r/e investing. I don't believe my way is the only way (or the best way for that matter), but I can testify that at the moment it is working.

I get the feeling you are being a little condescending with your tone in suggesting "please take this being just a different point of view…I know what has… and hasn’t worked for me over 29 years…I believe Steve…is still finding"

While I can't boast 29 years of r/e investing and do not profess to have the same experience you have...I remain a chartered accountant who has transacted more than 100 property transactions (buy/sell) in under two years. This, I feel, counts for something.

In response to some of your other queries:

>GD Hey Steve you are not an ordinary guy and I know not everyone can do it?<

To this I disagree. I believe everyone has the capacity to achieve great results. To believe otherwise is to give in without trying. I hope to show and inspire others to believe that doing something different is what life is all about. If 95% of people end up poor, then I make no apologies for acting differently.

>GD Is that you AND you partner…$91K each?…Gross? I would estimate John Burley makes more from seminars each year than from all the wrapped properties?<

Agreed. That's why I believe JB no longer purchases property (he still administers a lot of r/e though). To me this takes away from some of his credibility, which is why I've purchased two properties again last week.

You are right, the seminar I ran did make money. I make no apologies for providing a service which met the demands of the market. Was it too expensive? Did I provide poor value for money? The feedback seems to indicate not. Nevertheless, do something different and you open yourself up for ridicule.

Aren't you being a little hypocritical though? I understand you make money from running seminars too, right?

>GD Lets look at the numbers 50 houses x $70 per week x 52 weeks is …$182,000 GROSS? You
did say more than 50 but not how much more?<

What does it matter Geoff? I actually don't keep a tally on the whiteboard. Let's say 50, and the return is between $50 and $70 nett per week and yes it's a total for the business so my business partner and I share it 50:50.

It's nett of all expenses and P&I repayments...that's the beauty of wraps. No doubt you're confused so let's imagine I buy a house for $45,000 and sell it for $65,000. My interest rate is 8% and I charge 10%. Repayments I make are (80% LVR) are $64.07 p/w. Repayments I receive are (loan $65-7k =$58k)= $121.54 per week. Nett difference p/w is $57.47.

You ask if I do all the management myself and the answer is yes and no. Our assistant accountant does the admin and we supervise. It requires about three hours per week of Tim's time in total.

>Steve did you know…There are ways to turn capital gain into tax free income! Without the hassell of 55 houses AND a partner.<

Yes I do know Geoff...remember I'm a chartered accountant. One of the things I had to learn though is in many ways two heads are better than one. Building a team of people smarter than you is critical to be able to work less in the long term. David, my business partner, is an excellent accountant and has different skills to me. Without David I wouldn't have achieved nearly as much as I have over the past few years.

I'd rather share the pie than have to buy the ingredients, bake it, eat it and then wash up solo. I respect your right to disagree.

>SM It's not that hard and doesn't involve any cheating or swindling.<
>GD I very much hope not!<
>SM I was on 'A Current Affair' recently and they couldn't find any dirt at all...in the
>end they gave it an amazing plug and called me 'Melbourne's Housing Hero'!<
>GD Yeah right A Current Affair know a heap about property investment…of any type!<

I wonder if you could be any more condescending about someone's achievements Geoff? Perhaps it's because I'm trying something different?

You ask why I include some rentals in my property strategy. Surprising as it may sound, wraps are only one of a selection of investing tools and I like to diversify to some extent. The problems with wraps is that one day the income will stop and you'll be paid out. Also, in a wrap you have fixed the maximum capital growth you'll achieve.

So, I also invest in +ve geared rental properties that provide a good return (at least 15% gross).

You need many tools to build a house.

>GD I invest in hi capital gain and hi cashflow properties within 15minutes drive of Brisbane CBD<

Good for you Geoff. I admire someone who is taking action. My point of writing that I don't invest in high priced apartments is that they are -ve cashflow and generally over valued when purchased off the plan...here in Melbourne anyway.

>GD Disagree (about capital gains) it is critical to get capital gains<

I respect your difference of opinion. I agree capital gains are important, but I say you can't buy groceries with it and if you plan to quit working you'll need some form of income to replace your lost salary.

If you plan to work and don't need the income then perhaps a strategy that earns low income and high capital growth is more prudent. Personally, I'd look to invest in shares / mutual funds if this was my goal.

>GD What is this all about? Life will change when you have assets and cashflow and a choice to do what you want to do!<

Agreed, but setting a monetary figure is by itself pointless unless you determine what non-monetary benefits the lifestyle will provide.

I believe that ultimate wealth (for me anyway) has little to do with money, rather my definition of wealth comes back to my understanding of my relationship with Christ and also physically. I suspect we are getting a little D&M though.

>GD I get FREE FOOD through my rental properties!! Its easy!<

This I'm not sure about. Care to elaborate?

>GD Think lateral Steve… Cap gain AND cash flow… get it …you can have your cake …and
eat it!<

There's something I'm not often accused of. I try to think literally...surely a deal where you buy one day for $45k and sell the next day for $65k, borrow and 8% and charge 10% is lateral thinking or having my cake and eating it too.

>GD Excuse me… haven’t you sold your cap gain for a tiny $70 pw who now has control… tell
>me steve… if interest rates go back to 15% …How many of your purchasers would walk away? Sure you could resell …to…?<

Geoff, try reading your posts back aloud...your tone comes across as condescending again.

In any event, as interest rates rise we'll encourage our wrapees to fix their rate at an affordable level so they aren't forced to vacate. I try to focus on the person before the property.

You are right in focusing on an exit strategy before entering into a deal though. Our numbers suggest we would need to rent an average wrap property at 60% of the average current rent and still break even cashflow wise.

>GD Could you handle 20 vacancies in those lo socio areas and no cap gain what if they revalue as they did to a friend of mine a multi millionaire and almost sent him broke…he had to go back to work.<

Should this happen because of my mismanagement of people then, as an investor, I understood the risk and will not walk away from my obligation to clean up the mess.

>GD How many of my tenants would walk …zero ..in fact there would be more tenants…interest rates don’t affect tenants …they affect owners.<

Perhaps, my economic brain says that as interest rates rise, landlords start to compete for tenants to fill vacancies since the rise in interest rates causes some financial pain.

Supply exceeds demand and rentals drop. This is what's happening in Mackay at the moment when there has been a glut of properties hit the rental market after the mines restructured and the sugar growers suffered a bad year.

Perhaps we'll agree to disagree.

>GD Hang on you are an accountant …I know very few businesses that made a substantial profit in the
first year in fact most struggle til they find what works and then tweak it to make better returns…property is no different you can affect the return in a number of ways …if you own it and control it!!

Interesting comment which I agree with for the way the average person goes into business.

No client of ours is advised to go into a business which will be unprofitable in the first years unless it is a lifestyle decision.

>GD I often turn a loss making property into cash flow positive & I get the cap gain & I have the control<

Good for you. Perhaps you'd like to provide some strategies so that all Somersoft users can benefit?

>GD Pardon me Steve…didn’t you run a seminar (or 2) for 60 + people at $700 pr head …that’s
$42000 (beats wraps…) and don’t you have your inner circle at $197 per head (first 50 people) …<

What's your point Geoff? Do you resent that I ran a seminar...that I was able to help people and make money at the same time?

Don't you too offer paid training...does that mean you no longer invest in property?

What's the criticism? That I'm trying to make a better life for my wife and I by running a seminar and making a profit? I am not a charity and do not believe I ever held out that I was.

>GD Whaaat..international shares…this must be another seminar!!<

Geoff, comments like this suggest to me that you are bitter about something. Surely, as someone who also makes money from seminars, comments to this is about as hypocritical as you can get.

In any event, I still maintain a free newsletter which outlines my ideas. Do you offer such a facility, free of external advertising, where you provide information to help people? If so, please sign me up and send the back issues too.

I'd be keen to learn as much as I can from anyone with experience and knowledge in areas where I lack.

Before this post I had a professional respect for your opinions and comments. Now, I'm left wondering if that is justified.

As far as I'm concerned, continued argument about these points detracts from us both.

Sincerely,

Steve McKnight
http://wealthtipsonline.com.au
 
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Reply To Geoff (Long)

Reply: 2.2.1
From: Michael G


Hi Steve,

In the last post you wrote;

"It's nett of all expenses and P&I repayments...that's the beauty of wraps. No doubt you're confused so let's imagine I buy a house for $45,000 and sell it for $65,000. My interest rate is 8% and I charge 10%. Repayments I make are (80% LVR) are $64.07 p/w. Repayments I receive are (loan $65-7k =$58k)= $121.54 per week. Nett difference p/w is $57.47"

I know its up to each person to manage their own deals, to get what they want out of them. But its always interesting to learn how others are structuring their.

So I'd be interested to hear your views on the following.

When I read the above, I wondered "nett"? hmmm what about;

- stamp duty
- legal fees
- bank charges
- tax
- insurance

All the little incidental costs that have to be factored in.

Looking at the above. If the $57.47 is nett profit, then I assume that this money is not covering all the costs mentioned above. So I wondered where its coming from?

Then I remembered you deducted the $7k from the wrappees purchase price as a deposit.

So that leaves you $7k to cover the initial costs. Steve could you express in detail. What all the initial costs were on such a deal and show how the $7k covered this?

Opps, forgot to mention deposit (which was 20%) when is this money recovered?, is this a 1yr return on investment or spread over 5yrs? This sum I believe is $9k ($20% of $45,000)

One last thing to be considered I guess is if we assume that we recoup all our initial purchase and selling costs within the first year (minus deposit), then there is still the issue of tax to be considered that is payable per annum, actually two types;

- the capital gain which is the difference between $45k and $65k which we assume is spread over the term of the loan

- the income tax which is the interest rate margin, that being the difference between 8% and 10% which is $2900 in simple interest or $55 a week.

But before we can discuss this tax we have to determine what our tax margin is;

If we buy a wrap in our own name, then the profit is added to our income and so the tax on profits can be anything from 0-48%. For those with non-working partners the wraps can be bought in their name to reduce tax of course.

But what options are there for single high income earners like myself?

I'm looking at a company trustee/trust structure. This would cap my tax at 35% say which is lower than my income tax.

Of course we may be able to deduct costs like purchase costs over 5yrs at 20% and interest. But that stills leaves some amount of tax to be factored in before we can state net profit after all expenses.

I'm not seeking advice, but I am interested how fellow investors minimise their tax and increase their ROI.

Unfortunately I don't have any other business besides my property investment which I can generate losses with to offset my tax with. Because of this the tax is one expense I have to factor into my balance sheet.

Steve, yours and anyone elses feedback would be appreciated.

I'm sure everyone would love to hear the replies on this one.

Regards
Michael
 
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Reply: 2.1.1.1.1
From: Anonymous



We all want to get to the same destination.

Just some are taking the train. Some are in the car. Some are walking. Some use one road whilst others use another.

Like shares there will always be healthy debate on how to achieve.
 
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Brain Storm - Capital Gains Tax

Reply: 2.1.2
From: Ross Sondergeld


Hi,


How could a seller minimise their capital gains tax obligations when they
sell?

I'm just looking for a few creative ideas...


Ross
_________________________________________________________________________
Get Your Private, Free E-mail from MSN Hotmail at http://www.hotmail.com.
 
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Reply To M.G

Reply: 2.2.1.1
From: Steve McKnight


Hi Michael,

When I say Nett, I mean the end cashflow after all expenses but before taxation.

I do consider taxation in my calculation - but I don't want to confuse the calculation in the early stages. I'll outline my thoughts on this in my next IC newsletter.

Anyway,you ask about:

>- stamp duty
>- legal fees
>- bank charges

You are correct in identifying these areas as things to look out for. I generally provide for 5% of the purchase price to cover this.

I made a mistake in the figures of an earlier posts as I should have included closing costs.

>- tax

See my comments above. Because the deal is +ve cashflow we will pay tax. Sadly the calculation is not just as simple as taking the cash flow and multiplying it by a tax rate since some of the repayment is interest and some of it is principal.

>- insurance

This is paid by us and we are reimbursed for it.

>All the little incidental
>costs that have to be factored
>in.

True.

>Looking at the above. If the
>$57.47 is nett profit, then I
>assume that this money is not
>covering all the costs
>mentioned above. So I wondered
>where its coming from?

Incorrect mate...the $57.47 is the nett (before taxation) but after expenses. Remember, stamp duty etc. are once off 'closing costs', not regular ongoing charges.

>So that leaves you $7k to
>cover the initial costs. Steve
>could you express in detail.
>What all the initial costs
>were on such a deal and show
>how the $7k covered this?

Michael, I have gone through these figures in detail in previous editions of my newsletter...especially the latest issue of Financial Independence. Put a post on the IC forum if you have any queries with the figures I've presented there.

Regards

Steve McKnight
http://www.wealthtipsonline.com.au
 
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Brain Storm - Capital Gains Tax

Reply: 2.1.2.1
From: Robert Forward


It can be done but you should talk to you accountant about that.

In some cases, via a business, CGT is deferrable. But talk to your accountant about it.

Cheers
Robert
 
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"RE: Reply To Steve, Geoff et al. (Long)"

Reply: 2.2.1.2
From: Dave :)


Michael.

That was a well balanced point. Thanks. I too have the utmost respect
for both Steve and Geoff. They obviously have chosen different
strategies and have worked them both to be very successful. Personally,
I prefer your (and Geoff's) strategy. I think capital growth is
FUNDAMENTAL and will never put yield ahead of it.

By the way, you weren't condescending, to your credit. :)

Keep up the good work.

Cheers,

Dave

p.s. After the 4th IP purchase, serviceability (in the banks view)
becomes a problem, making it hard to finance another purchase. Because
of this, would it be beneficial to purchase some cheaper high yield
properties to include in my portfolio, such as the type Steve talks
about?


-----Original Message-----
From: propertyforum Listmanager
[mailto:listmanager@bne003w.webcentral.com.au]
Sent: None
Subject: Reply To Steve, Geoff et al. (Long)


From: "Michael Croft" <croft@asiaonline.net.au>

Hi All!

Couldn't resist this one......... Had to have my 2 bobs worth too!

We all know there is more than one way to skin a cat, that one mans fish
is anothers poison, horses for courses ....... I'll stop now before you
all throw up. Come on guys lighten up and ...................

SHOW ME THE MONEY!!!!!!!

Steve, a familiar question for you, 'what is the one thing you can do
today that will earn you the most money?' apologies to John Burley and
if I sound condescending I apologise in advance.

A wrapper deals in property and one property deal is worth say $20k up
front plus $50-70pw for 25 years (if not cashed out). That's a pretty
good deal right? This would probably be the one thing a wrapper could
do to earn the most $$ on any given day.

This equates to about the same amount of work/effort it takes to buy any
IP, then rent it out and maybe a bit less work than those who manage
their own.

So, to the numbers .... and yes, this is a real example of a recent
purchase. Cap growth for area last 100 years 8%, vacancy rate less than
1%, and I never plan to sell.

Purchase price all up 350,000
Gross rent 30,160
net rent 24,600
5 year IO loan 100% 22,015 (6.29%)
(these are raw figures only, depreciation not taken into account,nor is
tax as it depends on too many variables)

So after interest I am infront $2,585 pa or $50 pw plus future rent
increases, that's not a bad effort and I control the asset for life.

Now I haven't got that 20k up front hit the wrapper got but I do have
cap gain. The cap gain is $24k on this asset at end year one and is
indexed and the growth has historically been higher than inflation.

We all know we can access the cap gain and consume it tax free. Lets
say, because I am conservative, I consume only half the cap gain which
is 12k. Still not as good as the 20k the wrapper got BUT I can do it
annually forever and increase it if required.

Yes I know "that past performance is no indication/guarantee of future
........" but remember that over the last 100 years which has yielded
that average 8% cap growth we have had; 2 world wars, the depression,
several deep recessions, the oil shock, several 'police actions', many
changes in Govt and policy ............... you get the drift.

Now I forgot (well not really) to add that part of that $350,000 were
renovation costs and the new valuation has come in at $394,000. That is
a 44k cap gain in 12 weeks (I was a bit slow doing this one). And of
course that ongoing cap gain has increased to $31,500 in the first year
etc. So you see it gets even better, I can repeat the process, take my
cap gain immediately and consume it or what ever.

So, dear readers you be the judges, which is the better deal, Steve's
wraps or the buy, reno and hold? What was my IRR? Infinite. What was
CCR? Infinite. Can I do it repeatedly? Yes. Have I done this before?
Yes. Will I do it again? What do you think? And what is the one thing
I can do that will make me the most money? Sorry Steve it ain't a wrap.

Now I am no guru and this is not rocket science either. I think my plan
is really "back to basics" and you can do it too! For those of you who
are interested I'll be posting my seminar locations and dates later in
the forum ................... only joking ;^)

Steve and Geoff, I have the highest respect for both your individual
achievements, they are an inspiration to us all and for which I thank
you both. Keep posting and arguing the points of your respective
philosophies, I for one love it! ;^)

Michael Croft
(aka Michael Croft in the old forum)



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"Reply To Steve, Geoff et al. (Long)"

Reply: 2.2.1.3
From: Mike .


Hi Michael,

Steve has multiplied that $50pw over 50 times in 2 years. That's a yearly rental yield of $65,000. You would need 4 IPs @ $325,000 @5% return to produce the same amount. Who can afford to buy 4 IPs @ $325,000 in 1 year then do it again year after year?

You also said: "Now I am no guru and this is not rocket science either. I think my plan is really "back to basics" and you can do it too! For those of you who are interested I'll be posting my seminar locations and dates later in the forum ................... only joking ;^)"

Me again: I'd like to see you speak at a seminar. In fact, Why don't we put together a Forum seminar with some people like yourself, The Wife, Paul, Geoff, Les, Robert, Gee Cee Cee, Sim', Rolf, all the Michaels, Ross, Kristine, Anna et al? Now that would be a cracker of a seminar!

Regards, Mike
 
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Sim

Administrator
"Reply To Steve, Geoff et al. (Long)"

Reply: 2.2.1.3.1
From: Sim' Hampel


You wrote:

..."Why don't we put together a Forum seminar [...]? Now that would be a cracker of a seminar!"

Yeah... it's called a BBQ ;-)

 
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Set The Record Straight

Reply: 2.2.1.3.2
From: Steve McKnight


Wow,

This seems to be becoming a long post.

Anyway, I just want to say ANY real estate investment idea that earns +ve cashflow without factoring in 'so-called' tax advantages is something I'd support.

I seem to be known as the 'wrap guy', which is OK...except that I also own a block of units and about five other long term rental properties too.

I don't believe wraps are the only answer, nor to I believe my way is necessarily the best way...I'm still learning!

All I do know is that (in my opinion) buying a property that is -vely geared has one critical assumption you'll need to appreciate before you ever make any money...that's capital growth.

Personally, I'd like capital growth, but since I'm not in control of that...at least give me some sort of return for my investment from day one.

Steve McKnight
 
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Set The Record Straight

Reply: 2.2.1.3.2.1
From: Robert Forward


G'day Steve and others

Just going to make this post a wee bit longer with my 2.2c worth. (sorry but you can't get a tax invoice for the .2c either)

With buying properties for straight capital gains you will soon hit a brick wall with lenders. You know the old serviceability issue....

So you do need some high cash returning properties to be able to continue buying and getting out of the rat race. Steve has chosen that over 50 houses helps him best in getting around the issue of serviceability.

It's all a matter of what you want to do in life and how fast you want to get out of the rat race. It also comes down to the fact that there are many paths to take to get out of the rat race and each of us will take different paths. Sometimes these paths will cross over and you will meet up with others that think the same, you'll have a drink and discuss which path you both came from to get to the stage in life you are at now and then discuss what path you will follow now to get out of the rat race. Then you are both off again on your ultimate goal of wealth and exiting the rat race. Whether you are both on the same path to reach your goal or not after your drink doesn't matter. As long as you're going in the right direction.

Anyway, enough of rambling.

Cheers
Robert
 
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"Reply To Steve, Geoff et al. (Long)"

Reply: 2.2.1.3.1.1
From: Robert Forward


And that BIG BBQ is going to be in Canberra and held by The Wife herself sometime in June I think it got mentioned.

So, it's only 7 hours drive for the southerners (Melbournians) and 3 hours for us Sydneysiders to get there, but it is a long way for the locals of Brisvegas to get there. But don't despair there are cheap airfares these days.

So the BIG BBQ should be a big affair. The Wife is organising invites at some stage so send her an email and tell her you want to be there...

I'll probably get my butt kick again by TW for putting that in, but, I'm a big boy and I can handle it. hehehe

Cheers
Robert
 
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