How to break the cycle of debt
Closing the financial gap of getting out of debt and into savings and positive territory can become a downward spiral.
We’ve all been here at some point. Struggling to pay the next mortgage or rent repayment, credit card bill or living in overdraft. But how do we get out of the debt trap?
Here I share my top tips on breaking the cycle:
1) Change your mindset
Once you understand the why behind your debt, you can move forward and focus on how to break this cycle. Asking yourself questions such as was this debt out of your control? Was it a lack of planning and prioritising your spending? Or are you just disorganised and don’t keep a budget?
Once you figure out why, you can begin to change your relationship with money starting right now. While you can’t change the past, you can find new ways to better prepare a great financial future.
2) Stop “poor” spending habits
You can’t create a positive financial foundation with poor spending habits. Do you spend beyond your means? Are you an impulse purchaser?
There are also many things that you can reduce to ease financial pressure. Can you reduce your mobile phone bill? Can you find better insurance quotes? Can you cancel the gym membership you never use?
Once you can get clear on your spending habits, and make better choices, you can make the necessary changes to spend less and save more.
3) Find new income opportunities
Multiple income streams can increase your earning power and get you out of debt quicker. It can also allow you to diversify your cash flow and even save and invest while breaking free of debt. A few hundred dollars a week extra can have a massive impact on your overall personal finances.
Debt cycles don’t solve themselves, so you’re going to need to buckle down and make some changes If you are serious about breaking the cycle of debt, now is the time to invest in yourself and your financial future. The sooner you start, the less debt you’ll have to deal with.
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Our best tax time blogs
It’s that time of year again — tax time.
Investment property tax claims can be complex, but getting the most out of a claim can add thousands to your return.
Here are our top tax time resources for your end of financial year preparation:
What are your top tips for getting ready for tax time?
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Australia’s leading Positive Property HOTSPOT for 2014!
I have spoken a lot in previous blogs about the property market cycles but this week I have some really exciting news – the Pilbara Market is certainly heating up.
Here at Crawford Property Group we are constantly researching and reporting on what’s driving property markets around Australia.
The number of buyers emerging in regions like Karratha are the highest I have seen in the last 18 months with leasing enquiries picking up as well.
Watch my special report on why Karratha is a hotspot as well as a featured story on Today Tonight here.
Four property investment myths – BUSTED!
Property is one of our favourite topics of discussion. Conversations and debates over whether the market is rising or falling, what the best strategy is, where the next hot spots are and so on are endless.
So are the myths. Here are four of the most common I hear and why I think they’re bogus!
MYTH #1: You should buy your own home first
Australians have a love affair with home ownership of the owner occupying kind. To own (or, partially own) your own home is still viewed by society as one of the key milestones of success, of having it ‘sorted’.
Unfortunately, many of us are blind to the financial impact and consequences that can come with purchasing a home as your first property. The decision to own and occupy first can weaken your financial position and servicing ability with banks, and increase your cost of living. More often than not, you will also find you have to live in an area that does not tick all your boxes because you can’t afford to buy elsewhere.
In the vast majority of situations, it is going to cost you more to own your own home than to rent. If you want to accelerate wealth creation (and get that dream home quicker), the best approach is to keep your living expenses as low as possible while you establish your investment portfolio; monthly mortgage payments on your PPOR will only hinder your borrowing capacity and slow your ability to grow a portfolio. Continue renting or live with family and resist non-essential spending while you improve your financial position.
If you had the choice of purchasing your dream home in five years, or a poor quality, badly located home now – wouldn’t you wait?
MYTH #2: Invest because it will save you tax
Investing in property to save on tax is absolutely NOT the right approach to property investment in my opinion. In fact, this is not ‘investing’ at all.
Your reason for investing must be to make money – not lose it! Negative gearing is acceptable if you’re confident the average annual capital gains your investment will deliver will sufficiently outweigh what it costs you each year to hold the property.
Until you realise your capital gains by selling, or your property eventually becomes positively geared, you will actually be losing money every month as you dip into your own pocket to meet your loan payments.
Invest for returns and returns only. And if you are negative gearing, you must make sure you’re invested in a market with strong long term growth drivers.
MYTH #3: Debt is bad
‘Debt is bad’ is another stigma still prevalent in our society which hasn’t been helped by the GFC. There are many advocates of buying a home and paying it off before you out your money anywhere else. This isn’t the wrong approach, it’s just not conducive to efficient and swift wealth creation.
There’s not just one kind of debt – there’s good debt and there’s bad debt. It’s important to know the difference and how good debt – understanding how to use debt effectively and safely – can see your wealth creation goals realised a lot sooner.
What’s ‘good debt’? It’s using the power of gearing to maximise returns while staying within your financial limits. There’s a reason interest-only loans are popular with investors. You can secure a high value asset with minimum outgoings, while taking all the return.
Using equity from existing assets also allows you to build your portfolio quicker without affecting your cash flow. Multiple properties means multiple capital growth and cash flow opportunities. This means, with smart investing, you will be able to pay down the debt on your home a lot quicker than if you were relying on your salary alone.
MYTH #4: Making money from property is a sure thing
Unfortunately it’s not. This belief is driven by Australia’s historical trend – but as we all know, not everyone that has invested in property has a positive story to tell.
A rising macro market doesn’t mean all property has grown in value – some cities and towns will go up while others will go down. Even if a property has risen in value, it still doesn’t mean it has delivered an acceptable return. A market rising just a few percent each year will barely cover inflation and your costs for holding the property.
It’s quite common for investors to think that buying a centrally located property in a capital city is all that’s required to make money. As any investor in Melbourne’s inner city developments will tell you, it’s just not the case. Sure, the market will recover at some point, but it will likely be years before you have recouped your losses. You’re worse off than when you started!
Don’t ever be lazy with your market research. It is the most important step to achieving property investment success.
4 tips to change your financial life and make it stick
We’re now well into the new financial year and I’m wondering how many of us are thinking about improving our financial positions in the 2015 tax year – and how many of us are actually taking action.
What you need to do to organise your finances seems like common sense – budget, plan etc. But it’s amazing how many people just don’t do this. I believe, for the most part, that they think their dream lifestyle is just too far out of reach. Or, maybe they hope they will stumble upon some kind of quick fix (lottery win, inheritance, rich partner!).
This blog isn’t about how to create a budget or a financial plan. It’s about sharing a few simple tips that have stuck with me through the years, made the process simpler and more effective, and provided clarity during my decision making.
TIP #1: Goals are essential – but be realistic and don’t have too many!
I think one of the main reasons people don’t stick to budgets and don’t realise their goals is because their goals just aren’t realistic. Grand ideas of paying your mortgage off in 10 years while investing in three properties, taking a two month trip around Europe and buying a new car seem great. But what will be the impact of this on your daily life? Will you be unable to go out, socialise, buy new clothes etc because the budget doesn’t stretch that far?
Rather than working for you, your budget is working against you. You begin to feel contempt towards the budget because it’s depriving you of enjoyment. Before long, the budget has been forgotten and you’re back to your old habits!
Budgeting is not about deprivation. It’s not about cutting funds for social occasions, holidays and personal items altogether. It’s about structure. It’s about allowing yourself these things while ensuring you don’t spend more on them than you can afford.
Set realistic goals, and you’ll find you’re much more likely to stick to your budget.
TIP #2: Invest time in financial planning – it will be your greatest investment ever
As life seems to get busier and busier, taking time out to review and plan your finances can be a hard thing to do, regardless of whether you have the assistance of a professional. Investing this time though is one of the best investments you will ever make – and it will save you time and money in the long run. Once you have your finances in place, they will, for the most part, take care of themselves – with a yearly review.
The prospect and process of creating a budget isn’t something most people enjoy. Change your mind set about what a budget means though, and it can actually be a very exciting process. Seeing what your projected savings will be at the end of the year, how much you would have paid off your mortgage, the interest you may saved, the assets you might own… It’s truly empowering and motivating. While enlisting the help of a financial planner is highly recommended, you can get started with the basics on your own – there are some fantastic free financial planning tools on the web these days.
TIP #3: Invest simply – understand what you’re investing in and why
The investment options available today are mind-boggling. Without fully understanding what each investment offers – the pros, cons and risks – it’s easy to get caught up in the latest investment fad and market hype.
When you’re just starting out, it’s especially important to take a simple approach so that you can easily understand what you’re getting into, the risks and the potential returns. It will make it easier to align your investment options with your financial goals.
The simplicity of residential property investment is why it’s still such a popular option for retail investors. That doesn’t mean that investment diversity isn’t important – a mix of property, shares and high interest savings – is generally a sensible approach and can be tailored further depending on your appetite for risk.
As you become more informed, you can look at more complex investments – as long as they align with your goals and risk comfort level.
TIP #4: Use the power of leverage – but know your limits
One of the great advantages of property investing is the ability to benefit from leverage or gearing – that is, borrowing to invest. Put simply, you use someone else’s money (the bank’s) to increase your profit and build wealth quicker. It means earning a profit on a $500,000 property, for example, while using only $100,000 (or less) of your own funds. As you build equity in your investment, you can then use this as a line of credit to borrow to invest again, further increasing your profits.
You can also borrow to invest in shares.
In our current tax system, borrowing to invest can also reduce your tax bill, as ongoing borrowing costs (interest and fees) are tax deductible. However, using leverage simply to reduce your tax bill isn’t a recommended strategy.
Remember though, just as leveraging can increase your gains, it can also amplify your losses. If the investment drops in value, you can end up owing the bank more than your assets are worth.
Consider the risks carefully and how much you can afford to lose if things went wrong. Then set a limit on your debt exposure.
Financial planning doesn’t need to be complicated. Keep it simple (at least in the beginning), keep it realistic, and admire your progress!
Step 2 to conduct due diligence like a pro
In my last blog I discussed a simplified due diligence process to help you undertake market risk assessment in a more manageable way.
As promised, this blog will set out the due diligence process that you should follow once you have identified a potential investment property.
When get to this point, it’s important not to let your emotions take over. If you’re satisfied with your market due diligence, you may think you’re onto a winner. But failing to thoroughly investigate the property itself can have dire consequences.
No one wants to find out months into having purchased an investment that it has serious issues which could significantly affect your return. Identifying potential issues will help you avoid buying a dud or it will arm you with the ability to negotiate on purchasing terms.
While your settlement agent will be able to assist with some or all aspects of your property due diligence, it’s essential that you’re aware of what’s required. It starts with asking the vendor for a copy of the contract of sale.
The contract of sale contains information on what the vendor is offering to sell you – but it’s not always clear and the standard inclusions will vary from state to state. Below is a list of what it may or may not include. Where information is not included, you should source it for yourself, or request that the vendor provide it as a special condition of the contract. What is provided to you by the vendor should be checked for accuracy. Even if you never intend to occupy the property yourself, these factors can affect the property’s value and its tenant appeal.
Your property due diligence check list:
1. Land survey – Ideally, the sale contract will include a plan of the land, or land survey, (standard in some states) but it many cases it won’t. A land survey is particularly important if you are intending to sub-divide or develop. Lenders also often require an up to date survey.
How to get one: If you haven’t been provided with one, you can source one from the state land authority or, you may need to appoint a surveyor to undertake one. Even if you are provided with a survey, you’ll need to check that it’s consistent with the actual property and you still may need to appoint a surveyor.
What the survey will provide:
· The dimensions of the land
· The location of the property in relation to other houses and cross streets
· Identification of any easements which may permit a person (usually a government authority) to use your land for running electrical mains or drainage. Easements can affect how and where you build on that land.
· Identification of any restrictive covenants which may prevent you from using the land in a particular way such as not building above a certain height
2. Sewer plan – this shows the location of any sewer mains and the property’s connection to them. As with electrical and drainage easements, if your property contains a sewer main, it may affect your use of that land, potentially preventing you from building on it or near it.
How to get one: Your local water authority will be able to provide you with information on your water and sewerage connections and a sewer plan (for a small fee).
3. Zoning or planning certificate – Zoning information may be included in the contract for sale in the form of a zoning certificate or as part of the Certificate of Title (depending on which state you’re in). It will inform you of what the property can be used for, what planning and development regulations apply and whether it has sub division potential.
How to get one: Your state land authority or local council will be able to provide you with an official record of the property’s zoning for a fee.
4. Local planning and development documentation – in some states, the vendor will be obligated to provide information from the local council indicating whether any works are planned on adjoining properties, local roads etc which could affect the use and value of the property. It’s also worth checking with the vendor or agent if there have been any problems with the neighbours.
How to get this: The local council will be able to provide you with information pertaining to civil development plans and building approvals in your area.
5. Building inspection and termite reports – You must ensure that the building’s structure is sound and not affected by termites if the property is located in a problem area. If buying a strata property, providing this information will be the responsibility of the owners corporation.
How to get this: You may be able to request a building inspection report from the vendor using your chosen licensed builder or architect as a special condition of the contract. Alternatively, you can undertake this yourself with your chosen person.
6. A list of fittings and chattels included with the property – this might seem obvious, but sometimes what the buyer expects and what the seller is offering can vary. Items that can require clarification include carpets, blinds, certain appliances, garden sheds etc. If in any doubt, make sure you check what fixtures are and aren’t included and have these clearly stipulated in the contract.
7. Additional considerations for strata properties – If you’re looking to buy a property under a strata scheme there is some additional due diligence to be done. You’ll need to find out what strata levies you’ll be required to pay, if the financial position of the strata company is solid, and assess its ability to maintain the property and its building insurance policy.
How to get this: You’ll be able to request all this information from the strata company (owners corporation).
Once you’ve satisfied your market due diligence and property assessment criteria, then it’s time to put in your offer!
NEXT WEEK – How to negotiate like a pro and tip the odds in your favour!
Are you getting the best deal on your property purchases?
As investors, we actively seek to secure the best deal possible every time we make a purchase, don’t we?
After all, no one wants to pay more than they need to and we all want to ensure that we maximise opportunities for creating equity as quickly as possible.
So how do we find properties that will deliver us ‘instant’ equity?
And how can we master the often stressful and emotional purchase process?
It comes down to a combination of knowing how to identify properties with value-adding features and honing your negotiation skills.
Three questions to ask when identifying your next purchase:
Does the property have subdivision potential or is it in line for a re-zoning to higher density?
If yes, then you could have found yourself a gem. Sub-dividing and then selling or developing the additional lots can be very lucrative for the savvy investor. Developing property requires considerable further knowledge and skill so make sure you are well prepared if you take it on.
Is the property a diamond in the rough?
Many buyers can be put off by unattractive appearances. Often properties that don’t present pristinely or need a little TLC go un-noticed in the market. If the cosmetic problems are easily rectifiable, then a small investment into improving aesthetics could deliver a significant return.
Does the property have a below-market lease in place?
Often owners will accept lease terms below market value to secure a high quality corporate tenant or long term lease. This can impact the value of the property’s re-sale price based on achievable yield in some locations. Buying a property with a below-market lease in place is quite often a great way to secure a good buy. You may have to ride out a number of years at a lower return, however once the lease expires, the rate can return back to market and often instant equity is achieved in the property.
When you’re happy that the property offers some ‘instant’ equity potential, you need to consider the maximum amount you would be willing to pay for it and any opportunities that may enable you to lower the price.
Mastering the art of negotiation:
Do your homework
Research the market to gauge the amount of buyer interest, the time the property has been on market and what similar properties in the area have sold for in recent months. This will enable you to establish what you believe the market value of the property to be.
Find out more about the seller. Why are they selling? Is it an urgent sale? Has the price of the property been reduced during its time on the market? What interest has there been? This information will give you a great advantage ahead of entering negotiations.
Often the price is not the only motivator in property negotiations. Many sellers may also be motived by other needs including a swift or unconditional settlement. Ask what other terms may suit the sellers – being flexible to their additional needs could help you negotiate a better price.
Leave emotion at the door
When it comes time to make your offer, keep a poker face – don’t reveal your position or plans. Let the seller know that although this property may tick many boxes, you are considering a number of property. Play it cool and you’ll find yourself securing some great buys.
The dos and don’ts of buying in a boom town
‘Boom towns’ across Australia have delivered many property investors some phenomenal returns in recent times.
In very short periods, rents and house values in boom areas can skyrocket to unbelievable levels. They offer huge opportunities to fast track wealth creation – but they are not for the ill informed and under-prepared. When it comes to the rapid-growth boom towns, what goes up usually comes down.
To make money and avoid getting burnt, you need to know how to read them.
DO buy a property that’s desirable to the local leasing market
Every area or market has its own leasing demographic – certain demographics want certain types of properties. A boom town is no different.
Tapping into the corporate leasing market is what most investors aim for in boom towns. Corporate leases usually mean maximum rent, longer leases and quality tenants, helping to reduce risk. But investors shouldn’t ignore the private market either. Corporate demand for rentals can rise and fall in line with project activity. The resident population is more stable. The more (quality) demographics your property appeals to, the greater pool of potential tenants. Make sure the property you’re investing in will appeal to more than one group.
The best way to determine whether a property you’re considering buying will appeal to the right tenants is to speak to a local agent. They should be able to tell you the locations, types, styles and configurations that are most in demand. They will also tell you the rent you could expect to receive from these types of properties.
Ideally, you want to select a property that will perform well in both boom and quiet market periods, offering extra security on your return during these periods.
It’s important to remember that almost anything will lease for a good price during a boom period. When the market starts to settle, you want to ensure your property will still be desirable to the RIGHT tenants.
DO aim for a secure lease
Many properties for sale in boom areas will come with leases in place. This is what you should aim for. Purchasing an investment with a secure, medium to long term corporate lease minimises vacancy periods and new tenant fees, and ensures quality tenants.
Be careful not pay too much for a property just because if offers an attractive lease. Compare the property and rental rates against other similar properties in the area to ascertain its comparable value.
Don’t get caught up in the hype!
When a boom town starts to run it generally receives a high amount of media exposure. Very quickly, everyone wants a piece of the action. Investors flood in and the market rapidly turns into a seller’s paradise. When this happens, it’s not uncommon for investors to bid well over the asking price to secure a property, desperate to not miss out.
Avoid getting caught up in the hype. Make an informed, well-researched decision. This applies to your chosen area, property type and timing. Ensure your finances are in order. When you’re ready to take action on your selected property, put a condition on your offer. Limit the consideration period to that day only. This will place urgency on your offer and get the seller’s immediate attention.
Don’t buy in at the market peak
Short term boom towns generally have one strong market run which typically lasts from three months to two years. Long term boom towns offer these same growth periods, however growth cycles will usually come around every three to four years. Long term boom towns offer multiple growth opportunities for both the short and long term investor.
The key to ensuring you’re not buying in at the top of a cycle (which will drastically reduce your chances of a return) is to understand how to read the market. If prices in the town have been increasing rapidly for 12 consecutive months, chances are the end of the growth period is imminent for that cycle. If the town has gone through a period of flat or negative growth over the previous 12 – 24 months, it’s likely that a long-term boom town may be ready for its next project-based upswing. Buying in at this point will reward you with capital and rental growth as the market recovers.
Short-term boom towns will continue to appear in Australia, providing opportunities for nimble investors to make a quick return if they get their timing right.
The established hubs, with their strengthening industry and continued civil investment, will experience ongoing growth cycles and will continue to reward those with a buy and hold strategy.
Designing your personal property investment strategy to reach your goals
Is your current property investment strategy working for you? Or more fundamentally, do you actually have a strategy?
If the answer to either of these is no, then it’s time to take control of your investment journey to ensure you reach your goals.
The below points are key to ensuring your strategy is tailored to your personal circumstances and desired outcomes.
1. Write down your goals. Consider what you would like property investing to achieve for you and the timeframe you want to achieve it in – but be realistic. Do you want to retire earlier, enjoy more time away, pay off your mortgage sooner or purchase a new family home?
2. Which type of property investment best suits these goals? Looking at your goals, what do you need most from your property investment? Growth, cash flow, tax relief? Do you require another form of revenue immediately to top up your salary so you can enjoy a better lifestyle, work less and retire earlier OR are you currently positioned well with cashflow and prefer a capital city investment that will slowly appreciate and provide positive cashflow over time?
While it’s certainly possible for an investment to achieve both – as many regional areas have proved over the last several years – in theory, areas with high rental yield typically have slower capital growth and vice versa.
3. Do a loan comparison and find out what you can afford. It’s wise to align yourself with a mortgage broker that specialises in investment property but arming yourself with loan product and comparison information will still be invaluable. Understanding what your loan options are and identifying the best product for your needs will empower you to secure the best deal.
When you have a clear idea of your borrowing capacity and payment plan, you can then start to identify potential investments.
4. Pick your next purchase in line with your goals. As well as the mortgage, you need to consider the additional expenses involved with holding a property as this may affect the type of properties you can afford. Additional expenses can include agent’s fees, if you expect to have the property professionally managed, maintenance, strata and insurance. A new build typically ensures minimum maintenance, while a well planned reno could deliver instant equity on an older home. Think about whether a property that requires minimal managing would suit you best or if you’re prepared to put the time and effort into a reno project.
5. Identify where to invest. This is the most challenging part. Everyone will have different opinions on where the next boom area is. My recommendation is don’t follow the masses! Do the research and find your own hotspot. The key is to pinpoint areas where demand is on the verge of outstripping supply. Don’t spend too much time analysing where the median house price is going up as this can be very deceiving. How to conduct your research is explained in more detail in one of my previous blogs here.
6. Create your shortlist of properties and run the numbers. Once you’ve identified promising areas, look at what properties are available that fit your profile and create a shortlist. You’ll then need to calculate the economics of each property weighing up the holding costs versus the rental income and projected growth. There are some excellent spreadsheet templates to be found on the web that will help you calculate and compare the costs and returns quite easily.
7. Determine how much you want to pay. The only real way to get an accurate notion of the market value of a property is to look at what other similar houses in the area have recently sold for.
Then it’s time to brush up on your negotiation skills and contact the agent!
Repeat this process for each property you buy and try to diversify the markets you’re investing in to reduce risk. And remember, professional advisors are there to support you every step of the way if you need them.
With each property the process will become easier, your knowledge more extensive and you will be one step closer to achieving your goals!