Why you must adopt a long-term property investment mindset

At the start of every year, we always receive a flurry of enquiries from potential clients keen to invest this year. Amongst those enquiries are always a cohort of people who want to “get rich quick” supposedly using property as the wealth creation vehicle.
It doesn’t take Einstein to realise that they never engage our services. That’s because our business has always been about creating real estate wealth over the medium- to long-term. We know the value of a long-term property investment strategy.

Often, they get annoyed when we try to educate them about the realities of successful real estate investment – specifically that it takes time for properties to grow in value and for wealth to be created.

We tell them that even when investing in locations with strong market fundaments now and into the future, it is unlikely that anyone is going to become a property millionaire inside a decade.

Short-term investment thinking

Many of these people are fixated on what the media is saying certain markets are doing right now.

They falsely believe that if they buy any old property in a location that may have produced solid growth over recent years, then the money train is on its way.

Little do they know, literally, that the train has already past their station and they didn’t jump on board soon enough to ride the capital growth journey.

It is common in real estate for some people to have short-term investment mindsets. Smart investors realise that a long term property investment is often the most successful.

Unfortunately, with such a point of view, these people often speculate in risky markets, hoping that the returns will keep flowing forever and a day.

What often happens is they’re left with a property that has fallen in value, as well as one they can’t rent out either.

Over history, this has happened plenty of times, and especially in one-industry locations such as mining towns.

About a decade ago, the resources sector was booming, and property prices in those locations were, too, albeit temporarily.

Speculative property investors piled into regions that were heavily reliant on the mining industry – today they are paying the price for their poor decision-making.

Consider Gladstone in Queensland where median house prices have fallen over 30 per cent over the past five years.

Gladstone change in median value

 

Some suburbs have seen prices plunge even further, with Calliope recording a massive price drop of 42 per cent and West Gladstone down 43.7 per cent over the same period.

On top of that, about four years ago, residential vacancy rates in Gladstone hit an eye-watering 9.9 per cent.

So, those investors who were enticed by unrealistic future house price growth were soon left wondering where it all went wrong – and often in terrible financial shape indeed.


Long-term property investment is better for tomorrow

Smart investors, on the other hand, bought in locations that had sound fundamentals that would continue to underpin their property markets in the future.

Today, their portfolios have increased equity as well as the potential for passive income in the near future.

They understood that real estate investment is never about making a stab in the dark and hoping for the best.

They worked with experts and over time invested in the best locations for the future.

One thing that they also always did was adopt of a long-term mindset, which meant they paid little notice of the short-term vagaries of market conditions.

Even when prices temporarily flat-lined or softened, they weren’t worried, because they understood the most important thing was the end result – not what happened one or two years amongst decades of property ownership.

A case in point is Sydney and Melbourne, where prices softened for a time recently, but rebounded by the end of last year to both post 5.3 per cent median dwelling value growth.

I guess the point I’m trying to make is that superior investment locations will always have temporary ups and downs.

One thing that never changes, however, are their market and economic fundamentals, which will underpin property price performance over the many years ahead.

The ins and outs of SMSF property investment

Over the past decade, one property investment strategy has come into its own more than almost anything else. That is SMSF property investment.

With superannuation balances starting to show solid balances of hundreds of thousands of dollars, more and more people are deciding to take responsibility for the future growth of their super accounts.

They are doing this by establishing a Self-Managed Superannuation Fund, or SMSF, and then borrowing money to invest in property.

Using your super fund as the purchasing entity can allow investors to increase their portfolios, but it does come with a number of rules that must be followed as well as additional fees and charges.

Buying in a SMSF             

                     
Investing in property using a SMSF involves using something called Limited Recourse Borrowing Arrangements (LRBA), which means that the super fund is the borrower.

These types of property loans are more complex and costly than a standard loan, so it’s vital to ensure you have the funds in your SMSF for the deposit as well as the ongoing repayments.

A LRBA usually requires a larger deposit, such as 20 or even 30 per cent of the property’s purchase price, and the loan often has higher interest rates as well.

On top of that, all property costs – such as rates, repairs and lease renewals – must be financed from SMSF funds.

Other rules include not being able to renovate the property substantially until the loan has been paid off and not being able to negatively gear it against your personal tax rate as it is owned by the fund and not you personally.

However, SMSF trustees can claim depreciation on the property, using the standard 15 per cent super fund tax rate.

A SMSF residential property investment also has a number of property rules that must be followed such as:

  • It must pass the “sole purpose test”, meaning it is maintained for the purpose of retirement benefits for its SMSF members.
  • It cannot be lived in by a person or entity related to the SMSF member.
  • It cannot be bought from a related party.
  • It cannot be rented by a person or entity related to a fund member.

SMSFs can buy commercial properties, which have different rules again, such as being able to be leased by a business entity of a SMSF member, as long as the commercial market rent is paid.

 

YPYW Client SMSF Property Purchase Example –

Purchase Price: $320,000
Weekly rent: $360 per week
Rental yield: 6%
Type of property: Residential house, 4 bedroom, 2 bathroom, 2 car garage with 2 living areas on a 600 sqm block. 2014 build with low maintenance.

 

Property selection vital

With more rules and more costs, it’s no surprise that property selection is vital for anyone considering buying in their SMSF.

As well as having a minimum fund balance of at least $150,000, there should be enough cash flow in the fund to cover all property-related expenses.

This cash flow can come from super contributions as well as rents, which is why choosing a property that has solid rental returns is important.

Savvy investors ensure they buy properties that not only have solid capital growth prospects but are also ones that pay for themselves almost from the outset.

This is also paramount because borrowing money to buy property in your SMSF requires principal and interest repayments to be repaid out of the fund.

Unlike residential investment, you can’t “top up” the super balance once contributions have hit the legislated limit.

Investing in property using a SMSF can be a sound wealth creation strategy.

However, it is not something that should be attempted without expert advice and guidance given the additional rules and costs.

You can learn more about investing in property using a Self-Managed Super Fund here.

What young people need to understand about a trust

If I had a dollar for every young person that has said to me, “I need to set up a trust”, I would probably have enough money for a deposit on another investment property!

Seriously, though, the problem with such a statement is that most people don’t understand why they think they need one in the first place.

Let me explain.

Tax savings not enough

For young people especially, owning property in a trust for supposed tax or “protection” benefits doesn’t necessarily make it a good idea.

Firstly, most young people – in fact, most people – aren’t employed in a profession where they are likely to be sued, such as in the medical field, and, therefore, they need to protect their assets from litigation.

In fact, age is a big factor to consider because young people generally don’t have enough wealth created to make the expense of operating a trust worthwhile.

One of the main reasons that people have a “rose-coloured glasses” view of trusts is because there can be tax concessions such as reduced land and income tax.

Also, income earned from assets held within trusts can be distributed to beneficiaries on low incomes who have reduced tax thresholds.

The thing is, unless you already own a substantial portfolio, successful business, or a brood of children, opting to own property in a trust while you’re young doesn’t make much financial sense if you ask me.

That’s because the Australian Tax Office is well aware that people sometimes use trusts to potentially reduce their tax liabilities so there a number of rules and regulations that result in high operational costs.

Over the years, the ability to distribute income to children, for example, has been tightened by the ATO so that the maximum amount that can be paid to minors tax-free is now just $416, with the remainder taxed at a staggering 45 per cent.

A time and a place for trusts

Personally, I don’t have any of my portfolio in a trust, because I am only 29, plus Sophie and I are yet to have children.

In the future, as our business and family grow, then we will likely consider trusts so that our company is legally protected but also our children can benefit from our endeavours in the years to come.

Ideally, with a multimillion-dollar portfolio, we will be able distribute income to whichever one of us stays at home with the children when they are young, which will be taxed at marginal rates because of that person’s low income.

When our children are older and perhaps at university, then they can also benefit, with the income distributed via the trust helping to support them during their studies.

Also, much further down the line, a trust can be used to protect a family’s intergenerational wealth when it comes to succession planning.

Say, for argument’s sake, our future daughter or son marries but then divorces.

Any property that is held in our family trust cannot form part of a financial settlement if one of our hypothetical children’s marriages doesn’t work out.

As you can see, though, I am talking about things that, as a young person, have yet to become a reality.

Sure, at some point in the future, when our ages start with a “three” or perhaps a “four”, then we will consider asset protection measures such as trusts.

Until then, though, I would rather spend any extra money we have on building our wealth to such a point that we need a trust – rather than just merely wanting one for reasons that most people don’t fully understand.

Why now is the hour to invest

The Federal Budget has now been released and in it came plenty of handouts but not many new housing policies as such.

Now, with the Federal Election still a few weeks away that could change, but as I see it investors are perfectly placed to buy now.

Before you say, “Daniel, of course you would think that”, just hear me out.

Let’s consider the major policies of the two main political parties.

Economic stimulation

As was sung from the roof-tops last night, the Federal Budget will soon be back in black for the first time in more than a decade.

It appears the LNP has done its job, like it often does, and got our nation’s accounts back in order, which is no mean feat given the GFC was only a little over a decade ago.

Now that there is seemingly some extra cash floating around, they have announced $100 billion in major infrastructure projects over the next decade, which will stimulate the economy generally.

The federal budget also revealed tax cuts for middle income earners, who usually miss out on anything much, will result in a kickstart in our retail sector after 1 July.

Creating more job opportunities – such as the promise of 80,000 new apprenticeships – generally will also see our economy start to strengthen over the short- to medium-term.

Another solid economic policy from the federal budget is the reduction in the small business company tax rate to 25 per cent, which enables business owners to expand and hire more staff.

Ditto, with the increase to the small business asset write-off to $30,000, which will incentivize businesses to spend money on a variety of products.

All in all, the LNP is heading to the election with an economy that is in good shape as well as a number of policies to stimulate growth, both of which work to strengthen property markets.

Negative gearing to go 

On the other hand, the ALP maybe pinning its hopes on the fact that it is ahead in the polls and therefore probably already have one foot in The Lodge.

However, most of its policies also aim to stimulate the economy and fund essential services such as health and aged care, however, its point of difference is when it comes to housing.

As I written about before, the ALP has announced a policy that will restrict negative gearing to new properties as well as slash the Capital Gains Tax discount from 50 per cent to 25 per cent.

Last week, they announced that, should they win office, they will implement the policy from 1 January 2020.

They have previously indicated that the policy will be grandfathered, meaning current investors will not be impacted.

In fact, given we have a start date of 1 January next year, that means that investors who buy before that date will not affected.

Now that we have the proposed start date, savvy investors are acting now to ensure they are included in the grandfathering provision before the start of next year.

What is helping them do so is the renewed push for investment loans from lenders now that the banking royal commission is over and done with.

While sophisticated investors understand that negative gearing is not a strategy but a moment in time, it is still worth their while to utilise tax deductions if they can.

They know that after a few years their properties will be neutrally or positively geared, however, if they have the ability to offset some of the costs during the first few years of ownership they might as well.

From 1 January next year, unless investors buy new properties – and most smart ones don’t – then that taxation benefit will no longer be around.

So, regardless of your political persuasion, that is why I believe now is the hour to invest.

The economy looks set to strengthen under LNP, while negative gearing will also be axed under the ALP.

Either way, investors currently have the opportunity to make the most of the market, and the most of beneficial taxation policies.

Ignore the Negative Gearing Noise

Ignore the Negative Gearing Noise

There’s a lot of nervousness among property investors at the moment.

I’m not talking about the softening in property prices either, because the savvy ones know that you should act while others are hesitating.

I’m talking about the proposed scrapping of negative gearing provisions for existing property that Labor will seemingly make a reality should they win the next election in May.

A lot of would-be investors I’m speaking to are worried, but I’m here to tell you to ignore all of the noise about negative gearing.

It doesn’t matter. It shouldn’t concern you. And really, in the scheme of things, it won’t impact you.

Here’s why.

 

It’s not a strategy for you

Negative gearing is a moment in time.

It provides some modest taxation benefits for the short-term, allowing you to offset the ongoing income losses of having a rental property that costs you more than it brings in.

Let’s break that down.

Your investment loses you money, and so you get a bit of a leg-up from the Tax Man.

That doesn’t sound like a fantastic investment to me.

It sounds like a short-sighted gamble where you’re banking on a hope that what you’ve bought will increase enough in value to make up for the money you’ve had to pour into it.

It means you’re buying speculatively.

You’re essentially paying to secure the investment, potentially haemorrhaging money while you’re holding it, and praying that you can sell it on to someone else for more than you paid.

The smarter thing to do is to think long-term.

That’s what sophisticated investors do.

They make smart buying decisions and hold – preferably as part of a 15-year plan.

Part of that smart buying is picking an investment that doesn’t rely on negative gearing.

Most well-bought investment properties are neutral within three to five years, and preferably positive not long after that.

Educated investors hold their ground and focus on the big picture.

They don’t roll the dice and hope for the best.

This isn’t the pokies.

They work with experts like buyer’s agents to source the best deals with the absolute best prospects that can deliver solid growth.

They have a strategy to maximise their returns without having to speculate.

 

The plan doesn’t work anyway

Labor hopes its scrapping of negative gearing will improve housing affordability.

They feel that by giving “tax breaks” to property investors, it stimulates activity and drives up house prices.

It’s not a new idea.

In fact, this is simply history repeating – one from long enough ago that many seem to have forgotten how it played out.

In 1985, the newly minted Hawke Labor Government abolished negative gearing on rental properties.

They, too, believed it would aide housing affordability by evening the playing field, so owner-occupiers could get into the market at the expense of landlords.

You know what happened? Rents went up. With less rental stock in the market, supply dwindled while demand remained high and prices increased.

At the same time, the promised relaxing of house prices didn’t really eventuate.

Interest rates were also in double digits, which made getting a mortgage and paying it off an unrealistic prospect for first homebuyers.

At the same time, they had less money to save because they were forking out more in rent.

Negative gearing was reinstated pretty quickly.

 

Change will help the market

Let’s say Labor wins the election, which most polling indicates is a strong reality.

They scrap negative gearing – except for investors buying brand new property; part of the strategy to seemingly boost housing supply.

You’re a savvy, strategic-thinking property investor who focuses on the long-term, remember? So, it doesn’t really matter to you.

But here’s what would likely happen.

Rents will increase. We know from basic economics of supply and demand that this is likely to happen.

Supply is already tight, with new housing starts falling because big developers are nervous about softer prices, the global economy and lending restrictions.

Should mum and dad landlords who need negative gearing decide that it’s not worth their while and sell up, more supply will be ripped out.

Rental demand remains extremely thanks to population growth and low levels of first-time buyers in the market.

And, so, rental prices will go up.

For strategic investors, fewer first-time buyers means less competition at the affordable end of the market – the price pocket that deliver now-higher rents will be attractive prospects.

Given that Labor’s plan means negative gearing will only apply to brand-new properties, we’re likely to see a lock of speculators out and about.

They’ll target brand new builds, which will be overpriced as a result.

Those investors with their focus elsewhere, on properties with fairly ordinary investment fundamentals, will again lower competition among savvy buyers like yourself.

You’ll be away from the feeding frenzy, targeting well-located property with good capital growth prospects for the long-term.

 

We could see a mini boom

The likely Labor election result will see a lot of change.

There will be a change in regime in Canberra with the focus shifting away a bit from getting the Budget back to surplus and towards investing in big-ticket infrastructure, health and education.

There will be an uptick in consumer confidence. Major sectors like construction will likely also enjoy renewed activity.

And, I predict, there will be a rush of investors keen to take advantage of the grandfathering clause in the negative gearing changes.

They will buy while they can, to lock in the tax break for established properties – not that negative gearing is their motivation, but it does help in the first few years of owning an investment property.

This may drive a short mini property boom, helping to kick along the recovery phase for markets like Sydney and Melbourne where prices have fallen but, in some cases, appear to be beginning to plateau.

So, let’s sum up.

If you’re savvy, negative gearing changes won’t matter to you, but they will see rents increase and your competition for good investment opportunities dry up.

And the prospect of the changes between now and then will likely spark a rush of activity that will help markets bounce back.

All that’s left for you to do is keep your eye on the long-term prize, buy well now, and position yourself for the best returns in the years ahead.

 

free property investment ebook

Capital growth vs yield

Why Your Strategy Counts


When it comes to building a portfolio, each individual  has different goals

When it comes to building a portfolio, each individual has different goals. For me it was about creating financial freedom so I can live life on my own terms – you may want an early retirement or create passive income in case you lose your job. 

It’s your end goal that’s going to determine your strategy – whether you take the fast track with a high performance approach or build your portfolio at a slower pace.

When you’re building a high performance property portfolio, you need to think differently to achieve your goals.

Some investors will tell you rental yield is the most important consideration when buying a property, but I’ve learned otherwise. 

A well balanced and diversified portfolio of capital growth and cash-flow is far and above what’s going to help build your portfolio – and do so quickly.

As your properties grow in value, you’re able to tap into their equity and buy more houses at a much faster pace.

This accelerates your portfolio into high performance mode, just as I did with my own property journey. 

It’s what enabled me to build a $4m portfolio on an average wage, without being held back by a shortage of funds.

Seeking higher rental yields in favour of capital growth is a mistake most new investors make. They look for immediate return on investment, and do not do the correct research to identify the growth drivers of that particular area.

Rental yields are important in that they enable you to hold your properties, but shouldn’t be the only reason to buy.

Learn more about our investing strategies by downloading our free ebook ‘0-3.5 million in 6 years’ here

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High-Performance Property Investment in 5 Simple Steps

In this free guide, you will learn how to Implement the same strategies that led me to build a $3.5 million dollar portfolio in less than six years. – Daniel Walsh