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Ben Kingsley Blog post by Ben Kingsley

Key steps to work out the best Property Investment Strategy for you

Thank you very much Paul. Good morning everybody. Thank you for getting up so early on a Saturday morning to hear this presentation. Hopefully I won’t disappoint you.

We’ve got a lot to get through this morning. The first section of the presentation just talks about the frameworks that we use in terms of putting the big rocks in the jar as I like to call it and then the second part is we’re going to do a live demonstration in terms of looking at how we measure cash flows and then how we put property investment strategies around the household’s wealth position.

Now I’ve got a quick question or a raise of hands. Who knows when they’re going to retire? Set the date yet? Who knows how much they’re going to have in retirement? Very good. One, and that’s usually about the statistics. So it’s about one in a hundred where people who plan to become what they plan to become and they actually measured it out and that’s what I’m going to show you how to do today.

So let’s get into it. What I want to talk about firstly is PIPA, the Property Investment Professionals of Australia. I’m the chair of that association. Then we’re going to go through the step by step process and then finally we will do that live demonstration and then hopefully if we’ve got time for some Q and A, we will get some questions out as well. I am at the stand at the start of the expo.

So let’s get into it. Firstly, my financial disclaimer. Don’t take this information off and try and do it yourself without seeking professional guidance from qualified and licensed professionals. That’s really important.

So PIPA first and foremost, our industry is unregulated. So what that means is anyone can put on a nice suit and come and talk to you about property investment and aren’t regulated to do so. They may not even be qualified to do so or your mortgage broker might give you great property investment advice, so-called great property investment advice.

So we’re passionate about making sure that if you are looking to use professionals, that you use members of the association. Why do you need to do that? It’s because they are qualified in their profession. So the accountants are actually tax agents. The financial planners are licensed financial planners. The mortgage brokers are licensed mortgage brokers. The real estate agents are licensed real estate agents. The buyers’ agents are licensed real estate agents, et cetera, et cetera.

So it’s really important that you understand that you should be getting your specific advice about certain things from qualified professionals other than someone who tries to be all things and has an opinion on certain things.

The second point is with an unregulated industry, disclosure of fees is a really important message. So if you’re dealing with someone and they’re getting paid by the developer or paid by some other party, isn’t it important that you actually know how much they’re getting paid? So there are no hidden fees or kickbacks and so forth.

So it’s really important that they would fully disclose. Their members of the association must fully disclose how they’re paid and that’s again an important message for you. So you can make an informed decision as to whether they’re working in your best interest or their own best interest in terms of how much they’re taking of the clip.

Finally, we would like to think that when you’re dealing with PIPA members, you’re dealing with professionals in our industry.

Now a little bit about myself. I’m a qualified property investment adviser. So in my business, I give the property investment advice. OK? So when people come and see me and my business, I build financial plans using property investment. OK? And that’s exactly what I do.

Here are some stats. So since 2010, I’ve built for 300 clients, over 180 plans. I’ve advised on the purchase of 516 investment properties to the market value of about $238 million. So that’s all I do in the business. People come in and I build exactly what I’m about to talk to you today. OK? So that’s an important message that I wanted to share with you. This is all I do. So let’s get into it.

How we go about it first and foremost is learning about you. What’s important to you? What does your story look like? Because guess what. Everyone here today has a different story, has different incomes, have different goals, want to retire earlier, happy to retire later, want a certain amount of income in retirement. Everybody is different. It could be household-combined. It could be a single household.

So the message from me to you is surely someone who’s giving you a one-size-fits-all solution, is that the most appropriate for you? Then the next person is coming along and they’re offering the same recommendations. So just a little tip for you that you want to try and make sure that the solution is tailored to you and to do that, they need to understand a lot more about you than just trying to sell your property.

So what they want to understand is your income. They want to understand your expenditure. They want to understand the time that we’ve got to invest and the target, so how much we actually want to get to, because in some cases, it might be a hard conversation but your expectations may be a bit unrealistic. OK?

So the adviser needs to set some of those expectations as well. But also encourage people and understand their potential. So it’s really important we understand that.

Finally, how much risk do you want to take? How active? How much knowledge do you bring to the table versus how much knowledge you need to get from your professionals to help you on your journey?

[Watch: What are the Risk of Investing in Residential Property?]

So that’s the first thing I do in understanding that. The second thing is I then assess your potential. So I’m looking at ways in which – how you want to operate. Do you want to do renovations? Do you want to basically just be a passive investor and just let the investments do their thing? Working out the time frames that we’ve got. All those things are just coming together.

So I’m starting to put the pieces of the puzzle together in working with my clients to get a solution that’s perfect for them.

Then finally the step three is, “OK, what type of returns do we need from our properties?” Now if I ask most people when they’re looking to invest, the first thing they say, “I just want the best returns.” OK?

Now what are the best returns? What does that mean? What does that mean? Well, I just want the asset to do the best it can do. But guess what. In property just like in shares and in other types of investments, certain properties deliver certain types of returns. Some properties deliver capital growth. Some properties deliver more rental yield. So it’s important for you to understand that in terms of the types of properties that you need to put into your portfolio and when you need to put them into your portfolio as opposed to just going, “I just want the best return.”

I mean you wouldn’t take this approach to shares. Well, you shouldn’t take this approach to shares or any type of investing. You should know the types of returns that you want to expect from that property. In my seat, I actually tell you the types of returns that we’re targeting. In the live demonstration shortly, I’m going to do exactly that. I’m going to show you how you work that out.

This is an important slide and I really want to spend a couple of moments on this slide. So let’s unpack it.

Over here, we’ve got a capital growth strategy and over here we’ve got a yield strategy. Now the capital growth strategy, this is the value and you can see the blue line here. I mean if you get a great capital growth property, the sky is the limit in terms of the value that it delivers.

But interestingly enough, the correlation between the rental income that you get from that particular property, and this is your rental income over here, is different. The gap starts to widen and that’s the power of compounding return.

[Read: The Impact of Growth vs Yield]

Now in addition – different to that is obviously a slower growth strategy but chasing higher rental income. OK? What you see here is the correlation is tighter but interestingly enough, there’s this intersection through here that the capital growth property will ultimately still deliver you a bigger cash return if it performs well.

But the important message when you’re chasing a growth property is you normally need to bring more money to the table. So you need to use more of your own cash in that conversation.

Some people might not have that cash. They might be just starting their family and so we might have to chase yield, because still any type of return is better than no return at all. OK?

So some people have to chase yield first. Some people can chase growth and then as you build a portfolio, it might be a combination of both strategies. OK?

So that’s a really important message for people to sort of say, “If my surpluses are only $300 a month, I can’t go and chase a $700,000 property and only get a four percent yield on that, because the shortfall would be too big and that would send my household broke.” OK?

So that’s the first message. So in doing that, this is the science that we use in our business around understanding where you get your returns from. OK? The message here is very clear. In the research that we’ve undertaken, 80 percent. Now this is a default position. Eighty percent of your return comes from the area you choose and only 20 percent comes from the property. That’s default and I will explain to you more.

So think about it logically. I’m going to use an example. Just in the l ate 1880s, Castlemaine Gold, boom rush, very, very successful; Ballarat the same. And you could go into those communities and you can see magnificent stately homes, magnificent, handcrafted, beautiful homes.

If I was to pick that home up in Castlemaine and I was to drop that into Hawthorne, what would be the value of that particular property in Hawthorne? Three to five million dollars? Pick it back up and put it in Castlemaine and it’s 900 to maybe 1.1 mill.

Now why is that? Because if it’s all about the asset, why isn’t that property doing exactly the same? Because it was built in the same era. So it can’t just be about the property. It has got to be about the location primarily.

So we start off at this point. Eighty percent of the lifting is coming from the area, 20 percent from the property. Now guess what. When you do get a classic property like that, which has intrinsic value, it’s turned into a rare item and it’s turned into something that has really strong status and an emotional appeal and what we call owner-occupier appeal. Then that moves the conversation and now you might get 40 percent out of the property but you still get the bulk of your return out of the area, suburb that you buy in. All right?

So in some cases, you can buy an ugly duckling or a reliable and durable property in a great location and you will get a better return than what you would in terms of buying a house five or six suburbs away. Does that make sense? Because in most cases, people want to live in an area where they get all of the things that are important to them. So we call it the study of human interest and human behaviour, because at the end of the day, the marketplace is controlled by owner-occupiers. They control 70 percent of the Australian property market. Investors, we’re down here at 30 percent. So they set the price and they buy on emotion, because they’re sitting there saying, “Honey, if you’re not getting this property, I love this property. If we don’t buy this property, so they keep putting their hand up at auction, and keep pushing the value higher.”

[Watch: Tips for Buying at Auction – Part 1]

That underpins the value because if we lose them, our investor is going to just stand there and pay the money? No, they’re not. They’re not going to go anywhere near the property and values are going to drop.

So you need that underlying demand and that underlying appeal and that is supported primarily by incomes and people’s desire to live in a certain location.

So you need to be spending more time in trying to understand the psyche of people who are looking to buy in an area and that underlying demand and appeal, and you will get great capital growth returns.

So that’s a big message. So in our business, we put those two together and these are the strategies we use. So we’re looking at them here. We have the area strategy first to get out and that’s a growth story. We also have an area strategy for yield and then we have property strategies for growth and we have property strategies for yield.

So when we’re building out these plans, our clients know what they need to be chasing. OK? From a capital growth and yield perspective and the types of properties and the types of areas they need to be looking for. All right?

So that’s the information that you need so you can get your road map into the future. So putting all that together, that’s how I build a property portfolio plan and this takes anything from 10 to 30 hours of work with a client and also doing the backend work, in terms of being able to build a road map for your retirement. Guess what. The best part is it’s set with the end goal in mind and then we reverse engineer it. So we work out exactly what target you’re looking for and then we do the cash flow models to work that out and that’s exactly what I’m going to show you right now with this case study.

So let’s look at this particular client that want a $100,000 passive income. They’re a mid-30s couple with kids, two kids. They’ve got a household income of 130 and they’re looking at their – we looked at their cash flows and their income and they’ve got after monthly tax cash flow of $8580 and then their bill payments are $2100 and their living and lifestyle and discretionary spending is 2750. So ultimately they’ve got a mortgage as well, 2900. So their total expenditure is 7810. That leaves them with a surplus of $770.

Now that’s right now. But guess what. Their two kids are currently in childcare. So they’re going to go to primary school. Then what type of schooling are we going to give for them? So their future expenditure is going to change, isn’t it? They’re going to have situations where in the future, their expenditure is going to go up and potentially come down as their kids leave their home.

So the property investment strategy needs to be designed that we don’t buy them something that in two or three years they have to sell, because they’ve got no money left. They might want to have a third child as well and then all of a sudden they’re down to one income for a period of time. So it’s important and so many people lose money at getting in property with a one or a two-year or a three-year strategy.

Property is not a one or a two or three-year strategy for investing. It might be for speculating and if you want to speculate in property, all the best. But not on my watch. I’m here to make you money as an adviser.

So let’s go into that example. Karen, can we just switch over to the example please? Thank you very much. So just like any decent financial adviser, the first thing we start with is a fact find and it’s a financial fact find. It’s about getting to know you, that income, what’s coming through. How old are the kids? What are the plans with the family? There’s the income, et cetera, et cetera. Their bills, the savings, the assets, their superannuation. Do you have any existing investment properties or are we building from scratch? What type of mortgage do we have? Do we have any car loans? What sort of credit card debt?

This is a picture of your household cashflow. It’s critical if you want to make smart decisions about how you want to move your money and create wealth out of property.

So we work through all of this. Bill payments, spending, and then we get that outcome. So you can see here I was talking about that $770 a month or $9200 a year. That’s what we know today. But in the future, things change. So what are we looking at in the future? Well, we’re going to have to replace our car. It’s going to run into the ground at some point. This couple wanted to take their family to Disneyland. So we’ve got a Disneyland trip based in there for $12,000 in 2023.

Now that’s in today’s dollar terms, but we index it out by three percent. So that might be $80,000, $90,000 into the future. Then we’ve got those cars indexing through as well.

Then we’ve got the kids. Rory is in childcare. That ends in January of 2015 when he goes into primary school. Amelia has got a few more – a couple of years left of childcare and then they go to primary school and then they go to secondary school.

But what if they also wanted to put their kids through private school? So we’re going to have a look at that example as well. What if they wanted to have a third kid? The interesting part about my job is I actually – I’m almost in birth control. I’m in relationship management, because families come in to me and say, “We want to have three kids,” and they walk out realising they can only have two, because I’ve just spoiled their fun in terms of their investment.

Every household is different of course if they want to have three kids and that’s the most important thing for them. We try and work out to see whether they can actually invest sensibly and safely when it comes to property investment.

So we do all of that work in terms of helping the clients get there. Now, in that case, here’s where it gets really exciting. OK? All that information is then moved into this very sophisticated software tool that tells me a story of their current situation and also their future situation.

Now what I can see here is a snapshot of their household situation. Now this is monthly cash flows every month for the next 40 years. I can measure those monthly cash flows and over here, this is cash on hand because there are two things we need when it comes to managing and investing in property.

We need the cash flow to support it. But we also need a buffer or we also need to make sure we’ve got equity or savings and it’s a marriage of the two that gives us the results that we’re looking for.

So this area here is the potential for this client to invest, not in just one property but in a portfolio of properties to get them to their $100,000 target. OK?

Now let’s have a look at their current situation as it stands now. So this is their current situation. Now they want to retire at 60, which is 2037 for this couple and this is the future value of the assets and this is the present value.

So in present value terms, this is how much they’re able to save and that’s them paying off their current $260,000 mortgage. Now if they take $100,000 at retirement, you can see that they dwindle down their superannuation and savings to a point where they don’t make it and they have to start doing reverse mortgage on their current home.

Now the interesting part about that, if they get a $1.1 million wealth base by retirement and that was delivering a four percent return, that would be only 46,000. So for this couple, they realise that they do need to do some investing and they’ve decided that property investment is for them and residential property is their preferred model.

So knowing what I know in terms of their current cash flows, I now start building a property investment strategy. We have a look at what that strategy can do. So I go back in here and I put in a value of that particular property. So the first investment property I’m looking at, what if we actually tried to put an $800,000 property in here? OK.

So it’s a very significant, strong asset that we’re trying to chase strong capital growth on. If I come back in here into the models, I will go back over here and I’m telling you that this particular client, I’m looking to get an eight percent capital growth target and a four percent yield. OK?

So I hit the calculate button. The $800,000 goes in there. I’m using the equity in the existing homes. So I’m borrowing at 105 percent. Let’s get the maximum tax advantages and over back here, I can have a look at the household cash flows. You can see that that property is stepped up. So the cost of holding that property has gone up and also behind that, the little green line representing the income, that’s stepped up as well because obviously I’ve got rental income coming into that property.

Now, is that a suitable thing to do? Because looking at my global household cash flows or I’m pushing the envelope a little bit hard here and from my point of view – and this is where the science gets really powerful. Behind that is hundreds of thousands of calculations that are occurring and I’m allowed to then see in real time year on year exactly what’s happening from a household cashflow perspective.

So you can see here year one, year two, year three and I actually run out of money in year four. Now underneath this – and this is the power for me to be able to be the best adviser I can be. I’ve got that in real time in terms of month by month. So is that $800,000 the best type of property for this kind of buyer? No, it has burnt them. It has cooked their cash flows. It has cooked them in terms of how much they need to bring to the table.

So we need to adjust that down. Now of course I’ve done this presentation quite a lot before. So I’m going to bring that down to $500,000. Let’s see if that makes the situation any better from a household cash flow point of view. So I hit the calculate button here and you can see I’m actually clear on cash flows.

[Read: Case Study – Retire Sooner Retire Richer]

But when is then the next best time for our client to buy their property? So is it straight away or do I need to wait a little bit of time so they can consolidate their property, get a sense that it’s feeling good, and it’s the most appropriate property for them and things are going well, and the investment returns are materialising as we hoped? It might be.

So then the next property I’m looking at buying for this particular couple is going to be in 2018 and in 2018, I’m looking to buy a $400,000 property. In this particular case, what are the investment returns that I’m looking for?

So I go back in here and for me, this $400,000 is more appropriate. It’s what I call balanced. So I’m trying to chase some growth and some yield. So it’s a seven percent growth target and a five percent yield target. So I hit the calculate button here. The $400,000 property goes in here. I go and have a look at the household cash flows.

The second property is turned up and I’m still OK from a cash flow point of view. So I’ve still got some potential here. But again, I’m just going to be patient. I’m going to be sensible and then we look at to get the third property.

Now I have a snapshot look at their overall global household position. There’s the first investment property in red. There’s the second investment property. There are my debt levels here and I’ve got the debt coming down. OK?

It might be just a chance for one more property in here to build out the portfolio. So this one I’m going to do a cash cow. OK? So I’m going to do an entry level property around that $250,000 in today’s dollar terms and I’m going to look to get a six and six percent yield.

So let’s go back in here and I look at building this out at $250,000 and then I go and have a look at my parameters again back here and I can set any parameters I want. There’s my six and six. Let’s go and have a look at the household cash flow. Let’s see that come through. It has come through now and then I’ve got a nice, clear position and my cash flow is growing and my clients now have a great story of that debt being retired. The system is now generating them $100,000 in passive income in retirement to a point where they actually can give themselves a pay rise because they’ve got surplus money now being generated from the value of that property portfolio, from the passive income coming in.

So a couple of things that you need to understand when you’re building out these models is that you’ve got to make sure you provision in future value terms. So an example of that will be let’s look at that $250,000 property again. We’re going to buy that in 2015 – sorry, 2022. So let’s go and have a look inside here, what that property is going to cost us in 2022.

So we go into our assets. We move across to our investment property one, investment property two, investment property three. Where are you? Coming across one, two, three. So in future value terms, that property is going to cost us $398,000 to buy in 2022.

[Read: How to Move Past Investment Property One?]

So it’s making sure we’re not just looking at it in today’s dollar terms because we know the values of those assets are going to increase. We’ve got to understand that the debt we take on into the future has also got to be calibrated correctly as opposed to calibrating it in today’s dollars won’t work.

Now we assume in our models that interest is – sorry, that incomes are increasing at only three percent. OK? So if you’ve got better income increases, that will improve your story. We also assume that each property is vacant for 5.2 weeks a year. So we only assume 90 percent occupancy, which is a really important point and we also assume maintenance costs of 1.5 percent, indexing at three percent, so you can keep the asset in a good working order and a good lettable order. OK?

Here’s the big crunch number. Our interest rates that we assume in your models, 7.25 percent, not 4.99 in today’s dollar terms. Seven point twenty-five percent.

So all of those models that you’ve just seen there and all the interest that’s being calculated is being calculated back here as I scroll down. Here’s all the debt levels. OK, 7.25 percent. OK, in terms of what we’re paying that out. So, obviously if we get interest rates cheaper, the model is going to be even better and your store is going to be even better if you can control those cash flows.

So that’s a really important message that when you are doing your own modelling, to make those assumptions. Now if you can’t do that or if you want assistance in that, we would be delighted to be able to help you in terms of looking at that information.

So that’s how we do it and we can show you – as I said, we’re at stand 610, at the front of the show. If you want to see more about this modelling and more about the plan work we do, I would be delighted to show you, so you can take home some of that knowledge yourself in terms of how that looks.

So we might – Karen, if we can switch back into the main presentation. That’s a snapshot. Now everyone’s household is different. OK? Everyone has got different things in there. I didn’t put in the private school fees. I could have. I could have put private school fees in there. I could have put having a third child. I could have done all those particular models to get the result that you’re looking for in your household.

It’s about the big rocks in the jar. They might have wanted to upgrade their home in five or ten years. OK? Or they may want a strategy where they start with their first home, which might be a unit. Then move up to their family home, then move up again.

They might want to have a strategy where they have a little bit of renovation to quickly add value to the asset. We can do all that type of modelling, so you can make the best decisions around your household wealth.

So just in recapping, the key steps for you are these. Assess your potential. All right? Everyone here has potential to make a difference to your household position. The reality is that even on lower incomes, there’s still potential.

Of course there’s huge potential on high incomes. There’s no doubt about that. When you’ve got strong surpluses, the sky is the limit.

What’s your motivation behind it? You’re all here today instead of enjoying probably one of Melbourne’s better days in the last six months, because you’re determined to make a difference to your household.

So that put into action can mean a lot to you. OK? So just focus on that. Investment is technical. There’s a lot of numbers involved. There’s a lot of moving parts. OK? If you’re going to make informed decisions about how those moving parts work, you would do it through sensible understanding of your own numbers.

Now I would always say to you, you need to understand your skill sets. If you don’t have those skills, go and see someone who does. OK? And try and make them as independent as they possibly can be, and make sure that they’ve got your vested interest at heart.

If they do, then again I think the sky is the limit for everybody here. It’s your strategy. It’s not anybody else’s. If Uncle Barry at the barbecue says, “Oh, no, no. That’s not how you do it. Do it my way,” unless Uncle Barry is retired and living off his household passive income from the investment properties already done, don’t listen to Uncle Barry. OK? He’s not there.

He probably thinks he has got your best interest at heart. But the reality is, he may not be professionally qualified to do the work. So it’s your journey. It’s your tailored solution.

[Read: Property Professionals – Who do you trust?]

So I will finish off with a couple of warnings. It’s a jungle out there. Everyone wants your business. OK? So again, make sure that they’re working in your best interest and make sure they’re qualified to give you the advice as to whether it’s good for you.

There are sales agents here trying to sell you stuff. That’s great. That’s their job. OK. Work out whose side of the fence they’re on and make sure that they disclose how they’re being paid and ask their qualifications.

My final message is BHP or any decent business wouldn’t go out and invest a third of their wealth without doing detailed financial models of the returns they’re going to get on that investment. You and your household in relative terms should be exactly the same.

Your money is your business and how you manage that business is going to ultimately determine the wealth you’re going to have into the future. OK? So take that message away. Hopefully you’ve learned something today and I’m here to take some questions, either at the back of the room or I can also be at the stand today.

So one final thing. We’ve got a – our brochure is on the chairs there and there’s a yellow form inside that brochure. If you fill that out, we’ve actually written several articles for Money magazine. Bryce Holdaway, my business partner, has done a great job in putting a lot of content into money. The current magazine which is free here at the show, we’ve got a great article about the systems and the formula of investing in property. We also have this story here, which is three different households, three different strategies, and that will be free for you if you fill out that form and give us your email address. We will send that out in a PDF for you as well.

[Read: Money Magazine – How to Earn $2,500 a Week by Building a Property Portfolio]

In addition to that, at our stand we’ve got some lifestyle bags as well as a free copy of the other Money magazine that we wrote the article on how to do it with the equity in your home. OK? So with using other people’s money, but being done sensibly as opposed to just going crazy.

So if there are any questions, I’m happy to take some now or I can take them at the back of the room.

 

If you would like to learn more about your wealth potential or a review of your financial health check, book a free one hour no obligation appointment with us today. Fill in the form at the top.

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