Residential Property Investment - The Whole Story
Introduction
Being wealthy may not guarantee happiness, but money sure does come in handy sometimes.
Most of us aspire to having that dream home, holiday home by the beach, seeing the world while we still can, being able to afford the best medical care if we need it or helping the kids out financially should they need it. But most importantly, wealth gives you the freedom to choose when you spend your money, and what to spend it on, in other words to choose when to stop doing what you have to do and start doing what you want to do.
Here's some of the questions you might want to ask and our answers.
• What is Wealth?
• What about Retirement?
• What about the Aged Pensions?
• What about Superannuation?
• How much is Enough?
• How Much Will You Really Need?
• How do you accumulate enough?
• What is Residential Property Investment?
• Who To Turn To For Help?
• How to decide what to do?
• What's Needed To Get Started?
• How does Property Investment really work?
• What type of Property and where?
• New Vs old?
• Why a Rossdale Home?
• What about other services?
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What is Wealth? |
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When people think of wealth they often say their "net worth" is... |
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Add up the value of everything that you own, and subtract from it everything you owe, that's called your net worth. |
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The average net worth for couples under 35 years of age is $36,000. (NATSEM report 11th Dec 1999). |
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The average household income was $67,000 per annum in 2005. (ABS Cat. 6523), that's over million dollars in 15 years! How much have you saved over that time? |
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Where does all the money go, besides paying for food and taxes? |
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Net worth is not necessarily anything you can spend on a daily basis. (You may have heard farmers say they are poor or don't have any money to live on, when they have land, a farmhouse, sheds and tractors etc. The trouble is, that in a bad year, they may not have any crops or livestock to give them an income even though they are have plenty of net worth). |
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People should not think of their wealth or net worth as a nest egg that they can retire on because in most cases it may include some assets that simply won't generate income when they retire. |
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You may be shocked to find out how small the average person's income producing nest egg will be when they retire. |
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What about Retirement? |
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How much money do people need to accumulate to enjoy a comfortable retirement? |
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How much you need depends on what you want from life. |
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Most people need more than they really think |
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As one financial observer put it; "the only thing worse than dying is running out of money first". |
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According to professors Sharpley & Yardley writing in the Journal of applied health behaviour (1999), concerns over finances rated the highest of all stresses. |
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Retirement should be an exciting and enjoyable time, not just an enduring time between the end of work and the end of life. |
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Figures from the ABS show that the amount of time spent in retirement has dramatically increased, bringing with it a mixture of good and bad news. |
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In the 1960s the typical male left school at 15, worked for the same firm for 50 years, retired at 65 and died aged 68. |
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Retirement planning was unheard of and unnecessary because the government could afford to pay the pension for three short years. |
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Today the typical male remains in the education system until he is 20, works for several different firms for the next 35 years, retires at age 55 and spends an average of 25 years in retirement before he dies. (Australian life tables 1995-97). |
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We should all be excited about having extra time to enjoy retirement, but while you'll live a longer fuller life, financially you'll need to be able to afford the extra years possibly with no income. |
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What about the Aged Pensions? |
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Due to increased life expectancies and the greying of the baby boomer generation, by the year 2031 more than 5.4 million people or 21% of the population will be aged over 65 compared to 13% in 2001. |
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At the same time the percentage of people of working age from 15 - 64 will decline. |
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This means that proportionately fewer workers will pay less in taxes to support more retirees on a pension. |
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Governments are admitting that they can no longer afford to fund age pensions and that in future, these will be reserved for the disadvantaged as a privilege, not a right. |
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Soon it could be that "The only person who can look after you in your retirement is you" ! |
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What about Superannuation? |
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The superannuation guarantee charge (SGC), currently 9% of salary, is Australia's compulsory scheme for forcing people to save for their own retirement. |
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The SGC is not a road to wealth. It was never intended to provide an income high enough to give anyone a luxurious retirement. |
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It was intended to make average and below average income earners, who had no intention of planning their own retirement, help pay for their own pension. |
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With the current taxes on super contributions and lump sum payments, and the management fees charged by the super funds, after 40 years of SGC contributions the average couple would be lucky to have $250,000 tucked away. Is that enough ? |
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How much is Enough? |
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So is $250,000 enough? |
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Do you know how long it would last an average couple who retired at 55? |
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Most people think they can live off the interest, but if they spent $50,000 per year $250,000 would last less than 6 years as you can see from the table below. |
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| Year |
Start of Year |
Income |
Expenses |
End of Year |
| 1 |
$250,000 |
$17,237 |
$50,000 |
$217,237 |
| 2 |
$217,237 |
$14,979 |
$51,000 |
$181,216 |
| 3 |
$181,216 |
$12,495 |
$52,020 |
$141,691 |
| 4 |
$141,691 |
$9,770 |
$53,060 |
$98,401 |
| 5 |
$98,401 |
$6,785 |
$54,122 |
$51,064 |
| 6 |
$51,064 |
$3,521 |
$55,204 |
-$619 |
Assumptions: 7% gross return, 2% inflation, 0% tax, 1.5 % management fees |
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How Much Will You Really Need? |
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Estimate what you'll need in retirement:- YOUR NEST EGG, (not your net worth). |
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"Superfunds", the magazine of ASFA say "Most people want to retire on 75% of their pre-retirement gross income." a figure reported in Superfunds (Jan 2000). |
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For the average couple earning $67,000 per year, 75% means about $50,000. |
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Only 4.7% of people retire with the $50,000 they had hoped for. See the table below. |
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| Amount |
% Population |
| Less than $10,000 |
7.1 % |
| $10,000 - $20,000 |
54.9 % |
| $20,000 - $30,000 |
22.1 % |
| $30,000 - $50,000 |
11.2 % |
| $50,000 + |
4.7 % |
Source ABS Cat. 6523 (1999) |
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Some people suggest that that you could calculate your required nest egg, by multiplying your desired income by 20. |
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Why use a factor of 20 ? Because gross return on investments has 2 components; capital growth and income yield. If capital growth keeps pace with inflation, the before tax yield is usually about 5% gross (ie 1/20th) (1/20th of $1,000,000 = $50,000). |
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In other words, for an income of $50,000 per year, a nest egg of $1,000,000 is required. |
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If the nest egg was to be $100,000 per year, then you'd need $2,000,000, and so on. |
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Is this much more than you ever imagined? |
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You're probably saying to yourself: "How on earth will I be able to get a million dollars before I retire? |
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How do you accumulate enough? |
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So how do you accumulate enough wealth for retirement? |
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• Money in the bank earning interest.
• Retirement fund / Superannuation Policy / Share portfolio
• Property Investment
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Bank Interest |
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"Money in the bank, safe as houses". The age old saying that unfortunately many people follow, and do not consider any other options as a way to increase their wealth. |
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Low risk, responsible and should increase the initial investment: but by how much? |
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In high periods of inflation bank savings interest rates there was a significant opportunity to gain wealth through banking. |
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Globally economies have now realised that high interest rates are tied to high inflation. While governments use interest rate policy to control growth and reduce inflation they will not allow interest to reach the high of the eighties as it then fuels inflation. |
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Bank savings interest rates generally only just keep pace with inflation. |
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Retirement Funds / Superannuation Funds / Share Portfolios |
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The big proprietary investment funds provide a growth strategy for savings by investing in shares, property trusts and fixed interest investments both nationally and internationally. |
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They are generally low risk no fuss investment portfolios covered by conservative investment policies with high administration backing and costs. |
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Shares and stocks are subject to world politics and economies and their performance can go up and down depending on world stability. |
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When considering shares or portfolios based on shares, terms like leverage, gearing, capital growth and margin calls should be understood. |
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Property Investment |
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"Money in the bank, safe as houses", the age old saying supposedly to promote putting your money in the bank. |
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Well if it's as safe as houses, then by that logic, and if you believe that banks are low risk then "houses must be safer or lower risk". |
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Most people put their money into their own house, & spend all their life paying it off. |
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The bad news is that its not a nest egg for their retirement, but the good news is that they will have increased their net worth, and the best news is that they have an asset that can be used to increase wealth. |
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When a home is bought & is in the process of being paid off, after some time it should have increased in value & their should be some equity in that home. (ie if it is sold there would be money left over (called equity), after the mortgage has been paid out). |
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Depending what was bought, where and when, will depend on how much equity there could be. |
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What is Residential Property Investment? |
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Buying or building residential properties for the sole purpose of increasing your wealth through rental return and / or capital gain. |
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It generally involves diverting some of your current income into assets that can provide you income while there is growth in property prices over a period of time. |
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It is not a get rich quick scheme. This type of strategy can take 10 years or more.
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The formula normally is: |
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Buy income producing residential property that is appropriately financed to achieve maximum tax benefits while you are working. |
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As Property values rise and cashflow increases, you re-finance so that your liabilities (borrowings) increase with your assets, enabling you to build wealth by increasing net worth. |
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This is a "buy and keep" philosophy so you will have a portfolio of residential investment properties that can continue to grow in value and produce a regular indexed income in the form of rent for the future especially retirement. |
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This has the possibility of giving the investor the opportunity to retire much earlier and with more wealth than they could otherwise. |
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Who To Turn To For Help? |
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Financial Advisers |
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Financial advisers, financial planners and investment advisers are generally professional people who provide independent financial advice to clients on all investment types such as managed funds or direct investments such as cash, shares and property. |
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Most financial planners operate under the license of multi national companies and are only permitted to sell that company's products.
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Rossdale Homes |
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Rossdale Homes are NOT financial planners or Investment advisers or Share Brokers or an Insurance company. |
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We cannot and will not provide you with financial advice, planning or recommendations on how or where to invest your money. |
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We are not a Finance company trying to sell you a home so we can get your mortgage business (that's not such a Devine idea). |
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We are not Property Developers trying to sell you a patch of dirt under water interstate. |
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Rossdale IS a HOME BUILDING company that just want to build homes and make a fair profit from it. Nothing more and nothing less. |
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How to decide what to do? |
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Perhaps the most useful and unbiased information comes from other property investors. There's no need to join an association, you'll often find them at work or playing sport along side you, or your family or friends. |
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Ask them if they have sold a home in the last few years. It will most likely be their own home. If they did, ask them how much they bought it for, how long ago, and what they sold it for. |
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Do the maths, if it sold for more than it cost then it may have been a good investment, and could be typical of every home purchased and sold over a long period of time. |
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Ask yourself; "when did you buy your current home, how much did you pay and what would you sell it for now". If you sold it, would it have increased in value? |
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You will realise that the longer you keep it, the more it is worth, but the more you will pay in mortgage interest costs. However if it was an investment home you should have been able to nearly balance those mortgage interest costs with rental income and tax and depreciation relief. |
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No one can look after your financial well being and future prosperity like you can. |
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What's Needed To Get Started ? |
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Equity in your home or some available assets. |
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A stable job paying a stable income. |
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Some weekly cash spare |
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How does Property Investment really work ? |
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Its about Leverage, Gearing and Capital Gain.
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Leverage |
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What does this mean and why is so important in building wealth ? |
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As the word implies, your money can act as a lever or a multiplier increasing your strength. |
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As an example, if a person had $20 and invested that money they could earn a return on that $20. |
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But if that $20 can be used as a deposit or security to borrow $100 and then the person invests that $100 then they can earn a return on that $100. That would give them 5 times more return than if they just invested the $20 described above. |
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In Property Investment terms it means: if a person had $50 / week surplus cash going into a bank earning bank interest. Over 10 years that $50 / week will be worth $34,000 if the bank pays an interest rate of 5%. |
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If that person had a house that they bought more than 3 years ago the equity that they would now have in that house could be used to secure a bank interest only loan for another property to the value of at least $250,000. |
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Land could be purchased and a home built ready for rental for $250,000. |
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Once built, the rental income coupled with the tax and depreciation benefits, would mean that the cost of borrowing that money might only be around $50/week. That's called gearing. |
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Over time that home purchased for $250,000 will increase in value so when it is sold it will be sold for more money than it cost initially. That's called Capital Gain. |
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Historically, property values have increased by around 6% on average per year. At this rate after 10 years the property should almost double in value. |
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If property values did increase at 6% per annum then a home built for $250,000 would be worth $500,000 after 10 years. When its sold the bank gets back its initial $250,000 and there would be a profit of $250,000 less expenses such as selling costs and capital gains tax. |
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So with the $50 / week in the bank would earn you only $34,000 in 10 years, but by using the family home equity there is a leverage strength of $250,000, so the $50 / week working in property investment can earn up to $250,000. |
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Better still is the fact that after a couple of years that capital gain is usually enough equity to do it again with another property and so on and so on.
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Gearing |
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In essence this simply means using OPM to buy property. |
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What is OPM ? It stands for other people's money, and the only way you can use other people's money is to borrow it. |
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By borrowing money, you can own and control a very valuable asset using a relatively small amount of your own money. That's called leverage. |
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If the total expenses including interest on this borrowed money exceed the rent, creating a negative cash flow, the property is said to be "negatively geared". (If the expenses are less than the income it could be positively geared). |
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So long as the property is producing income and you intend the net cash flow to be positive, legislation allows you to offset the loss against other income. |
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This other income may be from your salary, bank interest or even other property. The loss usually results in a tax refund that lessens the impact. |
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But the purpose of owning geared property is not to simply to reduce tax.
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Capital Gain |
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Over time a home could increase in value, from when it was originally purchased. That's called capital growth and when you sell the home and finalise all expenses there could be a Capital Gain. If it decreases in value its called Capital loss. |
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It's like growing an apple tree, you plant the seed, water and nurture it and one day the tree bears fruit for you to pick. |
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What type of Property and where ? |
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Imagine a scale of 1 to 10 where 10 is a waterfront mansion and 1 is a fibro shack next to a railway line. |
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The waterfront mansion may not be affordable for the average person to buy nor for the average person as a tenant to rent, while at the other end while cheap, it may be difficult and unreliable to find and keep tenants for the fibro shack. |
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It is best to acquire properties in the 4 to 5 category as these will be around the median price and could have a good combination of both yield and capital growth which are the attributes of a good investment. |
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The properties do not need to be in the dress circle areas. |
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Locations where lots of families live and are close to schools, shops, transport give the most options for potential tenants to see value. |
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Our Home packages include the home and land and are located in these areas AND THEY ARE ALL IN ADELAIDE |
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New Vs old ? |
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Building a new home is generally cheaper as you only pay government stamp duty on the land not on the whole home, and you aren't paying for someone else's capital gain. |
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A new home is modern, latest style and fittings, open plan living with modern fit out. |
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Building a new home is generally maintenance free for a long time and a good builder generally covers most maintenance issues if they do occur. |
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Depreciation of the home and its fittings is an important part of reducing the mortgage interest costs. The buildings can be depreciated for 40 years but the fittings generally can only be depreciated over a maximum of 10 years. To maximise depreciation you need a new home. |
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Why a Rossdale Home ? |
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Other Builders |
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The Chinese philosopher, Confusious would say " the sweetness of a supposed cheap price is long forgotten by the bitterness of poor service" |
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All builders use the same materials, the same subcontractors and all roughly have the same overheads so if another builder says he has a cheaper price, you would have to be suspicious, wouldn't you ? |
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Rossdale has a great reputation for quality and service. |
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No builder other than Rossdale offer an absolutely fixed price before you sign a building contract.
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Consultants / Property Investment planners |
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Consultants / property planning / intermediators are all middlemen who aren't providing their service for nothing surely? |
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There must be a commission earnt from someone in the investment chain that increases what you pay. |
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Once you sign a contract with the builder what can they do for you? You might as well just deal with the builder and the manage the services yourself. |
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Generally they are trying to get you on a plane to Queensland or WA to buy a property you can not check on regularly.
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Rossdale Homes |
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Investors should buy with their calculator rather than their heart. |
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Property investment and building wealth are all about dollars and cents, not colours of tiles and curtains. |
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Our packaged homes include quality fittings and tasteful colour schemes designed to be neutral and appeal to the widest possible range of people. |
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The homes include everything needed for a tenant to move in such as; curtains, floor coverings, light fittings, air conditioning, TV antenna, pergola, letter box, instant turf etc. |
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We believe that the home making up the highest proportion of the property value as opposed to land is best as this provides the maximum depreciation benefits. |
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Our packages include professionally prepared depreciation schedules and valuations provided by Licensed Valuers. |
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They don't include any hidden costs that you will be hit with after you sign up. |
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They don't include any secret commissions, trailing fees or backhanders. |
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What about other services ? |
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Property investment should not be hard work or time consuming for the investor. After all you have your job, family, sport to enjoy. |
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Our aim is to make the process as simple and stress free as possible so that when the time is right, investors will feel confident about adding the next property to their portfolio. |
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Property management is essential. Some people think they must save every last dollar to make their rental property work. This is not the case. You don't need a phone call on a Sunday to go and fix a tap washer. |
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Property Managers will do regular inspections, screen the tenants, assess market rents from time to time, collect rent and maintain a business relationship with the tenants, and the costs of management are tax deductible.
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Rossdale only builds homes but we have assembled a network of people that a potential client can make use of to cover all aspects of residential property investment including:
• Mortgage broking/finance
• Landlords insurance
• Financial/accounting advice
• Property management
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For more information, please complete the Investment Enquiry Form, or call Denny Havriluk on 0419 832 227.
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Note: Rossdale does not charge any fees, earn any commissions, or get any kickbacks for making these these services providers available. We just want to build you a home.
Acknowledgments to Jan Somers (Somerset Financial Services Pty Ltd) and her book More wealth from residential property printed October 2002.
Disclaimer
The opinions expressed here are of a general nature and are not intended as expert financial or investment advice. Prospective investors are urged to seek their own independent advice from a qualified advisor.
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