The Magic Bank Account

Imagine that you had won the following prize in a contest – a magic bank account. Each morning your generous bank would deposit $86,400 into your personal account, provided you adhere to the following competition rules:

1. Everything that you didn’t spend during each day would be taken from you.
2. You can’t transfer money into another account – you can only spend it.
3. Each day, the magic bank account is refilled with another $86,400 for spending.
4. The bank can revoke the prize and end the game without warning by simply closing the account.
5. If that happens, you can never win another prize – that’s it, game over.

What would you do?

You could buy anything and everything you wanted right? Not only for yourself, but for all the people you love and care for. Even for people you don’t know, because you couldn’t possibly spend it all on yourself….could you?

You would try to spend every dollar, and use it all, because you knew it would be replenished the next morning, right?

Confession time – no bank is ever going to play a game with you like that. But you know, you are in this game right now…..and it is real!

Each of us is already a winner of the prize. We just can’t seem to see it.

That prize….. is time.

1. Each day you receive 86,400 seconds as a life gift.
2. When you go to sleep at night, any remaining time for that day is gone.
3. What you haven’t used up that day is forever lost.
4. Yesterday is forever gone.
5. Each morning the account is refilled, but the your account can be terminated at any time, without any prior warning…..

What will you do with your 86,400 seconds?

Those seconds are worth so much more than the same amount in dollars. Think about it and remember to enjoy every second of your life, because time races by so much quicker than you think. Make every moment count. Start now, don’t wait, not even a minute.

A last thought for you – Seize the day, then relax the grip a little, and enjoy it…..

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For Capital Growth, What Beats Location, Location, Location?

For this week, I would like to blow away another “secret” of property investing.

It is often said that the only three words that you need to be concerned about when investing in real estate are these – location, location, location.

But then both you & I know that’s a load of rubbish. Sure, location plays a huge part in what makes a property sought after. If you have been reading my recent blogs, you will know that money supply and what is available to borrow to purchase property, plays a big factor too. Other things to consider are how you finance your property and what property managers you have to look after your investment – these can dramatically affect your return.

But what factor beats location for above average capital growth?

It’s called – infrastructure. In particular, changing infrastructure. Some basic examples of this might include the addition of sewerage, which could enable a block to be developed. More sophisticated examples would be the addition of new transport options like a rail line, or the opening up of a new freeway which shortens travel times.

But even better than this – changing infrastrucutre, in an already established, popular area.

On a recent trip to New York City, I had the pleasure of walking along what is now a famous tourist destination called “The High line”. (http://www.thehighline.org) It is, or was a railway line that runs about four stories above street level from West 30th street, south down to about West 10th. It was built in the 1930’s and was used up until 1980 to transport all sorts of goods, including bulk meats down to the meatpacking district. Trucks eventually replaced the old rail line and by 1999, the High Line was under threat of demolition when moves were made to save it.

With private donations and public funding, the rail line was preserved and turned in to a park where thousands of people can enjoy a walk on the west side through several New York districts, enjoying fantastic views to the Hudson River and east across the city skyline. A really fantastic job has been done with the renovation and conversion to a unique park 30 feet above the streets of New York, running about a mile and a half in length.

The northernmost part of the line was completed in 2009, with the southern section finished in 2011. The first picture above shows the northern section. If you look carefully at either side, you can see many new apartment buildings that were constructed when the line was complete. The picture below is of the more recently complete southern section – you can see the green garden area where the walkway has replaced the old rail line running down the middle. What else do you notice?

If you answered a lot of construction on either side you would be correct. But what is important about that?

Before the High Line was fixed up and turned in to a park, the areas along the line were rundown and decaying. Living in the rotten old apartments next to the line would have been noisy and not very pleasant, Now, because of a change and improvement in the infrastructure, it is one of the hottest areas of reasonably priced real estate in New York.

Find locations where there are significant infrastructure changes or improvements happening – or better – planned to happen and invest there. You will have significant capital growth over and above the market.

A last thought for you – nothing changes, if nothing changes.

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Are You a 1 Percenter?

Why is it that so few people actually achieve their financial goals?

It’s because so few are prepared to do what it takes.

Oh, many think they do and they go through the motions, thinking, dreaming, maybe even proper planning – but never really committing and taking action. And not just action to start something. Continued sustained actions over a period of time, until such that the goal is achieved.

How many times have you known someone who started a diet, an exercise program, resolved to stop smoking, and then fell back in to the old pattern within days of commencing the new way of life?

Recently, a friend of mine took part in a healthy exercise program set up by his insurance company, which naturally wanted healthy policy holders. Five hundred and eighty people registered for the free six week program. One hundred and forty of those people, so just 24% actually showed up for the first session. Numbers dwindled over the following weeks until only ten people were left. And my friend, his wife and their three children made up five of those ten. So really, just seven adult people, or 1.2% of the original participants, completed the whole program.

I find that extraordinary.

Why bother to make a commitment and sign up for the program, if you really never intended to follow through? Why show up and start the program if you never were really committed to seeing it through to the end?

There may be many reasons but there are no excuses.

What meant for the 76% of people who had registered, and never showed up even once, was that they weren’t really committed to shift their lives. They were not in enough real pain to actually do something about their health or weight or whatever it was that had them sign on for the health program in the first place. It was just an idea – a thought without any action.

If nothing changes, nothing changes.

Those people are not likely to have any shift in their health anytime soon. Nor in the rest of the way they do their lives. Because how you do anything is how you do everything.

Are you starting and not finishing in your life? Or even worse, thinking, daydreaming and not even starting?

What are you doing – really doing – on a committed consistent basis, to have a better life? Be it health, relationship, education or financial?

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Taking Charge Of Your Finances

That is a pretty scary headline for a lot of people, particularly if your money controls you rather than you controlling your money. Last week I shared with you some simple, basic, but essential tips on how to prepare yourself to be able to borrow to invest in property. This week, I offer you a magical money management system that will put you on track to the wealth you want – its easy and you can start right now.

If you would like to learn about this simple system, then please read on. This is the single most important thing you can do in the pursuit of your financial goals. And the really cool thing about this system is that a whole lot of guilt free spending fun is built in to the program!

The idea is to break down your after tax income in to percentages and allocate those towards your spending and saving patterns. First step – work out your after tax monthly income. Let’s say its $50,000 per annum, or say $4,200 per month.

We need to break that down in to sections of your finances. We start with your Long Term Savings – this is your investment fund, never to be touched – ever – except to invest. Allocate 10% to that – so you are paying yourself first. Then you need to allow for your necessary expenses – these include rent/mortgage, food, fuel, insurances, rates & taxes – allow 50-60%. If you look at your current net income, and your necessary expenses are more than 60% of your after tax income – you have two choices – increase your income or cut your expenses, otherwise you have no chance to save to invest and your only choice will be to work to 70 years or more and exist on a pension pittance. So in this example, if you are paying more than $500 per week in rent or your mortgage, you need a cheaper house in which to live. Or a better paying job, or a second job.

Then you have Short term savings – you need to put money aside to replace a car or take a holiday. If you don’t do it regularly, your only choice to enjoy a new car or go overseas will be to borrow to do so at interest rates of 12 to 21%. That does not make much financial sense. Allow 5-10% here.

Most of us have credit card or cards – let’s dump these as they have interest rates over around 20%. Use them each month for convenience but pay them off each month. If you have existing debt, let’s kill it. Take 5-10% of your income and attack one card, paying everything you can from your 5-10% debt killer account, off that one card until you have paid it off. Then cut it up. Proceed to the next card paying off everything from that one debt killer account on the second card, until it too is paid out. Repeat until you are credit card debt free. Then you can apply that 5-10% to making larger long term savings in your investment account.

Everyone should put aside 5-10% of their income to invest in to education – it could be your children’s or it could be your own. Every year I do a new course and read new books, seeking to increase my knowledge, learn new skills and gain more confidence.

Lastly, it is beholden on each of us who are financially blessed compared to many others in the world to put aside 5-10% of our incomes to give to those who need it more than we do. Choose a charity or cause that fits with your beliefs. Giving also tells your mind that you have enough money to give some of it away to others less fortunate than you and that more is on the way. If you can’t afford 5-10%, start with 1 or 2% and build it up as you can. You will make a big difference in the world and to your own feelings about money.

Lastly, the fun bit. Ever walked past the shoe shop or that new restaurant you wanted to try, gazed longingly through the window and then clunked back to reality, remembering there was nothing in your bank account and your credit cards were maxed? What if you had money in a separate Fun Fund – that you just had to spend each month – on whatever you wanted? Like that idea? I bet you do. All you need to do is allocate 5-10% of your net income to your Fun Fund, in exactly the same way as you do your long term saving account. This is your fun reward for all of your fiscal discipline and a great reminder for your mind that you can be firm with your finances and have fun at the same time.

So to summarise:

  • 10% – Long Term Savings for Investment
  • 50-60% – Necessary Living
  • 5-10% – Short Term Savings
  • 5-10% – Debt Killer
  • 5-10% – Giving
  • 5-10% – Fun Fund

Work out the ratio that totals up to 100%, that best suits you and adjust it each twelve months as your financial situation improves.

The best way to run this management system is to have a separate online bank account for each of your money accounts. You do need to find a bank though that will offer you this without all those annoying and expensive account fees, which can be $10-$20 per month – per account! If you leave all your money in one account, without separating it, I guarantee you will not be successful managing your Money system – it is just too easy to take money out of savings or out of debt killer to pay for that ticket to the concert you just had to have when your Fun Fund ran low.

I guarantee you this will work – but you just need to start – and then be disciplined. Think about the lifestyle you want – taking charge of your finances is the first step on the journey.

Now you have money to invest. And you can have fun doing it!

 

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If Money Makes The World Go Around, How Can You Get Some?

Last week I shared with you the truth about what really moves property prices – and that’s money. If you have it, that’s great, you are in the game. If you don’t – then you need to get some.

It’s a good thing there are very profitable businesses out there that cater for that exact need – they are called banks. To accelerate your chance to gain wealth through real estate you simply must be able to borrow money, at least until the point you can sell down what property you have to pay off the debt and still have plenty of income for your lifestyle from the property you still own.

To give yourself the best chance of getting some of that cash, there are six important steps you need to take before applying for a loan – and all of these need to be done well before you get out in to the market place looking for property. Some of these are self-evident, but nevertheless important.

1. Have a steady job – the banks like it better the longer you are in your job. If they see job-hopping on your application, they assume you are not stable in your work and therefore your income is at risk, therefore you are not a good person to lend to. If you are running your own business, you need a minimum of two solid years of profitable, up to date tax returns to submit as evidence of your income. Minimising your profit (legally) through a business might save you some tax, but it won’t help your borrowing capacity.

2. Savings – Your friendly lender will want at least 5% of your purchase price in savings over a 6 month period. They prefer 10%, but really start to warm up to you if you can put down 20% as a deposit – if you can do that, you can avoid the real gods of money – the mortgage insurers. Every loan that has less than 20% deposit must have insurance to cover the bank if there is a loss, and of course you have the pleasure of paying for that insurance. If you aren’t saving yet, start now. I’ll talk a bit more about how to take charge of your finances next week.

3. Get your debts under control – the first step to dealing with those evil pieces of plastic in your wallet is to cut all but two of them up and limit your use of the remaining two. Do what you can to pay them off each month. Start a debt reduction plan, focusing on one card at a time. If you have many credit cards, the bank will assume that you could go out and do cash advances on all of them at once. They will reduce the amount you can borrow for your investment property because of that.

4. Check your credit report – your credit report will contain any loans you have applied for or been approved for and any outstanding debts, even over a number of years. This is more important than ever as recent law changes mean that even for the most trivial of debts or late bill payments, creditors like electric companies for example, can report your debts after just 30 days late – so make sure you pay your bills on time. There are a number of agencies that offer a free initial credit report, which takes ten days or so, or you can pay for an instant report. Some will charge you for ongoing services or to help you clear your report if there is a problem or if you need other financial advice. Without making a recommendation, some of these are – www.creditrepairaustralia.com; www.checkmyfile.com.au; www.fixbaddebt.com.au. Getting a copy of your report can alert you to any issues you may not be aware of.

5. Determine Your Credit Score – the friendly banks also have a way of rating you to determine how credit worthy you are – they look at your age, postcode, length of job, banking type, how long at your address, whether or not you own or rent and so on. The average score out of a scale of 1000 is 750. Find out what yours is and do what you can to increase it. Don’t do anything to decrease it – for example, moving house can drop your score by 80 points, changing banks by 30, and getting divorced drops your score by 100! Some of the websites above can help you determine your score for free – though www.checkmyfile.com.au works well.

6. Set up a meeting with a competent finance broker – a finance broker has access to many different lenders and they can assess your situation and guide you towards the best solutions for the kind of loan/s that you need. A really good finance broker will do the best he/she can to ensure that the loan you get will be a springboard for your next property. A fantastic broker will sit with you and help you work out your long term plan for the number of properties that you want. If you don’t have one of these people on your investment team, I can proudly recommend my friend Margot Whittington, who has a strong financial counselling background and is a gun finance broker – you can reach her at Margot@wamoney.com.au.

And a last thought from Earl Wilson – Today, there are three kinds of people: the have’s, the have-not’s, and the have-not-paid-for-what-they-have’s.

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What Really Makes House Prices Rise?

To understand this is one of the truths I was referring to earlier in my writings – it is critical in your thinking and planning as an investor. The most obvious conventional answer to this is supply & demand – how much property is available versus how many people want to buy. If there are more buyers than sellers, price goes up and vice versa. But what affects supply & demand? And which is more important?

There are a lot of things that on the surface can seem to affect the price of housing. At a macro level you would consider the economy, interest rates, unemployment, number of houses constructed, retail spending, government policy (like taxes, negative gearing or first home owner grants). At the micro level, the number of bedrooms, bathrooms, location of the home and its nearness to amenities can all seem to affect pricing. In reality though, these are just peripheral factors that can affect property prices. The truth is a little different.

I have spent the last fortnight in the USA, particularly in San Francisco. It is a fascinating city stuck at the northern end of a peninsula facing to the Pacific Ocean, making it a windy place. It is home to some of the most expensive property in the world, with the median price of houses topping $1M USD in June 2013. In touring around the city, I noted the extraordinary disparity in the wealth of people here and how they live. In one suburb called Nob Hill, just to the immediate west of the CBD, most homes are in the $10-15M plus range. At the bottom of the hill, in an adjoining suburb called Tenderloin, live squatters and homeless people in their thousands in old run down tenement buildings, shelters or on the streets.

San Francisco has over 40,000 homeless people – they are very evident as you travel around the city. If you remember the movie “The Pursuit of Happyness” starring Will Smith about a man who battled his way out of homelessness, that film was shot in this area of San Francisco. I didn’t know how real that film was until now. I still can’t figure out how so many people don’t have a home in a city with unemployment less than 4%.

A little further south, about 45 minutes travel, is the fabled Palo Alto, home to companies like Google and Microsoft, where the median housing price is an eye watering $1.94M USD – and rising fast.

Since the GFC, housing across America has been very much in the doldrums, with evidence of falls in values of 30-60% in some states, particularly Florida. There has been and seems to be an ongoing recovery of sorts happening over the last 12 months to two years. Yet right through that period, San Francisco and surrounding areas hardly missed a beat with real estate prices remaining very firm.

Why?

It is easy when you think of it – San Francisco and Silicon Valley are recognised are the tech capitals of the world, with many innovative companies created, nurtured, grown and sold, for millions and billions of dollars. Often when this happens, the specialised high income employees holding stock options become very, very rich. As a results, they have plenty of money, usually cash, and very supportive banks willing to loan such wealthy high income people for housing.

And so the prices rise, and keep rising.

So house prices really rise because of demand – fuelled by the amount of money accessible to the buyer – be it cash or a mortgage. If banks pull out of, or restrict housing funding, you can be sure house prices will fall, no matter how many bedrooms or how good the neighbourhood. And those who supply property – the property developers like me, won’t do anything unless there is sufficient demand for their product, unless they want to go out of business fast.

A last thought for you – you have heard the old saying – “money makes the world go round” – and now you know why.

 

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Give a Little, Get a Little – Contribution

It has been said that the best way to help poor people is to not be one of them. Another way to look at that is, if you don’t have money, how can you financially help others who don’t have money?

There are so many reasons to want to build wealth, but I am here to tell you, that if you are only building wealth so you can make your own life better, your wealth creation will likely be limited to not much more than you can spend on yourself. I think that those of us who can help others, should do so. And don’t wait until you reach your financial goal before starting to give. A little given regularly by many can add up to a world of change.

Some of the richest people in the world, like Bill Gates and Warren Buffett have committed to give up half or more of their wealth to causes they feel passionate about. That reads kind of easily though for men who can give up half their wealth and still have a net worth approaching that of a small country. I am not suggesting this for you, but I am saying that it is your responsibility to share your wealth in order to make the world a better place. And to do so now, so you can start making a bigger difference.

So go ahead, and choose a cause you are passionate about. For me, it comes down to affordable housing for all. You see, I believe that the basis of wealth creation for the average person is to own their own home. Anything I can do to promote that, falls right in to line with my belief that anyone who wants to own a home should be able to do so. For that reason, I support Habitat for Humanity (www.habitat.org) – they are a global not-for-profit organisation creating home ownership through a hand up, not a hand out. I spent a week last November in Cambodia building houses with people from all over the world – hot dusty, sweaty and tiring work, but oh so rewarding.

My wife Michelle is a passionate entrepreneur, so it makes a lot of sense for her to choose to support Kiva (www.kiva.org) which is a micro-financing company that supports people wanting to start their own business. She (& I) believe that the solution to world poverty is not giving out rice, but in helping people create and fend for themselves. People who can start and run a successful business can feed themselves and their family forever – no need for welfare. And the cool thing with Kiva is that you can start off with just a $25 loan, which will get repaid to you in small pieces – and then you can re-loan that money out to people you want to support. Michelle has helped a chicken farmer and a shoemaker and a taxi-driver among lots of micro-businesses.

One of my best mates, Keith Daddow is a fascinating character. A brilliant real estate rep and investor in his early 40’s, he contracted prostate cancer, which to say the least changed his life and that of his family. Not one for lying down, Keith beat the cancer and now chooses to support the Prostate Cancer Foundation. He is doing this by climbing Mount Kilimanjaro with six other cancer survivors. You may not be aware of this, but prostate cancer kills more men each year than breast cancer kills women.

Keith’s goal is to personally raise $10,000 for the trip – he will pay his own way and all money raised goes straight to the foundation. I will personally donate to this cause and I am asking you to do the same – whatever you can will be fantastic – just click here and give until it hurts!
https://saveamankilimanjarochallenge.everydayhero.com/au/keith-daddow

Keith is a fascinating character truly worth meeting if you get the chance. I am sure he won’t mind if I give you his email – keith@theriverofmoney.com – so you can reach out and talk about anything you want, including his cancer journey – he loves football, poker, his wife & kids and he particularly loves to chat about positive cashflow real estate – that’s the kind that puts money in your pocket every month.

A last thought for you – giving is the start of receiving – the law of karma ensure this.

 

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Will You Be Working Until You Are 70?

Maybe you heard about it, maybe you didn’t. But our Treasurer announced on Budget night 13th of May, that the pension age would increase from 67 to 70 by 2035. That means that anyone born after 1965, will have to work until age 70 before being able to qualify for the aged pittance – sorry – pension.

Does this affect you?

Part of the Government’s rationale was that increases in pension spending were way beyond the ability of the country to afford to keep paying, with the amount being paid out increasing by 6% each year and already surpassing the total of the defence budget. Future projections show that the pension wold be the biggest single item of national expenditure in the future – even more than defence, education and health combined. The previous Labor Government also saw the writing on the wall and had already legislated an increase in the pension age to 67 by 2023.

So many people work 40 or 50 years of their lives looking forward to the mystical place and utopian life that is retirement. The reality is that life in retirement is something that is changing quickly – people are living now for 20, 30, or even 40 years after they stop working. People have better health and are living lives that are more active – an active retirement may cost a lot more than the cost of a working life, since you have so much more time to spend your money!

Pensions were introduced only recently, with Germany the first country to introduce them in 1889, and quickly followed by many advanced Western nations. At that time, the age of retirement was set at 65 and the average life expectancy was 67. So the taxpayer did not have to support retirees for a long period of time. The idea that the Government owes us a pension after providing it a lifetime of taxes is now very much ingrained in to our thinking. We think it’s a right rather than a privilege.

That situation is very different now. And Governments all over the world are now spending a huge proportion of their tax revenue of social welfare and its increasing as more people live longer and join the retirement bandwagon. This can’t continue – we are mortgaging our children’s future and saddling them with tens, even hundreds of billions of dollars of national debt that they will have great difficulty in repaying in the future generations. As our population ages there will be fewer and fewer people of working age to support those on a retirement pension. Our children and our grand-children will pay the price of this continued largesse in the form of reduced living standards, higher taxes and a lower level of government services.

So what will you do about it? Will you grit your teeth and prepare to work for five more years before you can retire and live handsomely off the aged pittance – sorry, pension?

Or will you make a decision, right now, that you want more that, you deserve more than that and you will do something about it – immediately?

Your lifestyle will be determined by your choices and your decisions. If you want more than the pittance, you need to begin investing for your future right now. Taking charge of your life could mean you can send a message to your Government in your living years after you choose to finish work.

 

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The Urban Sprawl Is Changing – Is The Big Aussie Backyard Dead?

This week’s topic is something we all need to consider as we begin to build or even to reshape our investment portfolios.

The rapid explosion of suburban development from the 1960’s came along with access for most people to their own car and strong population growth. With it, the dream of the quarter acre block, 3 kids, dog, Holden Car and a big backyard became real. Urban sprawl is the type of thing you tend to forget about if you’re living in it, except maybe when you’re stuck in traffic inching home after work. But it does a lot more than cause road rage.

According to a new US Study, Measuring Sprawl 2014, urban sprawl also makes us fatter, sicker & poorer and it is the source of 50% of the carbon footprint of the USA. It is reasonable to expect similarities with the Australian market.

The study finds that people who live in densely populated regions benefit in many ways. In brief, they have greater economic mobility, they’re healthier, and they live longer.

It’s also cheaper to live in dense cities. In those areas, people spend slightly less of their income on the combined cost of housing and transportation. (They have more low-cost transportation options like trains, subways, light rail, and walking, which of course is free.)

People who live in compact cities also tend to live about three years longer than people who live in less compact cities. The gap is probably thanks to more driving (which means more fatal crashes), a higher Body Mass Index, higher blood pressure, and more diabetes in less-compact cities.

The environmental impact of suburban development is also under scrutiny. According to a new study by researchers at the University of California, Berkeley, population-dense cities contribute less greenhouse gas emissions per person than other areas of the country, but these cities’ extensive suburbs essentially wipe out the climate benefits. Dominated by emissions from cars, trucks and other forms of transportation, suburbs account for about 50 percent of all household emissions in United States.

The lower cost of cheaper homes in far flung suburbs is rapidly being recognized as not real savings at all – when you consider the cost of fuel, time spent in the car travelling, parking and other direct costs, let alone the benefits to the economy and environment of more dense living styles.

It is not something that has been palatable to Australians in the past, but that is changing – for economic, environmental and lifestyle reasons.

And that means as investors that you need to consider carefully the choice of property that you want to own. Because investing is about the future – future returns from growth and rent. And the future will mean higher demand for less expensive, more compact, well located property that is on or near transport links. And higher demand is likely to mean higher rental returns & capital growth.

 

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What Type of Property Will Suit Your Investment (Property) Portfolio?

Last week we determined that you would need somewhere between $1.25M & $2.5M worth of property owned free & clear to produce you a living passive income of $100,000. You need a lot less property if you buy high yielding property – check out the website under my signature below. Or you need a lot more property, if you go with more conventional capital city property.

This week let’s dive a bit deeper in to what type of property you want in your portfolio.

Before we do though, I want to share with you that I will mix up the content of my blogs from week to week – sometimes a bit about investing or property and other times we will work on our mindset and beliefs and our goals and actions. Because 90% of your success results will not come from what you learn about property, it will be about what you do about property. And you won’t do anything unless you believe you can. That’s why we work with your inspiration.

There really are only two types of residential property to consider – that is you will be buying houses or apartments. It’s an age old discussion about what is better – bottom line is they are both good, but our answer to what you buy is – you will buy what will be what is best for you.

When asked by my investors “should I buy a house or a unit?” I know what they really mean is “which will make me the most money?” Again, at the risk of sounding like a broken record, there is no absolute right or wrong answer. Houses and units, though both are real estate investments, each have different characteristics, advantages and disadvantages.

It is worthwhile acknowledging however, that over the last 30 years or so, the great Australian Dream of a home with a big backyard has been the type of property in most demand by Aussie families. Therefore it was the type of property that has had the highest growth potential, since it had the highest demand. The difference in investment returns in historical terms between houses and units has been in favour of houses by approximately 2% annually.

I did say historical returns. When you invest in property, you are not buying history, you are in fact buying the future, or explained another way, you are buying a future income and capital growth stream. You must realise that what produced an outstanding result in the past may not necessarily hold true for the future. It is important to understand that the type of property that was in the highest demand in the past is changing rapidly.

The Australian Bureau of Statistics calculates that by 2020, households that have two people or less will be approximately 80% of the total population of households. This has a profound effect on the type of property we should be accumulating since the family style home will be in far less demand than previously. Units, apartments and townhouses will assume more prominence than before and the population will far more readily accept and expect to live in this style. Particularly property located on transport lines (rail, bus) and closer to the city – we just don’t want those long waits in traffic anymore.

I am not saying that you should not buy houses, but I maintain that your portfolio must include some of all types of property – and consider the future demand from people wanting to rent your property.

Another common question that creates confusion is the misconception that houses must appreciate faster than units because they have more land. After all, it is the land component that increases in value, while as the building ages it lowers in value. Therefore, the bigger the block of the land, the better right? My answer is always the same – not necessarily.

Consider this – given the choice between buying a 1000 sqm block located 30km north of the CBD in a new sub-division and a 300sqm block just 4km east of the CBD in an established redeveloping suburb, both of which are single residential lots and valued at $350,000 – which would you buy? The answer every time would be the smaller block, that is, if you were buying for investment reasons.

You may choose the larger block away from the city for lifestyle reasons (like bringing up your family) but the closer in block will undoubtably have stronger capital growth over the long term. So I put to you – it is not how much land you buy, it is where that land is located. The inner city location is going to have a far more limited supply of blocks than fringe suburbs, where if demand increases, the developers just rub their hands together and create more blocks.

Units then, will have a higher proportion of their value in the building itself, since the blocks or land component is far smaller. This means that units tend to have higher proportionate depreciation allowances than properties with a high land value. Units therefore have a lower land cost component and there is an argument that more of your investment dollar will be returned to you by way of higher rental yields.

At my stage of investing, I am focused much more on yield since I have built a sizable portfolio using a capital growth strategy (negative geared & land) but what I want now is steady relatively passive income that will pay for my lifestyle. You need to determine where you are at in the investment cycle – building wealth or building income. If its wealth, load up on ore houses. If you want income, you could consider having more units in your portfolio.

And why are we doing all of this? So you can do what you want to do rather than what you have to do.

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