Over the past few weeks I have received a goodly volume of email and telephone enquiries from quite a number of CWG investor friends whom we had been able to help; and also several brokers and planners. We have worked hard these past 15 years to achieve that status where when someone needs property information that they automatically think “LETS CONTACT CERTAIN WEALTH GROUP – THEY WILL KNOW!
The enquirers posed a good range of questions that suggested the questioner is either considering their next step in their property investment journey, or conversely, how they might use the CWG process to improve their property asset base for that future time when they will either wish to begin to draw an income, or even plan for bequeathing properties to their children or grandchildren.
I think it is worth sharing with you a few of these enquiries and my replies; even if most might be fairly evident to you. I remember when at school being too embarrassed to ask a question I really wanted to know the answer to; and being relieved when somebody else asked that very question! Does that ring a bell?
Let me address a few of the questions.
Q1 What do you consider is a realistic time frame for one’s investment property journey; and how many properties does one need to have to ensure a good investment return in the future?
A1. Our Certain Wealth Formula recommends 15 years as a suitable term to achieve realistic goals. Using your capital growth equity to support subsequent acquisitions (sometimes you may wish to use some equity from your home to accelerate your program), you can normally purchase your second investment property in two and a half to three years, and then with two properties growing; in another 18 months you can acquire a third (because your program has accelerated with two not one property growing for you).
Using this method that we call “Duplication”, one can purchase between 5 and 7 properties in 12 years; then, hold your property assets for another 3 years to maximize growth, and, if you now want to modify your investment to obtain an income, then sell off perhaps two of the higher equity properties and use the cash to pay down your debt such that you are now nicely positively geared, and receiving a regular income. You may now wish to enjoy that income while still enjoying your properties growing in capital growth; forever. If at some time you need a considerable chunk of money (Children or Grandchildren going through university; change of lifestyle, etc.), you can consider selling another of your properties; but in doing so, speak with a specialist to ensure your “Gearing” is still sound; that you are optimizing capital gains, and you are not slipping back into negative growth.
I believe that the biggest pitfall the property investor must watch for is ensuring that subsequent acquisitions (number 2, 3 etc.) are extremely well researched, and sound. A bad property selection can cause irreparable harm to the balance of one’s entire investment portfolio.
Q2. Shares versus Property; What Should I do?
A2. I am asked this question at least weekly, and my first response is that I am not qualified to speak with authority on this subject other than to say that a balanced investment portfolio will include Cash, Fixed Interest, Shares, and Property; the proportion depending on the stage of life of the investor.
We have seen modest growth in shares over the past 10 years or so, and simple statistics will reveal that property has over the same period, in most of our Capital Cities, doubled or better in price.
An anecdote I like to use to explain my philosophy on property versus shares goes like this:
If I have $50,000 in cash and I say to myself ‘What can I best do with the $50,000? Should I just leave it in a savings or term deposit account and see it deteriorate in spending power; bearing in mind that money halves in spending power about every 12 years. But it is safe as a bank!
Let me look at Shares – I want to maximize my $50k in share trading by borrowing from the bank to increase my trading capacity. And so from the bank, assuming my salary, indebtedness, and ability to repay the loan were OK, I could borrow another $25,000, giving me an investment “pot” of $75,000. If I could invest the lot into company X and receive a return of 6% over the next year, my pot of $75,000 would give me a gross return of $4,500. When I deduct income tax at 35%, I must deduct $1,573 from my $4,500, giving me $2,925. Not too bad; equating to a trip to Bali for a week. However, one also has to repay the bank for the $25,000 loan at say 6% interest, which equals another $1,500 deduction. That brings the net profit to $1,425; not enough for that Bali holiday. There are also a few legitimate taxable deductions to include that will increase my net profit a bit through income tax savings.
In the case of investment property; if I went along to the bank to borrow to purchase an investment property with my $50,000 and a good financial record, I could borrow about $450,000; some 9 times my deposit; and if I achieved a 6% growth in my first year of my $500,000 property, this would represent some $30,000. And there would be no tax to pay on this capital growth until I decided to sell the property. What’s more; I can claim considerable tax deductions for interest (as can the shares investor), depreciation, and other deductions such as rates, land tax, maintenance.
Which option do you think generally offers the best and safest return?
Q3. Planning for the Future.
I have now taken care of my children through my last will and testimony, so now how can I grow the modest amount I have set aside for my grandchildren to receive after my death?
A3. I will provide you a real life example I encountered some 12 years ago as it is really worth relating.
An existing client brought her mother in to meet me to discuss property. She had 3 grandchildren of ages 21, 19, and 17, and wanted to discuss how she could introduce them to property so that they would understand its benefits and appreciate its potential to providing them with a better life.
We discussed the matter at length, and as a special favor, I suggested that they meet with me for 3 hours during which time I would conduct a personalized workshop for them, as well as an introduction to the practical aspects of managing investment property. I reported back to the grandmother that the session had gone well, and so with CWG’s assistance and with the grand children’s participation, we chose a suitable investment property. Grandmother put down 20% deposit and the contract was written up as “Tenants in Common” with the Grandmother as “Guarantor”.
The three grandchildren jointly looked after the property quite professionally, and Grandma paid for them to inspect the property with me at the end of the first year. After 5 years, the youngest grandchild purchased that property from the older two who used their proceeds to purchase their own properties; the oldest with her (new) husband.
Today, all three have two or more properties, and each investor has his/her structure slightly positively geared.
Think about this example for your own family as an alternative to having money sitting around losing value. With specialist advice you could turn unused savings into a growth “product” and help your children or grandchildren become property responsible financially rewarded adults.
Q4 Maintaining Goals
From one of our long term clients.
Bill, when I established my investment property “goals” with you, I was single; on a great wage; and only answerable to myself! Now, 5 years later, I have a husband, a child, and one more “on the way” – a child that is! Now, my original goals are not appropriate. What shall I do?
4A.Your goals must be your focus on whatever you are setting out in life to do. One of the best things about goals is that they can be changed, and so must be reviewed regularly. How often? Say, once every 2 years, and must be reviewed if you circumstances have materially changed. Modifying goals periodically is not an excuse to water them down just because it is convenient; and in some cases, they need to be tightened up; such as if you have received a salary bonus, or inherited money from a relatives will, etc.
Remember, we started our goal setting exercise by deciding how much regular income you were going to need (want) to aim for in X years. If the answer is $100,000 P/A in 15 years, then you plan accordingly. Conversely, if you are happy with $48,000 PA in 10 years; your formula is going to be different. Do you remember our CWG “Formula to Duplicate” slide? I have attached it to this paper to jog your memory?
To address more generally the question of how can I reset my goals; Certain Wealth Group provides a Telephone and Skype service to its clients in which, during a one hour meeting, we help you to revise your goals to reflect your new conditions. We ask you to provide some relevant data before the meeting which we process in advance of us speaking.
To conclude, your goals could change 6 times in 15 years, and only by modifying them to suit your changing circumstances will you achieve them.
To arrange for a goals review or other personal contact with a CWG Investment Director, you are welcome to contact me at firstname.lastname@example.org In the interim; take a look at our Website at www.certain-wealth.com, and while there you may be interested in watching one of our other video sessions.