Years ago, I sold my car to raise money to buy my investment property.
My friends thought I was crazy because it was only a 2-year-old sports car and I was getting ‘benefits’ from the novated lease agreement I had with my work at the time.
Most importantly, they didn’t understand why I would give up on my joy to get into another debt.
I had no regret and knew I just did what needed to be done.
Get rid of the bad debt (personal debts) to get the good debt (mortgage) to buy properties to create wealth in future.
A recent research from Reserve Bank Australia shows that the overall personal debt is shrinking at its fastest rate in five years and people are getting more cautious about their level of personal debts partly due
to the increasing pressure on mortgage repayment, utility costs and slow growth in wages.
There are a number of reasons to minimize your personal debt:
It increases your overall borrowing power
Do you have multiple credit cards, however you don’t really use them?
I have had clients telling me that they have multiple credit cards, BUT the balance is zero so they could not understand why it would have any impact on their borrowing capacity when it comes to applying for their mortgages.
Simply put, a credit card is a loan, an unsecured loan against your credit whether or not you use the full limit.
Lenders will always calculate your credit card debt based on the card’s limit, instead of the actual balance regardless how much you use every month.
If you don’t need the credit cards, then reduce the limit, or even better, cancel them.
You will have a much better view of your personal finance
Having multiple personal debts such as credit cards, personal loans, and car loans makes it difficult to keep up with the repayments and the changes that your creditors might apply to your loans.
Over time, you are likely to lose track of the progress in terms of paying off the debt.
You might be forced to take on more personal debts because you can’t really save due to the existing ‘never-ending’ personal debts.
You will pay less for what you need and save more
Usually, you will be able to reduce your repayment significantly if you consolidate your short-term personal debts with your mortgage.
Consolidate your personal debts and take advantage of the low rates of your mortgage.
So you will be paying 5% rather than 10% for your personal debts in some cases.
Now, I am not encouraging you to use your mortgage to indulge yourself, however, it’s way cheaper if you HAVE to use the money.
You will pay less for what you truly need.
You take control of your financial future
Same with a lot of things in our life, one of the critical factors to being successful in anything is having the right mindset first.
By trying to consolidate all your personal debts and keep them to the absolute minimum, you have already shown commitment to better managing your finances.
It will motivate you to have an honest discussion with your family and loved ones and set the right priorities in your life.
It will take you out of your financial slump and position yourself to succeed financially in future.
It’s time to sit down and have a closer look at what you owe and see if they are structured the best way possible.
You might very well be making 6 figure from your work, however, all the personal debts are like the holes in your bucket and you need to stop the leak.
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Every quarter, the Reserve Bank conducts their review of where to buy Pregabalin in canada in which they examine the ratio of Australian household debts and assets to disposable income.
The latest review was recently released and it shows that the household debt to income ratio was at the record high of 193.7% as of Jun 2017.
Unsurprisingly, most of the household debt is related to the housing debt.
Is this alarming?
This number looks alarming as the debt to income ratio shows that your debt could be 197 times more than what you actually earn.
Let’s examine other ratios also published by RBA and put this number in perspective.
Other important ratios to consider as of June 2017
A) Household debt to assets ratio was at 20.7% and it has been falling since September 2011. This number means that your debt is 20% of your assets.
This number means that your debt is 20% of the value of your assets.
B) Housing Assets to income ratio was at the record high of 516%. This means your
In summary, both the value of our assets and the value of our liabilities have increased relative to our incomes.
Why has the debt to income ratio been increasing?
According to Philip Lowe, the governor of RBA, the reasons for the ratio to increase again over the past few years are as follows:
1. Lower interest rate
2. Slow growth in household income over the last 5 years
3. Some of our cities have become major global cities, and therefore more demand from overseas investors
4. Stronger population growth
Reasons 1,3 and 4 are strong indicators that the housing market will keep performing well because of the basic law of supply and demand.
Why has the housing price been increasing?
where can i buy Pregabalin online summarized it for us in his speech.
We chose to borrow more for housing and this pushed up the average price of housing given the constraints on the supply side.
The supply of well-located housing and land in our cities has been constrained by a combination of zoning issues, geography and inadequate transport.
Another related factor was that our population was growing at a reasonable pace.
Adding to the picture, Australians consume more land per dwelling than is possible in many other countries, although this is changing, and many of us have chosen to live in a few large coastal cities.
Increased ability to borrow, more demand and constrained supply meant higher prices.
Is there a bubble?
So we saw marked increases in the ratios of housing prices and debt to household incomes up until the early 2000s.
At the time, there was much discussion as to whether these higher ratios were sustainable.
As things turned out, the higher ratios have been sustained for quite a while.
This largely reflects the choices we have made as a society regarding where and how we live (and how much at least some of us are prepared to spend to do so), urban planning and transport, and the nature of our financial system.
It is these choices that have underpinned the high level of housing prices.
So the changes that we have seen in these ratios are largely structural.
While it’s true that the increased debt puts pressure on all of us to keep up with the monthly repayment due to the slow growth in wages, the fundamentals of the housing market are still sound.
Looking long-term, financially, the key to creating wealth in property is your ability to manage cash flow.
Whether you are just starting out or have been in the game for a while.
You may have heard of other people making a decent profit out of building multiple units.
I have always wanted to do a project ever since I started researching property investment and finally had a chance to take one on about 2 years ago.
Here is a quick look at the project.
Apologies for the quality of the video.
I purchased the block about 2 years ago and started building 3 units in June 2017 after going through the lengthy process of getting the planning and building permits from the council.
In this post, I will share 9 things I have learned so far and hopefully, they will be useful to you.
1. Understand why you want to do a project
Don’t do it because it looks fun, or it potentially generates instant growth.
Make sure you review your overall property investment plan and understand what your goals are.
Understand whether doing a project now will put you in a better financial position to continue to grow your portfolio.
Comparing to the standard buy and hold strategy, starting a project requires a lot of working capital and it could take anywhere from 1 to 3 years to finish if there is a major delay.
If you are just starting out, it’s better to build your foundation portfolio with a couple of residential properties that are medium priced and located in the metro area.
The reason for that is those type of properties are more likely to withstand any unforeseen changes in the economy.
Also, you will be able to tap into the growth in those properties fund your development in future.
For me, I had built my foundation portfolio before I purchased this block, however my borrowing capacity was hitting a bottleneck due to the overall debt I had accumulated over the years.
I had to do something to increase my income so the bank would continue to lend me for future purchases.
So the situation was pretty clear for me.
I needed to manufacture growth and cash flow by doing a small development.
2. Pick the right structure
By structure, I mean the
You could buy a property under your own name or under a
Most people will just buy under their names for a normal property, however, with a development, the structure could be different depending on your plan for the project.
If you are planning to sell, you will be better off setting up a trust and purchasing the site under the trust.
There are a couple of tax benefits to you when you sell your units eventually.
The downside to that is the trust is a separate entity and all the gains and losses while building and holding the units will be contained in the trust, and therefore you wouldn’t be able to claim negative gearing.
That could be a showstopper for a PAYG person.
For me, I was still working full time as a PAYG employee at the time, so I needed the negative gearing benefit to offset the holding cost.
I chose to buy under my personal name, and I was fine with it because my plan is to keep all 3 units as rental properties.
This is not tax advice, it’s just a reminder for you to consider different options when deciding how to make your purchase.
Because once the transaction takes place, it’s going to be costly to change the structure.
So this brings us to the next point.
3. Have an exit plan
Hopefully, you have an exit plan.
Just like how you should’ve formed a blueprint before you started investing in property.
Ask yourself the question – what’s going to happen to my portfolio in 20 years?
When do you want to stop investing, and what’s your desired outcome?
Are you selling some of your properties? or are you going to work as hard as you could to pay them all off and keep them as rentals? etc. etc.
Now, with your project, you need to have an exit plan as well. Are you selling them straight away?
Or are you going to keep them for now and sell in 3 – 5 years time?
Having the end goal in mind allows you to reverse engineer and work out what needs to be done now.
It also allows you to decide how you might want to build the project, whether they are going to be investment grade build or built with a higher level of finish to attract home buyers.
If you plan to sell, you might want to engage a selling agent to sell your units off the plan.
If you plan to keep the properties as rentals, you could also engage a property manager to start the campaign towards the end of the construction.
4. Do Your Homework
Before you even talk about the price for a site, you need to find out what could be done on this block of land.
Is it really a ‘gold mine’ or just a ‘lemon’?
The first question you need to ask is “What are the state and local planning policies & overlays that apply to the site?”
Each local council has its own planning policy and you are only allowed to develop the site as per the policy.
I started with the buy generic Pregabalin online to check the zoning and overlay for my site.
This website will tell you almost everything you need to do know about the site you are interested in.
It will tell you the zoning, overlay and/or any restrictions or special requirements the local council might have on the site.
Those requirements might significantly increase your build cost even though you get the block for a relatively low cost.
You could then cross check with the local city council website to find out what those requirements mean.
I will talk about this in details in another post.
5. How much should you pay for a site?
Property investment is essentially a business and should be treated as such.
Taking on a project is like developing a product/service for your business to sell.
For a product, you would research the market to figure out what’s selling in the market and for how much.
Once you know the selling price for your end product, you would then subtract from it the costs such as
Finally, you would have the figure you want to pay for the material (site) The same principle applies to buying a site for development.
Start with your end product in mind, do your homework, figure out what’s selling in your selected area.
Make sure you use recent and comparable sales data.
By ‘recent’ and ‘comparable’, I mean:
- Recent: within the last three months, and
- Comparable: the same type of development, within the immediate vicinity (same street if possible.
You might have to broaden your search.
Just be aware that the further you go for comparable sales data, the less authoritative your data will be.
If you can not support your figures with hard data, it is an indicator that you may have difficulty obtaining finance.
Let’s say if you are looking to build 3 double story townhouses on the site, and they are selling for $500,000 each in your area.
Now, the end value of your finished project will be around $1.5M.
Let’s say the construction cost is around $700,000 for 3 such units, and the development cost is around $20,000 to get permits etc.
Now, you do the math, how much would you pay for the land?
That’s the simplified version, In real life, there is a lot more to consider in terms of cost before you could reach your budget, however you get the idea.
I have included a cost model and a demo video walking you through it.
6. Site selection
When it comes to choosing the site, the only thing mattered to me is the numbers.
Don’t be emotionally attached to those blue-ribbon suburban streets.
Remember you are in this to create capital gain and/or generate cash flow.
You are not buying your own home.
You need to consider the hard facts like site orientation, the width of the driveway, how the existing property on the block is built and what’s on the nature strip etc.
With a fee, a draftsman and a town planner can help you inspect the site,
I have built a quick site selection checklist.
7. Approvals can take a long time
There are two approvals required before you can start building.
You need the Planning permit and the Building permit from your local council.
The process could be lengthy as it could take up to 12 months to obtain both approvals.
One tip is to try to reach an agreement with the vendor to submit the planning application prior to the settlement.
That means you could potentially get your planning permit as soon as the site is settled!
I could’ve negotiated with the vendor, however, I didn’t and application process didn’t start until 2 months after the settlement.
8. Explore your finance options
There are a number of ways to fund a development depending on your circumstances.
One thing I would like to point out, without being technical, is that make sure you talk to a buy Pregabalin 150 mg online about your options.
I applied for the construction loan from the same bank that funded my purchase of the block.
The result was less than ideal.
I would’ve had to fund 50% of the development cost had I gone through them.
I took the same application to another lender and the result was much better.
Different lenders value the development differently and look at your income sources with different views as well.
Don’t be discouraged if you are knocked by one bank and think it’s the end of the world.
Because you always have options.
9. Things can go wrong. Have some buffer
Like any projects, there are always variations.
My development is no exception.
Just when I thought I had done enough planning and covered all possible scenarios, I was still hit by unexpected delays.
Once the construction began, I was told the soil was too moist, so the builder had to pour more concrete in to make sure the foundation is solid.
That was $10,000 unexpected. Ouch!
Lucky they didn’t hit any rocks on the site, otherwise, I could be in a world of pain.
Make sure you have some buffer set aside for unexpected situations like this.
It’s an exciting and rewarding process to take on a development project.
Do your homework and treat it like a project that has a scope, implementation plan, back-out plan, deliverables and an exit plan.
Understand your why. Why you want to do a project, and why now.
Make sure you review your exit plan and make the purchase under the appropriate structure to maximise your gain.
Due diligence and feasibility analysis are two critical steps you can’t afford to miss.
Most importantly, treat your project as a business. Move on if the numbers do not stack up.
I recently attended a property and finance conference and had some very interesting discussions on the topics of where the market in Sydney and Melbourne heading, and what could potentially happen to the interest rate.
I will share my thoughts with you on those topics in details later on, but for now, I want to quickly share with you an interesting report presented by the analyst from CoreLogic.
There is a ton of information in it. best place to buy Pregabalin
Enjoy! Speak soon.
Your superannuation is one of the most important, not to mention tax efficient, ways to save for life after your retirement. Unfortunately, almost half of Australians aged between 45 and 64 do not feel confident
they have adequate funds to do what they want in retirement. Having the right plans in place to manage and grow your super can make a significant difference to your retirement goals. For some, this includes managing their own super independently through a self-managed superannuation fund (SMSF).
An SMSF is your own personal super fund that gives you control to make the important decisions around how your super is invested. Managing your own super through an SMSF can be extremely rewarding, but they aren’t for everyone because they require your close attention and dedication. In this article, I will take you through the 5 steps of investing in property with your super.
First thing first, let’s address the elephant in the room, what is super borrowing? Simply put, it is a loan to your SMSF (Self-Managed Superannuation Fund) trustee to purchase an investment asset. By law, the trustee of a regulated superannuation fund, which includes SMSFs, can not borrow money. However, it does allow an SMSF trustee to borrow money to acquire certain kinds of assets, including residential investment property, provided that certain conditions are met.
One of these conditions is that any rights of the lender or other person against the SMSF trustee is limited to the asset acquired with the borrowed money. This is what is often referred to as a ‘limited recourse’ loan.
A Superannuation loan is a loan to your SMSF trustee for the purpose of financing or refinancing the acquisition of a residential investment property.
Let’s use the simple scenario below to illustrate the general process of super lending
James, 51 is an IT account manager, and his wife Grace, 49 a doctor, together have been contributing to standard industry superannuation funds for many years. They sought professional advice, and took all the necessary steps to set up their own SMSF called The Jamesgrace Super Fund – in doing so, they also choose to have a corporate trustee for their SMSF (Jamesgrace Pty Ltd) of which they will be the directors.
Step 1. Legal
James and Grace have set up a SMSF and chosen to have a corporate trustee for their SMSF (Jamesgrace design Pty Ltd) of which both of them will be the directors. They also set up a security holding trust, to which the vendor will transfer the legal title. The holding trust will become the legal owner of the property, while the SMSF is the beneficial owner and receives the rental income.
During the term of the loan, the legal title to the property is held by the trustee of their security trust – as required by superannuation law, while loan repayments are made by the SMSF itself.
Step 2. Understand if the numbers stack up
When considering whether to borrow against super to invest, it’s important to determine if the net investment returns are likely to exceed the after tax cost of borrowing. James and Grace have done their due diligence by gathering the available data about the property being considered for purchase, the loan and associated structuring costs (including the costs related to the SMSF arrangements).
James and Grace decided that they want to include residential property in their SMSF’s investment mix. So they sought legal advice regarding borrowings for their SMSF. They have $300,000 in cash in their SMSF and have found an investment property worth $500,000 which they would like to purchase.
As the directors of Jamesgrace Pty Ltd (the corporate trustee for their SMSF), James and Grace arrange to buy the property and use $175,000 in cash to make an initial payment for the property. The shortfall of $325,000 plus $25,000 in stamp duty and acquisition costs is funded by a ‘limited recourse’ loan, using the property as security.
Step 3. Apply for the loan
James and Grace arrange for a loan to be provided to their fund in order to cover this shortfall. The SMSF will initially qualify for the loan as the SMSF:
Meets the pre-purchase minimum net asset position of $200,000
Passes the liquidity test of at least 10% of total assets, after settlement. The SMSF will still have $125,000 remaining as liquid assets after the purchase has been completed.
Both James and Grace are also required to provide the lender with personal guarantees for this loan.
Step 4. Repay the loan
Income from the rent, other SMSF investments and James’ and Grace’s super contributions can all be used to repay the loan. In addition, James and Grace choose a variable interest rate loan option and link a 100% offset account to it. This means that every dollar their SMSF holds in the Offset Deposit Account effectively reduces the amount of interest the fund will pay on the loan.
Step 5. Paying off the debt
The super borrowing arrangement will end once the loan is paid off, and the title of the security will be transferred from the security holding trust to the SMSF.
Above are the very high level steps that you will need to go through to invest in property using your super, and this is only the tip of the iceberg as there are other tips and things you also need to consider to maximize your super borrowing. If you like this article, please visit my blog for more articles on creating wealth via property.