Price vs Value

It’s a big news that London property price has been falling for the last 8 months. The report says the value has also been falling at the same time. 
 
Price is how much the buyer is willing to pay for the goods and services
 
Value is what the property is worth fundamentally regardless of what people might want to pay at the time. 
 
When it comes to property investment, the value is more relevant and more complicated.
 
Price is important when you buy, however, the underlying value is what creates wealth for us in the long run. 
 
The price fluctuates due to people’s perception of the market, overall economic condition and job security etc. 
 
The underlying value is determined by the fundamentals such as the population growth, infrastructure, and increase in the number of jobs locally etc.  
 
Focus on the fundamentals and act when the market conditions change to your favor. 
 
Don’t sit around and procrastinate.
 
Be prepared, bold and take action.

Why Invest? Why Bother?

When I was a little kid, my parents used to live a very frugal life.

Making the ends meet was never a problem for my parents, however they were very cautious with money and kept telling me how hard it was to make money.

My parents were both public servants and make a reasonably good living.

A close friend of our family tried to convince my parents to invest their spare money in shares or properties, however investing seemed too risky in my parents’ eyes.

‘Why give up the comfort to do something risky? What’s wrong with just saving the money in the bank?’ My dad would always dismiss the idea of investing with those two questions because no one is his circle

were able to give him a convincing answer.

Fast forward to 2017, both my parents and that close friend of theirs have retired, my parents still have the significant savings that they had been building their entire working life, however their close friend would have far more money on his book if he were to sell all his shares and properties.

My parents would also comment on how their savings don’t seem to be worth as much nowadays as they were 30 or even 10 years ago as they saw the expenses of living and property prices skyrocketing.

They haven’t done anything wrong.

They could’ve done it better, however.

Regardless of what my parents were telling me, I started investing as soon as I had my first paycheck.

I started with shares, sold them right before the GFC and then I bought my first house with the profit I made.

I always knew that I wanted to invest and now I will share with you the reasons why it is important to invest.

1) Protect the purchasing power of your money

Let’s say that your weekly grocery shopping budget is $100 in 2016 and you put aside $100 every month as your grocery budget for next year.

Fast forward to 2017, the same monthly grocery budget of $100 would only buy you $97 worth of food, goods and services.

So without investing, your $100 is only worth $97 a year later and has lost some purchasing power.

Why?

This is due to inflation, which is the general increase in the prices of goods and services over time.

Now, how do we keep the same purchasing power?

We have to come up with an investment that has the rate of return that equals to the rate of inflation.

The inflation rate in Australia in 2016 was 2.1%.

So the return on the investment needs to be 2.1% just to keep the same purchasing power.

We have to make our $100 in 2016 worth $102.1 in 2017 so we can put the same amount of food on the table to feed our families.

Sure, there are other ways to potentially combat the inflation.

For example, we could get a pay rise, but how many of us will get a yearly increase? and how much of raise would that be?

2) Grow your wealth

Most of us would not be happy with just being able to put the food on the table and pay the bills.

Some of us would like to get ahead of the inflation a little bit so that we could save some money to improve our living standards or retire a bit early.

Let’s say that you have $100 now and you have 3 options:

1) Put the $100 aside and do nothing with it
2) Save the $100 in a savings account that returns 1%
3) Invest the $100 actively and return is 6% a year

Let’s assume the inflation rate for the next 20 years is 1%, that is the prices of goods and services only goes up by 1% every year.

Below is what your purchasing power will look like in the year 2037.

Options 2017 Rate of Return Return in 2037 Inflation Cost of Living in 2037 Net Difference
A) Do Nothing $100 0% $100 1% $122.02 -$22
B) Savings Account $100 1% $122.02 1% $122.02 $0.00
C) Active Investment $100 6% $320.71 1% $122.02 $198.69

A) If you do nothing with the money, it will still be $100 in 2037, however the cost of living will have increased to $122.02.

B) If you put the $100 in a savings account, it will be worth $122.02 in 2037, so we maintain the purchasing power and can still buy the things we bought in 2017.

C) If you actively invest the $100, it will be worth $320.71 in 2037, so we could either spend more money to improve our standard of living OR spend the same amount of money on grocery and save up the difference for a holiday or even early retirement.

Numbers do not lie. Investing is the only way to create wealth.

3) We live our life everyday investing

‘An unexamined life is not worth living’ – As Socrates suggests.

I am not sure about you. I didn’t want to just show up to work, earn my money, retire and live the rest of my life on my superannuation.

That sounds like a plan, however it was never my plan.

I want to explore life as much as possible while I am still relatively young and the only way I could fund an early retirement is by investing the money I make from exchanging my time and talent.

The process of investing itself is a way of examining our lives whether you have noticed it or not.

Our life is about investing, we are all living it.

The definition of invest is to devote (one’s time, effort, or energy) to a particular undertaking with the expectation of a worthwhile result.

You invest time in your family when you spend time with your partner and your kids in exchange for a happy family.
You invest time and talent when you work for someone else in exchange for money.
You invest your time and emotion when you are sitting on the couch watching footy.

We are investing every single day of our life, there is nothing new about it.

Conclusion

See, investment is not a want, it’s a need.

It’s part of the human nature of constantly evolving. The world we are living in changes and evolves every day regardless of what we want to do.

Hopefully, you now have a better understanding of why it is important o invest and we will look at the reasons to invest in property tomorrow.

4 Reasons You Need To Smash Your Personal Debts This Summer

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.

Bottom Line

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.

I have written a post about reducing your personal debts by consolidating them. Head over here to find out more.

Too Much Debt? It's Not That Bad

Every quarter, the Reserve Bank conducts their review of household finance data 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 facts

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?

Governor Lowe 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.

Bottomline

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.

 

9 Things I Have Learnt From My Property Development

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.

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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 structure under which you are purchasing the property/site.

You could buy a property under your own name or under a trust name.

 

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 Victoria Planning Map website 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 labour cost, marketing cost, tax, your profit, and buffer etc. etc. 

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:

  1. Recent: within the last three months, and
  2. 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, however you could also do some preliminary check yourself. 

I have built a quick site selection checklist.

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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. 

Lesson learnt for me.

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 qualified mortgage broker 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.

Conclusion

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.