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Real Estate Investing: How To Invest In Real Estate Profitably – A Definitive Guide

Discover How to Turn Your Property Investments
Into Cash Generating Assets in 8 Proven Steps
(Even on an Investment Property That is Not Making You Money)

 prudent property investing

 

Today I’m going to show you how one investor went from losing nearly $5,000 per year on his rental properties, to putting together development deals that could net him $150,000 to $200,000 in 12 short months.

He started out with zero connections in the building industry and zero development skills. In this guide, I’ll walk you through the exact step-by-step real estate investing process I used to help him begin thinking and acting like an investing legend.

Con Kalavritinos owned four properties that were costing him nearly $5,000 per year just to hold. First, I taught him how to turn the cash flow around on those four losing properties by implementing three strategies I will teach you about later in this guide.

Con began saving nearly $5,000 per year and was no longer draining money from his personal account to keep his properties afloat. Then we began working on his mindset and strategy. Here’s what Con said about the outcome:

“Working with Jason was a game changer. When I first started the coaching, my strategy was a very conservative buy and hold approach. Jason pushed me to become more outcome focused and manufacture my growth, as opposed to set and forget speculation. I am now working on a townhouse development and expect a healthy six-figure profit in the next 12 months, and I can’t wait for my next one. This type of deal was never on the cards prior to his coaching.”

Before I reveal the step-by-step process Con used, I want to challenge you to think about your own future.

Later in this article, I’ll also go into actionable details on how you can turn a losing property investment into a cash flow positive asset. So stay tuned!

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You Aren’t Getting Any Younger

Have you ever noticed that the older you get, the faster time seems to pass?

As a child, my grandfather must have said to me a dozen times, “Son, it seems like just yesterday when I was your age.”

His statement reveals something about human nature. When we’re young and we imagine the future, we tend to think, “I have so much time left.” As we grow older and look back, we tend to think, “Where did the time go?”

I’d like to ask you one of the most important questions anyone will ever ask you. This is a question that you likely wish someone asked you 10 or 20 years ago. And, even if you were asked this question as a teenager or in your early 20’s, you probably didn’t feel the weight of its importance:

How old do you want to be when you no longer have to work?

All of us are racing toward the day when we must either live off the income of our investments, or rely upon someone else to provide for our basic needs. Your body is currently in a state of entropy. You will likely outlive your physical ability to trade your time for money. Even more likely, you’ll outlive your desire to do so.

If you’re young, the need for passive income probably doesn’t seem urgent. You’re probably thinking, “I have so much time left.”

If you’re older, you may think about that need daily, asking yourself, “Where did the time go?”

Most people hit retirement age unprepared. Currently, 75 percent of Australians ages 65 and older rely on a full or partial Age Pension for financial support.

thinking manIf you were forced to retire today and had to rely fully on the Age Pension, your income would be under $400 per week. Assuming this pension still exists when you retire, what would life look like for you on the equivalent of $21,000 per year?

“But I have my super,” you may say.

The average super balance today sits at about $100,000. Only a third of baby boomers are expected to retire with a sufficient nest egg to maintain their current standard of living.

How about you? Are you on a path toward a retirement with less than your desired level of comfort and security?

You may be thinking, “But I own property.”

Even those who do step out to invest in real estate make little true progress. A total of 92 percent of property investors only own one or two properties, and most of those are negatively geared and on interest only loans. Without perpetual capital growth, these investors don’t stand a chance.

There is a better way.

If you want to retire richer, and perhaps even sooner, here are eight detailed steps that, if you act upon, will carry you closer to the lifestyle of comfort and freedom you ultimately desire. This is more than a how-to on real estate investing for beginners. Even if you’re a seasoned investing professional, there is wisdom for you to gleen in this manual.

Before we get to those eight steps, I want to give you one final exhortation. If you’re going to take the time to read this little guide, do yourself a favour and commit to taking action on what you’re learning. You may have read other real estate investing books and done very little after the fact. To help make this learning experience as practical as possible, I’ve included “Time For Action” sections throughout. Be sure you follow the instructions to the letter. Here’s the first one!

 

Time For Action

Time For Action

The first step in taking action is to take good notes. If you have a journal, keep it close by when you’re reading. If you don’t have one, buy one before you read the first chapter.

As you’re reading, make notes on the things that stand out to you. Jot down ideas that come to your mind and reflections upon what you’re learning.

Throughout this guide, I’ll give you some practical steps to follow. You’ll also need your journal to respond to these action-driven tasks.

All the best on your journey. May you feel inspired to dream big and achieve your goals.

 

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The Ultimate List of Resources on How To Invest In Real Estate and Achieve Financial Freedom

This guide will teach you valuable skills for investing success, from vision and strategy to due diligence and making offers

 

 

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Chapter One

  Stop Following the Crowd and Start Thinking Like an Investing Legend

 

think differently

 

Legendary investor, businessman and poker aficionado Sir John Templeton died in 2008 at the age of 95. He became one of the wealthiest investors of all time and gave away over $1 billion to charitable causes throughout his life.

Templeton

Templeton had a knack for creating wealth by ignoring conventional wisdom. He made $86 million shorting NASDAQ stocks before the March 2000 crash. When everyone was bullish and buying, he foresaw the carnage to come.

Here’s some investing wisdom from Templeton: “If you want to have a better performance than the crowd, you must do things differently from the crowd.”

Are you following the property investing crowd? If so, and if you want better performance than the crowd, then it’s time to change course.

Warren Buffett is not only one of the most successful investors of our time, but also one of the wealthiest men in the world. He attributes much of his success to thinking differently than the crowd.

After once explaining that asset markets are primarily controlled by fear and greed, Buffet offered some advice. He said, “…be fearful when others are greedy, and greedy when others are fearful.”

What are legendary investors able to see that the crowd can’t see?

Another investing legend a little closer to home, Steve McKnight, bought his first property for $44,000 in Ballarat back in 1999. Since then, he has traded over 500 properties in three different nations. He went on to write several best-selling property investing books and now runs a managed fund worth over AU$115 million, invested in commercial properties in the United States.

Steve McKnight’s personal philosophy is to never adopt a herd mentality by following what the general investing public is doing. According to Steve, “Success comes by doing things differently.”

Are you picking up a theme here? The most successful investors in the world ignore what’s commonly considered to be conventional wisdom, and instead chart a different course.

If you want results that are greater than the crowd, here are four specific ways you can shift your mindset to think more like a property investing legend:

1. Consistently Spend Less Than You Earn and Become Wealthy

Australian banknotes in walletAccording to one study, Australian household debt has tripled in the last 25 years. Another survey found that almost one in five Australians would struggle to come up with $1,000 to cover an emergency expense. One in three Australians live from paycheck to paycheck, spending everything they earn.

If you want to lower your debt and create long-term wealth, read on.

Steve McKnight says “The average Australian is programmed to fail at long-term wealth creation because they’re inclined to spend more than they earn. Doing things differently is not just an option, it’s a total necessity.”

If you follow the spending habits of the crowd, you won’t even get out of the starting gate. Before you can be an investor, you must be a saver.

Here’s how:

The first and most important principle of wealth creation is to spend less than you earn and invest the difference. This is real estate investing 101. If you lack the discipline to live below your means, accumulating money to invest with will be impossible.

Warren Buffett once said, “Do not save what is left after spending, but spend what is left after saving.”

Draw a line in the sand and say enough is enough, because it’s time to get passionate about wealth creation. This will mean deciding first how much you will save each month and then finding a way to live off of what’s left.

This will require a discipline that few people in our culture seem to have, which is spending less than you earn.

Here’s the deal: You need to create and stick to your budget. Budgeting is not an optional addition to your financial management plan. It’s not just for those who can’t reign in their spending. Budgeting is foundational to wealth creation. You must treat your personal finances like you would a business.

The ultimate goal of budgeting is obvious: to be deliberate about where you spend, so that you can direct more funds toward investment. If you’re in debt, I can virtually guarantee that you have not been living on a budget. For those who were never taught how to budget, this can take some getting used to, but don’t give up. If you stick with it, it will get easier.

Time For Action

Time For Action

Don’t know where to start? Here’s how.

Stop reading for a moment and follow these nine easy budgeting action points:

  1. Get your journal and something to write with.
  2. Calculate how much money you earn each month after taxes.
  3. Write that amount at the top of the page.
  4. Write down exactly how much you commit to save each month.
  5. Make a list of all of your monthly expenses, and write the total amount down.
  6. Subtract your expenses and savings from your total income to confirm that the figures balance.
  7. If the figures don’t balance, figure out how to reduce your expenses until you can meet your savings goal.
  8. Write these two commitments on a separate sheet of paper and fill in the blanks:
    1. I commit to save $________ each month, and I will discipline myself to keep my spending below $________.
    2. I will never borrow again to purchase an item that I know will depreciate in value.
  9. Pin your two commitments up where you can see them daily.

Don’t read any further until you’ve taken action on this most basic step. Even if you’re already saving money, you’re not truly investing like a legend unless you are keeping a budget and treating your personal finances like a business.

Why is this important? Keep reading to find out.

2. Ways You Can Stop Gambling and Start Investing in Real Estate Successfully

Stop GamblingLet me share with you the most painful investing mistake I ever made.

I just graduated from university with a degree in finance and was working as an intern for a large investment bank. Considering myself to be a sophisticated stock market professional, I borrowed big off my credit card to go all in on a technology company I knew was going to make me rich.

The DotCom Bubble of 1999 had just burst, and I was sure that share prices would shoot back up soon. After all, the professional analysts were saying a rally was inevitable.

Having watched these shares trade for months between $100 and $120, I picked them up for $55 per share. As a gullible and naive young investor, I was emotionally swayed by analyst projections, who claimed these shares were headed for $500.

Long story short, having greedily passed up an opportunity to sell for a quick profit at $75, I watched this company’s share price drop back to $55, then $45, then $35, and then all the way down to about $2 per share, where I eventually sold them.

I learned a valuable lesson over those horrifying months: relying on luck rather than skill seldom pays off. In fact, it most often equals pain.

Here’s another Warren Buffett quote: “Risk comes from not knowing what you are doing.”

When we use investment strategies that we have little or no training or expertise in, we set ourselves up for failure. Betting big may be thrilling, but your financial future is too important to gamble with for the sake of a cheap – or not so cheap – thrill.

If your investing success depends on factors outside of your control, you are relying on luck, not skill. This means you’re gambling, not investing.

This happens every day in Australia, as inexperienced investors buy properties speculating on future capital growth. Many people wrongly assume that all real estate assets will perpetually increase in value.

I could tell you many stories from investors I’ve coached who learned the hard way that you can lose a lot of money in property when you don’t know what you’re doing.

To keep from losing a lot of your own money, read on.

3. Stop Losing Money: Strategies to Help You Reject Negative Gearing and Be More Creative

Australian banknotes in walletAccording to the 2012-13 taxation statistics released by the ATO, of the nearly 1.9 million landlords in Australia, 1.26 million of them recorded a loss on their rental income. That amounts to two-thirds of all property investors losing money each and every month by holding real estate.

If you want to follow the crowd and lose money, try negative gearing. What is negative gearing?

In this case, the word, gearing, simply refers to borrowing money to buy an asset, and the word, negative, refers to a cash-flow loss. With negative gearing, the interest the investor is paying on the mortgage for the property, plus other costs, amounts to more than the income from the rent.

In other words, the investor is earning no money from the rent. There’s actually a loss.

So, why do so many investors choose this strategy? Obviously no one gets into real estate investment to lose money.

The negative gearing tax benefit allows Australians to write off the losses made from rental properties against their income. This has the immediate effect of lowering the investor’s taxable income.

The government incentivises investors to lose money on their rent, so they can save money on their tax.

The crowd believes that the ultimate benefit will come through the growth in value of the property. Negative gearing is simply speculation that the future capital gain on the asset will eventually amount to more than the annual income loss, which they can also justify through the tax break.

Of course, the so-called industry professionals often declare negative gearing to be a property investor’s best friend. The truth is, the only ones making a killing from this strategy are the spruikers who sell these negatively geared properties to unsuspecting investors.

diceBecause most investors believe that all real estate assets will only go up in value, they are easy targets for the salespeople who promote this strategy.

Investors who negatively gear are at the mercy of the market. This is gambling, not investing. Just like at the casino, sometimes investors win with negative gearing, and sometimes they lose.

What’s the alternative?

There are two ways to achieve a growth outcome through investing in real estate – generic growth and manufactured growth. Generic growth is when your property appreciates in value because the entire market appreciates. Investors who negatively gear depend completely upon generic growth.

Manufactured growth is when you take charge of your investing outcome and make the growth happen by adding value to your property. Manufactured growth strategies include renovation, subdivision and development, or other creative ways of boosting the rental yield.

This type of creative investing requires a higher level of skill than most investors possess, but you can develop these skills through proper education and mentoring.

The next step is your key to wealth creation.

4. Your Money Making Mindset: Steps to Stop Buying Solutions and Make a Profit Buying Problems

How do you make money in real estate regardless of what the market is doing? You buy problems and sell solutions.

Here’s the deal:

If you buy an off-the-plan apartment, what problem is there left for you to solve? None. You’ve bought a solution.

The developer made money, though. He bought a problem, which was vacant land, and sold you the solution, which is an income-producing dwelling. Is there any profit remaining for you to make? Only if the whole market in that area goes up in value.

What if you bought a property that’s old, but in an area where people want to live instead? Perhaps it’s in need of renovations, or on a larger block that you could subdivide. Even if you currently don’t have the skill to pursue a creative strategy like this, at least you would own a property you could improve in the future as your skills develop.

buyThe crowd believes that buying new and pretty real estate is a better investment. But remember, the only way the crowd can make money is if every property in the same area also goes up in value. Since the crowd believes all properties only appreciate in value, buying solutions seem to make sense. After all, they say, look at the depreciation benefit you’ll receive on your taxes.

Are you seeing a theme here? The crowd is happy to invest in real estate to save money on taxes, but you’re developing a new perspective. You know that trusting in future generic growth amounts to little more than speculation, and speculation is gambling. You’re also learning a key mindset of legendary investors: Paying tax is an unfortunate but welcomed consequence of making money.

In order to change your mindset, you need to understand how investors lose money by passing on problem properties.

Investors typically avoid problem properties for three reasons:

Problems Are Often Unattractive

The crowd is emotional. Most investors pass up problem properties because they only invest in homes they would want to live in themselves.

Investing in a property you would want to live in is an emotional decision. As an investor, you’re not purchasing with your eyes and your heart, but with your brain and your calculator. As long as the deal stacks up, who cares how you would feel about living there? Get this truth in your head: most often, the uglier the property, the better the profits.

Problems Are a Hassle to Deal With

Some people don’t have the time or the appetite to deal with the aggravation involved in buying problem properties. If you fall in that category, don’t plan on achieving financial freedom in the next five to 10 years, unless of course you have a high income. If you earn over $300,000 per year and are willing to live on $100,000 or less, you can afford to avoid a little hassle. Otherwise, suck it up.

Problems Require a Higher Level of Skill

creative dealMany people are scared away from buying problem properties. I can respect that because at least they aren’t jumping into anything foolishly, but the goal should not be to avoid the strategy. Instead seek to remove the constraint. Find the education and mentoring to help you develop the confidence required to invest in more creative deals.

Steve McKnight says, “The farther away you are from the problem, the farther away you are from the profit.” If you want to take charge of your financial destiny, it will require you to be unemotional, to be willing to manage aggravation and to develop your skill.

Before we go any further in discussing strategy, let’s take a step back and lay the right foundation. After all, it doesn’t make sense talking about how to get there until we first know where we’re going.

At the end of each chapter, I’ll give you a list of helpful articles to read and online resources to explore, so you can deepen your understanding on each of my eight proven steps.

Recommended Resources:

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Chapter Two

Develop a Crystal Clear Financial Vision 

 

Crystal-Clear-Financial-Vision

 

money-target

Here’s the facts:

Some of the deadliest auto accidents in history were multi-car pileups resulting from dense fog. When you’re behind the wheel of a car, your most valuable asset is your vision. Without it, you’re a danger to yourself and to others.

In the same way, having a crystal clear financial vision is crucial for anyone who hopes to achieve financial freedom. The farther into the future you can clearly see, the greater the likelihood you will rise above the status quo of the crowd.

This chapter is all about helping you develop clear, compelling and definite long-term goals.

How far into your financial future can you clearly see? If you’re like most people, the answer is not very far.

Three-fourths of Australians who hit retirement age are forced to rely on government or family for financial support. Why? Quite simply, most people lack a clear financial vision. They never took the time to consider the life they most desire in 20, 30 or 40 years.

As a property mentor at PropertyInvesting.com, I’ve had the privilege of working with hundreds of investors from all ages and walks of life. While I love working with just about everyone, I find it particularly rewarding to mentor young investors in their 20’s. I’m passionate about helping them think long-term, and to begin dreaming about financial freedom in their 30’s or 40’s.

If you’re currently in your 40’s or 50’s, imagine if you could rewind your life 20 years and set a 10 or 20-year financial freedom goal. While the regret of failing to set goals may be painful, it’s not nearly as painful as it would be if you were still sitting in the same place in another 20 years.

I’d like to help you now begin to develop some vision for your future. The following are three important goals I will challenge you to set, which will massively clarify your long-term financial vision.

Go ahead and pull your journal back out, so you can write each of these questions down, and then answer them.

Do you want to retire? The answer to this first question will show you how.

1. How Much Money Per Annum Will I Need to No Longer Have to Work?

This is the starting point of clarifying your financial vision. Whether you plan to stop working at traditional retirement age or younger, you’ll need a certain level of passive income before you can quit your job or sell your business.

Dream big, but be realistic. Rather than setting a goal that would give you a lavish lifestyle, determine the amount required to maintain a modest but comfortable standard of living. The freedom to no longer be required to trade your time for money is glorious enough.

Write down your annual income goal in your journal now.

How much money do you need? In this next question, you’ll find out how to determine your winning numbers.

2. How Much Real Estate Will I Need to Produce My Desired Level of Income?

Passive income is produced by assets that produce cash-flow, which is significantly greater than the costs of holding those assets. With real estate, this usually means the properties are debt-free.

In order to determine the value of your required asset base, you need to know the rental return, or yield, that you expect from the asset. The yield measures the amount of income the asset produces relative to its value:

  • Yield = Annual Income/Asset Value

NAB’s Residential Property SurveyFor example, a rental property that’s worth $500,000, which produces $30,000 per annum in rental returns has a gross yield of six percent:

  • That’s $30,000/$500,000 = .06 or 6%

We can also tweak the formula slightly to determine how much real estate we ultimately need to achieve financial freedom. All we need to know is the amount of annual income we desire and the yield that we can achieve in the real estate market.

To calculate your total required capital, divide your desired annual income by the yield you think you can achieve:

  • Required Capital = Annual Income Goal/Expected Yield

If you need $72,000 per year to quit your job and you are confident that you can achieve a six-percent yield from residential property, you will need debt-free real estate assets worth $1.2 million:

  • That’s $72,000/.06 = $1,200,000

If you chose to purchase quality commercial real estate, you may be able to achieve a yield of eight percent or higher in the current market. At eight percent, you would only need $900,000 in assets to achieve your income goal:

  • That’s $72,000 / .08 = $900,000

The primary benefit of commercial real estate investing is that the tenant typically pays the outgoings, like rates and maintenance costs. This means you get to keep more of that rental income for yourself. Just be mindful that commercial real estate comes with some risks not present in residential property investing.

Right now, stop and use the formula above to work out how much debt-free real estate you must own. Then, write the amount down in your journal.

How much longer do you want to work? This next question is the key to setting your time goal.

3. How Much Time Will It Take Me to Grow My Capital Base Through Real Estate Investing?

How Much Time Will It Take Me To Grow My Capital Base?Finally, and this is the ultimate question, how long will it take you to acquire this much debt-free real estate?

If we approach the question from a different perspective, how much longer are you willing to keep working?

While it’s important to be realistic, you’ll also want to lean strongly upon your desire for freedom in setting your time goal. If you want it bad enough, and financial freedom is truly a must, you may be able to overcome great obstacles in pursuit of your goal.

Of course, the younger you are, the more time you have. If you’re in your 20’s, to achieve financial freedom by age 45 is a huge win. You’d be decades ahead of the crowd.

However, if you are already pushing 45 or even 55, then you may be strongly compelled to find a way to achieve your goal in the next five to 10 years.

Time For Action

White clock with words Time for Action on its face

Get your journal and write down the exact date you plan to achieve your financial freedom goal.

  • Now that you’ve answered these three clarifying questions, create a goal statement that summarises your financial vision. Write the following statement in your journal and fill in the blanks:
    • By the ________ of ________, 20________ I will have $________ worth of debt-free real estate producing an annual income of $________.
    • Now commit to read your goal statement aloud morning and evening until you’ve locked it into memory. While you may feel a little awkward at first, this exercise will help to direct your mental focus and subsequent action toward the achievement of the goal.

 

Recommended Resources:

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Chapter Three

Chart Your Course To Financial Freedom

 Course To Financial Freedom

 

roadmapNow that the fog has lifted from your financial future, it’s time to chart your course.

Being able to clearly see where you want to go makes your journey possible. You also need to know how to get there.

You need some directions and preferably a map, so you can visualise the quickest and safest route.

So the next step for you is to clarify the path that you will take to achieve your goal. You need a strategic plan for building the capital base of debt-free real estate that you require.

Time For Action

White clock with words Time for Action on its faceWrite this question down in your journal:

  • How exactly will I acquire $________ in debt-free real estate within the next ________ years?

That’s the question you need to answer now. To do so, you’ll need to focus on the following three objectives, below:

1. Decide on Your Incremental Goals for Ever-Increasing Real Estate Investment Wins

Every year, my son and I hike over 24 km through Wilsons Prom to camp at Little Waterloo Bay. It’s one of the most beautiful secluded beaches in the world.

Hiking the first 12 km into the campsite is the easy part. Although there’s a moderate uphill climb toward the end, the first half is mostly flat or downhill. The journey feels relatively effortless. Even the brief stretches of more grueling terrain are easily overlooked because we’re so emotionally pumped about getting to the beach.

But the hike back out the following day is a different matter. We’ve had our fun and there’s little more to look forward to than a stop at the bakery on the way home.

And since we walked downhill the day before, it’s now time to walk back up those hills to the car. The final few kilometers of the hike are the worst. It’s steep and with a full backpack, it’s brutal.

On our first adventure into Wilsons Prom, my son Nathan was 10 years old. Walking back out that next day, neither he nor I were psychologically prepared for the final uphill climb. Our legs were already exhausted from the previous day’s hike. As an adult, you push through it. When you’re 10, you just know life sucks and you feel the need to vocalise that fact.

Once the final climb began, my son Nathan hit a wall quickly and was ready to give up. Before long, he was literally crying and begging me to stop and rest. It seemed like we were resting about every 10 metres.

At that rate, I knew it would take us hours to hike the final kilometer. I had to do something.

Incremental GoalsAt first I attempted to motivate him with some encouraging words. I tried everything from “You can do it, don’t give up,” to “Come on champ, think of the character you are building” to “Look at me son, walk now!” Once I realised I was only frustrating him, I decided to take a different tack.

“Son, if you can make it to that tree at the top of the hill just before the bend, we’ll stop and rest for a whole minute.” He found a new motivation through this incremental goal and was able to focus all of his effort on this small achievement and the reward that would follow.

After what seemed like dozens of little incremental goals, we finally made it back to our car. The sense of achievement we both felt was exhilarating. We high fived, then took our packs off and collapsed.

What’s the moral of this story? If you want to accomplish something big, break it down into smaller steps, and go after them incrementally.

Now let’s set some incremental goals for your hike to financial freedom.

As an example, let’s assume you need $1.2 million in debt-free real estate and you’re giving yourself 10 years to achieve this goal. One option would be to divide your goal by the number of years, setting 10 equally-sized incremental goals.

That would mean you would need to add $120,000 to your goal each and every year for 10 years. While you might be able to achieve that in the later years, in the earlier years that’s a pretty tall order. Since your progress toward your goal will most likely not be linear, this is not a realistic goal-setting approach.

Starting out on your hike, you’re probably a little short on skill and maybe financial resources. But as you progress closer toward your goal, your constraints will diminish as your level of sophistication, your confidence and your net worth grows.

You will most likely progress toward your vision by incrementally building momentum, building each year upon smaller, but ever-increasing wins. So, we need a formula for setting incremental goals that takes this reality into consideration.

Steve McKnightIn our Property Apprenticeship program, Steve McKnight and I walk investors through an incremental goal-setting exercise using a half-life, third-value formula. This approach encompasses the momentum principle, providing smaller incremental goals in the early years, then planning for greater progress toward the end.

Here’s how the half-life, third-value formula works: You divide your time goals by two, and your asset goals by three; thus the name half-life, third-value.

Using the goal example above of $1.2 million in 10 years, let’s work out what the half-life, third-value formula would look like:

  • In 10 years, you need $1,200,000
  • In five years, you need $400,000
  • In 2.5 years, you need $134,000
  • In 15 months, you need $45,000

Notice how the years are divided by two for each incremental time goal, starting with 10 years, then five years, then 2.5 years, and finally 15 months.

Similarly, the capital base goal of $1.2 million, when divided by three, breaks down to $400,000 at the corresponding five-year mark, then $134,000 at the 2.5 year mark, and finally $45,000 at 15 months.

In this example, we assumed you’re starting from scratch. If you already have, say $200,000 saved up or in other investments, you would subtract that amount from the long-term goal and start with $1 million at 10 years, rather than $1.2 million. Then divide $1 million by three for the five year goal, and so on.

The end result is a bite-sized 12-to-15 month goal. As long as you can clearly devise a strategy to achieve this first incremental goal, you know your longer term goal is achievable.

You know how the metaphor goes: “How do you eat an elephant?” One bite at a time, of course. This first incremental goal is your first bite. It becomes your complete focus. Once you reach that goal, then you focus on the next one.

If you can’t clearly see a path to this first goal, or if it seems completely unrealistic, then you need to rework the half-life, third-value formula, giving yourself more time to achieve the long-term vision.

Time For Action

Time For Action

Go ahead and pull your journal back out and set your own incremental goals using the half-life, third-value approach. Use the example above as your guide. Next, answer this question:

  • “How much must I add to my investing kitty in the next year to be on track toward my ________ year capital base goal?”
  • Continue reworking the formula until you come up with a timeframe and a capital base goal that gives you an achievable one year target.

If you are feeling overwhelmed, don’t worry, here’s exactly how to determine your personal investing approach.

2. Determine Your Investing Approach to Reach Your Wealth Creation Goals

Now that you know exactly where you need to be one year into your journey, it’s time for you to figure out exactly how you’re going to get there.

It sounds difficult, but read on to learn some simple strategies.

Time For Action

Time For ActionThe next question to answer is: “Will I be an active investor or a passive investor?”

  • Go ahead and write that question down in your journal now.

An active investor is willing and able to invest more time and energy into the pursuit of the ultimate goal. They may also have a vision for fulfilling the goal in a shorter amount of time, say five or 10 years. Because there’s not enough time or too little patience to wait on the overall market to provide gains, active investors will take matters into their own hands.

This active approach usually involves investing strategies that result in quick-cash or manufactured growth gains. As I said before, these types of strategies may include renovations, subdivisions and developments.

Passive investors, on the other hand, typically don’t have the time or the desire to devote more than five hours per week toward an investing goal. Because they either have a long-term vision or a large income, they can afford to allow time and compounding returns to do most of the work for them.

The passive approach relies on generic growth in the overall market to bring growth returns. In other words, your properties will go up in value because all land in the same area has also appreciated in value. The passive approach often assumes that given enough time, real estate will always be more valuable.

Be careful about relying upon generic growth when your income is average. There is no guarantee that the future will be like the past. We’ve recently experienced several decades of significant capital growth in the Australian real estate market. Whether the same rate of growth will continue over the next few decades is anyone’s guess.

So, Will You Be An Active Investor Or a Passive Investor?

Time For Action

Time For Action

Write down the answer to the question, above, in your journal as to which one you will be. Then write a brief statement describing why you’ve chosen that approach.

For example, you may write, I will be a passive investor because I do not have the time to devote more than five hours per week toward my goal. Because my income is relatively high and because my retirement income need is 20 years away, I am confident that I can achieve my goal as a passive investor.

Alternatively, you may write, I will be an active investor because I am not willing to wait a long time to achieve my goal. I must achieve financial freedom in ________ years. I am willing and able to devote the time and energy required to fulfill this goal.

3. Determine Your Personal Strategy and Develop Stronger Property Investing Skills

Now that you’ve determined your broader investing approach, it’s time to home in on the property investing strategy you will employ to get there. Most likely this will require you to develop a higher level of investing skill.

Here’s how you can stop wishing for good luck by using your own personal strategies for success.

Time For Action

Time For Action

Write down the following two questions in your journal:

  • What specific property investing strategy will I use to achieve my goal?
  • How exactly will I develop the skill required to successfully engage in this strategy.

The investing crowd relies on luck rather than skill to make money in real estate. That’s gambling, not investing. Remember what Warren Buffett said: “Risk comes from not knowing what you are doing.”

When you use investment strategies that you have little or no training or expertise in, you are setting yourself up for failure. Regardless of whether you’re using an active or passive investing approach, you must focus on increasing your competency as an investor.

Remember the half-life, third-value formula I gave you before? What is required to go from your one year goal to your two year goal? What about your two year goal to your four year goal?

In each successive period, you must double your results, accomplishing twice as much as you did before. The entire model assumes you are not only hitting your goal in one period, but also simultaneously developing the skill to achieve the results necessary to hit the goal at the end of the next period.

Here is a simple three-step process you can use to continually increase your property investing skill:

  1. Read VoraciouslyRead Voraciously: Your strong desire to achieve your goal will be evidenced by how you spend your time. Rather than wasting time on TV or the internet, create a list of must-read books or articles. Set aside one hour each day to increase your investing knowledge.
  1. Find a Mentor: Quality education is as much about what’s caught, as it is about what’s taught. You don’t just want a teacher. You want a mentor, someone who has done what you want to do, and who is farther along on the journey than you are. You can find mentors organically by building relationships with people in your area, or more formally, through a paid mentoring program.
  1. Take Action: While quality education is the crucial first step, ultimately, you can only develop your skill by taking action. You must step out of your comfort zone and start talking to agents, inspecting properties and making offers.

In Chapter Five, I’ll help you decide which specific investing strategy is right for you. For now, let’s focus on skill development.

Time For Action

 Time for Action

Get your journal and write down a plan of action for increasing your level of confidence and sophistication as a property investor. Do this by answering the following questions:

  • What three investing books will I read over the next three months?
  • Who will I approach for mentoring?
  • What can I do this week to begin taking action as a property investor?
  • In case you’re not sure where to start taking action, here’s an idea for you:
    • Contact an agent by phone with the goal of learning more about your local property market. In fact, I’d suggest calling three agents to get three different opinions.
    • Tell each of them that you are considering buying a property to renovate and then resell, but you’re not sure the best type of property to buy. Ask the agent the following questions:
      • What type of properties are you able to sell the fastest? Are they two or three bedroom homes? What about units? What is the ideal block size?
      • Who typically buys these properties? You want to know who the ideal target market would be. Is it families with young children? What about young professionals or retirees?
      • What is the average number of days on the market for a property like this?
      • If you were to list one of these properties, how long would it take to sell?

This exercise will give you a great deal of insight into your area and will sharpen your skills in working with other professionals.

Nothing but fear or laziness would keep you from taking this small action step. So, go ahead and pick up the phone. What do you have to lose?

 

Recommended Resources:

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Chapter Four

Turn Your Losing Deals Into Profitable Money-Making Machines

 

money making machine

 

Are you tired of being on the losing end of things? Read on to learn how to start winning.

I’ve had the privilege of coaching and mentoring hundreds of investors through Steve McKnight’s training programs. This has put me in a unique position to learn from both the successes and the failures of other investors.

money machineOne of the most common responses I hear from the people I’ve trained is, “I wish I knew this before buying my last property.” Let’s face it, making mistakes early in your property investing career is easy to do.

Most investors enter the real estate market with a plan for little more than speculation. Unfortunately, there are plenty of sharks out there keen to take advantage of unsuspecting and inexperienced investors. The crowd, having bought into the myth of negative gearing, is easy prey.

I wouldn’t be surprised if you too, are holding a property you regret buying. Before we continue creating your investing plan, let’s pause to talk about what to do with these underperforming assets you may already be holding.

Even if you’ve never previously invested in real estate, or you’re not currently holding any dud properties, this chapter will help spark some ideas for your next deal.

Here are seven strategies that may help you turn that losing deal into a winner:

1. Build a Granny Flat and Boost Your Cash Flow

cashflowDepending on where you invest, you may be able to add a secondary dwelling to increase the overall yield of your investment.

Last year I was mentoring an investor who converted her existing detached garage into a second dwelling. She and her partner carried out much of the renovation work themselves on a bare bones budget, and then rented the garage out for $190 per week. This provided a massive boost to their income on this property.

Another strategy is to convert part of your existing dwelling to a granny flat, by making some internal structural changes. This could be as simple as adding an unobstructed external entrance, a small kitchen and a laundry.

If the floor plan does not allow for a conversion, but you have some additional land, you may consider building an extension onto the existing structure to create a new, self-contained dwelling. Or if the block is large enough, you could take the more traditional approach of building a new detached granny flat.

Simple Action Plan Template

If you think this strategy may work for you, here’s a simple action plan to follow:

  1. Check Your State’s Laws. Granny flat laws vary from state to state, so be sure to do your research. If you live in South Australia, Victoria or most of Queensland, I’m sorry to say that only family members can rent secondary dwellings. However, if you live in Australian Capital Territory, Northern Territory, New South Wales, Tasmania or Western Australia, you can rent a granny flat to virtually anyone who will pay you.
  1. Consult Your Local Council. Be sure you’re clear on the minimum lot standard, the maximum dwelling size and all other requirements for granny flats in your particular area.
  1. Assess Rental Demand. Talk to local rental managers and ask for a rental appraisal – not only for your new proposed dwelling, but also for your existing property after the granny flat is complete. You must be confident that your new one-or two-bedroom unit will be easily tenanted. Be conservative and plan for a rent below other one-or two-bedroom units in the same area that may have a more desirable living space.
  1. Assess The Costs. Contact several qualified and trustworthy builders to bid on the construction of your new granny flat. Be sure to factor in all potential costs, including plumbing and sewer, utility connection and council fees. Many builders who specialise in granny flats will be able to provide a turnkey solution.
  1. Assess The Potential Added Value. Contact an agent to appraise the value of your entire property after the project is complete. Ask for valuations that consider both the investor market and the owner-occupier market.
  1. Crunch The Numbers. Make sure the deal stacks up. Although your primary concern is cash flow, your secondary consideration should be the impact on the overall value of your property.
  1. Secure Council Approval. Before commencing construction, you’ll need to secure development approval. In New South Wales, you can do this in as little as 10 days through a complying development certificate (CDC). In other states, the process may take longer. Don’t attempt to bypass council approval.

If you’re converting a garage or an existing home, you might be tempted to try to fly under the radar and take the easy path, but failure to obtain the necessary approvals prior to construction is an offence in every state and it carries heavy fines. If you rent out an unapproved dwelling, you’re exposing yourself to a civil lawsuit and possibly even criminal charges if something goes wrong.

  1. Engage a builder. You might find it helpful to engage your builder before applying for council approval. Many experienced builders will already have a system in place to manage the compliance process for you. If your project doesn’t require the skill of a builder, you might be able to supervise the project on your own. Just be sure you’re aware of all compliance issues and know how to manage your team well.

The next step will help you raise your rent revenue.

2. Add Value for Your Tenants in Exchange for a Rental Increase

rentHere’s the real deal: Tenants usually aren’t happy about paying the landlord more money, but if you’re a landlord, you likewise should not be happy about receiving too little rent.

Many property investors grow complacent and fail to raise rents in fear of losing a tenant. But it’s actually wiser to train tenants to expect regular increases. If you do not raise rents regularly in line with the market, in the future you’ll find that you’ll need to increase by a large amount just to catch back up with the market. Smaller regular increases are a much easier pill for tenants to swallow.

Even if the market doesn’t allow you to raise rents, you can still find creative ways to do so. Find out what kind of improvement your tenant wants in the property and agree to add value to the place in exchange for an increase in rent.

Remember Con, the investor I mentioned at the very beginning of this guide? He improved his annual cash flow by $2,340 per year simply by raising rents. He increased the rent in one of his properties by $15 per week after installing an air conditioner in the master bedroom. This $1,500 investment has brought him a $780 annual return. That’s over 50 percent year on year.

The next step is about one of the best ways to increase your profits by using simple negotiation tactics.

3. Negotiate Lower Interest Rates and Management Fees

Con also improved his cash flow by $2,184 per year after negotiating a lower interest rate with his lender and lower management fees with his property manager.

First, he contacted his property manager to say he was speaking to other agents in the area. At the time he was paying a six percent management fee. After gaining several quotes at a five percent fee, he took this back to his existing property manager who lowered their rate to match the competition.

The process was just the same with his bank. He spoke to a few mortgage brokers to find out what other rates were available. Then he simply went back to his bank to have a face-to-face conversation. The bank manager matched the best rate that he had found because he didn’t want to lose his business.

Knowledge is power, so do your homework to raise your profits.

Here’s another simple strategy for you:

4. Renovate the Dwelling to Increase the Property’s Perceived Value

house painting cost diy or hireHere’s one secret of successful property investors: Renovation is all about adding more in perceived value than actual cost. You may be able to boost your property’s value or increase your rental yield by making improvements to the property. This may attract a more discriminate buyer or tenant willing to pay a premium.

There are certain improvements that will bring more bang for your buck than others. In general, you’ll want to invest more in cosmetic improvements that provoke emotion, rather than in structural improvements that bring a property up to standard, but tend to add little value.

Removing asbestos, treating damp and mold, repairing termite damage, repairing a foundation and replacing a roof are all big ticket items that will add little if any real value to a property.

Here’s a quick list of areas to focus your improvements to add the most value with the least cost.

  • Exterior: Street appeal is massively important as most people make their judgement about a property before setting foot inside. This may require a fresh coat of paint and a tidy up of the yard. Some quality basic landscaping will go a long way.
  • Walls: This is a low-cost improvement that you can make quickly. When it comes to paint and wall coverings, keep in mind that a neutral colour scheme will appeal to the largest segment of the market.
  • flore renovationFloors: Carpet or low-cost flooring are essential to boosting the emotional appeal of a property.
    If your property already has hardwood floors, consider refinishing them. Alternatively, to keep costs down, rather than installing true hardwood, you could use laminate boards that look like timber.
    Be careful selecting carpet and tiles, as the costs of these upgrades can blow out quickly, depending on your selection.
    Carpet prices can range from $65 to $500 per broadloom metre, while the cost of floor tiles can range from $50 to $500 per square metre.
  • Kitchen: A generation ago, the living room was the hub of family life; however, the kitchen has evolved into the new heart of the home where friends and families gather to eat, talk, rest and entertain. Depending on your budget, you could carry out a simple cosmetic refresh, painting tiles and changing fixtures and fittings, or you could replace the entire kitchen. Knocking down a wall to create a more open area could also be a low cost way to make a kitchen and living space more appealing.
  • Bathrooms: The bathroom is another emotional hotspot in the house. A larger vanity will always appeal to females, and by changing the fitting and fixtures and painting the walls, you can get a lot of bang for your buck. A more extensive renovation may include replacing the shower and bathtub, re-grouting or re-tiling.

5. Smart Steps to Help You Subdivide Your Land and Raise Profits

If your dud property is on a larger block, it may not be a dud after all. Subdivision can be a lucrative way to add value to your property, if land in the area is in high demand.

You should proceed with caution, however. Subdivision can be a lengthy, complex and expensive process. It’s best to enlist the services of an experienced town planning consultant to research the local council’s requirements, such as minimum lot size, storm drain regulations and sewer placement. Be careful, as costs can easily blow out, which can defeat the whole purpose.

Time For Action

Time for Action

Here are seven initial steps you can take to get started:

I. Carry Out an Initial Feasibility Study to Assess Profit Potential

II. Set Up a Pre-Lodgement Meeting With a Council Town Planner

III. Engage a Town Planning Consultant

IV. Submit a Subdivision/Development Application to City Council

V. Offer the Property on Vendor Finance Terms

VI. Sell the Property and Move On

VII. Learn From Your Mistakes

Not sure which one to choose? Keep reading for an explanation of each of these seven points.

I. Carry Out an Initial Feasibility Study to Assess Profit Potential

There’s no point in proceeding with a subdivision unless there’s an acceptable profit for you to make. There may also be several options you could proceed with.

Steve McKnight teaches to assess every deal in light of four factors: profit, time, risk and aggravation. You’ll want to choose the subdivision option that provides the greatest profit, in the quickest time, with the least risk and lowest aggravation.

For example, let’s say you currently own a rental home on a 900m2 corner block. You have several options. You could keep the existing dwelling, subdivide the back half of the block, and sell the vacant land. You could also demolish the existing dwelling and offer two vacant blocks for sale. A third option would be to build two or possibly three new units, assuming you knocked the existing house down.

Each of the above options involves different costs and benefits. It’s your job to know those variables, and crunch the numbers. Never proceed with a deal until you’re relatively certain it will be worth your money, time and aggravation in light of your risk tolerance.

You may even find that none of the above options stacks up. In many areas across Australia, creating one new block is not profitable because the land is not valuable enough. The costs of a subdivision would eat up all your profit.

The next step will help you decide whether or not to move on, and also help you develop a relationship with your local town planners.

II. Set Up a Pre-Lodgement Meeting With a Council Town Planner

advisorMany city council offices provide an opportunity to meet with planning officers to informally discuss issues relating to the assessment of a proposed subdivision and development. You can do this prior to lodging the formal application and paying the associated lodgement fees.

This is a good opportunity to build a relationship with your local town planners and learn the council’s vision for growth, zoning and housing in your area. If there are any potential problems with your subdivision being approved, you can learn what those may be.

Council planners are notorious for speaking vaguely in pre-lodgement meetings and will offer no assurance that your application will be approved. However, you can often get a good idea of whether it is remotely feasible, learn the basic requirements and find out about the biggest hurdles to get the deal across the line.

If you think this sounds too complex, read on to learn a simple yet smart way to cover all your bases.   

III. Engage a Town Planning Consultant

One of the biggest challenges with a subdivision is the high level of complexity.

There can be multiple unknown factors, each with the potential of blowing out your budget and making the deal a loser. For example, knowing about easements and sewer lines and how they affect your subdivision and development is crucial.

property management feesYour local council will have many unique requirements in its development control plan (DCP) that will outline the limitations with your project. An experienced planner should already know the local legislation or at least be able to research them for you.

Consulting with someone who has a detailed knowledge of exactly what council requires can take a lot of risk and aggravation out of the deal.

Technically, anyone can prepare and lodge a development application (DA). However, a good town planner can handle the entire process from start to finish, filling out the required forms, submitting supporting documents, creating statements and reports, engaging surveyors and other consultants, and liaising with your local council.

An initial feasibility assessment from a town planning consultant may cost you a few thousand dollars before you even decide to proceed with the subdivision, but that investment can save you tens of thousands down the road.

If you choose to go ahead with the subdivision, you should budget an additional $3,000 to $5,000 or more for consulting fees, depending on the size and complexity of the deal.

The next step is a big one.

IV. Submit a Subdivision/Development Application to City Council

Depending on your local council and its policies, the DA approval process could take anywhere from three to 12 months. You should plan for at least six months to be safe.

If approved, you will be given a list of requirements that you must meet before the final subdivision is approved. This may include improvements for access to the site, sewer and storm drainage requirements and a myriad of other possibilities. Once you’ve completed them and paid the council contribution fees, your subdivision is fully approved.

V. Offer the Property on Vendor Finance Terms

dealOffering a property on vendor finance terms is another strategy to boost a property’s cash flow in the lead up to a final sale. For the right buyer, vendor finance can be a huge win, enabling someone to secure a home for purchase, rather than continuing purely as a renter.

As an example, let’s say you have a property worth $400,000 you are renting out for $350 per week. That’s a gross yield of 4.55 percent. This would definitely qualify in my book as a dud deal. The only way to win would be through some significant capital growth, year after year; something that will most likely not happen.

You could offer the property for sale on vendor’s terms for $430,000 to a buyer that has a solid income and credit history, but can’t get a traditional mortgage through a bank. Perhaps the buyer is self-employed and doesn’t have two years of income history through their business.

This buyer would pay you a deposit upfront, say $10,000, and agree to make monthly payments directly to you at a premium interest rate of say two percent above the standard variable rate. This arrangement could boost your weekly income to $450 or more. Both the deposit and a portion of the weekly payment would go toward the principal.

Finally, you would agree on a date in the future when the full purchase price of $430,000 would be due, minus whatever principal has been paid. Within five years from the contract date would be a standard timeframe. The buyer would need to qualify for finance with a traditional lender within that time. If the property was not settled within five years, the contract would cease and you would keep all of the principal payments.

Laws vary from state to state, so be sure to do your homework. You’ll also want to seek the advice of a qualified and experienced solicitor.

If things haven’t been going your way with a particular property, this next step could be your best solution.

VI. Sell The Property And Move On

Sell The Property And Move OnSometimes you must face the fact that a bad investment will always be a bad investment. If this is the case, perhaps it would be best to sell the property, and redeploy your equity or borrowing power into a more profitable strategy.

Deciding to sell can be difficult for investors because of the costs involved and the capital gains tax implications, but these are not reasons to remain in a losing deal.

If you’re struggling to decide whether or not to continue holding a property, ask yourself this question: “Would I buy this property today at its current price?” If the answer is “no,” then the obvious next question is, why would you continue holding it? If the only answer is an emotional one, then get over yourself and sell the property.

You’ve learned a lot so far, but this next step will add value to your property investing efforts.

VII. Learn From Your Mistakes

Once you have the courage to admit you own a losing property, the most important thing is to be sure you never make the same mistake again.

Learn from the biggest lesson of many of the people I’ve mentored in the past, “I wish I would have been more educated before doing that last deal.” Before you buy another property, be sure to educate yourself.

 

Time For Action

Time For Action:

Write down the following questions and answer them in your journal:

  • What did I not know when I bought my last deal that I know now? How will this information keep me from making the same mistake in the future?
  • What myth did I believe about investing that led me to buy the dud property?
  • What kind of due diligence should I have done that I failed to do with this property?
  • Who convinced me to buy this property? What was his or her motive? Did I get taken for a ride?

Answering these questions will give you some valuable insights the next time you contemplate a property deal. By understanding your past mistakes, you can avoid making them again in the future.

 

Recommended Resources:

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Chapter Five

Create a Deal Profile That Keeps You Laser-Focused

 

deal profile

 

Laser-FocusedLet’s set some parameters for buying properties you won’t regret later.

In Chapter Three, I challenged you to begin developing property investing skills related to your desired strategy. I suggested that you read voraciously, find a mentor, and begin taking action.

By now, if you followed my action plan, you’ve already spoken to three agents to learn more about your local property market. You should know the type of property most in demand, the ideal target market when selling a property like this and the length of time it typically takes to sell such a property.

But before you rush out and start making offers, you should be deliberate about narrowing your focus.

The crowd approaches property investing with the assumption that it doesn’t really matter what you buy because all real estate will inevitably be worth more in the future.

You’re no longer a part of the investing crowd. You know that not all real estate will necessarily be worth more than your purchase price when you’re ready to sell it. You know it’s possible to buy a dud property that loses money at worst, and ties up valuable resources at best.

A deal profile can help you avoid buying dud properties in the first place.

Based on the incremental goal setting work you did, you know exactly what you must accomplish within the next 12 months to be on track toward your long-term goal. Unless the next property you buy will carry you to this one-year profit objective, then you want no part of it.

You have now become what Steve McKnight calls an outcome driven investor.

Time For Action

Time for Action

Write this down in your journal: I am an outcome driven investor. I only buy properties that will carry me to my next incremental goal.

To keep you laser focused, I want to help you create a deal profile. A deal profile is a detailed description of the type of property that ideally suits your objectives, your strategy and your budget. It clearly defines the exact type of property you are searching for.

To quote Steve McKnight again, “If you don’t know what you’re looking for, then any and every deal looks good.”

A written deal profile will not only help you avoid the wrong property, it can also bring the right property to you. Your deal profile becomes your tool to put in the hands of agents, giving them a clear picture of what you’re looking for. This will get others on board helping to find your deals.

A deal profile takes into consideration the following four variables:

1. Your Profit Objective

Create your profit objective by writing down exactly how much money your next deal must make you, and when you aim to realise this profit.

You already know how much you must achieve within the next 12 months. If one deal can get you to the 12-month goal, perhaps you will just restate that goal here, or perhaps you plan to do two deals in the next year, which means your next deal must get you halfway to your annual goal.

Alternately, if you’re a passive investor with a 20-year vision, you may achieve your 12-month goal through savings, and choose to find a positive cash flow property with potential to subdivide in the future.

Time For Action

Time For Action

Write down your profit objective in your journal now in one of the following two formats:

  • Active Investors: My next property deal must provide a net profit of $_________ within the next ________ months.
  • Passive Investors: My next property deal must provide positive cash flow of $________ per month with estimated average annual market-driven growth of ________ percent.

2. Your Personal Budget

Real estate is an expensive asset. Therefore the number one constraint that most property investors face is access to capital, both in the form of cash for deposits and borrowing power to complete the purchase.

There’s no sense in looking for a property you can’t afford. It’s important to establish your budget upfront, so you can clearly define the property that matches it.

To establish your buying budget, answer the following questions:

a. How Much Cash Do I Have Available for Deposits?

Unless you somehow came into a windfall, the answer to this question probably comes down to what kind of saver you are. At the end of the day, it doesn’t matter how much you make, but how much you keep.

Savings is crucial because most lenders will not lend 100-percent of the purchase price of the property. They want you to have some skin in the game.

You’ll most likely need to put up 20 percent of the purchase price of the property as a deposit. It’s possible to get higher loan-to-value ratio (LVR) loans, but if you’re putting up less than 20 percent, expect to pay Lenders Mortgage Insurance (LMI).

Are you losing money on your property? If so, read on to learn how you can turn it around and start making a profit.

b. Is There Any Available Equity in Assets I’m Currently Holding?

You may currently have investment capital tied up in assets, rather than in cash.

If you own publicly traded shares that are underperforming, they can most likely be easily liquidated to use for a deposit.

If you own real estate that is worth more than is owed, then you have equity there that could be tapped into. You could either sell the property to realise your gain, or you could redraw some of the equity if your LVR is low enough.

Be careful drawing down the equity in your personal home. You never want to invest money you can’t afford to lose. You would also be wise to avoid using your personal residence to fund long-term buy and hold deals. If you must finance your next deal with your home equity, make sure it’s a quick-turn deal, so you can pay the debt back down on your home in the foreseeable future.

This next question will help you pinpoint your borrowing power:

c. How much can I borrow?

Your borrowing power is generally a function of both your current income and your current debt to asset ratio. The more money you make through your job or business, and the higher your net worth, the more you should be able to borrow.

At the end of the day, you won’t know how much you can borrow until you sit down with your banker or mortgage broker to assess your situation.

Time For Action

Time for Action

a. In your journal, write the amount of cash you have available for deposits: I have $________ in cash available to fund the deposit for my next property purchase.

b. In your journal, make note of the amount of equity you currently have available: I have an additional $________ in equity available I am willing to use to fund my next property purchase.

c. If you haven’t already done so, make an appointment this week with a lending consultant to establish your borrowing ability.

  • After speaking with a mortgage broker, write in your journal how much you can borrow, as well as your total buying budget and your planned LVR. Your lender will be able to tell you the maximum percentage of the purchase price that you can borrow:
    • I have the ability to borrow a maximum of $________ for the purchase of my next investment property. Together with my deposit, I can afford to purchase a home worth $________ at an LVR of ________ percent.

To keep you focused on the prize, check out the next step.

3. Active or Passive: Your Preferred Strategy

Now that you’ve established your buying budget, you must further clarify your strategy. By now you should have already determined your broader investing approach, namely whether you plan to be an active or a passive investor. You also know that you’ll need to develop greater skill in the area of your preferred investing strategy.

Now it’s time to decide precisely which strategy you will move forward with on your next deal. Here’s a brief overview of the various active and passive property investing strategies you could use:

Active Strategies

  • Renovation

    Renovation: Improve the appearance of a property, adding more in perceived value than actual cost.

  • Subdivision: Split one parcel of land into two or more separately titled blocks with the assumption that the sum of the parts will be worth more than the whole.
  • Development: Build one or more new dwellings, typically on newly subdivided blocks.
  • Flips: Flipping houses is another strategy. This where you sign a contract to buy a property, and then sell your interest to a third party for a profit before settlement.

Passive Strategies

  • Buy and Hold for Capital Growth: Hope that land values increase in the area over time.
  • Buy and Hold for Rental Income: Buy properties which bring in more income than they cost to hold and rent.

Ways to Determine Your Target Market and Make More Money

One final consideration with your strategy is knowing your target market. You should have a clear picture of exactly who will buy or rent your property. Will it be a family with small children, young professionals, retirees, or another real estate investor? Each demographic has different needs and wants. Matching the right property to the right tenant or buyer is crucial if you hope to make money as a property investor.

Time For Action

Time for Action on

Clarify your active or passive strategy by writing it down in your journal: I will use the ________ strategy for my next property deal.

Clarify your target market in writing in your journal: My target market will be ________.

Now that you’ve determined your target market, it’s time to decide what criteria you will use for your property search.

4. Craft Your Property Criteria to Attract Your Target Market

Now that you’re clear on your objective, your budget and your strategy for the next deal, it’s time to get more specific about the property that ticks all three of those boxes.

Here are nine questions to help you craft your own deal profile. Be sure to answer each question in your journal:

a. In what area will I focus my search?

property inspectionThe best place to buy an investment property is the area that you know the most about. You should pick at least one suburb or group of suburbs, and become an area expert.

Visit the area, walk around, go to their local shops, talk to the people, go to open houses and inspections, talk to city council planners and research everything you can about the area. Your goal is to know the area as well as someone who has lived there for several years.

An intimate knowledge of the area will help you home in on the exact street or streets to focus your search. You’re looking for the area that will best attract your target market. Your ultimate aim with this exercise is to find the property that fits with your profit objective, budget and strategy.

The amenities you offer will also help you attract your target market.

Here’s a key question for you:

b. What amenities will I require?

The more precise question is, “What amenities will your target market require?”

If your intention is to attract young families to your property, you may want to have a large garden and be close to schools, parks and playgrounds. You may also want to be within walking distance to shops or leisure facilities.

If your target market is young professionals, you may want to find a property near a train station or tram line. You may also want to be walking distance from shops, pubs and nightlife.

Now that you have a strategy and a target market, it’s time to get more specific.

Here’s another important question you need to ask:

c. How big do I want the block to be?

The answer to this question depends upon your strategy and your target market. Young families may want a home with a larger block, so the kids will have room to run around and play.

If your strategy is to subdivide an existing block and develop units, then you should have a specific requirement regarding block size. Local council requirements will factor heavily into this, so do your research.

Even if you’re not planning to subdivide the property right away, a larger block will give you more options for adding value to the property in the years to come.

The next question will help you learn how to focus on the future of your property to create even more wealth.

d. Do I have setback or street frontage requirements?

If you’re looking for a home on 1000 m2 to subdivide at some point in the future, your options will be limited if the dwelling is situated in the middle or toward the back of the property. If the dwelling is near the front with a minimal setback, it will give you the greatest amount of space behind the house to develop in the future.

You may also want to consider access to the rear of the property. Your local council will have width and setback requirements for driveways. In most areas, a home on a corner block will make a future subdivision even more achievable and less costly.

The age of a property is another key consideration. Here’s what you need to ask:

e. How old or young do I want the dwelling to be?

The benefits of buying a property with an older home are usually a larger block size, renovation possibilities and price. But the older a property is, the more potential exists for expensive structural issues. As with any home you purchase, be sure to pay a professional to carry out a building and pest inspection before you buy it.

The next question relates to the problem vs. solution argument. Here’s what you need to consider:

f. What condition do I want the property be in?

Closely related to the age of the property is the question of its condition. If your strategy involves renovation, you may want to look for a property in poor cosmetic condition. Your primary concern will be the building’s structural integrity.

However, if you’re focusing on an area where the land is highly valuable, you may not need to be concerned about spending money on structural issues. In fact, you may even be willing to demolish the dwelling entirely, in which case the home condition doesn’t matter.

At this point, you should continue to narrow your property choice down. This next question will help you:

g. What type of style and construction of dwelling should I look for?

You may want to target a particular niche market that demands a unique architectural style. Just bear in mind that the more unusual or unique the style of the home, the narrower the market. It may be best to keep to simpler designs that are likely to attract the broadest segment of the market.

Another related consideration is the material from which the home is constructed. Older homes in an area may be weatherboard, but the market may prefer brick veneer.

In order to keep making a profit, you should ask this next crucial question:

h. What type of floor plan am I after?

Typically, the more bedrooms and bathrooms a property has, the more it is worth. You may also have certain requirements regarding carport or garage spaces, alfresco, living areas or laundry.

You may find a property that you can convert in some way to add another bedroom. For instance, many older homes have a second living area or study that you could easily turn into a bedroom and remarket.

And lastly, this next question will complete your property picture for you:

i. Are there any other requirements I have for my target market?

Do some additional research if necessary to determine what your target market demands. If ducted air conditioning is a non-negotiable, you’ll want to avoid homes with a split system.

Is covered parking an essential? Should the home set up include gas appliances?

There are a myriad of other concerns that renters and homebuyers have. Try to put yourself in the mind of your target market.

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Your Property Criteria (Answer the nine questions):

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  1. Make note of the area that you plan to begin your property search. Try to be as specific as possible by choosing a suburb or town: I will focus my search and seek to become an area expert in ________.
  2. Clarify your required amenities by writing the following statement in your journal: My next investment property must be near ________.
  3. Clarify your desired block size in the following statement: The minimum block size for my next property is ________ m2.
  4. Write the following statement in your journal: The position of the dwelling on the block must be ________.
  5. Clarify the age of the dwelling by noting it in your journal: I’m looking for a property with a dwelling that is between ________ and ________ years old.
  6. Next clarify your condition requirement in your journal: The dwelling must be in the following condition: ________.
  7. Write down your style and material requirements in your journal: My style and construction material requirements are ________.
  8. Note in your journal what type of floor plan you want: My floor plan requirements are: ________.
  9. List additional requirements in your journal: The property must also have: ________.

This is the foundation of how to invest in real estate. Now that you know exactly what you’re looking for in a property investment, you’re in a much better place to begin looking. Keep in mind that your deal profile is a working document. As you look for properties, your insights on the market may expand, or you may choose to shift your strategy or focus slightly. Be ready to make improvements and adjustments to your deal profile as you progress on this journey.

 

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Chapter Six

Attract Wealth Through Prudence and Due Diligence

 

wealth magnet

 

White cartoon character with loupe and house.

Having personally coached hundreds of investors, I’ve learned that most people lack a solid and reliable system for due diligence. Due diligence is defined as a thorough and detailed investigation of a property and its potential improvements prior to signing a contract.

Remember, the crowd tends to gamble, not invest. The crowd often rushes into purchases without thinking through what could potentially go wrong.

I’m a fan of ancient Hebrew wisdom literature. Here is a proverb written by King Solomon of Israel that communicates the importance of due diligence: “A prudent person foresees danger and takes precautions. The simpleton goes blindly on and suffers the consequences.”

Here Solomon contrasts two different types of people, or in our case, investors: the prudent and the simpleton.

A prudent person is one who acts with care and thought for the future. This type of investor tends to increase in wealth, if for no other reason, they tend not to lose money.

The simpleton, on the other hand, is foolish, naïve and gullible. Due to their unwise investing practices, they often lack patience and rush into deals too quickly.

As I shared with you earlier, I had to learn this truth the hard way. Remember that technology stock I went all in on just out of university? That was a painful lesson, but I learned something.

Most of us have done some dumb things with our money at one time or another. The question is, have you learned your lesson? Are you prudent or are you a simpleton?

The good news is, you can transform yourself from a simpleton investor into a prudent investor. In my first-ever property investment, about six years after my share-trading debacle, I partnered with another investor in a small four-unit development. In that deal, I made a quick-cash profit of about $25,000 in a little over 12 months.

attract moneyIt wasn’t a fortune, but it was certainly a win, and it sure beat losing money. I credit that success both to my partner’s skill and experience, and my new found wisdom, having read Steve McKnight’s book, From 0 to 260 Properties in 7 Years.

In the world of property, there are plenty of real estate professionals seeking to prey on the naivety and gullibility of people. If you’ve inspected any properties at all, you’ve likely heard assertions like these from an agent:

  • This would make a great investment.
  • You can expect significant capital growth in this area.
  • You could easily raise the rent on this property by $50 per week.
  • You could surely build four units on this size block.

It’s not only the property professionals we must watch out for. Other dangers lurk in the shadows, and you see them every time you look in the mirror. In case you haven’t figured it out yet, that danger is you.

king solomonAfter I go to inspect a property for a potential subdivision and development, I estimate a potential profit based on certain assumptions. These assumptions include council approval, purchase price, improvement costs and sales price, just to name a few.

At this point, as King Solomon tells us, “A prudent person foresees danger and takes precautions. The simpleton goes blindly on and suffers the consequences. As real estate investors, it’s our job to confirm accuracy, not only of others’ assertions, but also of our own assumptions about properties.

As Steve McKnight says, “Due diligence is all about separating the facts from the opinions.”

You’ve already laid the foundation for acting with prudence by establishing clear goals, defining your strategy and creating a written deal profile.

Let’s take a closer look at five key areas where you must focus your due diligence and create solid systems for investing with prudence:

1. Prudent Investors Develop an Informed Opinion on the Broader Market

Here’s why this is important for your success: At the time of writing this, interest rates are at historical lows in Australia. As a result, property values have hit record highs. Every man and his dog seems to have an opinion on where real estate prices are headed.

Even our own regulators are unable to agree on the current state of the housing market. Some say we’re in a bubble; others say demand will continue to outpace supply, but at the end of the day, it doesn’t matter what regulators, politicians and the media believe about the future of property.

All that matters is where you see property prices headed.

 values will continue to riseYour opinion on the broader property market will frame your strategy of investing. If you believe values will continue to rise, then a buy and hold approach may be in the cards.

If, on the other hand, you believe property values are topping out and at risk of decline, then you may be more inclined to do quick-cash deals to get in and out of the market in a short period of time. You may even decide to sit on the sidelines and cash up.

So how do you develop a sound opinion?

First, you must recognise that you can’t believe everything our regulators and politicians tell us. The RBA Board members make comments in the media with the express purpose of affecting the financial markets.

Second, you can’t trust everything that agents, bankers and other so-called property professionals tell you. Most often, they are motivated in the direction of however they are incentivised monetarily. Agents will decide to believe what they need you to believe in order to get you to buy their property. Usually they’re not purposefully being dishonest. It’s just human nature. The mind follows the money.

Third, understand what’s really driving the value of real estate. I’ll give you a hint. While supply and demand of housing is an important secondary driver, ultimately real estate’s value is dependent on the availability of cheap credit. It’s no coincidence that our highest property values on record have come at a time when interest rates have been the lowest in history.

Fourth, read everything you can about the property market and filter it through the previous three assumptions.

The next step will make you even more of a prudent investor.

2. Prudent Investors Create a System for Researching and Assessing Areas

 

Create A SystemAs you’ll recall, when you established your property criteria in your written deal profile, the first question to consider was, in what area will you focus your search?

The crowd tends to go from seminar to seminar to hear the latest ruminations by the latest hot-spotting experts. Rather than rely on the opinions of others, prudent investors learn how to make up their own minds about where to invest.

Therefore, you must create a solid system for researching and assessing areas. This system will lead you to become an area expert, as we discussed in Chapter Five.

Here are the three top tips to help you conduct effective area research and assessment:

Research Tip 1: Make Multiple Personal Trips to Learn More About the Area

I know a local builder where I live who sells dozens of properties per year to investors who live out of state. The vast majority of them can’t even be bothered to schedule one trip to learn more about the area. They are following someone else’s advice, someone who is getting paid to sell them a property.

To avoid this classic mistake, don’t think one trip will tell you everything you need to know about an area. If you’re wise, you’ll make regular visits over several months to gain the proper perspective required for you to buy with prudence.

On each of these trips, you should drive around, learn the streets, visit the local landmarks, inspect properties, talk to local council planners and speak with agents. The more time you spend in an area, the more you’ll learn.

Research Tip 2: Ask the Local People a Lot of Questions for Valuable Insights

Ask The Local People A Lot Of QuestionsOne of the best ways to learn an area is to ask the local people what they know. It shouldn’t be difficult to get people to talk, because everyone loves to share their own opinion.

If you’re looking at properties, you should find it easy to talk to agents. Property managers will also have insights into vacancy rates and rental prices. Local accountants and solicitors can also be great contacts to network with, as are tradespeople, town planners and local business owners.

Research Tip 3: Investigate the Area’s Economic Data and Become a True Expert

Demand for housing in an area is directly tied to the availability of jobs nearby. The stronger the local economy, the higher the likelihood for capital growth in that area. Spend the time and energy to learn the area and region’s economic strengths and weaknesses.

You should, at the very least, know who the major employers are in the area and what industries dominate. The more vibrant industries, the better, as many who have invested in mining towns have recently learned.

You can become more aware of the local demographics by answering questions like these:

  • Is the area growing in population?
  • What types of people are moving to the area?
  • Is the area growing in population?How much money do they make?
  • What’s the average age?
  • What’s the birth rate in the area?
  • How many children does the average family have?
  • How many people are on the dole?

Spend some time researching the local infrastructure, such as public transport, schools and hospitals. Talk to council to learn about planned infrastructure development. Are there any new commercial properties being developed?

Finally, you should research the local housing data, including the median house price, average days on the market, rental prices and rental vacancy rates.

By follow those three research requirement tips, you’ll be well on your way to becoming an area expert. The next tip will help you avoid a bum deal.

3. Prudent Investors Thoroughly Inspect Every Property Themselves

Once you determine which area you want to invest in, it’s time to find the right property to buy. Because you’ve created a thorough deal profile, you should already clearly see what your ideal investment property looks like. To make sure you don’t buy a dud, you need a solid system for making sure the properties you look at pass the test.

The simpleton investor will put little forethought into inspecting properties. Remember, the crowd comes to the market assuming all properties will always go up in value.

Prudent InvestorsPrudent investors consider everything from cosmetic and structural condition of a property and the layout, to the floor plan and land size. Make sure the property matches your deal profile, and also inspect deeper to learn what you can’t see with just a quick look over. Here’s some important points to note:

  • Inspect Thoroughly. Plan to inspect a property at least twice before committing to buy. If the property passes your preliminary inspection, the next test is to confirm that it passes your follow-up detailed inspection.
  • Don’t Be Gullible. Come to every property with the assumption that the vendor is not being completely forthcoming about the property’s defects. You should also expect the agent to paint a rosy picture, so you can’t rely on them for your due diligence.
  • Engage an Expert. Finally, be sure you engage professionals to inspect your property. This may be a qualified building and pest inspector, a licensed builder, a surveyor or an architect. If you’re planning a subdivision or development, you should also consult a town planning expert, as discussed in Chapter Four.

The next step will show you how to make a calculated decision.

4. Prudent Investors Make Sure the Numbers Stack Up

Most investors make multi-six-figure financial decisions based on emotions, gut feelings or another person’s opinion. This is how the crowd invests.

Prudent investors make calculated and disciplined decisions. They base their decisions on solid facts, not emotions, and take responsibility for their own financial futures. By using a few simple calculations, you can quantify the outcome of an investment decision, and clearly see how the deal stacks up in relation to other opportunities.

Here are the five basic number crunching formulas every property investor should know:

  1. Gross Rental Return (GRR): (Annual Rent/Purchase Price) x 100

This is the most basic of the five formulas, and is also commonly referred to as rental yield. To calculate GRR, divide the gross annual rent by the property’s value or purchase price. This calculation is a useful measurement of a property’s income earning potential. Its weakness is that it does not consider your cost of renting nor the benefit of leveraging with the bank’s money.

  1. roiReturn on Investment (ROI): (Annual Profit/Purchase Price) x 100

ROI is a formula accountants often use to assess the amount of income generated per year by an asset. It’s similar to GRR, but it’s a net return, factoring costs into the top figure. Like the GRR, its weakness is that it does not consider the benefit of using debt to buy real estate.

  1. Cash-on-Cash Return (CoCR): (Cash Back/Cash Down) x 100

This formula is a personal favourite of mine, because, unlike ROI, it considers the reality that you will finance much of a property deal using other people’s money. Simply divide your cash out of the deal by your cash into the deal.

Comparing the CoCR to the risk-free return of a term deposit is a helpful exercise. When you’re clear on what else you could be doing with your money, it helps you compare profit potential, while also comparing the time and risk in the deal.

This calculation is also helpful for quick cash deals. If you’re looking at a renovation or development opportunity, simply divide your profit projection by your cash in. It’s helpful to annualise the return, so you can compare it to other opportunities and factor time into the equation.

  1. Growth on Equity Return (GoER): (Expected Annual Growth/Current Equity) x 100

Unlike CoCR, GoER takes into consideration the capital appreciation of a property over time. If you’re holding a property long term, it’s helpful to have a calculation that factors in growth.

To work out the GoER, simply divide the expected annual growth by the current equity in the property. This formula introduces the likelihood of some human error, as it requires you to speculate on future growth. If you’re using this formula to determine whether or not to buy a property or whether or not to keep a property, be sure to be conservative and realistic with your future growth expectations.

  1. Net Profit PercentageNet Profit Percentage (NPP): (Annual Cash Flow + Annual Expected Growth)/Cash Down] x 100

While the GoRR factors in growth, it fails to also consider the cash flow from the property. Both are important, so this is where the net profit percentage comes in handy. It offers a complete and comprehensive view of your real estate investment.

To work out the NPP, simply add your annual cash flow and your annual expected growth, then divide that figure by your equity or cash into the deal. It’s somewhat of a combination between GoRR and CoCR.

You should crunch the numbers using the appropriate formulas, not only when you are evaluating a potential property purchase, but also to do periodically on the properties you already own. As a prudent property investor, knowing when to sell is just as important as knowing when to buy.

This next step will help you find the support you need for ultimate property investing success.

5. Prudent Investors Build a Property Investing Dream Team

Prudent investors are able to see dangers that blind simpleton investors can’t see. Every investor has blind spots, or areas of weakness. One of the prime marks of the prudent investor is that they engage others to do what they can’t do themselves.

Dream TeamAccording to ATO data, about 73 percent of property investors own just one property. Less than 19 percent own two properties. That means 92 percent of all property investors own only one or two properties. Unless you get lucky, which you probably won’t, you’ll never be financially free with one or two properties.

So what sets apart the other eight percent from the crowd? How are they able to break through the two-property barrier?

The short answer is they are able to overcome their constraints. You can’t overcome your constraints by working harder. You must learn to work smarter. This is where your dream team comes in.

Depending on your particular strategy, here are the real estate professionals you will likely need on your dream team:

  • Agents
  • Property Managers
  • Mortgage Broker
  • Accountant
  • Solicitor and Conveyancer
  • Town Planning Consultant, Land Surveyors and Engineers
  • Quantity Surveyor
  • Builder
  • Architectural Designer
  • Tradespeople
  • Joint Venture or Money Partners
  • Insurance Providers
  • Property Mentors and Educators
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Call three different solicitors in your area. Tell them you are looking for a legal professional to provide conveyancing for a future investment property purchase. Ask how much they charge for their services. Based on your interaction with them, make a decision on which one you feel most confident working with.

Remember, investors who try to do everything themselves often make mistakes and miss opportunities. The more you can use other people’s labour, other people’s time, other people’s talent and other people’s money, the more you have the ability to accomplish.

 

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Chapter Seven

Make Win-Win Offers That Maximise Your Profits While Keeping You Safe

 win win offer

 

offer acceptedHere’s another valuable property investing lesson for you.

I remember once hearing Steve McKnight quote one of his mentors, Stu Silver, saying, “If you’re not making offers, then you’re not making money.”

That was an a-ha moment for me. I realised then that the real-life starting point of profitable investing is the offer, and the most successful investors not only make offers, they make a lot of them.

As a property investor, you must master a few basic fundamentals when it comes to making offers.

This can be especially challenging for the first-time investor. After all, the offer represents your most significant step of action yet. It’s the moment when you first risk tens of thousands of dollars of deposit money, and hundreds of thousands of debt.

It wouldn’t be unusual if the majority of your offers never made it to the final contract stage. Your offer may not even be accepted in the first place. If every first offer was accepted, you’d have to wonder if you were offering too much the first time.

Sometimes, assuming you’ve made your offer wisely, you could end up being the one who pulls out. If the deal doesn’t pass your due diligence process, you won’t want to proceed.

Here are four important rules for submitting win-win offers that will not only protect you, but carry you to maximum profits:

1. Show You’re Serious: Make Your Offer in Writing and Sign It

 Make Your Offer In Writing And Sign ItPeople always consider a written offer more seriously than a verbal offer. Because you only want to make an offer when you intend to follow through with the purchase, assuming it passes your due diligence, don’t bother with verbal offers. They only make you look uncommitted and unprofessional.

When you take that extra step of signing your name, you demonstrate that you are personally standing behind your offer. This will communicate to the agent that you are a serious buyer.

Ask the agent how he or she prefers to receive your offer. If they don’t supply you with a prepared, contract-like form, type up your offer as a letter. If they are happy to receive the offer via an email, attach your signed offer on letterhead as a PDF file, rather than just including the details as text in an email.

Follow these tips, and it will increase the likelihood that your offer is accepted.

2. Create a Safe Exit Strategy: Include a Get Out Clause in Your Offer

After a property passes your preliminary due diligence, you’re well-positioned to make an offer, but this doesn’t mean you’re finished with confirming the details and ensuring that the numbers stack up. Once your offer is accepted, then the next phase of due diligence begins.

You don’t want to invest too much time and money inspecting a property in detail until an offer is accepted. Making the offer enables you to tie up the property to avoid losing it to another investor.

As long as you include the appropriate clause, you can continue your more in-depth due diligence without fear of being locked into the deal. You’ll have the leeway to make a decision later as to whether or not to follow through with the purchase.

Here are a few examples of some special conditions you can add to your offer:

  • Subject to Satisfactory Building and Pest Inspection: This is a standard clause, but the wording of this special condition could fall in the favour of either the buyer or the seller. As the buyer, you prefer the inspection to be subject to your personal satisfaction. The vendor will usually prefer a more objective criteria, like a set dollar limit to cover the necessary repairs.
  • approvedSubject to Finance Approval: This is also a standard clause with a time limit attached, often 14 or 21 days. This special condition buys you time to get your mortgage approved before going unconditional, meaning your offer will be free of any added conditions after all specifications are met.
  • Subject to Solicitor’s Review: This can be a catch-all special condition. If you decide not to move forward with the purchase, you can tell your solicitor to reject the contract.
  • Subject to Due Diligence; This time limited catch-all clause buys you an opportunity to carry out a more thorough due diligence before going unconditional. Be mindful, however, that the stronger the market, the harder it is to get this clause accepted. Also keep in mind that using this condition to bow out of a purchase can damage your reputation with an agent.

It’s important for you to recognize that the more clauses you include in your offer, the more unattractive it will appear to the vendor. The most attractive offer to the seller is always an unconditional offer; however, because you often carry some additional risk, you should rightfully expect a concession to offset that risk.

The next tip will save you a ton of time.

3. Make Your Offer a Win-win

There’s no point wSell Your Lazy Assetsasting your time submitting offers that vendors will never accept. Unless you’re in a strong buyer’s market, submitting unrealistic offers is a great way to gain a bad reputation with local agents.

The best approach before making an offer is to talk with the agent about the reasons why the vendor is selling. That way, you’ll know , so you can craft an offer that appeals to their desires, and is therefore much more attractive.

Read on to learn how you can keep things running like a well-oiled machine.

4. Include a Sunset Clause in Your Offer

SunsetA sunset clause is a time and date for when your offer expires. This is important to include in order to motivate both the agent and the vendor to be prompt in their communications. If you are looking at multiple properties and have a limited budget, you’ll want to know quickly whether the seller has accepted or rejected your offer.

Remember, if you’re just getting started on your investing journey, it’s natural to be a little nervous when submitting an offer. Following the four rules above will give you some practical steps to focus on and will keep you protected. It will also help you build a good reputation with agents in your area.

 

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Chapter Eight

Exit Every Deal a Winner

 

winner

 

house_prices_upHere’s the truth: The first investment property I ever sold was easy for me. It was a small unit that I developed in a joint venture with a builder.

The market was strong, and even though I had no idea what I was doing, the property sold quickly and at a good price. It was a seller’s market, so my mistakes didn’t hurt me. I could still come out ahead despite them.

Fast-forward a few years to 2008. I listed a second investment property for sale, but this time, we were just about to experience a global financial crisis. This home sat on the market for 12 months.

At the eleventh hour, just when I was about to put a tenant into the property, a hungry buyer snatched it up. Thankfully, I broke even on this deal, even though my holding costs and a price reduction put a serious dent in my projected profit.

Had I known then what I know now, I probably would have sold that second property much sooner by being far more proactive in the process. To save you the same fate, here are five things I wish I knew then that I know now – actions that could have provided me with a much better outcome.

Not sure about the value of your property? Keep reading to help clear the confusion.

1. Assess the Realistic Value of Your Property

Step one is to assess what your property is truly worth. We all think we know what someone should be willing to pay, but sometimes there’s a difference between our wishful thinking and reality.

Value Of Your PropertyThe market was telling me that I had overpriced my property, but I wasn’t listening. I thought all the potential buyers were the ones with the issue, not me.

We don’t know what a property is worth until someone pays for it in the open market. However, we can arrive at an estimated theoretical price of what someone will likely be willing to pay.

Unless you’re an area expert and have access to recent comparable sales data, you’ll need to use the services of a third-party professional to help you arrive at an estimated value. The simplest option is to contact a real estate agent to carry out an informal valuation on your property. Alternatively, you could pay an independent accredited valuer to suggest a more precise figure.

My experience has been that independent valuers are not always ideal for this purpose because they tend to undervalue. They can be held legally liable for negligent valuations, but they most often represent bankers who prefer them to be conservative. If you do choose this route, it’s wise to supply your valuer with as much relevant information and data as possible to help direct their outcome.

Did you know your real estate agent needs you more than you need them? Read on to learn why.

2. Choose Your Agent Well

The greatest need of any real estate agent is to gain new listings. In Australia, agents can’t sell what they don’t have listed,Choose Your Agent Well so your agent needs you more than you need them. This will help you to remain discerning. You can take your time to find a quality agent.

Ideally, you’ll want to interview at least three different agents. First, visit a few agency offices to get a feel for the type of services they offer. You can also ask other investors in your area who they’ve worked with and who they prefer.

After you’ve chosen a few agents to interview, invite them to visit your property at different times for a home inspection. Ask them to provide you with a sales proposal within a few days that includes the following important details:

  • Expected Sales Prices
  • Comparative Sales
  • Sales and Marketing Plan
  • Sales Costs and Fees

This sales proposal should give you plenty to work with in making a well thought-out decision about who will represent you in the sale.

I wish I had done this in 2008. I literally went with the first agent that someone recommended. After six months, he proved to be slack, so I ended up changing agents, going with another recommendation without interviewing her first. Another six months later, the property finally sold.

3. Know Your Target Market to Achieve Advertising Success

A target market is a group of people that have shown a demand for properties that are comparable to yours. These are the people you and your agent will direct the bulk of your marketing and advertising efforts towards.

Time For Action

Time for action

In order to determine who your target market is, just ask yourself the following key questions and mark your answers down in your journal:

  • What type of people will want my property, and why?
  • Am I marketing to owner-occupiers or investors?
  • How old are they and what are the needs of their age group?
  • Are they young families, single professionals or retirees?
  • Where do these people currently live?
  • How much money do they earn?
  • What do they care about most?

I never thought about who I should direct my advertising efforts toward precisely, not even once. I suppose I was just hoping for the best. If I knew who my target market was, I could have worked with my agent to build a plan that would provoke emotions and desire in potential buyers. A few hours of intelligent thought could have saved me thousands of dollars in holding costs.

Here’s another key mistake you need to avoid at all costs.

4. Create Your Advertising And Marketing Plan

Marketing PlanMy biggest mistake in 2008 was that I gave complete control and responsibility for selling my property over to my agent. I thought since he was the expert, after all, he had it all under control.

I made the mistake of believing my agent was more capable and as passionate as I was about the sale of my property. How wrong I was.

No agent should ever know your property better than you do. While most agents tend to be experts in working a proven sales system, few agencies have an expert whose forte is creative marketing.

What this means is that most real estate marketing is generic, and few campaigns offer that personal touch.

As the property owner, it’s your job to help the agent see the unique selling points of your property, in light of your target market. If I did this, and helped my agent craft a marketing strategy, I could have shaved months off the time it took to finally sell.

This next step will help you reel in your potential property profits.

5. Present Your Property Well

Present Your Property WellTo use a fishing illustration, if advertising and marketing is like the bait that attracts the fish to bite, the presentation of your property is the hook that lands them.

While your first goal is to entice people to walk through your property, that alone will not get the sale. Your most important concern is to provoke emotions and desire in the hearts of every visitor.

Again, I completely dropped the ball on this one in 2008. I literally did nothing to stage the interior of the property. In fact, I didn’t even properly landscape the exterior. My builder even had to call me once to suggest I mow the property. It’s no wonder the house sat empty for 12 months.

Preparing your property for sale is not rocket science. At the very least, you must keep your property clean and tidy. Weeds in the garden beds or grime in the shower impresses no one. If your property is older, add a fresh coat of paint, and perhaps some new floor coverings.

If someone is already living in the property, a good presentation can be even more challenging. Try to keep the appearance as uncluttered and minimal as possible. Make sure all the little things, like holes in walls and broken tiles, are fixed. Incentivise your tenant to have the property clean and tidy at inspection times.

Finally, if you want to go the extra mile, stage your property with furniture to give your home a warmer and more inviting feel. One investor who I’ve mentored, Caroline Vass, is quite good at this. She’s a professional renovator and a staging expert. Here are three points that she teaches about preparing a property for sale:

  1. Convey Emotion: Before any properties go to market, stage them with furniture. Staging a property is crucial because it allows you to convey the emotion of what it will feel like to live there.
  1. Spark ImaginationSpark Imagination. When a house is empty, people often spend time thinking about where their furniture will go or fit. When a property is staged, people focus more on the feeling and presence of the house, and they start imagining themselves living there.
  1. Remove Mental Hurdles. In some houses, the room shape makes it difficult for people to imagine what they could use the space for. When you stage the property, you’re removing this mental hurdle.

Your job as project manager of the sales process is not finished until you’ve exchanged the contract. You must remain involved in the process, even after delegating to your agent.

You should receive regular updates from your agent after property inspections and interactions with any potential buyers. Strategize with the agent about the timing of your open houses, as well as the creation of advertising.

Talk to your agent frequently about the maintenance of the property during the campaign, as well as the staging and presentation of the property. Ask for regular feedback from your agent about what prospects like and dislike. That way you can make adjustments along the way.

Follow these tips, and you’ll avoid the mistakes that I made as a novice investor.

 

Recommended Resources

Need a bit of priceless investing inspiration? Keep reading…

Final Thoughts – You Can’t Just Sit There

lawnchair larry

On July 2, 1982, Larry Walters, a 33-year-old truck driver from Los Angeles, fulfilled a lifelong dream: flight.

While hanging out with a few mates in the backyard of his girlfriend’s house, he strapped himself into a lawn chair tied to over 40 helium-filled balloons. They anchored the chair firmly with two nylon ropes to the bumper of his friend’s car.

Lawn Chair Larry, as he became affectionately known, took along a six-pack of beer, a peanut butter and jelly sandwich and a BB gun. He figured he could shoot the balloons out one at a time when he was ready to land.

According to his “expert” calculations, the balloons would lift him about 30 to 40 metres into the air, thus fulfilling his dream, and offering him the joy-ride of a lifetime.

To Larry and his mates, it seemed like a brilliant plan.

At Captain Larry’s command, his ground crew cut the first tether in preparation for takeoff, but then suddenly, the second tether snapped. Larry shot so rapidly into the Los Angeles sky that his glasses flew off. He began climbing at over 300 metres per minute. By the time he leveled off, he had ascended to 5,000 metres.

Larry’s little mishap took him directly between the air traffic patterns of the Los Angeles International and Long Beach airports. Too frightened to shoot any of the balloons, he stayed airborne for more than an hour drifting in the cold air. At least he had a sixer to calm his nerves.

Eventually, a pilot spotted Larry and radioed the tower to say he was passing a guy in a lawn chair. The airports were forced to shut down their runways for most of the afternoon, causing long delays in flights across the country.

Larry finally mustered the courage to start shooting out a few balloons. He began his descent but then dropped his gun, an accident that may have saved his life. Eventually, he landed without harm; but not before getting caught in a power line, causing a 20-minute electricity blackout in a Long Beach neighborhood.

After being cited by the police, reporters asked him three questions:

Were you scared?Were you scared?”

Larry simply replied, “No.”

“Would you do it again?”

The obvious reply came back, “No.”

“Why did you do it?”

“Because,” he said, “you can’t just sit there.”

We can all learn something valuable from Larry.

While I wouldn’t suggest making an uncalculated risk on the level that he took that afternoon, I would encourage you to follow his example of taking massive action toward the fulfillment of a dream.

Hopefully, you’ve taken copious notes in your journal as I’ve meticulously walked you through these eight steps. If so, I believe you are now closer than you’ve ever been to achieving financial freedom.

But you can’t just sit there. You now need to take action on what you’ve learned.

If I could condense everything I’ve taught so far into three key action points, here’s what I would suggest you do now:

1. Keep reminding yourself of your goal and how you’ll get there to stay on track

Many people have goals, but few people write them down. Even fewer still review them regularly.KEEP REMINDING YOURSELF OF YOUR GOAL

Listen to Earl Nightingale’s famous audio, “The Strangest Secret.” Follow his instructions for reviewing your long-term goal daily. Whether you write it on a notecard or in your mobile phone, pull it out and declare your goal out loud every single day.

Declare it as a fact that has already happened in your life. This will train your mind to begin directing strategic thought toward the fulfillment of the goal.

Regularly review your strategy and your progress toward your goal. You must not only have a goal, but be clearly able to see the steps to its fulfillment.

By creating this routine in your life, you will arm yourself with the motivation to press through difficulty and stay the course when you feel like giving up.

As Benjamin Franklin once said, “Energy and persistence conquer all things.”

2. Begin researching your area and networking with people to make connections

Before you make one offer, you should spend several months visiting open houses, inspecting properties and meeting agents.  NETWORKING WITH PEOPLEThis will arm you with a market awareness for your area, so you’ll know a good deal when you see one.

Even if you don’t have any money for a deposit yet, you can be taking action in this practical way. Believe it or not, if you find the right deal, finding the money is the easy part.

You can’t achieve your goal on your own, so begin building your team now. You need a solid relationship with agents, as well as with an accountant, mortgage broker, solicitor and other like-minded investors.

Find meetups with other investors in your area. Become an area expert, learning as much as you can from other people and drawing strength and encouragement from like-minded people.

3. Actively increase your skill and confidence to continue up the property investing ladder

The biggest mistake that most first-time investors make is trying to go it alone. As I said before, the most common response I hear from our clients is, “I wish I would have known this before buying my last property.”

SkillI recommend you find a mentor who can support you while you learn. You don’t just need knowledge, you need accountability.

There are many training options available, but be sure you partner with someone who doesn’t have an ulterior motive. Many mentors out there are just trying to steer you toward a particular investment opportunity – one that will make them money. Find someone who is purely an educator; someone who will help you learn with no strings attached.

In Steve McKnight’s Property Apprenticeship course and Millionaire Apprentice mentoring program, we never recommend specific deals nor try to steer anyone toward a specific real estate investing strategy. Our goal is to empower investors to find deals on their own and to equip them to achieve consistent results.

Don’t try to go it alone. Whether you seek mentoring from us or someone else, just find someone who you are confident has integrity and who has your best interests in mind.

And remember, you can’t just sit there.

I wish you all the best on your investing journey.

Jason Staggers

P.S. – For the ultimate real estate investing forum and real estate investing blog, follow these links:

 

Jason is a personal mentor for Steve McKnight’s Millionaire Apprenticeship Program. He has helped hundreds of investors achieve greater results on their journey to financial freedom.

13 Comments on Real Estate Investing: How To Invest In Real Estate Profitably

  1. Jason, the last conversation was good. Thanks for that.
    Every bit helps and chapter 7 is good is really good as there is multiple bits needed to achieve a goal :)

    Thanks again for this article.

  2. I am 22, and after reading Steve McKnights book, I have developed an extreme passion and desire to:
    -get my parents into a position where they can retire and live off cash flow from rental property
    -choose to work by 35 myself
    -do what you do and share what I have learnt

    This was great. Thank you for sharing :] Having been set on this path by Rich Dad Poor Dad, two years ago, it is astonishing how much perspective frames our actions and the way in which we view what happens in the world.

    • Well done Edmund for developing a vision for financial freedom while in your early twenties. I’m sure many of our readers wish they could go back and have the same goals while in your season of life. All the best!

  3. Having just read this. It has raised questions i have never thought of and reiterated things i know already. Personally i find this article great for anyone looking to get started like myself at the age of 24. Like Edmund, i want to get my parents into a similar position. While i work towards a goal of being financially free by around 35th birthday. Living off the income of my investments and giving back where i possibly can. I feel i am in a position where i can make something now and while so young. Cheers Jason

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