Investment, Real Estate, Tax Savings, Seven Steps to Wealth, John Fitzgerald, Custodian WealthBuilders, Australia

STEP 1
Buy Land for Capital Growth

Land appreciates; buildings depreciate

Bricks and mortar do go up in price - but the increase is usually a mirage created by inflation. True capital growth only comes from land: that's the commodity with limited supply and increasing demand. When property values are split to show the two components - the land and the building - the picture is clear.

The higher the land content, the greater the capital growth.

People starting out with limited capital and borrowings can't afford to buy land only: they need a dwelling to generate income (from rent) to offset their outgoings.

About 34% of Australian investors buy units. But land content forms less than 15% of the purchase price - and to secure significant and sustainable capital growth, you need at least 30% land content. Houses and duplexes usually fall into this category: townhouses, only within 7km of a CBD.

Lesson 1: Don't fall for the unit trap! Look for at least 30% land content.

STEP 2
Optimise Your Income

Almost all Australians have rented a home at some stage. About 30 per cent of people are currently renting. And the number of people renting homes continues to increase - despite a few urban myths. WealthBuilders buy property that appeals to the rental market, to ensure a secure and growing source of income.

Some tips for optimising income:

• Buy property in areas where jobs and population are increasing. These are the primary factors that underpin rental demand.
  
  
• Ask several real estate agents how many rental properties on their books are vacant: this is the area's rental vacancy rate. Look for a vacancy rate of 3% or less.
  
  
• Buy property that will allow you to charge affordable rent. Calculate rent at about 30% average weekly income - and then charge $10 a week less! Tenants will be easier to find (no income-idle vacancy) and will often show their appreciation with a hassle-free tenancy.
  
  
• Buy houses or duplexes rather than units. Most tenants prefer individual dwellings - and in some areas, units can remain untenanted twice as long as houses!
  
  
• Look for areas with less than 35% rental properties. Owner-occupiers tend to buy in such areas enhancing demand for the property when it is time to sell. (And meanwhile, there's less competition for tenants...)
  
  
• Employ a professional property manager to find and manage your tenants.
  
  

STEP 3
Maximise Tax Benefits

Negative gearing describes how the costs of maintaining and financing an investment property can be offset against the income earned from renting it. If a shortfall results, the amount can be deducted from personal income.

Landlords can also claim various deductions - including interest on the mortgage.

The deduction that makes the biggest difference, though, is depreciation. Investors buying rental properties built after July 1985 can claim depreciation of the building, fixtures and fittings.

The maths can be complicated, but the effect is very encouraging... Investors buying a new property, borrowing 90 per cent of the purchase price at seven per cent (interest only) and receiving rental income, can increase their net income!

Getting the taxman to contribute to your outlays - while your equity grows...

STEP 4
Finance to Build

One of the reasons property stacks up so well against shares - apart from performance - is the ability to leverage your investment. Most banks regard residential real estate as prime security, against which some will lend up to 95% of the property's value. (Shares: 60%...) So with the same amount of capital, you can get a property asset worth almost three times the equivalent value in shares!

Property investors can use other people's money to build wealth!

To use leverage to advantage, find a loan provider who will:

• Lend 90 per cent of the property value.
  
  
• Disclose the security value of the property prior to purchase
  
  
• Take 80% of the projected rental income into account when assessing the investor's ability to repay the loan.
  
  

Investors can rely on property to increase in value. When the value of one property has increased by 10-15%, the equity can be used to buy another property. Again. And again - for the beauty of compound growth. Find a loan provider who understands this!

These requirements may disqualify the big four banks - but the finance market is very competitive. Shop around to find a mortgage provider who will support your wealth building plans.

STEP 5
Aim for Affordability

Would-be WealthBuilders get excited about land appreciation - for capital growth - and building depreciation - for tax benefits. They get even more excited about building wealth with other people's money! But many investors are put off by the dreaded 'real estate cycle'.

You hear about people losing money on property bought during a real estate boom - followed by a slump... But you can easily avoid this pitfall. Simply set an upper limit on the price you are prepared to pay for a property, which is affordable for the average employed person. Market fluctuations have little effect on this type of property.

Lenders indirectly control the price of property by deciding how much they will lend: most accept that up to 35% of a borrower's income can be used to repay a mortgage.
Property that meets the market is the best investment

Don't buy property when prices rise above the average income earner's ability to pay. Wait until after peak prices have been reached - and buy when the market drops ('counter-cyclical' buying) for greater growth potential.

STEP 6
Make time work for You

Wealth Building requires a long-term acquisition plan. Use your capital growth to accumulate a property portfolio - and hang on to it! This is the way to responsible investment, managed risk and secure returns. Call it: 'get rich slow'...

Few Australian investors trade successfully in the property market. The costs of buying, selling and adding value often eat up the profits...

The key to wealth building is to buy - and HOLD while the value of your assets grows.

If you need to sell, you can: that's just good exit strategy. But there are alternatives...

STEP 7
Be all You can be!

Wealth Building is not just about money. For many people, it is about a secure retirement, a great family lifestyle and financial freedom. But it is also about responsibility.

There are very few wealthy people in the world. Ideally, those who create, control and enjoy wealth should help those who don't. At Custodian WealthBuilders, we take this responsibility seriously by striving to use our wealth to benefit fellow Australians - and educating and supporting others in doing the same.

The Custodian WealthBuilders Group is the principal benefactor of the Toogoolawa Childrens' Homes Foundation. Toogoolawa ('a place in the heart') provides residential care and educational opportunity for youth at risk.

We want to build up communities, as well as assets. To invest in lives, as well as in property.

To reap passion and purpose, as well as financial returns.

May we encourage you to explore this path with us?