Quote of the Week

The main advantage of real estate is that it allows you to borrow a lot of money to fund its purchase. (page 3)

Start with the big picture. (page 9)

Investing in the regional areas could prove to be false economy. (page 11)

Land has the highest growth because they aren't making any more of it. (page 12)

Do your research beforehand. (page 12)

Land appreciates, buildings depreciate. (page 14)

The higher use of land can result in windfall gains. (page 14)

Watch out for hidden agendas. (page 16)

A good rule of thumb is to buy only units that do not need a lift. (page 18)

Houses have higher capital growth than apartments. (page 18)

You should only buy off the plan at the start of the property cycle. (page 20)

It is difficult to get a man to understand something when his salary depends on his not understanding it. Upton Sinclair. (page 23)

Established properties are less likely to be overpriced. (page 23)

The capital returns from real estate measured by the increase in median prices are unrealistically high. (page 28)

Your first goal should be to avoid losing money, and your second is to make money. (page 31)

The greatest risk with real estate is usually self-created by inexperienced investors who overextend themselves. (page 34)

Increasing the rate return on your investment or the term of your investment increases your proceeds exponentially. (page 38)

The true capital growth needs to take into account any capital injection made by the owner. (page 42)

The future capital growth of median houses will probably be around 5-6% per annum. (page 43)

The interaction of supply and demand drives real estate prices, and hence capital growth. (page 46)

Wages constrain property prices through affordability. (page 48)

The house price to wage ratio is a measure of value. (page 50)

A large reduction in interest rates only supports a once off increase in real estate prices. Further increases will only be supported by population growth and growth in average wages. (page 51)

Property prices move in cycles driven by the interaction of demand and supply. (page 53)

The vacancy rate measures the interaction of all demand and supply factors. (page 53)

My preference is high capital growth properties, provided you can service the loan in the short term, due to the more favourable tax treatment. (page 55)

The most important location requirement is proximity to employment and transport. (page 55)

Real estate prices usually increase in the more expensive areas first, and then ripple out to the other areas in a concentric circle. (page 56)

Keep your properties when you move. (page 56)

You are losing 10% of the property's value just by entering and leaving the market. (page 58)

Over the long term, rent increases are constrained by increases in average wages. (page 59)

Make sure you review the rent on your investment property at least every year. (page 60)

Compare the relative rental yield against historical values to assess whether the property market is overpriced or underpriced. (page 62)

Good investments do not need a rental guarantee. (page 63)

High capital growth properties provider higher after-tax returns than similarly priced high rental yield properties. However, to reap the capital growth over the long term, you have to be able to service the property in the short term. (page 66)

You are probably better off renting than buying, provided you invest the difference. However, I recommend that you aim for the buying option. (page 67)

When you spread your investments, you increase the security of your portfolio while maintaining the same expected yield. (page 69)

To achieve spread with real estate, buy properties from markets that are out of phase. (page 70)

Assets and liabilities should be matched as closely as possible. (page 72)

If you already own a property, it might be much easier to buy another one than you think. (page 74)

One of the easiest ways to build a property portfolio is to keep your old home as an investment property when moving house. (page 75)

One a year for a few years, then nothing for a few years ... (page 76)

You should only add more properties to your portfolio when the market is in the Buying Zone. (page 76).

It's portfolio size that counts. (page 77)

Take the time to build your portfolio securely over a number of cycles. (page 78)

There is nothing more stupid than shopping all day to save a few hundred dollars on a big screen TV, then turn around and buy an investment property without doing any research. (page 80)

Always get at least a second independent quote. (page 81)

Flipping real estate is only for dummies. (page 85)

Real estate prices do not increase in a steady trend, but in spurts. Patience is critical to successful real estate investing. (page 85)

Time heals buying mistakes. (page 86)

The time to get interested is when no one else is. You can't buy what is popular and do well. Warren Buffett. (page 88)

Buying at the top of the market is a sure way to lose money. (page 89)

The Buying Zone occurs when market value is less than intrinsic value. (page 91)

The Buying Zone occurs during the accumulation stage and early uptrend of the real estate cycle, from three to four years after the last peak to three to four years after prices start rising again. (page 92)

Fundamental analysis compares the price of real estate to its intrinsic value based on cash flow. (page 92)

The Buying Zone occurs when the Relative Rental Yield for the market is 60% or more. (page 93)

EVA measures profit after allowing for the cost of capital. (page 93)

When the property market only pays a Relative Rental Yield of 40%, it is 50% overpriced compared to when it pays a Relative Rental Yield of 60%. (page 95)

A contrarian right from the start. (page 96)

Technical analysis looks at the impact of the interaction of supply and demand for real estate on price. (page 96)

The Buying Zone occurs when vacancy rates are at their lows. (page 97)

Real estate is usually financed by a combination of two different sources of funds: equity and debt. The first is equity, the money that comes out of your own pocket. The second is debt, which you borrow from other people. (page 98)

Too little equity reduces the security for the buyer and the lender. (page 100)

You repeat the piggyback process again and again to build your property portfolio. (page 102)

No money down strategies are dodgy. There are no free lunches in life. (page 104)

What will you do if prices fall instead? (page 106)

If you do not have a suitable deposit, then you are probably better off not investing in the property market. (page 106)

Magnification will only work if you can earn a higher yield than the interest cost of your borrowings. (page 108)

Magnification reduces the security of your investment – you cannot go bankrupt if you do not have any debt. (page 109)

Just as it is risky to borrow too much, it is also risky not to borrow at all. (page 109)

Not all debt is bad. (page 110)

The debt service ratio usually limits how much you can borrow. (page 113)

The wrapper/lease option seller charges a higher price and a higher interest rate/rent for the same property in return for accepting a lower deposit and providing financing. (page 120)

If you cannot obtain a standard loan, then you are better off renting and investing in shares and other investments. (page 121)

The best loan is usually the cheapest loan. (page 122)

Some of the cheapest loans are rebadged direct loans from the banks. (page 123)

A small difference in interest can make a big difference. (page 126)

The quickest way to pay off your debts is to start with the non-tax deductible debt first and tackle the highest interest loans first. (page 127)

Positive gearing occurs when the rent covers all the expenses and interest. Negative gearing occurs when the rent is insufficient to cover all expenses and interest. (page 128)

Negative gearing with a positive cash flow occurs when the rent plus tax credit covers all cash expenses and interest. Negative gearing with a negative cash flow occurs when the rent plus tax credit is insufficient to cover all cash expenses and interest. (page 129)

Positive cash flow: puts money in your pocket. Negative cash flow: takes money from your pocket. Positive gearing: you pay tax on the profit. Negative gearing: you get a tax refund on the loss. Negative gearing with negative cash flow ð negative gearing with positive cash flow ð positive gearing (page 130)

From a funding perspective, positive cash flow is better than negative cash flow. However, negative geared properties produce better after-tax returns than positive cash flow properties, all other things being equal. (page 131)

Positive cash flow properties are self-funding, and therefore, any capital gains are a bonus. (page 132)

A much more common situation is negatively geared properties with negative cash flow. (page 132)

Negative gearing only works if the future capital gains are greater than the income loss and the investor can fund the negative cash flow. (page 133)

Paying tax is good – it means that you are on your way to achieving your financial goals. (page 137)

Capital gains tax is triggered on exchange of contracts, not settlement. (page 141)

The best way to minimise capital gains tax is to hold on to your investments for as long as possible. (page 142)

You can reduce the amount of tax payable by minimising your income and maximising your capital gains because of the different tax treatment. (page 143)

The key to this strategy is not the negative gearing, but the taking advantage of the different tax treatment between income and capital gains. (page 143)

The most effective way to minimise the effect of tax on your returns is to focus on high capital growth properties over high rental yield properties. (page 144)

The Warren Buffett way: buy high-capital-growth properties and never sell them. (page 145)

Never commit to buying a property until the loan approval is unconditional. (page 155)

Buy as close to the CBD and water as possible because this is where the greatest capital growth occurs. (page 159)

If you miss the boat in a particular suburb, then look to adjoining suburbs that are still in the Buying Zone. (page 160)

Get the agents to compete for your business, instead of competing for theirs. (page 164)

Agents can be a wealth of information. (page 165)

A lender valuation is usually conservative and can be below market value. (page 178)

If the lender declines the loan or requires additional security for the loan, then this is a clear sign that the property is overpriced. (page 179)

The three strategies to effective buying are: avoid competition, know what the property is worth and have attractive alternatives. (page 181)

If you must have it, then you'll probably end up paying the asking price. (page 183)

Where the final price ends up compared to the buyer’s or seller’s original price is irrelevant. What is relevant is how it compares with the property’s value. (page 183)

The offer should be made with reference to your valuation, and not the seller’s asking price. Where you start depends on how much you want the property and the level of competition. (page 184)

Always put a time limit on your offer. (page 184)

Not only is low-balling a waste of time, it can also be detrimental to your prospects of securing a property for a reasonable price. (page 185)

If the seller rejects your offer, then get them to make a counter-offer before you raise your offer. (page 185)

Consider making a knockout offer to scare off the competition. (page 186)

You have a significant advantage over other buyers if you can exchange contracts immediately with sellers under time pressure. (page 186)

Negotiation 101: negotiate with reference to your valuation, not the asking price. (page 186)

The best defence against underquoting is to know the property’s market value, and use it to your advantage. (page 189)

A building and pest inspection is part of the cost of investing in property. (page 196)

You should increase the rent regularly every year. (page 203)

For most property investors, I recommend using a property manager. (page 204)

Choose a property manager whose service area covers your property. (page 206)

Keeping good records is an important part of property management. (page 207)

Warranties save money. (page 208)

Only proceed if the renovation is rental positive. (page 214)

Focus on renovations that pay for themselves. (page 215)

You might be able to share the cost with the tenant. (page 216)

The boring things make you money while the sexy things cost you money. (page 216)

Play Monopoly® with your family. (page 226)

The key to successful property development is to get set with the land. (page 227)

Selling is like killing the goose that lays the golden egg. (page 232)

Drawing down equity is usually better than selling and buying back. (page 233)

If you have to sell, do it in the Selling Zone. (page 236)

They key to selling successfully yourself is to find enough buyers so that the property sells itself. (page 237)

Baiting buyers with a low price will attract more interest, but is counterproductive because it only attracts bargain hunters. (page 241)

Be wary of paying for advertising that is of marginal value in finding buyers. (page 242)

Choose the agent that is most likely to find the most genuine buyers in a cost effective way. (page 243)

Don't hold out for too long. (page 247)

Over the long-term, the returns from investing in real estate are satisfactory. (page 255)

Timing the market turns a satisfactory return into a very good return. (page 258)

The main difference between novice investors and experienced investors is that the novices look for a shortcut that will give them an edge but does not require much work, while the pros use a basic strategy that anyone can apply, but requires hard work. (page 261)