What's so Great about Foreclosures?

Foreclosures right now are exploding with interest because of the number of homeowners going into foreclosure and the returns they can realize from them. People are finding out foreclosures are a better, safer, and more secure way to make a living than other real estate techniques. It's no secret that foreclosures are at a 30-year high. Why? Some may feel the economy is to blame. Still others say it could be due to unemployment. Yet others speculate that it could be the leniency in the lending business. Whatever you choose to believe, the fact still remains that foreclosures are at record highs right now and will continue to grow. It's unfortunate some of us live in a atmosphere where the bigger houses, nicer cars and fun toys tend to be more important than living within our means. Investors absolutely love this kind of market which just means there are plenty to go around and several to search through so you can find that "diamond in the rough".

Most people have heard that foreclosures are or can become a great investment. So why doesn't everyone do it? Is it because it is hard? To time consuming? Takes a lot of money? These are all good answers, however none are correct. Through our research, we have discovered that most people just lack the motivation, desire, and knowledge. They are stuck in what some call a "comfort zone," satisfied with their surroundings, living from paycheck to paycheck.

Foreclosures are not new by any means. During the depression, savvy real estate investors were making all the money investing in Real Estate. They would buy houses dirt cheap, then sell them for a little more than what they paid for them. So why do the rich keep getting richer? They know where to find the money.

Foreclosures are just one of those areas. It was Robert Allen who said "More bargains are available in the area of foreclosures than in any other area of real estate." (Multiple Streams of Income - p.157)

Foreclosures to most people automatically imply the word "discount," which is great. This is exactly what you are after. You are after properties with discounts, which means you are looking for homeowners in distress. You are looking for people in desperate circumstances, who are motivated, who want peace rather than money.

Are there people out there like that?

Absolutely...Without question!

There are several reasons homeowners become delinquent on their mortgages. It could be because of a job loss, divorce, death of a spouse, illness, job transfer, rising interest rates, bad investments and so on. These are all unfortunate situations, but the truth of the matter is these situations happen all the time. It's now your goal to help this homeowner get out of this situation. You are trying for a "Win-Win". You want to make money; they want out of their unfortunate situation. Most people have a lot of pride in their home; therefore, the biggest challenge they face is embarrassment. They don't want their friends, family, and neighbors to know they are about to lose their home. So they would rather take a loss -- "sell the home" and start over from scratch.

So, how do we find these homeowners in default or behind on payments? There are several ways in which to find motivated homeowners! Newspapers, ads, signs, courthouse, and attorneys, just to name a few. See, when a homeowner is delinquent on their mortgage, a legal notice, or notice of default, must be sent to the homeowner to let them know that their property will be going to auction soon. These legal notices are published weekly -- sometimes daily -- at the courthouse. Some counties have a website or newspaper that lists all the legal notices. When you find the notices, call up the homeowner and see if you can help them out of their situation. This is one way to find motivated sellers, because their home is going to the auction soon.

Questions to Ask Homeowners in Distress

In this business, it is imperative that you ask questions. You don't want to waste the homeowners time but more importantly you don't want to waste your time. Most likely, you already know these homeowners are motivated because they will be calling you for help from ads you've placed in the newspaper or letters you've sent out. So here are some basic questions you can ask and information you need to get to proceed.

Get the Name of the person.

"Are you the owner or agent representing the property?"

"What is the sq. ft. of home?"

"How old is the property?"

"What improvements have been made on the property?"

"How many bedrooms/bath?"

"How old is the roof?"

"Have you had a recent inspection on the property?"

"How long ago and what kind of inspection was it?" (termite, home)

"What is the address of the property?"

"What is the City, State, and Zip?"

Ask about the neighborhood; what is it like? (i.e., commercial, residential)

"Why are you selling your home?"

"How long have you lived in the home?"

"What did you pay for the property?"

"Have you had any offers? How many?"

"How long have you had it on the market?"

"Have you ever had the property under contract?"

"What is the property worth?"

"How did you come up with that price?"

"What improvements have you made to the property since you have owned it?"

"Do you know of any repairs needed to the property?"

"What are you going to do with the property if it does not sell?"

"Have you had the property appraised recently?"

"Tell me about the loan. How much do you owe on the property?"

"How much is the 1st mortgage?"

"How much is the 2nd mortgage (or Home Equity Line of Credit)?"

"Is there a 3rd mortgage? If so, how much is it" (very rare there is a 3rd)

"Are you able to do any creative financing?" (i.e. purchase “subject to”, carry some of the note, balloon payment, seller financing)

Don't just limit yourself to these questions. Every deal is different, and other questions will arise. Once you're in the home, you need to find out as much as you can about the property; what the property is worth, what options you have and if the homeowner is ready to get out. Be sure you have all your documents there in hand ready for them to sign if it's appropriate. For most people, this is a touchy subject, so you need to be careful what you say to these people. Here are some things you should avoid saying:

“Yes, Joe, I found out you are in foreclosure…”
“The auction is coming up Joe. What are you going to do?”
“How did your home get in foreclosure in the first place?”

Here is a simple guideline you can use when you receive a call from a homeowner in foreclosure.

1. Introduce yourself.
2.Thank them for calling and ask them when you can stop by to see the property.
3.Ask questions and get the details.
4.Verify the home has enough equity in it to make it worth your while.
5.Get them to sign a purchase agreement
6.Be prepared to close in a few weeks.

In some cases, where you would have to drive 30 miles to see a property, it’s not a bad idea to ask a few more qualifying questions first to avoid wasting your time. However, it is best if you can sit down with the homeowner to establish a relationship of trust and then sincerely find out why they want to sell and what they want out of the deal before you tell them all the options they have.

It’s also important that you make sure all the owners of the property are present when you come. This will make it much easier when you begin to negotiate and if you need them to sign the purchasing agreement. Also ask them to find all their recent loan statements so you can look at them. This information will help you make your decision. Make it a habit to always have a purchase agreement with you at all times so you can fill it out and have them sign it right there on the spot.

In the meantime, Good Luck with your investing.

Jarad Severe

Don't Let Emotions Dictate The Deal

Don't Let Emotions Dictate The Deal by Scott Lamm
	When it comes to buying real estate, we must never let our emotions take over the deal. The times that we do are often the times that we end up learning the “hard lessons”. I am sure that we have all learned this important lesson one way or another. Maybe it was in real estate, maybe the stock market, maybe it was a relationship, or maybe it was in choosing what items to buy at the grocery store! Emotions can even play tricks on us; let me explain. Have you ever bought something at a great price, sold it for a profit; then, right after you sold it, the item went up even more in value? How did you feel? Probably not that great! It has happened to me, and I felt like I had gotten kicked in the stomach -- I was sick. Have you ever bought something at a decent price and, when the item went down in value, you sold it and cut your losses? Then, within a relatively short period of time, the item went down even more in value? How did you feel? If you are like me, we felt great. We might have even patted ourselves on the back about the great decision we made! Wait a minute here, what just happened? We made money and felt crummy and we lost money and felt great? That just doesn’t seem right to me; but at the end of the day, that is precisely what emotions can do to any of us. Emotions really can play tricks on us in our investment lives. I was working in a one-on-one situation with a young couple, Karen and Steve, as they were getting their real estate investments off the ground. I was coaching them, developing a plan and keeping them accountable to the plan. As part of our initial session, they shared a story with me about a deal that they had done where they had just barely broke even. They asked me if I would review the deal with them and help them understand where they may have gotten derailed in their maiden attempt to make a profit! After all, that is what the business is supposed to be about, right? It reminds me of a story that my father told me when I was a teenager. There was a young man who wanted to start a business and went to his father to borrow some money to get the business going. After going into great detail about the proposed venture, the father finally asked, “Can you make any money?” The son replied, “Well, I think I can at least break even.” The father simply said, “You’re already there!” We are in the business to make some money; if all you hope to do is break even, then go watch Jeopardy and eat some cookies! Anyway, back to Karen and Steve and the deal they had me review. After spending 30 minutes or so going through the deal details with them, it became very clear to me what the issue was. They let emotions dictate the purchase and they overpaid for the property. One of my recent articles dealt with the concept of Starting at the End (see the Article Archives on www.emitraining.com if you missed it). The final analysis was not that they sold the house for too little -- it was that they bought the house for too much. They should have started at the end and come up with a maximum offering price then stuck to their guns. I had them go through this exercise after the fact. After looking at all the numbers and figuring it out, they realized that they should have bought the property at about $15k less than they actually did. The lesson for them was that they wanted the house more than they wanted a profit, and it should be the other way around! The only other way to have made money was to not have spent as much in the process of the fix up. It is possible to over-improve. Not everything has to be perfect -- don’t be afraid to leave a project or two for the next owner. The bottom line is that when we let emotions dictate a deal, we can fall into the trap of not running all the numbers and over-paying for the property. When we want the profit more than we want the property, we will make sure to start at the end, run the numbers, and stay true to the goal of profitability.

The Secret of Starting At The End

So you want to be a real estate investor?! One of the most common questions I get from those who are just starting is, “Where do I start?” or, “How do I know where to begin?” I want to share a secret with anyone who has ever struggled with how or where to start in the world of real estate investing; start at the end.

When I say start at the end, I mean that you have to figure out where you want to end up or it is awfully hard to develop a plan for how to get there. It would be like the family that says they want to go on vacation but they never take the time to figure out where they want to go! If they never take the time sit down and decide where to go, then they forfeit the right to complain about never arriving anywhere.

Your real estate investment choice should begin with drilling down to what amounts to 2 very basic baskets of choices;

1. Would I prefer a bigger chuck of cash now?
2. Would I prefer the passive income each and every month?

Either answer is fine. Let’s face it: in real life we will want both, but we also know that we need to have a primary and a secondary when it comes to these two categories. If you already have a good chunk of cash, then you would most likely lean towards the passive income category. If you lack the cash and need to build up some money, to solve some other issues or areas of your financial life, you would most likely lean towards getting a bigger chunk sooner.

Consequently, when we come across deals, we tend to try and push them towards the primary objective that WE need; either cash flow or cash now. I have seen beginners get frustrated when they just can’t seem to get their first deal under their belts. One of the reasons they might be struggling is because they have tried to fit a square peg into a round hole. Maybe the deal they have found would be great for cash flow but not so great for cash now. Or maybe they found a decent wholesale deal that would have some cash if they flipped it; but it spits off no income if they were to keep it.

Instead of trying to force our own will and what we need into every deal, we need to learn to stand back and start at the end and see what the deal allows us to do. When I look at any prospective deal, I ask myself 3 questions regarding any potential profit;

1. Can I make money living in it?
2. Can I make money renting it out?
3. Can I make money selling it?

First of all, if the answer is no to all three of these questions, then it probably is not a deal I am going to do. What if there was money renting it out, but I don’t want to have rentals or I need the quick cash? Or what if I could buy it right, but the rents just won’t cover the debt service? Should I throw the deal away? Definitely not!

This is why it becomes so important to build our team. Just like Robert Allen and Mark Victor Hansen talk about in the OMM book, you need to develop your Mastermind Team. Part of this is to surround yourself with other investors who might be looking for things you are not. For instance, if you are looking for cash flow, and you find a deal where there is profit on a flip but not from a passive income perspective, you could flip the deal over to one of your team members who is looking for a rehab. If you are looking for fixers to rehab and sell, but you find a 4-plex in good shape that has some cash flow, you could still turn the deal over to one of your team members who seeks that.

Simply said, rather than getting frustrated when we find deals that don’t give us what WE want, see if there is profit in another category and make a bit of money by flipping the deal to another investor who may be seeking something different.

Another way to say it is, "start at the end". See what the deal allows you to do and go with it instead of fighting it!

Property Wealth Triangle

Property Report 2: Property Wealth Triangle 17/02/2008 , by Phil Jones
		Audio File
		The power of the Richmastery Property Wealth Triangle has existed for hundreds of years. It is the secret formula that draws investors to real estate as an investment medium but it is a concept that is poorly understood and rarely taught. In the current property market it is critical to understand the theory and benefits of the Property Wealth Triangle as it provides clear clues on how to invest now, why to invest now and what to expect when you do invest now. Put simply investors purchase real estate to attain one or more of the above three benefits being: Cashflow - Where the properties income exceeds its costs and delivers an annual profit Capital Growth - Where the properties value increases over time Equity - Being the immediate equity an investor banks when they purchase a property at a discount If investors cant get any of the 3 Wealth Triangle benefits they cease investing in the market because there is no possibility of getting a financial return. This rarely happens as even in a soft or receding market attractive returns can be made using the right strategies. Clue Number 1: If your don't know the right strategies your screwed. Every phase of the property cycle (Boom, Slump & Recovery) allows investors to achieve one or more of the above 3 financial results.... Immediate Equity, Cashflow or Capital Growth. And if the market didn't shift between phases then the Triangle would get out of balance with one corner having more expansion than the others. Here is an example: Lets rewind the clock back 18 to 36 months ago and look at the Richmastery Property Wealth Triangle. In that market lets see where the 3 corners were: > Capital Growth = Strong > Cashflow = Very hard to find and disappearing > Equity = Almost impossible to buy property at a discount because the market was so buoyant Rewind the clock back to 2001... > Capital Growth = Was dead, the market bearly had a capital growth pulse > Cashflow = Was easy to get, South Auckland was covered with positive cashflow properties earning $50 a week plus > Equity = Abounded, it was simple to buy property at large discounts So lets look at the current market, where are we at.... > Capital Growth = Flat and soft > Cashflow = Increasing due to lower available house prices > Equity = There is Truckloads of immediate equity available because property can easily be bought at a discount Intelligent investors like myself read the cycle, check the Property Wealth Pyramid and customise our investing tactics to harvest the profits using the strongest available corner of the Pyramid. In early December 2007 I taught this concept at the Blue Peak Licensee Launches around New Zealand and advised investors that the 2008 investing process will be.... Clue Number 2: Turning Immediate Equity (which is available in abundance) into Cashflow!!! You see the challenge is not that you cant made profits, the challenge for most investors is that in a flat market they don't know how to turn "Immediate Equity" into "Cashflow". So I'll let you ponder that and post your thoughts in the forum. I would appreciate hearing from you. Oh one last thing.... do you know there will be investors who didn't buy a single property in the last 2 years because the interest rates were too high, now they wont be buying a property because the markets too soft. My friends there will always be an excuse to sit on your arse and do nothing, after all that's what 99% of the population does! But in life the money is made by those who do what others are not prepared to. Do yourself a BIG favour this year, book for Richmasterys Property Negotiation course next weekend. If the secret to wealth in 2008 is turning Immediate Equity into Cashflow, the starting point for you is knowing how to get large portions of immediate equity through negotiating purchases at huge discounts. Become an expert at that and the world is your oyster.

Auction Opportunities

Market Report 4: Auction Opportunities 19/02/2008 , by Phil Jones
		Audio File
		Auctions have just become a real estate buyers secret weapon. In a booming market where the ratio of buyers exceeds sellers auctions should be avoided but now the tables are turned! Buyers are scarce and that means we now have the upper hand at auctions, especially mortgagee auctions as I alk about today. Now there are several ways to take advantage of the current market and auctions, here are a few: 1/ Follow up on No Sales More property than ever is NOT SELLING AT AUCTIONS which gives investors massive negotiating power to pick up bargains after an auction has failed. You virtually have no competition and some very desperate sellers who have just spent a lot of marketing money on a property that didn't sell. 2/ Mortgagee Auctions Two things work in your favour here, mortgagee auctions are on the increase and buyers for them are on the decrease. This means you are likely to be able to cherry pick some VERY HOT bargains on some very good properties that no one else wants. Remember most mum and dad home buyers DO NOT go to a Mortgagee Auction to buy their next family home. 3/ Auction Terms Before an Auction starts you can register your buying terms with the auctioneer. This is rarely done in a hot market but in a cold market all the power rests with the buyer! You could for instance ask for a 90 day settlement if you win the auction or request access to improve the property or show prospective tenants through before you settle the purchase. In the US, here is what is happening with Mortgagee Auctions, its beautiful! Can you see a bargain or two like: $1000 Starting Bid for a $321,300 home $79,000 Starting Bid for a $525,300 home Now I'm not suggesting your are going to see these sort of numbers in New Zealand but what it does illustrate is the opportunity Mortgagee Auctions offer in a flat market. An example of this was brought home to me this week when I spoke to one of my students from New Zealand who had just signed a lease option deal this week that gave him: $90,000 in Equity Profit and $330 a week in positive cashflow. You have to laugh that at the exact time when some investors say they cant make money other investors are doing deals like this. Deals that sit in the market right under everyones nose! Pic 1: Corinna with Charles Hoskowicz from Keller Williams Realty in San Diego In the last couple of weeks Corinna and I have spent a lot of time with Real Estate Agents, Mortgage Brokers and property industry experts in the USA for three reasons: 1/ The NZ Market can learn a lot from the US 2/ Some of the products, services and solutions here are very useful for Richmastery customers in New Zealand 3/ We are looking to buy here later in the year

Turning Market Pain into GAIN!

Property Report 1: Turning Market Pain into GAIN! 15/02/2008 , by Phil Jones
		Audio File
		This week the property market has received some bad news. So how should investors interpret the "crash" "slump" and "run for the hills we are all about to lose thousands" hysteria. And what practical steps should you take right now? And what about profits, are they still possible? There is no doubt the market is flat and is softening, that's what happens when the demand for property diminishes as I wrote would happen in my blogs last year and is confirmed by the recent statistics from the NZ Herald and REINZ displayed below: But this is A GOOD THING! For years investors have been windging that they cant purchase property at a DISCOUNT, now you will be able to get deals at a Discount EVERY WEEK. Every smart share market investor knows shares are best bought when the market is soft and the shares are under valued, property is the same! Yipee. Its a buyers market and now the POWER is on your hands, make sure you use it! And as prices on residential real estate purchases reduce.... > Cashflow Increases because you are paying less to buy a property > Yield Increases > Immediate Equity Increases Blue Peak Licensees must be thinking all their Christmas's have come at once right now! Over the next little while I'm going to write a series of blogs on how to profit in the current property market. These blogs will be punctuated by the odd different blog to break things up and keep my blog reading interesting for you. The Number 1 thing investors need to do right now is not get EMOTIONAL. Property investing is a business and we need to treat it with respect like a business owner and make decisions based on facts, processes, plans and real achievable profits. Professional business owners don't take advice from cackling housewives on "how to complete a free trade agreement with Mongolia", neither should you! Emotion will compromise your investing and kill you, avoid it like the plague, now is the time to be decisive, calculating and make decisions based on the numbers. The Number 2 thing investors need to do right now is FILTER. Its critical that you check the facts, validity and accuracy of information and filter everything particularly when its from the media. All too often one sound reported statement is hijacked by a "pity party" of wining others who transform the issue by adding a range of outrageous comments. Focus on the facts and filter out the waffle and emotive hysteria. Investing is about the facts and the numbers nothing else! Peoples opinions are never reasons to base investing decisions on. The Number 3 thing investors need to do right now is NOT REACT. A reaction is often an emotional response to a fear. And often FEAR is: > False > Expectations > Appearing > Real Your actions as an investor need to be considered, deliberate and part of your overall investing plan. Reacting to situations often only creates more of a mess and disjointed chaos. Show maturity, understanding and balance. Weigh your next move with the focus, concentration and skill of a chess player. Do not react like a light headed Pixie. The Number 4 thing investors need to do right now is PLAN. You must operate to a plan that is firmly based on the numbers and your current financials. The first step in formulating your plan is to map out where you are at right now using the RevIQ software. Load all your portfolio into RevIQ including your own home, load the mortgages, what banks they are with, the interest rates, when the rates expire, your rental income on each property, budgeted annual repairs and maintenance and your chattels valuations on each property. You can't move forward until you intimately understand your current starting position. And if your don't have RevIQ buy it, it is the most essential planning tool you need right now. RevIQ's house sales downloads are going to make investors a lot of money this year. You cant afford to miss this critical information. The first thing you should do today is an updated download on each of your properties so you have a snapshot of the current value of each home and each ones available equity. The Number 5 thing investors need to do right now is EDUCATE yourself. The upward lift in the market over the last 4 years has insulated a lot of uneducated investors, it has been pretty easy for most people to make money even though many had little or no idea what they were doing. Today's market is different, you need to be on your game, know exactly what your next move needs to be and execute it with expertise, skill and care. Paul Hogan said once: "Don't bring a knife to a gun fight". Investors that don't arm themselves with a strong solid education for TODAYS market risk suffering serious injuries.

Nine Tips for Raising Financially Literate Children

Nine Tips for Raising Financially Literate Children
Michelle Samaad (bankrate.com)

Tips for teaching your children about money

You try to raise your children right and teach them values, and while morals
and ethics are important, it’s important to be sure children learn about
money and finances. Here are some tips for parents to help their children
learn about how to manage money.

Tips for teaching children about money

1. Get kids interested in money early.

When your children are very young (age 3 or 4), show them how to tell
different coins apart. Then give them a piggy bank to store up their change.
Piggy banks are a tangible place to keep their money safe, and they can
see, hear and feel how the bank fills up.

2.Make saving a habit.

Make a house rule of saving a percentage of income, whether it’s birthday
money from relatives, earnings from a neighborhood lemonade stand, weekly
allowance or a part-time job.

3. Open a savings account in a child’s name.

A bank savings account can show kids how their money can earn money
on its own -- through compound interest. Give kids a compound interest
table (available at most banks) to let them anticipate how their money
can grow. Be sure to plan regular visits to the bank, too.

4, Encourage goal setting.

Have your kids write down their wish list, along with a deadline --
a skateboard by the end of the summer, a bike by next year. Visualizing
may give kids the added motivation they need to save. You might also contribute
a matching amount every time they reach a certain dollar amount in savings
by themselves.

5. Give regular allowances.

Allowances give kids experience with real-life money matters, letting
them practice how to save regularly and plan their spending. Of course,
you should determine the amount of allowance that you think fits, for example
an amount equal to half their age per week.

6. Help plan a budget.

Have kids write down what they’ll buy during the week and how much
each item costs. Then write down their weekly income. If it doesn’t add
up, they’ll have to prioritize their "needs" and their "wants."

7. Encourage money-earning ventures.

To earn money beyond their weekly allowance, suggest that kids find
creative ways to make money -- doing special household chores or seeking
jobs in the neighborhood such as raking leaves, mowing lawns, pet sitting
or shoveling snow.

8. Show children the effects of inflation.

To show your kids how prices have gone up over the years, take them
to the library to look up ads -- for movie tickets, bikes, sneakers --
in the newspaper archives. Try finding the year they were born. Your kids
can also use their math skills to see how much items they’re saving for
will cost in the future. For example. a bike that costs $50 today might
cost $60 in five years, with 4 percent inflation.

9. The ultimate step to investing: stocks.

For a fun way to teach kids about stocks and how they work, make a
game of it. Have everyone in the family pick their favorite company --
McDonald’s, The Gap, Walt Disney, Nike -- and "invest" $100. If you own
mutual funds or variable annuities, you can let your kids find a name they
know in the annual reports. Then show your kids how to keep track of the
stocks’ daily progress through the newspaper’s financial section. Give
a prize to the person whose stock goes up the most over each month.

The Magic of Property

The Magic of Property
Dolf de Roos

If Property is so good, why aren’t more people promoting it as an investment vehicle? or "Investing in Real Estate has special advantages, you should know about".

Although direct investment in property continues to be one of the best investment options available today, there are very few people openly raving about its merits.
Partially this is because there are not many people (other than property investors themselves) who benefit from property acquisitions. Indeed, in New Zealand, even real estate agents get their commissions not from the purchasers, as they do in many parts of the world, but from vendors.
The lack of enthusiasm for property is also partly the result of incomplete knowledge about how property works. This incomplete knowledge manifests itself when yields on properties are quoted and compared to the returns on fixed investments. Almost without exception, the yields quoted are income yields, and no account is taken of factors that can dramatically affect the net returns to investors, such as depreciation provisions on improvements and chattels. Similarly, most people not involved with property are very quick to point out the management "burden" of property, but fail to fully explore the tremendous benefits.
And benefits there are, both relative to property investment in other parts of the world, and to other investment vehicles. Of all the benefits, there is one in particular that sets property apart from most other investments....
Imagine going to a bank manager and saying: "I really think that gold and silver are going to go up in value, and I am quite bullish on diamonds as well, and furthermore my friends assure me that antiques and paintings are truly sound investments, so please Mr. Bank Manager will you lend me some money so that I may invest in these things?"
The response of the banker will be the same the world over.
On the other hand, all over the world banks and financial institutions are falling over themselves to lend you money so that you may buy property (be it for investment purposes or other reasons). That tells us two very pertinent things about property: firstly, it is still perceived to be an exceptionally secure investment, and secondly (and more importantly), you don’t even need to have the money required to buy a property.
Whenever I mention these points at a seminar there is always someone whose comfort zone does not yet encompass property who speaks up and says something like: "Now hang on a minute, one bank has just changed its lending rules from advancing 70% of the property’s valuation to only advancing 60%, which proves property is out of favour, so don’t tell me they are falling over themselves to lend us money". The answer is simply that even if one bank reduces its exposure from 70% to 60%, that is still 60% more than any bank will advance on almost any other asset in which you may care to invest. As to the "falling over themselves" part, I stand by the wording. Recently, one bank was offering mortgage applicants six chances to win $10,000 simply by arranging a mortgage with that bank. Another bank got on the band-wagon and offered a free trip to Sydney just for taking a mortgage out with them. Others replaced their standard 1% application fee with a $1 fee, or waved it altogether "for this month only".
At one seminar an attendee pointed out that banks don’t just lend against property: his bank had been more than willing to advance him 100% of the money he needed to buy unit trusts, so surely everything I had been saying was biased. When I asked him to share with us what the bank required him to put up as security for the loan, he admitted that he had offered his home as collateral. So even in this situation it is property that provided the security - not the unit trusts. Try asking a banker whether he would let you mortgage unit trusts to enable you to buy a property!
This willingness on the part of banks to finance your properties is a delightful situation: banks have the money needed to buy a property, but do not wish to own it, whereas you want to own the property but don’t have the money. It is, therefore, not surprising that a synergetic if not symbiotic relationship arises.
The net effect on the investor is that his investment is now "geared" or "levered". Consequently, the notion of yield is no longer as relevant as it is to an investment (property or anything else) that is not geared. To illustrate this, let us consider two investors, each with $100,000 in cash. Let’s assume that the first investor puts his $100,000 cash into an investment (again it matters not whether it is property or something else) without gearing. The yield on that investment then represents the return to the investor on his $100,000 cash. Let’s also assume that the second investor uses his $100,000 cash as a deposit on a property. For the sake of this exercise we do not need to know whether the purchase price is $200,000, $500,000 or whatever, for we are not interested in the yield on the purchase price, but in the return on his $100,000 cash.
Whatever the level of gearing, our property investor may deduct mortgage interest payments against rental income. If the investor is negatively geared (total outgoings exceed rental income), then he may claim the loss against other income, even if the loss largely comprised non-cash deductions such as depreciation (i.e. a paper loss). If the yield on purchase price exceeds the mortgage interest rate, then the greater the purchase price, the better off he will be. What ultimately interests the investor is the Internal Rate of Return or IRR, which takes into account his cash outlay, the cash flow transactions during the period of ownership, and the redemption value at the end of his period of ownership. The IRR then is a figure that tells you what your return has been, not on the purchase price, but on your series of cash flow transactions.
Although accountants have a complex text-book definition of the IRR, the concept is really quite simple. Calculating the IRR for a property is complex, but software easily takes care of that. And when the IRR of a property is compared to that of other investments, then suddenly it becomes apparent why property investors are such fervent practitioners of their trade.
Dolf’s brilliant books and software package "Real Estate Acquisition Program" or REAP are availalble on line.