Are you taking property advice from friends who don’t know any more than you?
People talk so much rubbish when it comes to property, mortgages and money. Everyone has an opinion. A bit like nutrition or diets. Few people know what they’re really talking about… really. Pick your advisers after you have educated yourself to a sufficient level where you have developed a B.S. detector.
Let me tell you about Darren and Rachael (not their real names) who are clients in Melbourne. Total champions. Here’s the scenario: Two-income family, two dependent children, they’re a young couple in their forties. They own two properties in growing suburbs not far from the Melbourne CBD and in the corridor of the enormous development and growth that is happening to the west. Things were looking good with their work, both houses they own were worth substantially more than what they paid. The investment property has never been vacant, ever. They are getting tax benefits. The property is growing steadily in value.
As I like to say, ‘it’s working’.
They owe (only) $340,000 on their non-deductible side (home loan) and $650,000 on the investment side. Bloody beautiful set up going on here, as they’ve got $250,000 income and all the tax to pay that goes with that and hey, who wouldn’t like to pay less tax?
The investment is not actually costing them anything. There’s no impact on their cash flow at all. I called their accountant. Three times as I like to do. I need to know the details. Anyway, the accountant is very happy with the setup, they can afford, it, there’s no financial stress or duress or anything, it’s looking really good to me. I’m stoked for them because they’ve bought well and in years to come, they’ll reap the rewards of the seeds they’ve sown.
But actually, they won’t. Here’s why:
Wait for it… the property had seemingly ‘stopped going up’. Well, no shit! What do you think it would do? Just go up and up and up and suddenly be worth $3m?!
If it were like that, we’d all be driving Bentleys and sipping Sangria on our very own private beaches. It needs to be said that in a market nothing goes up or down forever, in a linear pattern. It’s impossible.
My idea here, with the full blessing of their accountant (technically, I’ve not licences to give financial advice but I will consult with your professionals who can), was a simple restructure with a product that allows me to dial down their non-deductible debt to 0.75% and dial up their deductible to 4.75% (at the time of writing) with the overarching goal of paying off the $340,000 they owed on their home in five years (totally doable) and then turning their attention to their investment debt and have it all cleared out in the next 15 years.
I do believe firmly in paying off your investment properties if you have no other value-adding strategy and plan to keep the asset. If you buy it, you should pay for it. 100% realistic and achievable.
Can I tell you what they did? One of their mates, who is definitely not wealthy, got in their ear and suggested they should sell their property.
Darren told me that they ‘were feeling a bit stressed out’ by it. By what? By the thought they owed the bank? It’s going to be okay! This intelligent couple, who after seeing amazing growth in their home were smart enough to buy another, had been talked into selling their future retirement fund or hand-me-down to their kids because a fool, who is not wealthy and knows nothing about making money, told them they should sell.
So, what happened? They sold the investment property at the bottom of the market making a small profit which they blew on a holiday. They paid capital gains tax. They cheated themselves out of what could have been the cornerstone of a self-sufficient, fully funded retirement plan that they owned, controlled and could drive past and see. They caved in, succumbing to misleading advice given by someone who is not wealthy and made an irrational, emotional decision without going back to the maths or discussing the matter in a pragmatic way with a wealthy mentor or adviser.
Property investment isn’t what Scott Pape might recommend but please remember he is barefoot and drives a ute, so is he really the person to listen to when it comes to getting rich? I can’t answer that question for you, but I would suggest reading one of his books to pick up some knowledge on managing your money and see what you get out of it. If you don’t believe property can create wealth, just count the number of people in the BRW Rich 200 who are heavily involved in property. What do you think Frank Lowy did? Build property and lease it. He just went BIG.
- How successful and wealthy is your accountant?
- How successful and wealthy is your financial planner?
- How successful and wealthy are your friends?
- How successful and wealthy are your family, parents, partner, spouse, or soulmate?
Who of these people have you been taking advice on your finances from?
If you answered something like ‘not very’ when you asked yourself the above questions. And you take advice from them, is it really any wonder that you’re not out there slaying the bank at their own game like the folks with the million dollar views and million dollar mansions, which, by the way, they have no debt on.
Don’t listen to advice about your money from people who are not wealthy because taking the wrong advice can cost you a fortune. When they start talking, you should stare off into space and just act like you’re listening. Yep, I said it again. If you’re looking for advice, ONLY listen to those with deep pockets, heaps of assets and money magnetism. Or someone who speaks to those people on a daily basis. Someone who knows the ins and outs of their financial brain. Someone like me. You can start by booking a call with me here, when you’re ready.
Professional Mortgage Broker