December 07 ~ Preparing for 2008
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December, can you believe it!
Another year almost over, I hope you have achieved your goals for 2007. I hope you set some and wrote them down so that you can actually know whether or not you have achieved them!!
Getting ready for 2008
So what are we going to do over the next 12 months?? I thought we’d look at some options and think about a plan. First thing to understand is this;
What you do in 2008 is going to be determined by your decision to get results,
NOT by what the market might be doing!
There are opportunities everywhere all of the time. Some people decide they don’t exist in a down market, so they do nothing. Other people decide the best opportunities are in a down market so they find them.
There was an article this week in the Herald comparing “old School” investing with “New Age” investing. Sadly it completely missed the real issue IMHO which is that one group has a mindset that says “The market has changed, this is how I will keep creating wealth”, while the “Old School” mindset is ‘Do nothing, protect your capital until the market changes”.
Neither one is necessarily right or wrong, they are simply acting on what they have decided to do.
So, what are you going to do in 2008??
Are you going to set wealth creation, financial, relationship and spiritual goals and set a plan to achieve them or not?? Don’t even think about the “how” yet, just decide whether you are going to do this or not.
If you’re not then you can hit delete on the rest of this newsletter as it will only make you feel guilty about your decision and I’m not into guilt trips 
OK so you’ve decided you are going to take or keep control of your life and your dreams and keep moving forward with your life, GREAT!!
So having decided that, let’s talk about what we need to think about as we set specific goals and strategies.
What will property do??
I kind of discussed this last newsletter, the short answer is ‘Who knows?”. However it is wise to take a conservative view and make some plans based on a worst case scenario situation.
So given what we know of population trends etc. a realistic worst case scenario over the next 2 to 3 years is negative growth in property values and continuing stagnant rents and even higher interest rates, right??
So let’s say that property prices might drop 10%, rents stay where they are and interest rates go to 12%.
Now I don’t think this is what is going to happen for 1 minute but we are trying to paint a black picture here. So in that environment what would be some usable strategies utilizing property in that climate?
Well depending on your starting position, plenty!!
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If you are cashed up it is really business as usual. Look for exceptional buy and hold deals and utilize your cash position to purchase them well below valuation. You won’t care if the market goes west for a season as you won’t be highly geared and you are buying equity which is better than money in the bank.
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Lease options and sandwich lease options will increasingly become viable in this market. They create positively geared rentals with few if any management hassles and they become much more attractive if the above scenario occurred.
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One of the most fundamental strategies you can apply from a risk minimization point of view is simply to think about how you can profit from people who are going to be in the market, even though it is bad.
The fact is that people still buy and sell houses in a bad market. It’s not like all property sales are postponed till a boom. So decide how you can get in the middle of those people and profit from what you know. I talked a month or 2 ago about transactional engineering, getting paid for helping others buy or sell a property. This is a primary strategy in a bad market, no risk and you can help people get great results.
You’ll have to decide exactly how to execute this strategy in a way that works for you. My advice is to start by sticking a sign up at work or at Foodtown that says
“Buying a house? I can save you money GUARANTEED” -
Developers and builders don’t all go bust in a slump either. So go and get a shopping list from them of what they are looking for and go and find it for them. I know it sounds a bit simple, but making money out of property is not rocket science. Since I first started teaching about this I saw a video of accompany in Oz who only do this strategy. They go to developers, get a detailed shopping list of their requirements and then provide stock to them. They are making millions because once they learned what to look for they started keeping the best deals for themselves!!
Real financial literacy
I met with a financial planner and accountant today who wanted some investing advice. It made me realize just how differently I thought about money and how a formal education in finance does not necessarily result in true financial literacy.
The points of our conversation are interesting enough to relate to you as many may think like my friend did.
They had 100K in cash and were wanting to grow that with a view to eventually building a buy and hold portfolio. They had decided that they had to trade to grow their money and when I advised they go and buy a rental. They couldn’t understand why I would say that as this was in their mind counter productive to growing their capital.
I used an example of a property I had just purchased as an example.
Lets look at his mindset and mine in relation to this deal.
His mindset:
$100,000 cash in bank earning interest until used for a trade. Let’s say we are going to complete 1 trade in 12 months and make 50 grand gross margin.
So lets assume no holding costs as we contemporaneously settle, we just have a deposit written out from the 100K.
So 100K in the bank at 8% = $8000 = $108,000
Less Tax and inflation = $6000 = $102,000
Plus 50K gross margin on trade = $152,000
Less tax/Gst/legals etc. on trade = $127,000
So at the end of 12 months we have turned our 100K into 127K. Not bad. We have had to find a great deal and get it sold but not a bad result.
My mindset:
Purchase a property for $250,000, (this is an actual property I have bought last week),
Put the $100,000 in as deposit
Valuation $310,000
Mortgage of $150,000
Net position = $160,000
Rent covers all outgoings
Average cap growth = 10% = 30K
Net position = $190,000
Tax refund $9000 = $199,000
Set up revolving credit facility to 80% of valuation making funds available of $90,000 for more investing.
Final Position
Accountant: $27,000 gain in one year, zero ongoing benefits
Dean: $99,000 gain
plus 90% of original capital is still available, PLUS deal provides minimum of 30K growth every year tax free PLUS ongoing tax benefits.
Which would you choose??
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Here is an example
of a thread that started by someone simply asking why they shouldn’t buy a property in their own name.
Within 48 hours they AND ANOTHER FORUM MEMBER discovered their lawyers advice and accountants advice had been wrong and we saved them from bad structuring and the enormous costs that could have been associated with tainting, ALL FOR $500 a year!! And this was just one question of hundreds sitting in the forum that you can learn from!!
Buying PPOR in own name
#1 Questioner
Hi all,
I am the beneficiary of a trust which owns a long term B&H rental. I am sole Director of the Corporate Trustee and Beneficiary.
I also have a new TT which as yet I haven’t done any trades in. Myself & partner are directors of the corporate trustee and Beneficiaries of the Trust.
I am Settlor of both trusts.
My partner & I are buying a property for us to live in long term, in our own names jointly.
My question is – would doing future trades in the TT taint or otherwise impact on our PPOR property if/when we sell it in the future? And is this structure OK for what we have done so far?
#2
Why are you buying you own house in your own names?
I would be putting it into a Wealth Trust where it is a protected asset from the wolves, in the event of something going pear shaped.
If you have equity in it,you can always do a loan to your trading trust and have the appropriate loan security paperwork done to protect your Wealth Trust against the money it has lent.That way your Wealth Trust is a secured creditor.
Sounds like the rest is OK
#3 Questioner
Lawyer suggested buying in our own names as the rental property is my own investment with funds accumulated before our relationship began. That way it is kept seperate.
#4
Doesn’t protect your own home if you are borrowing against it though.
You can always set up the trust in a way that if you both go your own ways the trust deeds says how it would be handled.
Just my thoughts any way.
I believe you are better having your assets protected rather than left open to all, in the event you have a “left field” event.
Prevention is better than a cure.
#5 From Dean
You would be mad to buy this property in your own name. It runs counter to every correct and smart rule of wealth creation, asset protection and tax planning. Buy it in a trust or don’t buy it IMHO.
And yes I believe you would immediately taint your own home.
#6 Questioner
Lawyer has given the OK to buy it in our own names, I’ll follow up with him.
#7 From Dean
Your lawyer is a conveyancing solicitor, not a structuring expert. Buying it in your own name won’t end your life but is definitely the worst possible way to own your own property.
#8
Dean, we still own our own PPOR in our own name.
Our portfolio is not hitting double digits yet, so would it still be prudent to get our PPOR in a wealth trust. Our accountant mentioned it may not be so crucial now for us as the size of our assets is not as big as some other investors.
What are your thoughts about this. Should we start out how we wish to continue.
#9 Questioner
Our lawyer has NOW advised to buy it in a wealth/family trust. I already have a buy&hold trust with 1 rental, a TT (not used so far) and now will have a 3rd trust and only 2 properties! Seems overkill and exp but I think I’ll do it anyway.
#10
You won’t be thinking that(its an overkill for 2 properties) if something “left field” happens and you loose everything, will you!!!
Do it once and do it properly.
#11 From Dean
Definitely get it into a trust. You get sued it wouldn’t matter if you had no rentals, you could still lose your house. And if your accountant has the initials $& I suggest you get a new one.
#12
Thanks Dean. Will look into it.
#13
Get your personal home into a separate family trust. Number one rule, keep your home safe. If you have to have a loan on it, use 1 bank you will use for nothing else.
This is from a guy who went bankrupt AND losing the lot for not paying attention to these details.
#14 Questioner
The bank have said they will re-doc the loan in the trust’s name at no charge + Mike has time to set up the trust before settlement on the 30th. So I’m glad I asked just in time!
Will get in touch with some of the accountants you recommend.
Thanks a lot guys – awesome forum!
#15
What if your own PPOR is already in your name, can you sell to trust?
#16 From Dean
Yes you can
#17
Thanks Guys. Will get onto it.
So do yourself a favour and join the best forum on the planet TODAY
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Thank you all for an amazing year. We are excited about 2008 as Ashley comes on board and we find new ways to serve the investing community, the people of Fiji and YOU !!
All our love, Dean, Raewyn and the Massive Action team
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