Sunday, April 03, 2011

Property Strategies 1 April 2011


Caroline James, a journalist with the Australian Property Investor magazine, wants to interview investors who started their portfolio of residential investment properties when in their 50s.

If you would feel comfortable sharing your story in a respected national publication, Caroline would be happy to document it.

Phone her on 0409 580 315 or email

and remember to say something nice about me!


"The people who get on in this world are the people who get up and look for the circumstances they want, and, if they can't find them, make them." -- George Bernard Shaw


Developing your portfolio of investment properties is no different from developing any other form of business - the first thing to focus on is the cash flow.

And you will get the most secure i.e. regular, cash flow from a succession of long stay tenants.

And these are likely to be a young couple with kids in primary school (in our culture, the parents don’t want to break their children’s friendships by moving school).

Now that you know who is the ideal tenant, you give them what they want – which is a four bedroom + ensuite family home, with aircon and a double garage, in a family suburb.

This accommodation itself probably represents 30% of your long term success in property investing (as it will give maximum depreciation benefits and will attract an on-going series of ideal tenants, without the needless costs of on-site managers, body corporate levies and sinking fund fees – and when you exit, buyers will be families, not investors).

The next question is – where should this investment be best located? And the answer is: the south-west suburbs of Brisbane.

Where there are clusters of strong economic zones nearby – where there are jobs for your tenants.

Rents in Greater Brisbane are relatively higher than for any other capital city, and land tax in Queensland is the lowest, but the principal reason for the south-west suburbs of Brisbane is because (of the 35+ regional markets across Australia) this location is acknowledged to grow at the fastest rate over the next ten years.

The geographic location probably represents 50% of your long term success in property investing.

Then the packaging – the legal ownership structure, the funding package, the insurances, the asset manager etc will represent the final 20% of your long term success in property investing.

If you don’t think that you’ll have enough for 25-30 years of a comfortable retirement, contact me – Bernard Kelly – and let me help you explore your options.


Since 1 July 2010, it has become slightly more difficult to borrow when you pass your 55th birthday.

When you are starting you portfolio of investment properties, it is normal to borrow 80% of the value of the investment (to avoid the cost of mortgage insurance) and then do whatever else you need against the wealth “hidden under the floorboards” of the family home.

However, with the new and more conservative guidelines, the banks are now required to satisfy themselves that you will be able to repay the loan on your family home before you reach 70.

This is normally not an issue for most first-time investors, however it can adversely impact on anyone self-employed, whose accountant has suggested that attempt to minimise their income for the purpose of saving on tax.

Of course, once you have a portfolio started, the growing equity in the additional properties will make it easier to expand on the number that you own.

If you have any queries, feel free to contact me – Bernard Kelly – anytime. There is normally a solution to such issues.


Accountants, solicitors and now financial planners are very keen to market Self Managed Super Funds (the rationale is of course that they earn fees from this new product) however for a property investor, there are real problems.

The background is that SMSFs became attractive to wealthy investors who had a threshold of say $1,000,000 in super. Depending on their fund, annual fees would be say 2% - that’s $20,000 – or perhaps 1% (still that’s $10,000).

Now if you manage your fund yourself, there would be no management fees, and other fees e.g. from your accountant, may only come in at say $5,000. So the rush began into SMSFs.

However, the super that we are talking about here was invested into equities, and there was no debt involved.

But remember that to put an investment property into a SMSF, the average person needs to borrow most of the purchase value from a bank.

So some hybrid mortgages have emerged, but of course hybrids come with rules.

One rule for SMSFs is that the funding for an investment property is non-recourse, so banks will only lend around 65% of their valuation, and consequently the cash deposit is far greater than the $1000 normally required.

Another problem is that you can’t access the increased equity in an investment property held inside a SMSF to increase your portfolio, as each property inside a SMSF can only be used as security for its own mortgage.

So my conclusion is that it’s better – as a generalisation of course – to continue as we have always done i.e. acquire investment properties in your personal names, take advantage of having that extra cash every payday (from a negatively geared investment) and never sell.

SMSF advocates will tell you that you will be exposed to capital gains tax (when you sell).

However I say that if you’re running your portfolio as a business, should you need extra cash you would just put a line of credit against your investments.

Why would you ever sell? SMSFs are – to my mind – still an unproven arrangement for property investors. (another issue is – of course – that accountants, solicitors and financial planners know nothing about the determinates of an outstanding property investment)


Why are you not wealthy already?

I have looked for the answer to this for years, but only in the past few decades a field of inquiry has emerged called “behavioural finance”.

This study of human behaviour has shed new light on how we make investment choices.

The problem appears to be that the human mind is hard-wired to participate within the group.

This was a valid approach for society to take for zillions of years, up until the economy developed to such an extent that it allowed individual self interest (and entrepreneurs) to flourish.

But we’re only talking here of the past 200 years.

Today we are busy people in a complex world.

We cannot possibly give in-depth consideration to every choice. So we revert to type - the brain takes a shortcut in evaluating our choices. As a consequence, we “follow the herd”.

The significance of this is that – for anyone concerned about having enough for 20-25 years of dignified retirement – you’ll have to do something totally different to the herd.

Which is why my (very successful) investment approach is such a perfect fit for you. It looks solely at the numbers, and ignores any emotional attachment to what the vast bulk of the community thinks is “the obvious way to go”.

My advice – don’t listen to the herd. Instead, contact me – Bernard Kelly – anytime. My mobile is 0414 778 518


The Governor of the Reserve Bank of Australia - Glenn Stevens said that he wasn't really concerned about the prospect of a collapse in the country's housing market.

"I think there are significant issues but they are as much social as economic," Mr Stevens said when questioned about the booming housing market following a speech in London on 8 March.

Mr Stevens told an audience at an event organised by Australian Business in Europe, a business forum, that the housing market wasn't "top of his list of worries".

By way of explanation, he said the ratio between buyers' incomes and house prices hasn't changed much in 10 years.


A study that has parallel implications for Australia shows that almost two-thirds of people living in Britain today are likely to see a 60% drop in their income when they retire over the next 40 years and a plummeting quality of life.

"The UK has a distinct problem with middle-income earners who are failing to save enough and are likely to find the drop in income during retirement unexpected and unacceptable," said Paola Subacchi, one of the report's authors.

The report says the problem is worsening because of a shift from defined benefit (DB) pension schemes to defined contribution (DC) schemes, which do not guarantee a predetermined retirement income.

"Furthermore, the recent recession has highlighted how vulnerable wealth and pension funds are to economic shocks and reduced annuity conversion rates," it adds.

The 15 million households earn between 18,000 and 44,000 pounds each and represent roughly 35 million people, according to the study by London's Chatham House think-tank.

Their incomes will take the biggest hit from retirement compared to the lowest and highest 20% of earners.

Middle-class Britons' meagre savings mean they will have to rely heavily on the relatively small state pension, which "only just ensures a minimum standard of living", Chatham House said.

"Some may even slip into poverty," the report adds

Source: Reuters 10 March 2011


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About Bernard Kelly:

Bernard Kelly BEcon MBA CRPC Australia’s Retirement Strategist®, is a highly sought-after advisor, retirement authority, thought-leader, author and radio commentator because he makes the complicated and mundane topics of investing and retirement fun! Bernard has over 20 years’ experience providing families with financial thought. He is the author of Live Your Dreams in Retirement, Property Investing for Couples, Goolwa by Breakfast and Raising Decent Kids into Substantial Wealth and publishes a fortnightly newsletter that reaches thousands of subscribers worldwide. 19 Prospect Street, Box Hill 3128 Australia. Tel 61-3-9899 8577 mobile 0414 778 518

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