Start Investing Wisely

Investing isn’t just for the wealthy. Almost anyone can devote at least a little money to an investment, keep close tabs on it, and wind up with more money than they started with. After all, this is what we do when we put money toward our super.  If you have a few thousand dollars or even a couple hundred you don’t need right away, here are some suggestions on how to make the most of it.

Note: This article assumes that you’re looking to grow your money over time and are willing to take some risk rather than just saving your money in a no-risk, low-yield savings account. It is also assumed that you already have another reserve fund set aside that includes enough money to cover normal living expenses for six months should your income end suddenly. It is further assumed that you have no high-interest debt, such as credit cards. You would be further ahead paying off such debt rather than investing your money (because there are virtually no investments that would pay you as much interest as you would typically spend carrying high-interest loans and other debt).

1. Pay yourself first. Set aside as much of each pay as you can for investing. Do this even if you can devote only a few dollars at first. Even $10 per week will add up over time. Try to cut your cost of living by budgeting. Don’t deprive yourself of necessities, but try to cut out wastage. Some of the wealthiest people in the world lived frugally when they first became serious about accumulating wealth.  If your employer offers direct deposit, consider sending a portion of each paycheck directly to your savings or investment account. If you never see that money, you won’t be tempted to spend it.

2. Discipline yourself to build up your emergency fund to six months’ worth of living expenses. You should also pay off any high-interest debt you’re carrying. This is especially important in the likely event that the interest rate you’re paying on such debt exceeds the interest rate you could expect to earn from your investments. See how to decide whether to invest or pay off debt for more information.  If the interest payment on your debt is higher than what you’d be making from an investment, it’s probably not wise to invest at first. In this case, try to pay off all your debt before investing your surplus; that way investing will actually make you money instead of merely underwriting your monthly debt payment.

3. Before you invest, educate yourself. You need to understand what investment options you have, how to read financial statements, how to analyze stocks (for quality, valuations, financial strength, growth potential, etc), as well as how to avoid investment scams and pitfalls, and where to find information. Warren Buffett is known as one of the most successful investors ever, having read every investment book he could lay his hands on before he turned twenty.

4. Promise yourself that you’ll keep your cost of investing (fees and commissions) to less than 2% of the amount being invested. Multiply the amount you have to invest by .02. If the trading cost is more than that, put your money in a savings account instead until you can find an investment opportunity with a lower cost ratio.

5. Remember if  you plan and invest slowly you will achieve. If you don’t have a plan it’s bound to fail. This has been a known fact, your life is like a business, if you plan and have goals it will surprise you how easy they can be achieved.

Good Luck and happy wise investing.

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New Credit File Laws Increase Personal Credit Accountability

Big brother is watching you…

New laws mean a lot more data on your personal spending habits is captured and added to your credit file enabling anyone who does a search to access information on what your commitments are and whether or not you are meeting them on time.

The government says we are a free society but the new laws passed by the Federal Parliament on 29 November 2012 mean that additional information will soon be available on consumer credit reports.

Until now, consumer credit reports in Australia have only been allowed to include identity details, credit enquiries and negative data such as defaults, court judgments and bankruptcies.

However from March 2014, when the Privacy Amendment is due to come into effect, your credit report could contain additional information that can be viewed by credit providers when you apply for credit. The new data elements include:

  • Credit account information (eg. account status, open and/or closed date, credit limit)
  • Type of credit and account (eg. credit card or revolving line of credit)
  • Up to 24 months of repayment history information for commitments with a financial services organisation (eg. details of whether your payment obligations have been met or not)
  • Credit provider details

What does this mean for you?

More data will soon be available on your credit file which will demonstrate how well you meet your banking credit obligations. If you pay your bills on time, this change will have no impact on your credit standing.

If you don’t pay your bills on time, credit providers will see your payment history and will be able to decide whether or not they wish to extend credit to you based on this information.

Importantly, if you’ve had a payment issue in the past, this information will allow you to demonstrate to credit providers that you’ve rectified your slip up through a series of on-time payments.

Changes to credit reporting laws mean that some organisations will be able to collect more information about people’s creditworthiness. This includes information about whether a person has made or missed a payment on a credit card or loan. If a person misses making a payment from as early as December 2012, it will be able to be recorded on their credit record and may affect their ability to access credit in the future.

What should you do?

First, it’s important you take the time to ‘order a copy of your credit report’and familiarise yourself with the information it contains. It’s worthwhile doing that now, even though the new information won’t appear on your file until 2014.

Make sure you check that all of the data is correct – if you note anything on your file that you believe shouldn’t be there you can contact the credit provider or D&B’s Public Access Centre on 1300 734 806.

Do we live in a Free society?

With the steps that the government has taken in passing this law you would need to ask yourself the following questions:

  1. With this information have they made a level playing field for finance institutions?
  2. Is it fair trading?
  3. Is this going to retract business in this country?
  4. If government starts with this law where are they going to finish?

 

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Wraps – Vendor Finance or Instalment Sales Contracts

The conventional way that most properties are sold is with the buyer paying a percentage of the purchase price as a deposit with the balance due at settlement, normally in about 60 days.  60 days is required so that the buyer’s solicitor/conveyancer has time to prepare for settlement and the buyer’s lender has time to approve finance and execute mortgage documents.  At settlement the property title passes to the buyer with a first mortgage held by the buyer’s financial institution.

However another way to sell property is by wrapping, sometimes also called “vendor’s terms” or an “instalment sales contract”.  Instead of the buyer paying the full balance of the purchase price at settlement, payment of the balance is instead divided into a series of periodic payments made over a specified period of time.  The title of the property remains in the sellers name until the buyer makes their final payment.

Wrapping is a great low or no-money-down strategy that enables an investor to earn significant returns for a relatively small and manageable risk.

Example…

John is a property investor. He has found a property for sale in a country town for $180,000.  Kylie is currently renting in the same town and is very interested in buying the property.  However Kylie only has $3,500 in savings and will not qualify for a mortgage from a major bank.  Kylie is excited to learn about the possibility of wrapping.  She is eligible for the First Home Owner’s Grant and can comfortably afford repayments of $250 per week.

John offers his “vendor terms” on the basis that the sale price is $200,000 and that interest would accrue on the repayments at the rate of his finance plus 1.5%.  The term would be twenty-five years, although Kylie can pay out the balance at any time.

John puts in an offer to buy the property and obtains 80% finance at a variable interest rate of 5.0%.

The numbers would be something like this for Kylie:

Purchase Type                                   Traditional     Wrap
Purchase Price                                       $180,000            $200,000
Deposit ( Note 1)                                    $  36,000            $  40,000
Less Deposit                                                                         -($3,500)
Less Fist H.B.G                                                                    -($3,000)
Settlement costs                                                                 $        910
Loan                                                         $144,000            $194,410
Interest rate                                             5.0%                   6.5%
Weekly Repayments P & I                    $194.26              $302.93
Weekly Repayments Interest only      $138.47              $243.01

The critical success factors in a wrap are:

1. It’s all about people

The essence of a wrap is that the investor becomes more like a financier and less like a traditional landlord.  In fact, all the property expenses in a wrap such as rates, home maintenance etc, become the responsibility of the buyer (in the example above that would be Kylie).  This really highlights the need to focus on the person rather than the property, because if you have an unreliable buyer then your cash flow will suffer and your investing headaches will increase dramatically.

2. Build win-win outcomes

There are lots of people who don’t qualify for traditional finance and will be interested in vendor terms, your job is to pre-qualify your buyers to ensure you create win-win outcomes.  A large component in pre-qualifying a potential buyer is to ensure that he or she can afford the repayments.  If he or she can’t meet the repayments then you won’t be doing anyone, most of all yourself, any favours, as the eviction process is stressful for all.

3. Play by the rules

The wrap laws in each State are slightly different, which means you are going to have to complete some research before launching into wrapping.  At the time of writing, wrapping is legal everywhere in Australia except in South Australia.

Some particular rules to be aware of are:

Privacy Laws
You need to be careful about privacy laws when seeking information about potential buyers, particularly when doing a formal credit check.

Consumer Credit Laws
Whether wrapping falls under consumer credit laws is open to debate, but why risk being caught in an argument that’s easily avoidable?  In most States it’s a matter of procedure (which means filling out a form) to comply with the consumer protection laws. Be sure to complete your due diligence before launching in.

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Have you Completed an Annual Strategy Review?

Holiday downtime can provide the perfect opportunity to reassess your current investment position, conduct a portfolio and financial check and plan your next investment move to maximise returns in 2014.

Strategy:
First, review your current strategies and your goals. If your portfolio isn’t currently meeting your objectives, establish a plan to realign and improve performance. If your portfolio is negatively geared, you may need to revise your approach to focus on positive cash flow investments so that you’re not left out of pocket. Or, you may need to consider properties that will deliver some instant equity if your portfolio has not been growing as rapidly as you had hoped.

Finance:
Are your current products and lenders providing you with the most competitive interest rates and fees? If you’re not sure what you’re paying, request this information from your loan provider and then compare with other products available. Utilise comparison websites and mortgage calculators. If you find better deals elsewhere, use this information to have your broker renegotiate with your current lender first to assess whether they can offer better terms. If not, consider refinancing as it could make a significant impact on your current return on your investment property portfolio.

Investment properties:
If you are looking to grow your property portfolio you need to ensure all prospective purchases meet five critical criteria:

  1. Location – in an area of demand, close to major amenities and public transport
  2. Redevelopment – benefits from new or proposed infrastructure investment
  3. Capital growth – consistent appreciation forecast over the short to long term
  4. Affordability and cash flow – the property is positively or neutrally geared or you can easily afford the repayments
  5. Rental demand – the property will be attractive to tenants, is easy to maintain and will attract fair rental returns

We currently know of two developments available in Ascot and Burswood that meet this criteria. See www.crproperty.com.au for further information.

Self Managed Superannuation Funds (SMSF):
Retire richer than you ever thought possible by taking control of how your money is invested through a Self Managed Superannuation Fund.

The Australian Government has created an incredible opportunity for all Australians to dramatically grow their wealth and self manage their retirement through superannuation. Every Australian worker earns superannuation contributions as part of their employment remuneration, yet most still don’t understand the opportunities this provides. So whether you’re planning to retire in the near future, or you’re simply looking for ways to create and protect your wealth, self managed superannuation is a strategy that simply must be explored.

Changes to superannuation legislation in 2007 enabled SMSF’s to purchase property through leveraged funds called bare trusts or custodian trusts. Previously superannuation investing was largely focused on the share market but now investors have the power to buy real property. Using property as a wealth creation strategy is much more attractive as it all but guarantees long and concessions available now and into the future, never before have SMSF’s been more appealing.

To take advantage of this fantastic opportunity and bring self funded retirement closer you will need to talk to your accountant about setting up a SMSF. You can do this individually, or couples and families can contribute to a combined fund.

There are two main benefits of SMSF’s:

  1. A fund pays only 10% capital gain tax (CGT) on property held for more than 12 months and no CGT if the fund is in pension phase.
  2. You pay only 15% tax on your contributions (up to $25,000 per annum) as opposed to receiving income in your name and paying a much higher individual tax rate.

Some of the other benefits include:

  1. Investments within SMSF attract only 15% tax, as opposed to investing in your own name and paying tax on your investment income at your individual tax rate
  2. The ability to invest in NRAS property
  3. The SMSF can choose to end the bare trust and take ownership of the property at any time
  4. SMSF assets are protected from risk
  5. Family insurance policies can be included to take advantages of estate planning benefits

This really is just the tip of the iceberg with a myriad of opportunities available based on your personal circumstances. Remember, any decision to pursue SMSF as a wealth creation strategy should always be made in consultation with your financial planner or accountant.

Wishing all a healthy, safe and prosperous 2014 to you and your families.

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The Economy

It’s time for the government to step up its commitment to the Australian people and not just to tax. Businesses around the country are suffering from the world eccononic downturn and this goverment is on fairy land thinking we are lucky. I say to the polititions look around – people and businesses are hurting and your small handout you’ve given to a limited class of people is a bit of a joke.

To really enable the Australian people to enjoy the benefits of living in our reasource rich country the government needs to address the following:

The reserve bank needs to reduce interest rates not by the usual safe .25 but by .50 basis points, which might start giving the public and business more confidence that action is being taken.

They need to stabilise the buiding and real estate industry by introducing more incentives before the situation worsens and people can’t afford to buy and can’t afford to rent either.

When GST came in stamp duty was going to be abolished, now it’s time to do the right thing and abolish the stamp duty on the tranfer of land.

There is still time for the government to assist small buisness which is the backbone of this country and provide an environment that allows the Australian people to flourish.

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Investment choices

The current market provides attractive opportunities to invest in the commercial and residential property market as the demands are high and the yeild on return is also high.

The commercial market in the Perth CBD is very tight and the rental/leasing returns average around the 8%. On that return if you financed 100% with other security on bank bill plus margin you will still be positively geared given the current interest rate.

The residential market in Perth is also very tight with rental returns averaging between 5% and 6%. On that return alone your property investment is not positively geared but with the added benefit of tax advantages obtainable based on your individual circumstances, the inevestment could become neutral or positive geared. With continued population growth through immigration Perth has a shortage of accommodation which will defintitely increase the price of the property in time and demand for rental accommodation will also increase.

Investment of superannuation savings is becoming increasingly frustrating, with so many experiences of fund managers losing your money and continuing to charge fees for doing so.  Those who have the resources to look at self managed superannuation fund options should definitely consider investment in Perth property for long term sustainable yields.

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Reserve Bank

Its great news that the reserve bank of Australia has cut interest rates. Its interesting how the banks don’t pass on the full rate cut to the consumer though. The explanation that the banks give is the cost of utilising client deposits is higher than the interest rate. I suppose that could be logically correct in some circumstances if they are using the deposits of customers in Australia to fund loans, but not if they are using funds from overseas as the cost of that funding source is much lower. Consumer confidence in Australia is at its lowest and the reserve bank cutting interest rates by half a base point further demonstrates to the consumer that there is no confidence in the economy.  The reserve bank needs to cut interest rates on at least two further occasions in total between half a base point to one, then I believe they could remain static for the next couple of years.

The Australian Government must realise that if we take the mining industry out of the equation we are in a recession, we are not the lucky country as they say we are just lucky to have resourses to depend on

Once the confidence is restored to the public with job security then the housing market will take off again in order to meet demand as we don’t currently have enough homes to accommodate our growing population.

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Australians Struggling to Enter Property Market

The latest edition of the Real Estate Business Bulletin came through with an interesting article lately on how the Australian Public is struggling to enter the property market.

You can find a copy of the article located at:  http://www.rebonline.com.au/breaking-news/3636-australians-struggle-to-put-foot-on-property-ladder

In reading this article, I found it fascinating how statistics are showing that the affordability of new home buyers entering the market has not adjusted to the current income of your average mum and dad. The only way for many Australians to afford their own homes now is to either have government intervention, or alternatively, follow the trend of the overseas markets which involves living in complexes rather than a house or house and land package with all the frills that we are used to – formal areas and living areas.

The government should consider this statistic.  It’s quite clear and it shows that they need to push through another extended first homebuyer grant, which will then proceed to creating work in building houses, and processing those loans.. .the chain will continue to grow, and we will continue to see growth as a nation, and your average Australian can then buy their dream.

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Wednesday News Links

It’s been a bit quiet on the mortgage and rate front lately, so I haven’t had much to say! But I’ve got some new news articles to share, and I hope everyone has a good look at some of these.  There are signs of recovery from the Melbourne Cup day rate hike!

http://www.news.com.au/money/property/surprise-jump-in-home-loans/story-e6frfmd0-1226005731579

http://www.news.com.au/money/property/avoid-borderline-decisions-with-property/story-e6frfmd0-1226006744743

http://www.news.com.au/money/westpac-and-cba-refuse-to-give-in/story-e6frfmci-1226005487690

http://www.news.com.au/money/property/bad-news-renters-more-rises-on-the-way/story-e6frfmd0-1226004712670

http://www.news.com.au/money/banking/nabs-exit-fee-plan-triggers-fresh-bank-mortgage-war/story-e6frfmcr-1226004723361

http://www.news.com.au/money/commonwealth-bank-plans-a-home-loan-push/story-e6frfmci-1226003440700

http://hia.com.au/hia/news/article/MR/National/HIA%20Welcomes%20Moves%20To%20Restore%20Rent%20Scheme.aspx

http://hia.com.au/hia/news/article/MR/National/EC/Rate%20Hikes%20Impact%20New%20Home%20Lending%20In%20December.aspx

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Brokers, not Banks

The Australian has published an article on their website lately regarding how the public has indeed turned towards your average broker, rather than to your average bank, for their home loan needs.

According to the article which was published on 13 January, Mortgage Brokers have gone up in both the number of loans that they have written up, along with the average loan given out – from $270,688 to $276,715.

The Market Intelligence Strategy Centre (MISC) has said that there is a better than expected performance, and that borrowers are being encouraged to embrace alternative channels for their home loan needs.

The major banks have seen their market share fall from 91 percent to 87.4 percent in the last six months, while non bank lending is up 49 percent in the last two months.

As well in the mortgage news, fixed rate mortgages are becoming more and more popular with borrowers again as people begin to fear the potential for future interest rate rises. On the flip side of that, however, building approvals have fallen due to the November rate hike.

There is news on the house price front as well.  Prices in Perth have been reduced on average around $44,000, and according to a news.com.au article, buyers in Perth aren’t seeing capital appreciation – and haven’t since August 2007. Melbourne is the strongest market around Australia currently, in fact.

And, last but not least, never fear if you have been unable to save for a home loan.  Mortgage broker Loan Market has been lobbying banks to allow people who are applying for home loans to use rental payments as evidence of savings – and St George Bank has become the first Aussie bank to change its requirements to allo rental payments to count. This is a huge boost nowadays as rents are sky high to compensate for the rate rises and the economy.

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