The future of wealth creation

The model of wealth creation I was taught as a kid was simple; study hard, get a good job, save your money. Straightforward. But completely ineffective. This ‘philosophy’ goes a long way toward explaining why many people of my generation spend their life buried in debt, working in an unfulfilling job and wishing they would win lotto and escape. No strategy, no advice, no mentors and no support makes it almost impossible.

But what about now? With access to so much information, it should be easier to chart a course to financial wellbeing, but much of that information is inaccurate or unhelpful and confusing. As a result, there is a greater willingness to seek advice. As advisors however, we have to realise that priorities have shifted. The “work hard, save your money” approach has been replaced with work hard, travel extensively, enjoy experiences, be open to change and new opportunities.

So, wealth creation strategies have to incorporate new levels of flexibility. They have to allow for more career changes – potentially across multiple states or countries, more liquidity to enable quick changes of direction and more cash flow to facilitate lifestyle choices.

The end goal is the same, but the game has changed.

 

Words by John Di Natale. John is a Managing Director of Equi Wealth. He is an international speaker, wealth creation specialist, financial planner and licensed estate agent.

Am I putting property on a pedestal?

“What’s the best thing to invest in?” “Well, it depends…”

That’s not the cop-out answer it first appears to be. It really does depend. Helping our clients develop their investment strategy, choose investments and manage them is a key part of what we do.

Of course, there are lots of investment options and there’s no absolute right or wrong. There are good investments, there are better ones and there are worse ones. You could invest in shares, or bonds, or options, or bitcoin or a dozen other things.

 

I’m happy to put my bias on the table.
I think property – specifically residential property
should be the foundation of your investment portfolio.

 

Why? Well, let me give you a few reasons.

One. Most people understand property to a reasonable level. It’s the one investment class that most people will get involved in at some stage over the course of their life. Those of us fortunate enough to buy our own home or buy an investment property will have at least a basic understanding of finance, capital growth, perhaps leverage and the buying and selling process.

Two. It’s relatively easy to understand the fundamentals that drive the growth of property values. Population growth, demand for housing, proximity to services and amenities such as transport, schools, shopping centres, cafes and entertainment.

Three. Perhaps most importantly, residential property is the best performing asset class over the last 10 years.* In fact, bricks and mortar has produced an average annual compound return of 8.1% That’s taking into account the total returns from the assets including increases in value and income such as rent and dividends for shares. And that’s across all the major capital cities in Australia. Most likely, if your property is in Melbourne or Sydney, you’ve done better than that.

What’s surprising is that Australian shares produced an average annual compound return of 4.3% over the 10 years. Global shares did slightly better at 5.5% and Australian bonds returned 6.1%.

Yes, I know this is not the whole story… We have to take tax into account and how much actually ends up in the owner’s or investor’s pocket will depend on their marginal tax rate, whether the assets are owned inside or outside superannuation or other structures, income distributions etc.

BUT, this is a big tick for making sure that you get into property and make it a key part of your investment portfolio.

Four. Banks like property. There is no other asset class that is as well regarded by the banking sector when it comes to leveraging for finance. That means you can utilise equity to a greater extent to secure other investments or raise money for whatever else you happen to be doing.

So, when people ask me what’s the best thing to invest in, my go-to answer is still property.

*The reference to property being the best performing asset class is based on the 2017 Russell Investments/ASX Long Term Investing Report.

When “buy and hold” is not all its cracked up to be

We’ve all heard it many times. The best thing to do is to buy property and never sell. The last time I heard it, Warren Buffet was quoted as saying his favourite investment term is forever, but is that actually a good strategy for us mere mortals?

Well, like most things, it depends…

Buying and holding a quality property asset that generates income and increases in capital value over time is certainly not a bad thing. What’s important in making the decision to sell or not sell is the motivation for doing so.

One of the most common reasons touted for not selling is avoiding tax, specifically, capital gains tax. Of course, part of any wealth creation strategy is the minimisation of tax, but if avoiding tax causes you to hold onto a poorly performing asset, what’s the point? As investors, it’s important to come to terms with tax so we’re making decisions for the right reasons. Tax is simply a cost of generating income, perhaps best thought about in the same way we think about rent or salaries or marketing costs – necessary for getting the job done.

If “buy and hold” is not the right strategy in every circumstance, the next question we should ask ourselves is, when should we sell. In almost every other asset class, having an exit strategy is one of the key elements to success; knowing the price point at which you’ll sell your shares for instance. Why should it be different with property?

Here are a few thoughts to help guide your decision-making.

Are you letting your emotions rule?

Investing is based on logic – or at least that’s the theory – but most of us find it difficult to totally remove emotion from our decisions. Sometimes our investments have personal significance; they’re in the neighbourhood where we grew up, or are close to where we live… and we let those factors affect our decision making instead of growth, rental yield and tax effectiveness. As much as possible, try to take the emotion out of the important decisions, like when to sell.

Does the investment fit your strategy and your risk tolerance level?

Buy and hold is an investment strategy, but certainly not the only one. It’s a strategy that may be appropriate if your plan is for long-term growth with relatively low risk (assuming you have selected a fundamentally good asset of course). Some strategies depend on buying and selling and getting the benefit of increased value. Renovating, buying and flipping and the like would obviously fall into this category. Your strategy needs to be appropriate for the type of asset and aligned with your overall objectives.

Each approach carries with it a degree of risk. Having a good understanding of the type of risk and the level of risk you are prepared to tolerate is an important part of the discipline of investing. There’s no point chasing big returns if the added risk is going to give you a heart attack!

Be careful not to get “Investor’s A.D.D.”

Successful investing is a sometimes tricky balance between being patient and having the courage to act when you should. Some investments grow more slowly than others, but that doesn’t necessarily make them a bad investment. If you work on the basis that there is always a better opportunity elsewhere, you will constantly be buying and selling, incurring cost, paying tax and potentially missing out on long term growth. Setting your benchmark and ensuring that each investment is performing at that level in its own right is better than constantly comparing, chopping and changing depending on what’s “big” this week.

That’s not to say you should never sell. Sometimes you just have to make the decision and move on to other, better opportunities. There are many situations where selling is in fact, the smartest move. If you have a property in an area that is not showing any growth over an extended for period instance, or if you geared too highly and the cashflow is hurting, perhaps you bought an older property and the maintenance costs are getting too high, or you were convinced by someone (as often happens) that you were buying in a “boom” area, but the boom just hasn’t happened… This last one by the way, usually coincides with paying too much for the property in the hope that it will go up in value quickly or achieve super high rent.

Whatever the reason, holding on and just hoping for things to improve is NOT a good strategy. Any good investor knows that it is sometimes better to make a decision, sell and move on to better opportunities elsewhere. There’s a place for loyalty; hanging on to a bad investment is not that place.

From a cost perspective, agents’ commission and marketing spend are the two big ones when selling. These could amount to somewhere between 2 and 4 percent of the sale price depending on where you happen to be and whose services you choose to employ. On a big sale, that can be a sizeable amount and our instincts will naturally tell us to avoid it, but what about the opportunity cost? Having your capital tied up in a poorly performing asset is depriving you of the returns that same capital could generate in a better asset. The longer you wait, the greater the opportunity cost becomes. In my experience, most successful investors are decisive. They don’t take months to think about selling; they sell and move on to a better investment.

Finally, keep a close watch on the market and the performance of your investments; our review cycle for example, includes a full portfolio and strategy review every 6 months as a minimum. Monitor the relevant indicators of performance (I’ll talk about these in detail in my next article) and have an exit strategy you can activate when the signs point that way.

John Di Natale is a Director of Equi Wealth. He is an international speaker, wealth creation specialist, financial planner and licensed estate agent.

Is it about time you had a check up?

You’ve heard of a check up, right? The type of check up you go and see your GP for on a regular basis, just to make sure you’re on track for a long and happy life. We’ve been sold on the idea for decades and we’re still told about the various tests we should have done when we reach this age or that. It makes sense to be pro-active. The earlier you act, the more likely you are to avoid the nasties.

Have you ever run a scan on your computer? Just to make sure it’s free of bugs, worms and scammers whose uncle died and left them 14 tonnes of gold they’d like to store in your garage… Of course you have. Again, it’s become a habit even to the extent that we set it to happen in the background automatically.

What about your wealth creation plan; who is reminding you to keep that in good shape and when was the last time you really put it to the test?

If you’re like most people, I suspect you might be quietly questioning whether you in fact have a wealth creation plan – other than work hard and save. If you actually do have a plan, is it current, does it reflect changes in your circumstances, has it been adjusted for changes in legislation, is it being implemented consistently and is it actually working? In other words, are you on track for the life of your dreams where you spend your days ticking things off your bucket list – or are you headed for that long, slow agony of retirement on the pension?

If you think your plan might need an overhaul, don’t worry; it can be a painless process. Getting a clear understanding of your current position (I know you know, but some people just “don’t know were all the money goes..”), defining your goals, then developing and implementing a strategy to get you there. That’s what a wealth creation health check should do. As the saying goes, your bank balance will thank you later.

Take advantage of the opportunities that are out there right now. Make the most of government grants, tax saving structures, stamp duty concessions or whatever else may be relevant for you. Review your current arrangements for additional leverage and potential savings – lower rates, better products, lower risk, bigger benefits.

The key of course, is getting started. Just like the doctors appointment, this is an easy thing to put off until next year, or when you get the new job, or when the kids finish school, or when you turn 50 or 60 or… So here’s an important question to ask yourself: “if I stick to my current plan and keep doing what I’m currently doing, will I achieve my goals?” If the answer is no, you know what to do. Make that appointment. Get that check up!

 

Words by John Di Natale, Director of Equi Wealth
Licensed Real Estate Agent, Financial Planner

Gen Y: Demanding. Unrealistic. Programmed for instant gratification. Addicted to their phone and smashed avo for breakfast.

Gen Y… Those born between 1981 and 1994 and now aged in their early twenties to mid-thirties. Subject to criticism and often labelled as above. But those labels certainly haven’t carried over into reality in my experience. In fact, the people I’ve met who fit this demographic are generally smart, well informed, focused and ambitious.

Not in the same way that Gen Xers like me were ambitious – subscribing largely to the values instilled in us by our parents. We didn’t have social media, a million YouTube videos and an online network of thousands from whom to learn our values. Gen Yers are ambitious in their own unique style. They want to do it their way and they will I believe, become a major force for change. They are coming into their own in the workplace; they have skills that every business needs if it is going to succeed. They are better travelled and have a more global view. They are better informed and know much more clearly what they want – and what they don’t.

Let’s take the suburban home, a huge mortgage, a family and a steady job that will allow us to pay that mortgage off 30 years from now and live perpetually broke in the meantime. Gen Y doesn’t want this kind of life – and who could blame them? Instead, they are looking at ways to better use their earnings and investments to live a more satisfying life. Utilising their endless stream of information, they are making better investment decisions. Many are renting where they want to live (for the lifestyle) and then investing in more affordable areas (for the leverage and capital growth). They have a highly developed ability to find and sift through data, make comparisons, ignore the things that are not in line with their plans and put the rest to good use. Many don’t intend to be tied to one suburb, one state or even one country for the rest of their lives. They’ve already had a taste of the world and want more.

One of the major differences between Gen X and Gen Y is their risk profile. Yes, I realise that’s a broad generalisation, but it appears to me that Gen Y is more comfortable with risk than the previous generation. If you’re a Gen Xer, you were probably taught, like me, that money doesn’t grow on trees, the most important thing is to work hard in a good, steady job and investing is risky. So, instead I taught my kids that if they’re passionate and focused and work both hard and smart, they can create their own reality and achieve whatever they want. I taught them that taking calculated risks is OK, and you have to expect to fail occasionally if you’re going to succeed.

So, keep an eye on Gen Y my friends. I think they’re going to do it even bigger and better than we did.

 

Words by John Di Natale | Director and Licenced Estate Agent | Equi Wealth

Popping the housing bubbles bubble

Apparently we’re in “the grip of a housing bubble”. If your bits have been feeling a little errr, constricted, this could be the explanation.

What is a housing bubble anyway? In high school they told me it’s always good to start with a definition, so here’s mine:

Housing Bubble (def): Device for driving traffic to media websites, catch-cry of the week for economists and property commentators, mythical object only seen by the eyes of a blind virgin on a full moon.

I’ve been doing quite a bit of reading and here’s what I’ve learned about the bubble – not much. Economists and experts can’t agree on how to define a housing bubble, let alone whether or not we’re in the grip of one. Nor can they agree on what the implications of the bubble might be for homebuyers, first homebuyers, investors, downsizers, developers, the banks and government revenue.

So, what is this thing called a housing bubble? The best definition I can find is that its simply when property prices reach a level that can no longer be sustained and they drop to a lower benchmark. Of course there is no agreement on what that lower benchmark should or will be and whether that drop will have any flow-on effect or even go on to become a fully-fledged recession. This rise, a slight drop and then rise again is what property prices have been doing at pretty regular intervals for the past hundred years or so. I’d say that’s a market correction, rather than a bubble and its influenced by factors other than price – like population growth, household income, savings levels, tax policy, buying psychology and many others.

If you want to talk about a bubble, you could perhaps point to mining towns where property prices were pushed to ridiculous levels and then “popped” when the mining companies pulled up stumps and left town. If you’re an investor, there’s an important lesson there about “hotspots” vs. good investing fundamentals, but that’s a discussion for another time.

Interestingly, the chief executives of National Australia Bank, Westpac and Commonwealth bank, testifying at a parliamentary inquiry into banking this week, said that while they have some concerns about aspects of the housing market, they don’t believe prices are over inflated. Read, there is no bubble. Rather they claim, the higher prices are supported by the fundamentals.

Bubble or no bubble, about to pop or not, the fundamentals should continue to be the major drivers in your purchasing and investing decision-making.

Life is for living. All the best on your investing journey!

Maybe the sky isn’t falling

An article titled “The Australian housing market – what are the key issues?” by Dr Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital somehow ended up on my desk. I gave it a quick once-over expecting the usual unsubstantiated gloom and doom most people churn out, but was pleasantly surprised to find a relatively balanced view.

Just for the sake of the exercise, I tried to extract some of the positives and a few of the not-so-negatives to help investors maintain a positive outlook.

Here are a few of the points I found interesting (with my comments in brackets):

  • Expect average home prices to fall 5-10% once an interest rate tightening cycle gets underway in 2018-19. (See my comment in point three below.)
  • Sydney and Melbourne unit prices are most at risk. (Based on what?)
  • Over the last 5 years Sydney dwelling prices have risen a ridiculous 73% and Melbourne prices are up 47%. (Makes a drop of 5-10% mentioned above seem almost bearable if you’re playing a long-term game – and you should be. Lets talk strategies for getting people into their first property ASAP. If you’re sitting around waiting for prices to fall, that’s a fool’s game.)
  • There has been an inadequate supply response to demand. (The ABS graph shows a shortfall of almost 50,000 dwelling based on current demand. So much for all those ‘oversupply’ articles I keep reading…)
  • Consistent with this, while vacancy rates have increased, they have only increased to around average long-term levels. In Sydney, vacancy rates are below average. (So, maybe the sky is not falling after all, Chicken Little.)
  • While commitments to lend to property investors slowed in 2015 after APRA tightened macro-prudential controls, this has since worn off.
  • Foreign buying is also impacting – with indications it is around 10-15% of demand – but it is also concentrated in particular areas and SMSF buying appears to be relatively small. (Yes, we know some suburbs are very popular with overseas buyers. Have a strategy; know your price points if you’re looking in those suburbs; be sure to look at alternatives.)
  • The surge in prices and debt has led many to conclude a crash is imminent, but we’ve heard that lots of times over the past 10-15 years. (In any case,) The situation is not that simple:
  1. Firstly we have not seen a generalised oversupply and at the current rate, we wont go into oversupply until 2018 and in any case approvals suggest that supply will peak this year.
  2. Secondly, mortgage stress is relatively low and debt interest payments relative to income are around 2003-04 levels. (Read the second part of the sentence again!)
  3. Thirdly, lending standards have not deteriorated like they did in other countries prior to the GFC. (Think non-recourse loans in the US.) In recent years there has been a reduction in loans with high loan to value ratios and interest only loans are down from their peak.
  4. Finally, generalising is dangerous. While prices have surged in Sydney and Melbourne, they have fallen in Perth to 2007 levels and seen only moderate growth in other capitals.
  • Polices to help address poor housing affordability should focus on boosting new supply, particularly of stand alone homes, which have lagged.
  • Generalised price falls are unlikely until the RBA starts to raise interest rates again and this is unlikely until later in 2018, whish after a few hikes will likely trigger a 5-10% pull back in property prices as was seen in the 2009 & 2011 cycles. (I’m reminded of an interview with Harry Triguboff, one of Australia’s billionaires, in which he said something like; “people worry about a 3 or 4% price drop but they forget property has gone up perhaps 10% every year for the past 5 years…”)
  • While there is a strong long term role for residential property in investors’ portfolios, at present there remains a case for caution. It is expensive on all metrics and offers low net income (rental) yields of 2% or less. This leaves investors highly dependent on capital growth. (See my previous comments about the long term nature of property investing. Good asset selection and management should see you do better then 2%)

Hope you find those points as thought provoking as I did. I reiterate what we believe and forms part of our approach with our clients at Equi Wealth. Investing is not a singular event; it’s a process. Investing in property is best thought of and implemented as a long term strategy. Property is – and probably always will be – the foundation of a wealth creation strategy for most investors. Good asset selection and ongoing review and management are key to success.

Life is for living. All the best on your investing journey!

Frog in a saucepan

You’ve probably heard the story about a frog in a saucepan filled with water. Take that saucepan, put it on the stove and the frog will happily sit there as the temperature rises until the poor frog is boiled – literally. Why would that happen? Apparently, because a frog is cold blooded and its body temperature adjusts to its surroundings, it doesn’t notice the ever-increasing water temperature – until it’s too late!

I had an alternate title in mind for this piece. It was: What’s your bullshit story? You’ll see why I was planning on calling it that below.

Then I stumbled across the frog in a saucepan analogy again, which explains in a unique way the outcomes of the bullshit we tell ourselves.

Why am I talking about boiled frogs?

Well, because some people are just like the frog. Things start out OK. You’re working, you’re making some money and you’re feeling pretty good about things.

And then the temperature starts to rise. Life starts to wear you down, as it tends to do. Before long, you find yourself settling for “reality” rather than aspiring and working towards your goals. You settle for not renovating your home this year, not going on holidays, not sending your kids to the school you really wanted them to go to. You settle for expensive credit card debt as a fact of life, overdrafts, borrowing from your family…

You’re now the proverbial frog, sitting in the saucepan seemingly oblivious to the fact that your situation is heating up. So what do you do? Here are a few possible scenarios:

  1. Do nothing
    This is in fact what most people do. Perhaps not the best option because you pretty much end up “cooked”.
  2. Settle for “reality”
    Explain the increasing level of pain you are experiencing with phrases like “oh well, what can you do?” and “that’s just the way it is”.
  3. Look outside the saucepan
    You may be surprised to discover that you’re not the only frog and your “reality” is not everyone’s reality. There are other frogs out there; like the one sitting on a lily pad, wearing sunnies and sipping on a drink with a little paper umbrella in it.
  4. Do what frogs do best – jump!
    Get out of the saucepan and get a clear perspective on things. Have a critical look at how you got into the saucepan in the first place and how you can avoid ending up there again – or at least turn down the heat.

I hope the frog in a saucepan analogy hasn’t confused you. Here’s what I really want to say in simple terms: most people are not fully aware of their financial situation – both in terms of the things that are hurting them and costing money and the opportunities that could make them significant amounts of money.

So, I suggest you “jump”. Get clear on your situation and how to improve it. Get professional advice. Develop a strategy. Make it happen and get out of the saucepan forever.

Here’s your opportunity

You’re no doubt familiar with Jim Rohn’s famous saying: “You are the average of the 5 people you spend the most time with”. I don’t know if that is factually correct, but I suspect the objective was to get us thinking. So, I’ve been thinking. Perhaps it’s not so much about who you spend the most time with, but who is influencing your thinking the most. We can spend time with family members for instance, but they may not have any major effect on how we think and how we make decisions in business or in life.

Truth is though, somebody is influencing you – whether you like it or not. The people you talk to, look up to and listen to are affecting your thinking, your decision making, your view of the world and possibly even your self-esteem.

The temptation of course, is to take the easy path and spend all your time with people who are constantly supportive and provide positive feedback. We all like to hear “good job, well done…” But there is no point surrounding yourself with people who only say nice things. If you want to get ahead, get some critics! People who will say “that was terrible” are important too. Negative feedback – or at least feedback about things you didn’t do well – is more important to progress than the feel-good pats on the back. Negative feedback tells you where your opportunities for improvement are. It tells you where your systems are broken and where the gaps in your product offer are. It tells you where you’re not meeting expectations. Important things to know if you genuinely want to get better.

One of the keys to success is developing the mental toughness to seek that feedback out. Ask your customers, ask your team, get a mentor who will tell it how it is, find someone who will hold you accountable. Then live with the criticism and the slightly bruised ego and get on with making the necessary improvements.

A letter to my children

Hi kids,

Attached to this letter is a Savings Account form. I’d like to you to fill this out and open an account.

Why? Well, a few reasons. Let me explain.

If you pay any attention to the media (no, not Facebook, I mean the news) you’ll know that its getting harder and harder for people in this country to buy their first property. So much so, that the government put in place a First Home Buyers Grant to try to help people get the deposit for their first property. As a nation, we’ve become pretty crappy at saving money. We spend more than we earn and have record amounts of individual debt.

On a more personal level, you don’t have to look far to realise this is true. My parents and many of their friends worked hard all their lives; and what do they have to show for it? In many cases, an average house in the outer suburbs, still not paid off by the time they die.

Many people my age, including me, have a big mortgage and too much credit card debt. They’re living in a house they don’t really like but can’t afford to fix it up or move to a better one, driving a car that is getting too old and haven’t taken their family on a proper holiday in years. Like them, I’ve made some poor decisions, spent too much time focused on the wrong things and been too afraid, lazy or uninformed to be in a better position than I currently am.

I’m not saying money is all there is to life. Far from it. There are lots of other things in life we should be grateful for, but financial security – having enough to live the life you want without having to stress about money all the time – is important too.

I’m writing to you because I want you to have the benefit of that experience and not make the same mistakes.

I met today with a financial planner who works with property investors and many high net-worth individuals. We had lunch and a long and interesting discussion about finances, investments, money management, taxation strategies and similar things.

Then he said something really interesting: most people don’t think. They live their lives going to work, paying the bills and going back to work.

That certainly got me thinking. He gave me some good advice on questions I had. Then we got talking about you and I learned that some of the banks have special accounts to encourage young people to save for their first property. The accounts reward good saving behaviours and will help you build financial security and own your first property faster.

Some of the accounts allow you to put the money you save into superannuation if you decide you don’t want to buy a house. Superannuation is a long term saving strategy to help you have enough money and live the lifestyle you want when you decide to retire.

I want nothing more than to see you happy and financially secure so you don’t have to stress about money and sacrifice your lifestyle like 90% of the population does. What’s amazing is, that it’s actually not that difficult to set yourself up for life – as the saying goes. Most people just put it off because they’ll “start next year” or “haven’t got enough time” or “haven’t got enough money yet” or whatever other excuse they come up with. Here’s the thing. Time is finite. We only get so much of it, so what’s important is what we choose to do with it.

I’m not going to push you or remind you or harass you, but I’m happy to discuss this with you at any time. I hope you are mature enough to give this the attention it deserves.

To help you, here’s what I’m offering to do. I’ll contribute an amount equal to the average balance of your account every six months. If the balance of your account is $1,000 or above for six consecutive months, I will contribute $1,000. If the average balance is $5,000 I’ll contribute $5,000 and so on until you are in a position to buy your first property.

I suggest it would also be worth starting to understand the benefits of saving, investing and property ownership, depreciation and tax benefits, capital growth – as a starting point – so you begin to realise how much of an effect this will have on what the rest of your life looks like.

I’m happy to speak with you about it any time, or otherwise, apparently there’s this thing called the internet…

Love you,
Dad