In E16 of the Inspire & Inform Show, Colin teaches you how to understand and know your numbers as well as diving into a customer case study.
Please see below for the full transcript of this video
Hello and welcome to Episode 16 of Inspire & Inform where I’m going to be going through a client case study today. And really just helping you to understand your numbers and what it really means when you’re looking at potential properties for your investment. But before I do that, I just want to share some really good news for first home buyers. As of a few hours ago, there’s a lot of talk about the $25,000 home builders scheme grant that you can use now that towards your deposit for your first property. So that’s really good news for first home buyers, the devils obviously in the details, so more details to be released soon, it’s literally just come out as hot off the press. My name is Colin Lee, and I’m the founder of inspire realty helping our clients and people like yourself to build better futures together, My vision is to be one of the most trusted and transparent property investment organizations. And really in this series, our aim is to inspire and inform you, and really to provide you with the tools to help you make informed decisions about your own property investments. You see, I’ve invested personally myself over 10 years ago. And since then, I’ve built a multi million dollar property portfolio diversified all across Australia. But I haven’t always started that way. I came to Australia as a migrant just after the Olympics in 2000, as you would hear in my previous live sessions, and we really struggled for the first few years to try and make it happen for us in this new country. So lots of ups and downs a lot of hot eggs as well, I saw my family, particularly my mom and dad really struggled through to get the you know, the first jobs in Australia. And they got a lot of rejections. For to being to qualified and not having enough experience. It was kind of catch 22. But I’ve seen my parents struggled. And I made a promise to myself that I want to be financially free one day so that I can provide for my parents. In that time, I’ve made a lot of errors, mistakes, and lost opportunities, there were some great opportunities. But because I was in a situation, I couldn’t really get into it. So I am where I am today. And I formed the belief that anyone regardless of your background, your experience, how much you have now I get a lot of that I don’t have a lot now, how much you have now how much you’re earning now, as well. It matters, obviously your starting point, but that that can always be improved. And it’s all about your mindset and your belief systems. So I believe that as long as you have a strong desire, you can make it happen. There’s a saying, you know, there’s a will there’s a way, but I just have to thank you No, no, rather, I want to thank all my mentors that I’ve had the privilege to associate myself with, I’ve worked with some of the top property companies in Australia, I’ve worked with some of the top developers in Australia. And I’ve learned a lot from, you know, these mentors. And I certainly wouldn’t be where I am if it wasn’t for them today. So I’ve learned a lot and really my intention. And my goal is to inspire you and to share my learnings, one of the key learnings I’ve learned over the years is to always begin with the end in mind, I’ll just say that, again, begin with the end in mind, I want to share with a real life case study of a client who really didn’t know what I’ll say she what she wanted, in life, let alone what she really wanted to do with her properties. And she saved up quite a fair bit of money in a deposit, she’s got a very good career not affected by COVID. And she’s just been sitting idle on that cash for a while knowing that, you know, putting that cash in the bank is not really going to help her to become financially free one day. And as my mentor says, you know, you’ve got to first begin with the end in mind, know what you want, you got to decide what it is that you want in your life. And then the next thing you got to do is you’ve got to know what price you need to pay to get to that. I mean, you can’t have everything and not do anything. So there’s a price to pay for what you want in life. And lastly, if you know what price, you need to pay the sacrifices that you need to make along the way, you got to decide then whether you’re happy to pay the price. So some of this price would mean that you know there may be a bit of a short term pain for longer term gain. But I can promise you it is worth it. You know if you just make some sacrifices now for your long term future. So what I want to do is I want to go through a case study of applying these are, I’m just going to go through very quickly, in the interest of time, just a snapshot of the consults that I do with my client. This is a very, very powerful case study. So I just want to share my screen with you.
So if you can see, you know, I’m all about spreadsheets, I love my numbers, not as much as Andrew is, is the number you know the he’s the genius on all this. But this these are the sort of questions I tend to ask my question. So with this client Assuming Her name is Jane Smith, I’ve had to alter the numbers a little bit just for privacy reasons. But say Jane Smith is earning $90,000 a year. And all we said was what if we could replace your $90,000 a year income, say in 20 years, we’re very realistic. She’s in her late 20s. She’s got many more years to work, she’s not adverse to, to working. And she goes colon, yep, I’m happy to retire in 20 years, and I’m on $90,000. Okay, good. And then we look at the inflation rate and cash return on equity being 5%. I won’t go into details about that. But we spent a long time just talking what are some of her major goals and milestones that she wants to achieve in life. And we worked out just to start off with about six major milestones. So the reason why I do this is because property property investing has got lots of ups and downs. And unless you are reminded of why you’re doing this, it’s very, very easy to give up along the way. So for example, she wanted her own home to live in, in 20 years and $2 million, obviously, in today’s money in 20 years, it’ll be a little bit more than that. She wants to have a family with two kids and put them through private schools. She wants a $200,000 in the next five years, set aside $20,000 per year to travel and experienced the world spend two days a week volunteering a time for charity and church, and to donate $20,000 a year with what she has to a local church to build their missions. outreach is quite a faith filled person. So we’ve done this exercise, and we’ve realized that she needs all in all in 20 years, by 2040, you’ll need about a $3.2 million net equity. And net equity is the total net worth you have after releasing all your mortgages, you know, with the properties that you have, under your under your your possession, really. So so we figured this out, this is a fairly long winded process, I really take my clients through this this coaching process. And then I show them this, you know, I’m not going to go through it in detail. But assuming Jane earns 90,000, she’s got about $150,000 in savings and about $100,000 in a super, what I’m able to show Jane. And by the way, this is not financial advice in any way. That’s just a little disclaimer, you need to speak to your accountant if you want a you know, more accurate and definitive answers. This is just a general visual for, you know, Jane situation, it’s different for your situation. with Jane, she’s putting aside $250 a week and she’s got you know, super that grows at 9.75% in her contribution. And really, if you look at it in 20 years by 2040, she’s not even close to where her target is, this is the red line is really where she wants to be just conservatively, you know, getting $90,000 in passive income a year. I’m not gonna focus too much on this. But I really want you to just experience what we do during our consultations, which is completely free of charge. By the way, if you’re interested in having a discussion with myself, and one of my one of my team members, one of our strategist, feel free to make an inquiry on website, and we’ll be in touch with you in within 24 hours to begin a time to have that consultation and work through your scenarios with you. One of the important things about looking at property is like I said, to know your numbers. And you know, with her current future with Jane, the future is not bright. If she just went along, if nothing changes, all she did was put $250 aside, and she grew her superphone 100,000. Assuming in 20 years it grows at the rate that it is growing out. But this is where she’ll be at. So really it’s not that enough. So which means the the alternative is for Jane to then depend on her superannuation on its own, or at the time when her super runs out, she’ll have to get on the pension which once again, we hope that in 20 years, the the pension rates are still enough for an average person to have a fairly comfortable lifestyle. The ATR says we need about 40,040 $5,000 to retire on to live fairly comfortably. And I just know that your pension is just not going to be enough. So the future is not very, very bright for Jane, if she does nothing, just keeping the same situation she’s on at the moment.
In the purpose for the purpose of time, I just want to spend the next 10 minutes going through some of the things I really do with my clients. And with this particular client Jane, for example, she didn’t really know how property investment worked. That’s why she was very afraid to get into property investment. She didn’t know her numbers, you don’t know how much deposit she really needed. She didn’t really know how it works from a cash flow perspective how much money extra she needs to put out. And she suddenly had no idea I didn’t know anything about depreciation for the first two years of my investing career. Obviously I claimed it after but you know, that’s one of the things you learn when you’re surrounded with mentors. And people who’ve been there and done that made the mistakes that we hope that you don’t make, so that you can maximize your investment property portfolio and, and generate that investment asset, you know, for your future. See, I believe that investing property is like running a business, you got to know your numbers, you got to know the you know how it works, you got to know the cash flow. So once again, without going into too much detail, I think this is a very, very important exercise to do. So, Jane had the idea that she wants to invest, and she was kind of toying between Queensland and New South Wales. So I showed her a couple of options. In Queensland, I showed her a couple of options in New South Wales in Sydney. But because of her budget, she couldn’t really find anything that’s too close to the CBD in Sydney for her price point. So we really had to look a little bit further out. And when you start to look a little bit further out, I’m talking as far as potentially Newcastle for to really afford something decent. The idea then quickly switch to Okay, well, maybe let’s consider something in Queensland, where the cash flow is a little bit better, and the yield looks a little bit better for her for the long term. And so there’s pros and cons for everything I’m not, you know, promoting Queensland as per se. It is really up to your situation, your financial situation, after talking to your bank or broker and then coming back to me to look at what you can afford and how it works from a cash flow perspective. So in this case with Jane I, I said look, okay, let’s look at some options. I believe in townhouses, I believe, you know, in in units, and I believe in house and land, I believe in all different types of products. It’s just what suits you now and make sure that you have a diversified property portfolio. So she looked, we looked at an option in in Queensland at the moment, it’s a townhouse literally about 20 minutes from Brisbane CBD, so three bedroom townhouse, two bathrooms, very, very big, open space patio in the back. And it’s very close to the third largest shopping center as well, in Brisbane, it’s shopping center called chermside. So that’s a really good suburb, I know it’s an emerging suburb, there’s no way Westfield would spend all that money and construct the third largest shopping center in all of Australia, in a suburb that they don’t think is going to grow. So we know there’s a lot of good potential in this place. It’s $459,000 for the three bedroom townhouse. Now, so she remember she’s got 200,001 of the things I tend to like to encourage my clients to think about is not to utilize all that deposit quickly got to have some buffer just in case things like valuations of the property don’t stack up as much as we we’d like to think it is. Unfortunately, because of covid. valuers and bangs are starting to take a little bit more of a conservative approach when it comes to valuations of property. So always have a little bit of backup, don’t try and be too optimistic, and then find yourself having to find money to be able to settle on the property. So she’s going to put 110,000, that’s about just over half of what she’s got available. So she still has about 90,000 that she has up her sleeve. Obviously, you got to pay stamp duty and it’s about $16,000. I’m trying to keep the loan to value ratio, in case you don’t know what that is, that’s just the amount of money you borrow against the total value of the property at 80%. Just so that we can, you know, look at the option of not paying Lenders Mortgage Insurance because she has the money. She doesn’t really need to pay the Lenders Mortgage Insurance unless she wants to buy another property soon then yes. You know, so it’s about your risk profiling as well. So in this case, we looked at a 3% interest rate, I’m not going to, you know talk about interest rates, even though I’ve been able to help my clients get, you know, down to about 2.59 as of today, some interest rates for investment property. So let’s keep it a conservative at 3%. And therefore no lmia and solicitors fees could be 1500. But let’s just use $2,000. And it’s a p&i loan. By the way, this is for illustrative purposes. I don’t it’s not, you know, all detail at the moment, because I’m using some hypothetical figures at the moment, as accurate as I can make it. So annual rent based on the property. By the way, I’m also able to get a 5% rental guarantee on this property for 12 months 5% which is very decent money. So 5% of 459 is about $22,950. That’s a guaranteed rent for the first 12 months. She has to pay strata insurance and property management fee, which is about 1767. And then interest of 19,000 as well. That’s the p&i on 100 us around 337,000 minus the council strata rates miners you’re letting cost you they can see right? In fact, you know what, I’m going to take out the vacancy rate for the purposes of this exercise so you know what the cash flow position is, because for the first 12 months, you’re not going to have any vacancy with the rental guarantee. So this is a situation for the first year. So what we are able to show is the total revenue of the income coming in from this property, it’s about 22,000, this is purely from the rent, you subtract all your cost, and therefore your total expenses is 27,000, your total costs outgoing is about 4088. This means you’re going to fork out 4088 cash flow gross, at the end of the year to be able to keep up and sustain this property. But hang on, there is the total gearing that you can offset against your income and also your depreciation. So the depreciation, I went to a simple website, and I looked at the, you know, looked up plugged in some figures, with the, with the depreciation schedule on a $459,000, property new brand new in in Brisbane, and, and, and, you know, entered how much it’s worth. And it produced this for me now, without going to detail, let’s just assume at this point in time, we’re going to use the diminishing value for the property, which means for the first year, you can claim up to $12,000 in depreciation for the property. So we put $12,000 in there, no deductions, lrmi and $16,000. In total, for tax deductions, she’s earning 90,000, on 90,000, she’s paying $20,000 in taxes, obviously, she owns 100% of it, I can do the same calculations on a couple by the way. And so her tax deductions are up to $16,000. As you can see, that’s made up of 12,000 depreciation, about $4,000 in total gearing, so all of a sudden, instead of paying $20,000, in tax, she gets to offset a $90,000 income and subtract the deductions of 16,000. All of a sudden, her new net assessable income is 73,000. Obviously, you know, taxes are all according to a scale, that means a new tax payable is about 15,000. And what that really means at the end of the year, she sends the depreciation schedule does all the tax. And then she gets a, you know, a tax refund from the A to to the tune of $5,229. That’s cash. But obviously, at the end of the year, unless you decide to, you know, work it in throughout your text throughout the year. But assuming this is just the normal stack stock standard, she gets about 5229 back into our account. So what that means in totality, in actual fact, a net annual cash flow is about $1,141, that’s positive, that means this property that she’s looking to purchase is positively geared. And that that equates to about $22 a week in her net, weekly cash flow. So I wanted to just kind of show this to you. It’s it’s in by no means
in, you know, in any way trying to pitch any prop for you at this point in time. Or very importantly, that we understand your situation, we understand, you know, what your goals are, what your what your objectives are as well what your investment risks are, what do you want to do in the next five years, if you want to purchase your own properties, investing in in property now, the right track for you? There are a lot of questions that I ensure that I ask before I even position any product for you. But as and when I do that, I will go through the numbers with you. The other thing I want to say is, you got to make sure you know your numbers, not only from a property perspective, that’s, you know, on one hand, I, I’ve been working in the property industry for many, many years, and I’ve seen that property, the property industry is great. A lot of them are very optimistic about a lot of things, but capital growth, about valuations about a lot of things. And I think that’s great. I think that can potentially be dangerous if you don’t understand the financing part of it. So as a finance broker, I’m able to I don’t normally do finances for all my clients. But I’m able to give you that sort of aspect, that second opinion, the strategy for financing, and have some sort of contingency plans. I’ve been seeing a lot of clients from you know, many different walks of life, they come to me and they have problems with trying to settle that property right now. And I think that’s because from the very beginning, the the finance discussion was never had, it was never structured properly from the very beginning. So there’s a lot of problems that that they’re encountering during the settlement face. Okay, let’s put it that way. I made the same mistakes myself, I you know, I’ve had challenges settling on my property I’ve had to sell, you know, a couple of them just to make it work. So I know what it’s like, you know, life takes a turn things happen, obviously. But you just want to make sure that you protect yourself and have those discussions, have those, you know, really tough discussions, what if this happened, what if that happens, and we stress tests you to make sure that you’re still able to invest in the property, not only exchange it right now and put the deposit down, but ensure that you have the ability and the funds to be able to settle on the property. That’s the second thing. More importantly, the capacity to hold for the long term, and that’s why the cash flow situation and your calculation is very, very important. Because you want to know how much are you putting out on a year to year basis? What are the rent drops by 10%? How much do you need to put, you know, how much do you need to to fund and pay extra to maintain your mortgage? So there are a lot of these questions. Like I said, there’s di and I hope that you find, I hope it’s asked that you have that discussion with to work out your property strategy and your financing and your your numbers. I wish you all the best and we hope to connect with you sometime, please visit www dot inspire realty.com and watch our episodes every week on Wednesdays at six o’clock. We do a live telecast, it’s usually myself or Andrew that will be running workshops, seminars live broadcast on a week to week basis. So we thank you so much for your time. Some of you are watching live, some of you will be watching it after life. I thank you so much for your time and I look forward to chatting with you individually. Thank you and have a nice day to a better future together.