I recently attended a presentation by John Fitzgerald related to his Untold Wealth, Success From Scratch product. The Success From Scratch product provides information to help build wealth though property investment. Untold Wealth doesn’t seem to be geared towards anyone in particular, there was good representation from all age and income brackets at the presentation.
The following bullet point list is just some of the information that John covered and is not meant to be complete, accurate or financial advice – just a bunch of interesting points that I remembered from the presentation:
- What type of investment options are available?
-
From an investment opportunity stand point, there are two basic options:
- Income
- Growth
If you were investing for income, you are positively gearing the asset; such that you expect to receive enough rent/income from the property to pay off your debts, hopefully with some to spare. At the end of the income based investment, you have gained an asset without having to outlay any money. The by product of that is that the possible returns against the investment are much lower.
If you are investing for growth, it typically involves negative gearing (ie, that it will require some additional money from the owner to meet the repayment requirements). Investing for growth is the strategy that John employs, which involves compound growth (see below) to earn you serious money.
- What type of property should you buy?
-
There are essentially four types of real estate to invest in:
- High rise (10)
- Townhouse (20)
- Duplex (30)
- House (40)
they are listed above in least favorable to most favorable based on the land content ratio (see below).
- Where should I buy my investment property?
-
John invests according to a really simple set of rules:
- Short distance to schools, preferably good quality private schools if available
- Short distance to public transport, especially a major piece of transport infrastructure like a bus interchange or railway station
- Short to medium distance from recreational facilities
- Short to medium distance from regular shopping destinations, such as groceries
- Medium distance to the central business district
Since John invests in the standard family home, he wants to make sure that the location of that investment property suits his intended tenant; the average Australian family. From his experience, the most important items to someone tenanting an investment property relate to the children, not the parents. As such, it is more important to be close to schools than it is to be close to the parents work.
- When should I invest in property?
-
A hard question to answer directly it seems but John pointed out that the market runs in a cycle. Generally speaking, most people consider the market to cycle about every 7-8 years or 9-10 years, depending on who you talk to. In an ideal world, you would want to buy when the market is low, not high.
The tricky problem is that for as long as statistics have been kept, the price of houses doubles approximately every 7-8 years. Knowing that the price of the property is only going to go up, there really isn’t a bad time to buy unless you happen to jump in while the market is burning hot.
- How much should I pay for my investment?
-
This point was made very clear, when buying an investment property you want to be paying the mean/median price for it or below. There is no point spending the extra money on getting a ‘better house’. Remember that you’re investing as a wealth building exercise, so you need to stay emotionally detached from the investment property. There was concern in the audience about real estate market performance across time and how that’d effect the overall successfulness of the Success From Scratch strategy. John pointed out that he sticks to the mean/median price because in the event of a market slump (which will happen, so don’t kid yourself) – that the average property is effected the least, as everyone essentially needs an ‘average’ house to live in.
- Land Value Ratio
-
Land Value Ratio is the price of the land your investment sits upon, compared to the total price of the investment. If you’re investment property cost $300,000 and the land component was $100,000 then you have a land value ratio of 33%.
Beside the four types of property listed above there were numbers. Each of these numbers represents a rough percentage for the land value ratio for that type of property. It should be of no surprise that the standard house offers the best possible land content ratio, as you actually own the land.
- What makes a good investment?
-
Since everything that John went through was about investing for growth, one of the single most important points had to have been land content ratio. When you purchase an investment, he said it is safe to assume that after forty years that the above ground assets are completely written off. This comment was really two fold, not only does the physical asset need serious attention and might as well be knocked down but the Australian Tax Office will let you depreciate an investment property at about 2% per year.
Knowing that the above ground assets are going to be worth next to nothing after a forty year period is important, as if you don’t have the above ground asset – what do you have? Well you’ve still got the land, which illustrates the point John was making about land appreciating and bricks and mortar depreciating.
If you’re going to spend $x on an investment property, it makes sense that the largest possible percentage of x be made up of the land value and not the house itself. After all, the house itself is only going to cost you money over the course of time with maintenance and so forth – while the land just keeps appreciating in value!
- Where should I get my money from?
-
There didn’t seem to be any real preference towards what lender to use for your loans. I did get the impression that he was not particularly interested in the main four, especially with respect to the property valuation documents.
One important point that came out of the discussion surrounding bank loans was that you should not place your investment loans with the same lender that you have your home mortgage with. John used a phrase I hadn’t heard before, which was “cross collaterisation”. My understanding of cross collateralisation was that the bank will use your mortgage and your home as some form of securities against the investment loan. He pointed out that this was a bad thing, as it is difficult to unlink going forward and if you look to invest again further down the road – it will probably reduce your lending capacity.
- Property Valuation Documents
-
The property valuation document is apparently a very important thing that most people don’t know exists and even if they do, struggle to attain one. The property valuation document is something that your lender provides you, which outlines all sorts of important numbers about the property you’re about to invest in.
Throughout the presentation, John kept referring to the document as the foundation of which to build upon. According to John, the vast majority of lenders (especially the main ones) do not like giving out property valuation documents – in fact it is in their standard operating procedures not to.
It wasn’t covered in huge depth (just that they are very important and you need to get one), however I gathered that you can use the valuation document to take to another lender further down the road to help you get into the next investment property. Essentially, its a contact on paper that you can take to another lender and say ‘Lender X states property Y is worth Z dollars’. Without the document, the new lender will form their own opinions about the property and its worth – which might not be in your favour.
- What is the compound growth thing all about?
-
Compound growth is the technique that John uses which allows him to keep on buying property. The word compound is important, as it implies that not only is something growing but that it is growing at an ever increasing rate.
Property prices double every 7-8 years on average, so every year that you hold an asset it is going to go up in price approximately 10% (just to keep it simple). For the sake of an example, lets assume for a moment you’ve just bought a $300,000 house. The first year you hold your home, the market price for your home has increased to approximately $330,000; so you’ve just gained $30,000 in equity. The second year you hold it, you’ve now gained another 10% or $33,000 (up from $30,000 the first year).
The presentation John gave was really useful, a fair amount of it I had previously read and there was a lot of stuff I hadn’t. I think I’ll enjoy reading the book which accompanies the Success From Scratch product, it’ll no doubt clarify some of the points which weren’t covered in great detail during the presentation because of time constraints.
I dont understand the differance in income and growth type investments. Considering if you buy the exactly the same houses with the two types of investment options, how would your returns with the possitive gearing be lower when you arent forking out the extra money each week to cover the initial investment as with neg gearing? are you not running a higher risk relying on the tax office to cover your outlays at tax time should they change what you can claim back on investments? I should go to his seminar I think maybe? so many questions! I just dont like my money not working for ME.I just cant see paying for a room in a house that other people live in is seen as investing
Heremia
Property 1:
Inner Melb
Say $500,000
$100,00 Deposit
$400,000 Loan @ 8%
$32,000 Interest Per year
Rent $400 week x 52 = $20,800
You are losing $11,200 per year plus expenses rates etc.
You can claim this loss against your income – thus it is called negative gearing.
Why would you lose money?
Well – lets say the capital growth is 10%
$500,000 x 10% = $50,000 Gain.
And you don’t pay tax on this gain until you sell.
And even then, if you hold for more than 12 months – you will only pay tax on 1/2 i.e $25,000.
Say at 31.5% = approx $8,000 Tax.
This is a gain of $42,000 less $11,200 loss less expenses.
Property 2:
Country Victoria
Say $200,000
$40,00 Deposit
$160,000 Loan @ 8%
$12,800 Interest Per year
Rent $300 week x 52 = $15600
You are gaining $2,800 per year less expenses rates etc.
This is called positive gearing
Why not always choose this
Well – lets say the capital growth is only 5%
$200,000 x 5% = $10,000 Gain.
$10000/2 X 31.5% Tax = Approx $1600
Net Gain $8400 plus $2,800 less expenses.
Overall – the 2nd property doesn’t gain you as much as the first.
Yes – Yes – these are just rough examples to show the concept.
To make the first property Cash Flow Positive – you need to either get more rent for it, buy it below market price – or put up more of a deposit.
You can also claim depreciation allowances which can help with the cash flow.
Often – you just can’t get some properties to be cash flow positive by borrowing lots howevere provided there is good capital growth – then it is not so bad. However – increasing interest rates makes it harder to make ends meet – and might restrict capital growth.
Cheers
I am really sceptical of all of these marketing and seminar practises. Whats the catch with Untold Wealth? Is is as good as it is made out to be?
Have a read of this article in The Australian, http://www.theaustralian.news.com.au/story/0,,23040345-25658,00.html
Apparently the con here is to attend their seminars and then they try and get you to buy their own properties they develop that aren’t high returners. Surprise surprise they also offer you finance for these crap properties and guess who owns the finance company. They do! Wow who woulda guessed it.
Google is a wonderful thing. Put in ‘untold wealth’ and keep scrolling down till you get through all the hits about how wonderful they are and you’ll always find somebody who has the real story on the sly buggers.
I paid $4000 for a two day seminar that promised me it would teach me to trade options. The options segment went for about 25 minutes on the second day. The rest of it was feel good crap saying stuff like ‘You Can Do It’, very forced and American. I refused to pay anything after the deposit and put a small claims in to the local court house when they chased me for the bux. I won. It cost me a $600 deposit to find out “I can do it!”
It appears to be good advice on buying properties just don’t get sucked into buying THEIR properties or using THEIR finance.
This paragraph from a longer version of the same article says it all I think.
“I recently valued two John Fitzgerald properties which the people had bought in 1999 for a total of $380,000 which are now worth $680,000,” McGeever said. “But if they had spent $380,000 in (the Brisbane suburb of) Red Hill in 1999 they could have bought a four-bedroom, two-bathroom family home on an 800sqm block which would now be worth $1.4 million.”
http://blog.investmentmentor.com.au/2008/01/18/location-it-isnt-an-untold-truism/
I would like to make a comment regarding property valuation documents.
The bank will not give you a copy of the valuation – this is because it is done by the valuer according to the banks criteria. This criteria includes comparables of properties sold – no more than 90 days old. Therefore if you are planning to use this valuation in the future it would not be relevant.
All banks have certain valuers that are approved on their panel- therefore if you are going to different banks and you do have a copy of the valuation they may not accept that valuer. On top of this if the valuation is more than 3 months old they cannot rely on this as a current market valuation. Unfortunately many people are mislead at different events that they can do this – if you don’t come from a banking/finance background you will not now that this is not possible.
The best thing to do is make a record of the valuation at the time, and request a local agent or someone with the ability to appraise your property for free to offer you some guidance on the current market value. You can than supply this to your lender to provide to the valuer to utilise in his comparable sales. Also keep note of properties that sell in your area if they are comparable.
I have been to a John Fitzgerald Seminar and to the follow up appointment where the Sydney Sales Manager was just a pushy sales person. He would give me no facts about where the real estate was other than some vague “in Qld or Vic”. He even told me he was not licenced to sell Real Estate or talk about financials… he then went on to promote some HUGE dollars that I could make ONLY if I invested with Custodian and John Fitzgerald. WHAT A SCAM! John even owns the finance company and probably makes money on the finance as well as the huge mark up on the Real Estate. I checked out the NSW Sales Manager’s credentials and found he was formerly the infomercial spruiker for Danoz Direct’s Abtronic “fitness” device and in 2003 was found to have been engaged in “misleading and deceptive conduct” in his spruiking. I will not be investing with Custodian.
WHAT A SCAM!! BUYER BEWARE.
I am always wary of seminars myself, and the NSW sales manager I heard speak openly admitted he was a former infomercial spokesperson. He has not been employed for his real estate insight, but his marketing skills.
They also made it clear that this system was not for everyone, in fact, real estate investment is for less then 3% of the population. Of course during the initial free consultation they are not going to give their identified property locations! But if you paid attention in the seminar you would know they go for capital cities.
They also openly stated that we did not have to use their mortgage broker or even the properties they identify, I found them to be very straight forward in their real estate investment property strategy…GROWTH in land value.
I can’t say whether or not we will be signing up with Custodian, but they have been more impressive in their openness and strategy then I have seen at other places.
I recently attended John L Fitzgerald’s Custodian WealthBuilders seminar in Melbourne. As a Mortgage Broker and Property Investment Advisor, I found his seminar interesting from many different angles. I thought that a majority of what John had to say was relevant and accurate, particularly when referring to the history of property within Australia and the potential to build wealth through property with growth, income and strategy. After buying my first investment property years ago I quickly realized the benefits and rewards, so much so that now my client base is almost exclusively made up of friends and family whom I want to help assist in building their wealth in the same way.
As previously posted in earlier comments, there were a few misleading comments during the seminar regarding valuations, but also when discussing how a bank will cross collateralise your house, how land content is better in a house rather than a unit and the only places to buy are Melbourne, Sydney, Brisbane and Perth. If I followed John’s theory I would never have bought my first property in Darwin in 2004, a 2 bed, 2 bath apartment for $230,000 that now rents for $460 p/w and was last valued at $420,000 12 months ago.
Like any investment choice, it is best to do your own homework and try and gain an understanding of what it is you are getting yourself into, but I will quote a comment from John “surround yourself with people who know property who can provide you with support and guidance you trust”, ie a Mortgage Broker, Accountant, Property Adviser etc. To get it right you need industry professionals to ensure you don’t make any mistakes, not just a mistake that can cost you money up front, but that can cost you in lost opportunity. Most people think that they can do it on their own and save money, not aware that the commission is built into the sale price for a property, regardless of who provides it. Activate a healthy sense of skepticism, find out who gets paid and for what. I must admit I would be a little cautious purchasing a property that was developed and owned by the same company providing mentoring, finance and structure. In that situation would you really get freedom of choice of location or non biased advice?
There are some great forms of research out there, most of the good stuff you need to pay for though, including BIS Shrapnel, Terry Ryder, RP Data just to name a few.
On the whole I thought that the seminar was informative and worth while attending.
Good luck