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Money makeover, day seven – money nitty gritty

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by Peter Switzer

It's now time for the actual stuff you can do to start getting wealthier. In articles over the past week, which you can check out here, I gave you the fundamentals for changing yourself, setting your goals, finding the money to invest and destroying debt.

Coming soon

Over the next six instalments, I¹ll look at plans that work and have helped others. There is no silver bullet or magic pudding, outside of luck with Lotto or Powerball, that will build your wealth. But there is a very consumable cocktail that will deliver you the pleasure often only reserved for French champagne and that¹s what you will be drinking if you follow my rules for getting richer.

Aussies love property

Let’s start with what most people love and trust most of all and that’s property, real estate, bricks and mortar! I like property because the banks will lend you a lot more money and that¹s how people build wealth – borrowing for assets that have great capital gain.

Worst house, best street

The easiest way to build wealth is to buy a poor property in a great street and suburb. You get it for a good price, you renovate it sensibly and you pay it off and own it. On the other hand, you could pay interest-only money, say for five years, which reduces your repayments, which helps fund the renovation, and then you sell to trade up.

Remember, there is no capital gains tax on your principal property, which makes it a great money-maker.

Pay it off fast

Many people pay off this home really quickly by throwing bigger weekly or monthly repayments at the mortgage. They then might buy an investment property. This was a great tactic of immigrant families who culturally, like us, have loved trusted property big time.

Investment properties

With an investment property, the tax office helps you. Yes, this is true, stay with me on this.

Investment properties, unlike the principal property you live in, attracts a capital gain tax if your property increases in value but you can claim a tax deduction for your interest repayments and any other expenses you incur in running the business of being a landlord or property investor.

Negative gearing is when you borrow to fund a property where the money in rent will be less than money out, including interest, agent fees, maintenance costs, rates, etc.

Why do people consciously lose money? The answer is simple – capital gain!

They think over time the tax deductions and the gain will make the whole deal pay off.

You can use a good accountant or better still a quantity surveyor who can help you increase your expenses and this can make the whole thing cash flow positive. Lots of people don¹t claim their rightful deductions and this makes the exercise less profitable over time.

Some people decide to rent so they live exactly where they want, say in a trendy part of a city, but they own five or six homes as a landlord. If they have good income and they work the tax deductions well, it can be a good wealth-building strategy.

Buying cheap properties

In contrast, I knew a guy who always bought what he called “penny dreadfuls” in a poor area where the rent was high enough so that the money coming in was more than money going out. These were positively geared properties and many of them became very valuable over 20 years and his plan was a ripper.

It can be hard to find these properties but they are out there.

A word or two of warning

Do a lot of homework on the property, the suburb, the rents you can charge and any other factor that could ruin your investment, such as termites!

Don¹t pay too much or borrow too much and make sure you can cope with a three per cent increase in interest rates. By the way, if you are not an expert and you won’t do the homework, talk to an adviser or expert who can show you stuff that could make a real difference to the profitability of the wealth-building plan.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

The Switzer Super Report is a newsletter and website for self managed super funds. With exclusive commentary from Peter Switzer and Paul Rickard the Switzer Super Report will help you maximise your after tax investment returns and grow your DIY Super. Click here for a free trial or subscribe today.

Published on: Thursday, December 31, 2009