Inflated Property Returns

I was talking to someone recently about our property in Florida, and was saying how the expenses were higher than we first imagined, and in turn our return is a bit less than what we were hoping for. Initially I was hoping for a net yield of around 8.00%, I thought this might be a bit optimistic but going through the numbers before purchasing a property, it seemed like a realistic value.

But after obtaining our property in Florida and seeing first hand the expenses, it seems that despite being fairly conservative in our initial assumptions, the return is still less than what we initially hoped for. However, if you rearrange the numbers a little, the investment looks better and perhaps even a bit more realistic as well. See below for the initial and subsequent calculations which show net yield returns.

Initial Calculations

The Net Yield of 0.56% is less than desirable, and if we were told we would be getting this return then I don't know if we would have taken the leap to invest in the US as the hassle would just not be worth it. Although I did not include any capital gains on the property (as our plan is for cash flow) this can be  disregarded as the cash flow target simply has not been met.

But by making some adjustments to the calculations, like shifting some of the expenses to the capital (moving the cost of the A/C unit and the whitegoods under capital expenditure), the numbers start to look much better. This is realistic as these expenses are not a yearly expense and you would hope that a new A/C unit would last a few years at least, the same with the white goods. Further, you can remove the cost of PI  insurance (as this expense is not dedicated to this single property and will cover all properties under the LLC) and include it as part of the LLC's general overheads.

Adjusted Calculations

As you can see by adjusting the calculations to perhaps more realistic figures, we have now obtained our 8.00% Net Yield that we were hoping. It is important to note that both situations are essentially identical with all expenses included in both examples (with the exception of PI Insurance), yet it is simply a different way of
calculating that gives you a very different result.

I think this is a good sign to be careful when seeing advertisements purporting unbelievable returns. You should always look through the numbers yourself and satisfy yourself that what is being advertised is achievable. You should also always check whether the returns are 'gross' or 'net' yield and what expenses have been considered.

Interest rates: are your investment decisions sending you to an early grave?

On the first Tuesday of every month something happens that gets every property investor and commentator curious.

I am talking about the meeting that the Reserve Bank of Australia (RBA) has every month to talk about all things interest rates. 

It may seem insignificant to change interest rates by 0.25%, but 0.25% means millions of dollars for banks and financial institutions. If property owners are treading that fine line of only just being able to service their loans, then one rate change in the wrong direction could leave them struggling to make ends meet, and a couple rate changes could leave them close to having to sell their home or even facing bankruptcy.

This is why it is so important that people take into consideration the potential consequences of rate changes before they sign up to a new loan. A property loan is a long-term deal. Even with refinancing you could still be locked in for up to three years - and facing 30 potential rate changes in that period.

It's a matter of needing to hope for the best but plan for the worst.

I still remember when I got my first home loan ... the standard variable rate at the time was about 5.80% per annum and with that rate I was comfortable making the repayments, even being able to manage some extra repayments. But before I finally signed off on the contract, I wanted to make sure that changes to the interest rate wouldn’t leave me bankrupt. Having done the sums, I would have still been able to make the repayments if the interest rate rose to 10.00% per annum.

A simple way to check is to add 3.00% to the current standard rate and see if you are still able to make repayments. If you can then you should have no problems servicing the loan.

It’s interesting to note that most financial institutions don’t advise you to carry out this sort of simple, yet very important, check. I was given pre-approval for a loan amount way out of my limit. Add to that a few rate changes in the wrong direction and I would have been on the brink of not being able to service the loan.

In my opinion, this is just pure greed on the part of financial institutions and is plain negligent. A lot of people will take the pre-approval amount and start looking for properties up to this price range, completely unaware of the precarious position they are putting themselves in. Add to this the tendency for Australians (at least in the past) to live way above their means and you have a perfect recipe for disaster.

At the end of the day, however, people still need to take accountability for their own actions and should take a greater interest in their finances. Getting finance is the most powerful tool property investors have in regards to building wealth, but, like most things, it is a double-edged sword. You need to take stock of your current situation and plan for the different circumstances that could arise in the future.

I have watched my parents worry about bills as they come in and get stressed at the increases to grocery prices. One of the things that they did do right was to pay off their home loan as fast as they could. Couple that with a large deposit and they didn’t need to wait for RBA’s monthly interest rate announcement with sweaty palms.

It is this mentality that I have emulated. When I see the interest rates change, I know my large buffer will keep me going before things get tight. As I increase my investment property portfolio, I make sure that I use these ideals in every investment decision. The last thing that I want is to be watching the news once a month, praying that the RBA does not increase interest rates, knowing that if they do, it would lead to financial catastrophe.

Investing is about growing wealth, not about growing stress.


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Disclaimer: By viewing this website, you acknowledge that it is for informational purposes only and does not imply any contractual agreement, promises of returns or legal expertise. All investors should consult with legal representation and appropriate accountants before making any investment and should ensure that individual due diligence is done. Any information provided here is for educational purposes only and should not be taken as financial advice.

Does US Tax Make Sense?

Realising that we are going to have to start filing a US tax return at the end of the year (the US financial year runs from January to December), I started to look into how the tax system works and what forms we need to fill.

I have not figured out all the complexities of their system but I believe we are going to change the classification on our LLC so that it is classed as a corporationn(C Corp) for tax purposes.

I remember seeing C Corp and S Corp when we were first setting up the LLC, but did not know the repercussions of each class, so we ended up going for the default partnership arrangement. Unfortunately, if we leave it as this, it means that both us will need to apply for an ITIN and file individual tax returns. Essentially each tax return will declare 50% of the income and deductions and you also have to file a tax return for the LLC.

While I was looking at the rate of tax paid in the US system, it made me realise that the way Australian tax is done is a lot simpler and seems to make a lot more sense. What I mean by this is the amount of tax paid is linear, as you earn more, you pay more tax. Whereas, in the US system, it is has big steps between the brackets. I will show you what I mean:


10% on taxable income from to $8,700, plus

15% on taxable income over $8,700 to $35,350, plus

25% on taxable income over $35,350 to $85,650, plus

28% on taxable income over $85,650 to $178,650, plus

33% on taxable income over $178,650 to $388,350, plus

35% on taxable income over $388,350

You can see that there is no tax free threshold like there is in Australia (currently $16,000), and there is no marginal rate for amounts over a certain amount. What does this mean? Let's look at the following situation:


Person A earns $35,300 in annual income - pays a rate of 15% tax, so net income becomes $30,005


Person B earns $35,400 in annual income - pays a rate of 25% tax, so net income becomes $26,550


It is amazing isn't it, Person B earns more income, yet because of how the US tax system is setup, it forces him to be taxed more and end up with a lower net income! It really does not make sense. I am tempted to ask my US accountant if this is true. It would make me want to ask my boss for a "de-raise" if I was close to one of the brackets or look at what tax deductions I could claim to lower my taxable income. What do you think?

Turning your PPOR into an Investment!

Recently I wrote an article about the comparison of Renting vs Buying. That article was for the initial choice between buying a house compared to renting a place to live and investing the assumed extra cash flow that comes with it. A question was asked of us recently on the benefit of moving out of your PPOR and renting a place, while renting out your PPOR in the meantime.

I remember reading an article a couple years ago about the benefit of purchasing a place that you want to live in some time in the future, basically the typical 4 bedroom suburban home to raise a family in, while you are single and young, live where you want to. The benefits seemed to make sense and this is exactly the situation I was asked about. I now seem to find myself in the same situation. I have been living in my PPOR for the last two and a half years but I am relatively far from the city, not close to many of my friends and not in the most desirable area to live in.

The decision to move out has already been made in my mind; I feel for me at this time, it is a better lifestyle choice. Since I have already balanced the emotional side of the decision, I now just had to convince myself of the financial benefits. I was able to develop a fairly routine spreadsheet to show the financial implications of making such a decision.

Basically, I would be able to rent out the property for $400 per week and to rent out a place that I would like, I would be able to find a property for $250 a week. Already it is easy to see a benefit of $150 per week. However it is important to note there is a lot of additional expenses that will need to be covered when you become a landlord. Landlord insurance is required to ensure your tenants do not take you to the cleaners, contents insurance is also a good thing to have when you are renting. Property management fees will also need to be taken into consideration.

After taking all of the above into consideration, I found out that I would be approximately $100 per month better off if I moved out of my PPOR and rented it out. It should be noted that I did not take into account the tax implications of turning my PPOR into an investment. I realise you would be able to deduct a fair bit due to having the investment property, but this would most likely be offset by the added income due to the rental returns. So in the end, I did not take into account the tax implications, it would have made the spreadsheet a lot more complicated, and I do not believe it would have added anything extra.

If you would like a free copy of this spreadsheet, please click this link Spreadsheets

I have also read about the benefits of exchanging the title of the property into a trust to be able to fully deduct the interest repayments with your tax return; however I have not looked into this in great detail and unfortunately cannot provide any extra information. However if you have paid down the principal significantly (in which case there is minimal interest to claim), then it may not be worth it. As stamp duty will have to be paid when you transfer the title to a trust.

2 Houses Are Better Than 1

One of the first things I noticed when looking to get a loan was just how much interest you ended up paying over the life of the whole loan. To purchase a $400,000 property on a 30 year loan would end up costing you around $1,000,000 (assuming interest rate of 7.00%). So you are effectively paying two and a half times the value of the property.

This didn't seem too appealing so I looked at the best way to reduce the amount paid in interest. The most efficient way I could determine was to reduce the loan period, which means increasing your repayments. To purchase a $400,000 property on a 15 year loan, it would only cost you approximately $650,000. Saving you $350,000! This is almost enough to buy the same property again. I then wanted to figure out other ways to be able to escape this need to pay such a high amount in interest repayments.

Unfortunately, to pay off a property quicker, you need to increase the repayment amount. In the example above, the 30 year repayment was $2,660 and the 15 year repayment was $3,600. So where would you come up with the extra $1,000? Then I remembered sitting with my group of friends and talking about investing in property.

I have talked in another post about the benefits of purchasing a property with someone else, where simply the increase in repayments by using the combined incomes, significantly reduces the loan term and effectively reduces the interest paid. But now I am contemplating something different. Let's say two people purchase a house together and use their combined incomes to pay off the property ASAP. Then the same two people buy a second house, again paying it down ASAP. So at the end of the day, each person has a house each.

There would be a lot of complications between what is an equivalent house for each to own and there may be some issues between the two if one believed the other got the better end of the deal, but avoiding all the emotional aspects, and looking at the pure financial side of things:

Using the following inputs:
- Each person has a monthly saving of $3,000
- Initial cost of a house is $300,000
- Capital Appreciation of 2% Per Annum
- Interest Rate of 7.00% Per Annum

Situation 1 - Each Individual buys their own property

Using this formula in excel - NPER( ) - the repayment period will be 151 months for each person, so a total individual cost of $453,000.

TOTAL COST - $906,000
TOTAL PERIOD - 14 Years 7 Months

Situation 2 - They buy 2 properties together, one after each other

So the total repayment is now $6,000 per month.

1st House will take 60 months to pay off. A total cost of $360,000

To obtain an equivalent house for the 2nd property, assuming the capital appreciation of 2% per annum, the house price of the second house would now be $331,200.00 (after 5 years)

2nd House will take 67 months to pay off. A total cost of $402,000

TOTAL COST - $762,000
TOTAL PERIOD - 10 Years 7 Months

So as you can see in Situation 2, the total cost is $144,000 cheaper than Situation 1. And also the total period of being in a loan is 4 years less, with both people at the end of the day essentially obtaining the same thing.

Keep in mind, this is a very simplified example, and there is a lot I have not taken into account. Firstly, if you do buy a property together, you will only be able to use one FHBG and stamp duty exemption or whatever else your government offers you. Also there is the option of, for instance, say you both purchased a 2 bedroom property, then in Situation 1, each person would have a spare room which they could perhaps rent out for extra repayments, whereas this does not occur in Situation 2, until the second house is bought. It is also important to note the preferred option is typically dependent on the capital appreciation of the property, using a low rate (as I used 2.00%) will generally have Situation 2 preferred, but a higher rate (over 5.00%) will generally have Situation 1 as the better alternative financially.

I have developed a spreadsheet which takes all the above into account and allows for a fairly accurate comparison between the two different methods.

If you would like a free copy of this spreadsheet, please click this link Spreadsheets

The Internet vs The Spruiker

Photo courtesy of Alex E. Proimos

The internet is a great place. It contains a wealth of information and all you need to do is put in a little bit of effort to find what you need or want. The number of people spruiking highly-priced educational courses never ceases to amaze me. These people claim to be rich from whatever field they are in but are out there trying to get you to buy their course which promises to make you rich. It shouldn’t cost thousands of dollars to learn about an investment idea that is freely available on the internet.

Now don’t get me wrong, a number of them are genuinely good at what they do and are simply passing on what they have learnt, with a significant fee attached to have that privilege. However, the majority of these so called ‘gurus’ are nothing more than con men and women, trying to profit from everyday people.

I believe that the key to becoming financially free or at least financially comfortable is to ‘give it a go’. This may sound quite simple but you won’t gain anything from not doing anything. You need to take a few risks, get involved in a number of different sectors and the most important thing, learn from your mistakes. I believe mistakes are much more valuable than successes. Now this may sound a bit hypocritical based on what I have written above but there is a difference to getting involved in new things and wasting thousands of dollars on rubbish ‘get-rich-quick’ schemes.

But I digress. As I was saying, the internet contains copious amounts of information and a lot of it is free. So whether you’re just starting out in the investment game or have been investing for years, there is always new and better ways to do things. The best thing you can do to reach your goal is to keep learning. Use the free information that the internet offers. Have a crack at different investment options that come your way (of course only after weighing up all the pros and cons) and learn from them.

The most important thing, however, is to be positive. Not many people become rich by being negative and pessimistic. You will all have come across the friend, colleague or family member who instantly rejects the new idea or investment that you have just told them about. It is this attitude that stops them from trying anything different. It’s this ‘sheep’ mentality that will keep them employed but always chasing their tale. Whether it is trying to keep their job or trying to keep the bank happy.

If you don’t want to be like most other people, work 9-5 and only start enjoying your life when you’re way over the hill, then you need to do something different.

The fact that you’re reading this blog already shows you’re on the right path.

Check out these posts on investing:

Creating Investing

Importance of Keeping a Budget

Should you pay off your Mortgage or Invest?

A lot of people talk up the benefit of having a mortgage in investment property, so you can deduct all of the interest from your income and effectively save yourself when you pay your money to the tax collector. But the way I saw it was that instead of paying money to the tax man, you were just paying the money to the bank in the form of more interest repayments? So my initial thought is to just pay down your mortgage as quickly as possible.

Now you should note that I am only talking about for investment properties, where the interest paid is tax deductible. A PPOR should have the mortgage paid down as quickly as possible to avoid paying a lot in interest over the years.

After looking into it further, I thought I should actually calculate if I was better off paying down the mortgage for an investment property, or instead of paying down the mortgage, investing the saved money elsewhere. Looking at it fairly simply, I first did some hand calculations pretty much as follows.

There is an existing loan of $300,000 at the start, with 7% interest rate, the interest only repayments become $1,750 per month. Saying now you have an extra $2,000 per month in savings, choosing to either pay down the mortgage amount, or invest it elsewhere. Other assumptions include a $120,000 gross salary (after superannuation) and an investment return of 15% gross for the other investment option. Also assuming this is an investment property returning $1,500 per month in rent.

CALCULATIONS

Paying Down Mortgage - After 1 Year

Monthly repayments of $3,750 on a $300,000 loan at 7.00% interest rate

Principal after 12 months = $256,625.00 (using spreadsheet calculations)

Total Rent Earned = $1,500 x 12 = $18,000.00

Interest Paid on Loan = $19,625.00 (using spreadsheet calculations)

Taxable Income = $120,000 + $18,000 - $19,625.00 = $118,375.00

Tax Paid = $31,745.00 (using Australian 2012/13 Tax Tables)

Net Income = $120,000 + $18,000 - $19,625 - $31,745 = $86,630

Plus bonus of reduced Principal = $300,000 - $256,625 = $43,375

TOTAL VALUE = $86,630 + $43,375 = $130,005

Investing Elsewhere after 1 Year

Principal after 12 months = $300,000 (no principal paid down)

Interest Paid = $1,750 x 12 = $21,000.00

Interest Earned on Savings = $3,574.00 (using spreadsheet calculations)

Rent Earned = $1,500 x 12 = $18,000

Taxable Income = $120,000 - $21,000 + $3,574 + $18,000 = $120,574

Tax Paid = $32,560.00 (using Australian 2012/13 Tax Tables)

Net Income = $120,000 + $18,000 - $21,000 - $32,560 = $84,440

Plus amount in investments = $45,010 (using spreadsheet calculations)

TOTAL VALUE = $84,440 + $45,010 = $129,450

As you can see from the bolded values above, there is a benefit to paying down a mortgage in this instance, this is also assuming a 15% return from a different investment, which is of course a very impressive return.

I developed a spreadsheet to be able to calculate a number of different scenarios and by using different variables. The spreadsheet also acts over a 10 year period so you can see a longer term approach. It should be noted that inputing the above variables into the spreadsheet, after 10 years, paying down the mortgage is still a better option. Typically, the higher the interest rate, the better it is to pay down the mortgage, however this is a general statement and it depends on a number of investments.

But looking at the spreadsheet, it shows that paying down a mortgage can actually be a very good place to invest your extra money. This means that while you are looking for a suitable investment, it is a good idea to just park the money into an offset account attached to the loan and pay down the mortgage and reduce the interest paid, until you find a suitable investment which can provide you the required return.

Also please note I have only talked about the purely finance benefits of investing or paying down a mortgage, there is always emotional conditions to consider. For example I myself just prefer to be debt free and to be honest always loathe it when I owe someone money, and owing the bank is no different. So this is just another reason why I typically choose to pay down the mortgage as fast as possible.

If you would like a free copy of this spreadsheet, please click this link Spreadsheets 

Landlord paying Utilities!

I have just been reading a forum post about a concept derived by this person in USA. The concept itself is relatively simple, basically charge a slightly higher rent to the tenant, and in return, you will pay all of the tenant's utility bills, i.e water, electricity and gas. 

At first I was a bit skeptical of the concept, because you have no control what the tenant does with their house, so you are taking an expense out of your hands. But reading the description of how it all works, to be honest it sounds like a really great idea, a definite win win for everyone. Below is a bit of a summary of how it all works:

• The property is first to be fitted out with high energy saving light globes, with timers attached to ensure vacant rooms are not left bathed in light
• High efficient whitegoods are installed to ensure electricity is not wasted when using a dishwasher, fridge, dryer etc
• A thermostat is fixed at a certain temperature, say 23 degrees celcius, all year round. The important feature is that this temperature is fixed. Heating and cooling can be a high expense, and you would not want a tenant to set a temperature up to 30 degrees in the middle of winter and waste all of the electricity that you are using.

By completing all of the above, you would hopefully be able to reduce the typical outgoings of utilities by around 20%. So already there is a benefit to the environment which is always a positive thing. 

Now see below for a working example of this situation, keep in mind these numbers are not based on any real scenario.

Initial utility expenses:

 Gas -          $200 per quarter

 Electricity - $300 per quarter

 Water -      $150 per quarter

With the reductions above, the  renovated utility expenses are:

Gas -          $150 per quarter
Electricity - $250 per quarter
Water -      $150 per quarter

The initial rent for the property was $400 per week, but now with all utilities paid for, this number becomes $450 per week (I believe $50 a week is reasonable given all utilities are paid for)

Rent collected initially would be $400 x 52 = $20,800 annually

Rent collected after renovations would be $450 x 52 = $23,400 annually
However there is the $2,200 to be paid in utilities annually
So the net received becomes $23,400 - $2,200 = $21,200 annually (greater than the initial $20,800)

Looking at it from the tenants point of view now

Rent paid initially would be $20,800 (as before) with the addition of utilities of $2,600 utilities
Total paid by tenant to be - $20,800 + $2,600 = $23,400

With landlord paying utilities the total paid by tenant is $23,400 (same as before)

So as you can see, the tenant does not lose out, and the landlord is a couple hundred ahead. But not only is there the financial advantage. There is also the potential dilemma of services being shut off due to bills not being paid, and then the connection fee providing an added expense for the landlord if the tenant is moved on. Also this will provide you with more tax deductions when performing your tax return, the cash paid on the utilities would be tax deductible! Although this may be countered by the increase in income which will have to be declared, however you still not be in a worse position than before so it is definitely a good move.

So I must state that I have not tried this myself, and the numbers above are purely an example, however I believe the practice should work well in theory, and is another way to get a bit creative with your investing to increase the cash in your pocket. One thing that needs to be looked into is the cost of renovating the property to suit the changes listed above, I feel this may run into the thousands, so it may take a couple years before you fully realise the profit from this change.

Disclosure: The article is not to be taken as investment advice and the views expressed are opinions only.  Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.

Rent vs Buy

It is always interesting to see if it is better for people to rent or to buy. It is a big decision, a huge lifestyle choice either way. Financially speaking there is so much to take into consideration, such as seeing what the RBA is going to do with

I have always found it interesting, I think that people rush into the decision to purchase a house way to quickly, I mean, it is most likely the biggest purchase we will ever make, and yet we sometimes dive into it giving less thought to what mobile phone contract we will pick. When I purchased my first property (it was a PPOR) I made sure I researched as much as I could to see if it was the right thing for me to do at the time. It is interesting, at the time I thought I was making the right decision, I guess it has been ingrained into the Australian culture that owning your own house is the ultimate dream, and the sooner you can do this, the sooner you will be content. Looking back, I realise I may have made a mistake, not a diabolical one, but just believe I may have been able to make a better decision if I chose to rent compared with buying.

There are plenty of advantages compared with renting, mainly, typically because the rent paid will be less than the mortgage repayments, it will open you up to a lot more cash flow than if you purchase a property. For example, say you wanted to live in a $300,000 house, you would probably pay around $300 per week in rent. Whereas to purchase the same property, you would be looking at paying around $500 a week in interest repayments, a significant amount less in cash flow compared with renting. These figures do not include the additional maintenance, strata, utilities, rates etc that come along with purchasing a property. The extra funds with renting can allow you invest elsewhere, or to simply have a higher quality of life.

One more big advantage to buying compared to renting, is if you find out that you make the wrong decision with where you live, it can be so much easier to move when renting compared to if you bought the place. Sure the actual moving is a hassle, but apart from removalist and cleaning costs, it is nothing compared with closing costs of selling a property, not to mention the stamp duty required with purchasing a new property. Further on from this, renting will also give you so much more flexibility with where you can live, mainly because it is cheaper than buying, it allows you to live where you want, rather than where you can afford. And if your life status changes, then you can move to suit your new lifestyle. If you start having kids, you can move near a school, if you retire, you can move somewhere quieter. Of course you can still do this when you buy, but the buying and selling costs make it way too impractical. 

An example of the above is my business partner, Lenny, he works near the city, cannot afford to buy a house anywhere within 40 minutes that is also in a good area, so renting turned out to be the best option. It suited his lifestyle, he can be near where the nightlife is, near his friends. And everything works out great, in a couple years if things changed, such as his office changed location, it is not much of an issue to move to somewhere closer again as long as you continue to rent. If he gets married and starts to have a family, again it is not difficult to move into a more family friendly house. 

However just note that this is not only going to focus on the advantages of renting over buying, there are definitely aank 

It is also important to mention that flexibility is not for everyone, there are some of us that want to know where they will be year after year, they want the guaranteed security. When you rent, even with long term leasing, there is always the possibility that your landlord situation changes and the property no longer gets rented out. Whereas when you have a mortgage, you own the place, so there is the security that you will stay put in the same property as long as you want. Finding a new place to rent can be very stressful and frustrating experience, this is the main reason I chose to purchase a property as oppose to renting. 

So above I have outlined the sentimental reasons and touched on the financial advantages and disadvantages associated with buying verse renting. To look at this at a purely financial standpoint, I developed a spreadsheet which has fairly simple inputs to compare purchasing compared with renting.

If you would like a free copy of this spreadsheet, please click this link Spreadsheets 

If you have any other questions or comments, feel free to email us at StreamlineInvesting@gmail.com 

Disclosure: The article is not to be taken as investment advice and the views expressed are opinions only.  Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.

Creating 'Investing'

When I got my first home loan in 2009, the interest rate was nice and low at 5.37% per annum. During 2010 there were several interest rate rises that saw this figure go up to 6.88% by the end of 2010. In just over a year, I was paying more than 1.5% extra interest than when I first got my loan. Now it was not a big problem, because when I first decided to purchase the property, I made sure I looked at the interest rate at the time. I made sure I would be able to still service a loan comfortably even if the interest rate had gone up 3.0%, so I was still fairly comfortable but not happy with the rate rises

A friend of mine recently told me that he needed $5,500 to go on a school soccer trip to the UK. Not being able to work too often with work commitments, he was short on ideas of where to get the money. He already had about $4,000 saved up but the extra $1,500 would have been difficult to make. He was telling me that he would probably just put it in the bank, collect the 6% interest and just do odd jobs around the neighbourhood to try and save up the extra money, which he ended up doing and in the end it worked well for him.

This got me thinking...the banks will give you around 6.0% interest on savings, the interest collected is then taxed at around 35 to 45% typically. So that gives a maximum 3.9% net return on your investment. So people earn 3.9% net return while I am off paying 6.88% interest on my loan. And then it all clicked, instead of people investing their savings at the bank, why don't they 'invest' in my loan instead.

I could act like a "bank", charge my own interest while reducing the amount of interest I paid on my loan. So this is what I ended up doing with a friend of mine. He took $20,000 out of his online savings account and deposited it into my home loan account. Obviously a fair bit of trust is required to undertake this type of investment or you could draw up a quick contract which you can easily find with google. I offered him a 6% interest rate per annum, compounded daily (where the interest earned is tax free). After leaving the money there for a year, look at the comparisons below -

Initial Loan Amount - $400,000

Interest Rate on Loan - 6.88%

Friend's Savings Deposit - $20,000

Interest Rate given to friend - 6.00%

First - by doing nothing, i.e friend keeps his savings in the bank collecting 3.9% net return:

Me - Interest paid on $400,000 for 1 year = $27,520

Friend - Interest earned on $20,000 for 1 year = $780

Now - if my friend deposits money into my account and I pay him interest:

Friend - Interest earned on $20,000 for 1 year = $1,200

Me - a) Interest Paid on $380,000 for 1 year = $26,144

         b) add on interest paid to friend = $26,144 + $1,200 = $27,344

Based on the example above, my friend would stand to make an extra 54% on his interest earnings and I would make a saving of about 1%.

So without too much work, we were both able to make some money, creating a win-win situation for both of us.

How to Finalise the Paperwork When Purchasing a US Property

When signing any official document in America, you need it to be witness by a Notary Public. A Notary Public in the US is similar to a Justice of Peace in Australia and is just as common over there. In Australia, a Notary Public is much less common (they are generally a practising solicitor with around 10 years experience) and MUCH more expensive.

When we had the offer on our first property approved, we needed to get the closing documents witnessed by a Notary Public with both of us present. As both of us work full-time as Civil Engineers and on the opposite sides of Sydney, this posed a problem. Finding a Notary Public that worked outside regular business hours and didn't cost an arm and a leg proved very difficult. A Notary usually charges on a per hour or per document fee and you will be hard pressed to find anyone to witness a set of documents for under $200.

To find a Notary Public, use this link in Australia - http://www.notarylocator.com.au/

The Notary Public we chose works at Chatswood and was very easy to work with. He was very interested in our US Investing and was actually working on investing over there himself. He did not have much experience with the whole purchase of a US property and the forms involved, so it was a bit of a learning process for all of us. One thing that we were very impressed with was his professionalism and thoroughness. This is crutial when selecting a good Notary Public.

When we contacted our Notary for a quote, he asked us to send him the documents via email so that he knew exactly what he had to do. Others simply gave us a figure (sometimes much less and sometimes much more than our Notary) without really giving this too much thought. Our Notary ended up quoting us for $380 for his services.

You need to be well prepared when visiting a Notary and have the following documents ready:

• Two types of photo identification (preferably with your signatures on them like a Passport and Driver's License)
• Proof of ownership of the company or entity that you are purchasing under
• Evidence that your company is in good standing and is active at the time of the purchase

The whole process took around an hour (we had around 12 forms in total that we had to sign and about 6 or so that the Notary had to witness). In the end he decided to charge us only $350 for his work, a bit less than the initial quote, but still a fairly expensive exercise. When we deposited the money into his bank account, we decided to split the difference and sent over $365.

It seemed that both parties were happy with how all this turned out, he asked us interesting questions about our US investing so it was good to get some more critical information from a different perspective. It was a win-win situation that we created, which we believe is important because we intend to purchase several more properties over the next year or so.

If you are from Sydney or are visiting and would like to have an appointment with our Notary, then feel free to email us and we can pass on his information. He is very helpful and we are more than happy to use hime again.

The Importance of Keeping a Budget

One of the most important steps to becoming a successful investor is the ability to save, stick to a budget and invest wisely. It may seem like common sense but the ability to know where your money is coming from and where it is going will allow you to streamline your personal finances. A budget is not just about the simple matter of working out the cash inflow and outflow. You also need to decide which of your expenses are 'needs' and which are 'wants'. It's important to note that it is much easier to cut your costs on the 'wants' rather than the 'needs'.

The first step to analysing your finances is to get a clear picture of where you are out laying your money on a month-to-month basis. Tracking your outflow does not have to be a cumbersome process and can be done any number of ways, such as:

• writing down any purchases greater than $10 (there are a number of mobile phone apps that can help you with this process)
• making a simple spreadsheet to track expenses (NOTE: Send us an email if you would like to receive a free budget tracking spreadsheet)
• checking your credit card and bank account statements

The best way to get a good idea of all of your expenses is to pay for everything with your credit card and then just checking the statement at the end of the month. Another important aspect of setting and keeping a budget is to make it flexible for when your circumstances change. We recommend that you review your budget every 6 months or after you make a major purchase such as a car, house or take a holiday.

There are many free tools online that help you set and keep a budget. We recommend that you try a few of these and don't feel that you have to follow them without exception. You a budget should be tailored to your individual circumstance and be made as complex or simple as you are comfortable with.

Having created your budget, you will be able to see exactly where your money is going and, more importantly, where you can invest it. Here are our top 5 tips for creating, tracking and keeping a budget:

1. Start simple and add more details to your budget once you have a better understanding of your finances.
2. Use the free tools available online
3. Split your budget into categories such as; entertainment, food, insurance etc.
4. Allocate 10% of your monthly income to an investment.
5. Set some financial goals (monthly and yearly) so that you can have something to strive for.

If you would like a free copy of this spreadsheet, please click this link Spreadsheets 

If you have any other questions or comments, feel free to email us at StreamlineInvesting@gmail.com 

Disclosure: The article is not to be taken as investment advice and the views expressed are opinions only.  Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.