Let us Look at a Financial S.M.A.R.T Goal Example
S = Specific
You Want To Acquire Three Investment Properties Paying:
$500 Per Week Rental Income
Gate Keeper 1 - The Banks
If you want to own four investment properties, it is extremely likely that you will have to deal with the banks and their rules. Furthermore, Banks have different rules to one another.
Mortgage literally means 'Death Pledge': 'Mort' from Latin, and 'Gage' from old French.
This is why it is a good idea to engage with an independent Mortgage Broker who is not bound to the rules of one banking institution.
Remember, you make the Death Pledge or acquire a Mortgage to the Bank - not to the Mortgage Broker.
The Mortgage Broker is an Intermediary between you and the bank. You shop for a Mortgage once or twice in your lifetime: a Mortgage Broker Shops for Mortgages everyday.
Mortgage Means Death Pledge
You should try to structure a mortgage that lets you control the bank, rather than having the bank control you.
Debt mapping your future property portfolio is a way to create a blue print plan, to maintain the integrity of your future tax deductions.
The following is General Advice - This is not Personal Advice as it does not take into account your personal circumstance.
Do not act on the following considerations without talking to us first as there are multiple variables below which may not be applicable to your situation.
The basic debt mapping formula is as follows:
i.) Ascertain the nature of the property over its life time: is it a Principle Place of Residence or an Investment Property? Or will it be both?
The 'True' Family Home is where you want to be when your Grandchildren are born and where you wish to die.
This is the debt you want to pay down first.
Up to this point, you should maintain the integrity of your debt by paying interest only OR paying interest only and depositing any surplice into a genuine 100% bank offset. (Be careful, some banks call their accounts Offsets but they are not true 100% offsets).
Note: The first home you buy and live in may thus become an investment property; in this circumstance, it is in your best interest to maintain the integrity of the future tax deduction with reference to this loan, in order to offset against future rental income.
ii.) Do not rush into paying down any debt until you have established the long term nature of the debt.
Ask yourself these questions:
- Is this debt tax deductible now?
- Will this debt become tax deductible in the future if my circumstances change?
- If I pay the debt down now, could I lose tax deductions in the future if the family home becomes an investment property?
Be 100% sure of what is tax deductible debt and what is not tax deductible debt.
Understand that the pieces on the board move. What is not tax deductible debt today may be tax deductible debt tomorrow, if your circumstances change. For example, if your family home becomes an investment property.
It is important to understand where the pieces are moving to as well as maintain the integrity of future tax deductible debt.
Debt Mapping over the long term is complex.
However, a visual debt mapping process can make the complex seem simple and act as a blue print when growing an investment property portfolio.
iii.) Beware Of False Authorities!
If you are buying a house to live in, traditional advice from Accountants and Mortgage Brokers is 'Pay down your debt as it is not tax deductible'; On face value this appears to be prudent advice.
However, this could be terrible advice if the house you are living in is a transitional home whereby this house will one day become an investment property.
As soon as you upgrade to a new bigger home, with more bedrooms and a bigger garden, the house that had been your principle place of residence - becomes a investment property and accordingly, that rent is taxable income.
On an investment property the interest from the loan would have been tax deductible; but in this instance, there is no loan!
On the Advice of your Accountant and/or Broker, you paid the loan down to zero.
Now you have a investment property producing rent that is 'assessable' income for taxation purposes with no deductions on the loan because there is no loan!
However, there is a loan on the new bigger house you are moving into and because the new home is a principle place of residence the interest is 'not' tax deductible!
Because your Mortgage Structure was misdiagnosed by your Accountant and Traditional Mortgage Broker, you now have rent that is taxable and a home mortgage which is not tax deductible!
You are worse off!
You are also paying more tax because of your lack of understanding of the tax system in Australia.
Your Financial Situation was misdiagnosed by your Accountant and Traditional Mortgage Broker, because they did not delve deeply enough into your long term goals.
It does not have to be that way.
Ian Streeter the Founder of Bull and Bear Financial Strategies, is a Financial Planner and a Mortgage Broker as well as a members of the Tax Practitioners Board.
At Bull & Bear Financial Strategies we diagnose mortgage structures taking into account the long term purpose of your property in relation to tax deductions.
The first question we will ask is:
- Will the Family Home at any time in the future become an investment property?
If the answer is yes, the next question will be:
- When this principle place of residence (family home) becomes an investment property, will you be buying another house that will be the home where you die?
While you are growing an investment property portfolio, you only want to pay down your true non tax deductible debt - not your tax deductible debt.
The key to this is delving into your long term goals and objectives and ascertaining the long term purpose of the house you are living in.
- Will the house you are living in one day become an investment property?
If you live in a property for 5 years then rent it for 15 years, you need to maintain the integrity of the debt to offset against future rental income.
What do you do if you have the money to pay off your family home but you know in the future it will become an investment property?
Instead of paying off the family Home you can put the money into an Offset Account. If you have a $500,000 loan and you have $500,000 in your Offset Account, the interest charged on the loan should be zero. (We can check that your bank has a true genuine 100% offset product)
In this situation you are paying no interest and you have maintained the integrity of your future tax deductions.
Gate Keeper 2 - The Government
When building an Investment Property Portfolio, Investors utilise tools like depreciation and tax deductible interest, to improve their financial position. The Government also drives a different tax agenda. The Government has the ability to throw the whole system into turmoil, intentionally or unintentionally. When you are an investor you need to watch the Government and legislation that hurts investing.
Warren Buffett says 'Only invest in companies a fool can run because one day a fool will be running that company.'
When considering proposed legislation and how that will affect investors the above quote can be seen to be applied to Governments as well as companies.
Gate Keepers 3 - The Australian Tax Office and the Office Of State Revenue.
The Australian Tax Office deals with Income Tax, Capital Gains Tax, deductions and Offsets.
The Office Of State Revenue deals with Land Tax and Stamp Duty. Taxes like Stamp Duty can vary from state to state.
Due diligence on taxes are necessary when investing in Australia.
Gate Keepers 4 - Lawyers, Conveyancers, The Land Titles Office & The Settlement Houses.
If you intend to grow a property portfolio you need a good Lawyer or Conveyancer. When buying and selling property there are a great deal of moving parts, like some banks discharging mortgages and other banks taking possession of mortgages. There are also title deeds changing ownership and usually occurs in a high paced high energy settlement house.
Gate Keepers 5 - Real Estate Agents & Buyers Agents
When you deal with Real Estate Agents, remember who they work for. Be careful of Real Estate Agents promising to sell your house for big money then repeatedly giving you lowball figures which serves to condition you into taking a lower price. This is called 'Conditioning The Vendor'. Negotiation is a skill you should practice if you want to build a property portfolio. If you are not good at negotiating, take someone with you whom you trust and who has experience at negotiating. Do your research when you buy a property. Look at the demographics, the location and how close the property is to shops and transport. If you buy an investment property, you need to do due diligence on the suburb's rental vacancy rates. You should also look at the growth of the property over the last few decades.
Gate Keepers 6 - Leasing Agents
This is something you need to get right!
You need a good Leasing Agent to rent your investment property out to tenants.
Be aware that a traditional Agency often asks for two personal references and checks two years of rental history.
A serial Killer can give you two personal references and two years of rental history - after they have been convicted.
What you need is a Veda check; this is a credit check on the individual who wants to rent your property.
The credit checks goes back seven years. Get the prospective tenant to sign a statutory declaration stating that a Lawyer has neither cleaned their credit file nor removed defaults against their name in the last seven years. If the person has a credit file that is riddled with defaults then that is a indication of the person's character. If your tenant stops paying the rent, you will still need to pay the mortgage. A series of bad tenants could potentially bankrupt you. We believe that a Credit Check reduces your chances of losing rent and having to go to the rental tribunal. If your traditional leasing Agent does not want to get a Veda check then insist that they do. Make it a condition of them renting the property. Just as when you submit for a loan with a bank, the first thing the bank does is check your credit record; the bank does not ring your two best friends and check your rental history!
There are only two rules to investing money:
Rule number one: Don't lose money
Rule number two: Refer to rule number one
You cannot afford to have tenants not paying rent.
Upfront due diligence when screening tenants will pay dividends long term if you can constantly secure good quality tenants.
If your goal is four properties all paying $500 each, you have not reached your goal if you have four properties and tenants not paying rent.
Now, with due diligence you have built the stone foundations around your goals. Its time to start building on your goal.
M = Measurable
What do you need to do to achieve your goals hourly, daily, monthly and annually?
In conjunction to this question, what do you 'not' need to do on an hourly, daily, monthly and annually basis?
We need to establish Routine and Constancy.
Routine and constancy are arguably the two most important factors when it comes to achieving goals.
'Hard work beats talent when talent fails to work hard.'
Measurable and consistent behaviour is what achieves goals time and time again.
You need to embrace the grind, the mundane and you need to keep showing up and stay constant.
This is the time your feelings need to be in check. It does not matter if you are happy or sad, sick or healthy, weak or strong you just need to keep showing up and pushing forward a little bit at a time.
Inch by inch you keep pushing forward, because those inches add up and those inches are the difference between failure and success.
Every day we try to get a little better and a little better.
This is how you build companies - an inch at a time, always pushing forward.
Tony Robbins has a acronym called CANI.
It means :
Continuous And Neverending Improvement
A = Attainable
You are probably not going to be a world class Sumo Wrestler and a World Class Sprinter at the same time.
These goals move in different directions and require different physical attributes.
Both goals require a tremendous time commitment.
Setting too many goals at the same time can have the same result as setting no goals
Most people do not have enough goals but there are those 'A' Type Power Alphas who set too many goals.
Examples of this are:
Work 15 hours a day to get noticed to get promoted
Doing one hour of cardio a day
Doing one hour of weight lifting a day
Getting a black belt in Karate
Only cooking health meals with no carbs for dinner
Helping your son with his Maths every night
Helping your daughter with her English every night
Taking your son to Soccer three times a week
Taking your daughter to Ballet four times a week
Starting a home-based business and devoting 4 hours a day after work
Hosting a book club dinner every Wednesday night.
You need to funnel your goals.
Setting too many goals can have the result of setting no goals at all.
The main places people set goals are as follows:
Charity / Social / Religious
How to avoid goal fatigue
You need to rank your goals:
As a guide we recommend that you take on no more then 2 major goals running concurrently.
You goals need to be built! Once they have been built they need to be maintained.
If you have multiple goals, then it is a good idea to stage them.
There are countless experts who espouse the virtues of diversification when setting goals.
Diversification can be good when investing.
But if you have a very big goal, like quitting your job and setting up a company, you should know the statistics.
According to Bloomberg and Forbes, 8 out of 10 Businesses Fail.
Ask yourself, what are those 2 Business Owners doing successfully that others are not?
Those two business owners who made it, have not evenly diversified their goals.
Those two business owners have obsessively built there companies or businesses taking extreme ownership of the challenge. Thus, when starting a business ask yourself, is this something that 8 out of 10 business failures would do? Or is this something that 2 out of 10 Business Winners would do?
When people talk about the importance of Balance they are probably not talking to high level Athletes, or Steve Jobs or Bill Gates or other Super Successful People.
Realistically, the bigger the goal, the more it will drain your focus from other areas in your life.
Before becoming disheartened, remember that most goals do not take forever;
It does not take forever to become a Surgeon or a Lawyer;
It does not take forever to build an investment property portfolio.
Goals like this take a season of your life.
Many good goals will take years of persistence, determination and belief.
Your Attitude Determines Your Altitude
R = Realistic
When you set a big goal be careful who you tell.
Not everyone will be supportive. People love to label people with the extent of their own ambitions.
Some goals are best not shared!
The reality of your goal depends on your reality.
When someone tells you that you can't be a Doctor or you can't be a Lawyer and you can't build an investment property portfolio!
The reason could be because they never became a Doctor or a Lawyer or built an Investment Property Portfolio.
Apple Fired Steve Jobs in 1985.
People get it wrong!
People may get you wrong!
People may not believe in you to achieve what you say you will achieve.
You Need To Be the Thermostat Not The Thermometer
The Thermostat sets the temperature in the room.
The Thermometer moves up and down with the temperature in the room.
When setting goals you need to believe they are realistic. Others don't need to believe, but they will when you achieve your goal.
T = Timebond
If you have a goal that you want to achieve then take action today.
Email or call 0450 077 442 and tell us about your goal.
Your goal does not have to be financial it just has to be a goal!
We would love to hear from you...
Lets put some structure and timeframes around those goals.