NEW 11 SECOND SOLUTION

Hi Brownbear,

I was also at the seminar. It was pretty good!

I think what Steve was trying to get at was that any property could be made into a good investment. The current annual rent and rent return tells you the purchase price to get in today. Once in, manipulating the figures by doing things like changing the use of the property or throwing in some extras to increase the yield would see increases in property value.

From the above, what I got out of the new, revised formula was that pretty much any property could be made into a positive cashflow investment property (unless you get totally ripped off at the start) or value can be added fairly quickly by making some large OR SMALL changes.

Robert Bou-Hamdan
Mortgage Adviser

M: 0414 347 771
E: [email protected]
W: http://www.mortgagepackaging.com.au

Comments made are of a general nature and should not be construed as individual advice.

© 2004 Mortgage Packaging Pty Ltd

Hi Steve

I was at the seminar on Sunday and did not understand the new 11 second solution either, despite your attempts. With all respect, I wonder if you are making something much more technical and confusing than what it needs to be – getting a bit too analytical.

I am more than willing to try and understand, and have spent quite a bit of time looking at it from different angles. But I can’t help thinking that it is just playing with maths. It is like saying the tail wags the dog!

The three factors – rental income, yield and property value can all be swapped around to work out what any one of those figure are if given the other two. This is simple maths.

BUT, the way I look at it, yield is the end result of rental return income in relationship to property value. You can determine a figure for rental income, just as you can for property values – which will then give a yield value. But other than commercial, or where there are an extremely high percentage of investors, I have never seen or heard of residential property values determined by yield. Isn’t this determined by supply and demand?

If you have two houses side by side, exactly the same, one rents for $250 pw, the other for $300 pw, you are saying that the one that rents for $300 pw has a higher property value! Who would pay this? How many owner occupiers would care about the rental income or yield?

Yield can make properties more attractive to investors (high cash flow +ve), which then has the potential to drive up property values due to demand, but this is the result of the rental income in proportion to property value.

Where I think the confusion lies is the reason for the higher rental income is due to an improvement to the property – which has also increased the property value. It is the improvement which has added value, not merely increasing rental income. (Unless you had a particular deal with the tenant where a higher than normal rental was negotiated – and would be guaranteed to continue permanently with new owner. But if the yield was still the same as the property next door, what is the advantage of paying the higher price???)

Am I on the right track, just looking at it in a simpler way??

regards
Reno

Hi,

I agree that it is difficult conceptually to understand (e.g. your comments about yield and residential property).

In the end, the rules you need to remember are:

1. Increasing annual income; and
2. Decreasing rent return %

are the drivers to increase purchase price.

The maths etc. justifies this is the case.

One last point – you need to appreciate that ALL property is sold on a yield basis (even if it is not advertised or perceived, and even if home owners don’t really care), as yield is the measure of affordability and the acceptable price at which the market buys.

Keep working through it.

Bye,

Steve McKnight

**********
Remember that success comes from doing things differently.
**********

In your example, changing it to commercial would mean that you could rent it for more money. This would mean higher annual rent which would increase the purchase price. A reduced rental return would most likely occur as well when considered in reference to the new purchase price.

I think of it like this:

If I had two properties side by side which were identical but one was renting for 100 p.w. and the other for 200 p.w., I would pay twice as much for the one renting for 200 p.w. if I thought they were a good buy in the first place. People like myself work on numbers. I have no intention of renovating or developing for example. A renovator might prefer the property that rents for 100 p.w. and pay half as much and fix it up so it also rents for 200 p.w.. They would make more money but they had to work harder for it.

Robert Bou-Hamdan
Mortgage Adviser

M: 0414 347 771
E: [email protected]
W: http://www.mortgagepackaging.com.au

Comments made are of a general nature and should not be construed as individual advice.

© 2004 Mortgage Packaging Pty Ltd

Not having attended any seminars, it seems from this thread as if the principles are based on Steve’s new book ie problem plus solution equals profit.

I like to look at a number of scenarios, worst case, medium and best case and prepare a cash flow over a number of years. If I then consolidate the cash flow with my other investments I can see where there might be problems and look at how I manage those risks. I’ve gone for P & I loans so that although I can have a good taxable profit, the effect of the principal payments and tax payments might give an investment a negative cashflow. One of the other advantages of this approach ie worst, medium and best case is you can look at strategies to reduce your worst risks, and improve your returns. Second your bank or lender can see you have done a business plan and that you’re not winging it. My bank manager comes into town periodically so I can say to him where we’re up to etc what might be possible in the future etc. After all if times get tougher, the people with better management have a better chance of prospering.

I can’t say for sure, but from my understanding, there isn’t an actual FORMULA that you can use as a calculation as per the old rule.

Hi guys

I also was at both the October and December seminars and the Ah-Ha moment for me was when Steve first looked at the idea of increasing purchase price by increasing rent.

I am now applying this to one of our IP, so maybe a practical example willhelp some of you understand…

We recently signed new tenants into our house on a 12 month lease at $230 pw (5%, current market yeild). We have now decided to sell, but before doing so I have offered the tenants ducted A/C for an increase in rent to $245 pw. I had an agent give me a rent appraisal before the A/C and then after the A/c was added. The market value had increased by a commensuarate $15,000 (for a $2,500 outlay).

Here’s the trick:
Yes, I value-added, but the new buyer will be an investor, not a home-owner because the lease is in place for 12 months. Investors want return, so I had to find a way to make the return stay around 5% with the increased purchase price. If I hadn’t raised rent, the return would be below market value and even though the house might now be worth that, the investment isn’t.

Hope this helps.

And thanks to Steve for showing us how to make more money!!

Cheers,
scotty3

Hi Monopoly

Yep, I suppose I have – but by accident rather than design! I had intended to hold the property as I bought before the boom on a 7.6% return. The place has increased in value by about 37% in one year. It was an Ah-Ha moment at Steve’s seminar (AFTER the new teants had signed up) which showed me that I’m not getting 7.6% anymore, I’m only getting 5%, so sell the thing and get me money working harder elsewhere!
From there it was a matter of making the sale more profitable, and Steve’s development of the new 11-second rule has been very valuable indeed in that respect! I have targeted the investor market (had no choice), which in this case is still very strong.
Make the most of what you’ve got!

cheers,
scotty3

You’ll have to let us know how the sale goes, because until you get your price, the alleged gain is only theoretical. Keep us posted.

cheers
r