I found this Lazy Budget many yrs ago and always use it as a quick cross reference to see how things are tracking.
10% Pay yourself
A good start but double or triple this if possible.
25% Housing
If phone & electricity is included it could be more like 30-40% of total. But if you own your PPOR it’s less. Note that as you cut out other things this proportion of total expenditure will increase.
20% Food & Drink
About right. Though note all drink expenditure (except milk) is discretionary and this presents a huge opportunity for saving.
10% Transportation
On the low side, especially for people paying off cars. If you use public transport only 10% might be OK.
15% Debt
Should be zero – make the ‘Pay Yourself’ 25% and forget about budgets!
5 % Recreation & Vacations
Reasonable. Can make this 5% go further if you take your holidays in places where you’re buying IPs so your fares come out of the IP budget!
5 % Healthcare
OK for most people, though I must admit my own proportion is nearer to 0%. Higher for people with special needs.
10% Everything Else
If it includes clothing, furniture etc that is reasonable, especially if you’re like me and use the hard rubbish collections (remind me to go to the timberyard to get a top cut for the table I found yesterday!!!). Presents – yeah well I’ll keep these under a few hundred and wrap in newspaper – won’t blow the budget!
But that proportion is a bit lean when you consider other things. Therefore if you’re into budgeting (which I’m not) I’d want to make allowances for:
1. Culture, education and books (or incl in Recreation)
2. Charity (set a minimum amount and increase in future years)
For those who aren’t content to keep working until age 65, this book describes how you can speed up your wealth accumulation through real estate, share investing or your own business. Once you find something that appeals to you, it’s a good idea to turn to more detailed books on the topic.
Making Money Made Simple by Noel Whittaker
If you’re a beginner to investing and can only afford to buy one book, this is the one to get! Written by an Australian, it advocates careful budgeting, household debt reduction, saving, investing, and if you wish to really accelerate your wealth journey, the use of borrowed money.
Retire Young Retire Rich by Robert Kiyosaki
Deals with the importance of replacing your employment income with passive income to become financially independent. There are some useful ratios given that can measure progress towards financial independence. Some of his approaches could be regarded as either high-risk (for instance quitting your job to pursue full-time investing with little capital, rather than remaining at work and saving heavily) or unethical (eg stance towards insider trading).
Rich Dad, Poor Dad by Robert Kiyosaki
The most well-known of a series of books by this prolific author. A story about how the young Kiyosaki was coached by his friend’s wealthy father. There is some doubt as to whether ‘Rich Dad’ really existed (look up John T Reed on the web!) but the book is very readable and despite what detractors say it has given many people the kick they needed to begin their investment journey. His definition of assets and liabilities is interesting; most controversially it does not regard the family home as an asset as it generates no income. Kiyosaki emphasises the need for financial education, saying that traditional schooling equipped people to work for money rather than have money to work for them.
The Millionaire Mind by Thomas Stanley
Probably No 2 on your list, this is a rigorous study of over 700 US millionaires. It describes how they got there (most were self-made), their choice of career or profession, attitudes towards spending and even how they found their spouse. This book is a companion volume to ‘The Millionaire Next Door’ which is also recommended.
The Richest Man in Babylon by George Classon
Possibly the earliest personal finance book and regarded as a classic by many. A fable that well explains the basic principle of investing, ie spending less than you earn and wisely investing the difference.
**Property
From 0 to 130 properties in 3.5 Years by Steve McKnight
Advocates buying rental properties (mostly outside the major cities) that are so cheap that they make money for you from day one. This differs from some other investors who regard capital gain as most important and are happy to lose money in the interim. The book is very strong on assessing the profitabilty of deals and explains different approaches to property investing (eg buy and hold, renovating, lease options, wraps) well. Because the emphasis is on fast financial independence, McKnight emphasises purchasing dozens of (profit-making) properties so that you can retire before your loans are paid out. This differs from others who will either defer retirement until the loans have been paid or hope for a capital gain so they can sell the property at a profit for their retirement nest-egg. However if the quest for positive cashflow forces the purchase of run-down houses in one-horse towns (something McKnight himself does not advocate) then maintenance and vacancy risks are magnified. The book has less information on non-financial aspects of investing (eg choosing a property manager or inspecting properties), but fortunately other books on this list fill the gap.
How to Create an Income for Life by Margaret Lomas
Like McKnight, Lomas advocates the purchase of cheaper positive cashflow real estate to replace your salary when you retire. However unlike McKnight, Lomas is happy to accept a before tax loss provided that this translates to a profit after tax. This is mostly achieved by buying post 1985 properties that qualify for building depreciation allowance. This is fine if you are on a high income and/or intend to keep working for a while, but heavy reliance on tax benefits can cost dearly if you stop working. The merit of Lomas’ approach however is that ‘after tax cashflow positive’ properties are easier to find than ‘before tax cashflow positive’ and that such properties may be more tenantable and/or have better growth prospects. The book also outlines variations in sale procedures between states, something that is important as the author is not hesitant to buy interstate property sight-unseen.
Investing in Real Estate by McLean & Eldred
An American book that’s very thorough and devoid of hype. Once you’ve made allowances for the different terminology, financing and tax arrangements in the US, it is an excellent read with very clear explanations. It advocates a conservative approach based on (i) never assuming sustained high capital growth, (ii) beware of negative cash flows, (iii) don’t over-extend yourself (iv) never over-pay for property. Three very usable approaches to valuing property are also presented. There is also a caution against the uncritical acceptance of ‘nothing down’ deals as championed by another American, Robert Allan.
Ordinary Millionaires by Jim McKnight
A compilation of stories from people who started with little but by hook or crook (in a few cases) became millionaires through investment property. Common threads seem to be (i) borrow to buy as much property as you can to hold onto as long as you can (ii) look for new uses for properties that others may have overlooked and (iii) the importance of acting decisively.
More Wealth from Residential Property by Jan Somers
Explains the worth of residential property when held as a sound long-term investment. Agrees with the Wakelins that it normally doubles in value over seven to ten years and suggests using equity in your own home as a deposit. However Somers advocates the purchase of affordable property and (rightly) points out that both gain and yield emphases can work, and the right mix depends more on the investor’s circumstances. This author has written several other property books, including ‘Building Wealth: Story by Story’ which are personal accounts from numerous investors.
Seven Steps to Wealth by John Fitzgerald
A slim volume that emphasises that the key to capital growth is land, and purchasers should buy inner-suburban properties with large land components to maximise growth. In practice this means houses or duplexes rather than flats or villas. Advocates buying and holding, then selling a couple of houses to pay off debt on retirement.
Streets Ahead by Monique and Richard Wakelin
Unabashed advocates for capital growth for all investors, regardless of circumstance; any other approach will fail! Recommends purchase of well-located inner-suburban properties with scarcity value and archietectual merit that are likely to grow in value over the longer term. Though the approach recommended could produce excellent result for readers on secure middle to high incomes who intend to retire in 15 or more years time, it is not for every investor and the authors should openly acknowledge this. Nevertheless, ‘Streets Ahead’ still has much to offer and is recommended.
The Property Investors Handbook by Graham Airey
This book recommends a capital growth-based approach, with high yields being equated with high risk. The other books reviewed emphasise that almost anyone willing to do the work can become a property investor. Airey is more conservative, with a quiz that almost says that if you are young, on a modest income, don’t already own a house and don’t live in a capital city you need not bother! After page 11 though, it gets better, with the remaining 200 plus pages being very useful. It’s main strength is the breadth of topics covered, which are not included in other books. For example, there is coverage given to commercial property, ‘less traditional’ property investments, leases, property trusts, selling property, the GST and more.
Understanding Investment Property by Nick Renton
A large and thorough volume by a well-qualified author whose professional expertise extends to most facets of investment and accounting. As hinted by the boring cover, large number of pages and refreshing lack of hype, this volume is more serious than some of the other books reviewed here. The book’s main strength is that it takes a balanced approach, pointing out the pitfalls as well as the benefits of property investing and borrowing money. Unlike some property authors who say that shares are risky and not worth investing in, Renton avocates both share and property ownership as part of a balanced portfolio. The investment style advocated is similar to Airey in that Renton favours investing for capital growth and equates yield with risk. However as the book was written in 2000, the yields used as examples would now only be obtainable in outer suburban or country areas. Renton is more conservative than Wakelin or Fitzgerald when it comes to borrowing and the heavy use of negative gearing and other tax deductions. Again like Airey, helpful chapters on commercial property, the GST and more are included.
Your Investment Property by Anita Bell
Be verrry suspicious of everyone, scrimp, save and buy dirt cheap! These seem to be the keys to Bell’s approach. You can almost sense this without reading a word; her books are printed on poor quality paper, the price is kept low and a lot is packed in between its covers. Bell’s main technique is the rapid repayment of loans. Though this lessens tax deductions, she points out that the interest savings are greater and you can buy and pay off your second property even quicker (with two lots of rent helping). What most appealed about this book was its down-to-earth style and thoroughness on matters such as inspecting properties. The financing approach recommended limits the number of properties that can be bought at any one time, but for the new investor her conservative approach is sound.
I come from SW WA and I haven’t even heard of the place so it must be tiny!
I agree with others re independent research.
$100pw @ $65k is pretty poor given the size of the place. $110pw @ 55k is not bad, but my gut feeling would be to favour an even higher return for a place so small unless you think it’s got growth prospects. Also it could be a problem to manage or to get tradespeople out.
Check out country WA towns & cities with populations between 3000 – 30000 and look at sale prices & rents. You might get something with slightly lower yield but vastly lower risk especially if you plan to hold for the long term.
The thing that amazes me is the number of retail properties that just sit there vacant, for years if not months. And there’s not even a ‘to let’ sign in the window of the now derelict property or signs of renovation activity.
The owners must be happy to tolerate the year in year out negative cashflow in the hope of capital gain.
The most just thing would be for another investor to come along, buy it from the owner cheaply and rent the property out.
Beside lock in interest rate, you can have some cash reserve in high interest rate account. If the interest rate rise then you can inject those cash into your home loan.
I’ve wondered about this. If you were getting 5% interest, after tax you’d only just be keeping up with inflation. Not good!
Wouldn’t it be better to put it into an offset account (assuming the interest rate on the associated loan is no higher than a no-frills loan) so you’re reducing the interest component? Or if you don’t have an offset facility put it into the loan, reducing the principal faster and thus the risks of higher rates. You could then redraw if you needed it.
A few months ago saw a group of 3 shops in an established Melbourne suburb up for sale. The sign said $100k pa rent/year.
Residential yields in the area are around 3-4%. So allowing for the higher yields for commercial and the risks of nearby Chadstone expanding, I thought maybe it would go for a bit over $1m.
I stumbled across the auction during my lunch hour. Imagine my surprise when it sold for $2.2m, ie a yield of just 4.5%! Definitely negatively geared even if tenants pay outgoings!
Haven’t been doing much reading on commercial property, but a light industrial type property (eg one that would house a mechanic or panel beater) appeals to me more than retail. Only a gut feeling and more to do with a relative’s past success than any rigorous study.
It all depends on what you want. High long-term wealth or to replace your work income with passive income as soon as possible.
Instead of having an aim of owning $X m of properties, I prefer to have rental income exceeding $X k/year or 50% of total income (work and non-work).
To do this requires me to buy sufficient numbers of properties to do this. While it will certainly not be 130, one or two (such as which most negative gearers own) is not enough either!
So the issue is how to finance all your purchases. The trick is to be able to afford the purchase of sufficient numbers of properties (to provide the required income) while keeping debt and serviceability ratios under control.
For me on a somewhat below average wage, a heavy negative gearing strategy would be one of ‘pay and pray’. I’d have difficulties with getting finance for more than a couple of properties as serviceabilty and overall debt could be a concern. Also paying out to support properties would reduce investments in other areas and tax deductions are less (30 vs 47%).
A very positive approach based on cheap properties would allow the purchase of more properties generating higher income. Serviceability would be good, but LVR would be high, and with little cap growth it might take a while for this to drop. However the very cheapest properties are in tinpot towns without infrastructure like tradesmen and PMs and the properties themselves would not necessarily be good quality, well-located or highly tenantable.
I have opted for a strategy between both extremes, but probably two-thirds towards the positive model with yields around 8-9%, so they are close to neutral. So far for me this has meant well-located highly liveable villas or duplexes in regional cities that are below median price and were built in the last 20 years. Huge subsidies are not required, but if interest rates increase then that can be handled.
I agree that both growth and yield can help the portfolio grow. This will influence where I plan to buy next. If I want a bit more cashflow to prepare for interest rate increases, I might try for 9.5-10% yield next time (particulary as my last only gives 8.3% but in my view was underpriced and has some growth prospects).
My understanding is that the initial trip to an area to buy a property isn’t. However subsequent visits to do an inspection or maintenance are.
>but flights, hotels and car hire are pricey and >will already eat into any potential ‘profit’
I would suggest looking at ways to cut costs while having fun and making it more a holiday.
Let’s look at each of these in turn, based on what I learned from my two trips to WA last year:
Flights: The most expensive part of the trip. The coach or train might be cheaper and you get to see scenery. On one of my trips I found there was a backpacker discount card that gave me 50% off the Indian Pacific. So I cancelled my coach booking, saved myself over $100 and took the train (much nicer, saw the Nullarbor and no stops at expensive roadhouses).
Accomodation: Backpackers will put you up for around $18 per night. Even if you stay 7-10 days, that’s affordable.
Food: For two meals out of three buy from the supermarket (cereal, juice, fruit for breakfast & rolls/sandwiches for lunch). Eat out for tea (<$15 ea).
Car hire: though having a car might have been good to look at more suburbs, I didn’t find it necessary for the properties that I was interested in (well-located in regional cities) as they were within walking distance of the CBD. I did go on long walks through other suburbs though, but it might have been better if I hired a bike. A taxi could have been another option.
Phone calls: Carry the mobile, but only use it to recieve calls. Use a phone card and phone box to make calls if one is nearby.
Overall total daily expenses should be about $40 – certainly no more than $60.
Assuming that the whole trip costs $1000, that’s little more than 1% of the property price and small given that you’re setting yourself for the future and having fun now!
Richmond wrote: ‘heard on the radio this morning Aussie dollar is tipped to go over 80 cents by middle of year’
I hope it doesn’t. My IPs are in regional areas dependent on export income. A higher $AU dollar means less cash flowing in
In contrast, consumers in the city get cheaper imports, which may mean that subsequent interest rate hikes will not dampen down consumer spending or lower our trade deficit.
Re Anita Bell, her IP book is subtitled ‘…. triple your returns in 3 years’.
I must be going blind, but I couldn’t find anything that backed this up in the book apart from paying less interest and owning the property sooner. Also conspicuous is that she doesn’t say a lot about yield or cashflow and that the book is called ‘your investment property’ when four owned outright is probably a minimum for (frugal) financial independence.
Just wondering if Steve has ever done a TV or radio debate with either of the Wakelins? I reckon that’ll be fun viewing ; )
Hi Redwing – most timely for me – Dec 31 is the day to look at the portfolio and see how it’s growth over the year.
I started doing something like that about 7 years ago, and used net wealth as a measure of progress.
About 12 months ago, I started questioning this approach as being a diligent saver and having $20k more than the previous year (for example) did not mean a great deal in relation to my aims.
For those seeking financial independence I realised that the most important statistics were:
1. Passive Income / Living Expenses
2. Passive Income / Total Income
Once 1. exceeds 100% (with an allowance for inflation and future living standard increases) and 2. exceeds 50% then you are close to being financially independent. That is of course if you are not servicing large investment loans!!
Other salient ratios are:
3. Annual Savings / Annual Income
4. Yields on investments (%)
For me 3 has always been very high but my questioning of 4. led me to realise that yields from my portfolio were poor, and that they could be increased through the purchase of property. 4. is also directly linked to 1 & 2 above. The whole aim of investing is to increase these two ratios as quickly as safely possible.
So these days I look at both growth in wealth and other measures such as proportion of income passively derived.
Hi Benno – I also agree about having a portfolio of both yield and growth assets (can include shares or property). You buy the yield assets mainly for your income and can sell some (but preferably not all!) growth assets to reduce debt when you want to retire. Also the growth can reduce your LVR when you want to borrow more, while the yield helps serviceabilty.
‘I bought in an area which has seen steady yet impressive growth over a long period of time.’
I think the idea of using past growth is that you hope this will continue into the future. I’d agree that this might work if the area has some qualities shared by more expensive suburbs around it but still appears undervalued in comparison.
I must admit to being more attracted to regional cities that have had rather POOR growth records over the last 10 years. If the population trends are sound, the area appears underpriced compared to cities of similar size and the property is in a good area (ie near CBD and beach) I think that it has reasonable growth prospects.
‘my problem with that is, even with zero capital growth for the entire term, the investor will own the property outright after 25 years, for about $2k per year!’
This is OK for some people, but what if you want to become financially independent in a time span shorter than 25 years? And why pay $2k per year when you can by a larger number of properties that have zero running costs?
‘aa few years into the term, as the principal is reduced, the property will actually become cashflow positive!’
It might be more than ‘a few’ years, as the principal owing reduces very slowly at first, then reduces quickly past year 15. Paying off the principal is effectively a compulsory savings scheme. If you got into a situation where you couldn’t afford your property expenses (eg loss of job) you’d still have problems as the property is not self-supporting. This is exacerbated by the high reliance on tax deductions and the loss of these if you lose your job.
‘has steve just ignored this to make his way look way better (which it is anyway)’
I don’t think he has.
Negative gearing is making guaranteed losses for a gain which may or may not happen. It carries risks or opportunity costs including:
1. Loss of job means loss of funds to support property and loss of tax deductions = increased financial stress and risk of having to sell up
2. Limit on number of properties that can be bought as serviceability gets poorer with each subsequent purchase (especially if on $30k/yr salary)
3. Any absence of capital growth makes whole idea unattractive
4. Difficulty in making extra payments on loans to reduce principal
5. Negative cashflow means not being able to make extra investments
6. Not suited to low-moderate income earners or those who wish to retire in <10 years.
7. Increased sensitivity to interest rate hikes
Positive cashflow reduces these risks nicely. But positive cashflow can have risks of its own in the current environment, eg:
1. Properties that qualify may be in very small towns with declining populations
2. Properties may be higher maintenance (ie timber/asbestos instead of brick)
3. Vacancy risks could be higher
4. Small towns might not have the population to support LOCAL property managers and tradespeople.
5. More difficult financing in small towns.
6. Less chance of capital growth
My hunch is that by buying in large established cities like Ballarat, Steve’s risks are lower than many later investors who have needed to go to little towns to find the required 10% plus.
I must admit though that I am very attracted to the idea of lowering risks by buying low-maintenance properties in regional cities. Yes the yield might be slightly lower (about 9%) but in my view the lower maintenance costs and long-term tenantability outweigh the small shortfall which can come from other parts of the portfolio (eg dividends) if required.
There was an article recently in API which gave a figure of approx 8.8% yield – this was when interest rates were about 6%, and allowing 2.8% for other costs. Can’t recall what % LVR that was for – 80, 90 or 100%?
Now interest rates are higher, surely the required yield would have to be over 9% now?
Matt & Mel have given good answers, so I’ll answer other bits of your question.
‘do they give different returns?’
Returns comprise both yield and capital growth
Which of these is most important to you? High yield so the property is self-financing and provides you with an income to retire on, or capital growth so your wealth grows and you can borrow against it to buy more properties?
Different gurus advocate different approaches; Steve McKnight is a yield man, whereas Monique Wakelin is a one-eyed growth girl. Some of us attempt both (eg have several high yield properties supporting a growth property).
It is commonly said that land appreciates, buildings appreciate. So if capital growth is your aim, an old (but structurally sound) weatherboard house in a good suburb near the CBD could be OK.
But if you were going for higher rental yields, you need to go for maximum rentability to ensure as near as possible 100% occupancy.
This means a convenient (but not necessarily inner-suburban) location and a building that’s as liveable, tenant proof and low maintenance as possible. A brick & tile villa or duplex in a suburban location or country city would be fine. Air conditioning and a garage or carport would be an advantage.
Most of the value would be in the building and not in the land so long-term growth might be lower, but the rental income should be higher, especially if you buy two suburban properties or four country town properties for the price of a near-CBD house.
As for the new inner-city towers, their rental yield is lowish. I don’t know about their capital growth prospects as the land component for each unit must be small. But the depreciation and other tax deductions are huge, to (partially) compensate for the other losses.
‘anything else to look out for?’
* Body Corporates: If considering a villa or flat note body corporate fees that are an extra cost. But somewhat offsetting this is that your maintenance costs should be lower than a house. But not everthing with a strata title need have a active body corporate; I have a duplex half which has no common areas and no b/c fees.
* Multi-unit developments: I have a bias (prejudice?) against these. If you buy in a complex of 20, there is a high chance that one or two will be vacant at any one time. Your property will not be unique and your ability to charge higher rent will be constrained (no matter how many internal improvements you make). Also you have less control over what you can do compared to if you had a free-standing house or even a duplex.
Also multi-unit developments may have gyms and lifts and attract high body corporate fees.
* Building depreciation allowances: I know Steve is lukewarm on this but I would opt to claim these to help cashflow in the early years, provided 1. you’re happy to keep working, 2. pay enough tax for there to be deductions and, 3. intend to buy and hold. Most important is that the building was built after 1985/87. Books by Margaret Lomas (over?) emphasise this aspect.
I recommend both these books, which you’ll find at almost any reasonable bookshop. If you could only get one, I would go for ‘The Millionaire Mind’.
Most ‘get rich books’ detail an approach that (we hope) actually worked for the author. Reading other people’s stories is educational, but success may not always be reproducible.
In contrast Stanley uses a statistically rigorous approach of simply talking to 700 millionaires to produce a volume of (un?)common sense on the wealth-keeping habits of rich people.
I found that Stanley’s millionaires are not an exact fit with people who are financially independent because he uses a formula based on expected wealth for income and age. Overall they’re more career minded than many of us.
If I was doing a similar study on those who are financially independent, I would want to talk to:
1. Those who have done it by age 40 (or even 25)
2. Those who have achieved it at an older age, but who’ve had setbacks or only decided to start late in life
Also, I would have used a formula based on the percentage of income derived from passive sources, and include examples of self-sufficient hippies who survive on $5000/year jsut for fun!
Nevertheless Stanley’s correllation is good enough for his books to be highly relevant for people seeking financial independence.