Hi all,
Just joined the forum as I'm currently reading Steve's book '0 to 260+ properties in 7 years'.
Is it just me, or is it also virtually impossible to find a property that will pass all 3 tests outlined in chapter 15?!
I'm looking to invest in Adelaide, and can't find a single property (unit or house) that will pass all 3 tests – unless either the rent is enormously over-priced for the market, or you can only earn tiny interest from your money sitting in a bank. Given that i can currently earn 7%pa interest in a certain online bank account, it seems impossible to satisfy the 3 tests Steve recommends.
I've gone from being keen to get started (I have approx $120k capital ready to go, don't currently own any property) to feeling overwhelmed and deciding nothing will work out!!!
Any advice or ideas?!!! I was initially looking to purchase 2 or 3 IPs and keep the loans steady by contributing to the repayments to cover what the rent won't. What are people's thoughts – both recently entrants to the market, and seasoned performers?
Thanks in advance.You can't compare the interest on a bank account deposit to a property investment. There are many more factors with property investment that can increase your returns exponentially.
$120k @ 7% is $8,400 per year profit invested in a cash account.
With a bank (or online) account, you are being paid interest on cash. The cash is eroded each year by inflation at around 2.5-3%, and there is no capital growth on cash.
You are also being taxed on your interest at your marginal rate (say 33% for argument) because it is a profit that you get paid.
Your nett return on your cash may be as little as 3-4%. say; $4,800.With property you can use leverage, tax deductions, on-paper tax deductions, cap growth on the investment (unlike cash), rent to increase returns.
Even if you have a neg geared property that costs you $100 per week from your pocket (god forbid), if the property cost you
$400k, and you used the $120k for deposit and purchase costs, and it goes up by an average 5% per year cap growth,
your return on your $120k is;outlay; $120k plus $5,200 for out of pocket neg cashflow = $125,200.
Property increases in value by 5% = $20,000 (no tax paid as it is on-paper cap growth). That's 6.2% return.If you then include the tax refund due to the neg gearing and on-paper deductions, you could effectively wipe out any neg cashflow, and re-invest the proceeds into the loan tax free. The return goes up even more.
This is very simplistic, and with $120k cash you can invest in more than $400k of property and with better rent returns etc, thus increasing your returns even more.
Steve developed the 3-2-1 model so that investors would have a 'yard stick' by which to measure the reasonableness of profit being derived from a particular deal. It was first shown to members of the RESULTS Mentor Program 12 months ago and this was how Steve explained it to us.
You may not be able to find a deal (at the present time) that will give you a 'pass' on all three criteria but that doesn't mean you shouldn't do the deal. Perhaps you will be comfortable with 2 out of 3 or even 1 for that matter.
Ultimately It will be up to you to determine whether or not the deal 'worth doing' from you own perspective. Don't get too hung up on the model, it's only a tool to help refine your decision making process.
On the topic of the 3 second solution, I have read the book but can't seem to understand how this replaces the 11 Second Solution. I mean, my understanding is that the 11 Second Solution was intended to help you quickly filter a list of potentials, however the 3 Second Solution leans heavily on knowing a whole lot of different figures and therefore would take a while to put together.
Perhaps I have misunderstood, maybe someone can enlighten me?
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