Monday, November 20, 2017
Sunday, November 19, 2017
Much of the day in the life of an investor is spent managing information.
In trading, there is no shortage of information.
It is possible to track the opening and closing of all major world markets courtesy of cable television.
The internet has brought the dealing desk into the home with vast information resources available via the pc.
It is possible to subscribe to magazines from all around the world.
You can even get the Wall Street Journal on line as it is delivered to homes in New York.
With property, you can get valuations, opinions, articles, magazines and even watch full TV shows about it all.
It’s a deluge!
There is a problem with all this information.
It is largely irrelevant to the professional trader.
None of it is provided by people who actually trade for a living (this includes stockbrokers who are commission sales people).
New traders are unfortunately prone to trying to find as many sources of information as possible.
As a consequence of this, they suffer from two conditions.
The first goes under the trader’s euphemism of – paralysis by analysis.
Too much information causes the trader to literally seize up and be paralysed into inactivity.
The second problem with information overload is more insidious and probably more important.
Humans have some unique idiosyncrasies when it comes to processing information.
The first is related to our confidence in our decision-making ability.
Assume that we are trading NWS and we receive a single piece of information and we are asked to rate how confident we feel about any outcome based on the limited information we have received.
We can, for the purpose of the exercise, assign an arbitrary weighting to our confidence.
Say that with one piece of information we are 10% confident.
If we get another piece of information our confidence may go to 20%.
This is reasonable as we have doubled the information we have received so our confidence level doubles.
However, if we get three sources of information our confidence level instead of going to 30% will suddenly rocket to 90%.
Traders become disproportionately more confident with a slight increase in information.
An additional traders’ quirk applies to how we process more and more information.
The more information we get the more we focus on the superfluous and the irrelevant.
What has been found is that traders become less accurate the more information they receive.
Whilst it is psychologically comforting to feel that your opinions are validated by the opinions of others, there is overwhelming evidence that you will not get rich listening to the advice of others.
The new trader needs to manage the information they are receiving to ensure that they are receiving information that is only pertinent to them and is not tainted by the opinions of others.
Traders need raw information, not recommendations.
Within this management of information, the technical trader needs to be addressed.
Technical analysts may initially assume that because they use purely price to dictate their actions then they would be immune from the problems of information management faced by other traders.
Unfortunately for the technician, this is not true.
You will remember that the least important question that I posed in my introduction was what is your entry trigger?
Entry triggers comprise far less of the trading process than people realise.
Most technicians ignore this and scour the globe looking for the one perfect indicator, many buy software packages containing what is called the ultimate indicator.
Many homebuyers are, not surprisingly, happy couples looking to fly the old family nest and establish their own, new residence.
Without second thought, they go through the motions of acquiring said house in their blissful state of togetherness; often putting both names to the mortgage contract.
But there are some important considerations when it comes to arranging finance as a couple, particularly if the property you are purchasing happens to be an investment, rather than your own home.
Firstly, your property investment debt and ownership structures will largely determine how viable your portfolio is from a cashflow perspective.
Given that optimising the growth of your investments and holding them within a manageable cashflow environment should be your priority, this is something you want to get right on the money!
And what can be the biggest cashflow curse for property investors, or any working Australian for that matter?
You guessed it – income tax and increasingly for small home based business owners, GST.
Now there is no “one size fits all” when it comes to structuring investment debt, hence we always recommend you consult a professional mortgage broker who is experienced in property investment.
However, there are some general principles that can be applied consistently to ensure your loans are established correctly.
This list will get you started…
1. Get the ownership structure right
This is important from both an income tax perspective, as well as an asset protection one when we talk property investment.
There are numerous pros and cons with all ownership structures, so careful homework needs to be carried out at this stage and a long term strategy, based on your investment goals, must be the basis of your purchasing decisions.
You can buy an investment property as a single entity, a couple, in a joint venture arrangement, within various trusts and companies and as tenants in common.
Seek advice on this from a properly qualified and experienced advisor before you even start looking for the perfect property investment.
2. Seek professional counsel and take it!
Leading on from the above, property investment comes with a steep learning curve.
It is not, and should never be approached in the same vain as, the purchase of your own home.
It requires sound logic and careful analysis of all the facts and figures.
You can attempt this on your own, or you can engage the services of an appropriate expert, along with others who will become part of your investment advisory team – you’re A team!
The role of your financial adviser/accountant specifically, is to provide guidance as to the best way to acquire and hold your investment properties, according to your current situation, needs and future plans.
3. Make the highest income earner the beast of burden!
Okay, that might not have come out quite right!
But the premise is to set up your loan in the name of whoever earns the most money.
The interest paid on your investment debt is tax deductible, so you want to maximise that deduction wherever possible.
If need be for serviceability, the lesser income earner can be a guarantor to the loan.
4. What’s the worst that can happen?
If every cloud has a silver lining, it also carries the promise of rain.
Any type of property investment ownership and debt structure carries risk, so you need to heed those risks and account for them in your planning.
Consider what might happen if one of you becomes ill and can no longer work, or other factors that are out of your control transpire against you, such as;
- Property market highs and lows
- Long-term tenant vacancies
- Regulatory reviews (particularly unfavourable legislative changes like those recently discussed around negative gearing)
- Other economic and social upheaval
It is always possible to prepare yourself for a rainy day with the right type of debt structure.
We usually recommend cashflow buffers for clients, particularly those who are highly geared, so they have a back up should one of their “worse case scenarios” play out.
At the end of the day, any type of investment that requires a large debt to make it possible comes with risk.
The key is to mitigate the risk, while optimising your returns and establishing those safety net contingency plans to ensure you always stay nicely afloat.
Get the first step right – by setting yourself up for success with careful foresight, planning and honest evaluation of where you are today and where you want to be tomorrow; particularly if you’re taking someone else along for the ride!
We’ve all had those sliding-door moments when we wonder what things would have been like had we chosen another path in life.
Deep down it’s because we know that the right path makes all the difference.
It’s the one that leads to success, whereas the wrong path can lead to a cul-de-sac – a kind of going around in circles – or worse, you can end up at a dead end.
So you may have wondered from time to time which path you’re on.
The right one or the wrong one?
Here is how you can tell….
Here are 5 signs you’re on the right path
1. You feel alive.
When you’re on the right path, you’ll feel engaged with what you’re doing and it’s often described by some people as feeling “alive”.
Your skills are being put to use and you feel like all of you is participating fully in what you’re doing.
It’s the opposite of going through the motions.
2. You’re stimulated.
Boredom is never a good sign and when you’re on the right path you will feel intellectually challenged.
There will be a feeling that you’re growing from the experience and learning as you go.
3. You’re going somewhere.
Being on the right path doesn’t necessarily mean it’s smooth, but it does have to lead you somewhere.
You can’t expect wins all the time but you should expect progress, whether that’s learning from a mistake and moving forward or notching up career wins.
4. You have a high tolerance threshold.
If you’re doing what you should be doing you’re unlikely to fly off the handle or take things to heart.
You’re not quick to snap at people or become intolerant because your values are aligned with what you’re doing and you’re not easily rattled.
5. You have the bigger picture in mind.
But here are 4 signs that you’re on the wrong path
1. You hate what you do.
It’s impossible to love what you do all day every day, but most days should be enjoyable.
Life is not meant to be a paradise, but it shouldn’t always be hard or boring either.
If you’re regularly dissatisfied, it might be time for some soul searching.
2. You feel frustrated.
Perhaps you find yourself getting frustrated over little things and don’t know why?
Maybe superficial things annoy you?
It could be a sign of a deeper anger at where your life is heading.
3. Your skills aren’t being used.
Think about what you’re good at and then ask yourself whether most of those skills are being used.
If they’re not, then, chances are you’re not on the right path.
That’s because research consistently tells us that human beings get the most enjoyment out of life when they’re doing what they’re good at.
4. You’re jealous of others’ achievements.
If you find yourself unable to celebrate your friends or colleagues’ successes then that’s an alarm bell.
When we’re not following our own dreams we find it very hard to watch other people follow theirs and succeed.
A little bit of jealousy is normal, but if it stops you from being happy for the person then it’s a sign that something is wrong.
The above points aren’t an exhaustive list, and at the end of the day, only you can really know if you’re on the right path.
But the thing to remember is that the right path shouldn’t be easy.
Often it won’t be but it should engage you.
And those are two very different things.
An important demographic trend that is affecting our property markets is the changing way we use our homes.
While it has been highlighted in the latest Census results, the trend of multiple generations living under the one roof was discussed in the latest McGrath Report.
Here’s what they had to say….
Affordability, the rising cost of living, our ageing population and increasing multiculturalism is driving a revolution in the way we use our homes.
Multi-generational living – where more than one generation of related adults live together, is on the rise as more extended families look to help each other both financially and in terms of lifestyle, particularly in our major capital cities where housing and the cost of living is most expensive.
We are also seeing a strong trend in home owners seeking ways to make money from their homes, with Airbnb enabling a major new trend in principal places of residence being used for short term letting.
Changes to state planning laws are also allowing more people to build granny flats alongside their homes to accommodate family members or rent out to tenants.
In Sydney, the prevalence of people living in multi-gen homes has increased by 31.8% in just 10 years.
According to the latest Census, 129,885 grandparents, aunts, uncles, cousins and siblings were living with a core family unit of mum, dad and children compared with 98,564 in 2006.
In Melbourne, multi-gen living has increased by 37.7% and in Brisbane by 39%.
Among the most common scenarios is grandparents living with the core family unit due to their need for care or to help raise their grandkids to save on child care costs.
Families are also living together simply to pool funds, with a typical mortgage now requiring 39% of household income to service compared with 25% in 2001.
As our population continues to age, we expect this trend to grow within our marketplace.
Multiculturalism is also playing a significant role in the rise of multi-gen living, especially given increasing immigration from Asia where it is common for several generations to share a home.
And kids aren’t leaving home…
Another common multi-gen scenario is 20-somethings remaining in the family home to save money for a place of their own.
In 2016, 18% of Sydneysiders aged 25-34 were still living with their parents up from 17.6% in 2011, according to Census data.
In Melbourne, it was 16.5% of people aged 25-34 still living at home and in Brisbane it was 12.5%, up from 12% in 2011.
This trend is being driven by housing affordability, with young people struggling to save the deposit for a first home and often needing the bank of mum and dad to make up the difference.
According to CoreLogic, 62% of young Australians living with their parents said they could not afford to move out.
Within the property market, multi-gen living has resulted in greater demand for larger homes with teen retreats, self contained in-law accommodation and granny flats in the backyard.
With the cost of living increasing, more Australians are also looking for ways to make money from their homes.
Airbnb has provided a substantial platform, with many owners leasing their homes while they are away on holidays. Almost 200 countries have Airbnb listings and Australia is among the top 10 destinations and top 10 sources of outbound guests.
Read more: McGrath Report.
If you think that property investment expenses end once you buy a property, you’re wrong!
Investing in property requires an ongoing input of cash – and sometimes it’s when you least expect it.
Don’t get me wrong: investment grade property will also deliver more than enough capital growth to make up for the expenses along the way.
The key is to make sure that you have the cash flow to hold your portfolio over the many years that it takes for the magic of compounding to work.
So to ensure that you don’t get blindsided by unexpected expenses, here are five that you’ll encounter along your investment journey.
No one wants a vacant rental property on their books but it can and does happen.
Why is that?
Well there’s often a period of time between when one tenant shifts out and the next one shifts in.
During that period – that’s right – there will be no rent coming in to help pay the mortgage.
Also, in soft rental market conditions – which you will experience during the course of your property ownership – you may have a vacant property for a few weeks.
And there really is not much you can do about it…
Apart from ensure that you are charging rent that meets the current market conditions and that your property is looking the best that it can.
That’s why it’s vital to have a financial buffer – such as a line of credit – to see you through any vacancy periods.
2. Maintenance and repairs
As the saying goes, land appreciates and buildings depreciate.
In fact, buildings will someday become obsolete because, while they’re built to last several lifetimes, they’re not meant to last forever.
The way that you slow down your property’s aging process is to keep up with all maintenance and repairs.
This could be reactively when something, like a stairwell railing, needs replacing.
But it should also be proactive, such as replacing carpets and window coverings, to ensure that your property is in tip-top shape and will attract tenants more easily as well as a higher rent.
Of course, maintenance and repairs cost money – and sometimes there are emergency repairs which need to remedied immediately.
So you better make sure you have the cash available to do so.
3. Owners corporation or body corporate fees
In Australia, the number of people living in units, villas and townhouses is increasing every year as our population grows, but we’re not growing any more land.
Every owner of a strata-titled property also belongs to the complex’s owners corporation or body corporate.
Every quarter, each owner pays administration fees to the company that manages the scheme.
They also have to fork out money for the scheme’s sinking fund, which is used to pay for the upkeep of the building as well as other expenses.
The costs of these fees can vary widely depending on the age of the building, but $1,000 a quarter is probably about average.
So you need at least $4,000 a year just for these fees – not to mention council rates and water charges.
And, alas, money doesn’t grow on trees.
While your owners corporation fees will also pay for building insurance premiums if you own an attached dwelling, if your investment property is a house you’ll need to stump up for building insurance yourself.
Other insurances that you’ll need to pay for include landlord’s insurance, which covers you for such things as malicious damage by tenants or visitors as well as loss of rent.
The premiums for landlord insurance can vary so make sure you ask around to get the best deal for your individual circumstances.
5. Property management fees
As I’ve said before, it’s always a good idea to get a professional to manage your investment properties.
That’s because property managers are aware of all the relevant legislation that regulates the rental market.
Plus, it’s always wise to keep a business relationship with your tenants, which many private landlords struggle to do.
Like any professional service, however, there are fees to pay for property management.
The first one is a percentage commission of the weekly rent to manage the property on your behalf.
So, if your weekly rent is $500, the amount that lands in your bank account maybe about $450 to $460 once the property management fee is deducted.
The second and third expenses are lease renewal and letting fees.
If you have a long-term tenant, but one who only signs a six-month lease, then you’ll have to pay for the property manager to renew the lease every six months.
And that can be about half or one week’s rent.
That’s one of the reasons why it’s a good idea to have 12-month leases on your investment properties – unless you’re considering selling.
Likewise, if your tenant shifts out, then you’ll need to pay one or two week’s rent for your property manager to relet your property.
Don’t get me wrong: these fees are appropriate for professional property management and will ultimately save you money in the long-run.
You just need to be aware of them so you’re not caught financially short.
The main point is…
Investment grade properties should grow in value significantly over the years that you own them.
But that doesn’t mean that you won’t have to put your hand in your pocket from time to time to hold them.
The key is to make sure that you have a financial buffer in place to make those expenses as pain-free as possible.
Wages grew by just +0.48 per cent in the September 2017 quarter, to be +2.01 per cent higher over the year.
Superficially this looks like a bit of an improvement, and at least it can be said that wages are growing a bit ahead of the rate of inflation. Just.
And including bonuses the annual increase was a slightly more upbeat +0.7 per cent for the quarter, and +2.2 per cent for the year.
However, the result this quarter was pumped up by the minimum wage increase, and you can see in the chart below that a number of industries (such as accommodation & food) how this inflated the quarterly numbers.
Over the year the industries with the most robust wage price growth included healthcare & social assistance (+2.7 per cent), arts & recreation services (+2.7 per cent), and education & training (+2.4 per cent).
On the other hand wages growth in the mining sector (+1.2 per cent) remains very low, as it does in professional, scientific, & tech services (+1.5 per cent).
Annual wage price growth in the private sector remains super-low at just +1.86 per cent, with wage price growth in the public sector some way higher at +2.37 per cent.
The public sector index has outpaced the private sector since the peak of the resources construction boom.
Resources states slow
At the state level Queensland, Victoria, and Tasmania each recorded wages growth of +2.2 per cent, while New South Wales (+2.1 per cent) also recorded reasonable growth.
However, there were considerably weaker results in Western Australia (+1.3 per cent) and the Northern Territory (+1.4 per cent).
Western Australia recorded the fastest pace of wages growth through the mining boom, but is now coming back to the pack.
Overall, while it’s positive to note annual wages growth moving a bit higher and ahead of the rate inflation, in reality this was a very soft result which missed expectations, having been puffed up by the minimum wage increase.
Not much in the way of pre-Xmas cheer to be found here!