As they say, where there are many success stories, there are many MORE tales of failures also.
Failures are because of no step by step strategy, thought process around how one can leap frog from one property to the next. That is why 71% of all individual property investors in Australia, per the Australian Taxation Office (ATO) are STUCK at 1 investment property. They have no clue on what to do next.
While on the other hand, success for our clients has been due to them having a ‘step by step’ Property Accumulation Formula (PAF) plan tailored to your circumstances.
There are odd occasions where people say they have a dream, however unfortunately haven’t proceeded with a step by step plan tailored to their circumstances.
When we met Samuel & Rene, they could have purchased 4 investment properties over a period of time, as they built the savings and had potential equity to tap into with the markets giving them the opportunity to do so.
About Samuel & Rene: Samuel & Rene are IT professionals, who had a family income of $222,000. They have one dependent.
Where they were and what they could do:
Taking into account their existing home debt which was around $550,000, they had the potential to add at least 4 investment properties worth $400,000 each, renting for $380 per week. That is an investment portfolio of $1.6 million in addition to their home:
Investment Properties x 4: $400,000 x 4
Total Property Ownership: $2.27 million
They could do all this whilst maintaining the tax effectiveness of their owner occupied loan and in fact, paying it off as they proceeded to turn this debt into investment debt through an active ‘debt recycle strategy’ proposed in their step by step plan.
Samuel & Rene had paid approx. $20,000 in Lenders’ Mortgage Insurance (LMI) to their bank.
When you have paid significant amounts in Lenders Mortgage Insurance (LMI) to your existing lender, if you refinance to another bank you lose the benefit of the LMI, and if the value has not increased sufficiently you need to pay LMI AGAIN and eat into the equity.
Paying LMI again is only worth it if there are significant equity gains AND you are going to a set up that allows you to maintain the tax effectiveness of your investment loans.
At times it makes sense to NOT refinance.
What they did & where they are now:
Unfortunately like many well intentioned and uninformed first time property investors and despite them having paid $20,000 of LMI, and having one of the most flexible loan products on the market, Samuel & Rene were convinced by someone to refinance their home loan to another lender, and pay another $10,000 to $15,000 in LMI.
So, effectively they have paid anywhere from $30,000 to $35,000 in just LMI between two banks. Assuming an interest rate of 4%, they will be paying an additional $10,800 in interest on $15,000 over a 30-year loan term, totalling $25,800 additional cost to them.
Not only this, they also signed up for a brand-new House & Land Package in a new estate, filled with cookie cutter houses, which will further hamper any future growth prospects and rental demand.
Whereas following the ‘step by step’ strategy to fast track their portfolio, they could have saved up the EXTRA LMI and still purchased 4 investment properties.
Now, they not only have an ineffective loan structure, but…
- they have lost $25,800 over the life of their home loan due to extra LMI
- they are unlikely to see much growth or profit in their House & Land package, and therefore unlikely be able to buy anymore properties or build wealth through property investing for the long term
What is the cost in real terms?
Buying 4 x $400k established properties with a step by step strategy laid out for them over the next four years, with properties purchased in areas with future potential, even with a conservative 4% growth per annum, by year 15 they could potentially have a $2.7million asset i.e. more than $1million in equity (apart from their owner occupied property).
Their decisions will mean Samuel & Rene will become part of that 71% stat of people stuck with 1 investment property, just because of no step by strategy being followed.
If you are wanting to follow a proven system and have guidance from somebody who has done it for themselves and their clients, then request for your Finance Kickstart Call
If you are a first home buyer, upgrader, looking to refinance or to buy an investment property Book a Kickstart Call with the Property Twins Team
Join Our Exclusive Facebook Community: Property Addicts Australia
Note: Please ensure you always seek specific specific credit, tax, financial, legal or investment advice. Property Twins' Blogs are not a substitute for personal and specific, taxation, financial, legal or investment advice