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Concept Testing, one, two three . . . .
Recently, I was asked by a business acquaintance to give
him some written insights into property investment. This
occurred because of real estate agent interest in his
property, stimulated by a very likely zoning change.
I would be most grateful to those with greater experience,
if they would offer critique, comment and/or correction
to what I've written for him.
I have tried to keep it simple, sometimes with wordy
reasons, because of the potential for mis-understanding
of acronyms, and general PI jargon.
How well have I done? (please be nice)
My Dear Friend
No one learns "financial intelligence" at school because
it's not taught there. Nor is it taught in most homes. Many
people shirk from the straightforward steps to achieve it
because they listen to the opinions and advice of the
wrong people: the people not taking those steps. This
includes "experts" who write newspaper columns.
What follows applies to most everyone. Excluded are
those who earn millions of dollars a year. They probably
don't need it.
The key to financial security is "passive income." For
most people, their job (JOB = Just Over Broke) income is
a factor of their time and effort, combined with their
skills and experience. I.e. if such people don't "have a
job" or don't "go to work," then they don't get paid. This
applies to self-employed trades persons, as well. Their
income is directly proportional to the physical hours that
they work.
Passive income is something one earns, whether or not
one gets out of bed in the morning. Every year, a passive
income earning asset may require it's owner to work for
3-4 weeks, but earn for 52. Conversely, an active (wages,
salary) income earner works for 49 weeks to earn for 52!
However, passive income generation is not something-
for-nothing.
There is some knowledge, effort, investment and risk
involved. Your modest experience as a Gisborne property
investor tells you this. The good part is that, as
knowledge increases, the risk and effort usually decrease.
Secure passive income usually involves money invested
in a tangible asset that:
can be bought with a modest deposit;
can be owned by the investor;
nearly always earns an income;
may produce a tax loss;
appreciates in value;
provides tax deductions;
provides borrowing collateral.
For most people, land and buildings furnish those things.
And, for most people, most all of the time, selling land
and buildings is the wrong choice. The major advantages
with secure passive income arrangements are:
the investment risk is low;
the investor has total or significant control over the investment;
there is no investment manager taking a part of the earnings;
the investment's paper value figure rarely drops below the original investment figure.
Insecure passive income usually involves money invested
in a bank or other lending institution (or worse, in the
share market or mutual funds), i.e. in an intangible
"asset" that:
can not be bought with a modest deposit;
often can't be owned by the investor (unsecured creditor);
usually earns an income;
can not produce a tax loss;
often depreciates in value;
provides no tax deductions;
rarely provides borrowing collateral.
The major disadvantages with such insecure passive
income arrangements are:
the investor carries all of the risk;
the investor has no significant control over the investment, if any at all;
the investment manager always gets paid well, even if he investor makes a loss;
the investment's paper value figure can drop below the original investment figure
E.g. In bad times, mutual fund holders can find
themselves paying tax on the fund's earnings, yet receive
no personal income in that year!
So, if your present, about-to-be-rezoned property has a
value of $1M and you lease it, you have:
ownership of the investment;
an income (or at least the potential therefor);
an appreciating asset;
the potential for a tax loss;
tax deductions available;
borrowing collateral.
To buy a replacement place of habitation, you could
mortgage the land-to-be-leased, realising, (depending on
the current level of indebtedness, if any), say, half a
million dollars. That's a cost of leasing, because you're
doing what's called, 'withdrawing your equity.' That
leaves the leasing business to pay back the loan. All such
loan interest payments (not principal) are tax deductible.
Depending on the level of borrowings and lease income, a
possible consequence of such a mortgage is the leasing
business may be earning less than it's overheads. If so,
that produces a tax loss, which can be offset against
income from other sources, perhaps through a LAQC or a
Trust.
Meanwhile, you buy a property (or properties) to live in,
paying cash (a strong bargaining position) with the
prospect of having no private, non-tax-deductible
mortgage interest payments.
As time passes, the (bare) land being leased by 'your'
leasing business will go up in value, decreasing the
debt/equity ratio. You may then be able to re-value and
borrow more money (using the increased land value as
collateral) to erect a building (or other improvement) on
part of the land. This produces a bigger rental income.
This can be the beginning of a trend towards bigger
things.
All this is not devoid of risk, but careful planning,
appropriate structures, commensurate borrowings and
planning provision for times of reduced occupancy (with
reduced income) helps mitigate the risks. With careful
attention to structural and operational arrangements (such
as using a good property manager – a very rare
commodity), such arrangements can be almost entirely
hands-off and provide for your retirement. It can also
provide for your posterity, ranging from higher education
costs to collateral for borrowing for a dwelling.
Good luck with your deliberations.
(c) Copyright S P Spiller
Recently, I was asked by a business acquaintance to give
him some written insights into property investment. This
occurred because of real estate agent interest in his
property, stimulated by a very likely zoning change.
I would be most grateful to those with greater experience,
if they would offer critique, comment and/or correction
to what I've written for him.
I have tried to keep it simple, sometimes with wordy
reasons, because of the potential for mis-understanding
of acronyms, and general PI jargon.
How well have I done? (please be nice)
My Dear Friend
No one learns "financial intelligence" at school because
it's not taught there. Nor is it taught in most homes. Many
people shirk from the straightforward steps to achieve it
because they listen to the opinions and advice of the
wrong people: the people not taking those steps. This
includes "experts" who write newspaper columns.
What follows applies to most everyone. Excluded are
those who earn millions of dollars a year. They probably
don't need it.
The key to financial security is "passive income." For
most people, their job (JOB = Just Over Broke) income is
a factor of their time and effort, combined with their
skills and experience. I.e. if such people don't "have a
job" or don't "go to work," then they don't get paid. This
applies to self-employed trades persons, as well. Their
income is directly proportional to the physical hours that
they work.
Passive income is something one earns, whether or not
one gets out of bed in the morning. Every year, a passive
income earning asset may require it's owner to work for
3-4 weeks, but earn for 52. Conversely, an active (wages,
salary) income earner works for 49 weeks to earn for 52!
However, passive income generation is not something-
for-nothing.
There is some knowledge, effort, investment and risk
involved. Your modest experience as a Gisborne property
investor tells you this. The good part is that, as
knowledge increases, the risk and effort usually decrease.
Secure passive income usually involves money invested
in a tangible asset that:
can be bought with a modest deposit;
can be owned by the investor;
nearly always earns an income;
may produce a tax loss;
appreciates in value;
provides tax deductions;
provides borrowing collateral.
For most people, land and buildings furnish those things.
And, for most people, most all of the time, selling land
and buildings is the wrong choice. The major advantages
with secure passive income arrangements are:
the investment risk is low;
the investor has total or significant control over the investment;
there is no investment manager taking a part of the earnings;
the investment's paper value figure rarely drops below the original investment figure.
Insecure passive income usually involves money invested
in a bank or other lending institution (or worse, in the
share market or mutual funds), i.e. in an intangible
"asset" that:
can not be bought with a modest deposit;
often can't be owned by the investor (unsecured creditor);
usually earns an income;
can not produce a tax loss;
often depreciates in value;
provides no tax deductions;
rarely provides borrowing collateral.
The major disadvantages with such insecure passive
income arrangements are:
the investor carries all of the risk;
the investor has no significant control over the investment, if any at all;
the investment manager always gets paid well, even if he investor makes a loss;
the investment's paper value figure can drop below the original investment figure
E.g. In bad times, mutual fund holders can find
themselves paying tax on the fund's earnings, yet receive
no personal income in that year!
So, if your present, about-to-be-rezoned property has a
value of $1M and you lease it, you have:
ownership of the investment;
an income (or at least the potential therefor);
an appreciating asset;
the potential for a tax loss;
tax deductions available;
borrowing collateral.
To buy a replacement place of habitation, you could
mortgage the land-to-be-leased, realising, (depending on
the current level of indebtedness, if any), say, half a
million dollars. That's a cost of leasing, because you're
doing what's called, 'withdrawing your equity.' That
leaves the leasing business to pay back the loan. All such
loan interest payments (not principal) are tax deductible.
Depending on the level of borrowings and lease income, a
possible consequence of such a mortgage is the leasing
business may be earning less than it's overheads. If so,
that produces a tax loss, which can be offset against
income from other sources, perhaps through a LAQC or a
Trust.
Meanwhile, you buy a property (or properties) to live in,
paying cash (a strong bargaining position) with the
prospect of having no private, non-tax-deductible
mortgage interest payments.
As time passes, the (bare) land being leased by 'your'
leasing business will go up in value, decreasing the
debt/equity ratio. You may then be able to re-value and
borrow more money (using the increased land value as
collateral) to erect a building (or other improvement) on
part of the land. This produces a bigger rental income.
This can be the beginning of a trend towards bigger
things.
All this is not devoid of risk, but careful planning,
appropriate structures, commensurate borrowings and
planning provision for times of reduced occupancy (with
reduced income) helps mitigate the risks. With careful
attention to structural and operational arrangements (such
as using a good property manager – a very rare
commodity), such arrangements can be almost entirely
hands-off and provide for your retirement. It can also
provide for your posterity, ranging from higher education
costs to collateral for borrowing for a dwelling.
Good luck with your deliberations.
(c) Copyright S P Spiller
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