INTRODUCTION

This is not just a book about how to build wealth by investing in real estate. It’s a book about how you can build wealth by investing in real estate.

There’s a big difference. The words ‘property investment’ probably conjure up visions of serious guys in serious suits talking about things like ‘negative gearing’, ‘leverage’ and ‘equity positions’. And for most people, that’s a major turn-off. Perhaps that’s why property investment is one of the best-kept secrets of the financial world.

I’m going to let you in on a few well-kept secrets in this book — and I’m going to try and do it in easy-speak language so that anyone can pick it up and read it. I figure, if Stephen Hawking can write a popular book based on Einstein’s theory of relativity, then somebody ought to be able to do the same for real estate investment! I’d like to give you something you can relate to and, more importantly, use without constantly tripping over a load of jargon and statistics.

The books on wealth creation that are full of jargon and statistics (and there are a few of them around) are often written by academics who may have gathered a wealth of theoretical knowledge but haven’t actually — personally — created any wealth. I’d have to say, I’m pretty much the opposite.

However, Einstein himself said, ‘Everything should be made as simple as possible, but not simpler’. Good rule. So, you will find numbers, charts and technical terms in this book, but they are there to clarify key concepts — not to prove that I can use statistics and big words. We’ll also cover a fair bit of information, but this isn’t one of those ‘everything you never particularly wanted to know about economics’ books. I’m simply going to tell you about the most effective way I know to build wealth.

The book is divided into two parts, with the first part made up of chapters (introducing how to build and grow wealth through real estate) and the second part split into steps — that is, the 7 Steps to Wealth. This is the part that will give you the big picture, explain the key ingredients and, importantly, it will get you focused on the only two things that matter: cash flow and growth.

The strategy is for you to use real estate as a tool to grow your wealth from $100 000 to more than $5 million. There’s a huge difference, and I will give you case studies on people who have done just that.

By the time you finish reading this book, you will have a pretty clear idea of how to maximise your assets, reduce your tax bill, ask the right questions and see through some of the so-called experts in the field. And, perhaps most importantly, you’ll know that you can build wealth.

The principles set out in this book aren’t new. I’ve been using them for myself, and for clients, for more than 40 years — and they work. They’ve given us financial freedom, security and a great lifestyle for ourselves and our families. But that’s just one part of what building wealth is about. For me, it’s also about the potential to make a difference in the world: an opportunity to be all I can be. I think of it as a journey to discover purpose. Welcome to the adventure.

A fool and his money are easily parted

There are really only two reasons why you would lose money in real estate:

1. greed
2. not doing your homework.

Unfortunately, those two things catch out about 95 per cent of ‘punters’.

Greedy investors are usually locked into ‘get-rich-quick’ thinking — and they shoot themselves in the foot in all sorts of ways, such as making false economies, pricing themselves out of the market and selling short of real growth (50 per cent of property investors sell in the first 5 years). As an investor, unfortunately, you also need to avoid being manipulated by the greed of others — and there’s a fair bit of it about in the real estate industry. That’s why doing your homework is so important.

The real estate industry is huge: the residential sector alone turns over nearly $613 billion per year. That’s a lot of property. And it’s often bought and sold less on sound research and decision making than on sentiment, impulse, gut feeling and, of course, ‘expert opinion’. (Multibillion-dollar industries seem to attract ‘expert opinions’ in about equal quantities.)

I forever have people walk into my office saying they’ve bought the property that is going to make them a lot of money, or that they represent a vendor and have a particular property that I’ve just got to acquire if I want to make money. Over the years, I have learned not to get too excited: probably only 1 in 100 of these people has any idea at all what they are talking about.

It’s a bit like McDonald’s restaurants: everyone thinks they can set up a duplicate fast food chain because McDonald’s make it look like such a simple business. It isn’t — and thousands have failed in the attempt.

I’m reminded of this every year, on my pilgrimage to the AFL Grand Final. Everybody has a strong opinion about the game before, during and after it’s played! Our opinions don’t always coincide, and frankly, aren’t always based on sober fact or objective analysis. That’s our right to free speech! Sitting among the spectators, you could well believe that the person next to you would make a far better umpire than the umpire — and certainly a better coach than the guys in the box. The fact is, however, that umpires and coaches have paid their dues in the little league, or with other football clubs, and then graduated through the majors: they are appointed on their track record and judged on their track record, game by game, as their career goes on.

The real estate industry has all the opinions — and not too many of the track records to support them. There are literally thousands of people giving advice about what to buy or sell, and quite a lot of them simply haven’t got a clue! Others, of course, have their own good reasons for giving bad advice. And if you take that advice, you’re probably a fool — and guess what will happen to you and your money?

It sometimes seems like there’s a ‘veil of mystery’ (or perhaps it’s just confusion) over property investment. If you’re going to make good decisions that will build you wealth, you need to look behind two veils:

1. Why are you buying a property?
2. Who is selling or advising you to buy it and why?

There are really only three reasons to buy a property:

1. for your own use — that is, to live or work in
2. for income — that is, to supplement your income in the short term, through charging rent and taking advantage of legitimate tax deductions
3. for capital growth — that’s what builds wealth. Add the dynamic of compound growth where you start with one property and use its capital growth as a springboard for acquiring more properties and you have solid potential for serious wealth.

I travel all around Australia talking to people about building wealth in real estate. A lot of them have already acquired some sort of investment property, and when I ask, they are quick to say: yes, indeed, of course they’re after capital growth. But a few more questions usually reveal that they never in fact considered the capital growth potential of the particular property that they acquired.

They ‘knew’ that property goes up in value, but didn’t realise that could mean anything from 20 per cent down to 2 per cent per annum: in other words, the difference between positive and negative growth in real terms (in excess of inflation). They based their choice of property not on capital growth potential but on all sorts of other factors: they liked the idea of rental income (perhaps guaranteed by the vendor) or tax deductions; they ‘liked’ the property; it was recommended by someone they trusted; it promised low maintenance costs; it looked like a ‘bargain’; or the finance offered to them on the property made it amazingly hassle free.

None of these things make for capital growth. If you’re looking to build wealth, look past them!

The single most important factor for capital growth is land. Land appreciates in value; buildings don’t.

Do you want to know what the single most important factor for capital growth is? Land. Land appreciates in value; buildings don’t. However much you fall in love with a building, however low maintenance it is, however much rent you can charge and however many deductions you can claim, the building will depreciate in value over time.

This is why so many investors get their fingers burned when they purchase new units or townhouses. The land content of their investment may be only 10 per cent of the purchase price, 90 per cent of which is therefore a depreciating asset. This is the best-kept secret of the real estate industry because no developer is going to tell you about it when they can sell 20 units instead of a single house or duplex on the same block of land.

That’s why you need to look behind the second veil: who are the people selling you the property and what are they getting out of it?

The real-estate...