05 Jun Guaranteed wealth creation – Michael Sloan
Michelle called in with a question about renovation so we seek advice from Michael Sloan, the author of “The Formula To Successful Property Investing”. He also talks about benefits of debt reduction.
Kevin: Michelle is on the line. G’day, Michelle. How can we help you?
Michelle: Hello, Kevin. I just have a question because I’m renovating my bathroom. I have a small farmhouse, and I have a very, very small area – 1.2 only – to put a vanity in. It originally had a single vanity basin. For resale, should I go to a double vanity?
Kevin: If it looks out of place and it’s going to clutter, I would think it’s not going to add a lot of value. Just be very, very careful when you’re in those small spaces.
Michelle: Thank you, Kevin. It’s a bit tricky to know what to do.
Kevin: It is.
Michelle: Thanks, Kevin.
Kevin: Good on you, and all the best with your renovations, too.
Michelle: Thank you. Bye-bye.
Kevin: You have to be so careful with what you do about renovations.
I’m talking now to Michael Sloan. Michael is the author of The Formula to Successful Property Investing.
A point that you make in the book, too, Michael is that you need to understand what the market really needs before you start doing your renovation.
Michael: Yes, you have to have a look at how much you’re spending and how much difference it’s going to make. Sometimes you can spend $40,000 on a renovation and get an increase in value of $60,000 or $80,000, but other people, especially when they’re trying to renovate for profit…
I would say over the years, most people who I’ve met who try to renovate property for profit haven’t made any profit. But when you live in it, that’s a perfect time to do the place up slowly and add value.
Kevin: Yes, we spend a fair bit of time talking about renovations, and we have a couple of really good renovation experts who will constantly tell us that they’ve seen so many people coming to what looks like a very, very easy method of making money and they’ll just lose money hand over fist.
I have to say that I’m actually one of those people who have actually lost money through renovation because in the early stages, we didn’t really know what we were doing. It just looked so easy – and it is so easy sometimes to buy a property and think “I’ll just turn this over.”
Michael: I did it myself a long time ago, with my first property I ever bought.
Kevin: Yes, there are some valuable lessons there.
I want to talk to you about something you wrote in your book, and that is the guaranteed wealth creation strategy. Tell me about that, because anything that has a guarantee on it, my ears prick up straight away.
Michael: Yes, Kevin. This one is guaranteed because what I was talking about is debt reduction. It’s something that doesn’t get a lot of press, but paying down debt is a guaranteed way to create wealth.
There are a lot of really good calculators – we have some on our website and there are some on other websites as well – where you can just throw around some figures and run some numbers to see how much money you’re going to make just by $50 or $100 a week going into your mortgage.
Mortgages are the biggest debts that people carry. That’s why you have to be very careful buying a negative property. We’ve talked about negative or positive properties before. People buy negative cash flow property that might cost them $100 or $200 a week, but what they don’t do is look at the lost opportunity of what they could have done with that money.
How much will that make you by putting it into your mortgage? Because that money is guaranteed wealth creation.
Kevin: It requires discipline, doesn’t it? And it requires the plan and the focus for you to be able to do that.
Michael: Sometimes you just have to get off your backside and do a bit of work as well. When I do presentations, I’ll say to people “Who would change banks for $11 a week, if they saved $11 a week?” and no one will put their hand up.
But $11 a week on an average mortgage could be 0.25% on your loan. Over the life of the loan, that will save you about $17,000. But if you leave your payment as it was before, it actually saves you about $40,000.
Kevin: Do you think we’re lazy, or we just don’t do the sums and work it out?
Michael: Often, we don’t do the sums. But take a week off work. It is a lot of trouble moving banks, so take a week off work if you need to.
What I say to people is call a couple of banks that you don’t deal with and ask them to pitch for your business. When they give you the best rate, as long as the loan is equal, go back to your bank and tell them you want them to match it.
What they’ll often do is stay within about 0.25% above what you have, because they don’t think you’ll bother moving for that much money. But if you do the sums, make sure you know how much it’s worth to you, especially if you maintain the same payment because that’s when it really turns into tens of thousands of dollars.
Kevin: Those small fish can be very, very sweet. As an example, a few years ago, we tried an exercise where we just opened a bank account and we thought “We’ll just put $50 a week in.” It’s just an automatic payment; it just goes in. We just left it, didn’t touch it. It was amazing how quickly that grew, and it became a substantial amount of money. Sometimes the small, sweet fish can really add up to be quite big.
Michael: Yes, there are lots of small things you can do to save money on your mortgage. One of them is have a look at how much money your kids have in their bank, and what are they earning – a couple of percent interest? Even older children saving for a deposit to buy their own place might have a bit of money in there and they’re getting next to no money and they’re paying tax on it.
Put it in your offset account against your loan and pay your kids the interest rate you’re paying on your home loan. It’ll be two or three times what they’re making.
Kevin: Great advice from Michael Sloane. Michael is the author of the book The Formula to Successful Property Investing.