Preface

Right now, as you read this book, someone in the suburb or city where you live is closing a property deal that will make more profit in one lump sum than you’ll earn from your job over the next 12 months.

And if you’re worried about the effects (or after-effects) of the global financial crisis, let me reassure you that more money is made as economies recover from downturns than at any other time in the economic cycle. This is because during the gloom assets are oversold to the point that values become artificially low. Once the economic climate improves, values bounce back, and those who took action at the right time become substantially richer.

We are in a time of unprecedented opportunity. Yesterday I signed the contract to sell a subdivision deal that will make a very handy pre-tax profit of $130 643. Property transactions such as this are happening every day of every week, and unquestionably prove that you can still make a lot of money from real estate.

It begs the question then: why are you working so hard for so little pay, when you could be investing in property and taking life a lot easier? If you think it’s because you’re not smart enough, or that you need to be a brilliant investor to find and profit from the best deals, you’re wrong.

As I’ve outlined in chapter 16, the subdivision deal that released this impressive lump-sum profit wasn’t particularly tricky or complicated. In fact, after reading this book you’ll be able to do deals just like it with your eyes closed.

The answer as to why you are not making a financial killing from property investing right now is because an experienced investor, who knows what he or she is doing, hasn’t shown you how. But don’t worry. That’s all about to change, because in this book I’ve documented the proven knowledge and experience that has seen me purchase well over 130 properties and achieve financial freedom.

Today, my family and I live the lifestyle we’d always dreamed of. My goal in writing this book is to provide you with the knowledge, confidence and motivation so you can too.

G’DAY!

My name is Steve McKnight and I’m a 30-something ex-accountant. My wife, Julie (whom I met while on holiday at Ayres Rock — how about that?), and I live in the eastern suburbs of Melbourne and have two gorgeous little princesses.

You’d pass me on the street and not look twice. Why? Because I’m just a normal-looking guy who got average grades at school, is average at sport (except maybe table tennis, where I routinely thrash my older brother), and, like many approaching-middle-age men, I am gradually becoming more and more ‘folically challenged’.

In fact, life for me would have been decidedly normal, except for one fateful day in May 1999 when, pushed to the brink of an early mid-life crisis and desperate to try something new, I bought my first investment property. Far from being the Taj Mahal, it was a three-bedroom house in West Wendouree, which is a suburb of Ballarat, a regional Victorian town about an hour’s drive west of Melbourne.

It’s hard to imagine given what has happened to property prices since, but all I paid to buy that property was $44 000. You have to understand, though, that West Wendouree is no Toorak, Vaucluse, Balmoral or Mossman Park.

My first investment property

As you can see in the photo, it’s a normal-looking home. However, looks can be deceiving. I later found out that these types of houses were trucked in as two halves, assembled, patched up and then rented out as cheap government housing to people who needed subsidised rent.

If you look closely you’ll see that the chimney is painted. If you’re wondering why, it’s because letterboxes were a non-essential luxury at the time these types of houses were built, and a cheap solution was to spray-paint the house numbers on the chimney.

Over time these houses became privately owned, and modesty prevailed. Letterboxes were installed, chimneys were painted to hide the crude street numbering, paling fences were erected and gardens planted.

Although it looks fairly basic, this property was still one of the better homes in the neighbourhood. Properties across the road had front yards full of weeds, cars (many in different stages of disassembly or decay) and shopping trolleys.

Given this property is not the sort of investment you’d show off to your family and friends as an example of your investing brilliance, you might be wondering why on earth I bought it.

I know it’s early on in the book, but this property demonstrates one of my essential real estate investing rules.

Without wanting to sound like a snob, there’s no way I wanted to live in that property, but that didn’t matter. My only concern was whether or not I could earn my desired financial return.

This is an important point, because the minimum standard of some property investors is whether or not they could live in the house. This attitude is a mistake, because once you become emotionally involved with your investments, you’ll make decisions based on how you feel rather than the financial facts. The fact is that often, after deducting all expenses from the rent, there is a surplus left over. That is, the property is cashflow positive.

Let’s do a little exercise to test your financial IQ. I’ll help you by giving you the first answer.

I’m assuming you said stone masons work with stone, and woodcutters work with wood, but did you say that property investors work with property? If so, you’re mistaken. Property investors work with money, not property.

When you strip away all the emotion, the only decision worth considering is how much money your investment will make, compared to how long it will take to earn it and how much risk there is that you will lose some of your capital. Anything else is an afterthought. Who really cares whether the dwelling is made of brick or weatherboard, or whether the curtains are pulled together or pulled down?

If all this sounds a little strange, let me ask you a question. Is your current home better, or worse, than the house you previously lived in?

Irrespective of whether you rent or own, as we get older and have more money, it’s usual for us to improve the quality of the houses we live in. However, what I’ve found is that increases in rent don’t keep pace with appreciation in value. Talking investor-speak for a moment, as value increases, return diminishes. That’s why income-focused investors are better off buying more basic houses as opposed to fewer elaborate homes. That is, you’ll get a better income return by owning two $250 000 properties than one $500 000 property.

In summary, as we age we gain a bias away from the sorts of properties that are the best investments. This means that relying on emotion, rather than financial skill, will cost you money.

Don’t worry if you’re confused by what I just said. We’ve got the whole book ahead of us and by the end you’ll be much more advanced than you are now. The key point is not to get emotional about the property you purchase.

MY ORIGINAL MASTER PLAN FOR FINANCIAL FREEDOM

Owning one or two West Wendouree–type investment properties wasn’t ever going to put me on the BRW Rich List, but that was never my aim. My master plan was to own enough houses that I could substitute the salary I was making as an accountant with the rental income earned from the property. If I could do this then I’d have an income for life and never have to work again.

It took five years of hard work and sacrifice, but with the help of my wife and my business partner at the time (Dave Bradley), on 9 May 2004 I achieved the goal of having $200 000 in annual passive income and a million dollars in the business bank account. I was financially free.

‘That’s great Steve’, I hear you say. ‘But $44 000 properties don’t exist anymore, so can you still apply your strategies today?’

I concede the game has changed. Property prices are a lot higher and the effectiveness of individual strategies ebbs and flows. But one thing is certain: as long as people need to live in houses, you’ll be able to make a profit from real estate investing, provided you buy problems and sell solutions.

And that’s what this book is all about — how you can identify the right investing solution to transform everyday property problems into enough profit to become financially free forever.

Along the way we’ll debunk many of the myths that are kneecapping your potential, and by the end of chapter 29 you’ll be well on the way to a brighter financial future.

But enough of the chitchat, it’s time to make a start....