The Morello Matrix E Book DPS

8/19/2019 The Morello Matrix E Book DPS

1/36

Your guideto propertyinvestment

TheMorello

Matrix


2/36

Our initial connection was a shared interestin property- particularly as an investment-and the use of rising values and equity tobuy more property.

I’ve known a lot of property investors, manyof them very successful. But Andrew was a

bit different. For a start, he was in his mid-twenties when I met him. He’d already built asizeable property portfolio off his own back,from a running start.

Where many young people talk about gettingrich quick, Andrew talks about the long game.

Andrew is a fan of hard work, owning qualityproperties and being a good landlord.

His approach to investing in property isvery smart and structured, but he does notpretend to know it all. To get the best deals,he uses a broker; for tax - related decisions,he uses accountants; and for repairs andalterations, he finds the best tradies.

In short, he has a financial approach forhard-working Australians to build propertywealth and attain financial self - sufficiency.

Property is a good way for average Australians to build wealth, and I reckon theMorello Matrix is an excellent way for peopleto start on their own property portfolios.

Good luck,

ForewardI met Andrew Morello duringthe filming of Channel Nine’sThe Apprentice show in 2009.He was immediately likeableand I picked him as someonewho was motivated, intelligent,hard-working and would gofar in life.

Foreword from Mark Bouriswritten by Mark Abernethy whichwas thought to be completedduring initial discussions.


3/36

My parents own a service station in Moonee

Ponds, which Dad has run since 1974. Dad

opened Morello Motors at seven o’clock each

morning and he worked hard to ensure that

everything ran well. He believed that blood,

sweat and tears would give him a successful

business and everyone who worked with him

knew that the customer came first.

worked at Morello Motors from the age of 8

until I was 13. Dad used to pay me $5 a day

and there wasn’t much sitting around. When

you worked for John Morello, you worked at his

pace and to his standards.

When I turned 13 I took a part time job at

sports store Hanna’s Sports, in Moonee Ponds.

By the time I was 14 I had branched into the

realm of blue light discos building these dances

nto large events at major nightclubs.

During my mid-teens, my father started taking

me on the rounds of his rental properties, for

maintenance and repairs.

he views presented in this guide is general in nature and does not represent financial product advice. You should always seek independent legal and financialdvice before making a decision in relation to a financial product. Yellow Brick Road Finance Pty Ltd ACN 128 708 109, Australian Credit Licence 393195.ellow Brick Road Wealth Management Pty Ltd ACN 128 650 037, AFSL 323825.

I became interested in all things property from

valuations and rental yields to hot suburbs and

renovations that create more value. My older

brother, John, was also auctioning a lot of

properties. I became hooked on property and

started doing night school while still at school.

I bought my first property two years after starting

work, through my brother’s real estate firm.

And here I am today. I am not yet 30, have

auctioned more than 1,000 properties and I own

a large portfolio of investment properties mostly

in Sydney and Melbourne. I also invest in small

start-up businesses and entrepreneurial ideas.

I believe in having a strong, open, positive

attitude and I challenge myself every day.

I decided to put some of my thoughts about

property into writing, as it interests many peopleand also scares people. My approach to property

is that caution is a good thing, but fear is not.

Bear in mind when I use the word ‘property’,

I am referring to residential property.

TheMorelloMatrix


4/36

Savings

Compound interest Volatility

Money from scratch

BusinessShares Property

In this book, I’d like to share with you my method to convert cash into assets. I call it theMorello Matrix. The asset game I play is property and to do this, I use every tool in thetool box, as well as borrowing. Let’s look at some of the ways Australians invest to createwealth.

Simply saving your money might not be the bestway to build wealth.

Here’s why:

Let’s say you put aside around $100 per week.

You would save $5,200 per year. With interest ofaround 4 per cent per year, you would have saved$62,432 at the end of 10 years. Over a decade,

you earned $10,432. Long-term inflation is around3 per cent in Australia, as this is the increase in

goods and services in the economy.

Owning a business can be a great source ofpersonal success. In fact, there are over two

million businesses in Australia, of all shapes andsizes, and 12 per cent of them are opening andclosing each year.

A private business can create income for theowners and, over time, help to set up a network

of customers and businesses building upgoodwill.

The drawback is that in private business, youcannot take your investment out when you want

cash. Also, there is no guaranteed businessvalue and your selling options can be limited.

Remember that business ownership isn’t foreveryone.

In this book, I advocate a different approachto savings, business and shares. It involves

borrowing, property and equity, and it’saccessible to everyday Australians.

Savings accounts offer compound interest, and I’min favour of it.

Compound interest earns money on your interest.The longer you leave your investment, the greater

the compounding interest effect - and the wholepie grows bigger.

As a rule of thumb, if your savings are growing at8% p.a. your money doubles every 10 years.

That’s why experts encourage us to startsaving early.

Volatility is the variation of price over time. For shares,

because their price is valued every second of everybusiness day, the value may vary many times every

day. For some people this volatility is unnerving.

Generally speaking, the higher the growth, the morevolatile the ride. Because they are valued every day,

shares tend to be more volatile than owning direct realestate.

Wealth occurs in two key waysFirstly, when you work, you produce cash-flow. The second way wealth occurs is when youown an asset which produces income and increases in value.

Turning cash-flow into asset wealthEssentially, you can use your cash-flow to invest in assets to build more wealth. This is calledinvesting. At some point, you no longer have to work for cash - the assets do the work for you.This is the key to all investing.

Shares are a popular investment option, but are morevariable than property.

Owning shares can be both lucrative and unpredictable. Almost four out of ten Australians own shares or arepart of a managed fund that invests in shares. (Nearlyeveryone who has superannuation is invested in shares!)

When you buy shares in a publicly listed company youown a small portion of the company, so you achievegrowth via both the market price of the share (shareprice) and the income it may distribute each year(dividend).

I call thisTheMorelloMatrix


5/36

$120K

$90K

$60K

$30K

$0

Simply saving your

money might not be thebest way to build wealth.

40months

8 12

Savings

16 20

Let’s say you put aside around $100 per week. You would save $5,200 per year.With interest of around 4 per cent per year, in 10 years, you would have $62,432.Over a decade, you earned $10,432. Long-term inflation is around 3 per cent in

Australia, as this is the increase in goods and services in the economy.

Here’s why:

24 28 3632 40 44 48


6/36

Understanding risk

Low risk

Savings

ResidentialProperty

Think of a spectrum: at one end is low risk, such as a government-guaranteed savings account or term deposit. At the other end is investingin a business, which carries no guarantees.

In between is property, where you can have downturns, but if you holdyour property for at least 10 years you may very well see growth. Slightlyhigher risk than property are publicly listed shares, which are volatile.

All investments operatein a risk environment.

Publiclisted shares

Private

unlisted shares

Highestrisk

Higherrisk

You can get some great advice onhow to invest. I will get into that later.The point is that all investing has risk.

Your job is to know what the risk is,see what you can do about it, andwhether the returns compensate forthe risk. If you avoid risk altogether,you won’t make money.

H i g h e r r e t u r n

Higher risk


7/36

Pros

R

e s i d e n t i a l p r o p e r t y a

d v a n t a g e s

Easy to understand: everyone understands what

makes a house comfortable and desirable. Anyone can

gain expertise.

Use debt to buy: there is a very competitivemortgage market for property in Australia.

Ability to add value: property can be improved

with your ideas and hard work, and tradies who

specialise in niches.

Income generation: if you have the right property,

someone will pay you to occupy it, and help you

service the debt.

Growth in value: over the last 10 years, most

properties in Australia’s east coast cities have doubled

in value.

Tax-effective: investment properties can have

most of their costs deducted against the rental

income, including interest on the mortgage,

maintenance, repairs, rates, management fees andasset depreciation.

Security: lenders will secure further loans against

your property, which makes property a good

wealth creation tool.

Cons

9

R

e si d en t i al pr o p er t y d i s a d v an t a g e s

Deposit: buying your first home can be tough

because the lender typically wants you to save

a minimum of 5 per cent of the deposit. To avoid

lenders mortgage insurance a deposit of 20 per cent

is needed.

Cash-flow: rental income doesn’t always cover

the mortgage repayments and you must fund the

shortfall from other income.

Stamp duty or land taxes: in most states, you pay

a stamp duty or a land tax to the government before

ownership of a freestanding property.

Portfolio over-weighting: if you own your family

home and one rental property, your wealth is

probably concentrated in one asset class and one

sector (residential). This can be a disadvantage if the

property market slumps.

Landlord responsibilities: when you rent a property

you have the legal liabilities of a landlord. This

responsibility doesn’t suit everyone.

Liquidity: you may need cash at a time when

the property market is down or there are few

or no buyers.

Let’s face it, in Australia we loveproperty because we can see it andtouch it. It’s part of our everydaylives in a tangible way.


8/36

Preparing for the matrixIn this book, I advocate a differentapproach to savings, business andshares. It involves borrowing, propertyand equity, and it’s accessible to

everyday Australians. I call it the MorelloMatrix. Before I take you through theelements of my system, there are someconcepts you need to understand.


9/36

Local intelligence experts

Do your homework so you know an opportunitywhen it appears.

To play the property game, start by immersing yourself in everything property:- Look in real estate windows.

- Subscribe to agents’ newsletters and catalogues.- Look at the property pages in your local newspapers and attend open houses

and auctions.- Talk to agents and auctioneers. Become a collector of intelligence on property by

following an area, street, or type of house.- Do your homework so you know an opportunity when it appears.

- Start by getting online and subscribing to the factual statistics and reports that exist.

There are plenty of sources for real estate information freely available these days.

Advice

Attitude

I consult the experts for advice. With property, there’spaperwork and tax considerations that can be a big

headache if things go wrong. On the next page is a listof the experts I use to make the journey smoother.

Aim to have a winning attitude. Many people fail to makethe leap into property because they can think of manyreasons not to buy. Practice turning that around: start

thinking about how you’re going to build wealth. Focuson what the property must have, the rent it could earnand what price you’re willing to pay based on suburb

averages and rental returns, also known as rental yield.


10/36

Mortgage broker

Accountant

Depreciation expert

Conveyancer

Business approach

When you get into the guts of the Matrix, there’ll becomplex decisions around valuations, refinancing and loan

types. It’s good to have an experienced broker guiding youthrough these decisions and giving you options.

When you own investment properties, you interact with thetax system and an accountant helps ensure you are paying

your taxes. This is crucial when you use negative gearingand particularly when you sell an investment property.

This is often an accountant who can calculate thedepreciation of your assets such as washing machines

and dryers. This can be done quickly and accurately bya professional, ensuring you get all your tax deductions

right.

Many people use a solicitor to do their conveyancingbut when you use a dedicated conveyancer they are

experts in just one thing: property transactions.They’re usually faster too.

When you buy a rental property you become a landlord. You have customersand your product is accommodation. Get yourself into this mindset; don’tbuy an investment property and then baulk at the responsibilities of being

a landlord. Also remember that your investment property has to include thethings that make it better to live in – not the things you personally like. Don’t

fall in love with your investment property - treat it like a business.

Experts and attitude


11/36

Take theleap

into property

nlocking the matrixI’d like to make a comment aboutcommitting yourself to property

and wealth.I speak to a lot of people who areafflicted by two mortal enemies ofwealth creation: “umm and aah”.They second-guess themselves;they find reasons not to act; theylisten to barbeque chatter andscare themselves silly. They findincredible excuses not to go toauction or return a mortgagebroker’s phone call.

I am reminded of the saying bythe once richest man in the world,

Andrew Carnegie. He said: “Mostpeople will lose more to indecisionthan they will to a bad decision”.

There is nothing wrong with beingcautious; there’s nothing wrongwith checking and rechecking.However I see millions of dollars infuture wealth going begging whenbuyers get cold feet.


12/36

Don’t let fear

rule your wealthcreation dreams

Andrew Morello


13/36

“Don’t fall in love with your investmentproperty, treat it like a business.”

Andrew Morello


14/36


15/36

1 B o r r o w

Find a low-costloan to buy a

house that willincrease in value

over time.

2Rent out your property and

use this income to repay theloan, cover the property costsand allow growth over time.

Rent

Phase A


16/36

3Equity

Generally your property will increase in value over time. Equity is thedifference between what your home is worth and how much you owe on

it. Once you have built up some equity, use it to buy more property.

4Understanding negative gearing and capital

gains tax is critical to the Morello matrix.

Tax

Once you create a ladder of income, you

need to protect it with the right tenants,insurance and owner’s equity via good

cash flow management.

Phase A


17/36

1BorrowGetting your first property

To start the matrix, you need to get onto theproperty ladder. Every portfolio starts with the

first property. This is usually your principal placeof residence, although some choose to buy an

investment.

The first property is important because it’sa chance to build equity. Once you have one

property, you can start to build on that foundation.

Save for a deposit: The first step is to get a deposit, usually5-10 percent of the purchase price plus costs.

Live with mum and dad while you save the deposit.

Map it out: Establish what you want to buy, the likely cost of it, andhow much your lender will require as a deposit.

Make a budget and stick to it.

Do your homework: find out the actual amount you will need forstamp duty and conveyancing fees.

Use a high-interest savings account or managed fund, that isseparated from your daily account.

Set a deadline on your goal of saving this money.

Cut out luxuries and bank the savings, such as coffees, eating out and exoticbeers or wines.

Accept it will take some sacrifice.

Get a second job, and save all the income from that job.

The golden rule is to pay yourself first, direct from employer into an account thatdoesn’t have a plastic card attached.

Look for overtime, do the worst shifts, then bank the extra pay.

Pay a regular amount into your savings, which you don’t have easy access to.

Start with a plan:

Ways to save

BORROW | ROUND 1

How much as a percentage of my income should I borrow?The first step is to work out how much you can afford to pay out each week.Then, find out through your mortage broker how much this will allow you to

borrow. Add your deposit to this amount, and this will tell you the maximumprice you can afford to start the shopping process! It is important to know yourbudget before you start, so you don’t fall in love with a property and then try to

stretch your money to buy it.

Phase A


18/36

Buying your first home is where you startto use the power of borrowing.

Borrowing means converting a smallamount of cash into an asset worthmuch more than your cash could buy.Borrowing funds gives you the power tocontrol a much larger investment. This

is also known as leverage, lending ormortgaging.

$500,000

$50,000Deposit

Building equity

$450,000loan amount

TIP: To help you pay the mortgage, buy a two-bedroomproperty and take on a flatmate to help your cash-flow.

Home valueat purchase $500,000

Deposit $50,000

Loan amount $450,000

Being attractive to the banks

Loan approval or serviceability Serviceability looks at your personal financial factors, such as total income from all sources andmonthly expenditure, as well as other outstanding liabilities, like credit card debts and other loans. After tallying these amounts, the lender will calculate the final loan amount.When you’re looking for approval for a loan, use the serviceability calculators online to see whereyou fit.

These are the typical items factored into your loan serviceability:

Income: your total income for the year including tax i.e. your gross income.

Applicants: how many people are applying for the loan?

Employment: lenders like full-time employees who’ve been employed for at least 12 months.

Tax: if you’re self-employed, the lender will want your recent tax returns, showing how much youpay yourself (not gross revenues). Also, ensure there’s no tax debt showing in your ATO portal.

Dependents: serviceability is influenced by the number of kids you have.

Overheads: some lenders calculate your monthly expenses based on your age, postcode,marital status, children, employment and credit cards. Other lenders will ask you toself-assess overheads.

Also• Get a copy of your credit check before you apply for a loan. If it’s not glowing, there are ways

to get it cleaned up to maximise the chance of getting loan approval.• If you can, create a record of regular savings over the last two years. (Lenders love this!)• Never hide nor misrepresent the true value and sources of all your expenses and commitments.

TIP: Two average-earning working people areoften better than one high-income earner.

TIP: Reduce the number of credit cardsyou have and your limit.

Lenders want to see that you have enough cashleft over each month to make the repayments, orservice the loan. With a smaller deposit, you havemore of the loan to pay off.

BORROW | ROUND 1

Phase A

Purchase

price


19/36

What lenders are looking for

Lenders want to see that your

deposit amount came fromgenuine savings. You shouldhave six months worth of

savings with regular deposits,rather than a few lump sums.

Lenders conduct credit

checks on mortgageapplicants to see if they havecredit defaults

or significant money owingor in arrears.

Try to have the same address

for at least six months.

+ +

Savings Credit worthy Address

Low doc loan

Along with serviceability, the lender is looking for:

If you are a small business owneror self-employed, you may not haveaccess to an employment contract orpay-as-you-go statements (PAYG), you can still be considered for a‘low documentation loan’, if you canshow documents that substantiate

your income (usually tax returns).

TIP: I advise any first-time home buyer who does not fit the standard borrower profile to use amortgage broker to find a low-doc alternative. You may pay a slightly higher interest ratebut it can usually be refinanced after a year.

Matrix of borrowingGetting your first property is the key to the Morello Matrix.

Yes, borrowing at 90 per cent ratio with lendersmortgage insurance is more expensive. I say, if theproperty is right for you and you are comfortableto make the purchase, lenders’ mortgageinsurance gets you into the game.

My approach is:

You have to buy your first propertyto get into the game.

Lenders’ mortgage insurance (LMI) is a necessarycost, allowing you to buy now rather than another

year, when the property may be more expensive.

If the cost of LMI isn’t significantly more thana year of savings or growth in the value of yourhome is likely to provide, then go now.

BORROW | ROUND 1

Phase A


20/36

Rent it out

From first home to income

Your property strategy has just begun.

Once you’ve secured your first property, you are going to turbochargeyour investment and use it to buy a second property within the nexttwo years.

You’ll achieve this by doing three things:• Locking in the capital appreciation of the property;

• Paying more into your mortgage than you have to, which will increasethe equity in your property; and

• Factoring in tax. This is always a great low-risk way to add to yoursavings after taking your income tax rate into account.

For the first year of owning your property, you should continue to cut expenses. Make abudget and stick to it. This is what successfulinvestors do when they start out.

TIP: When you do these three things together,you create wealth very quickly.

2Rent


21/36

E q u i t

y i s t

h e d i f f e

r e n c

e b e t w e

e n w h

a t y o

u r h o m e i s w o r t h

a n d h o

w m u c

h y o u o w

e o n

i t . . .3

Equity

Phase A


22/36

Equity Equity is the difference between what your home is worth and how much youowe on it.For example, if your home is worth $300,000 and you owe $100,000, you have

$200,000 in equity. Over time, as you reduce the amount you owe on your homeor the value of your home grows, your equity increases.

Let your property grow in value naturally. Capital growth is a rise in the price orvalue of your property over time. As your asset is property, think of an increasein the value of the home or land.

What most people do not understand is that it is the power of leverage thatcreates good long-term returns from property, not just the price appreciation ofthe property. Leverage is simply borrowing money to invest into something- in this case, this case property. This effectively allows you to let other peoplepay off your mortgage.

After paying back the loans (including any taxes, buying and selling costs, andhome improvements or maintenance), you will have created net equity (savings).That means that the value of the property and the rent you have received isgreater than the amount you started with.

Pay off the loan

First home buyers often choose a principal andinterest loan (P&I). This allows you to repay boththe amount of the loan as well as the interest overa set period. Your loan is completely

paid out for, say, 25 years.

Turbo-charge your loan by speeding up the equity and slowing down theinterest in three ways:

Increase yourrepayments

Select fortnightlypayments

5% 4%

Pay lump sumsinto the loan

Higher repayments reduceyour loan amount morequickly.• This builds your equitybecause you’re payingless interest.

When you elect to repay yourmortgage with fortnightlypayments (or half-monthly)two things happen. Youlower the interest capitalisingagainst your account at therate that it does when yourepay monthly; and youmake more repayments inthe year: 26 payments ratherthan 12.

Commit to putting taxrefunds and work bonusesinto the mortgage.• They increase your equityand lower the interest.

If you sacrifice some of yourlifestyle for a short amount oftime, you can boost your equityvery quickly - simply by findingan extra $500 per month.

Use a repayment calculatorsuch as Yellow Brick Road’sand see how fast you can buildequity when you increase yourrepayments.

Make more repayments andavoid additional interest bymaking disciplined fortnightlyrepayments.

If you put your tax refundsand work bonuses into anonline savings account, yourearnings are taxed at yourincome tax rate.

As you repay the loan, interest repayments declineand you increase your equity.

You may be tempted to take out an interest-only loan to lower the monthly repayments.Caution! You should seek specialist advice, as this can be fraught with danger.

Phase A


23/36

Turbochargingthe matrix

For those interested in an offset account, get guidance froman adviser about how best to operate one.

Shift money across twice a month.

• Ask your lender to set up an offset account linked to your mortgage.

• Pay any cheques, bonuses, tax refunds and otherincome into this offset account. In this account, thecash balance is offset against your mortgage balance,reducing it daily by as much as you have in there. Themortgage repayments are taken out of this account.

Along the way every dollar in the account reduces your

interest.

• Keep the balance as high as possible. Many people put alltheir income into the offset. Cut your household spendingand pay often into the offset account.Then the balance stays high and you can significantly reducethe interest and boost your equity.

• Offset accounts are for disciplined people who workto household budgets. Attached to these accounts aretransaction cards. Skip the card so you are not temptedto spend.

EQUITY | ROUND 1

• Get your regular bills (insurance, utilities, health, etc)

paid by BPay into those companies.

Phase A

Another way totake the equity-boosting strategyto another level.


24/36

My golden rules are:

Buy wellto achieve a 5-10 per cent rise in house prices in your area. Your $500,000 house could be worth $525,000 after the first year.

Fortnightly repaymentsmake the change to fortnightly repayments, rather than monthly.

Pay every bonus into the mortgagesuch as tax refunds and work bonuses totalling straight into the mortgage.

Add extra paymentsinto the mortgage, by starting with adding $500 per month.

Add everything intothe mortgage.

Once you have your firstproperty, it is time to

supercharge the growth inequity to leverage

into a second property.

Me? I throw everything but the kitchen sink

into these strategies.I put every spare penny into the

mortgage. I find a mortgage brokerto find me the best refinancing deal,

including a lender hungry for my businessor who is a believer in the area

I’ve bought in.

to buy new cars (or any cars) with the loan. Over time, these savings mean

you’ll be able to buy nicer cars all the time or more importantly build up

wealth from property much, much faster.

Don’t be tempted

Phase A

3. Fortnightly repayments $500,000 $540,000

$50,000equity

Start

Year 1Start

Building equity*

$450,000loan

$435,000loan(Pay down loan)

$105,000equity(Capital growthimprovements)

Year 5 Year 10

$375,000loan(Pay down loan)

$300,000

$282,877equity(Capital growthimprovements)

$539,636equity

Year 10

$839,636

*This is for illustration purposes only.

The information presented is intended as a guide only and does not take into account your objectives, financial situation or needs. You should obtainindependent legal and financial advice specific to your situation before making any financial decisions.

The information is based on a $450,000 loan over 30 years at 4% interest rate and 8% capital growth. Loan to value ratio, interest rate changes, inflationrates and other market conditions have not been taken into consideration. Figures are based on an assumption of $1250 monthly repayments.


25/36

Well spent money

on renovationscan INCREASE your valuation.

Making your propertyinvestment shineHome improvementsWhile you keep paying off the loan and building equity, yourproperty grows in value over time. Now let’s look at the activeside of capital growth: capital improvement. This is also known

as renovations, repairs or additions.

The trick to improvements is to add value to the property,without spending too much.

Don’t impress yourself when buying or renovating a property.Only spend money on those things that are valued by apotential purchaser. This may not reflect your own tastes.

When it comes to smart improvements, you have one audience: the valuer.The valuer is an independent professionalengaged by lenders to appraise propertiesto buy or refinance. Let’s say you bought a property for $500,000 and a year later you wantto refinance it with a valuationof $550,000.The lender seeks an independent valuationto see if the property is valued at - or closeto - that price.

Impress the valuer

What does thevaluer look for?

First impressions count. Valuers arelooking for things such as:

- A tidy garden and some basiclandscaping and flower beds

- Well-presented kitchen and bathroom

- A fresh lick of paint

- Extras such as an adjoining garage,ensuites, ceiling fans, air conditioning,new carpets, etc.

Phase A


26/36

Making your propertyinvestment shine

Smart renovationsWell-spent money on renovations can increase yourvaluation. The main areas of improvements are bathroom,kitchen, garden and paint.

• buy an apartment with a parking space on a separate title,sell the parking space and reinvest in your mortgage.

Other ways to add valueThere are many ways to make capital improvements:

• buy a run-down house and completely renovate it;

• buy a good piece of land with a run-down house and build a newhouse on the site;

• buy a house on a large block of land, subdivide it, build a newhouse and sell it;

• subdivide the land, get a development approval on the vacantblock and sell it for a premium; or

A trap to watch for is over-capitalisation. If you knock downan old cottage and build a new home and you end up withnot much more equity, you have probably spent too much.

In my opinion, there’ll be many years to renovate yourfamily home with all the comforts you desire. It doesn’thave to be done in the first year.

The swimming pools, outdoor pizza ovens and gazeboscan wait.

The first aim is to renovate to add value, so that you canrefinance and release cash from the growing equity.

If you spend $100,000 on a renovation and it only yields$50,000 in increased value, you have over-capitalised.

TIP: Don’t spend too much.In the first year, you’re trying to turn your cash-flowwealth into asset wealth. You have to stay focused oncreating more value for your asset.

Understanding over-capitalisation

Phase A


27/36

Life mistakesEvery property investor makesmistakes at some point.

When you stumble, you have to get back to the winningattitude. The journey with property, through all theeconomic cycles, is at least 10 years. If you make a

mistake, realise it sooner, not later. Dust yourself off andget back on the saddle.

I bought an apartment in Melbourne in 2012 for $435,000.My father had owned the land since the 1970s and I thoughtit would have been a travesty for a Morello not to own one ofthe properties subsequently built there.

“Hindsight is a beautiful tutor.” I regret making a businessdecision with my emotional brain, because as I write this theidentical apartment next door to mine just sold, after being onthe market for months. The sale price was $380,000. I will have

to follow my own advice and hold this property for at least 10 years before I can see the advantages of capital appreciationafter inflation has been taken into account.

I can live with one episode of bad buying. But when it’s yourfirst property, be vigilant about what you pay.

My life lesson: Don’t buy on emotion

Working with taxLet’s look at tax in Australia

and making the most ofcapital gains tax.

Keep in mind the differencebetween the original

purchase price and thefuture sale price of your

home. This is where capitalgains tax works to your

advantage.

Phase A

4


28/36

Working with taxLet’s look at the tax system in Australiaand making the most of capital gains tax.

Keep in mind the difference between theoriginal purchase price and the future saleprice of your home. This is where capitalgains tax works to your advantage.

Principal place of residence

For your investment properties, these are some types of costs you can claim againstthe income from the rent:

• advertising for tenants

• repairs and maintenance

• cleaning, gardening and pest control

• bank charges, insurances

• body corporate fees and charges

• borrowing costs i.e. valuation, conveyancing

• interest repayment cost on mortgage

• council rates, land tax

• depreciation of assets

• legal expenses, property agent fees and commissions

• stationery, postage and property-related travel

• undertakings to inspect, maintain or collect the rent

• water charges

Income deductions

Investment properties

Investment properties

TIP: If you hold onto the property for more than 12 months,your capital gains tax will have halved.

Negativegearing

Firstly, negative gearingonly applies if you arerenting out your property.

Negative gearing is when your investment costs arehigher than your rentalincome, which you claimin your tax to reduce yourtaxable income.

You can think of negativegearing as a tool forreducing your losses.

When property investors own several properties, allof them negatively geared, they can pool their losses

and reduce their assessable income accordingly.

So property investment can be seen from twoperspectives:

• investment property as wealth creation, using

cash-flow positive properties to cover the

mortgage repayments so a portfolio of properties

can be built;

• investment property as tax planning for high

income earners, who use negatively geared

properties to reduce their tax bracket; they might

end up with a capital gain when they sell

the property, or hold the property and eventually

make it cash-flow positive.

Positive gearing is where the income your property

produces is greater than the ongoing costs,

including loan repayments.

The question of whether to own investment

properties that are cash-flow positive or that are

negatively geared is one of personal taste.

I definitely lean towards cash-flow positive.

I believe that a good business is one that makes

more money than it spends, and so that’s how I like

to do it.

101

Rental income

Costs incurred

Tax deducution $2,000

$12,000

$10,000

TAX | ROUND 1

If you make a capital gain on your principal place of residence, the gain is usually exempt from

capital gains tax (CGT) if the property is held for more than a year. Investment property has

its net capital gain taxed at your marginal income tax rate, in the year the contract for sale is

signed.

It is never a waste of money to obtain professional taxation advice from a registered tax agent

before purchasing a property. Don’t wait until the purchase is in train.

Phase A


29/36

The

MorelloMatrix

P h a s e B


30/36

At this point you are preparing to own two properties:- The first, you will live in as your primary place of

residence- Your second, you will rent to tenants as it will become your investment property

You will use the equity in one to make a deposit on the other.

And if you handle it correctly, the rent from your second property will cover itsown mortgage and other costs. You will have capital appreciation from two

properties, but you only pay the mortgage on one.

Most people who work fulltime have the ability to build this scenario even further,

so they eventually have two rental properties and one family home. They’ll own

three properties, but only have to fund one mortgage out of their income.

Matrix in five yearsThe plan takes place over five years:

Morello Matrix round two

Year 1 Year 2 Year 3 Year 4 Year 5

Save the

deposit and buy

the property.

Pay down as much

on the principal as

you can.

Refinance and use

the cash to buy a

rental property.

Buy a second investment property from

refinancing the other two properties.

TIP: Use the equity in one tomake a deposit on the other

Investment property

In the Morello Matrix, you must be clear about whichinvestment properties to buy so your hard-won equityis not wasted on the wrong rental property.

Creating a portfolio of at least three properties is generally an ideal number for

most people and how many Australians develop wealth.

What you want

In your search for an investment property, you are looking for a long-term total

return of inflation plus 5 per cent.

Other things to look for:

• Rental income that covers most, if not all, of the mortgage and outgoings

• The likelihood that tenants will always be easy to find

• Proven demand and a history of rental income

• Low maintenance costs

• Saleablility of the property (transport, zoning, community facilities, etc.)

Do your research

Subscribe to a property service such as property data and analytics, which tracks

prices in postcodes each quarter. They offer rental yield reports, but you can do

your own research too.

• Go into five real estate agencies, pick up their rentals lists and study them.

• Look at what rents are being charged, for what sort of properties.

• It’s not what properties list for, it’s what they sell for and how long they take to sell

(days on the market) that’s important.

Rental income

Remember, you are looking for rental income as close to 5 per cent p.a. of the

market value as possible. This not only makes a good return on your investment,

but it is likely to produce the majority of the income required to cover your

mortgage.

Selecting your investment property

Once you own a rental property, you are a landlord and you’re in the business

of accommodation.

Phase B


31/36

Your product isaccommodation.

Take it seriously.

Consider the type of person who will want to rent your property,

i.e families want schools, why young professionals want restaurants

and public transport

Close proximity to shops

Distance to schools, universities, colleges

Close to churches, playing fields and parks

Proximity to public transport

If on the edges of the city, close to a freeway

Near to cultural hubs such as cinemas and theatres Near to a waterway, such as a beach, harbour or river

In a place with character, such as colonial or federation style

In a building with community features such as tennis courts, pool or

barbecue area

Close to a major employment centre

All of these may seem basic, but you must consider them. There are otherthings to look for in the actual rental property:

Modern, clean kitchen

Clean, functional bathroom

New floor coverings

Good paint job

Garden

Extras such as paid television connection, storage shed, barbecue area

Good laundry (if renting to families)

Type of tenant:

Try to get a tenant to sign up for longer than a year

Ask yourself: is the highest payer better than a tenant who is most likely

to really look after your property?

Here’s some of the criteria tolook for in a rental property:

Outsourcing service: if you don’t have a lot of time or willingness to investin learning about legal matters, maintenance and collections, then stronglyconsider outsourcing this to specialised businesses that do: propertymanagement businesses.

Learn your rights and obligations asan owner. Know your tenant’s rightsand obligations as well.

Phase B


32/36

First property(Principle residence)

Second property (Investment)

Third property (Investment)

Property examples

Let’s say you purchased a $500,000property for $450,000 loan at the beginningof your journey. Between capital growth,rental income and home improvements,the value of the property has gone up by10 per cent per annum.

Whilst consciously making repayments tothe principle loan, this will set you up forstep two and three of this example.

Let’s say you are looking at a onebedroom apartment and wanting tospend $400,000. At 90 per cent loan tovalue ratio, you’ll need $40,000 in depositand $360,000 in borrowings. You are goingfor an interest-only loan at 5 per centinterest which will cost you around $1,500per month in repayments.

Now let’s look at another number: itscurrent rental is $350 per week. That’s$1,516 per month, or $18,200 per annum.

This apartment has a rental yield of 5 percent, and its monthly rental income morethan covers the mortgage.

The capital appreciation average is 5 percent per annum in the area, so in the firstyear of owning the apartment, you makeapproximately $20,000 from your $400,000property, for no outgoings. At the end ofyear two, it’s worth just under $440,000and you haven’t had to pay the mortgage.

You should be aiming to buy a third rentalproperty, in the first three to five years.

So what do you do?Revalue both properties at this stage. After three years, your first property wouldnow be worth approximately $600,000,against a loan of $400,000. Also revalueyour second property that you boughttwo years ago.

Property two is now worth $440,000against a loan of $350,000.

Now you are in the advantageous positionto utilise your increased equity from oneor both of your properties to purchaseanother.

And so on, and so on...

Perhaps the greatest two questions that people ask are: ‘When should I buy?’ and ‘When should I sell?’. For selling, the answer is easy: don’t ever sell it if it produces a good income, unless someone offers you a price so far above the market price you’d be a fool not to take it.

For purchasing, it generally comes down to your timeframe. If you figure on holding property for the next 20 or 30 years, it generally doesn’t really matterwhen you purchase it. If you’re speculating (buying and selling inside ten years) be very careful not to buy near a property market peak.

Phase B


33/36

The Morello Matrix is not asecret. Thousands of Australiansbuild their wealth this way. Butmany more Australians stand onthe sidelines and choose not toplay. This is a pity, as Australiahas a really good lendingsystem for property.

It has a vibrant property marketthat generally doubles every10 years, particularly in metroareas, and we have a cultureof hard work and solid incomefrom employment.These things make property agreat way to build wealth.

Borrowing allows you to speedup the process, the rentalmarket allows you to covermortgage repayments withincome, and capital growthallows you to use equity to fundother properties.

The system is sitting beneathour noses, and we have to makethe decision to be part of it.

And then we have to act.

I hope that these ideas inspire you to browse through thosereal estate windows, go backto your pens, papers andcalculators and then talk to amortgage broker.

ConclusionTheMorelloMatrix

More money has beenlost by indecision than

by wrong decision.

Phase B


34/36

My name is Andrew Morello.

I’m just a simple boy fromMoonee Ponds, working hardand trying to get ahead in life.

Good luck! Andrew Morello


35/36

I’d like to dedicate this eBook to my mother and father,John and Pauline Morello. They have been great rolemodels of the rewards that come from sacrifice and hardwork through blood, sweat and tears, in the greatest

country in the world: Australia. Andrew Morello


36/36

Date post:	08-Jul-2018
Category:	Documents
Upload:	musmanmalik
View:	219 times
Download:	0 times

The Morello Matrix E Book DPS

Documents