Steve McKnight has changed his property investment strategy

Steve McKnight is back and he’s changed his property investment strategy.

While in Sydney the other day to appear on Channel 7’s Today breakfast programme I read From Zero to Financial Freedom, the latest work of property investor and businessman Steve McKnight.

I am a fast reader, it is true, but actually this is only a short book as compared to McKnight’s previous writings, clocking in at around 80 pages or so.

Positive cashflow – a rethink
I was very interested to note McKnight say that he believes that a strategy of continuing to acquire dozens of positive cashflow properties very quickly is not such a viable approach to attaining financial freedom today in a super-speedy manner.

I agree. For me, the numbers never really have stacked up.

While it’s possible to find properties which generate a small positive cashflow over a year, you would need to own dozens or even scores of them in order to generate an income of, say, $100,000.

Most average investors will never be able to achieve such a goal very quickly.

With many lenders requiring 10 percent deposits, and with property in Australia attracting painful stamp duty, if income is your primary short-term goal it might make more sense to invest in high-yielding bank shares or other blue-chippers.

Teasingly, McKnight says that the way to create wealth through property is…to attend one of his courses!

As always, McKnight is an entertaining and straight-talking read. Take a look if you can track the book down.

Interestingly, he notes that starting an internet business is another good way to generate additional income today.

The Snowball
One of the questions I am asked most often is “how quickly can I be financially free?”

Of course, there is no absolute answer to that question for it depends on a whole range of factors, including your skills, your required income and indeed your definition of “freedom”!

One truth is that, in life, few things that are worth having come easily.

Too often people are only interested in short-cuts and thus place all of their hopes in one or two incredibly speculative ventures or trade CFDs in the hope of becoming rich quickly.

Think of almost anyone you know who you deem to be successful – whether it be as a sports star, an investor or in a business – and you will probably find that their success came about as the result of hard work, or at least some level of sacrifice.

My advice would be to try and think a little differently.

Instead of seeing people as being “rich” or “not rich”, try to think of your wealth creation or financial plan as a snowball.

Wealth is best created slowly and surely over time, not overnight.

Realistically most people can create a very strong financial base over a period of around 15 years, a period of time which tends to incorporate more than one investment cycle.

Are you a sophisticated investor?
One thing which I’ve noticed in a couple of Steve McKnight’s books is some of his mentees talking of becoming “sophisticated investors”.

This was particularly so in the case in the book From 0 to $1 Million in Property in 1 Year.

Becoming a “sophisticated investor” is indeed a worthy goal.

In plain English usage terms, to be “sophisticated”, means that you can be aware of complex issues and understand them thoroughly.

However, most of these people will not become sophisticated investors quickly, and today I’ll explain why.

The definition of “sophisticated investor”
I would suggest that unless you know what a sophisticated investor is, you should never refer to the term, because you could get yourself into a world of bother, and perhaps even break the law.

What the heck am I on about?

“Sophisticated investor” is actually a value-laden term which means that you have an income of more than $250,000 or you have net assets of more than $2.5 million as defined by the Corporations Law.

This might sound like mere pedantry, but allow me to explain a little further.

A “sophisticated investor”, sayeth the law, should be able to evaluate offers of securities and financial products without needing to be issued with a regulated disclosure document.

Thus stockbrokers can sell you shares quickly and companies can undertake quick capital raisings without the usual need to issue a prospectus.

This is very handy for listed companies, because drawing up a prospectus for shareholders, detailing the risks of a particular shareholding and a wealth of other disclaimers and background information (as I know only too well!) is an incredibly painful, slow and costly exercise.

In fact, the only real winners when a prospectus is issued tend to be the lawyers and the legal firms, the investment bankers, the printing companies and the other service companies.

In order to be a sophisticated investor, therefore, you will need to be issued with a certificate which expressly says that you have the requisite assets or income.

Once you have a certificate from a qualified accountant, which is valid for two years, you can be placed upon a register by a stockbroker and you may be offered certain securities via capital raisings.

Don’t take it to heart!
I’ve lost count of the number of times on chat forums whereby posters take offence at listed companies having issued new ordinary shares or hybrid debt instruments to “sophisticated investors”, thereby seemingly implying that anyone who is excluded from the issue must be in some way dumb.

That’s not the intention of the law, though, it is simply the value-laden terminology that is used.

In one of his books, Robert Kiyosaki’s fictional Rich Dad character talks of how rich people are issued with all of the best investments, and it is illegal for poor people to invest in them.

As is usually the case with Kiyosaki’s writing this is an amusing little fable, but it isn’t actually the case.

In fact, such capital raisings that are issued to sophisticated investors are often dreadful investments, and the reason that they are not made publicly available is as much for the protection of average minority shareholders as for them representing necessarily superior investments.

Besides, fear not, for there are any number of incredibly speculative stocks on the securities exchange in which anyone may gamble away their hard-earned without the need for any certificate of being labelled “sophisticated” in any way, shape or form.

Corporations Law takes the view that higher income earners or those with a large asset base are likely to be smart enough to assess risk and decide for themselves what represents a risky investment or otherwise.

Whether or not this is actually the case, of course, is a different matter entirely!

As the legal saying goes, caveat emptor. Buyer beware!

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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


'Steve McKnight has changed his property investment strategy' have 4 comments

  1. February 28, 2013 @ 4:39 pm Harry

    I agree that the chase for high yield property tends to be at the expense of the all-important capital growth, as the latter eventually provides financial freedom. In our case my wife and I have a portfolio of four inner Melbourne properties (a house and three apartments). These are scarce assets (Art deco and similar with other attributes such as desirable location etc). We mortgaged our PPR to begin and all properties were purchased using just the equity in our home and subsequent accumulated equity in each property. The loans have all been interest only. Our purchases began in 1997 and the last purchase was in 2005. Since then we have retired and we have used $300k of our combined super (set up an SMSF) to reduce debt as we no longer have a taxable income to reduce tax and have to fund cash shortfall ourselves . We have also taken over one of the apartments for our own use as our PPR is some 150k from Melbourne and we use it as our “city pad”. Later in life we will return this property to rental. We plan to sell the house (reluctantly) to reduce our debt to very low levels and this will make the portfolio cash flow positive. The cash flows are expected to grow over time to and will serve to supplement our super pension. We realise we could retain the house but decided that low debt in retirement is a good trade-off for foregone equity. It has not been easy at times managing the negative cash flows but the properties have always been in demand and have soon rented when tenants leave. We have maintained the properties and made some improvements which increased the comfort for tenants. We have also never had any problems with tenants and have always used good managing agents.

    Reply

  2. Pete Wargent

    February 28, 2013 @ 5:01 pm Pete Wargent

    Harry, thanks for sharing your story.

    As you say, there is often some sacrifice involved today for a better tomorrow, but those with a long term strategy tend to do very well over time.

    Reply

  3. March 1, 2013 @ 12:24 am opinder

    Hi Pete,
    What a great article…I am a believer of holding investments for long time
    and totally agree that there are lots of sacrifices to be made overtime to accomplish goals.
    I love your articles Pete..
    Thanks for sharing..

    Reply

  4. Pete Wargent

    March 1, 2013 @ 2:31 am Pete Wargent

    Thanks Opinder for the kind comments. You’re right – especially when it comes to property, the shorter your time horizon, the trickier it is to make a worthwhile gain. Transaction costs make life difficult unless of course you are a skilled renovator.

    Reply


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