Welcome to the first edition of 'Financial Independence'.

It's a pleasure to be able to bring you this e-publication, together with the information available in the 'Hot Topic' area.

I've been planning this site for a long time now and more than anything else, I want this site to be a relevant and practical source of information to help you achieve your wealth and money goals.

At this stage you're probably most familiar with my real estate investing strategies previously outlined in my free e-bulletin 'Property Secrets Revealed' e-bulletin. While I'll be keeping a free service going, the information and content won't be anything like the great stuff you'll be accessing as an Inner Circle member.

Initially, 'Financial Independence' will have a strong real estate flavour, but over the coming months I'll be introducing more and more discussion about businesses and personal wealth too.

I strongly encourage you to take advantage of all the information contained in the 'Hot Topic' and 'E-Bulletin' areas.

After reading this material you may like to make a post on the 'Forum' to seek clarification, raise a question or argue a different perspective.

Importantly, the more you make use of the Inner Circle, the more you'll learn.

• My First Television Interview
• My 'Three Pillars Of Wealth' Strategy
• The Three Primary Real Estate Investment Rules
• Tenant's & Vacancies...The Silent IP Killer
• My Latest Wrap Deal
• Watching The Economic Clock

On the 12th March, Channel Nine's 'A Current Affair' ran a story featuring our wrap housing program.

The story ran for about six minutes and included footage of people I'd helped, some takes of me and also some comments by a critic who thought what I offered was a bit expensive. I have Channel Nine's permission to show the interview on site and I hope to get this organised in the near future.

'A Current Affair' heard about what I do from a newsletter subscriber. Over about three months I was contacted by a researcher and also one of the show's producers.

About a week before the wrap seminar, the producer rang back and said he had a camera crew ready and wanted to do the story as soon as possible.

Over the following two weeks they shot the story, interviewed me and went to air.

Before the story was shown, many people said I was foolish for doing it. At the wrap seminar nearly everyone said I was crazy as I had more to lose than gain. It's this point that I want to expand upon.

Read the sentence above out aloud three times and pause for a minute for its importance to sink in.

It's important for you to understand this concept because what I'll be discussing in the Inner Circle will be sometimes so remote, that to embrace the idea will require some degree of willingness to try something new.

But if 95% of the population end up poor, it's clear that something new needs to be attempted to avoid ending up with the masses.

Sometimes people ask, "how did I end up where I am today?" Let me answer this question by providing you a little more information about me.

I left a secure accounting job to go and study physiotherapy...a decision which people I worked with couldn't understand. While I didn't get in, publicly announcing my intention to change careers jeopardised my job, so I resigned.

Between jobs I went on a holiday around Australia and met the girl of my dreams at Ayres Rock...that girl is now my much loved and beautiful wife.

When I came back from the holiday, I moved from Melbourne to Mackay (where Julie lived) and took another job. After seven months they sacked me...I was devastated.

But, Julie and I moved back to Melbourne and I took yet another position where I met my business partner - David.

When David and I decided on setting up our own accounting practice our families were a little shocked that we'd quit high paying manager jobs to take a pay cut and work for ourselves.

We didn't listen and within six months we had embarked on a new and unchartered path to success.

Our first property investment was in the housing commission area of Ballarat. Talking to the investing elite, this was seen as a double no-no. First, investing in the (so-called) country was fraught with danger and second, the area we invested in was hardly renowned as the better area of town.

Nevertheless, we proceeded to purchase the property and began to vendor finance houses well before I'd ever heard of the term wrap.

I'm not afraid of trying something new. Perhaps you don't need to do such dramatic things, but if you want change in your life, then for things to change - first you must change.

Looking back on the television interview, sure there was the possibility for things to go wrong. I had faith that because I'd done things differently and genuinely tried to help people, nothing bad could come as a result.

I've learned that doing things differently is what makes life exciting. Succeed or fail, win or lose...don't be afraid to try.

In the week following the interview we received more than 1,300 phone calls from people all around Australia interested in receiving my help. It was a massive exercise to answer all those calls, but now we have the makings of a database of leads all across Australia.

The biggest danger with being an employee is the threat that when you are no longer employed you lose your salary.

I read in the paper yesterday that the disgraced rugby player Hopoate has gone from a $300,000 per annum contract to a $750 per week plumber's assistant. Imagine the impact of this on his family (apparently he has five children) and on his lifestyle.

What if you operate a small business and become incapacitated? You may be faced with a similar problem.

I want to encourage you to develop the a wealth strategy which has three income streams. Why? Because I'm confident it works!

My 'Three Pillars Of Wealth' plan will require you to:

1. Set up a part time business

2. Develop strong personal wealth habits

3. Invest in positive geared property

The plan is not just about buying books, tapes and seminars. This in itself is a poor strategy. An important lesson I've learned is the amount of wealth you accumulate is a direct reflection of how hard you work. The act of buying something is not a substitute for taking action.

My plan requires dedication and commitment and most importantly of all - doing something.

In the coming months I'm going to set up an online business so Inner Circle members can watch exactly what I do and learn the different phases of operating a business. I have never before run a multi-level marketing business (MLM), but for the purposes of showing how to start a business from scratch it will be ideal. The goal will be to earn $1,000 per month of passive income from the business.

Accumulating wealth without good personal money habits is like trying to hold water in a leaky bucket. I want to provide you with a detailed list of habits to help you retain control of your finances.

Starting next month I'll introduce a new wealth habit through the newsletter. Some will be easy, others hard. How well you succeed depends on how badly you want to change!

I want to encourage part of your plan to be investing in property that will provide you with a positive cashflow return.

In the coming months I'll be outlining the many tips and techniques I successfully employ to buy houses cheap, keep tenants happy, reduce vacancies, avoid buying lemons...and more!

By the end of this year my plan is to have helped you set up a part time business, develope strong personal wealth habits and also given you the tools needed to buying positive cashflow properties.

This month I want to share with you three rules which I swear by in my property investing.

For some, these rules will be somewhat of a refresher... but they are the cornerstone of my real estate success.

When David and I began investing in property in May 1999 we only had one rule - the maximum we'd pay for any one property was determined by a calculation...the weekly rent, divided by 2 and multiplied by $1,000.

Thus, the maximum we'd pay for a property renting at $100 per week was $50,000. Applying this rule gives you a gross return of just over 10% per annum.

Finding houses in metropolitan Melbourne which met this criteria was nearly impossible, so we broadened our search to include regional towns too. Note I say 'regional' town not 'country' town. When we started investing we wanted to keep the travel time to within about an hour from town.

We researched many towns and decided on Ballarat. The first trip up there was exciting. We looked over a block of units (in one of the units an ex-tenant had painted a chalk outline of a dead body homicide style on the floor) and also some single family houses.

The first investment property we acquired was a neat and tidy ex-housing commission property for $44,000. It had been sold twice previously for mid 50's, but both times it fell through because the purchaser couldn't get finance.

Our research indicated the likely rent was about $110 per week, so the acquisition price was well within our guidelines.

Many people have told us that we wouldn't get capital growth in country areas and I have to agree...to a point. I agree that it is hard for the average investor to get capital appreciation, but then again I'm not an average investor.

We sold that first house as a wrap for $65,000 a few months later. That's a 47.73% capital gain in less than four months. No capital gain in the country, right?

Even today I hear many people argue that city property is better than country property because it will appreciate faster. Again I agree for the 'average' house and the 'average' investor. But with the special knowledge that your Inner Circle membership provides, you'll be armed with special resources to find opportunities other people pass by.

Dave and I were pretty happy after doing our first deal. Soon after we would learn the most important property lesson of all.

After about six months the couple who were in the house decided to split. Just before New Years he walked out on her and the children, leaving them with no capacity to make repayments and kicking in the living room heater.

The house with the impressive return became a headache. They couldn't repay the loan and couldn't afford to move out either. So, we fixed the problem by paying them $500 to move out and then reselling the property within a week later.

What was the lesson? You might have the best property deal in the world, but without someone who has the capacity to repay, then you won't earn any return.

This event preceded our 'people before profit rule'. In reality, the rule requires us to acknowledge that it is the person living in the house, rather than the actual house which provides us with our passive income.

That's why I find all the arguments about city and country property to be irrelevant.

The three primary rules I want to encourage you to adopt are:

1. Invest in property for income returns before capital gains.
2. Work within the pricing guidelines of (weekly rent/2) * $1,000 as the maximum you should pay for and still expect some sort of positive cashflow return.
3. It doesn't matter how good the property is...it is the person living in the property who pays you.

Applying these rules I think it's fair to say it doesn't matter where you buy, so long as you have a quality tenant/user and a positive cashflow return.

In our first deal we only had the pricing guidelines covered and came unstuck on the quality tenant/user. This is a very common mistake, particularly amongst landlords who buy negatively geared properties and can't afford to have it vacant. In the end, such landlords rent to just about anyone and blame everyone else for the poor decision when things don't work out.

If you adopt a wrap strategy you need to be just as vigilant in your pre-screening of prospects. I'll talk about the techniques I use in later editions of this publication.

So what happens if you adopt a property strategy which implements my three primary rules highlighted above?

Your ongoing success as an investor is your ability to be prepared for what might happen. If you want to stop working then the first thing you need to prepare for is the loss in earning capacity you'll experience when you no longer work as an employee. This is the essence of Rule #1, because if you invest for capital gains then you have an assumption that there must first be capital gain for you to make money. I'd rather know I make money from day one based on positive cashflow.

Rule #2 ensures the property you buy has the best chance of being likely to provide you with some of the replacement income you need. Importantly, Rule #2 eliminates the possibility of investing in negatively geared properties. This reinforces the first rule that in property investing, capital gains are secondary to the pursuit of income returns.

When you no longer work, you'll be relying on others to pay you so you can buy groceries. You'll want your money to be regular in nature. This only comes from allowing quality people to use your property, which is the third rule.

Importantly, all three of these primary rules are not mutually exclusive....they must all exist for you to have the sort of property which fulfils the requirements for the property pillar of wealth.

The parameters in the second primary rule are a guide only. If the potential property meets the requirements, then you need to go on and complete further due diligence before you buy.

The due diligence process simply requires you to allocate more time to finding out specific financial information so you can determine your likely return before you purchase.

In time I'll develop a comprehensive checklist and put it online for Inner Circle members under 'Online Tools', but for the time being let me outline two components of the process - discovering more about the existing tenants and making allowing for vacancies.

A lesson I've learned recently is a key component of any due diligence process is understanding more about the tenant who is currently living in the property you plan to buy.

Why? A potential property acquisition may appear attractive when there is already a tenant in it, because you don't have the worry or hassle of trying to find a new tenant. You have guaranteed rental income...or do you?

What I've found is that often people sell their properties because of the tenant, so buying a property with an existing tenant just passes the problem onto you. This has happened to us, and the long process needed to formally evict a tenant who knows the system crucified our cashflow. Doh!

The whole problem can be avoided by asking a few questions before signing the contract.

Our due diligence process requires that we receive the following information on properties that are currently rented:

We want to find out whether there is a current lease or not. Often the lease will have lapsed and the tenant will be on a month to month arrangement.

Another thing we'd like to know is if the current lease has any special terms or conditions. For example, does the lease allow pets? You want to make sure there are no surprises once you've signed to buy.

Other information you can find out from the lease is:

• When did the lease begin?
• What is the current rent?
• Whose name is the lease under?
• Has the property been sublet?

The main purpose of this print out is to determine how regular the tenant has been with his/her payments.

If the report is by property (as opposed to by tenant), it should also show any period of vacancy.

You'll also be able to see any rental increases. A common trick is to increase the rent just before the property hits the market so the yield seems higher to a potential investor. Watch out for this.

Having a copy of the current manager authority helps you to discover exactly how much commission you can expect to pay to have someone manage the property.

I look to see when the authority was signed and compare it to dates on the lease and rental report. Sometimes irregularities need to be investigated and any loose threads may be potential problems.

The form should also outline how much you'd expect to pay in letting fees and advertising each time the property becomes vacant and is relet.

So many people ignore requesting a condition report. In fact, we did too until we were caught out once.

One thing I've learned is a tenant sometimes makes improvements to the property which belong to them. Unless you know otherwise, it's natural to believe something you saw on inspection will be there when you own the property.

In most cases it is...until the tenant moves out and all of a sudden every plant is uprooted, carpet is rolled up, security systems ripped out of the wall and the place left filthy.

A tenant only has an obligation to return the property to the state s/he found it when they moved it. Unless you know what state that was, you may be buying a property that could change in appearance when the current tenant moves out.

I recommend you ask the tenant when you do a property inspection if there is anything which belongs to them. At the same time make sure you get a copy of the condition report. If one is not available then include a clause in the purchase contract for one to be done and forwarded to you within the next fourteen days.

Don't double up on unnecessary work. Why not obtain the personal details about the tenant for your files? You can find out current income levels, employment details... all sorts of other relevant information if all you do is ask.

Ever tried recovering a bond from an ex-tenant? Hmmm, the chances aren't good.

Before you buy make sure a bond has been lodged. This is particularly important if the property has been managed privately, as often private landlords can't be bothered with all the administration and don't collect a bond.

The purpose of asking these questions is to help us determine the quality of tenant we are likely to inherit, how long we have to have the tenant for and whether or not there is any information missing that we'll need to correct if/when we buy.

In your due diligence process, knowledge is power so you should look to find out everything you possible can. Avoid the mistakes Dave and I made and ask questions before blindly purchasing a property with an existing tenant.

Another critical component of our due diligence is allowing for our investment property to be vacant.

It surprises me to see how many investors analyse property deals on the 'best case' scenario and wonder why the return is so poor when things don't go to plan.

Part of being prepared is understanding what impact a vacant property will have on your investment return. Just yesterday a friend told me of a circumstance where an investment property he knew about was vacant for 5 years!

Having a vacant property is graphic evidence of how important the third primary property rule is. It is a problem which all serious property investors must allow for and manage and in this edition I want to outline my approach on two areas in relation to vacancies - how much should you allow for and how to mitigate the risk of having vacant properties.

Our rule is to allow a minimum of four weeks per annum per property.

This is usually a wild overstatement of what happens in reality, but remember I'm an accountant and I like to be cautious.

When setting an allowance for vacancies you must talk to rental managers in the area you plan to buy and corroborate what they say to the number of 'To Let' classified ads in the paper.

Like everything, when supply exceeds demand then prices fall. A depressed market means you should budget for a discount on the current rent as well as a higher vacancy allowances.

A close friend of mine, Brian Cavill, owns a three plex in the Latrobe Valley. Recently we caught up and he mentioned that he allows for an eight week vacancy because that is what is realistic in that area.

Our goal is to look at the worst case scenario and see what happens to our return if that should happen. Doing this allows us to be prepared if it happens and employ a strategy to protect ourselves to minimise the impact.

Avoiding vacancies is largely within your control. How? Because from my experience happy tenants rarely leave. If you commit to keeping your tenants pleasantly surprised then you will find your vacancy rate will be better than the wider market.

You should still allow at least four weeks vacancy in your due diligence, but once you own the property - look to immediately implement strategies to keep your tenant pleasantly surprised.

Wrapping your properties is one way to minimise vacancies as the person you wrap to commits to making repayments over the vendor finance term...up to twenty five years in our case. You may have periods when payment is late, however wrapping all but eliminate the possibilities of long term vacancies.

Yes, the best way of beating vacancies is to concentrate on the person already in the property and enticing them to stay.

If your property was purchased vacant then you need to do something to entice renters beyond what is already in the marketplace. I'll comment on some of the strategies we use for rental properties in a later edition.

I want to conclude this section of the e-bulletin by reinforcing the need for a due diligence process which analyses the quality of the existing tenant at the same time as determining the impact on your likely cashflow from vacancies. Don't ignore this! Take the time and pay attention to detail. You will lose money if you don't...vacancies are a silent killer of your positive cashflow real estate investment.

I've heard some grumblings around town that all the good deals are gone (some guy called Steve seems to have purchased them all). This is absolute crap, as evidenced by my latest wrap deal.

On Saturday I went back up to Ballarat with my wife to attend an auction. I was half inclined to buy the property if I could get it at the right price as I already had two people who wanted to buy it as a result of the ACA interview; I took along a business cheque just in case.

I thought the auction was at 11am and was surprised to see everyone standing around at the front of the property when I arrived 10:40am. I just assumed I'd missed out, but it turns out the auctioneer was waiting for me to turn up! Wow, it seems my reputation is beginning to grow much larger than reality.

Anyway, while the auctioneer started I had a quick look through the property and everything seemed OK. Since this was going to be an immediate wrap I wasn't too worried about the condition and it appeared neat and tidy anyway. I recommend beginners always have a builder's report but I've been through so many of the same ex-housing commission properties that I now know what to look for.

I arrived back at the front of the house just in time to start the bidding at $30,000. It seems there was me and another guy interested in bidding and he pulled out at $42,250. The house was passed in with the bid with me at $43,000 and I agreed to purchase the property for $44,000 (fair middle ground) when the original reserve was $45,000.

I signed the contract and immediately went out to both interested people, told them the price was $61,500 and gave them application forms to fill in and submit to me as soon as possible.

Today I rang one of them up and told them they had the property. He is an ex-builder/carpenter and would be ideal to fix up a few of the cosmetic problems associated with the house.

Let's go through the figures of this deal:

We make money on this wrap deal by two ways. First, we charge a margin on our purchase price ($17,500) and second we charge a margin on our interest rate (+2%).

To avoid mortgage insurance, David and I put down a deposit of 20% in each transaction. In this deal we will receive $7,000 back as the purchaser will nominate us as the recipient of his first home buyers grant. Our net cash difference in the deposit is $1,800.

In order to purchase the property we will also incur closing costs which include solicitor's fees, stamp duty and loan fees. Normally we allow 5% of the purchase price but in this case it will be a little higher given the purchase price is so cheap (5% of $44k is not enough in this case).

Our net cash needed to purchase the property is $5,000. In financial terms, David and I are willing to pay $5,000 now for a nett weekly return of $49.71 for the next twenty-five years. As a lump sum ($49.71*52weeks*25years) our overall return is $64,623 (pre tax). The annual cash return is $2,584.92 (pre tax).

One of the key indicators David and I use is a cash on cash return. This return is easy to calculate and is simply the annual cash return (in this case $2,584,92) divided by the cash needed to purchase the deal (in this case $5,000). The return in this case is 51.70%. The lifetime cash on cash return is $64,623/$5000 or 1,292%.

By itself the $49.71 is not a lot of money...but when you multiply it by fifty properties then the return starts to mount up.

While the figures are important in this deal, the most important point to note is I had a buyer before I purchased the property. Without a buyer, I would have been speculating that I could have found someone who wanted the property.

Once I had a buyer I had primary rule 3 covered. The financial analysis confirms rules 1 and 2. With these rules covered the deal gets the green light.

The Australian Dollar (a.k.a. Pacific Peso) is about as popular as a Taxation Office auditor at the moment. Despite what the government would have you believe, the dollar is falling against the US currency because there is more supply for our currency (people selling ) than demand (people buying) and like anything else, when supply exceeds demand the price drops.

Our cheap dollar isn't a big problem in itself. Exporters should have higher demand since foreign purchasers can now buy more quantify of material for the same price. Importers will hurt because our dollar buys less.

The biggest impact on us will be from rises in the price of oil (since oil is based in US dollars per barrel) and with higher oil prices comes higher transport prices which means higher prices in general for just about everything.

If you haven't already read about the 'Economic Clock' in the 'Hot Topic' section I recommend you do so. The feedback I've received from subscribers are that we're somewhere between 2pm and 6pm.

If everything has a start, a middle and an end I think we are in the middle of the slump. This morning I heard the Nasdaq is approaching a 20 year low. Some would say it's panic time but to me the prudent investor is currently shopping for bargains.

I'm not qualified to advise you, but I'm adopting a cash accumulation strategy at the same time as some selective bargain shopping on the stock market. The gloom will not last forever...just one short year ago prices were sky high. My plan is to ride out the storm with my cash reserves at the same time as snapping up red hot deals as they appear.

One day, hopefully soon as I'm travelling to the US in June, the Australian dollar will recover. Don't act on hype, adopt a long term strategy and ride the storm.

Well, that brings the first edition to a close. I'm at the beginning of a long and exciting journey of wealth creation. I see you're on the same road. Let's walk together and make the journey a learning experience for both of us.

Until next time, remember success comes by doing things differently.

Regards,

Steve McKnight