Hi,

Welcome to your May edition of Financial Independence.

I'd like to begin this issue by thanking those members who have completed and submitted the first Inner Circle Member survey.

It's clear you want the online wealth community theme to continue, as well as the completion of the Online Tools and Feedback sections.

I'll be using your valuable feedback to go on building and enhancing the Inner Circle. You can expect to enjoy more features, as well as the same great information in the upcoming months.

It was also wonderful to receive constructive criticism too. One question that was raised a few times was: 'Why was there so much information in the free section, yet so little information in the 'paid' area?'

Believe it or not, this was actually deliberate. Not because I was trying to offer poor value for money, but so I could build the content of the member's section the way that the members wanted from the start.

It doesn't matter what's interesting to me - it matters what's interesting to you!

That's why I'm looking for six key people who'd like to work with me in transforming this site into one of the best facilities in the world. I expect your involvement will take a maximum of two hours a week. The majority of the contact will be via e-mail, but I'd also like to set up some phone conferencing too.

The major role of the group will be to work through business planning and site development issues. Everything from colour schemes to communication issues will be on the agenda for discussion.

It's really an Inner Circle working committee and the recommendations of the group will be posted in the member's area for everyone to comment and vote on.

I'd also like to hear from people who are web developers, web architects etc. and who'd like to work with me on the nuts and bolts of the site.

Here's a great chance to forge an ongoing network with me from the inside, whilst also developing a long-term business relationship.

Here's what's in this month's e-bulletin:

• Wealth Tips Online Tape Sets Are In The Wild
• Marching To The Wealth Mantra
• Planning To Be Super
• Insuring Your Property Investments
• Calculating Repayments In A Wrap Deal
• The Emotional Highs And Lows Of Property Investing

OK, grab a coffee and let's begin...

Last week Tim and I completed the mail out of the Wealth Tips Online Tape Sets, which have now been distributed to the four corners of the globe.

The purpose of the tapes is to spark ideas in your mind. If all you do is listen to them in the car or running to the bus stop then you'll probably get limited value out of them.

A better idea is to set aside some quiet time and listen to the tapes. While you do, think about ways you could apply the topics discussed to your own life.

When a tape is finished, it's not supposed to be the end of the experience... it's really the beginning and I encourage you to post your thoughts and reflections, as well as questions on the Inner Circle Forum.

One development I plan to introduce to the site is an additional forum area where people can post their 'thoughts of the day' - personal stories or reflections about the journey that each of us is undertaking towards financial independence.

As always, I'd love to hear your feedback about the tapes. While a lot of my effort went in to creating them, it's my hope that they're of great benefit to you.

I began working as an accountant in 1991 on a starting salary of $20,000 (including superannuation). Even though this doesn't seem like a lot of money to me now, I still remember how happy I was every time my salary was put into my bank account.

$500 odd dollars a fortnight paid for just about everything a 19 year old living at home could ever want.

One of the myths of wealth creation is that you need to earn a lot of money to be wealthy.

In fact, money is far less important than time. It's just that as humans, we are very impatient creatures and have strong desires to get our wants and needs fulfilled immediately.

For example, now that you've discovered the concept of financial independence, you probably don't want it in ten years time... more than likely you want it now!

Those interested in property aren't fussed with a meagre $50 per week cashflow. Of far more attraction is the possibility of 50 houses and $100,000 per annum passive income.

Being impatient is only something to worry about if it breads inactivity. For example, I always chuckle when union protestors marching together shouting, "What do we want? More money! When do we want it? NOW"

Can you see the funny side of this? People have to stop work and go without pay while the march for possibility of earning higher wages.

Most unionists and aspiring wealth creators share a fatal flaw... the belief that more money is the answer to their problem. This flaw is uncovered when you ask people why are you demonstrating, or investing in property / shares etc. and they reply, to get more money.

In reality, money isn't the underlying issue prompting demonstration for the majority of people. How can you ever satisfy someone who wants more money, when they already spend 104% of what they earn?

The problem for all concerned is the lack of a definite personal wealth target. Without this goal the temptation is just to consume.

My first 'pillar of wealth' involves developing good personal money habits. Perhaps at the top of the personal wealth skills is an ability to develop an appreciation of time, and in particular, what you can achieve with the limited amount available to you.

Let's do a planning exercise as the beginning of your own wealth plan. Some of the questions below are tricky to answer, but as a responsible and forward thinking wealth creator, it's important to attempt them nonetheless. Once you've answered the left-hand column, go on and complete the right-hand column.

Now that you've answered these questions, you have completed the two most difficult elements of your wealth creation plan - knowing where you are at the start and also setting a target to work towards.

The next task is to work out how to achieve your goal using the path of least resistance.

Let your answers above become your new personal wealth mantra. Give it a go...

WHAT DO I WANT? [Insert Annual Passive Income Goal]

WHEN DO I WANT IT? [Insert Date You Plan To Have This Completed]

Now that you have a start, and an end, you have a yardstick to measure your investments by. Just ask yourself "does this deal move me closer to, or farther away, from my goal?"

On April 26, 2001, the Melbourne's Herald Sun newspaper published a feature insight into superannuation and, as expected, the prognosis for the average worker is not good.

The first paragraph on the front page under a headline of "Fears Over Super Crisis" was "Millions of Australians face a bleak retirement because they have stopped saving for their future."

Of more concern is the persistent finger pointing and blame shifting that's going on amongst the various players, best summarised in the Herald Sun Insight:

"More than five million workers have made no superannuation provisions at all."

"The Australian Government can no longer postpone decisive action..."

"The ACTU campaign for employers to increase their contribution from 9 per cent of wages...to 15 per cent, would place an unacceptable burden on business."

It seems like everyone is happy doing nothing.

Clearly it's up to you to provide for your retirement. If you don't, you run the risk of having to rely on the government to provide you with an old age pension, something that 66% of current retirees aged over sixty have as their retirement foundation.

This isn't a strategy I'd be recommending though, because statistics show we don't have the population of future workers to pay enough tax to fund the pensions of future retirees.

As an Inner Circle member you're probably planning to retire well before the compulsory retirement age. Well, according to 1997 Australian Bureau of Statistics data, only 27.9% of men retire before age 55 (the figure for women is higher, but that allows for women leaving the workforce for family reasons). I'm not saying it can't be done... it's just going to be a hard road.

What part will superannuation have to play in your retirement plans?

I believe superannuation does have a valuable role to play in building your personal fortune. It has to because the government has made it mandatory for employer's to contribute on behalf of employees.

Every day that you work, your superannuation account grows. How big the part superannuation plays in your own wealth plan will depend on how old you are and how much longer you plan to work.

The statistics mentioned above indicate that most people either don't care or don't want to use superannuation as a wealth building strategy. Despite the government making superannuation compulsory, the average person must see it as dead money because there is about $3 billion in lost employee's superannuation awaiting collection (if you feel you may have some superannuation that has not been credited to your name then call 131 020).

While you remain in the workforce, why not use at least your minimum compulsory superannuation contribution to build the biggest retirement balance possible?

This can be as simple as setting a goal for how much money you want to have accumulated in superannuation on the day you retire.

Making the decision to invest some time building a superannuation goal is all you need to do, because your employer and fund manager will do the rest while you worry about improving your wealth in other ways.

Even the complex financial modelling has already been done for you. Invest some time now and play around with the superannuation calculator located at:

Do the one thing that five million workers, the government and the unions can't... take action!

Being an astute investor involves not only acquiring sources of income, but also protecting them against loss or damage too.

Let's discuss three areas of property insurance:

I regard this as a must have strategy in protecting your investment. Anyone who invests in real estate without insurance is a cowboy looking for trouble.

Obtaining building insurance isn't a difficult task since most major insurance companies offer an investment property product and the premiums are competitive.

One thing to look out for in your policy is whether or not you are insured for the GST component of having your house rebuilt in the event that it's destroyed. There was a lot of confusion when the new tax system was introduced on this point and the insurance companies have had enough time to sort the details out. It would be prudent to check with your insurer to see what the situation is.

Depending on the policy and insurer, you may be able to insure against wilful destruction by a tenant for only a small extra charge. Personally, David and I don't insure against this for the reasons outlined in the next section below. But you may like to if you inly have limited time to monitor your investment.

Anyone insured with HIH or a subsidiary (FAI etc.) should definitely follow up and see what protection you have since the insurer is no longer solvent.

Having insurance to protect your rental income is not necessarily the best use of your money.

A better option is to develop a strong pre-screening process and then reinvest the money that you'd otherwise pay in rental protection insurance, back into the tenant to keep them pleasantly surprised.

Like most things in real estate, tenant insurance is only needed because people take short cuts and are not thorough to start off with. For most unwary investors, the need to have income is greater than the need to make sure the tenant is a good asset.

The best form of rental insurance is something that you don't pay for... it's you taking responsibility for mitigating the risk in the first place. Remember that I believe the tenant is the asset and if people allocated as much time to finding a good tenant as they do to trying to find a good property, a lot of the insurable tenant risk would evaporate.

Don't hand over your investment dollars to someone else unnecessarily. Look to manage the risk first.

If you do take on a risky tenant, then by all means insure against them, but make sure you raise the rent to recover the cost of the additional premium and then some more for good measure too.

This is the most contentious issue of wrapping at the moment and it's an issue I'm working to resolve for all wrappers.

The problem comes when you wrap a house to someone, say a convicted arsonist, who doesn't disclose that s/he has a criminal record and later your investment property burns down.

The popular opinion is that you will not have insurance because of the lack of disclosure to your insurance company.

Before we go into managing this risk, let's look at how insurance and wraps work in the first place.

You still need to insure the property and this can be done in either of two ways.

Your first option is to have the policy in your name and note the person to whom you are wrapping as an interested party on the policy.

The alternative is to have the person to whom you wrap organise and pay for the insurance (with you noted as an interested party on the policy) and then have a receipt sent to you for your files.

Whichever way you choose, you're finance provider will also needed to be noted as an interested party on the policy and be sure to include the requirement for insurance cover to be a clause in your sale contract.

The answer to this question depends on how you structure the policy as outlined above.

Either you can pay for the insurance outright and be reimbursed by the person living in the house, or you can get them to pay for it and send you confirmation of the insurance cover.

Again, your choice should be documented as a clause in your sales contract.

You should only look to insure the house and not the contents. The responsibility for that rests with the person occupying the property.

Until a specific policy is found or created to meet the needs of wrappers, it seems that we'll just have to mitigate the risk of wrapping houses to the arsonists of the world ourself.

It should come as no surprise that I recommend you pre-screen your applicants and avoid wrapping to someone just because you can. Since the person is the most important element in a wrap transaction, you should seek to find out as much about them as possible before you wrap them a property.

A key pre-screening technique is a credit check, which will identify if they have been bankrupt.

You can also request a police check, subject to having the person's consent. This information will give you some degree of comfort.

But by far the best strategy is to sit down with the person to whom you are wrapping and outline the consequences if they don't tell you everything. That is, tell them that if they are dishonest or holdback information, then there's a risk there won't be any insurance cover and that they could lose everything in the event of a claim.

This isn't just shock therapy - it's reality.

I'm in contact with an insurance underwriter in Queensland who wants to sit down and discuss the possibility of developing a specific wrap insurance product. This would be an attractive proposition for an insurance company because we have so many properties to insure and also considering the expanding wrap market.

All I need is some time to allocate towards doing it! I'll keep you in the loop as developments occur.

In the next edition of Financial Independence I'll begin discussion on detailed due diligence process for purchasing an investment property, including forms and checklists too which will be available from the Online Tools area.

But for this month, I want to expand upon the idea of getting the client to look for a property and also how you can empower them to do just that.

When David and I started property investing we would get in the car, look over each house, make offers in person... all in all a very time consuming task.

Before long, we developed a system that empowered our customer to do most of the leg work and we'd only have to spend time negotiating the price.

What we'd do is empower the person to go and look for a property based on having his or her repayments set around the same figure as the rent he or she was currently paying.

This requires that we work backwards from the weekly rent figure to derive the maximum amount we would be prepared to pay for the house. Let's look at an example:

Based on Bob and Sonia's circumstance they would qualify to purchase a house up to about $65,500.

Now let's go on to calculate the likely return we'd make on this deal.

For a payment of $12,650 today, you receive a total of $95,992 broken down into 1,300 payments of $73.84.

In my opinion this is only a so-so deal, but it is useful to illustrate the example in full.

I plan to build a calculator as an online tool to streamline the calculation of the maximum purchase price for you. While I get this operational, I'll write an Excel spreadsheet and e-mail it to you to play around with.

If you have any queries with this process then please post your questions on the Inner Circle Forum Board.

Last month I outlined my third primary property investing rule, which was:

This rule embraces the idea that it's the person living in the house that provides you with the passive income, rather than the inanimate collection of bricks and sticks they live in.

But you'll soon discover that dealing with people is both the biggest opportunity and also the biggest source of frustration in real estate investing.

Take, for example, Danielle's story.

Danielle was the tenant in the second wrap property we ever purchased. A compact brick veneer house, we acquired it for $60,000 on a $1,000 deposit with a likely rent of $140 per week. To me it seemed like a good property as it met the '11 Second Rule'.

Before settling on the house I ran an ad offering it for sale under vendor terms and, while there was a large response, the house wasn't popular as it had old brown carpet and two small bedrooms. This is one of the reasons that we now encourage people to find their own properties, since there's no accounting for people's taste.

Nevertheless, Danielle decided she wanted it and despite a 'gut feeling' warning me not to do it, I went ahead regardless.

This deal was in the days before the first homebuyers grant, so without a deposit, we entered into a normal lease with incentives to help Danielle save money (to pay her deposit). But it wasn't long before she fell behind in her rent and we had to set up a payment plan to help her catch up the arrears.

When the rent didn't come in as expected, I'd call Danielle and she'd always offer some sort of genuine excuse. We'd be accommodating - trying to follow our people before profit rule.

One day I rang to see why the rent wasn't paid as arranged, only to have a sobbing Danielle describe how she'd left her rent money and mobile phone on the post office counter. When she remembered and returned, it was gone.

I understand if you're sceptical, but I have to say that to this day I believe all her excuses were genuine - she really was just plain unlucky.

We decided to try and help and when Dave was in the area a few days later he called in and handed over $200 cash to help her buy groceries and keep the kids fed.

To say she was overcome with emotion is an understatement, particularly since her own family members turned their backs.

Sadly the story doesn't have the happiest of endings. Instead of doing the right thing by us, Danielle continued to pay the rent late and while she was nearly up to date from time to time, she eventually slipped behind by more than six weeks rent.

I'd run out of patience; she obviously couldn't help herself and she seemed to take advantage of us too.

Being too close to the person, I put the matter in the hands of our normal rental manager and she negotiated for Danielle to move out within two weeks.

By the time we recovered the bond we were about $500 out of pocket.

This story shares the highs and lows of dealing with people. From the tremendous joy that comes with being able to make a difference, to the heart break of seeing your trust misplaced.

This experience has not altered my resolve to continue to put people first, but it does mean that the expectation that you can help people is only true if the person wants to help him or herself first.

Well, that's it for another edition of Financial Independence. Here's a list of action steps for you to implement as a result of this month's newsletter:

1. Answer the questions outlined in the 'Marching To The Wealth Mantra' section. Doing this will help you develop your personal wealth goal and provide more substance to your investing. Write down your goal and keep it somewhere visible so you're reminded of it often and motivated towards achieving it.
2. Decide to take control of at least the compulsory superannuation that your employer contributes on your behalf. Use the information ascertained in your wealth plan and play around with the superannuation calculator. Work out a lump sum superannuation retirement goal and begin working towards it.
3. If you're a property investor, ring your insurance company and make sure that your building insurance covers the GST associated with rebuilding your property if it's destroyed. Also make sure your policy is not with HIH or one of its subsidiaries.
4. Weigh up whether you need rental protection insurance. Often a better strategy is a strong pre-screening process and a watchful eye to make sure the tenant does not fall too far behind.
5. If you are wrapping properties then broaden your due diligence to find out more information about the person to whom you are wrapping. If there's anything that might disqualify your insurance, mitigate that risk up front. I've found the best way to do this is by outlining the consequences if there isn't full disclosure and the property is destroyed.
6. Danielle's story helps us all appreciate the realities of property investing... when dealing with people there are always going to be problems. While I recommend that you focus on the person, try to avoid becoming his or her social worker. Perhaps implement a 'three strikes and your out' policy rather than a 'zero-tolerance' program.

Thanks for your continued membership. Please contact me if you'd like to be an Inner Circle Manager and be a valuable member of the working committee.

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

Regards,

Steve McKnight