Hi,

Welcome to your June edition of Financial Independence.

I'm writing this from Mackay in North Queensland, where sadly my wife and I have flown up for the funeral of her grandmother - Gladys Elizabeth Lay.

Attending a funeral is a sombre affair, perhaps because the general feeling of sadness is compounded within the church. While I only knew Glayds in the twilight years of her life, when Gayle, Julie's cousin, gave the Eulogy, I found tears swelling in my eyes too.

One of my favourite sayings is the teacher comes when the student is ready. What lesson does this experience have in store for me? So far I've learned two things:

1. That indeed we all will die.

After the burial service I walked around the cemetery and looked over many tombstones. Not everyone dies when they're old, but nearly everyone passes away either tragically or suddenly and all are sadly missed.

Accepting that we'll die provides perspective in our life. Most importantly of all, the finite nature of our lives stresses the importance that our time should not be wasted. Do anything - except nothing.

Wealth creation is but one of many facets of your life. Find a balance and enjoy your time alive. Money only matters if you're here to enjoy it.

2. A large gathering evokes human emotion.

I've mentioned the most emotional time for me during the funeral was when Gayle read the Eulogy. With the church at standing room only and the muffled sobs echoing of old stone walls, it's impossible not to be consumed in the moment.

Analysing my feelings, I wasn't so much sad for Gladys (since I believe she now rests in the Kingdom of Heaven), but for the people working through the grief of losing a mother, grandmother, relative and friend.

It seems the moment becomes more powerful as a result of the reaction and feeling of the people who attend it.

This month's topics are:

• Personal Wealth - The seemingly endless number of wealth proliferation experts.
• Business Wealth - Building business wealth starts with a simple business plan.
• Real Estate The real estate due diligence process: Inspecting the property.

The first Hot Topic contained an outline of the economic clock. The clock represents the peak and trough cycle of the economy and goes on to suggest which investment is appropriate for the different times on the clock.

Of course the clock is anecdotal, which means that the time is reflected by the various conditions in the marketplace - interest rates, spending patterns and also the number of wealth creation opportunities.

Should I have been surprised to see large advertisements for both Henry Kaye and Jamie McIntyre in the local Mackay paper? Kaye's ad is familiar, with the heading "Property Secrets Revealed In Mackay - we guarantee to teach you how to retire a millionaire". Interestingly, no mention anywhere of a seminar date.

Then later it seems that the advertising dollars has bought an editorial too. Under the headline "Who wants to be a millionaire?", the offer is for an introductory night with a four-hour video. The editorial goes on to say, "About 80 people attended the first night and about 10 had opted to continue on with the Investment Mastery Course".

When I looked at the investments on offer last year, I have to say that as an accountant Kaye's ideas are very high risk at best.

I couldn't last through McIntyre's seminar - with the swearing and lack of original ideas, half an hour was too much.

So if the product is so bad, why is it so popular?

Our solicitor, Lewis, has a theory that people buy hope... the hope of being a millionaire and for a while people can live within that dream of a better life with boats and sports cars.

But when the realisation that this doesn't work as expected hits home, the hope turns to despair. Kaye's ad has a testimonial from Jeff Miles, Builder/Developer and is quoted as "I have been half asleep for the last 10 years, I will be worth millions in the future because of this seminar. Thanks heaps!"

In reality, Mr. Miles would have been a millionaire if he had just saved 10% of his income and invested it long-term in a well managed mutual fund. No need to adopt a fancy high-risk strategy here.

It's not just property schemes that have become popular in recent times. Share trading and olive farms have also been popular among wealth promoters. The Sunday papers are full of courses and products that are guaranteed to make you a millionaire.

Schemes to be wary of will involve one or more of the following elements:

1. The thing that you're investing in can't be found where you live.

Investing in an area that you're unfamiliar in is dangerous and the further away you invest, the higher the risk. Investing interstate or overseas is something that has been used to fleece money from unsuspecting investors for a long time. Sure, not all such schemes are dodgy, but your investment risk certainly increases.

2. You have to buy now, since this deal won't ever be repeated again.

The more pressure applied that's applied to get you to sign up, the higher the risk you should associate with the product.

If you come across someone who says sign up now and then read the conditions later, alarm bells should be ringing. Always take your time to discuss an investment with your adviser or accountant.

3. There is a glossy, professional sales booklet with only the barest of financial data.

The bigger the hype, then the bigger the likely hoax. Almost always the hype is needed to disguise the shortcomings in the investment. My experience is the numbers don't lie, so watch out for glossy advertisements with cars and boats, but no financials which inevitably make up the substance in a deal.

4. You've never heard of the people behind the investment before.

When you make an investment you're really investing in the people behind the scheme. Take the time to research the background of those who are promoting the scheme, as a history of bankruptcies and failed businesses does not give you much hope of ever seeing your money again.

Seasoned punters don't bet on the races without studying the form guide first!

5. Do they guarantee to guarantee?

One of the recent developments in marketing is to offer a 100% money back guarantee, since statistics show that very few people take it up. Make sure you look for the fine print in the terms and conditions of the deal, especially look out for fees and charges that apply if you pull out.

Also be mindful that if your investment is unprofitable then the promoter may not have the funds to honour the guarantee. This is true for builders who provide a rental guarantees and then go broke.

6. Beware the price-quality illusion!

In economics there is a term called the 'price-quality' illusion, which reasons that a $20 product must be better than a $10 alternative because it's twice the price.

Just because your share trading system is expensive, or your property investing seminar is called a bootcamp, the $5,000 you pay for it doesn't necessarily mean it's better than a $19.95 book.

7. If it's too good to be true, it probably is!

If someone really did know the secret to everlasting wealth, would they be selling it for $299 (plus GST)? I don't think so. Stick to the facts that have stood the test of time. Schemes that offer instant riches or claim to outline the secrets to unlimited wealth should be immediately classed as dubious.

8. Independence is something money can't buy.

Always have the scheme reviewed by an independent adviser, such as your accountant. Even if they don't know the precise details of what is on offer, it's likely that your adviser will have seen similar schemes before and can tell you where the pitfalls are.

Don't be afraid to ask people if they are earn a commission from recommending the scheme. Be wary of people who get paid to close the deal to get paid... don't let it be at your expense!

With the collapse of HIH and One Tel, together with the emergence of more and more new age wealth promoters, the market is full of a lot of promise, but not much substance. I want to conclude this section with a quote from the Bible (Proverbs 14:33):

Seek knowledge from people with experience and are not paid on the basis of your investment.

Be wary of the fool that claims to know all, especially the path to instant riches.

Building a successful business is like making a cake. Even if you have all the right ingredients there is still no guarantee that the cake will taste good and often the end result will look nothing like the picture on the recipe anyway!

Importantly, cooking without a recipe dramatically increases your chance of failure, particularly if you haven't ever tried cooking before. The key to success is to find the way that has worked for someone else and then replicate it.

The worst sort of business plan you can do is one that simply goes through the motions. Sadly, nearly every business plan I know of is done for the benefit of someone else, since the owner already feels that s/he has everything under control.

Yet the process of preparing a business plan is an excellent opportunity for you to step outside the business and think about why you do things the way you do.

While there are many models and even software programs you can use to write a business plan, my experience is these 'one size fits all' templates are rigid and inflexible. I suggest you take a simple approach and set up a business plan as a long list of answers to the question "Why do we do it that way?"

I suspect that I've just shaved a year or two of most MBA courses, but the truth is:

The first question to ask yourself is, 'why am I in business?'

Starting with this question provides a point of reference for all other elements of your plan. If you don't know what you're trying to accomplish, then it will be very difficult for you to reach any sort of goal.

Sometimes the answer to this question is called a mission statement. I'd recommend you steer away from these terms, since they are almost always used by academics and advisers who are paid to make life difficult.

Keep it simple.

I've created a business planning worksheet for you to use and included it in the business column of the online tools tab.

Take the time and work through the four quadrants of the process, as by the end you'll have a clearer idea of why you're in business.

I'll build upon this model next month.

Remember to post any questions that you might have on the Inner Circle forum discussion board.

The first step in your due diligence process is to find a property that meets the '11 Second Solution' criteria. This is where your purchase price is equal to or less than the likely rental per week, divided by two and multiplied by 1000. For example, the most you would pay for a property that rents for $300 per week is (300/2=150*1000) $150,000.

A property that meets the '11 Second Solution' qualifies to be further analysed under the PATTERN™ system.

PATTERN™ stands for: Property And Tenant Tactical Evaluation Resource Network.

While PATTERN™ is something that Don Campbell and I are currently finalising, I'd like to provide a member's only sneak preview of a template we've designed to help you capture and analyse important property investment information.

Property inspections are a critical component of any real estate due diligence process and are generally handled very poorly for three reasons:

1. The owner tries very hard to hide the obvious defects associated with the property
2. The real estate agent does almost everything in his/her power to sell you the features and steer you away from the problems
3. It can be confronting to rummage through another person's property.

Sometimes inspections can be quite an eye opener. One time I was being shown through a house where the couple had forgotten they'd left the fluffy handcuffs clipped to the bed head.

With this in mind it's safe to say that no two property inspections are ever the same.

To help ensure that you have considered everything that you ought to, I suggest you use the PATTERN™ Property Analysis Worksheet. Print the worksheet out (it's saved as a .pdf file) by going to the Online Tools area.

The worksheet is broken up into ten specific property sections and two additional general sections.

One of the traps of property inspections is not knowing what to look out for. By using a standard form you'll begin to develop a routine that you can apply to any inspection. Before too long you'll start to ignore the agent's sales pitch, instead focusing on the physical components of a house.

What I like most about the worksheet is that it takes all the emotion out of the inspection, as it evaluates the house not on what it might be, but on how it currently is.

Section one asks you to write down some basic information about the property so that you can keep a written database of all the inspections you do.

This is useful because before long you'll inspect two properties with similar features. A couple of times I've inspected houses in the same area but a few months apart. I find looking back over previous inspections helps me to gauge the price of the property in comparison to others in the same area.

The second section asks you to consider the structural aspects to the property you are thinking about buying. When filing out the form, be mindful of:

Sections three to seven require that you inspect and record the details or features of the bedrooms, bathrooms, kitchen, laundry and other rooms (usually the living or dining room). The main purpose of having you note the details of each room is that it forces you to be more thorough than just a casual walk by, since the more detailed your inspection - the more likely you are to find problems.

Be on the look out for potential hazards like combined bath/showers with high walls, badly worn carpet, knobs missing from stoves and ovens and cracked mirrors. Also be mindful of how clean or dirty the property is, because a clean house will rent quicker and for more money.

Section

Inspecting the garage or carport is an essential part of your due diligence process because these structures are very seldom constructed properly and as such represent a minefield of potential problems.

Look at what has been used to make the roof and walls, as you'll often find asbestos. Look at the slab of concrete that forms the base of most carports. Is it cracked? Most importantly of all, seek to determine if the structure has been legally constructed and if not, then be conscious that it may be expensive in both time and money to fix the problem.

It's not just carports and sheds to watch out for either. In a house I purchased recently, the shabby looking greenhouse that was attached to the side of the property and erected against the side boundary fence was illegally erected since it impaired a firewall. It took me a day to fix and I'm still itching from the fibreglass splinters!

Section

It's important to understand that just because other houses in the street have gas connected does not mean that your property has the service available. Find out which services are and are not connected to the property and also determine how much it will cost to have the services switched back on.

Make sure you test to see that the heaters work, especially wall heaters and central heating units that are notorious for breaking down.

Also inspect the hot water service which may sometimes be in the roof. Most units can be found in the laundry and you can tell when they were made (and accordingly about when they were installed) by looking at the compliance plate which is located somewhere on the unit.

I advocate that you should buy a house for someone else to live in, so when you assess the condition be aware that the standards by which you judge a property may be different to the way someone else views the same property.

Nevertheless, a shabby property will attract a shabby tenant, so if you are trying to find a quality tenant then buying a property in a poor condition might be penny wise and pound silly if the cost of upgrading the property (or dealing with a shabby tenant) is substantial.

When rating the condition also be mindful of any minor cosmetic changes you can do that will add a lot of warmth to the house for little cost. Some ideas are:

• Changing the wall mounts of the power plugs if they are old and cracked.
• Buying some second hand curtains, even if it's only terylene, which is quite cheap.
• Give the window ledges a quick lick with some gloss paint.
• Replace wonky doorknobs.
• Replace the front door knocker, welcome mat and also light fittings in the entry hall.
• Fill the house with every ounce of available natural light.
• Remove any sign of grease, mould or mildew from the bathroom and the kitchen.
• Tidy up the garden.

While sections one to ten deal specifically with the property that you are going to buy, other considerations will make you look at how your property ranks with community facilities and other houses in the same street.

The closer you are to major amenities, the higher the prospect of benefiting from capital growth. Look at the state of the road and also if there is adequate street lighting which may prevent robberies. Make notes about how you feel as you inspect the property and also how much money you'd like to budget, if any, on repairing it.

The final section of the Property Analysis Worksheet is 11 property alerts to watch out for. If you see any of these factors then be aware that there may be something structurally wrong with your property that could be very expensive to fix.

I hope you find this worksheet helpful. As an Inner Circle member you have an unrestricted licence to use it for your own personal use.

Always remember to allow for enough time to make a full inspection. Sometimes the better way to do this is to make a time outside the usual public inspections and always remember to get a builder to have a look through the property, since the cost (at around $200) is a cheap insurance policy against buying a lemon.

Next month I'll outline the Tenant Analysis Worksheet, which is also a key element of the Pattern™ system.

At the bottom of this newsletter is a quote from the Bible which was read out at thanksgiving service. I encourage you to read it and reflect on what it may mean to you.

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

Regards,

Steve McKnight

John 14: 1-6: