In today’s show we ask Michael Yardney “what is the number 1 driver of capital growth.” You may be surprised at his answer.
We also get some really good advice as Michael Matusik expands on his 40/60 rule when it comes to property investment.
You can also listen in or read the transcript as Jenni Brown tells us about some bad advice she once received and Rachel Barnes says…waiting is a BIG mistake.
Have you heard of silent sales? Well as the name suggests they are properties that never really hit the market and some buyers will tell you they are really worth seeking out. But how do you do it? We catch up with a Melbourne agent to find out.
By the way…is it true that more bedrooms in a property will add to the value? Maybe not according to a valuer we talk to today, so I want to know what will add value and I set about finding out.
As the property market heats up some leading property economists and commentators have warned investors to do their research carefully before diving into the market. Carolyn Boyd from Domain has been looking into this and today I will ask her if there really is such a thing as a hotspot or is the hotspot just a place where investors get their fingers burnt?
Transcript
Carolyn Boyd
Kevin Turner: Well, at the start of the show, I talked to you about hot spots and we’d be looking at the possibility of finding out whether or not hot spots really exist and if they do, where are they? Carolyn Boyd, who is a property expert from Domain has been looking into this and I believe too, Carolyn, you’ve been talking to Dr. Andrew Wilson.
Carolyn Boyd: That’s right, yes. It’s an interesting concept of hot spots, isn’t it? I think people often get very excited by them, don’t they Kevin, let’s jump in there and see whether I could make some money out of [inaudible that area. As I’m sure we’re about to discuss, it’s not always a good idea.
Kevin Turner: No, well, interesting too, quite often when a hot spot is identified, it’s no longer a hot spot, because they, it’s the signs that lead up to it that are when you’ve really got to jump in.
Carolyn Boyd: Yes, but people often, you look at that data and you’re seeing it in the past I suppose, if that makes sense, when you look at, you’re seeing things that have already happened, then you think well, I might jump in, but you might have already missed that rise. The danger is, that what goes up often does go down and you’ve picked it up at the wrong time.
Kevin Turner: Quite often we’ve seen that with things like mining towns, that’s probably a classic example, isn’t it?
Carolyn Boyd: It is a classic example and I think a lot of people, you know because you hear the stories of people who did so well going into a town and then all the sudden all the miners were out maybe to rent out properties and were paying rather large rents and then things were then obviously on selling to other investors for high prices, but for all of those good stories there’s lots of negative stories as well as people have come in at the time when perhaps that town that was just relying on that one boost, the boost has gone away and then so have the property prices and rental income.
Kevin Turner: In your discussions with Dr. Andrew Wilson who is the senior columnist at Australian Property Monitors, what did he say? What should investors be doing?
Carolyn Boyd: He’s saying that sticking to the fundamentals is a much better way to go. That the property market isn’t a license to print money, so always looking not just necessarily for the hot spots. Hot spots are often driven by just one economy in an area. You know, something might be going really well and then that’s given it a bit of a boost but that’s dangerous because, as I mentioned, if that dies off, then so often does all the other economic activities relying on that. But if you’re looking for an area, the good basic fundamentals is a much better way to go. Properties that are well placed. They might be good infrastructure, they might be an area that’s got lots of things going for it in terms of different economies, so if one gets into trouble the other ones will still keep the area going.
Kevin Turner: I understand too, he talked to you about short term and long term capital gain and whether or not property at this point is there a place for short term capital gain?
Carolyn Boyd: He certainly did. You know, I think his view and I think the view of many investors is the medium to longer term view is a good way to go, because chasing short term capital gain is risky because you go in thinking, it may make you pay over the odds as well, thinking I’m going to make a quick buck here and get out, whereas if you’re taking a medium to long term play, you’re probably likely to take a more considered approach. In the property market at the moment, I think that we, the experts are saying that we’ll still see price rises but they’re not going to be double digit price rises or anything like that because just the, we’ve hit that affordability peak, despite the low interest rates. A longer term play is probably a safer way to go.
Kevin Turner: The bottom line, Carolyn, your impressions from your discussions with him, in terms of whether or not hot spots really exist.
Carolyn Boyd: Well, I think hot spots, they do exist in the sense that sometimes property prices go up quickly in an area, but you need to understand what’s behind that and you also need to think, you know, to be reasonably risk adverse and quite well researched if you’re looking at any of those areas.
Kevin Turner: Carolyn, thank you very much for sharing that knowledge with us and all the best Carolyn Boyd, who’s been my guest. Carolyn is a property expert from Domain. Thanks for your time, Carolyn.
Carolyn Boyd: Thanks Kevin.
James Freudigmann
Kevin Turner: Previously, I was talking to James Freudigmann from Propell Valuers. We looked at the risk rating on property. If you missed that, you can find it in the library at Real Estate Talk. James joins me once again.
The last discussion was fascinating because we did really talk about the big differences between the appraisal and the valuation, massive difference. The appraisal is what a selling agent is going to give you. An valuation, of course, is what a valuer will give you. We say hi to James again. Thanks for joining us again, James.
J. Freudigmann: No worries, Kevin.
Kevin Turner: I wanted to pick up on the conversation from last time. In particular now, I want to ask you about bedrooms. As a real estate agent, we always think more bedrooms = more value. Is that the case?
J. Freudigmann: Not necessarily, Kevin. A lot of people do think if you buy a house and cut it up and make a living room into 2 small bedrooms that are maybe 2.5 by 3 meters, they think having those extra bedrooms actually adds value.
Sometimes we see that having less bedrooms can work out in favor of the owner. The main reason being is that a lot of people are now looking for more spacious bedroom, not so much having more bedrooms.
Kevin Turner: If that’s the case, what are some of the things that we can add to a property that will actually lift its value, James?
J. Freudigmann: The things that will lift value, Kevin, are looking at a good indoor/outdoor flow. A lot of people are now wanting to have more space outdoors and live that more outdoor lifestyle. To have some sort of flow-through from your living room to your outdoor area is definitely a way to add value to your property.
Also a little bit more open plan. It’s now becoming a very more modern style to have an open plan home. If you’ve got the ability to take out a wall and have a breakfast bar or something like going from your kitchen into your living space, then that can definitely add value as it gives a perception that it’s bigger than it actually is.
The other thing is for a lot of valuers, the first impression really counts. When they walk up to your house, if it presents poorly, your front fence is falling down, you’ve got paint peeling on the house, that sort of thing, that images stays in the valuer’s mind when they’re going through the property and also when they’re leaving.
It won’t make a substantial difference because at the end of the day, the value is put on the improvements in the land, but that impression does make a big difference, so if you can make your property present well from the street, then it’s definitely a way to add value.
Kevin Turner: That’s an interesting point you make there because we quite often think of valuers as people walking around with those little wheels and measuring the areas and doing it quite statistically, but they do actually take into account the emotional things?
You talk about first impression there, painting and so on. How big a factor … You said it’s not a big factor, but can you put a percentage term on that?
J. Freudigmann: Probably not. Each valuation, while it is calculated, it is that valuer’s personal opinion of the property. I wouldn’t be able to put a real percentage on it, as it will vary in the value of the property.
Say on a $200,000 property versus $1 million would be substantially different, but it does definitely make an impression. In terms of marketability then in the future, your saleability or marketability of the property is a lot better when it present well.
Kevin Turner: Talking about things that add value and take away value, I’ve quite often thought that pools don’t necessarily fit everyone. Is a pool a lifestyle thing or does it actually add value?
J. Freudigmann: It does add value, Kevin, but it’s generally not to the value of what it costs you to put it in. A lot of the time, to put an in-ground pool can be quite an expensive cost, especially when people like to do the infinity finish or they do paving around it, that sort of thing.
That can be quite an expensive element. It is definitely a lifestyle choice if you want to put it in, but, generally speaking, it doesn’t add as much value as it costs to actually install.
Kevin Turner: What about some of the other features that actually detract from value? I think I read somewhere that things like murals painted on a wall can actually detract. Can you give us some other examples?
J. Freudigmann: Yeah, absolutely. Murals is a perfect example where that’s a very personal taste. Feature walls, that was a phase a few years that some people painted a bright red wall or a green wall, something like that. Those sorts of features generally detract. Some over the top light fittings … Some people like to look for a more classic style light fitting.
Some things like that can actually detract from the value of the property. Also if you’ve got a very pokey floor plan, where it’s in and out and there’s hallways here there and everything, that’s another thing that generally detracts from the value because people see they’ve got to spend a lot of money to actually get it to a livable standard.
Kevin Turner: James, great talking to you. We’ll get you to come back again at another stage. I want to talk to you about granny flats and a few other things too. My guest has been James Freudigmann from Propell Valuers. Thanks for your time, Kevin.
J. Freudigmann: Thanks, Kevin.
Michael Yardney
Kevin Turner: Quite often we are asked the question, out of all of the factors that influence property prices what is the number one driver of capital growth? Now there’s a really interesting blog on our website, we’ll tell you how to get to in just a moment, that Michael Yardney wrote about this subject and I want to talk to him about it now. Michael of course is our regular contributor from Metropole Property Strategists. But Michael, what is the answer to that question?
Michael Yardney: Good question. Out of all the factors that influence property price growth, in my opinion, is affordability. But Kevin is not what most people say, I don’t invest in affordable areas. Unlike others I propose you to be investing in areas where people have got high disposable income and where the residence can afford to and are prepared to to pay a premium to live there.
Kevin Turner: Michael that is very different. So how do you do that?
Michael Yardney: Kevin in the last five years census period, Australia wages went up on average about 20%, but in some municipalities, and you can get them through the Australian Bureau of Statistics website, wages went up double that. So if you think about in those ares people got more disposable income, they can spend it on fancy cars, or on big plasma TV screens, but a lot of people tend to spend it doing up their homes or buying better fancier homes and those are the areas which are going through a bit of gentrification as well, the other sort of areas I like to invest in, locations where there is a wide demographic of affluent people who, as I said a moment ago, can afford to but more importantly are prepared to pay a premium to reside there because of the amenities, because of the lifestyle and lately it’s a lot to do with where jobs are Kevin.
Kevin Turner: So Michael how do you find those areas?
Michael Yardney: Well Kevin I’ll explain in just a sec but there’s some pretty … graphics by … a recent study by the Gratin Institute called Mapping Australia’s Economy, that I’ve included and blogged on the real estate talk website under my sponsored channel, the blog is called the number one driver of property price growth. But what they showed was that currently Australia’s economy is doing well but interestingly 80% of the value, all the goods, all the services, everything we create is created on 0.2% of our land mass. What this showed is that the capital cities, the big capital cities, those are the engines of our prosperity.
Kevin Turner: Michael, it wasn’t always that way, was it?
Michael Yardney: No. Currently, people living in the capital cities are ones that are highly skilled workers working in the IT industry and in other service industries, but in the early 20th century one in three workers were employed in primary industry and almost half of the population lived in rural properties or in towns of less than 3000 people. Yet today, as I said, 0.2% of our land mesh is where we produce 80% of our economic activities and this are predominantly in our four big capital cities and in fact when you dig down deeper it’s actually in close to or in the CBDs of those capital cities.
Kevin Turner: So does it make sense therefore that the governments are trying to decentralized people or should they be really focusing on the capital cities?
Michael Yardney: Most people want to live close to where their jobs are. Of course all jobs are accessible if you’re prepared to drive long enough and far enough, yet few people really are today prepared to commute more than they have to. So given the current travel trends jobs that were more than 45 minutes or so away by car or 60 minutes by public transport are sort of classed as inaccessible.
Yes, all this new suburbs on the outskirts of our cities that’s not where most of the jobs are and that’s not where most people are going to want to look in.
Kevin Turner: So Michael, what does that mean to a property investor?
Michael Yardney: To me the conclusion is Australia’s economy continues to shift towards a more service based economy, more and more economic activity will become increasingly concentrated now on major capital cities and I see this meaning that there’s going to be a trend to more medium in density, high living, more medium and high density living, Kevin, where we’re going to live in apartments, townhouses, we’re going to swap our backyards with balconies, people are going to want to live close to where their jobs are, they would want to live close to where activities are, where all the amenities are.
So I see our population growth, and the wealthy people in these higher paid jobs unpinning property values in these areas, Kevin.
Kevin Turner: So there’s nothing really new about that, Michael, is it?
Michael Yardney: No there isn’t. Over the years the differential between the inner suburbs and the outer suburbs has become more and more so and it’s not just the same in Australia like the way Australians do same, oversees and all the big capital cities of the world.
Kevin Turner: So what’s the conclusion you draw from all this, Michael?
Michael Yardney: Kevin, if you want to grow your wealth or property investment, you’re going to need to own the type of properties that would outperform the averages with regard to capital growth. I see that in the suburban and middle ring suburbs are going to become more and more expensive relative to outer properties in the future just like they have in the past. I guess this is because in the future more and more of us are going to trade backyards for balconies and live in the inner and middle ring suburbs of our big capital cities because this is where the major economic activities occur, where wages are higher, where disposable income is higher and in general source where the amenities are, Kevin.
However, despite what I said about much of the activity occurring in our CBDs I would be avoiding the inner part of the CBD, I’ll be going to the inner ring and middle ring suburbs because what generally happens in the CBD is there’s an oversupply of properties and this tends to dampen capital growth and rental growth.
Kevin Turner: So is this that 5 to 10 or even 15 kilometer radius you’re talking about, Michael?
Michael Yardney: I think that’s about right in the big capital cities, but of course, not every suburb and even within those suburbs you’ve got to be specific about locations. You know in your own suburb some of these areas where you would live in areas where you wouldn’t live. But there has been over the years a bigger differential between the inner and the other suburbs and that’s going to keep happening, Kevin.
Kevin Turner: Very helpful advice Michael and thank you very much. Once again we refer you to Michael’s blog article which is on real estate talk, it’s under Michael Yardney’s sponsored channel and the heading for that blog is The Number One Driver of Property Price Growth. Watch that or look at that in terms of what Michael has been saying here today. Michael, thanks for your time.
Michael Yardney: There’s some really good graphs on that. Thanks Kevin.
Jenni Brown, Michael Matusik and Rachel Barnes
Kevin Turner: What’s the best and worst advice you’ve ever received? That’s a question I asked of mindset and lifestyle coach Jenni Brown recently. Jenni, what is it?
Jenni Brown: The worst advice I ever received … There’s actually a couple of things. One was around the type of structures and entities that I should invest in, and that cost me a lot of money.
Another thing was I was told once that 0 is worth nothing, so another 0 on the end of a figure, for example going from $100,000 to $1 million, is really nothing. That was really bad advice. It cost me a bit of money.
The good advice … The best advice I ever received was from my dad. He said, “Jen, you can do anything you set your mind to do. Don’t settle for less than what you want. Just go for it.”
Kevin Turner: Good advice there from Jenni Brown. I caught up recently also with Michael Matuzik, and I asked him about the traits of successful investors.
Michael Matusik: One of the things an investor needs to understand is the 40/60 rule. My experience is that a lot of them don’t. What I mean by 40/60 rule is that if you look at the success of a project, 40% is when you buy, and 60% of the property’s performance is what you buy.
A lot of energy and time is spent on buying it at the right time, and too much time isn’t spent on what you buy. If you look forward for the next 3, 5, I think even maybe 10 years, it’s what you buy that will be even more important.
Here I’m talking about getting the most rental growth and rental performance out of a property rather than relying just on capital growth, which seemed to apply in the last 10 years to many properties, but the future is somewhat different.
For me, if you’re a passive investor, and most listeners probably are … What I mean by passive is lock and forget and not renovate and so forth, then looking at buying a new property is the good place to start in terms of what you’re buying. There’s lots of practical advantages, and you usually get a lot more rent.
Kevin Turner: Some very good advice there from Michael Matusik. Here’s a bit more too, as we spread around our experts. I spoke to Rachel Barnes, who is a commentator on property, and asked her, in her experience, what she sees as one of the classic mistakes that investors make.
Rachel Barnes: One of the main things that people do wrong is they don’t get into the market. They spend a lot of time talking about it. They’re going to, they’re going to pay their house off first, all of these other issues that come up. The bottom line is the biggest mistake most investors make is not getting in early enough.
Kevin Turner: Analysis paralysis?
Rachel Barnes: Absolutely.
Kevin Turner: Too much of it. What is enough? You’ve got to satisfy yourself that you’re making the right decision, but sometimes if you do that, then you continue to analyze. You’re almost looking for a reason not to do it. Is that fair comment?
Rachel Barnes: That’s exactly right. When you do your analysis, you’ve still got a lot of … There’s some objective and some emotional issues that you put into your analysis. A lot of people will start putting in things that are unrealistic because of that fear factor.
Kevin Turner: I guess you’ve got to have a criteria. When you meet that criteria, you act.
Rachel Barnes: Absolutely. It might mean that you need to have a buddy with you to run that past because sometimes in your own mind, you can get too scared. Get a mate. Get on board.
Frank Ruffo
Kevin: Let’s find out now what silent sales are, probably you can guess from the name that it’s maybe a product that hasn’t been on the market, but let’s check in with a real estate expert or a real estate agent, a top agent from Melbourne, Frank Ruffo, who is the Principal of Hodges Bentleigh. Frank, what is a silent sale?
Frank: Hi Kevin. A silent sale is a vendor who is contemplating selling. It may not be immediate. It might be a question of price and proper settlement, a settlement term that actually suits them. Then what we’ll do from that point is we’ll probably match make a buyer with that vendor, so we may have a buyer who is passive in the market and will say to us it is a property that certainly hits their criteria for us to let them know. We may have a vendor who has a mild motivation in selling. We’re really a match maker for these two parties and getting those two parties to have a transaction.
Kevin: Probably a good result for the buyer, but I sometimes wonder, Frank, we see properties that aren’t marketed could possibly be sold under market. Is that a possibility?
Frank: Not if the agent has done their due diligence with the vendor and the vendor is well in tune with the sales that have occurred around them. Certainly if a vendor is not experienced in the market sale, they should get experience and find out what their home is actually worth. The other point I would probably make is that it can be done without fuss. Some vendors would prefer the private method of sale. My opinion is that going to market is always guaranteed to get the price possible, but for those who want to silent sale their market opportunities it also is still available.
Kevin: I guess for buyers who are looking for those opportunities, you really got to have your name registered with a number of agents to actually do that because you might not even know that it’s come on the market.
Frank: Yeah, correct. If you call one of your local estate agents or possibly a few of them, put your name down, let them know you are interested, you are a cash up buyer, these are certain properties that you’re looking in, have regular contact with the agent, don’t wait for the agent to call you every week or two, call the agent and say, “Do you have anything now? If you see something this week that might suit me …” and really be front of mind when that agent gets that property that you are the person that they call.
Kevin: Have you had much experience with this Frank? Have you actually done many of these silent sales?
Frank: As a matter of fact, we just finished the last financial year recently and about $65 million of the sales were conducted in this form.
Kevin: Wow, that’s quite sizeable. Frank, while I’ve got you on the phone, I want to tap into your experience. I’ve had a question sent in to me from Heather which is one that I’m hoping you can answer. Heather writes, “Are real estate agents allowed to withhold an offer to a vendor until they have secured other offers? We wish to put in an offer on our property and pay the full listed price, but the agent is telling us he will not present any offers until after the open home. I might add that the agent is even refusing to write up our offer. Is that legal?” Is that normal, Frank?
Frank: No, it’s certainly not normal and it’s not right. A vendor is entitled to know that there’s an offer on their property the moment the offer is made and they exist. The agent can have a conversation with the vendor and give them some guidance whether it’s an offer they should accept or not accept, but let them know that that offer is available. If the agent is waiting on another offer or another two offers to let both parties know so there’s transparency in the whole transaction. Where there’s transparency, there’s a better result not only for the purchaser but absolutely for the vendor. That agent not telling the vendor, in my opinion, they’re not doing their vendor a great service.
Kevin: Yeah. Heather has actually drawn the conclusion from this a little further in the email as I read down saying presumably the agent is doing this to use our offer to secure other offers at a higher price, but it doesn’t actually work that way. If the agent is actually working for the best interest of the seller, they’d want that offer and then they’d want to be able to negotiate it up I would have thought.
Frank: Well, with the offer, you can go back to a party and say, “We have another party that’s interested at a similar price point.” Whatever is real, whatever is happening, communicating that both with the vendor and the purchaser real live transaction is always going to get the best result both for the vendor and the purchaser.
Kevin: In the event that you are in competition with someone like that, is there a possibility that the agent would disclose your offer or is that something that’s not done?
Frank: Certainly different businesses have different rules of practice, what they perceive to be good business practice. There’s no set rule on how offers are presented to other buyers as much as an offer on a particular property. Perhaps before you put your offer in is ask the agent, “What is the process from here? Once we give you an offer, what is the process?” Try to get that in writing if you can by email just to really protect your position.
Kevin: Because you could actually be subject to gazumping in that situation, couldn’t you?
Frank: If your offer is a very good offer and it’s one that the vendor would consider and there’s no one else above you, you certainly won’t be gazumped. If you’re offer is a mild offer and probably at market would be below market, you might have the opportunity of missing out that property. If you really want that property, make an offer that’s a fair and reasonable offer that if someone did go above your price, you won’t be disappointed.
Kevin: I know Rob Balanda, he’s one of our experts, he’s a solicitor, he sometimes suggests if he finds you in that situation, you should put a timeframe on your offer and say that we need to get the acknowledgement back by 5:00 p.m. today or tomorrow. What would be your reaction to that?
Frank: It’s great advice. It really comes down to how much you want this property and are you prepared to let it go for a few thousand dollars and really knowing the process prior to you putting in the offer, what that agency’s good business practice is, once there’s an offer, are they presenting that offer directly to the vendor, will I hear correspondence within an hour, a day, two days? Then if it’s not to your liking then perhaps put a time limit on when your offer is valid.
Kevin: Very good advice. Frank Ruffo from Hodges Bentleigh has been our guest here and Heather Belington for sending a question and we’re going to give you a 12-month subscription to Australian Property Investor Magazine, thank you for the question Heather. Frank has answered that very, very well for you. If you got any questions, send it in through the website. Who knows, you may also walk away with a 12-month subscription to Australian Property Investor Magazine. Frank thanks for your time.
Frank: Thank you Kevin. Cheers.