Demographer, futurist and social commentator, Mark McCrindle says ‘your first home isn’t likely to be your forever home’ but that doesn’t stop some people spending too much time worrying about their first purchase. You might be surprised to hear the average number of properties we live in during our lives, how long we stay in them and how that has changed over the decades. I know I was.
Chris and his partner are concerned about asset protection and in particular transferring equity from a principal place of residence into a trust for investment purposes. Our expert in that area, Ken Raiss is along to help with some sound advice.
We check in with Nhan Nguyen to find out how he is going on week 3 of his 30 day flipping exercise. Buying and selling a property in 30 days to make a big profit with little or no outlay. He strikes a snag this week.
Our feature guest is Stuart Wemyss from Pro Solutions Private Clients. We dig deep to hear his personal stories about investment in property.
This low interest rate environment is opening up a number of opportunities for astute investors and Shannon Davis clues us up on what is happening.
You will find us at iTunes under podcasts as Real Estate Talk. Listen there for free, leave a review which helps us grow and tells us what you like and how we can improve the show. Don’t forget to subscribe at the site as well –even if you do get the show through iTunes – so that we can tell you about the bonus offers we make to subscribers. Your questions are welcome through the site as well.
Transcripts:
Nhan strikes a set back with his flip – Nhan Nguyen
Kevin: Let’s continue our journey and our story with Nhan Nguyen from Advanced Property Strategies. You might recall over the last couple of weeks, I’ve been telling you about Nhan’s journey where he was going to secure a property – he has done that; it’s on the south side of Brisbane – and with very little work, he was then going to flip it over.
I’ll just quickly summarize this, Nhan, before we jump into the chat. Your purchase price was $320,000. You then achieved a contract. Last week, you told us about it at $410,000. Reviewing last week’s chat, I also understand that you’re not going to be doing much work to it.
Nhan, welcome to the show once again.
Nhan: Thanks, Kevin. Thanks for having me.
Kevin: That’s a quick summary of where we are. This is week three. How are we progressing with that contract?
Nhan: Gee, the rollercoaster ride continues with the 30 day challenge. In the last 24 hours or so, the contract has actually crashed. The building and pest was done earlier in the week, and the contract has recently been terminated. Here I was, counting the money, but they did a building and pest report, and it turns out that some of the termites, which we did find on our original building and pest report, we didn’t treat. Oops! The new buyer had has a building and pest report done and has got spooked off and within a couple of days, has terminated the contract.
Kevin: Was there any way to salvage it? Could you have gone back to the buyer and said, “We will treat it?”
Nhan: At this point in time, my initial conversation with the original seller to me was that that seller wouldn’t negotiate with me based on a building and pest report. Maybe arrogantly, I said that I’d set those same lines to this new buyer. He’s just determined to basically not go ahead with any negotiations and just wanted to walk away because I think he was just a bit scared.
Kevin: I’m just remembering from last week, too. That purchaser actually had missed out on a property on the same street for $440,000. Where to from here, Nhan?
Nhan: The other good news that we had literally today is that we’ve secured another contract – another offer has come in. I have it in my inbox that we have had another offer come in at $405,000. It’s about $5000 less than the other contract. It has a building and pest and 14 days for finance. I think in this instance, we’re going to have to go and treat those termites, which is only going to be a couple of hundred bucks.
We’ll probably disclose with the buyer the building and pest report and see what they’re comfortable with because I don’t want to spend another week or so waiting to see if they’re going to crash it again on the building and pest.
Kevin: Are you able to give them the previous building and pest inspection report?
Nhan: Yes, that’s what I plan to do. I have it on a PDF, and there are no rules to say that I can’t do that. It’s up to them if they choose to read it and respect it or not, or if they choose to do their own. This is a journey, and my challenge is to do as little as I can to the property. I’m thinking that I might have to clean it up, remove some of the termite damage, get a bit of spraying done, and we’ll see after this contract whether I have to renovate it or not.
Kevin: Admittedly, even if it’s $5000 less, you’re still well and truly in front. It’s not quite as big of a profit as you thought, and you’re going to have to dip into your pocket to get that treated. What would be your advice to people in terms of disclosure? Will you say to that buyer now, “This is what’s happened?”
Nhan: In my personal view, I don’t need to disclose that. All they need to know is that there are termites on the property. I believe that the fact that the previous contract has fallen out is none of their business. It’s another person’s choice based on the same information. What I’ll do is I’ll just say to them, “We’ve had a contract that came through. It didn’t proceed as we thought it would, and we’re putting it back on the market.”
This particular buyer, he’ll make his own decisions based upon doing the building and pest himself or on our building and pest report, whatever he chooses to do. We’ll go from there.
Kevin: It’s still good buying. If a similar property on the same street sold recently for $440,000, and yours looks like it’s going on the contract of $405,000 or even $410,000, it’s still very good buying.
Nhan: Yes. I think it’s just managing expectations. Originally with the $410,000, counting the money at $65,000 or $70,000 profit, it’s just $5000 under. Look, we bought it for $320,000, so there’s a lot of margin in there. I think that part of when you buy right, it allows you to negotiate more fully, whereas if I had bought it for $400,000 and sold it $410,000 or $405,000, I’d definitely be losing money after stamp duty and legals and things like that.
Kevin: Have you settled on the property yet for your purchase?
Nhan: No, not yet.
Kevin: When does that happen?
Nhan: That happens very soon – I think in about a week or so.
Kevin: So it will be a small period of time when you do actually own the property?
Nhan: That’s right. If this contract is a 30-day contract, it’ll be only for three weeks. If the contract is 60-day settlement, it’ll be probably seven weeks. We want to get that gap as small as possible to minimize my holding costs, but I think anything from 30 to 60 days from settlement to settlement is pretty cool.
Kevin: Do you have any of your own funding in this? Did you have to put a deposit in, or is it 100% funded?
Nhan: In this particular project, because the project is quite small, I’ll just fund it myself. What I mean by that is it’s small in terms of quantity, but also if we profit share it, let’s say there’s a $60,000 profit in it, I can’t really justify giving away 30%, 40%, or 50% profit share for a profit that small, and I can settle it myself.
That’s what I’ll be doing: just settling it myself, probably cash initially for about a week or so while the bank refinances my cash out if necessary. Otherwise, I’ll just leave my cash in there for a month and have the subsequent buyer pay me back, and we’ll just roll again.
Kevin: I guess you just assess it as you go along. You just look at each week as it comes along and make a decision about what direction you’re going to take with it.
Nhan: Yes, exactly. I do find because we are scrutinizing it on a daily basis, on a weekly basis, it just seems like 30 days is such a long time between contracts. But we’re fortunate to know that the property is in high demand. It’s zoned for units and townhouses, 700 odd square meters with 18 meter frontage, so it’s in high demand and we’re getting a lot of leads from our marketing. It’s working really well.
Kevin: Are you on the lookout for the next one now?
Nhan: Yes, we are. Now that we know that this kind of marketing works – we’re doing door knocking, we’re doing letters, we’re doing flyers – we’re definitely ramping it up, and we’ve picked another couple of suburbs. We’re just ramping up to spend on the marketing to be able to find out our next deal. Our next deal might be a flip, it might be a buy, hold, and renovate or a buy, hold, and develop. It just depends on the project. [6:31 inaudible]
Kevin: We’ll check in with you again next week. Hopefully, this new contract might then be in place. You might also have some good news for us about the building and pest, as well.
Nhan: Yes, that’s right. Let’s see there. I’m not going to count my chickens before they’ve hatched. We are looking for another backup contract, and we’ll see how it goes.
Kevin: Good on you. We’re at week three of the 30 day challenge with Nhan Nguyen from Advanced Property Strategies. We’ll be back next week, and we’ll give you another update then.
Thanks for your time, Nhan.
Nhan: Thanks, Kevin. Thanks for having me.
Assett protrection whne transferring equity – Ken Raiss
Kevin: Joining us once again to answer your questions, Ken Raiss from Chan & Naylor.
Good day, Ken. Good to have you back on the show again.
Ken: Thank you, Kevin. I hope you’re well, as well.
Kevin: I’m very well, thank you. Lots and lots of questions coming in for you, and we have one from Chris. But just before I read that, I just want to remind you once again that your questions are always welcome. You can send them in through the website, and we’ll always get an answer for you from Ken or any one of our experts.
Ken, this question, as I said, comes from Chris. Chris says, “Great podcast.” Thank you for that, Chris. We really appreciate putting it together for you. “Very informative and very motivating. My partner and I are concerned about asset protection,” as everyone should be. “What’s involved with transferring equity from a principal place of residence into a trust for investment purposes? What issues and restrictions should we be aware of?”
There’s no one better to explain that to you than Ken Raiss, my guest.
Ken, over to you.
Ken: Great question. We get this question quite a lot. One of the mistakes people make is they physically transfer the property and then trigger the capital gains tax and stamp duty. The way around those taxes is by shifting equity. It’s the same as if you had a bank account with money and you moved it from one bank to another, there’s no tax implications.
There are a number of very critical steps that you have to perform. They are both legal for tax purposes but more importantly, to meet the conditions of the Bankruptcy Act.
The first thing you need to do is understand how much equity you have, and we do this normally via a solvency statement because if you effectively transfer one dollar more than you actually have, the whole transaction is void. A solvency statement, determine the amount of equity, and then transfer that as a gift into the trust.
You then borrow that back via a mortgage. So it’s critical to have proper mortgage documents, and we always say witness those documents for proof of the date that it was done. You have to pay your mortgage stamp duty on that mortgage, particularly in New South Wales.
There is a four-year callback period that in the event of bankruptcy, a receiver can go back four years to unravel everything. But that would have also been the case if you had sold the property and paid all the taxes.
You just have to be careful as time goes by, that as the values grow, you have to re-gift and re-loan, and again, with proper mortgages and proper solvency statements, and obviously, the four years on that increase starts again every time you increase that gift and loan.
What’s very important that a lot of people miss is you also have assets in trust. The equity that you have in a trust can be at risk. If a tenant sues you, if someone sues you, your assets in the trust are normally safeguarded, but if someone inside the trust sues you, then they’re at risk, as well. We always tell people to shift the equity from personal names, companies, trusts, into what we call an equity bank trust to achieve the asset protection requirements you speak of.
Hopefully, that’s answered your questions. Just follow those points and get a good legal mind behind the preparation and execution of those documents.
Kevin: It always highlights to me every time I talk to you about trusts and what to do with them, that you really need do need some expert help. There’s no one better than Ken and his team at Chan & Naylor. Of course, they are the ones who we recommend, and Chris, I would strongly suggest, if you want to, you can use the link on Real Estate Talk to talk directly to Ken and his team.
Ken, thank you, once again, for answering that question, and I look forward to catching up again soon, mate.
Ken: Thank you very much, Kevin, and thank you, listeners.
Housing – it is not a ‘forever’ decision – Mark McCrindle
Kevin: There was an article that was out earlier this week that said your first home isn’t likely to be your forever home, and it got me thinking about how many people actually live in a home that they were actually born in and whether or not this mindset makes us maybe choose the wrong house or maybe puts us into a mode where we find it very hard to make a decision.
How many people actually buy one house and live in it forever? Joining me to have a look at the stats around this on Australians and the homes they live in is demographer, futurist, and social commentator, Mark McCrindle.
Good day, Mark.
Mark: Good day, Kevin.
Kevin: Nice to be talking to you again.
Mark: Likewise.
Kevin: Mark, how many people actually do buy one house and then live in it forever?
Mark: Very, very few these days. In fact, the trend lines are for us to be moving homes far more frequently now than we did in the past. One of the biggest drivers of that has been the massive increase in the numbers of people renting and renting for longer periods. We know from the Australian Bureau of Statistics data that the average renter stays 1.8 years per home.
Even if you have ten years in your twenties where you’re doing the rental thing, which is mainstream now – a lot of people have been renting for a lot longer than that – that’s five homes at least just in that ten-year period.
We know that those who are paying off their home – and actually the majority of all households still have a mortgage – they have an average tenure of eight years per home, so that’s not the 30 or 40 years of home ownership that perhaps our parents’ generation had, but eight years.
That’s because people will buy their first home – maybe it’s a unit or apartment – and they’ll pay that down a bit, and then they’ll jump up to maybe a townhouse as the kids come along or they need a bit more space, then maybe to a smaller home and then maybe another home down the track. We’re cycling through more property – even when we own it – than ever before.
Kevin: I’ve often thought, too, that a lot of people agonize over making that first purchase decision thinking that this is going to be the place they want to live in for the rest of their lives when it’s really only, as you’ve just demonstrated, sometimes quite a short-term prospect.
Mark: Exactly right. That’s eight years average, of course. Some people have the 25-year mortgage, they’re paying that home loan off over a long period, which means a lot of people are buying a home, living in it and moving on every three, four, or five years, so that’s the median.
Those who have paid off their home, if we track those, have been in their homes on average 18 years. That’s the older generation. That was the traditional way, the Aussie Dream; you buy the forever home and you stick with it. But as for the next generation coming through carrying the debt of the mortgage on that home longer, far more churn than ever before.
Kevin: Have you got any idea on how many homes the average Australian will live in during their lifetime?
Mark: We have done some figures on that, and it sounds astonishing, but if we think of the number of homes, whether we own or rent, throughout the full lifecycle, it’s 15, which is a lot. We have about three homes in our upbringing before we move into the adult years just based on the parents moving a little bit and maybe that trial move out of home and then bouncing back when the costs get too high.
There are three there, and there are three homes that we’ll live in in our retirement years. There’s the downsizing home, there’s maybe a shift to retirement living, maybe supported age care down the track, which means that there are nine homes that we’re living in in our adult years.
Many of those homes are in that mortgage period, as I said, for the decade or so, but then you have the three or four homes that people will own in their adult years, as well. That’s just a lot of churn, 15 different premises in which we will live in our lifetime.
Kevin: Mark, it’s interesting, isn’t it? I think you mentioned the average stay time is about 18 years if you’re purchasing a home, and if you think about that, that allows the kids to grow up. I’m just wondering about today’s youth, whether or not they’re staying at home a little bit longer, maybe moving with mom and dad, or are they just moving out?
Mark: They are staying at home longer than ever, into their twenties – and indeed, closing in on the mid-twenties is now the norm. But interestingly, the Bureau of Statistics did a study on this and found that all of those mid-twenty-somethings who are living in the parental home, half of them had already moved out and moved back again.
It seems in Australia as if we do stamp our independence maybe in the uni years or maybe just after uni, moving out with their friends, trying out the home share, maybe even renting your own place, and invariably, when it comes time to save a little bit more for the mortgage of one’s own place or just with the rising costs, people move back to the parental home. That’s what takes place there.
Yes, parents are supporting their children in the parental home a little longer, which can be helpful, but that creates this multi-generational household more than we ever had before where you have the adults there and often their twenty-somethings still living under one roof.
Kevin: Fascinating. I’m talking to Mark McCrindle, and you can follow Mark at his website, McCrindle.com.au.
Mark, we’ve established that our first home may not be our forever home. Are first homes still fairly typical of the way that they were in, say, the 1950s and 1960s – three bedrooms, one bathroom, one lounge?
Mark: No. We’re getting a lot more in our homes. This is where some of the figures… We’ve done a lot of this calculation that if you go back four decades ago to, say, our parents’ generation, when they were buying their first homes – the young people of today, their parents – in the mid-1970s, the average home was five times the equivalent of average annual earnings. Today, it’s ten times those average annual earnings, so in a sense, it’s twice as much. You have to save twice as long to get that home.
But if you think about the average home of today, it’s a lot bigger and better equipped than the average home of the mid-1970s. Our expectations of our first home is quite different. Baby Boomers are quick to point this out, but yes, we got our first home a bit younger than our children’s generation, but that’s because we were prepared to take that little flat on the outskirts of town, not get the latest furniture, use hand-me-downs for a fair while, and pay that thing off.
There was a different attitude to home ownership then. We wrote a report on this recently and said many in the Generation Y category expect to start their home life in the manner in which they’ve seen their parents finish their home life, in a nice home in a nice part of town. That’s not how it used to be and it’s not always possible.
Kevin: Fascinating. I know you’ve done a lot of work, too, on the wealth of Australians, and I know that we quite often talk about how the older generation have built their wealth on housing. You’ve had a look at this. Can you give us some stats on what you found out?
Mark: That’s right. The Baby Boomers have done very well, and that’s because they did follow that traditional Aussie dream of home ownership. It was a bit more affordable, as we’ve said, for them, but it’s a home ownership and paying down their mortgage has the extra benefit, for wealth purposes, of forcing one to save and to pay down that debt.
The downside for Generation Y is that because homes are harder to buy, they’re not buying those homes, but they’re not investing that money that otherwise would go into a home into some other appreciating assets – shares, etc. – but rather, renting and then with a bit more of that cash that they have available, spending that money on lifestyle pursuits, travel, and the like, which is great for the lifestyle but doesn’t create a nest egg for them.
Subsequently, we have the Baby Boomers who are a quarter of the population earning 53% of Australia’s national private wealth – more than half owned by one quarter – whereas the Generation Y, 15% of the population owns 7% of the national wealthy. Their economic footprint is just half of their demographic one. Now, they have a lot of wealth accumulating years to go, but they are further behind where their parents were at the same age.
Kevin: It’s reflecting priorities, I think, isn’t it? I know in my generation, getting the house was the most important thing. It was bred into us. You have to get that first house, then hold onto it and build your wealth that way. I’ve spoken to a lot of young people who say, “I think I’d much rather travel. I’d much rather have a little bit of flexibility about what I do.” To them, it doesn’t seem to be as important, Mark.
Mark: It doesn’t, and it is a generation more focused on the journey than the destination, a bit more living for the now. There are some great benefits to that: the life experience and the travel. That’s something to be appreciated. The study that they’re investing in, also, is going to set them up well, but it can create and delay the financial challenge of the future because it’s not getting easier to own.
If we look at Generation Y, they’re a high-income-earning generation with a low net wealth: income rich, asset poor. The average Generation Y household annually is bringing in $113,000. That’s some pretty good money coming in, and that would be enough to get hold of some sort of property, maybe not to live in – it might not be where they want to live, but at least getting a foothold.
But there does seem to be a bit of a negative sentiment that “Oh, it’s impossible to own a home; I’ll just be a lifelong renter,” and that can create a vicious cycle of non-gain in wealth accumulation.
Kevin: It’s almost like a resignation, isn’t it? It’s like “I’m just resigned to the fact that I’ll never own a house now, so let’s just get on with life.”
Before I let you go, I’ve certainly held my average up. I think just doing some quick calculations, I reckon we’ve been in at least 20 houses. What about you?
Mark: I’m probably halfway through that lifecycle. I’m probably up to about seven or eight. I’m probably slightly above the average, as well, in that regard. I’m probably part of that era where there’s just a lot of churn.
Kevin: I think in my job, too, in radio, we tended to move around quite a lot. I think in the early days when we first got married, we were actually moving quite a lot. Anyway, that’s just the way it goes.
Mark, it’s great talking to you. Thank you so much for your time. Mark McCrindle has been my guest, and that website again is McCrindle.com.au. Thanks, Mark.
Mark: Thanks, Kevin. I appreciate it.
Stuart’s property story – Stuart Wemyss
Kevin: Stuart, thanks for your time. Tell me, why did you get involved in property investment?
Stuart: It started, I guess the same as for most people, by reading “Rich Dad, Poor Dad” by Richard Kiyosaki and in an effort to understand how to build wealth and create financial independence.
While I learned lots of things from that book, and it was really enjoyable, I decided probably the best path to financial security was to become self-employed and build a business that generated a bunch of cash flow, and then use that cash flow to build a passive residential property investment portfolio.
Kevin: Was that book the launching pad for you to do that?
Stuart: I think so. I remember a few years prior to that, having just finished my bachelor of commerce and just starting practice as an accountant, I remember looking at property investment. I couldn’t understand how it worked. I thought, “You buy this property; is it going to lose money?” I didn’t really understand. It didn’t make a lot of sense to me.
A couple of years later, I read the book “Rich Dad, Poor Dad.” I think that was the impetus, as well as probably a little bit of maturity, in thinking outside the square and doing some longer-term planning.
Kevin: What age were you when you picked that book up? Do you remember?
Stuart: I would have been probably 23 or 24. Early days. That seems like a lifetime ago, now.
Kevin: When you did that and you made that decision to get into property or property investing and look at it seriously, do you remember how long it took from the time you made that decision? Tell me about your first property.
Stuart: A couple of years. At that time, my earning capacity was pretty limited – being young – so it took a couple of years. We first bought a home and then leveraged that into buying an investment property. But it did take a bit of time because we had to save some after-tax dollars for a deposit and wait for some equity to grow.
Kevin: The first property you bought was your principle place of residence?
Stuart: Correct.
Kevin: Were you married at that time?
Stuart: Just about to get married. We bought it just before we were about to get married.
Kevin: Okay, you have a principle place of residence and then a few years saving a deposit. Do you remember what your first investment property was?
Stuart: Yes, I do. Really, we bought that home as an investment property. We just decided to occupy it for a period of time. The aim was very much about getting some capital growth from that property.
I remember we only paid about $150,000 for it, or maybe just a touch more. I think we contributed $20,000 or $30,000 as a deposit. We sold it for, I think, about $400,000 a few years later. We did quite well out of that and experienced a bit of growth. We sold that, and then we rented for a while and bought an investment property.
The first investment property I purchased was an off-the-plan property in a smaller development. That was my first investment, and that was my first mistake.
Kevin: I was going to ask you that. Very good that you identified that. Do you still own that property?
Stuart: No – sold it. I realized that was a mistake.
Kevin: Tell me, what was the lesson there for you? Why was it a mistake?
Stuart: Firstly, it’s hard to buy a property that isn’t yet built, because you can’t walk through it. You can’t see how big it is. You can try and step out a floor plan, but until it’s built and you can actually stand in the room and see how the light works and see how the floor plan works and imagine where the furniture can fit and whether it’s livable, it’s very difficult to make that assessment.
The second one is to make an assessment as to the value of that property, because it’s not built and lacks comparable sales. What’s a true market value for that property? Is it the market value when I sign that contract or when expect it to be completed?
Thirdly, there tends to be a lot of costs – which I didn’t expect – when it comes up for settlement, like putting in blinds. They put some crappy down-lights in there, so the transformers would blow, and so we had to replace all of them. It’s all these little unexpected costs that crop up.
Add to that the chance of not making very much of a capital growth. All those experiences, I think, tainted that whole mistake – or maybe you put it down as a lesson.
Kevin: Many people would associate with that and probably have been in the same position and decided not to continue with their investment journey. Did that put you off at all, or was it just valuable lessons you learned?
Stuart: It’s a valuable lesson. Did property investment just did not work? The answer would be no; I just made a mistake. I took responsibility for decisions I made, and it was really that decision to buy that property was a mistake. It wasn’t whether property investment works. I just used the wrong strategy. I chose the wrong asset.
It didn’t put me off. I was lucky. I sold the property and I made a little bit of money from it, so I didn’t lose out on it. But I don’t get any solace from that. It was still a mistake.
Kevin: We’ll talk strategy in just a moment, but if I could ask you at this point, from that lesson, if someone were wanting to start out in property investing today, what would be your advice to them?
Stuart: My advice would be get in as soon as possible. Save the five percent deposit. Don’t worry about mortgage insurance or anything like that. The cost of getting in, it’s the [6:04 inaudible]. Just get started.
Save as hard as you can to get enough deposit to get started and focus only on the quality of the asset that you’re buying. Instead of trying to optimize one or two or three different criteria, just focus on the quality of the asset.
We’ll talk more about that in terms of strategy, but it’s like chasing two rabbits. If you chase two rabbits, you probably won’t catch any of them. Just chase one rabbit. Pick the quality of the asset. Get that right and buy the best quality asset as soon as you can, and it should all work nicely from there.
Kevin: Let’s talk strategy now. That first property that you bought, you learned a lesson from that and you sold it. Do you now have a buy-and-hold strategy?
Stuart: Definitely. Buy and hold: capital growth. Buy the best quality asset. Don’t speculate. Bet on sure things. A very low-risk boring strategy, but one that I think works well over time.Kevin: Is that your mantra: something that is nice and secure, steady? You’re not a speculator?
Stuart: Definitely. It depends. I think it’s like playing golf and you’ve got to choose the right club for the right shot. I very much believe, for myself and talking to clients, we need a core investment strategy.
A core investment strategy needs to get us from A to B, which is typically from where I am today to maybe age 55 or 60 or when I think I would like to retire or the latest I’d like to work in my working career.
“If everything goes wrong, how do I fund retirement at that stage?” That’s that I call a core investment strategy. I think that core strategy needs to be low-risk, safe, blue chip, boring but works. All those adjectives.
Once a core strategy is implemented, then there are things that I might be able to do that bring forward that retirement date or improve my net worth position and that might be a bit higher risk.
There’s really only three ways to make money. It’s investing, speculating, or business. That’s when business and speculation may come into it, where I can afford to start taking higher risk knowing that my core investment strategy is under way and protected.
Kevin: There is no one strategy that works for all people, is there? There are a number of different strategies for different situations.
Stuart: I guess it comes back to your risk profile and the time that you have until retirement. When I say retirement, maybe that’s really more about passive cash flow and financial freedom, but however you want to define it.
I think, theoretically, you can sit down and decide. There are some superior strategies out there, but there’s no point trying to sell a point or a strategy to a client if it doesn’t fit well with them, because ultimately, they won’t adopt it for a longer term. At one point, they will become uncomfortable with it.
It’s a little bit like going to a property investor and trying to sell them the benefits of investing all of their money in shares. If they don’t know it, they don’t understand it, they don’t like, they don’t feel comfortable with it, theoretically, it might work for them. But practically it’s just not going to work, because they might start doing it and two years later the share market drops five percent, and they say, “See, it’s not going to work. It’s not for me.” They sell out.
It might not be because shares don’t work; it’s because it doesn’t suit them. You’ve got to choose a strategy that suits you and that you like and understand and feel comfortable with.
Kevin: As the market cycles and changes, do you think there is a time when you can actually flip property, turn it over quickly and make a dollar? Or do you think it always needs to be looked at as a long-term proposition?
Stuart: I think, again, if you bring it back to choosing the right club for the right shot, and is it part of our core strategy or is it something above the core strategy? The core strategy, I think, is very much long-term buy and hold, because the transactional costs of flipping property eat into the profit. You’ve got to pay five or six percent going in and another two or three percent going out. You want to be assured of a pretty high margin to offset those costs, as well as the capital gains tax that you’ve got to pay to the government.
I suspect the answer is no, but I guess it’s about always seeing the opportunities, as well. You’ve to be open to them, as well. They might be right in front of your face, but if you’re not open to seeing the opportunity, you’ll never see it. Maybe there are opportunities where flipping does work.
It’s really interesting. I’m addicted to watching property shows that are U.S.-based, and they do a lot flipping there. The margins seem to be really significant. I feel it’s completely different to the Australian market.
Kevin: I sometimes wonder how legitimate that really is, or whether they’re just picking best case scenarios. If you look at the U.K. shows, it’s a totally different situation, isn’t it?
Stuart: Yes, that’s right. How much is it to sell the show and a bit of hype? They probably don’t talk about all the ones they’ve lost money on.
But going back maybe ten years ago, I think it would have been easier to flip property. Now, it’s becoming a lot more difficult and I just don’t think the margin is there.
Kevin: Do you think that’ll change?
Stuart: I don’t think so. I guess it depends on the areas. But looking at the areas that I really study, which is the blue chip, inner-city, proven performers, I think that market is so saturated with such excessive demands – the demand is out-stripping supply – that I don’t think the market will allow those arbitrage opportunities to exist. Whether that happens in regional or more outlying areas, I’m not sure.
Kevin: Stuart, to date, what is the best deal, the deal you’ve been most proud of?
Stuart: The house we bought in 2008. It was just after Bear Stearns in the U.S. crashed. It was right in the heart of GFC. A property was up for sale that was kind of unique. It was two single-fronted Victorians, two-bedroom homes that were joined together to make a four-bedroom home in the suburb Prahran in Victoria, which is a great suburb.
It’s a little bit different. I thought that it was going to go well over my budget. I only wanted to spend about $1.2 and I thought it was going to go for more than that. It was later in the year –November, approaching Christmas. I thought it was a great asset. It thought it was a great opportunity.
I was a little bit worried. There were a lot of doom-sayers at that point: “The market’s going to change, investing’s going to change, the market’s going to drop, everyone’s going to go bankrupt.” All that hype and hysteria was around at that time, so it was probably the worst time to make a decision and buy a property.
I went to the auction, with the help of some property advisors, and was lucky enough to pick it up. That property is worth about $1.8 today.
Kevin: What did you pay for it?
Stuart: About $1.2.
Kevin: And you still own that property?
Stuart: Still own it.
Kevin: On another subject, if I could, Stuart, your pick in advising people, would you suggest they look at houses or apartments? Or don’t you think it really matters?
Stuart: My view is probably two-fold. Firstly, buy the best quality property you can find. Whether it’s a one-bedroom apartment, a two-bedroom apartment or a house, I don’t really care very much. I just want the best quality property.
If I’m comparing a one-bedroom apartment and a house and I think the one-bedroom apartment is superior, excluding the fact of the size of accommodation, than I will invest in that one-bedroom apartment. It all comes down to, from my perspective, the capacity to double its value in seven to ten years and continue on that trajectory for the foreseeable future. Then there’s an element or assessment of risk of whether that property can do that.
I would rather, if I’ve got the best one-bedroom apartment, and I think it ticks all the boxes and its past performance has been magnificent, I’ll put my money into that every day of the week.
Ignoring that, assuming you’ve got two properties on equal footing there, I think it comes down to what’s in your portfolio and getting a bit of diversification – geographic or tenant diversification, property type, all those sorts of things.
From a financial planning perspective, if you can invest in smaller assets, dollar-value-wise, it gives you a little bit of flexibility going forward. You’re typically going to get a higher rental yield across your portfolio, but it also gives you some flexibility to sell down one or two assets here and there as opposed to having two big, lumpy assets such as two homes, for example. It gives you less flexibility in that regard.
Kevin: When you’re looking for the best type of property, do you take into account any value that you might be able to add to that property? Is that an important consideration for you?
Stuart: It’s very much a satellite consideration, and it comes back to my comment about chasing two rabbits. Almost 95% or 99% of my focus is making sure that I’m almost certain that this property will double in value. Once I’ve ticked that off, if there’s some opportunity to maybe put a facelift on the kitchen or put a coat of paint or those sorts of things, then I’m happy and open to doing those sorts of things.
If it’s more substantial improvements to the property, then I again consider whether that’s going to fit my strategy. Buildings depreciate. Land appreciates. Do I want to spend money and get what is often a once-off or spurt in capital growth? I might spend $100,000 and the property improves by $200,000. That’s nice, but that’s a once-off thing. I’m much rather have that compounding growth year on year, and that’s what I tend to focus on.
Kevin: In those early days, when you were getting into property investment itself, did you have any mentors, people you turned to?
Stuart: One of the very first property investment seminars I went to, even before I started my business – so it would have been 12 or 13 years ago – was put on by Wakelin Property Advisory, Richard Wakelin. I read the book that Monique and Richard wrote, “Streets Ahead,” and that tended to make a lot of sense to me. As someone who was very green to property and didn’t really understand it, they explained it in a way that helped me understand it.
I’ve obviously gotten to know both of them over the course of business, and so forth. I think because they share very similar core values and belief in property strategy and so forth, I think they’ve been mentors of that process.
Kevin: The Internet, of course, has opened up so many opportunities for people to do their own investigations, become more knowledgeable about it, and in some ways, it’s made the world a much smaller place to live. Do you think that’s opened up opportunities for people to invest overseas in property?
Stuart: It definitely has. I guess the U.S. is a really good example – something that has been on clients minds’ for maybe the last four years and more, in terms of investing beyond Australia. I think we’ve got to be really careful about doing so. I’m not saying it doesn’t work, but again, you are accepting high risk. You’re accepting some currency risk, for example, as well as compliance risk, taxation risk, and those sorts of things.
I definitely don’t think it’s for everyone. If someone wants to accept that high risk, I certainly hope they got their core investment strategy worked out – so they’ve got a good, safe strategy that’s ticking along here in Australia and that covers off all the risks. If they’re then able to accept higher risk and take what is more akin to speculation to investing, in my opinion, then it works for them. But certainly the Internet helped that significantly.
Kevin: Coming back to Australia, investing in different parts of Australia, some people suggest that you can actually invest site unseen. Do you think that’s a wise strategy?
Stuart: No. No is probably the short answer.
I’ve always used a property advisor. Even though I’m in the industry, I’m not out there looking at property six days a week and I’ve not been doing that six days a week for the last ten or 20 years, as some property advisors have. There’s experience and knowledge. I can always get knowledge from reading books, but I can never get experience from reading books.
I know as a financial advisor and an accountant, you can go off to university and do the degrees and studies and so forth in two or three years. In three years, you’ll have the same amount of education as me, maybe a little bit longer, but you won’t have the same experience so you can’t give the same quality advice. What I’m paying an advisor for is their experiences. I’ve always used a property advisor.
Kevin: When you say a property advisor, do you mean a buyer’s agent?
Stuart: Yes, but buyer’s agents say, “I’m there to buy the property for you and negotiate to get you a great price.” That’s not what I’m really concerned about – I can do that. What I want is “Find me the best asset for my money, based on your experience.” That’s what I believe a good buyer’s agent does.
If I can find a buyer’s agent who I know and trust on the ground, then I’m happy to buy a property based on their advice. Obviously, he would have had walk through and see it and do due diligence, and so forth. But if it’s just looking for a property on the Internet, I wouldn’t. That’s just too risky.
Investing is all about getting the highest return for the lowest risk. Good investors like Warren Buffett always think about risk first. They go to mitigate as many risks as possible before they start thinking about what return they might get.
Buying a property without seeing it, that’s just asking for trouble, I think. That’s just too risky.
Kevin: In looking around for a buyer’s agent, it’s a pretty important decision you’re actually turning over to them, and that is that investigation stage. What sort of questions would you expect them to be asking you so that you get a comfortable feeling that they know what you need?
Stuart: First, I think it’s really important to understand you can’t delegate responsibility. It’s my money. It’s my responsibility. You can’t just blindly go and appoint someone and then expect them to look after your money like you do your own. There are lots of great, ethical people out there, and they will treat it as their own money. That’s fine. You’ve got to find those people. That’s good. But I think my advice would be don’t ever fall into the false sense of security that you now don’t need to worry about it. It’s your money and you need to look at it as your responsibility. You can’t delegate it.
In terms of asking questions, a good buyer’s agent should understand what my key concerns are. They should be partly understanding what my key concerns and my primary objectives are, but also educating me about what my primary objectives should be.
If I relate it back to my business, whether it’s mortgages or financial advice, what I want to do is understand the client and understand what their goals are, and so forth. If I think they’re going in a direction that I think is not right, then I need to educate them about why that direction is not right.
If a buyer’s agent meets me, I’m going to tell them my goal is 100% capital growth. I just want the best growth he can give me and the rest, I don’t really care about. I don’t care where it is, if it’s two-bedroom, one-bedroom. I don’t care if it’s art deco or brand new. I don’t care about anything. Just give me a property that I can buy today and, if I want to, in 20 years, I can sell it and it’s going to be three times the price that I’ve just paid.
That’s all I want. A buyer’s agent shouldn’t need to ask me any questions beyond that.
Kevin: As a successful property investor, what would you say is the most common question that you get asked, and how would you answer that?
Stuart: That’s a really easy one. The most common question I get asked typically is, in a couple of words, “How do I get rich quickly? How do I cut corners? How do I get from here to property millionaire in the quickest possible time?”
My typical answer to that is that there is no quick and easy way. A good, proven, safe, tested investment strategy takes time. If you don’t want to put in the time, then you’ve got to accept high risk, but it’s akin to going down to the casino and putting all your money on black.
That might be an extreme analogy, but we can’t fool ourselves that if we’re going to try and get rich quick, we have to accept high risk. Therefore, there is a high probability it won’t work. The problem with doing that is that you waste time – time you’ll never get back again. Money, you can always make back, but time, you’ll never get back.
If you want to spend the next five years chasing that rich quick strategies, you’re going to waste five years, likely, and there’s a very strong probability you’re going to be no richer if not maybe a little bit poorer.
We’ll have the same conversation in five years’ time and, at that point, you’ll say, “Stuart, you’re right. Slow and steady wins the race. It gets the highest returns for the lowest amount of risk.” That would be my response.
Kevin: That leads me very nicely into my next question, which is what do you see as the essential qualities and the attributes of successful investors, renovators, or developers?
Stuart: I think, typically, humans are motivated by two main emotions: fear and greed. I think a successful investor ignores both those emotions. They don’t get greedy. There’s a saying, “Be greedy whenever everybody else isn’t.” And the reverse. They don’t get greedy, and they don’t worried by fear.
There are a couple of stories there when Warren Buffett invested in Merrill Lynch, right in the heart of the GFC when no-one’s making any kind of investments. I can’t remember the amount of money, but he’s made billions of dollars from that one investment alone. He thought about his downside. He got a 10% yield on the bonds he invested, and they converted into shares at a really low price.
If the stock price is going to go up and the market is going to go up, you make lots of money. If not, he’d still get a good income return. He didn’t get worried about fear. He looked at the company, the quality of the asset, the quality of the investment, and made a decision there. Similarly, to a much lesser extent, buying a property in 2008 when Bear Stearns crashed and the world was ending, everyone was fearful and didn’t want to make a decision.
But really, the fundamentals of investments don’t change. As Warren Buffett would say, the fundamentals of what makes a good company don’t change. The fundamentals of what makes a great property don’t change. These things are established over time. They’ve worked for the last 40 or 50 years. They’ll work for the next 40 or 50 years.
It’s about ignoring the fear – your own personal fear and the fear that you hear out there, and also the greed. Don’t pay too much for a property when everything is going up because you’re worried you’re going to have pay $200,000 in 12 months’ time if you don’t buy it today, and, don’t buy a property now thinking we’re in a bubble and it’s going to crash next year.
You’ve got to really ignore those fear and greed motivators and run your own race, and that’s what successful investors do, in my opinion.
Kevin: You’re obviously a very successful investor, yourself. Do you continue to invest in your own personal development?
Stuart: Yeah. A business coach told me once, “Work harder on yourself than you do on your business.” By that, he meant continually educate yourself. You never stop learning. That’s key: going out there and talking to people, reading books and going to seminars.
You talked about the Internet. I think that’s probably one of the best things for dissemination of information and content. These days, there’s just a world of content available, and there’s no excuse not to continue learning.
I think, also, you can’t underestimate the power of asking good questions. Generally, I’ve found people are willing to share. Going out and finding successful investors and asking them ten questions, or finding unsuccessful investors and asking them ten questions – you can learn a lot just by talking to people asking the right questions. I think learning from people’s experiences is the best kind of learning, rather than learning from a textbook.
Kevin: If you had the opportunity to sit in front of Warren Buffett right now, what would you ask him?
Stuart: If he’d adopt me?!
I would ask him how does he ignore the emotions of fear and greed? How does he block that out? What was he thinking when he invested millions of dollars in Merrill Lynch at that point? Surely, he must have been nervous. How does he overcome those nerves?
I think it’s a natural human emotion. We’re pack animals as humans. When everyone is fearful, we’re going to be fearful. How do you block those emotions out and stay focused? The worst thing you can do is get emotional about money and emotional about decisions.
That’s why a lot of people get a lot of value from working with a financial advisor or accountant, because they’re very unemotional about their money. They can look at it and say, “No, you’ve borrowed too much. Don’t borrow anymore.” Or, “Your fear of borrowing now is ridiculous. You’re in a very strong position. You should borrow now.” It’s really about helping people past those emotions.
That’s what I would ask him. How does he manage them?
Kevin: How much of that would come down to confidence in his own ability and belief in himself?
Stuart: I don’t know. I’d have to ask him. I would imagine it doesn’t hurt to have that belief. I always tell clients the hardest investment you’re going to have to make is your first investment. Once you invest in property, and assuming you make a good decision on your first investment, you can start to see it work, and you get a lot of confidence from that fact. That’s why the first investment is the most important.
I’ve found that the people in our business who were investing through the GFC were experienced investors. First-time investors just didn’t have the fortitude to make those sort of decisions in that market. I think having experiences and getting runs on the board and seeing what works makes you more confident. Then you have that ability to ignore all of the media hype.
Kevin: What does success mean to you?
Stuart: It’s two-fold. Success means to me making the most of your opportunities. If you look at two clients, one earning a million dollars a year and one earning $70,000 a year, just because the million dollar person has slightly more net worth than the $70,000 person doesn’t necessarily make that person successful, in my opinion. It’s really about making the most of your financial opportunities. Maybe from an investment perspective, I guess that comes down to a net worth dollar of passive income and so forth, not that life is all about that.
Secondly, success is just being comfortable with your achievements. Some people have very modest needs financially and only need a very small amount of passive income in retirement. Other people have very grand plans. I don’t think either of those two types of people are any less successful than each other. It’s really just about being comfortable with what you’ve achieved.
Interviewer: I think most people aspire to be successful. What do you think it is that actually holds them back from achieving what it is that they desire?
Stuart: Fear of failure, probably. Fear of making a mistake. Fear of looking stupid. I think those are probably the only things that stop people. It’s easier. Humans don’t want to make decisions. They’ve got an aversion to making decisions because decisions are risky.
I can procrastinate beginning my investment journey. It’s probably not going to hurt me today. On the longer term, it’s definitely going to hurt me, but today there’s no pain in procrastinating. That way, I get out of making a decision that could end up making me look stupid or not working for me or losing me money. I think it’s really just fear of making a mistake.
But again, if we look at the context of the longer we have to invest, the longer the time horizon we have to invest in, the lower the risk we need to take. I’d argue that there’s no pain today from procrastinating another year before buying your first investment property. But there is an immense amount of pain in the longer term.
A lot of people leave starting their investment journey until the kids leave home or they’re close to leaving home and they think, “We need to start building our own base now.” The problem with leaving it that late is now you’ve only got a finite time until you’d like to retire. You’ve got to start taking higher risks to make it work.
Interviewer: Stuart, thank you very much for your time. It’s been great talking to you.
Stuart: My pleasure.
The low interest rate opportunities – Shannon Davis
Kevin: Certainly, everyone’s rejoicing about the low interest rates. I think they’re the lowest we’ve seen on record, certainly since I can remember, anyway. I know this is creating a lot of talk amongst property investors. Let’s get some word on what they are actually saying. Shannon Davis from Metropole Property Strategists in Brisbane joins me.
Shannon, thanks for your time.
Shannon: Good day, Kevin.
Kevin: You’d be hearing a lot – I guess – of people talking about the opportunities with low interest rate, but are you seeing more property investors into the market?
Shannon: In the Brisbane marketplace, we’ve seen post the federal election that there’s been an upswing in auction clearance rates and a little bit more sentiment, I think. The money rate, you’re not getting much money in the bank, so I think there is probably going to be a further move out of cash. It will either be to properties or shares, and I think the Brisbane market is well placed to attract some more investment.
Kevin: Is that because of affordability?
Shannon: Yes, affordability, a reasonably high yield, and a low cost of money. I read somewhere it’s just about $1.2 million needed in savings to get the same as the pension, so the big losers here are savers at the moment.
Kevin: That’s obviously going to change – interest rates will move up at some stage – but it’s a good opportunity to get in and maybe even lock in a rate. Do you think it’s good to lock your rate in at this time?
Shannon: I would always be loathed to lock 100% in. There was talk from NAB through the week that they expect a 1% cash rate earlier next year. With their predictions of further cuts to the variable, I think you’d lock yourself out of that. Then there’s the break cost fees, as well. You can never say never, truly. You don’t know how your life will happen to you, so I think if you were to lock in, just maybe lock in a portion.
Kevin: Let’s talk about oversupply because there’s been a lot of talk about that, particularly in the unit market. Inner city Brisbane, driving around, you see a lot of cranes. Is that a concern?
Shannon: Yes, it is to some areas. The really oversupplied markets at the moment for investors include the CBD, Kelvin Grove, Chermside, West End, and Mount Gravatt. They’re some of the areas that you probably want to be out of at the moment because where you see lots of supply and physical growth, you don’t see much capital growth. Rents will be soft, and your chances of capital growth also.
But it’s not as simple to say that all apartments are bad investments. There are areas that are very tightly held, that have had no real development, and are attractive to that demographic, i.e. walkability, café precincts, transport, and shops.
Kevin: Are we seeing many buyers come to the Brisbane market because it’s much more affordable than Sydney?
Shannon: Yes, and there’s a sentiment that Sydney and Melbourne may have moved, and it could be Brisbane’s turn next. What’s held us back in the past is job creation, but the Brisbane market has taken a lot of its medicine in that rate. The actual apartment boom is taking a lot of the jobs from the mining redundancies, and those people are getting jobs back in construction, so it’s not all bad news.
Kevin: Just before I left you go, if you’re looking for good investment in South East Queensland, where would you be looking right now?
Shannon: We have a particular focus in New Farm. It’s still doing well capital-growth-wise. There’s some vacancy around Morningside, as well. It’s well located and the first train station on those eastern suburbs. Coorparoo has had great upside with the eastern busway and the old Myer Centre development, and also Taringa and Wooloowin, which are both well located for transport, shops, universities, and CBD. They’ve done well consistently for our clients, and we’ll be sticking to those existing properties and adding value where we can.
Kevin: There you go. If you’re looking to invest in the Brisbane market, they’re the places to go and have a look.
Shannon Davis from Metropole Properties. Shannon, thanks for your time.
Shannon: No worries, Kevin. Any time.