Highlights from this week:
- Refinance pros and cons
- Squash courts into micro-apartments
- Commercial property ‘attractive’ to SMSF
- Is this a time to speculate?
- Cashing in on low interest rates
Re-finance pros and cons – Ian Rodrigues
Kevin: Well, amidst the rising interest rates and title-lending regulations, investors might decide to opt to refinance their property to access additional funds and ultimately continue growing their portfolio. Is this a strategy that could work for you, refinancing your way to your next property?
Ian Rodrigues joins me to talk about this. G’day, Ian. How are you?
Ian: Pretty good, Kevin.
Kevin: What are the pros and cons of this, and what are the steps to doing it, Ian?
Ian: Refinancing your way to the next property has always been a good strategy for investors. The numbers say that most investors do nothing. The next biggest group has one property, and there are very few people that move onto the second, third, fourth, and fifth property. That’s from data that the ATA releases about how many tax payers have investment properties in their tax returns, so it’s pretty reliable data.
What that tends to suggest is that a lot more people get to one but never actually get to the next one. So the key for people looking to get to the next property is that usually they borrow the maximum that the bank would have given them – maybe, say, 80% – against their investment – and something has to have changed in the property’s value, or the debt has to be decreased so that the, with the loan ratio, there’s some equity in that property.
That, of course, is then a good time to use that equity by refinancing, either with the same bank or with a new lender, to give yourself the deposit potentially for the second property.
Ian: Now, having said all that, is that a good idea? It entirely depends on your ability to fund those loans – if you’re missing a tenant or you lose your job or something like that. So for any strategy that included borrowing money, you need to be aware of all the risks that go with borrowing money, which I’m sure people are aware of. It’s not the unusual ones. It’s the basic ones. If you don’t have the income or you don’t have a tenant, if your borrowing is on a shoestring to be able to meet the commitments, you need to be very careful of doing that because that’s how you lose money on properties, being a forced seller.
Kevin: Yeah. That’s one of the risks: you overextend and you can’t afford it.
Ian: It’s the major risk. People worry about interest rate rises and all that. My advice to people – the banks seem to be finally applying this – is that, if the rate was a couple percent higher, can you still afford it? If that’s a problem for you, you are too highly [2:39 inaudible].
Kevin: So with that strategy, you can almost say, “That’s going to be my benchmark. I have to factor in a two or even a four percent increase in interest rates. What will happen if I have to pay that?”
Ian: Well, I think the banks were going through a period where they probably we’re as focused on that. They now are; for example, a lot of things that are going on in the marketplace. So they certainly take into account what might happen if rates were higher. That’s why I find all the oxygen about rates might move a quarter of a percent. They haven’t for a couple of years now. A quarter of a percent? If you’re worried about that change, you really are too [3:19 inaudible]. I’m talking about 200 basis points, not 25.
Now, whether the 200 is the right number or not is a matter for debate amongst some academics somewhere. But practically speaking, the borrower needs to be comfortable that if rates went up or they had a change in their income or didn’t have a tenant, how long they have before they’re going to run out of cash and build a significant buffer in, because those things can and do happen.
Kevin: While I have you there, I wonder whether you can answer a question from Mike, who wrote in and said, “When I made a redraw from home loan, I paid $8,500 extra in repayments. So my redraw capacity was $8,500. However, when I made the redraw a month later on my statement, they had increased the normal weekly loan repayment from something like $420 a week to $455, which was a bit of a shock at the time. So I rang them and asked them why, as all I did was tag back the extra payments on top of the normal payments, as I thought the redraw was designed to do. They explained that, because I had made a redraw, for some reason they had to increase the normal repayments I had been making for years to compensate for the loss of the $8,500 I had taken out. Can you please check on this? This is a very important point.”
What’s your response to that, Ian?
Ian: I think Mike has been a little bit caught in not understanding how the banks look at loan repayments. Somewhere in the fine print in these loan contacts that we sign that I reckon no one reads is how they calculate repayments. I dare say the bank wouldn’t get this stuff wrong. They may get other stuff wrong, but this is something they would generally get right.
The repayment is calculated on the total bit, and the repayment is calculated on the term of the loan. So with his total debt level, regardless of whether it’s in redraw or on the loan balance, they’re looking at the overall debt and calculating what that might be.
Now, these policies can vary, I would imagine, from bank to bank and from loan to loan. It’s more important for the borrower to understand, with $420 a week, how long it’s actually going to take to pay off that loan. A standard reference point when they’re handing out loans is generally 25 or 30 years. Some people still have interest-only loans. Of course, they’ve become very expensive in the current market. You want to understand when you’re going to get rid of this debt. To me, that’s the most important point for Mike. The repayments are what they are, but when does he want to get rid of this debt.
Kevin: Something that should be clearing up, yeah.
Ian: Yeah. Or does he want to save up in the redraw to get into his next investment property? I don’t know. That’s the key. I think people need to be much more in tune with their debt, how it’s going to be and what can happen to it in the future. All those issues are pretty important.
And we’re in an environment, Kevin, too, where borrowing from a bank used to be a simple, relatively straightforward process and the banks would [6:43 inaudible]. It’s changing before our eyes.
Kevin: Yeah. Very good, mate. Thank for bringing us up to date on that, Ian Rodrigues from the Bishop Collins group. Mike, thank you for your question as well. Ian, thanks for your time.
Ian: Great, Kevin. Talk soon.
Squash courts into micro-apartments – Ian Ugarte
Kevin: I always love talking about making housing more affordable. The more affordable we can make it, particularly as investors, the better return we’re going to get. You know what they say: a happy tenant makes for a happy life.
I want to talk about affordability now with my next guest, Ian Ugarte from Small Is the New Big. Also, about his product, HI RES. G’day, Ian. How are you doing?
Ian: Hi. Good, how are you?
Kevin: Good, mate. Congratulations on the work that you’re doing because I know, off-air, we spoke. And we spoke in a recent Skype that I did on behalf of your investment property about what you’re doing with affordable housing, in particular around squash courts. Interesting. Tell me how that’s working.
Ian: Firstly, thank you. I appreciate it. I’ve met a lot of people who are really enjoying what we’re doing and the reasoning we’re doing it. When we come to the squash court component of it, we create micro-apartments. How we do that is use communal residents or rooming house or boarding house policies across the country depending on what state you’re in. Every state has a policy.
What we’ve found is that, obviously, squash courts – I’m giving away a couple of my trade secrets here.
Ian: Really, an area of the ‘70s, ‘80s, and possibly part of the ‘90s where it was quite a vibrant industry, but it has now died down a lot. The days of everyone having a squash racket or a tennis racket in their cupboard doesn’t happen anymore.
So the businesses are failing, and we’re going in and looking at the structures. With the right zoning in place, we’re actually taking those squash courts – the squash court is essentially about six meters by nine meters, so 54 square meters of space that is usually two to three stories high. What we do is we go and get approval and convert each one of those squash courts into four individual micro-apartments of about 22 to 25 square meters each. That means that, out of one squash court, we get four separate micro-apartments, which can rent, depending on where you are in the country, anywhere from $200 to $250 – maybe $300 sometimes. So essentially a minimum of $800 a week per squash court is what you get in cash flow.
Kevin: So the squash court that we would apply to match on, as an example, you’d turn into two apartments, or would that be one apartment?
Ian: No, into four. Two up and two down. [2:30 inaudible].
Kevin: Oh, yeah. Forgetting the air space, the ground floor is two and then there are another two above that.
Ian: Correct. With the structure and the way it’s built, we can actually [2:40 inaudible] fire rating is easily. Then, within each one of them, we create a bathroom area and a kitchenette area. Through the rest of the squash courts, we have a communal area – a little kitchen and a little living area where people commune if they want to. If not, they just go back to their own space.
Kevin: Quite incredible. You’re right about the construction because my memory of the squash courts that I used to play on is that they’re quite robust – very well built.
Ian: Yeah. There’s no give in the walls when you run into them. That’s for sure.
Kevin: I found that out on a few occasions. Or more precisely, my racket did. Obviously, this is providing a very good return. Are you finding that it works better in some markets than others, or is it pretty much wherever there is a squash court?
Ian: Wherever there’s a squash court. Whether it be regional or whether it be metro, the return on them is really great, remembering that my main focus always has been and always will be, since we started this process with HI RES, is to make sure that community has a benefit and an outcome.
When you’re providing someone a small studios space that’s self-contained for nearly a half to one-third off their normal rent, then they benefit in a bigger and greater way because they’re saving money towards them actually getting into their own housing in the next three to five years. So we’re not talking low socio people. We’re talking professionals that are working big hours and are just trying to get ahead. We’re talking about the 55+ single woman. We’re talking about 70-year-olds who are just trying to get a breather and have some money at the end of the week so they can pay those extra bills or just go to the club or go for a holiday once a year.
Kevin: This is really great news. I imagine that the councils worthy of doing it, too, would embrace this because they’re out to get more people into more affordable housing as well.
Ian: Yeah. Some councils and locals have some perception issues because, as soon as we say boarding house, they start to go for the hills. But what we do is high-end hotel rooms. Most councils understand it, especially when I show them the facts and figures. The facts and figures are we look back at the 2011 census and the 2016 census, and almost with every area we look at, 80% of the new households that have moved into that new area are singles and couples, and 80% of the housing are three-, four-, and five-bedroom houses. So all new housing is way too big, and all new households need smaller housing. So what we’re doing is fixing a massive marketplace.
Kevin: You need to create another name. The name “boarding room” doesn’t really describe what you do.
Ian: No. I like the term “communal residence,” which is the Tasmanian version of it. What we’re creating is communal living. The reason they use the boarding house policy is because there are exemptions and cash being offered across the country, and they need to actually tie the policy into legislation. The word “boarding” has to be used in it.
As an example, in Victoria, New South Wales, if you build these, you actually have a zero land tax – so a full land tax exemption if you build style of a combination.
Kevin: Wonderful stuff. If you’d like to know a little bit more about this, the website to go to is SmallIsTheNewBig.com.au. Ian Ugarte has been my guest. Ian, thanks again for your time. Congratulations on the work that you’re doing. I think it’s outstanding.
Ian: Awesome. Thank you, Kevin.
Commercial property ‘attractive’ to SMSF – Jonathon Street
Kevin: There’s a growing interest in commercial properties and long-term investment in your self-managed superannuation fund, according to Jonathon Street from specialist commercial property lender, Thinktank. Jonathon joins us. Jonathon, thank you for your time.
Jonathon: Good morning, Kevin.
Kevin: What’s driving the increased interest in this?
Jonathon: It seems to be the interest of investors to find some stable returns amongst their investment strategy. Commercial properties come to the fore more recently with the volatility in residential property and also some volatility in the share market. In the way in which, I suppose, other alternative asset investments like hybrids perform and there’s some interest around those, but there are also some risks attached. Commercial properties have been quite good performers over a long period of time, and the yields attached to it are quite attractive as well.
Kevin: What are you seeing here? The typical investor – where is it coming from? It is your mom and dad investor or people looking for retirement? Or is it bigger companies?
Jonathon: It’s quite a spread, actually. It ranges from the mum and dad investors who are really looking for a balanced asset allocation in their investment portfolio right through to institutional investors and high net worth.
What commercial property does, if it’s in the hands of people who know what they’re doing, of course, and staying away from things like construction and development, which can be quite volatile themselves. But if you’re looking at just standard commercial properties that have income-producing improvements on them – we’re talking industrial properties and shops and offices and childcare centers and so forth – these are all very stable parts of the economy that produce very good, long-term, consistent returns.
Kevin: Would you say that people mostly interested in this are looking it to maybe house their own business or they looking at it as an arm’s-length-type investment?
Jonathon: Mostly an arm’s-length-type investment, Kevin, but around 20% of our business is from self-managed superfund members who have their business at the moment and they run a commercial property. They’re changing the ownership that property into their self-managed superfund to take advantage of the tax benefits in retirement. It’s very attractive for them.
Kevin: Putting aside that sector of the market, what would you say would be the benefits to an investor in this arm’s-length-type investment?
Jonathon: I think it’s the granularity that comes with a diversified pool of assets that produce the returns rather than a single asset, like a big office building or a big shopping center. Our loans are around about $650,000 each, so properties worth one to one-and-a-half million dollars. With a big diversified pool, the returns are very consistent. They’re very predictable, and they’re quite capital-stable.
Kevin: You mentioned earlier about the domestic market. Do you think the over- or the potential over-supply in the domestic market is helping to fuel this fire?
Jonathon: I think undoubtedly it’s helping the process, yes.
Kevin: Can I just ask you, Jonathon, about the portfolios that you put together for people? Is there an ideal amount that they should go in with? At what point is it not worth it?
Jonathon: For our type of investment, we start at $10,000 and go up from there. What we often find and found with 60-65% of investors already is that they put a small amount in to begin with. It might be $10,000-50,000. Once they’re comfortable with the profile of it, the returns, which are paid monthly, and the people we’re dealing with, who are me and my team, then they’re reinvesting and increasing their amount. So the average investment at the moment is around that half-million dollar mark.
Kevin: How are the banks looking at this type of investment?
Jonathon: We, on an institutional level, have considerable investment, and that’s both domestic and overseas because of the relative value of returns in the Australian market. So it’s significant.
Kevin: Thinktank is the website. What’s the website address?
Jonathon: It’s www.Thinktank.net.au.
Kevin: My guest has been Jonathon Street from Thinktank.net.au. Jonathon, thanks for your time.
Jonathon: Pleasure to be with you, Kevin. Thank you.
Is this a time to speculate? – Bateman and Harris
Kevin: You’ve heard me say before. Sometimes, if it sounds too good to be true, it probably is. Like many opportunities that’ll come your way, this is speculative. If you’re simply throwing money at something and hoping that you’re going to get a result, then you are speculating. You should never do it with property.
Joining me to talk about this are Luke Harris and Mathew Bateman, The Property Mentors. G’day, guys. How are you doing?
Matthew: Really good. Thanks for having us.
Kevin: Good. Define “speculation” for me.
Matthew: All right. Speculating really is when you do put some money into an investment and you really don’t know three key components to the outcome of that investment. Number one is you don’t necessarily know your result upfront. You don’t necessarily don’t know all your risk upfront. And you don’t necessarily know the timeframes that you’re dealing with upfront. So if we can minimize those three elements, we turn more of a speculative investment into a more known-outcome, known-timeframe, and known-risk investment, then we’re really probably at the better end of investing.
Kevin: Is there ever a time for speculation, like if the market is running hot? Can you take that risk?
Matthew: Some people can and do. With speculation in property, though, unfortunately there’s no one who can tell you what the property you’re about to buy or have bought is going to be worth that day, the next day, the next month, the next year, or even the next decade. So when 100% of your strategy relies on the market to do all the work for you – that is, either values go up over time or your rental goes up over time – there is a degree of speculation.
What we aim to do is have multiple strategies that allow us to time the markets but also have time in the markets to allow that appreciative nature of property historically to help with the result.
Kevin: Do you see short-term rentals as a form of speculation?
Matthew: I think, in some ways, it can be if you don’t have that as part of your long-term strategy. Like I was saying, it could be a speculation if you’re just throwing your property out there into the short-term market, hoping it will work for you. But if it’s part of a long-term plan that’s being crafted out with somebody who has had the experience in that space, then as long as you know the risks and you know what the outcome is that you’re trying to achieve, if it’s out of a long-term plan, then absolutely not.
Kevin: One of the things we are learning about the short-stay market is that it really does depend on the area, what you need to do with the property, and the amenities that are there. So unless you have all of that covered off, in a way you are speculating, aren’t you?
Matthew: Yeah, exactly.
Luke: Absolutely. To a certain extent, we’re using a company called QuickStay [? 2:36] to do the rentals for our own properties. We found that, if you’ve done your research and you understand the risk involved and the areas that you’re going into and the types of properties that you have available, then again, as part of your plan, it can be a fantastic strategy.
Matthew: If I could just in on top of that, I guess the main point we want to make about speculation versus investing is that, for the vast majority of investors, they really don’t have that plan. They don’t have that highly defined outcome that they’re actually chasing in the marketplace. So what they tend to do is make a decision – “I want to invest in property” – and then they go straight to RealEstate.com or Domain.com and they start looking at properties.
What we say is that, before you start looking at properties, perhaps as smarter way to do it is to sit down and actually decide on, upfront, what type of investing you’re going to do, what sort of returns you’re going to chase, what risk levels you’re willing to take on, and what timeframe you’re hoping to achieve all those results, because then you can get clearer in what you’re actually trying to achieve.
Kevin: It’s a very complex situation to sit down and do all that. One of the reasons why your company exists is to be able to mentor people through this. Sometimes we don’t know what we don’t know.
Luke: 100%. I think this comes down to the reasons why we started The Property Mentors in the first place. Matt and I, as property investors ourselves, were out there like everybody else, trying to get the best results we could. But the problem is that there’s so much information out there. Where do you start?
As a property investor that wants to get great results, we realized that, after many years of trying to do it ourselves and reading books and magazines and going to seminars and all the things that were out there, you really need to work with somebody who has been there and done that before.
If you’re really looking to get the results in property investing, you have to ask yourself, “Am I looking to get a small result or a big result?” If you’re looking to get a big result, it really helps to work with somebody who has already got a big result in property investing.
Kevin: Is there ever a time to speculate?
Matthew: It comes back to the plan. As a part of your plan, you might have some high-risk speculation. You might think about doing something like long-term land banking as a speculative plan and hope that planning and zoning changes come through in the time that you’re alive to be able to capitalize on that. It might be that you’re going to take a speculation on some higher-risk strategies, but it should always be a part of the longer-term plan.
As I said, there are really things that separate speculators and investors: how much of your risk you can know before you start, how much of your reward you can lock in before you start, and how much of the timeframe you can control within your investment.
Kevin: Guys, great talking to you. Thank you so much for your time, Luke Harris and Matthew Bateman from ThePropertyMentors.com.au. Thanks for your time, guys.
Cashing in on low interest rates – Richard Crabb
Kevin: As you know, we support PIPA, the Property Investment Professionals of Australia. They’ve elected two new board members to better represent they’re growing membership database because it is growing and creating a desire for a lot more learning. Sydney’s CoreLogic Head of Content, Kylie Davis, has been elected to the board. Melbourne’s ASPIRE Advisor Network’s Richard Crabb has also been appointed to the PIPA board.
I’m talking now to Richard from ASPIRE Advisor Network. Richard, congratulations on being appointed. I think PIPA plays a tremendous role in this environment.
Richard: Thank you, Kevin. I appreciate the opportunity to have a chat with you today.
Kevin: I’m keen to talk to you because I’ve known we’ve spoken a bit off air about what ASPIRE does and what PIPA does, but I think there are a lot of pitfalls for people getting into property. Where do you see a lot of people go wrong, and what are you advising your people through your network?
Richard: Thanks, Kevin. The biggest thing that we see in the industry is that a lot of these organizations spend a lot of money on marketing to look at selling the property. So they’ll build a story around a property and why it’s an amazing investment. Unfortunately, a lot of the time, that ends up not being the case.
What we really say is that investors need to start with looking at themselves and their strategy. Property selection should be toward the end of any investment process.
Kevin: What this means to me is that I think there are a lot of people I would call casual investors, a bit like low-hanging fruit. They are the ones who these marketers appeal to and pick off, whereas, if you’re really going to get serious about property investing, you have to treat it like a business. Research it. Understand who’s going to be on your team and whose advice you should take as well.
Richard: 100%. In line with what PIPA is doing in the industry, we’ve built a network of licensed professionals who are actually professionally insured for property investment advice, who actually work with investors on their strategy, their goals, and their objectives and actually learn how to delve into the research and analysis of a property to actually make an informed decision that’s going to deliver for them the right numbers for their investment strategy that they’re looking at.
Kevin: With those clear financial objectives that are just so important, how many people come to you the wrong way around, thinking, “We’re going to be able to find a property quickly if we work with these guys”?
Richard: We see it all the time. A lot of organizations that run big seminars, they’ll have very big marketing budgets and advertise and get people into a room and try to actually sell them a property. We get that a lot with our clients, where they’ve been one to these sessions or seminars and think, “Oh, wow. I think this property is great.” We actually sit back with them and say, “Let’s go back to the other end and look at you and why you think this property is great.” When you actually delve in the research, the demographic profile, the area, the location, the owner-occupier, the investor ratios, and the exit strategy down the track and try to align that to a property, they quite often find that what they thought was going to be an amazing investment quite often turned out to be nothing like what they were trying achieve with their actual investment plan.
Kevin: What advice do you give about the two different areas: cash flow and capital growth? Is it possible to do both?
Richard: It is. There’s no magic bullet, as they say. When you really look into the numbers, there is good structuring with the finance and how they actually do their finance arrangement. You can get both over a long-term strategy.
Kevin: Set and forget. Is that something that people should do or they do do that’s incorrect? In other words, buying a property or setting up a portfolio and then just letting it run. How often should you be reviewing it?
Richard: Great question. Something that we do as part of our process is a twelve-month review.
Kevin: On the whole portfolio or just the lowest performer?
Richard: You need to look at your whole portfolio. Part of what we like to do is speak with our investors every twelve months and look at it good, bad, or ugly. Is the property underperforming or over-performing? You really should always be analyzing and taking that time to actually work at where everything is and whether it’s still achieving the objectives of the plan that you had set for the long term.
Kevin: Because sometimes the lowest-performing property might be the one you shouldn’t get rid of because it either needs a bit of tweaking or it has better potential for the future. It might be worth holding onto.
Richard: I couldn’t agree more, and we do see that a lot. Unfortunately, sometimes investors will get nervous maybe early on. Maybe they’ve had a property for two or three years and they think, “But it’s not performing.” Getting rid of it at that time is really losing the benefit of holding it for that longer-term period, where you see the continued growth in the area or the evolution of the property. You’ve already had the upfront initial buying costs. Properties across Australia do go through cycles. Statistically, over time, that’ll often come through that cycle and over to the other side. So getting rid of it too early can be worse than not doing the right thing.
Kevin: Richard Crabb from ASPIRE Advisor Network has been my guest, and he is a new board member on PIPA, the Property Investment Professionals of Australia. We support them, and you can to by using the button on any one of the pages right here at Real Estate Talk. That will take you straight through to PIPA. You can join up there.
Thanks for your time, Richard. Congratulations again. I look forward to talking to you again soon.
Richard: Thanks, Kevin.