Our feature interview this week is a chat we have with Margaret Lomas who we asked to answer a question from Matt about investing in property in one of Brisbane’s outer northern suburbs. Apparently Margaret said in her Sky TV show that it is not her preferred area. We were surprised when we spoke to her that she revealed that she still has her worst performing property in her portfolio. Why doesn’t she get rid of it? Find out today.
Kevin: We have a question now from Matt. Thanks for the question, Matt.
Matt says, “I’m about to venture into a first investment property using our equity in our principal place of residence. We can spend $310,000. I was looking at younger and newer homes in Caboolture/Morayfield, but then I saw on Margaret Lomas’s ‘Your Money Your Call’ that she prefers Deception Bay/Rothwell.”
For the same money, he would be looking at a 10- to 20-year-old house. Matt notices also on other research that Caboolture/Morayfield are lauded as prospective areas for capital growth and is a little bit confused. Thank you for that, Matt.
We have Margaret Lomas on the line from ‘Your Money Your Call’ and Destiny Financial Solutions. Margaret, thank you for your time.
Margaret: You’re welcome.
Kevin: Can you help Matt?
Margaret: Of course, I can help Matt. The first thing I’d like to point out is that what Matt is doing is what I believe is a mistake that many first-time investors make, and that is that he is busy looking for a younger home.
Very often people are driven by those tax benefits that they believe exist in the younger home, such as greater depreciation and therefore a higher cash flow, so they want to get that newer home, and of course, they’re also thinking about the long term and having less maintenance to do.
Unfortunately, what that does for many investors is that it means that their primary driver for buying a property is the age of the home, and it’ll drive them to areas where housing is newer and there are potentially other issues in those areas, which I’ll talk about in a moment.
Really, what we should be doing when we’re buying investment property is to first of all establish the very best area that we can buy property in, and then work out what kind of properties exist there.
Very often hot spots are areas that have 10- and 20-year-old homes and not much in the way of new homes. Of course, that’s because they’re probably already built out. There’s no new land. We’re down to those established homes, and often they can be better hot spots.
Kevin: Margaret, what is it you like about Deception Bay that you don’t like about Caboolture?
Margaret: Let me first of all say that it’s not that I don’t like Caboolture and Morayfield. I agree with some of the research that, over the long term, they certainly have some potential growth drivers. But in the short term, we have a lot of new land available, particularly in Caboolture.
In fact, if you have a look up there at the moment, many of those brand-new houses that are being sold in that area can be bought for less than some of the homes that are already fairly well established – less than, say, ten-year-old homes – and they can be bought for that price.
Because there’s so much new land, we’re not going to see a lot of pressure on established housing, and therefore people who are buying there would much rather buy something that’s new themselves than they would buy the existing property. That means it’s going to take a lot longer for those properties to grow in value, even though they eventually will.
When we go to somewhere like Deception Bay, we have many of the features of Caboolture. We’re still a close enough distance from the airport. We’re not that far away from the CBD, as well. It’s still a good drive, access from the Bruce Highway, and a growing population.
But the difference is around Deception Bay is that you don’t have so much new land available, so the pressure is being brought to bear very firmly at the moment on those older homes. And to be honest, many of them have had some renovation, so the differences in the depreciation you can get on those homes isn’t as marked as what a lot of people might think.
Kevin: Yes, that’s the thing a lot of people don’t realize, isn’t it? They think they have to buy a new home just to get those depreciation benefits, Margaret.
Margaret: Absolutely, and in fact, that’s not true. Anything up to about eight to ten years old can have some good depreciation available on it. Then once you get older than that, very often there’s been a fair amount of renovation done. There’s probably a bit of a kitchen done, a bathroom, very often new hot water heaters, carpets, blinds, curtains, all that kind of stuff, all of which are depreciable items, even in an older home. So the depreciation benefits aren’t necessarily completely lost.
But again, I want to reiterate that you shouldn’t be buying for those depreciation benefits; it’s important to get some good cash flow, absolutely. I’m considered the cash flow queen. I like cash flow in my investment properties, but I also don’t like having properties in my portfolio that have great rent return and just don’t grow or don’t grow for a long, long, long time.
In addition to getting enough cash flow so that I’m not going broke waiting for the growth to occur, I like to see growth in my portfolio as early as I can get it, because growth means you’re leveraged into more property, and it’s the broader base of properties that creates a retirement income, not a single property or two properties in your portfolio.
Kevin: Would you class yourself as an impatient investor – in other words, you want those results or that growth as quickly as possible?
Margaret: Not necessarily. But I think all investors have to realize that every single investor has a different need for income and growth, depending on where they’re at in their own phase in life and where they are on their investment time horizon.
If you’re someone who may be in your late forties/early fifties, your kids have probably grown up and your cash flow’s probably improved because you’re not spending as much money on them anymore – school fees are all gone out the door – then you actually need a property that’s going to grow sooner rather than later.
You can probably take a bit of a hit on the cash flow for now and afford to fund some of those more negative cash flow properties that you’re going to get growth on sooner. You have to get that growth sooner, because you’re don’t have as big a timeframe to invest in.
If you’re a younger person, you can take more risk on property, so you can buy a property that if it doesn’t work out as well as you would have liked, you have got time to recover, but you can also wait a little bit longer for that growth.
The flip side to that, of course, is that anyone who’s waiting for growth, if they don’t have good savings or equity elsewhere, means that they have a delay in their acquisition of property. Everybody does need that growth at some stage, but everyone has a different need for it.
Kevin: Stay with us. I’ll come back a little bit later in the show and ask Margaret how often she reviews her portfolio, and she reveals the fact that she has a lemon in there, so we ask her why she’s not selling that.
This is Real Estate Talk.