Highlights from this week:
- Is ‘hook and flick’ a viable strategy in this market?
- Find out why many sellers miss the strongest buyer for their property which could result in the possibility of underselling.
- Knowing the best area to invest in and the best property in that area.
- Getting to the hot spots before they are hot.
- Margaret Lomas reveals how many properties she thinks you need in your portfolio to afford you a comfortable retirement. You might be surprised.
How many is enough? – Margaret Lomas
Kevin: A question I’m asked so often is “How many properties do I need in my portfolio to retire?” I know this is a question that my guest has had to answer on a number of occasions too. Margaret Lomas from Destiny Financial Solutions.
Margaret: Hi there. How are you going?
Kevin: Good. Nice to be talking to again.
How do you answer that question, when someone asks you, Margaret?
Margaret: The difficult thing for a lot of people is that that they feel that the spruiker is talking about unlimited numbers of property, and whenever they read those investment magazines, they see expose̒s of people who have bought 20 and 25 properties, and they think, “Oh my gosh. That’s what I need to be able to retire on a good income for the rest of my life.”
But in fact, you don’t need that many. We’ve done a little bit of an analysis on this back at Destiny and discovered that really, if you could put together a portfolio of seven properties, you would be living a pretty comfortable retirement, and if you could put together a portfolio of say, ten, then pretty much that’s all you really need.
Kevin: I guess it depends on how much cash flow you’re getting from those properties as well, Margaret, doesn’t it?
Margaret: Well, see this is the thing. It’s really unreasonable to think that everybody can go out there and pop 20 or 25 properties into their portfolio, even though we have a pretty low cash rate at the moment and a lot of properties are at least evenly geared. There’s still that chance that that could go up, and if you have too many properties in your portfolio at that time, it could cause extreme cash flow issues for you and you might be forced into the sale of them.
When I first started my portfolio… And I know that I’m sitting here talking from a position of having 40 properties, but for me, it’s been built over a very long period of time, and it was more about the… I guess I got a bit addicted to buying property for a little while there.
But when you buy your first one, it’s likely to be a good year or two between the first and the second. Not a lot of people can buy any more than one in the first one. And one of the things that I really want investors to understand is that in that first five to six years, it’s all about the build phase.
It’s likely that if you’re going to buy seven properties, it might take you five, seven, and even eight years to put together those seven. And as you’re doing that, the first property that you’ve bought, by year seven, is more than likely to have started to become a little bit positive cash flow or at least evenly geared, if it was negatively geared to begin with, and it makes it a bit easier for you to keep adding to that portfolio. As those properties grow in value, as the rental returns go up, then you usually find that they cost less for you to hold and it’s easier to add to that portfolio.
But in those first five to seven years, it’s almost a like game of one step forward, one backward, because acquisition costs in Australia are fairly high. So, you tend to eat into your equity with costs, rather than with more equity that will grow for you, and you take a bit of a step backward.
For many people who are building their portfolios, after having bought five or six properties, they start to think “It doesn’t seem like I’m getting anywhere. My portfolio isn’t growing. When it does grow a bit, I tend to go backwards.”
But it’s really the second seven to eight years that become the phase where you’re actually starting to see the growth.
Kevin: So, Margaret, it’s pretty much steady as she goes at the start of your career?
Margaret: I don’t want people to think that this is magic and that you can buy a property and bang, you suddenly become wealthy. Anyone who’s invested in Sydney in the last three years might be thinking that, because Sydney’s just gone through a fabulous growth phase.
Interestingly enough, Kevin, I was having a look at the figures the other day, and I did a little calculation on the 12-year growth from 2005 between the median house price in Sydney and the median house price in Adelaide, and guess what I found?
Kevin: What? What did you find?
Margaret: I found that the median house price in 2005 in Sydney, when you measure it against the median house price in Sydney in July 2017, had grown 78%. The median house in Adelaide, in the same period, had actually grown 112%.
Margaret: The difference is that Sydney had a big bang for three years, but they had nothing pretty much for the nine years before that, whereas Adelaide does a little bit every year, and it’s the compounding growth that counts.
The big lesson from those figures, is that, you might think it’s taking too long. You might think that you’re not getting anywhere because as you get that equity, you’re borrowing back for your costs from the next property. But if you can sit on something for 12 to 15 years and let your portfolio grow, and as long as you bought well and used the 20 questions to make sure you’re buying property in areas that have really good signs of growth, you’ll find that once you get up around that 12- to 13-year mark, you’re going to start to really see some things happening. You’ll have a nice wide base of properties, and as they all start going up, you’ll be adding to your network in large chunks, rather than in those little amounts that you saw at the very beginning.
Kevin: Interesting to hear to talk there about those 20 questions. That was the podcast that you and I did some years ago: “Margaret Lomas’s 20 must-ask questions for every property investor.” What I’ll do Margaret, is put a link back to that because we’ve still got that in our files.
Margaret: That’s a great idea because people still think they can buy any property and as long as they hold it long enough, it’ll perform. And it probably will. But what you really want is to buy the right kind of property, so that over the long term it performs really well, better than your money could have performed in any other kind of asset. And you can only do that by buying properties with those strong growth drivers.
Kevin: Okay, in the text version of this interview, just scroll down to where Margaret did mention the 20 questions. I’ll put a live link there that’ll take you straight to Margaret’s podcast where she and I talk about those questions.
Hey, Margaret, always great catching up with you. Thank you so much for your time.
Margaret: No problem. I’ll see you next time.
20 Must-Ask Questions – Margaret Lomas
How not to miss the ‘strong’ buyer for your property – Mat Steinwede
Kevin: When it comes time to sell your property, one of the things that you’ll hear agents talk about quite often is taking the emotion out of the sale. Not difficult if you’re selling a commercial property because they’re totally different from residential, but when you’re selling a residential property, it’s natural that you have some kind of emotional attachment to it, particularly in terms of its value.
So, what do agents mean when they say, take away the emotion? Let’s talk to one of Australia’s most recognized real estate agents, Mat Steinwede.
Hi, Mat. Thank you for your time.
Mat: Hey, Kevin. Thanks.
Kevin: Now, Mat, when agents talk about taking emotion out of the sale, what do you mean and how do you do it?
Mat: It’s like buyers and sellers start at the opposite ends of the interest wave, and what I mean by that is when an agent says to an owner “You have to take the emotion out of it,” or even people might say “Don’t get so emotional about your house,” it’s really good advice when people say that because a buyer starts logically and then they finish emotionally.
So, when a buyer first sees a home come on the market, they haven’t been there, they haven’t experienced it, they haven’t lived there, but what they do is compare it straight away logically to everything else that’s happening in the market right now, so everything else that’s for sale. They also pull up the data for anything that’s recently sold, so they’re looking at it very clinically.
And if any owner is thinking of selling their house, they have to do the same. So, they almost have to take the criteria of their property, the area their property’s in, maybe what other benefits it offers, and then sit down at a computer or go around to open houses and just get all the information they physically can and compare it clinically.
Forget it’s your house for a minute. Do you know how many houses I go to Kevin? I’ll go to three in the same street sometimes and they all say “This is the best position in the street,” but I just heard that from someone down the road recently.
When you live there, you get very emotionally attached because you understand everything about the house, but a buyer doesn’t see it that way when they first start looking at it logically.
Kevin: It’s so important there for an agent to be really frank with the seller, isn’t it, and say, “Well, look, this is how a buyer is going to see your property.” You really need to hear that, I think, don’t you?
Mat: You do. When I say they start at the opposite ends of the wave, and I said that they start logically and finish emotionally, once the buyer becomes interested in a home, that’s when price is built.
This is why properties sit on the market for an extended period of time. An owner will see it from that perspective first and work backwards, whereas a buyer has got to work upwards. So, an owner quite often says “No, I think it’s worth this,” because it’s worth that much to them. They almost miss the market. So, they start high, the market doesn’t respond because the logical part of the process doesn’t connect, and then they sit on the market, and then they end up dropping their price and dropping their price, most of the time.
Kevin: Is that why the first offer from a buyer could be a low because it’s like a statistical offer, a logical offer?
Mat: It is, yes. Even though it might be emotional to a buyer… And really, that’s the whole equation here. It’s how to emotionally connect an owner’s property with the marketplace, like try and find that middle band.
There’s a saying in real estate: your first offers are the best offers. Even though an owner might see it as low, to the marketplace or the buyer, it might be actually the right offer or the best offer because the buyer has been looking for a while.
Kevin: So, mate, what is your advice to owners if they’re thinking about entering the market?
Mat: After 16 years of seeing owners miss the best offers and end up selling a property for less down the track because they missed that first buyer, I would say that when you do price your home, take your time, research the market, really get a sense of what’s going on out there. Don’t listen to your friends or neighbors because they have no idea, half the time.
But when you do find a buyer, and if it’s in those early stages, the biggest mistake that owners make is say “It’s early days,” and they let the buyer go. What I would be doing is sitting with your agent and I’d want to know a few things: how long the buyer’s been looking for, how much they have to spend, and how much they love the home. What are their reasons for buying this home?
If those three things are all in your favor – for instance, they’ve been looking for a while, they have enough money to buy the home, they have a couple of compelling reasons to actually move there – I would say chances are that’s going to be the strongest buyer you’re going to find along the whole process.
Even though it might be less than what you want, don’t disregard it. Sit down with your agent and work through it and work through the reasons why their interested in the home.
Kevin: Great advice there from Mat Steinwede at McGrath Central Coast. Mat, once again, thanks for your time.
Mat: Pleasure, mate.
Where and what to buy – Shannon Davis
Kevin: My guest in studio this morning is Shannon Davis from Image Property and also Metropole Property Strategists.
Good morning, Shannon.
Shannon: Good morning, Kevin.
Kevin: I want to talk to you about how you go about selecting an investment property: what are the criteria, what are the areas you should look out for, what are the areas you should avoid? We’ll talk about Shannon’s picks, and we’ll look at why you’ve picked those.
Things that you should avoid when you’re selecting an investment property. You help investors to put together a portfolio all the time. What are the things that ring alarm bells for you when you’re looking?
Shannon: I think everyone knows a little bit about property, so I think their bias is something that…
Kevin: Everyone knows a lot about property.
Shannon: We all live in one and we’ve seen people buy them and stuff, but sometimes the worst advice can be free advice. I think everyone has a bias. I think investing to that bias might just harm you.
Kevin: Explain what you mean.
Shannon: You’re a bit of an expert on where you live, but is that area a great capital growth area? It may not be. You might be living there because of work. Say, you’re in the military and you’d been placed to an army barracks and you buy near there, but has it got the recipe for growth? And that is a rising population, strong confidence, and limited supply. That’s going to push your house prices up.
Kevin: Yes, we get very comfortable about the area that we know. Are you saying that we should – well, obviously – broaden that net, but become more comfortable with more areas?
Shannon: Yes, become an expert on more areas, and there’s a lot more advice. I think the property market is quite transparent these days, so I think you can school yourself up and do more research on what are the factors that are going to be driving prices.
Kevin: The research is there. It’s very easy to get that research and get a bit of understanding. Sometimes, I think there’s probably too much research and we almost go into information overload.
Even the simple basics of understanding what gearing is all about, because I talked to a number of people who have a lot of gearing in their own home that they’re not really utilizing. They’re saying “Well, I’d like to get into the market but I just don’t think this is a good time, I don’t really have the cashflow to do it.” Yet you find they probably have $500,000 worth of equity in their home that they could actually gear against.
I did an interview with Michael Beresford from OpenCorp during the week and we talked about accessing equity in your property. Do you find that? Is that something you talk about as well?
Shannon: Yes, sometimes they have a bit of a lazy balance sheet. I think instead of timing the market, time your life is something that I’m really keen on. So, if you have the equity there and the serviceability in this era, it’s very important for your investing, then the time is right for you.
Stop worrying about the headlines and all the bearish commentators out there, because for some people it’ll never be right; for them, probably, cash in the bank is the way to go. But if you have the right circumstances, your job security is there and there’s capacity to invest further, then it’s the right time.
Kevin: You talked about bias before, and sometimes the information we get or the feedback we get from family and friends is “Oh, no, this is dangerous. You shouldn’t be doing that.” I think that actually wears a lot of people down. That’s one of the reasons why they don’t go out and take those risks.
Shannon: Yes, definitely. Success is an action sport, so sometimes you just have to filter out those people, and if they have very little success to show for their time as well, I think it’s an easier job to ignore that advice.
Kevin: What are some of the other things?
Shannon: Is it going to be a good long-term fit? So, maybe not the way you like to live, but are there the right factors? If you’re, say, a family, and you’re used to a large kitchen, the way you’re investing maybe if you’re looking at apartments might not be that way and so needed. I think you have to make sure that you have a fresh approach to it and not always filtering it through what you would need.
When we’re looking for property, you don’t want to rush in. You don’t want to get fed up, then just make a purchase for the sake of it; it has to be a long-term fit. I think the most disappointing thing for me is when I see investors selling a property within two years. Just all those entry costs, the stamp duties and the agents’ commissions…
Kevin: Sometimes they have to do it because the planning wasn’t there to start with, the structure wasn’t there. I don’t want to put words in your mouth, but I think what you’re saying here, basically, is make sure you have the plan before you buy, and it should be a whole plan.
Shannon: Yes, definitely.
Kevin: Which leads me to another topic too. I know you haven’t quite finished going through those yet, and we’ll come back to that. Renovation. A lot of people go into renovation. The days of you hook a property, you do a bit of reno, you flick it over, and make some good money. I question nowadays whether that is a good strategy, whether it’s even possible.
Shannon: Yes, many times they would have made money in a rising market anyway without doing any of the work. But yes, renovations at the moment, we have high labor costs and high parts, and so it makes it hard with the transaction to make a good profit there.
Kevin: Johnny is on the line. Good morning, Johnny. How are you doing?
Johnny: Good, thank you. Investment properties: had a woman hassling me from down the Gold Coast regarding me buying an investment property and paying back interest-only.
Kevin: Okay. Shannon?
Shannon: I think interest-only can work. It’s definitely a strategy that investors use, and it’ll allow you to grow your asset base wider than undergoing a debt repayment strategy. But the circumstances need to be that you need that capital growth.
Kevin: I think the other consideration too – Shannon, I’d love your feedback on this too – is what the banks are doing. They’re trying to discourage a lot more of the interest-only loans, and I think you’ll find that there are a lot of penalties that come with it.
I think you have to have a bit of a mixture in your portfolio: some interest-only, some principal and interest, but I think it’s always a good strategy in this market to be paying down some principal. Shannon, what do you think?
Shannon: Yes, debt repayment is a guaranteed wealth strategy, so it’s needed, and it should be part of everyone’s investment portfolio. Interest-only does allow you to get that asset base a little bit wider and get there a bit sooner. It’s a tax deduction as well. Just because a property is for investment doesn’t mean it’s investment-grade, you just have to make sure you have a limited supply, growing population, and plenty of jobs in the area, and you’ll get most of it right.
Kevin: Johnny, we have a copy of Your Investment Property magazine. It’s actually dealt with in there. There is an article on principal and interest and interest-only as well, and also gearing. So, you might find that an interesting read. Johnny, we’ll put that aside for you, okay?
Johnny: Okay. Thank you. Have a good day, guys.
Kevin: Stay on the line, mate. We’ll get your details.
Spotting a hot spot before its hot – Shannon Davis
Kevin: Let’s have a look now at the indicators that a suburb or an area is about to grow. I don’t want to talk about hot spotting, because we talk about it and people love to get there before it happens, but by the time we all get there, it has already happened and it’s over and it’s peaked.
But let’s wind the clock back a little bit, Shannon. What are some of the indicators that in six to twelve months’ time, or even two years’ time, some suburb could become gentrified?
Shannon: I like to see the renovation count. I like to see people having confidence to put more money into that area and perhaps not move, but extend, improve, renovate. I think that’s a big thing. I think you also look at the type of cars. What I’m looking for is the demographics and disposable income. Maybe European cars, and putting that upwardly mobile spot. We like niche shops such as organic food and veg or butchers or farmer’s markets.
Kevin: Trendy cafés?
Shannon: Yes, another sign of disposable income, and we want that as a larger proportion. So, we look at weekly family incomes to the area. We do a lot of study on demographics. Australians tend to spend on housing up to 55. That’s the cap off on money that a household will spend. And then after 55, it starts to come down, so you get to downsizing and that effect going on.
So, young families moving into an area, perhaps buying deceased estates and turning those properties over and renovating, that’s a good sign as well because they’re still spending a great proportion of their family income into the housing. So, we’re looking for all those types of things.
It’s the owner-occupiers who drive the market. When you invest, try not to think like an investor. Most investors are going to be attracted to new property for the tax deductions and things like that. But we’re looking for the owner-occupiers because they buy emotionally and they improve their properties. They’re a little bit more house-proud, and that’s what’s good for the area.
Kevin: Yes, those improvements do actually drive prices up, don’t they? It’s heart-warming to see you buy into an area, and then all of a sudden, not so much unit development – especially not unit development – but you see houses being improved, renovated, even splitters, a house being moved sideways and another one put on beside it.
Shannon: You see some of those suburbs where they’re spending $700,000 to knock over a post-war house, get a 607 block sort of thing and get a contemporary build where they’re looking to spend, say, 2500 square meters on the build. That ends up being a $1.5 million property.
If you have good schools, green space, and a high street with cafés, you’re halfway there, and that’s a good sign of an area that’s gentrified or on the way to being.
Kevin: Yes. Another indicator for me too – and you touched on this – is what’s happening in the area. But some of the really good café operators will look at the demographic of an area, look for a niche need.
Shannon: I also think real estate agents play a big part. I’m not talking about the real estate agents who just want to sell you a house and get it over and done with; they’re transactional. I’m talking about the elite in our industry who actually want to push for the highest dollar, set records, and make a street precedent and things like that.
So, in those really high areas, you have some really good agents who are setting records all the time, and I don’t think it’s all to do with the area; I think it’s actually having the industry elite pushing up prices doing well for an area as well.
Kevin: So, you could do a lot worse if you are looking at selling a property than to ask the property agent to demonstrate how well they negotiate and what are some of their sales? Because agents will always tell you about other agents’ sales, but ask them about their own sales as well, see how good a negotiator they are.
The ‘hook and flick’ strategy – Pete Wargent
Kevin: Pete Wargent joins me now. Of course, his blog is very, very popular: PeteWargent.blogspot.com.
Good day, Pete. How are you doing?
Pete: Good thanks, Kevin.
Kevin: Mate, you’re doing a presentation in Sydney, coming up in October too – 7th of October. What’s that about?
Pete: That’s for people interested in some no-nonsense financial education. It’s a one-day workshop. No up-selling to more expensive courses; it’s just straight talking from five financial experts.
Kevin: Okay. If you want to get a bit more information about that, go to Pete’s blog, which we’ll tell you about, again, at that the end of this chat.
Pete, of course, is well known for having written a number of books about finance and the market. Get a Financial Grip was one. There’s a new one coming out in October, too – watch out for it – called The Wealth Way.
Pete, I want to talk to you specifically about hook and flick. I know that’s a terminology that really talks about flipping property. Is this a good time to be doing it, or is any time a good time to do it?
Pete: I was going to say, I think that’s what in England, we would call flipping.
Yes, in Australia, you do find if you’re flipping properties, then you have transaction costs when you buy and sell, and that can be quite a high hurdle to clear. I think in the current market in Australia, there’s less appetite for apartment development at the current time. But that means there’s more competition for splitter blocks and renovators.
You can still pull it off, but you’ll probably want to find a market that is rising and delivering some capital growth for you, because that can help to improve the margins.
Kevin: Apart from where you buy, is there a particular type of property? As an example, I know that a number of people have made really returns out of buying some of those older style units where they can add an extra bathroom by cutting down on the laundry. Are they the sorts of twists you look for in this type of investment?
Pete: Yes, definitely. In Brisbane and Queensland, the older style Queenslanders are another type of property that people look to renovate, particularly by raising them up. So, there are different types of properties you could approach, but there is some margin there for willing renovators.
Kevin: What do you think are the signs that make a good hook-and-flick property? What would you look for?
Pete: It’s all about doing the numbers. It’s very much a numbers game. If you have stamp duty and transaction costs to pay, when you buy and sell, then you need to make sure that there’s enough margin in the development. So, it’s really about thinking about what is your end product and sticking to the budget.
Kevin: It’s one of the golden rules of investing in real estate, isn’t it, that you’ll make money when you buy, not necessarily when you sell?
Pete: Yes, that’s right. There’s something I was alluding to there before. To go back two or three years ago, there was a lot of lot of competition for sites that you could develop with apartments and now that’s much less so the case, and therefore, there’s a lot more competition for a lot of these sub-dividable blocks and particularly for renovator-style properties. So, you need to do your research and buy well.
Kevin: You mentioned earlier, in Queensland, the number of splitter blocks. These are houses on two blocks of land. They may be two now, or they could have the potential to do that. Was that something that mainly happened in Queensland, or did it happen in other parts of Australia as well?
Pete: Yes, you can find blocks all over the country that can be sub-divided. The thing is, if you’re looking in Brisbane in particular, you would look at some of the 810 square meter blocks, many of which have now been split into 405 small blocks, as being standard size. There are certain rules as well, depending on the zoning from the city plan. So, if you’re close to commercial property, you can sometimes divide smaller blocks too.
Kevin: Okay. Just summing it up for you, the golden rules if you want to get into turning property over quickly, what would you say are the top three recommendations, Pete?
Pete: Firstly, you have to do a lot of research into the type of property you’re going to buy and the end product you’re going to deliver. Secondly, spend a lot of time on the budget, and also, I would say the third thing is allow for contingencies because there are often unforeseen costs when you’re doing a development.
Kevin: Pete Wargent. I mentioned that blog, right at the start. I’ll mention it again: PeteWargent.blogspot.com. Look on for some great content and also some details about that no-nonsense financial education program that Pete is running on the 7th of October in Sydney. Pete, thank you very much for your time. Look forward to that new book coming out, too, The Wealth Way. When’s that due out?
Pete: That’s also out in October, Kevin, so keep an eye out for that.
Kevin: Wonderful. Look forward to it. Send me a copy, mate, and we’ll have a chat to you when it comes out.
Pete: Sounds great.
Kevin: Good on you. Pete Wargent there, and it’s PeteWargent.blogspot.com. Thanks, Pete. Talk to you again soon.
Pete: Pleasure, Kevin.