Joint Ventures on the surface seem like a good way to get into property either as a small operator or joining others in a large development. Peter Koulizos takes us through the pros and cons of this type of investment and details the areas you need to be ware of before getting involved.
Apartment living looks set to be the way of life for the future and strategic investors need to work out how and when they are going to respond to this growing trend. Michael Yardney gives us the 5 reasons why apartment living will become the new norm.
Russell has asked us to further clarify a point made by Andrew Mirams in a recent show about refinancing. We will do that for you today Russell.
We set about either proving or disproving a common property myth to do with buy and hold or flipping. What is best? Nhan Nguyen will give us his opinion.
We tell you about a new website that will help you assess your portfolio and why it is so interesting is that it actually brings together all the tools you will need instead of having to rely on various sites.
Kevin: We’re going to answer a question in the show now from Russell. Thanks for the question, too, Russell.
It is in relation to some comments that were made recently by Andrew Mirams from Intuitive Finance to do with refinancing investment, and in particular, Russel wants to know by refinancing, you could access your equity and use the funds for a deposit on a property investment to invest in stocks and shares at education costs to support your children in purchasing their own home. I guess the key question here is Russell wants to know what other things could this be used for as opposed to property? Could it be used for lifestyle?
Andrew, it’s a great question, isn’t it?
Andrew: Yes, it’s a fabulous question, Kevin. Thanks, Russell, for asking it. As experts, we tend to just roll these generalizations out and probably don’t drill into the specifics like Russell has asked. I think it’s a great question.
The key here really is the purpose, Kevin, the purpose of what you’re using the money for. It’s his equity. If Russell has done well in his property portfolio and it’s all increased in value and he wants to refinance it and use that equity, he can use it for whatever he wants. That’s the end of the game.
But the key is not what we would call blending personal use – so whether he’s funding some education costs or he’s going on a holiday or buying a new boat or a car as a reward for what his property portfolio has done – blending that with then a deposit on that next investment property because that makes it really difficult to determine your tax deductibility, and the ATO will often scrutinize that quite heavily.
Kevin: Therefore, obviously, the answer to the question is he can use it for whatever he likes, but he should use it in a separate sense. Is that right?
Andrew: Absolutely, and that is the key. Let’s just say, he has three properties, his home and two investment properties. His home, he might have only just purchased, and that hasn’t really gone up in value because he’s just upgraded, but the two investment properties have gone up in value – let’s just say for ease of numbers – $100,000. That means at 80%, he could access $80,000 for each.
Now, he might have gotten active in the property market when he was just married and didn’t have children, and now the kids are going to school, but he also wants to buy the next investment property. So in that case, he would do two separate lines of credit or interest-only loans, or whatever it be, but two separate facilities.
One, you might say, “Look. This is going to be for the personal use,” and the other for the investment use.” By doing this, you’re quarantining both debts. One is very clearly used for personal use that can’t be tax deductible or isn’t tax deductible, and the other that is used for the deposit on his next investment, which very clearly is then for the purchase of an income-producing asset and is tax deductible.
Kevin: What about in the event Russell decides to buy a holiday home that he’s going to use both as an investment but also wants to live in it, as well? Is that a different scenario again?
Andrew: That would need a little bit more analysis. I wouldn’t use those two $80,000 scenarios. The key with holiday homes is how long is it used for rental and how long is it used for personal use? If the primary goal of this is as a personal-use asset, and he’s going to use it for half the year and the other half, it’s available for rent, then he really has 50% of it is available for tax deductibility, and 50% isn’t because that’s personal use.
Now, you’re really delving into some accounting advice, but there are ways that the accountants will split that on your tax return and things like that. Again, if that was the primary goal of what you wanted to do, you would just need a little bit more analysis around both of those scenarios, I think.
Kevin: Yes, great question, Russell, and a great answer from Andrew Mirams, who we’ve actually interrupted on a break, and I want to thank you for joining us today, Andrew. Andrew Mirams, of course, is from Intuitive Finance and always a regular on our shows, and you’ll find all the information about Andrew on our website, as well.
Russell, we’re going to give you a 12-month subscription to Australian Property Investor magazine for that excellent question. We’ll be in touch with you to get all the details, and you’ll be getting the next edition with our compliments.
By the way, too, if you send a question in and we choose it and you are already a subscriber to API, which Russell may be, well then we’ll extend your existing subscription by a further 12 months with our compliments.
Once again, Andrew, thanks for your time. Mate, you enjoy your holiday.
Andrew: My pleasure, Kevin. Thank you. All the best, and great question, Russell.
Kevin: A very interesting article in Australian Property Investor magazine, which is out now, deals with joint ventures. I’m going to talk to Peter Koulizos, better known as the Property Professor – the website ThePropertyProfessor.com.au – a little bit more about this – pros and cons.
Peter, welcome to the show, and thanks for your time.
Peter: Thank you, Kevin. My pleasure.
Kevin: Thank you. Peter, firstly, what are joint ventures? Can you explain to me what they are?
Peter: Sure. A joint venture, as the name suggests, is going into a venture or a project with one or more other people. Generally speaking, in property, it’s two people and it generally involves property development, but it doesn’t necessarily have to.
Kevin: There’s a saying that resonates in my head all the time: “If you want to wreck a great friendship, go into business with a friend.” Probably that raises a bit of caution about things like joint ventures. Would you agree with that, Peter?
Peter: Yes, 100%. Our friends might be great for having a coffee with or going away on holiday, but when it comes to business, you need to pick the right business partner.
One of my best mates is a great bloke to have a coffee with, go away on holidays. I use his holiday house from time to time. But when it comes time to pay for the coffee, you never see his wallet. So, I’m more than happy to do other things with him, but when it comes to business, I would be looking for somebody else to do business with.
Kevin: Yes. I guess the same with family, as well. You have to be very careful. It raises some issues that I do want to talk to you about. We can talk about the pros and cons, but also getting everything down in writing so that there’s no misunderstanding between the parties right up front.
Peter: That’s right. Look, if it’s not down on paper, then the agreement you have is not worth the paper that it is not written on. You need to find a good lawyer who is experienced in joint ventures to draw up the paper work because even though everything is all going nicely now, it may not go so nicely during the construction. A typical property development can take up to 12 months – if not longer, if it’s a bigger development – and unexpected things may happen.
Everything might be amicable, but unexpected things may happen during the process, so not only do you want to be able to get into a deal, but you also want to be clear as to how one or both of you can get out of the deal, as well as what share is everyone entitled to, what are the responsibilities of each party, and so on? It doesn’t have to be a very lengthy document, but it certainly does need to be documented.
Kevin: Yes, and done by a solicitor, who probably has some experience in this area so that he can foresee some of those problems.
Peter, how important is it that the parties in a joint venture are going to be able to bring different skills to the table? In other words, what I’m saying is is that important?
Peter: Very important. For example, if you’re a builder and your friend is a builder and you decide to go into a joint venture, that may not be the best option because there are many other skills required in a property development project.
However, if your friend was a builder and you had the money, then that could be a good joint venture partnership, or if you were a builder, your friend was a project manager, and together you could both borrow the money, then that would also be a good partnership. Somebody who complements your skills and experience would be the ideal joint venture partner.
Kevin: A little bit later in the show, I’ll get Peter to come back, and we’re going to talk about how dangerous it would be if both parties entering into a joint venture were brand new to property development. We’ll also look at the areas to be wary of and what are the real benefits of a joint venture?
Peter Koulizos will join us a little bit later in the show as we continue this chat and talk about joint ventures.
Kevin: One of the key things that we learn about property investment is that you have to keep up with those changing trends. It’s interesting; in some discussions that I’ve been having with Michael Yardney – who’ll join me in just a moment – from Metropole Property Strategists, demographics is playing a key factor in helping you to determine where you should be investing your property dollars.
Michael, thank you for your time. This is an interesting insight as to where the market is going. I know that you’ve assembled some thoughts on why apartment living may just become the norm.
Michael: Kevin, I believe that demographics – how we live, where we are going to live, how we want to live, how many of us there are – is going to be a more important factor shaping the future of our property markets than the short-term ups and downs of supply and demand or interest rates or government factors. And that’s why I agree with you; I think understanding Australia’s lifestyle and demographic trends is what all investors should be studying.
Kevin: Maybe you could take us through a quick look at some of the interesting Australian demographic trends and their implications, Michael.
Michael: Kevin, these are quoted in the Intergenerational Report that the Australian Bureau of Statistics has brought out. Other demographers are doing a lot of study because it doesn’t only affect property, but it affects planning, it affects commerce, it affects governments.
They’ve shown a couple of trends. One is our population is aging. Our baby boomers are becoming empty nesters and their lifestyles are changing. More are getting ready to retire, Kevin.
But remember years ago, they talked about tree change and sea change. That’s not happening, is it, Kevin?
Kevin: No, not at all, Michael.
Michael: No. People are wanting to retire close to where they live now. They still want to go to the same hairdressers, the same dentist, be where their friends are. So, one of the big trends is our population is aging.
I think the other one is that it’s changing. The average number of people living in each household is decreasing. There are more lone people households, couples without children, and single-parent households.
I think both the trends we just discussed a second ago mean there’s less demand for those sprawling properties with four bedrooms and probably more demand for medium-density properties, Kevin.
Kevin: Yes. Of course, in tandem with that, too, our population is growing, Michael.
Michael: Yes, it is. Our population is currently just under 24 million people, and even though population growth is slowing, it’s estimated our population is going to increase to 28 million people in ten years’ time, so we’re going to get another four million people, Kevin.
Close to four out of five of these people, though – just over 3.2 million people – are expected to live in our capital cities. They’re going where the jobs are, and more of them are going to go to Melbourne than anywhere else. The Bureau of Statistics thinks that 925,000 people will move to Melbourne, 820,000 to Sydney, 710,000 to Perth, and 530,000 in Brisbane.
But, Kevin, if you look at that, it means we’re going to need 1.7 million new dwellings to house those people, and think about all the extra cars on the road and the infrastructure and the shopping centers and the schools and the crèches. It means that we’re going to need maybe different sorts of dwellings, but it really underpins our economy and our property markets, Kevin.
Kevin: Yes, and of course, with the increased prices in Sydney and Melbourne in particular and those figures you were just talking about, the number of people who will be living in those capital cities, making it even more difficult for first-home buyers.
Michael: Kevin, I think we’re going to follow the trend of a lot of overseas countries, where in the very big capital cities, it is going to become harder and harder for first-home buyers – particularly if they want to buy a house, particularly if they want land around them, so more are going to turn to apartments. I think the trend that we’ve seen in the last years of becoming renting investors – in other words, renting where they choose but can’t afford to buy and buying an apartment as an investor – I think that trend is going to continue, Kevin.
Kevin: Of course, too, Michael, we’ve seen yours and my generation; looking at the current generation, their preferences have changed a lot.
Michael: Yes, they have. I think we did want to have a house and land and different areas and live in different places to where our parents did, but I think for the younger generation, there’s an increasing trend of people wanting to live in the city. In our days, no one wanted to live in the city. All they want is to live close to the CBD.
When we grew up, Kevin, they were more the working-class areas and the poorer areas and the industrial areas. The younger generations want to be closer to their work, closer to their social life, attractions, and they’re actually quite happy swapping backyards for balconies, living in apartments.
Kevin: Yes, and of course, some of those areas have become gentrified, too, Michael, haven’t they?
Michael: Very much so, haven’t they? What do they call this? The hipster generation, as well?
Kevin: Yes, exactly. So, what’s the bottom line?
Michael: Well, I think these demographic trends are important. They have important implications. I believe while more of us are still going to want to live in houses in the outer suburbs, a bigger percentage of Australians are going to live in apartments. They’re going to become more popular.
We’re going to have to build the right apartments. I think we’re building too many of the wrong small apartments. There’s a huge demand from baby boomers for reasonably substantial apartments that are lock-and-leave apartments where they can go off and do their things, but not the tiny poky ones. I think even the younger generations are going to want things with a little bit more space, a little bit more amenity.
I believe in the future, the properties that will increase in value are those that more people are going to want. If you can own them, you’re going to be a good investor.
Kevin: There you go. Five very sound reasons why apartment living is going to become the new norm. Michael Yardney has been my guest from Metropole Property Strategists.
Michael, thanks for your time.
Michael: My pleasure, Kevin.
Kevin: I’ve met a lot of investors over the years – some very, very savvy ones – and some will say to you that you should never sell a property. In fact, some of the richest people I’ve ever met are people who have still got the first property that they ever purchased.
But what about the buy-and-hold strategy? Is that the best way to go, or should you be looking at flipping? Has the market changed? Nhan Nguyen from Advanced Property Strategies joins me.
Nhan, what’s your view on this? Are you a buy-and-hold believer?
Nhan: Look, I think that buy and hold is part of a bigger game, and I do believe that buy and hold is important, however, it’s not the be all and end all and the only strategy. I have two or three strategies, one of which is buy and hold, and the other one is development – doing land sell divisions or townhouses.
Buy and hold… For example, Warren Buffett, an American investor, advocates buy and hold and hold forever. That’s great, however, the thing about property is that there’s debt involved and there’s negative cash flow. If you paid everything with cash and you had a lot of money, buy and hold is a great strategy, however because there’s debt involved and people have to go to the bank to borrow money, there’s negative cash flow.
I generally only hold stuff that is positive cash flow and pays itself off or is a strategic land bank for a rezoning in the future, development sites for units, or land sub-divisions.
Kevin: Nhan, I sometimes wonder whether the different strategies – buy and hold or flipping – is dependent on the property, or is it dependent on what’s happening in the market at that point in time? What’s your view on that?
Nhan: I think it’s absolutely both. For example, if you’re going to buy and hold stuff and, one, it doesn’t grow that much, and two, the income is very low, it may be more of a headache than anything else. Positive cash flow is critical. Also the growth is critical.
In a market that is hot, I do believe that if you have some stock and you want to get some extra cash, selling it is not a bad idea to take in the opportunity of the market being hot. But the thing is you have to replace that asset – you have to roll that money into another property – and some people are not patient enough to roll that money once the market has corrected.
Kevin: It could also have a lot to do with the individual, couldn’t it? Their age, as an example, their income as to whether they can afford to hold a negatively geared property. As I said, what age they’re at: it doesn’t make a lot of sense in your 60s to be buying a property thinking that in 10 or 15 years’ time, it’s going to be worth a lot more than it is today.
Nhan: Yes, exactly. Buying and holding or flipping is also relevant to your time that you have in the marketplace and your skill level. Some people are just too busy, so they just want to buy one property a year every year for the next 10 or 20 years. That’s great if that’s where the capacity is at. Other people want to put more time in, and so they want to be more active. If you’re more active, it gives you more opportunities to turn it over and create it as a business not just buy and hold.
Kevin: Nhan, when you’re looking for a property, do you look for properties that have a twist – in other words, you can do different things with them because that probably opens up more possibilities for you as to what you can do with it?
Nhan: Absolutely. Look, for example, a townhouse project that I’m going to be developing at the moment, I’m going to be holding. I bought a, let’s say, 700-square meters house at the front, and it’s zoned for townhouses and units. I just got an approval to put a triplex at the back. Once that’s finished, it will have four sources of income – four tenants – and that will be a great cash-flow-positive hold for me.
Kevin: So this myth is not one that we can necessarily rule a line through – the myth being buy and hold is the best strategy – because it really depends on so many different variables, doesn’t it – the market, the property, even you as the individual, Nhan?
Nhan: Absolutely. Even interest rates. At the moment, we have low interest rates. If the interest rates were 10% per annum, I don’t think I’d be holding as much because you’re losing all your rent to the bank, and you’re maybe better off just putting the money in the bank and getting 10% return. It is very variable on suburb, individual, and strategy.
But overall, the principle is just that – it is a principle, and you have to adjust it to your personality, your budget, your appetite, your age, your risk level, many things.
Kevin: Many things indeed. There are lots of things to be considered.
Nhan, I want to thank you for giving us your time today and your wise words of wisdom there as we are looking at these myths, and this one buy and hold being the best strategy. Some people say, “Never to sell a property,” but you heard there from Nhan that it really depends on so many variables, including the market and yourself, as well.
Nhan, thank you so much for your time.
Nhan: My pleasure, Kevin. Any time.
Kevin: Earlier in the show, I was talking to Peter Koulizos, the Property Professor, about the pros and cons of joint ventures, which has been prompted by an article in the latest Australian Property Investor magazine. We pick up on that conversation.
How dangerous would it be if two parties went into a joint venture who had no experience whatsoever in developing property and therefore didn’t know what problems are going to be emerging? Do joint ventures suit more the experienced developer?
Peter: Certainly do. I’d encourage people to do some of their own projects on their own and then look at joint ventures if you need to. Because when you do a joint venture, you add another risk, which is called business risk. There are many risks involved in property development, but when it comes time to do a project with somebody else, you are also exposed to business risk.
Kevin: I guess this is a fairly obvious question but maybe not necessarily an obvious answer – I’d hope not – but what are the benefits of a joint venture, Peter?
Peter: Firstly, you can make a lot of money in property development and a lot of people don’t have the money to do it on their own, so even if it’s just 50% of the total profit, 50% of something is better than 100% of nothing.
It allows you to get your foot in the door, so to speak, and if you’ve selected the right joint venture partner, you can gain experience and knowledge, and this is experience and knowledge that money can’t buy. You can read as many books and as many magazines as you like but nothing can buy you that experience.
Providing you have enough experience and knowledge, then a joint venture just might be a phase that you go through, and then when you have enough money yourself, you might decide to go back to doing it on your own, or if you find that the first joint venture works well between you and your partner, then you might go on to do bigger and better things.
But everyone is different, as there is a lot of risk involved in joint ventures, and some people are very risk averse.
Kevin: Tell me about some of the areas that we should be wary of. What are some of those risks, Peter?
Peter: Making sure, for example, the documentation is watertight, making sure that each person knows what they are entitled to, what each person’s responsibilities are, and there are exit clauses. As I said earlier, things happen in life that we don’t expect, but in the document, you have to try to include the unexpected.
For example, if you need to get out of the deal during the year – you might lose your job during the year, you can’t afford to keep making the payments – what is the option for yourself to get out of that joint venture agreement and still keep everything amicable?
Kevin: Yes, three basic areas, aren’t there? What do we each put in, what do we each get out, and how do we get out if we have to? They’re the three basic elements that you need to discuss with a solicitor.
In terms of what do we take out, is that always done on an equal basis, Peter?
Peter: No. It depends what each party brings to the table. Often, it will be 50/50, if each puts in 50% of the money and you agree that somebody’s project management skills are just as valuable as somebody else’s building skills. But really, it’s the money that you put in that most of the time will determine how much money you will take out of the project.
Let’s say, the project manager is a very experienced project manager and they might be asking for a greater share of the profit; one option is for the project manager to get a project management fee, which is separate to the sharing of the profits.
Kevin: Well, there’s a lot more information inside Australian Property Investor magazine in this article.
Peter, I appreciate your time in helping us understand a little more about it through this podcast, as well. Peter, thank you so much for your time.
Peter: My pleasure. Always a pleasure to chat with you.
Kevin: One of the big challenges when you are a property investor as you build your portfolio is to track how it’s performing and, in particular, try to design it for the future. We build a portfolio to end up somewhere in the future, hopefully, it’s going to help us put together our retirement package.
I want to tell you about a website that has been introduced to me. It’s called hausli.com, and I’ll tell you more about that in a moment. The man behind it is Vin Manhaas, who joins me.
Vin, is that a fair assessment of how the site has been structured?
Vin: Yes, that’s right Kevin. That’s a pretty good description of it.
Kevin: Now tell me why you’ve developed it and how we can benefit from using it as property investors.
Vin: Right. Well, the reason why I developed it is I started property investing myself quite a few years ago, and I always found that there were various tools available to property investors, but originally, they were often from different countries – so you could use an analyzer from the U.S. – and they weren’t quite relevant to the Australian market.
Another part was that they often did one component of what we needed as property investors really well but they didn’t tend to deal with the entire package of what it would mean to be a property investor. That was forecasting being able to deal with variables over time because obviously, as we know, being a property investor is a long-term commitment and investments should be long term.
Sometimes while I’m to holding those properties, things change and with a lot of the analyzers out there, you could only really set up one set of parameters that would run the full length of the analysis.
Kevin: Vin, if I could just ask you at this point, as an investor, when are we going to be able to use Hausli? At which point? Is this prior to the purchase and putting something into our portfolio or once we’ve purchased it?
Vin: We can actually use it at both times. It’s ideal for pre-purchase analysis and also once you actually have the property, maybe you need to change something, do renovations, change where you’re at, or there are changing parameters in the marketplace that you now need to forecast. You can do those with your existing property, as well.
Kevin: Well, if we’re going to put a property in prior to purchase, obviously, there has to be some analysis in behind all of that. Where have you drawn that information from to help us make that decision about which property to purchase?
Vin: With our analysis, rather than actually providing data on the market, what the capital growth rates are, and those sorts of things, what we’ve approached it from is to actually provide you with the tools to replicate what a real purchase would be like.
You can enter in all the details. It will do a lot of the heavy lifting for you, calculating stamp duties, things like that. You can simulate borrowing equity from other properties, so when you’re using borrowed funds, and especially loans being a big part of property investing and owning property, we put a lot of effort into our loan calculator. That can actually calculate loan interest daily, like the banks do, so you can get a really good picture of where your property may take you in the future.
Kevin: Okay. Now I put all this information in there and I build my own portfolio inside Hausli. Am I able to then pass that information on to the accountant?
Vin: Yes. We have two components with Hausli. One is the forecasting, so you can enter a property and then forecast it, the other part is that we found that investors often don’t have the tool to do this simple record keeping, keep their receipts, and give their accountant something usable at the end of the financial year. So it has a separate section built just for that and designed for the non-accountant person so they don’t have to learn, for example, an accountant package.
Kevin: Okay, now, this is a subscription model, so once I get to the site, I’m given the option of two levels of subscription. Just give me an idea on the costs involved there, Vin.
Vin: Sure. The cost for that for a standard account, which would be for most investors, is $10 a month or worked out, obviously, $120 a year. We have a subscription plan that people can cancel at any time. There’s no contract. You’re not locked into anything. The second subscription would be more for the property professionals.
Kevin: If you want to find out a little bit more about it, the web site is hausli.com. Check it out for yourself. It probably will be one of those tools that you’ll want to bring into your arsenal to help you, one, decide which property you should get and then also how to build your portfolio.
Vin, congratulations on the work you’ve done. Thanks for joining us today on the show and telling us all about Hausli.
Vin: Great. Thank you, Kevin.