29 May Refinancing Pitfalls | Important money lessons to teach your children | New vs established property | Reno tips plus more
We’ve all made financial decisions we would ‘undo’ given half a chance. It might be the under-performing property we wished we’d passed on or that great property we wish we had really chased. Given how important financial skills are to navigating life, and the fact that schools don’t teach children about money, as a parent, in this week’s show Michael Yardney shares a few important financial lessons you can teach your children.
Also this week Andrew Mirams answers some questions about re-financing pitfalls.
Margaret Lomas answers our questions about buying an established property or a brand new one, Mark Armstrong has some great tips for new investors and Miriam Sandkhuler details some ways you can improve the income you are getting from your investment property.
And our reno expert, Cherie Barber, tells us why not all renovations are the same especially when it comes to renovating an apartment. Cherie tells us about the experience she has had with doing up units and the some of the problems she has encountered.
Kevin: My good friend Margaret Lomas is back with us from Destiny Financial Solutions and star of that great show on Sky TV, Property Success with Margaret Lomas.
Kevin: Good to be talking again. Margaret, the specific question for you today is a question I get asked quite often: is it better to build with a buyer-established property? I guess here, you have to take into consideration depreciation, as well.
Margaret: Yes. Look, I guess one of the things that the spruikers always try to do is convince everybody that they need to buy new so that they get the maximum depreciation. But in reality, a property that’s a couple of years old doesn’t have a big difference in its depreciation than a brand new one, which a lot of people don’t realize.
The construction depreciation is, of course, exactly the same every year for 40 years, which is 2.5%. The fixtures and fittings in that first year or two, they don’t really age that much, and there’s not a big difference in the depreciation that you can claim.
The reason why the spruikers like you to buy the brand new one or to build the brand new one is because generally there’s a fair amount of builder profit in there and they can get a good cut of that in the form of a commission.
I always feel, as well, that from an investor’s point of view, if they’re buying that brand new property, they’re more than likely paying a little bit more than it’s probably worth or than they could pay for that property that’s two or three years old, but they’ll get the same rental yield as the older property.
Kevin: It always strikes me, too, that new properties purely by definition are going to be built in areas where you’re developing a lot of new stock, and it does actually take a while for them to actually start to gain any increase in value, Margaret?
Margaret: Exactly. The reason that is, is because most often when they’re being built in a new area, even if it’s in a suburb that’s already established, it’s very, very difficult to really work out what the true market value of those properties are.
Market value is never really established until a secondary sale takes place. Whenever properties are being sold and resold and resold, then we know what the market value is, because it’s whatever the market pays.
When people buy a brand new property, which could be either off the plan or just newly built, really the buyers pay what the developers are asking them to pay. Very often, they do that because most people when they buy a new home, they’re buying it with a view to living in it, and when we live in a property, we are often happy to pay that bit of a premium to get the kind of things we want in a home or to get the lifestyle that we’re after.
When it comes to being an investor, though, the extra premium that you pay to get that brand spanking new property is very often not seen returned to you in increased yield, and it ends up being, as you say, that you have to wait that period of time for the market to work out what it’s really worth, and very often, it will stay quite flat for quite a few years.
Kevin: Another reason why I tend to like more established properties is because they’re going to be built in established areas where you do have all that infrastructure. If you’re going to be attracting tenants, they like to be in areas where there are good schools and where there are lots of shops. But in some of those new areas, those things don’t happen until you get a fair number of houses in there.
Margaret: That’s very true. The other thing about a property that’s a couple of years old, maybe up to five years old, is it’s a little bit less that brand new car, which by the way, also loses value when it drives out of the driveway. When you get a new car and it takes you that little while to work out the bumps and sometimes when you buy that new car, there can be things that go wrong with it.
When you buy a property that’s a couple of years old, it’s already settled, you know how it’s sitting, you know whether it’s going to have cracks. There’s many things you can already know about a property.
Most houses last 50, 60, up to 100 years, certainly in the olden days, then there’s not that big of difference in the big scheme of things between the brand new one and the five-year-old home. I can tell you in ten years’ time, a five- and a ten-year-old property don’t look much different at all.
Kevin: Very good. Very practical advice from Margaret Lomas at Destiny Financial Solutions. Margaret, we’ll get you back in a few weeks’ time. I want talk to you because I know you’re across all of the Australian suburbs, but I’d love to have a talk to you about what you see are the up-and-coming suburbs if you’d join us again in a few weeks’ time?
Margaret: I would love to do that.
Kevin: Good on you. Margaret Lomas from Destiny Financial Solutions.
Kevin: As parents, we’re always looking for ways that we should be educating our children. I recorded an interview some months ago with Michael Yardney, and he talked then about the lessons we should be teaching our children. That was very, very popular and had a lot of listeners, so we’re going to do another, another seven crucial money lessons that every parent should teach their child.
Michael, welcome to the show once again.
Michael: Thanks, Kevin.
Kevin: What is lesson number one?
Michael: What we’re trying to do is save our kids from some of the hardships, some of the errors, and some of the mistakes we’ve made, because, remember, we learned a lot of what we know about how to handle money from our parents.
I think a really good lesson to start with is the sooner you save, the faster your money can grow – using compounding – and you can actually do something with it. Most adults – in fact, most kids, also – spend at least everything they have got, if not more than what they’ve got.
The trick is to teach your kids the importance of spending less than you earn, saving it, and keep investing it. For kids, they can then do something useful with it – they can buy that toy, they can buy that big-ticket item. For you and me, Kevin, it would be maybe to get the deposit for another property.
Kevin: Actually, I love the line that I’ve heard you use: it takes money to make money. So you have to start somewhere.
Michael: It does. You have actually got to teach your kids a level of financial fluency. A good way of doing that is being that way yourself.
Kevin: What about the criticism of this generation just wanting everything right now?
Michael: It’s so easy with the credit cards, the zero-interest payments for 48 months, and things like that. It’s a hard concept for people of all ages to learn; however, the ability to delay gratification in many ways predicts the success one has as a grown-up in all areas of life. Children really need to learn that if they really, really want something, they should wait, they should save up, and then buy it.
The problem is we all seem to want the best for our children. I know I was a bit that way myself. It’s a common trap. You don’t want your kids to go through some of the hardships you’ve had, so you give them the trampoline in the backyard, the new clothes, the new toys, and things like that. I think it’s probably best to teach kids to save a little bit of their pocket money and then get that nice prize at the end.
Kevin: Lesson number three, Michael?
Michael: You need to make choices how you spend money, because money is finite – no one has enough. You have to actually decide, if you spend it now, you’re not going to have it later. So teach them choices.
Kevin: What about good debt and bad debt?
Michael: That’s a little bit hard to teach younger kids, but it is important to teach them that necessary debt is [2:29 inaudible] by your home, and good debt is to borrow against appreciating assets. But to use debt – in other words, borrow – to buy depreciating assets, things that decrease in value, is a downward spiral.
Kevin: Like a car?
Michael: A car, the next plasma TV, the other big toys. If you can’t afford it – going back to one of the earlier lessons – save, wait, and be patient until you can afford.
Kevin: Lesson number five is one that we teach all the time, too, about building smart people around you.
Michael: If you’re the smartest person on your team, you’re in trouble, Kevin. You’re right. The most successful people in the world know that. It’s an important lesson to share with our kids. Surrounding yourself with good people is essential to get ahead in all areas. They inspire you, they motivate you, they lead by example.
Of course, your child’s first experience, somebody they’re going to look up to is you, so the best way to educate your kids in all things money is to ensure that you do a good job of educating yourself.
Kevin: Wow, that is a powerful lesson. What about a mentor, Michael?
Michael: You know that I always have mentors. I have business coaches. I know you have, Kevin, as well. In so many areas of life we teach children to look towards more accomplished, more experienced people for guidance. Why shouldn’t it happen with money, as well? Mentors have been helping everyday people become more successful. Teach them the value of having good mentors.
Kevin: There are a lot of temptations around, Michael. You mentioned earlier about credit cards. We see “interest-free” and “no repayment for 24 months.” That has to be a lesson in itself.
Michael: There are plenty of money messages in not getting a credit card – in other words, waiting, delaying gratification, saving up. I’ve seen so many young people – teenagers and people in their twenties – get caught up with not making the minimum repayments, and so when the interest-free period finishes up, they’re paying massive interest rates, and they get caught where they’re paying the debt for a long, long time. That’s a really good lesson, Kevin.
Kevin: It is indeed, Michael. On that note, we have to say farewell. But I just want to remind you that Michael is the director of Metropole Property Strategists. They create wealth for their clients through independent, unbiased property advice and advocacy. He’s also a best-selling author, one of Australia’s leading experts in wealth creation through property, and he writes his property blog – which you must have a look at; it’s a great read – PropertyUpdate.com.au.
Michael, thanks again for your time.
Michael: Thanks, Kevin. A final message is it’s never too early to start teaching kids how money works. Of course, showing them how it’s done is always more powerful than telling them how it’s done.
Kevin: It might be fair to say that many borrowers will probably prefer to stay with their deal because they don’t quite know what’s involved in refinancing. There are some pitfalls that you need to be aware of, but if we can bring them to your attention, you might be able to go into a refinancing deal with a lot more confidence.
That’s what we intend to do over the next few minutes as I talk to Andrew Mirams from Intuitive Finance. Andrew, thank you for your time. I wonder if you can just help us with just outlining a few of those pitfalls when it comes to refinancing.
Andrew: Good day, Kevin. Look, there are a few pitfalls, and it always comes back to the purpose, I guess, of why clients are actually looking to refinance – whether they’re looking to get a better deal or more money or do a renovation or buy that investment property, etc., what that actually is.
I think one of the very first pitfalls that we see all the time is clients just going back into their current lender, asking them what they think they want, the lender says yes, and they get it and they think, “Oh good. I’ve managed that myself,” without actually doing the shopping around and the legwork to just check they’ve got the best deal, they’re getting the maximum amount of equity out if that’s what they want to do. If they’re being told why one lender that they can access $400,000 to buy an investment property, there might be another one that can give them $500,000 that gives them a better opportunity to buy a better property.
The first thing is just accepting what your current lender offers you is the best deal. Do some legwork and absolutely, you should consult a mortgage broker in my opinion, and allow us to do the legwork for you. That’s the first point. Don’t accept what they just give you as a given.
Kevin: Okay. Check it out for yourself. And the next one?
Andrew: I think the other thing in the current market, especially with low interest rates, people tend to shop on rate and they don’t look at all the other options. A lot of the really cheap rates often have some fees – higher application fees, higher ongoing fees, and there might be other legal fees that they have to pay. Sometimes when you analyze it over a longer term, it’s not actually cheaper when you take the whole package into consideration.
Don’t just shop on rate; look at the whole package.
Kevin: Okay. The next one?
Andrew: The next one is really interesting because I had a client only a week or so ago saying, “Look, I’m just going to wait to the next interest rate decrease, and then I’m actually going to look.” I said to him, “Why are you procrastinating? What are you expecting that you’ll get by waiting that you won’t get today?”
He said to me, “Well, they’ll be cheaper.” I said, “Yes, but they’re cheap today, and assuming that all the rates go down by 0.25, they’ll be cheap everywhere in a couple of weeks’ times or whenever if they do go down. How do you know they are going to go down?”
Don’t wait. Take action now is the most important thing. Whatever it is, if there’s a saving, take it now. If rates go up or down, all the lenders are in a competitive market, so it’ll go up or down accordingly.
Don’t procrastinate. Don’t wait for rates to drop or to see what the next best deal would be out there.
Kevin: That’s a really great piece of advice. The thing that I found, too, is those who wait for things to become absolutely perfect generally end up doing nothing because it never, ever meets their expectation.
Andrew: Absolutely. It’s the old thing of waiting for the property market to drop, too, because they’re going to buy cheap, and then they realized they missed the boat. It’s the same thing with trying to shop, and the perfect storm very rarely arrives.
Kevin: Andrew, just before I let you go, what about those honeymoon rates? Something we should be aware of?
Andrew: Absolutely, Kevin. Whilst they look good in the banks’ and everyone’s marketing and advertising material, they very rarely end up on your end deal coming out as a better deal. Generally, they come to a higher rate when they expire, and most people think, “Oh, I can refinance or do something about that,” and then you can’t – you’re generally locked in for certain period or those fees.
The banks are smart. They know that they want to claw back that cheap rate to get the client in the door. The honeymoon rates very rarely come out ahead of just a long-term discount we can apply.
Kevin: That in itself is another great reason to use a broker, because brokers know what these honeymoon rates are like. They can take the long term in terms of your lending, as well, Andrew.
Andrew: Absolutely, Kevin. Yes.
Kevin: Very good. Great advice there from Andrew Mirams at Intuitive Finance on some of the refinancing pitfalls for you. Andrew, once again, thanks for your time, mate.
Andrew: My pleasure, Kevin. Thanks.
Kevin: Not all renovations are the same, as you’re going to learn in my chat now with Cherie Barber from RenovatingForProfit.com.au.
Good day, Cherie. How are you doing?
Cherie: I’m really good. Thank you, Kevin.
Kevin: Good to be talking to you again. You’ve just come back from the States, again, too?
Cherie: I have, yes. I have my own show over there now, so it’s very exciting. I went over there for the launch show.
Kevin: We’re used to seeing you, of course, on The Living Room on Channel 10. I look forward to catching up with you there.
I wanted to talk to you specifically about the renovation you’re doing right now, which is on a unit. It’s interesting that there are some complexities in renovating units, and I wonder whether you’d like to take us through a few of those.
Cherie: Sure. First of all, I guess living in an apartment and renovating an apartment, the first thing is the neighbors. Unfortunately, a lot of people don’t like change, and normally when you come in and do an apartment renovation, one of the first things people typically do is change the floors, so you have saws going on and all sorts of stuff. In my experience in the apartments that I’ve renovated, you always without fail get one or two or three neighbors offside depending on how big the block is.
I think the first thing is to be very courteous to neighbors and actually give a proper letter under their door just saying, “Look, we’re going to be starting a renovation in approximately two weeks’ time,” and give them the dates that you’ll start and dates that you’ll finish. In my experience, when you do that, you actually have less chance of neighbors actually getting offside.
I know in my one of my earlier renovations where I didn’t give the neighbors any notice, it became this messy war. They got really offside because you were disturbing their peace and quiet. That’s definitely one issue with apartment renovations, because everybody is so condensely packed on top of each other, so they hear the slightest ounce of noise.
Kevin: I think, too, the other thing to bear in mind is that other owners could quite easily be on the body corporate, and body corporate do actually wield a lot of power and can actually hinder the renovation process, Cherie.
Cherie: Definitely. Another issue is the strata body. Look, I think when you buy an apartment, one of the things that people need to research is how proactive the strata body are. In some units that you go into, the strata body are all over you like a bad rash – they won’t let you scratch yourself unless you get approval – and then in other blocks, they don’t care what you do.
A lot of renovators go buy an apartment, particularly a lot of younger renovators, who don’t have the money to actually go buy a freestanding house. They say, “Okay, we’ll do our first renovation.” It might be on an apartment, maybe something $300,000, $400,000, $500,000, and they go into these blocks and they either don’t get strata body approval because they don’t know to, or if do approach them, the strata body are notoriously slow.
I’m doing a renovation at the moment to the living room, actually, for an apartment that’s about $560,000. I said to the couple that I’m renovating to me, “Look, send an e-mail to the strata body manager. Say to them you’re doing these works, these cosmetic works – you’re changing the floor, you’re painting – and put a deadline on a response from them.”
What advise them to do is to say, “We’re doing these works, and if we don’t hear from you by Friday such-and-such a date, we’ll assume all is okay if we don’t hear from you.” As it turned out, they never heard from that person but at least they have it documented on e-mail that they approached it and it wasn’t their problem that the strata body was slow to get back to them.
Strata bodies, as I said, are notorious for being slow, and in the meantime, for renovators, you’re waiting, waiting, and waiting, and you’re racking up holding costs.
Kevin: The unit that you’re renovating now, is this any structural renovation or is it purely cosmetic?
Cherie: No. Purely cosmetic, and that’s the thing. I guess that’s another limitation of apartment renovations. You are limited with the works that you can do. Certainly in apartment renovations, you can’t do any external works, even doing things like painting the inside of your balcony that other people can’t see, you could have limitations on what you do in that regard, as well.
Typically, with apartment renovations, they tend to be 95% or 98% cosmetic works because you have to imagine, if you have two or three apartments living on top of you, it’s not as easy just knocking out walls because that can affect the structural integrity of all the apartments above you. The most you can do is really change the flooring, and even then, a lot of strata bodies won’t let you do that because of acoustic issues in apartments.
Kevin: Yes, you have to be careful of things like floating floors and so on. Some really good words of advice there, making sure that you get everyone onside and do your homework before you do one of those renovations. Cherie Barber, of course. RenovatingForProfit.com.au is the website to go to, and there is a free DVD there, as well, and also the upcoming seminars for Cherie.
Cherie, thanks for your time. Look forward to catching up again soon.
Cherie: You’re welcome. Thank you, Kevin.
Kevin: More and more, we’re becoming reliant on the Internet to help us shop around for property, but a very important part of this is the inspection process, as well. Most people prefer to look at properties during an open home, which is where you get the opportunity to look at it without being taken there by an agent and – supposedly – not harassed by an agent as you look, relaxed, around the property.
Mark Armstrong is from Rate My Agent, which is a great new website you should be checking out if you want to find an agent to sell a property for you. Mark joins me. Hi, Mark.
Mark: Hi, Kevin.
Kevin: You’re experienced. What should we be looking at when we do go to an open home so we don’t have to rely so much on the advice from the agent?
Mark: I always talk to people about looking for the things that you can’t change about a property and getting those things fundamentally right. What I mean by that is you can’t change the location of the property, so you have to get that right, because it’s not something that you can fix up down the track. You can’t change the size of the block of land, so you need to get that right. You can’t change what’s around you –you can’t change the fact that there’s a factory next door, or there’s an apartment block next door, or a petrol station.
The first step for me when I’m looking at any property is I’m focusing on the things that I can’t change about the property, and I need to make sure I get those fundamentally right. That’s a really good first step.
Kevin: It’s a great first step, actually. You’re right. There are so many things that you can allow for but you can’t change.
Mark: Exactly. When I start to look at a property – it’s interesting – the property inspection to me starts actually from the minute I jump in my car to drive to the property. The inspection doesn’t start when I get to the property; it starts as I’m driving closer to the property. I’m looking at the surrounding area. I’m looking at the infrastructure. As I drive into the street, I’m looking at the streetscape. I’m looking at surrounding properties. I drive up to the house and I’m looking at the façade and the presence of the property. There’s actually a lot of inspection done before you even get to the open home.
Once I actually get to the open home, my inspection actually turns more into a feeling – it’s the feeling that a property gives me. If I feel cramped, it’s because it’s probably a bit cramped. If it feels dark, it’s probably because it’s a bit dark. I think that the instincts of how a property makes you feel when you walk in the door, if there’s a lot of natural light, and it’s open and it’s airy, that gives a really positive feeling.
Kevin: You actually buy properties also on behalf of other people, as well, don’t you?
Mark: Yeah, I do. I’ve bought thousands of properties over the years, so I’ve been driving the streets, looking at property, for almost 20 years. It’s really important to follow your instincts and the sense that the property gives you.
Kevin: The reason I ask that question is because you’re obviously looking at property on behalf of other people, so you’re going to have to take their feelings into account, as well. I guess it’s key the questions you ask them before you start looking at property.
Mark: It is. It is really important. We need to get the fundamental facts down of how big they need a property, how many bedrooms and how many bathrooms, and car parking, and all those sorts of things. But once you get those fundamental points down…
Kevin: I guess good property is always good property, isn’t it?
Mark: Yes, that’s right. Good property’s always good property. Once you get the fundamental needs down – how many bedrooms and how many bathrooms – you’re then just looking for good pieces of real estate in good locations on a good-sized block of land with good natural light, with no privacy concerns. You have to get the fundamental points down, but then good property is good property.
Kevin: It’s really interesting to hear you say that, because you corrected me – and quite rightly, too – that the things that you would ask people to look for and people would want you to look for are how many bedrooms and the physical aspects about the property, but you’re talking more about the feelings. I wonder sometimes if we just buy on those first physical aspects and forget about the feel, thinking maybe we can change that.
Mark: We absolutely do. I think a lot of us get caught up on the cosmetics of a property. We look at the great new kitchen or bathroom, and we sacrifice. We look at the second bedroom, and it’s a bit smaller, and we say, “Oh, but the kitchen’s lovely. We won’t worry about the second bedroom.” We can change all those things. We can change a kitchen. We can renovate and put new carpet down or polished boards. We can actually create that feeling in a property as long as we have the fundamental structure there.
Kevin: Thanks, Mark. Of course, Mark’s website, as I mentioned, is Rate My Agent. Thanks, mate.
Mark: My pleasure, Kevin.
Kevin: If you’re looking for some clever ways to improve the income of your rental property, stand by, because that’s exactly what we’re going to be talking to Miriam Sandkuhler about. Miriam is the author of a great book I’ll tell you about in just a moment, but she is also the founder of Property Mavens. They’re a property advisory firm; they help you buy the right property, and they also help with vendor advocacy.
Miriam, let’s look at the best ways that you’ve found to improve the income of a rental property.
Miriam: Kevin, it’s really about understanding who your demographic is – who is the tenant you’re targeting who’s going to want to actually rent the property from you? It’s a case of the property itself, the surrounding vicinity, the suburb, who you’re likely to attract, and what it is that they’re going to want.
When you have the ability to understand that and do the research, then you’re in a better position to make sure that you can do what’s required to your property to extract as much rent out of it as you can.
Kevin: For someone who may be struggling a little bit with their property – in other words, it may be untenanted for a while – a good idea might be just to go and immerse yourself in the local area and maybe find out why it’s not renting. It’s not always about price, is it?
Miriam: No, it’s not about price. Frequently, it could be the physical size of the property itself. It could be the features that it may or may not have. A perfect example would be an inner-city suburb where you have high density, you have older apartments with a whole lot of new apartments being built close by, and you have tenants who are prepared to pay a little bit more for something shiny and new, whereas your tired old apartments may be inadequate and unappealing.
That’s where something like a cosmetic renovation might come in. You might need to do new carpet, new paint, new window furnishings. If that’s not adequate, and the property manager is advising you that tenants want more, that’s where you’d start looking at possibly putting in a new kitchen or a new bathroom, but making sure that you don’t overcapitalize in the process.
Kevin: That was going to be my next point. You have to make sure on all of these things that you do not overcapitalize. What’s your experience there about making sure that that doesn’t happen?
Miriam: Work on a percentage of your purchase price of your property. If you spent, say, $400,000, and you have one of these apartments that might be a bit tired, only be putting 1.5% of the value of the purchase price into the renovation on the bathroom. If you spent $400,000, don’t spend more than $6000 updating the bathroom. You can do it affordably and within a reasonable budget nowadays. You can go to organizations like IKEA or Masters, and they have got more affordable options for you. The same with the kitchen. You don’t want to spend more than that 1.5% or 2% of the purchase price.
Work on a percentage, stick to that budget, and do the best you can with the money that you have.
Kevin: And remember, too, that you’re not really renovating it to suit yourself; you’re really renovating it for your target tenants.
Miriam: Absolutely. Talk to your property manager, talk to other property managers, find out what tenants want, and then, if it’s a case of extra bells and whistles, maybe if you throw Foxtel into the package, that might appeal to them. It may be that you need to put a gardener in if it’s a really great property but it’s a high-maintenance garden.
Start thinking laterally and creatively. Ask the property manager what the feedback is from prospective tenants, why it doesn’t appeal to them, and then come up with creative solutions, but make sure that they’re affordable. Make sure they’re not going to blow the rent out so that ultimately it doesn’t appeal to anyone.
Look, maybe it comes down to have you bought the right property and is it in fact going to perform how you need it to? Sometimes it could even be a tough lesson that it may be one that you need to let go of.
Kevin: I guess sometimes, too, you have to remember that any improvement you make is not necessarily going to help you get more rent but it may just help you make sure you keep your tenants in there and that you really reduce that number of vacant days.
Miriam: Absolutely. You don’t want it sitting on the market for weeks and weeks on end. It’s about being pragmatic in a really reasonable and fast time frame so that you can do whatever it is you need to do as cost-effectively as possible to make sure that it’s tenanted. You do not want a property languishing and costing you hundreds of dollars a week in mortgage repayments and not having any revenue coming in to offset that.
Kevin: At the start of the chat with Miriam, I mentioned about the book that Miriam has written. It’s called “Property Prosperity: Seven Steps to Investing Like an Expert.” You can get more details on that at Miriam’s website, as well, Property Mavens.
Miriam, thank you very much for your time.
Miriam: Thanks so much, Kevin.