23 Jan The five stranded strategic approach | Tenants as property investors | Melbourne suburb spotlight | Increased use of non-traditional lenders
In this week’s show Michael Yardney reminds us about his five stranded strategic approach to investing to ensure the properties in his portfolio will outperform the market averages.
Andrew Mirams speaks about what has driven many investors to look at non-traditional lenders.
Greville Pabst turns the spotlight onto a bayside suburb in Melbourne and explains the area’s potential for an investment property.
We talk to a buyers agent as she looks at the property market on Queensland’s Sunshine Coast.
Shannon Davis discusses a growing trend with tenants becoming property investors while at the same time continuing to rent.
And we round the show out with a timely warning from an insurance brokerage firm who have found it necessary to expand their coverage of rental properties to include a previously unheard of risk for investors.
Kevin: It would appear that investor lending maintained its strength throughout 2014. The latest figures from the Reserve Bank of Australia reveal a 9.7% surge in investor lending in the twelve months to November, so much so that Australian property investors who have maxed out on their borrowing power are turning to specialist lenders or non-traditional lenders to continue growing their portfolio. Is this a concern? Are you finding yourself in that position?
I want to take some counsel now from Andrew Mirams from Intuitive Finance, one of our experts responsible for putting a lot of great content on our site. Check it out at Real Estate Talk.
Good day, Andrew. Happy New Year.
Andrew: Good day, Kevin. Happy New Year to you.
Kevin: Is this a concern? I know that APRA is concerned about it.
Andrew: I think that as soon as you get regulatory bodies looking at these things, it’s the type of investor or the appetite that investors have got. There are people out there who are borrowing to the hilt and taking 95% and 97% loans, and absolutely everyone should be concerned about that.
But the reality is your smart and seasoned investors know to make sure they’re got enough backup plans, as in buffers and financial resources, to make sure if and when the cycle turns, they’ve still got the ability to hold their properties and not have to sell down in potentially tougher times.
Kevin: What are you seeing? Are you seeing some investors with a higher risk threshold? In other words, they’re prepared to take a risk coming to you and saying, “I want to continue to grow my portfolio no matter what the market is like.”
Andrew: Yes. I think across the history of time, any time that rates are lower, it does fuel that a little bit, because the costs to hold your borrowings is a lot less. Even though your investment returns – depending on whether you’re in Melbourne, Sydney, Brisbane, or where you’re invested – with the yield there, there’s not that great a differential in holding the property, and that can sometimes fuel the ability to take up a higher LVR loan.
It means that when rates are a bit higher, it might be a 50%, 60%, or 70% loan, whereas now that’s 80%, 85%, or 90%. The holding costs are very similar when the rates are lower.
Kevin: What are you suggesting in terms of a buffer?
Andrew: Depending on everyone’s portfolio, whether you’re a first time investor or seasoned investor, we generally like to see as a minimum – and it’s very client specific as well, because you have clients earning significant incomes, but they’re still at risk if that was to turn down – at least a half a property cycle. We like to make sure that whatever their negative in terms of their holding costs are – let’s say they’ve got five properties and they cost them $50,000 a year in total, $10,000 for each one – we’d like to see a $250,000 buffer in there, about five years. At least half a cycle, depending on whether it’s a seven or ten year timeframe. It depends where the properties are, etc.
I think just making sure you’ve got that buffer there gives you the certainty to make sure you can hold your properties over the long term, because as we all know, that’s where you make your money in the property market.
Kevin: That’s right. How much clout does APRA have with the banks?
Andrew: You would probably have to ask APRA that! There’s a lot of speculation around that they want them to increase their capital ratios and things like that because of the growth in lending at the moment.
There has to be a balance to all of that, because if the banks are made to hold more capital, then that’s going to cost us all more to borrow. The banks are very quick in passing that on. They’re money-making machines in their own right, so they need to do that.
They want to be sure if and when a bad time comes – and like all cycles we know that it’s not going to be as good a time as it is right now forever – that the banks can continue to trade in their own right.
That’s where Australia was very lucky throughout the GFC. Our banks were very strong, compared to America and Europe where we had lots of banks falling over and government bail-outs. Even today, there’s still some hangover from all of that. Really, they’re just making sure our banks will continue to be strong lenders now and well into the future.
Kevin: That in itself should be a concern for a lot of people, because these non-bank specialist lenders are not governed by that prudential regulator. They tend to fly under the radar a bit, and they don’t even have to comply with mortgage insurance rules.
Andrew: That’s right. Arguably, there is a spot in the market for these guys – non-traditional lenders and banks like that. They’re not subject to mortgage insurance. They do what they call “self insurance.” But through the GFC, a lot of these guys went out of business, or couldn’t get access to funds, or just stopped lending full stop.
What they did, their rates, that are traditionally higher anyway, all of a sudden were jacked up because they needed to make sure that they could service their own loan book, because they’re securitized lenders, generally. They’re borrowing it from somewhere else.
That’s a real risk if you’re really looking to aggressively grow your portfolio and you’re out there using specialist lenders. Just make sure you’re covering off all your bases. They’re not lenders that we generally use at Intuitive Finance. If you can’t get it from a traditional lender, I think there’s a pretty good reason.
Kevin: Absolutely. That’s what you have to look at.
Always good advice from Andrew Mirams from Intuitive Finance. Great talking to you. All the best. We’ll talk again soon.
Andrew: Thanks, Kevin.
Kevin: Even though we talk a lot about the use of buyer’s agents in Australia many people – me included – wouldn’t be aware of the fact that almost 88% of property purchases in the U.S.A. were handled by professional buyer’s agents. While I’m not suggesting that overnight that’s going to be the case in Australia, it certainly is a growing trend.
What are the advantages for you, as a buyer, using a buyer’s agent? I’m going to talk now with Kristy Smith from Agility Property, who are based in Brisbane. I believe you’re on the Sunshine Coast as we speak, Kristy?
Kristy: Good morning, Kevin. I am on the Sunshine Coast up here, looking at some potential properties for clients and enjoying a bit of a break.
Kevin: Good on you, that’s the way. We might talk a little bit about that market, too. That’s an interesting market. But I wanted to touch base with you about this growing trend of using buyer’s agents.
We talk to quite a few on this show, but tell me about the type of people that are coming to you and looking for your services.
Kristy: I’d say the predominant are those who are either not in the location that they desire their property to be, or they’re time-prohibitive, or their time is better invested in their own business rather than the time that’s involved for research with regards to property.
Kevin: Are we talking primarily about investors engaging your services?
Kristy: Yes, but also executives who are moving interstate, or upcoming professionals who are moving interstate but are moving with a short period of time to do that. They engage us to get the ball rolling more quickly for them.
Kevin: No doubt. In America, the system is a little different over there, where it’s quite customary for people to only pay for a seller’s agent and also pay for a buyer’s agent. Whereas in Australia we’ve got that culture where the agent actually spans both.
Kristy: Yes, they do. It is a little bit different. I guess the one luxury here is that from a buyer’s perspective, we very much are only working for the buyer, and we are strong advocates for that. We certainly don’t enter into any of the selling arrangements, other than provide professionally a suggestion as to an appropriate seller for a client, if they’re interested.
Kevin: It raises an interesting question, too, that we’ve posed on a number of occasions, and that is how can one agent represent both parties – both the buyer and the seller?
Kristy: By law, it’s unavailable, but there are some that still canter into that area from time to time. I am a very strong advocate that you can only ever have one client and you can only ever have their best interests at heart at that time.
From a seller’s perspective, if they are looking to give you alternatives to purchasing property, they’re probably only giving you property that is on their books, whereas a buyer’s agent is looking at all the available property that’s on and off the market and only that which suits you.
Kevin: We talked at the start of the interview about you being on the Sunshine Coast in Queensland. A little bit about that market: I’ve noticed over the last couple of years, there has been a huge amount of stock available, which has really kept prices fairly low. Is that still pretty much the case?
Kristy: It still is in some areas, but the areas such as Caloundra is certainly up and coming, and probably moving slightly past that. They’re working on their community services and providing a more comfortable feel about the area, about trying to keep up that trend with Mooloolaba, Alexandra Headland, and then through to Noosa. But they’re still very affordable property: land holds, one or two streets from the coast, under $500,000 on a good size block.
Kevin: Are we talking about houses or units?
Kevin: Are these houses with some development potential?
Kristy: They could do. They’re probably sitting on an 800 square meter allotment. You could certainly subdivide and do something with that arrangement. The expense of the build doesn’t need to be extravagant, either. Most people here are here for a holiday, and as long as it’s comfortable and has a modern feel to it, you’ve probably done very well.
Kevin: What area in particular would you be looking for in the Sunshine Coast? If you had a buyer who was looking to spend around that $450,000 to $500,000 mark and securing a property with some development potential, what areas would you look in?
Kristy: I think I would still be looking in and around Caloundra. I’d be keeping my eye on some of the Mooloolaba areas, but you’re probably sitting a couple of streets back from the coast, and you would probably be leaning to look a little more inland. It just depends on how close to the coast people want to be or how close to the community services they want to be. But I still like the look of Caloundra.
Kevin: Good on you, Kristy. Lovely time talking to you. Kristy Smith there from Agility Property. Kristy, thank you very much for you time.
Kristy: And you. Have a good day.
Kevin: You might recall that last week I was talking to Michael Yardney about what we can expect is likely to come up in 2015, what strategies will work, and what strategies won’t work.
Just to recap, Michael, we might go over some of those strategies. You were pointing out last week that we should be very careful about hot-spotting.
Michael: I think this year is going to be of lower capital growth, so:
- Don’t look for the next get-rich-quick scheme.
- Don’t look for a hotspot.
- Don’t buy in generic apartment buildings – the big “off the plan” ones.
- Avoid house and land packages.
- Avoid regional areas and mining towns where capital growth won’t be much, because the economic growth won’t be there.
Kevin: One of the big lessons that came through out of last year was about those regional areas and how sometimes you’re better off buying closer in, in capital city areas, where the economy is much more diverse.
Michael: Clearly, there are many more pillars to the economy. Sure, properties are more expensive in capital cities, but I’d rather own a one-bedroom apartment in a good location in a capital city, than a larger house and land in regional Australia. And you know what? They would probably end up costing much the same.
Kevin: You’re probably one of the most successful property investors in Australia. I can say that; you might not want to. The strategy that you’ve used hasn’t really changed a lot, has it? Could you just run us through that?
Michael: It has changed from when I first started investing, because I didn’t have a strategy. Like every other beginner, I bought close to where I lived or close to where went to school. I actually lucked out, I bought in 1971 when Gough Whitlam came in, and we had massive inflation, and the property I bought just increased in value considerably.
But I don’t think I or other investors are going to have the comfort of that this year, so I think we’re going to have to be much more strategic.
Kevin: Let’s talk about your strategic approach.
Michael: What I do is use what I call a “five stranded” strategic approach. First of all, I only look at properties that would appeal to owner-occupiers. That means that they’re always going to be in demand by a wide group of people. Not that I actually plan to sell them, but those owner-occupiers are going to buy similar properties, pushing up local real estate values. I think that’s going to be particularly important in 2015, when the percentage of investors in the market is likely to diminish.
Next thing, I actually like buying properties below their intrinsic value. That’s why I don’t buy new properties and I don’t buy off the plan properties, because in general, they come at a premium.
I then look for areas that are going to have long-standing capital growth. I like an area with a history of strong capital growth, but it’s actually more important than the past. I look into the future by looking at the people who live there, looking at the demographics. I like to buy in an area where there’s lots of owner-occupiers – as I said – but people who can afford property not because it is cheap but because they have higher disposable income.
The census breaks down every municipality by disposable income, by income growth, so I look for areas where people are more affluent and they can afford to pay a premium to live there. And they generally want to because of lifestyle choices, because of locality, or because of the proximity to big CBDs.
The fourth strand is I look for a property with a twist. What I mean by that is something unique, something a bit special, something a bit different, something scarce.
Finally, and particularly in 2015, I think it’s important to buy a property where you can manufacture some capital growth. Generally, capital growth is going to be a little bit lower this year, so properties you can refurbish, properties you can renovate, properties you can do a development on.
I took advantage of the market last year – as you know, Kevin – and I’m really planning to this year.
Kevin: Yes. That final point – being able to manufacture capital growth – that’s not something you have to do immediately, is it?
Michael: You’re right, because the opportunity is always there. If you can’t afford to buy a property and renovate it straight away, I’d buy a property that isn’t all done up, that you’re not paying a premium for, because the upside is always there. They can’t take it away from you.
Kevin: Wonderful stuff. Great talking to you, Michael. I look forward to working with you during 2015. Michael Yardney, from Metropole Properties. Thanks for your time.
Michael: My pleasure, Kevin.
Kevin: Let’s have a look at another area that you might want to have a look at in the Melbourne property market. One of our experts joining us is Greville Pabst from WBP Property Group. Greville, what’s the area that you’ve chosen to tell us about?
Greville: I’ve chosen Albert Park.
Kevin: Why that area?
Greville: Albert Park is about 4 km from Melbourne, and it’s a bayside area of Melbourne. It is unique in that it is bounded on one side by Port Phillip Bay and Albert Park on the other side. It’s close to the CBD, and it’s probably got one of the most expensive land values in Melbourne.
Kevin: Does that necessarily make it good, or does it run the risk of being a bit unaffordable?
Greville: There is a little chance of it being unaffordable, but there is still entry-level price for investors. You can still buy a one-bedroom flat in there, for example, in the range of $450,000 to $500,000.
Kevin: What’s the median price in that area for a house?
Greville: The median house price in Albert Park is $1.375 million, so it’s up there.
Kevin: What type of buyer do you think would be attracted to that type of property?
Greville: For $1.375 million in Albert Park, you’ll typically get either a Federation style or a Victorian two-bedroom brick cottage. It really appeals to professional couples, but I think from an investment point of view, it has a really good history of growth.
Generally over the last ten years, the medium house price growth for Melbourne has been about 6.5%, but in Albert Park the median really does outperform that 6.5%. Typically in Albert Park, we would see a growth profile of 7.5% to 8.5% compound every year.
Kevin: If I was looking at an investment property in there, what sort of return could I expect?
Greville: The growth is going to come out of the land and the capital growth. In terms of rental yield, investment yield, really 3% is probably what you’re going to get on a house and probably in the range of 3.5% to 3.7% for an apartment.
Kevin: You mentioned there the growth potential in the past. What’s it like predicted for the future?
Greville: I think Albert Park is always going to perform well into the future, and that is because of the scarcity of real estate in that particular area. It is bounded, as I had mentioned, by Port Phillip Bay and by Albert Park on the other side, so they’re not making any more land there in Albert Park, and it is in a protected zone, as well. Developers are really precluded from building any density in there, so real estate is scarce, which means that with demand being strong, it’s going to continue to assist in driving price growth.
Kevin: There you go. That’s the story on Albert Park. Our guest this time, Greville Pabst from WBP Property Group. Greville, thanks for your time.
Greville: Thanks, Kevin.
Kevin: The other day, I was talking to our good friend Shannon Davis from Image Property Management in Brisbane who also looks after the Metropole Property Strategists operation in Queensland. He was telling me about a very interesting trend to do with renters, and I thought you might be interested.
He joins me. Hi, Shannon.
Shannon: G’day, Kevin.
Kevin: Shannon, tell me what trend you’re noticing with renters.
Shannon: Kevin, we have a large rent roll, and we’ve seen a large database of tenants over the years develop, as well. We’ve seen more and more tenants that are making the step into property investment rather than their house as a primary place of residence as their first home as maybe previous generations once might have.
Kevin: Are these young people you’re talking about, Shannon?
Shannon: Yes. Lots of people are beginning with being an owner or a landlord first because maybe it’s where they can afford to buy. They maybe can rent where they want to live but can’t afford to buy where they want to live, so they’re starting with investment in another area and therefore being a landlord before they’ve actually owned their own house.
I think also negative gearing is a little bit of help. When you’re getting that tenant’s rent, it becomes an easier hold, and when everything’s deductible, it’s a more affordable way of owning property. But also, you get people who are joining together – either brothers and sisters or workmates or friends. Sometimes you get the Bank of Mom and Dad that is assisting that first property purchase, as well.
Kevin: What would be your advice to anyone who is looking at maybe going into partnership with a brother or sister or friend or relation of some kind?
Shannon: I think your exit plan is really important. Even at the beginning, think of your exit. I know myself when I’ve done investments like that, if you’re at different life stages – say if one young person is in the accumulation stage of building up their appreciating assets and you buy with your mom and dad and they might be in the withdrawal stage where they want to start selling things to supplement their retirement – I think that’s a big problem, to make sure that you guys are on the same stage and that you have a similar exit plan and also that they’re of the same character as yourself. You don’t want any sort of nasty surprises when it comes to doing business with people.
Kevin: How do the banks look at these types of operations or these types of establishments?
Shannon: You would think that actually the banks would think it’s less risk – more incomes to go into the one mortgage or payment – but sometimes they see it as more risk as there are two or three people and potentially any one of those people could lose their jobs or any one of those people could be rogue in their actions and their money habits. They can see it as a bit more risk in some cases.
Kevin: Obviously, the first property you buy is going to be an investment property as opposed to your own personal property. I suppose if you’re young, before you get married or even before you meet your future partner, it’s probably a good way to get into the property market, Shannon.
Shannon: Yes, definitely. Investment debt is good debt. Your house as a home is what I classify as necessary debt. Then you have bad debt, which is all those credit cards for jet skis and cars and holidays and things like that. I think buying an investment property, in the long-term, will serve you well. The sooner you get started, the better.
If this is the case that you can afford an investment property, it will be more affordable that way because of deductions and the tenants covering rent and interest rates are quite low. I think it’s a trend that will continue into the future.
Kevin: I guess one of the things you’ve got to be careful of when you’re buying this property is understanding that it is an investment. It’s not going to be the property that you’re going to live in for the rest of your life, so it doesn’t have to be in an area where you want to live.
Shannon: No, definitely. That’s one of the big advantages. If people are renting a small inner-city apartment, they can afford something maybe bigger a bit further out. There are tenants at all levels. They’re able to get their rent; that helps service their mortgage. Housing is an appreciating asset, so they’ve got their money working well for them.
Kevin: Good stuff. Always good talking to you. Shannon Davis from Image Property Management and Metropole Properties in Brisbane. Thanks for your time, Shannon.
Shannon: No worries, Kevin. Any time.
Kevin: EBM Insurance Brokers are one of the largest brokerage firms in Australia. They have a division called Rent Cover, which specializes in insurance coverage for rental properties.
Recently, Rachel Barnes caught up with the general manager for Rent Cover, Sharon Fox-Slater, to talk about an interesting trend that is emerging that they’re noticing they need to provide coverage for.
Here’s Rachel talking to Sharon.
Rachel: What would you say is the biggest issue for landlords in the last 12 months?
Sharon: The biggest issue continues to be the loss of rent and damage caused by tenants. That being said, in terms of a new trend, drug labs are something that are really coming to the forefront. It’s a relatively new thing in Australia. It has been in the States for quite a number of years. It’s about how those properties are cleaned up and the chemicals disposed of.
That’s definitely a big issue for landlords. You can’t actually see the damage itself. It’s toxic chemicals in the property, so the properties actually have to be tested and professionally treated in a manner that’s different from cleaning a normal property. It’s the liability risk that goes with it if the property is not cleaned up.
I’ll use an example of a property in America where there was a meth lab in a property. The property wasn’t cleaned up. New tenants moved into the property. They had a six-month-old baby. The baby was crawling around on the carpet and became extremely ill and, unfortunately, subsequently died as a result of the toxic chemicals. The people who were living in the property had no idea because you can’t actually see it.
It’s a huge risk. In Victoria just in the first quarter of last year, the police closed down 70 labs in residential properties.
Rachel: What do you suggest a landlord can do to overcome that?
Sharon: Number one, they should have a really good property manager. Property managers are becoming more and more aware of the problems with these meth labs, and there are certain signs that a property manager will look out for when inspecting properties.
If a landlord ever has any doubt about what may have gone on in the property, they can get some professionals to come in and actually do some testing. They test that air and the walls and the carpets and things like that to see if there’s any evidence of toxic chemicals.
Rachel: Is there something you can insure with for that?
Sharon: You can insure it. Our policy automatically covers it. Some policies will have a limit on it, and some policies don’t cover it at all. The reason why some policies don’t cover it is it’s actually technically considered cleanup, and most policies will cover physical damage caused by a tenant but not cleaning of a property.
We actually classify it as accidental damage, because the intention of the tenant who was manufacturing the drugs was obviously to manufacture drugs not actually to damage the property. We cover up to $50,000, and it can cost up to that amount to actually clean the property up.
Rachel: That’s an area that I don’t think many people have known about, so it’s wonderful that we’re now forewarned and forearmed.
Kevin: Great job there from Rachel Barnes. Rachel, of course, is one of our regular contributors and an expert in her own right, catching up there with Sharon Fox-Slater from EBM Insurance Brokers. Sharon is the general manager for Rent Cover, and we thank Rachel for providing us with that information.