The greatest driver of capital growth | Predictions for the property market | Making money on a reno | Asset Protection

The greatest driver of capital growth | Predictions for the property market | Making money on a reno | Asset Protection

In this week’s show Cate Bakos shares details of a great indicator of future growth, and it’s not all about position. She says to look deeper about what those who already live there do and what they earn.
Michael Yardney looks at the year ahead and predicts what we will see as the differences this year compared to previous years and their likely impact on us.
Ken Raiss answers a question about asset protection and renovation queen Cherie Barber tells us that her plans to make money on a renovation begin long before she buys a property.
We catch up with Louis Christopher to find out if the predictions he made last September are starting to take shape or if he missed the mark.
And we have some news about a program that helps you pass on cheaper power bills to your tenants and make some extra money from your investment property at the same time.



Michael Yardney

Kevin:  We’re just starting a brand new year, so what do you think are going to be some of the differences this year to previous years? What should we be watching out for?
Michael Yardney from Metropole Properties joins me. Michael, what do you see on the horizon? What should we be watching out for?
Michael:  Every year is a little bit different, isn’t it? This year, I think we’re going to have much lower capital growth, but I think it’s going to be related to falling consumer confidence. I can see the year starting off with us all being a little nervous.
There is going to be lots of negative news, problems in the world overseas, China’s slowing economy, European economic difficulties, deflation. Locally, I think we’re also going to be plagued with unemployment, a weak economy, a government that can’t deliver its budgets.
We’re going to see a field day of negative media comments, and that’s going to mean the average Australian is going to keep their hands in their pockets. They’re not going to spend, particularly on big-ticket items like moving home or buying an investment property.
Kevin:  Yes, because that consumer confidence is pretty important, and very delicate, too.
Michael:  It is, so the more negative sentiment in the media, the more we’re a bit careful, and the longer it goes on, the harder it is to regain our confidence. So we’re going to need a few bits of good news as the year goes on.
Kevin:  Any other potential changes, you think?
Michael:  We could have some challenges with finance. There were some murmurs about self-managed super-funds not being able to borrow for property investments, the macroprudential controls that have been in the wind, and maybe the abolition of negative gearing.
Of course, these are all potentials – none of this is necessarily going to happen – but when there is word of this in the pipeline, people start to get worried, don’t they?
Kevin:  Yes. How do you think we should deal with it?
Michael:  I think falling consumer confidence is going to reflect in lower demand for properties, and if you have a long-term focus, you could actually see this as a positive. Remember what Warren Buffett said. He said, “Be fearful when others are greedy, and be greedy when others are fearful.” In other words, there is going to be a window of opportunity for those property investors who have got a long-term focus to take advantage when others are sitting by the sidelines.
Kevin:  What would you suggest about strategies to work in this type of environment?
Michael:  Last year, we had a very fragmented market. Some segments – Melbourne and Sydney in particular – performed very well, and I think other regions didn’t. I think it’s going to be even more fragmented this year, so the strategies are really going to be careful property selection, because in some locations, particularly new home-buyer locations, particularly in blue-collar areas or regional Australia, those areas are going to underperform in line with their weaker local economic factors – rising unemployment and job uncertainty.
On the other hand, there are going to be some suburbs, some locations in Australia, where the people living there will have high disposable incomes because they work in the type of industries that are still going strongly. In general, these are going to be in the inner- and middle-ring suburbs of our big capital cities.
Kevin:  Therefore, what strategies won’t work, in your opinion?
Michael:  I’d be really careful with looking for hotspots, looking for the next get-rich-quick scheme. But, on the other hand, that’s never really worked too well, has it?
Kevin:  No, it hasn’t. You’re right.
Michael:  I’d also be avoiding generic, off-the-plan, large high-rise projects. There’s already an oversupply of those, and that’s going to give limited capital growth and limited rental growth. I’d be avoiding house-and-land packages, because, again, first home owners are probably going to have more challenges this year than they had last year.
I’d avoid regional areas, because, again, economic growth is not going to be as strong there as in the powerhouse economies of our capital cities, and, lastly, it’s probably not even necessary to say: I think everyone is already avoiding the mining towns, Kevin.
Kevin:  I think they are indeed, Michael. Some great advice there. Thank you. I want to come back next week, if I could, and I’m going to ask you about ways we can maximize our portfolio for this year.
Michael Yardney from Metropole Properties. Thanks for your time.
Michael:  Thanks, Kevin.

Cate Bakos

Kevin:  In the past on the show, we’ve talked about growth drivers, and that’s certainly an indication about what is happening in a particular area. But is it the only thing you should be looking at? Maybe we might look at extending this out, just a little bit, to look at where you might be better off spending your hard-earned cash in an investment property.
Cate Bakos, from buyer’s agents in Melbourne, you must be doing this a lot. What sort of growth drivers do you look for, or what are the indicators for you, Cate?
Cate:  What I’m looking for: purely capital growth in an asset, and not necessarily worrying about a combination of strong yield. I’ll be looking at the inner-city or inner-ring suburbs in our strong major cities. One of the key growth drivers I look for are patterns of rising household income – in other words, people wanting to come into the area who have strong incomes, and perhaps stronger incomes than the median of the area at the moment.
Kevin:  So it’s not all about position, position, position, is it?
Cate:  It’s a combination of a lot of things, and position certainly comes into it, but when you’re looking for that elusive suburb that’s about to do something special, certainly, changes in patterns of household incomes can be a really good clue.
Kevin:  Is it because their earning capacity is so high that they become demanding in a particular area and therefore that needs to be catered to?
Cate:  Yes, absolutely. Areas can be popular for a few reasons. Usually, it’s proximity to the city, proximity to where we work, and also proximity to schools, and to really nice high streets, and communities that people are pretty excited to be a part of.
Sometimes, it might be a case of people who have been priced out of a certain location, and they might overflow into the next suburb that has some really desirable traits. What we then see for that suburb is a bit of a gentrification pattern, because the household incomes that are coming into the area are changing the area.
Kevin:  There’s an old saying in real estate that the value of a property is in the land, and I’ve heard Michael Yardney on this show talk about how people are trading in their backyards for balconies. It really is a growing trend, isn’t it?
Cate:  It certainly is. There’s an old myth that a large piece of land is more valuable than an apartment. But I often say to people I’d rather have an apartment in a fantastic inner-city location than to be in the backdrops of our urban sprawl with a really large piece of land, because the value of that small piece of land might be much stronger than the value of the larger and further out piece of land.
Kevin:  So would you prefer to see people sacrifice and maybe move closer in toward the city ring? Is that were the wealth really is, Cate?
Cate:  It is. If I’m talking to investors, I’d prefer to see them get closer into the city and be able to commute easily into the city, because then they’re purchasing a property that’s offering a really good tenant an opportunity to get into it quickly to and enjoy all that the inner suburban area offers.
Kevin:  More great advice there from buyer’s agent, Cate Bakos. Cate, thanks for your time.
Cate:  Thanks a lot, Kevin.

Louis Christopher

Kevin:  You might recall back in September last year, Louis Christopher from SQM Research made some predictions – as he does every year –about the year ahead, about 2015. He rejoins us now to have a look at that and to see if we’re on track.
Good day, Louis.
Louis:  Good day there, Kevin.
Kevin:  Thanks for joining us. I think from memory, you were looking at general capital growth around Australia of 5% to 9% – patchy, because some areas were going to be better than that?
Louis:  That is correct. Sydney, the forecast was for +8 – +12%. That was the strongest city in terms of results we’re expecting. The weakest city was a race between Darwin and Canberra. Darwin we had a forecast of minus 3% to plus 1%, and in Canberra, minus 2% to plus 3%.
At this stage, we believe our forecasts are on track. Sydney is still looking very strong. We think the new season is going to open up with higher clearance rates than where it ended off in 2014.
Kevin:  The auction activity late last year in Sydney and Melbourne was very strong – stronger, probably, in Sydney than in Melbourne, to be fair. Do you see that continuing?
Louis:  Yes, I do. It’ll be on fewer auction listings than what traditionally occur at the start of a new calendar year, but we’ll see higher clearance rates. I think we’ll see clearance rates for those two cities at least back into the 70s once again, driven by a strong buyer demand.
The reality out there is it is a patchy economy, I’m sure you’re well aware of that, but on the east coast of the country, things seem to be a little bit better. They’re better in Sydney, for sure. They’re a little bit better in Brisbane and Melbourne. It’s the resources locations or areas directly impacted by budget cuts that are feeling the pinch the most. That’s also translating into weaker real estate markets for those particular cities.
Kevin:  You mentioned Brisbane there. Let’s have a look at some of the regional areas, as well. There are some areas in Queensland that are continuing to suffer. The Mackay market hasn’t been looking very good for quite some time.
Louis:  Yes, that’s right. We still have elevated vacancies in Mackay. We’re still seeing elevated vacancies in Gladstone. Basically, any of those north Queensland towns that have exposure to the resources downturn are definitely hurting on the real estate front. Until we see a bottoming on the resources area, I see ongoing weakness with those particular towns.
On the other hand, those towns that are exposed to tourism are actually benefiting from the lower Australian dollar. In southeast Queensland, such as the Gold Coast, and to a lesser extent the Sunshine Coast, we are seeing a recovery in those local or regional housing markets as we speak.
Kevin:  Let’s go a little bit broader, Louis. What about Perth?
Louis:  The Perth market, in terms of our forecast, has very slow capital growth of 1% to 4%. We’re not expecting a dramatic fall in prices, but we have been on record to say there is a heightened risk of a major house-price downturn in Perth. We’re certainly seeing a downturn in Perth rental market. On our numbers, Perth rents are actually down 8% year on year.
So far, I think the low interest rates in Perth have managed to hold up the housing market overall, but whether that continues into 2015 and 2016, time will tell.
Kevin:  The big winners are really Sydney, Melbourne, and – probably to a lesser extent – Brisbane?
Louis:  That’s it. Many people are still wondering how we can remain so bullish on Sydney given the run it’s already had. There are a few fundamental things going on in that city market there. We have strong population growth right now. Last year, the estimate is that we had 90,000 people come to town. We have a strong state economy where the state budget is definitely in the black, and the state government is spending good money on infrastructure. That’s been boosting the local economy, and that’s also one of the reasons why we’ve had an ongoing recovery in the housing market.
Now, things are definitely expensive in Sydney, there’s no question about it. Could it keep on running for a while yet? Yes, we think it will.
Kevin:  It’s always good talking to you, Louis Christopher from SQM Research. Thanks for your time, Louis.
Louis:  Thank you, Kevin.

Cherie Barber

Kevin:  In the show, we quite often talk about improving our investment properties. That nearly always comes down to renovation. Who better can we talk to about that than Cherie Barber from Renovating For Profit?
Good day, Cherie. How are you?
Cherie:  Fantastic, thank you Kevin. And you?
Kevin:  I’m very well indeed, thank you. I’m hoping you can share with us your five most important reno tips for investment properties?
Cherie:  Okay, that’s a pretty easy one. The first thing is the old saying in real estate: “Location, location, location.” That’s true, but I don’t think it’s the absolute be all and end all. To me, I say, “Research, research, research.” It’s about doing the right amount of research on your suburbs, but also the property itself, and the property prices.
Kevin:  How much time should you spend researching, Cherie? You can go into overload with this, can’t you?
Cherie:  You can. We can actually get “analysis paralysis,” so you don’t want to do too much. I typically say to my students anywhere between six to twelve weeks is a good time to do research. That’s predominantly going to the open for inspections, getting very familiar with unrenovated or renovated properties – either/or – and the prices that those properties are pulling, the style of houses in the area, and which properties have bigger demand than others. It all just boils down to research.
Kevin:  Research also helps you determine what price you’re going to pay, because we quite often hear of people making silly offers. A silly offer is okay provided it’s within a market range, Cherie?
Cherie:  It is, and that leads me to the second thing you want to do: pay the right price for the property when you buy it. What I do know is that it doesn’t matter what award-winning renovation you do, if you pay too much for a property to begin with, you’re going to be in a lot of trouble.
It’s about paying the right, fair market price. In my experience it’s very hard to actually get a property for below cost or for wholesale cost. Quite a few people talk about that, but it’s very rarely done. It’s about paying the right price for the property when you buy.
Kevin:  The right price that’s going to allow you to make some profit out of it, Cherie. That’s what it comes down to?
Cherie:  Yes, and it’s very easy to pay the right price. Once you go to those open for inspections for anywhere between six to twelve weeks consistently, you will be amazed how much property knowledge or pricing knowledge you have on the properties in your local area.
I remember when I started renovating – many moons ago – I started doing that process myself. It was after about six weeks of going through every single open for inspection that I could start to take a wild guess at what properties were worth. At the end of the twelve weeks, I was actually predicting what properties would sell for within a $20,000 radius. It’s actually not very hard to do this is if you’re just consistent with your research.
Kevin:  You’ve highlighted a great point there about price and doing research. It’s so much easier to get a handle on price if you’re looking in one geographic area, but if you’re looking for a type of property across a number of different areas, prices vary and it becomes very difficult for you to get the price right.
Cherie:  It does. With my students, I say be a master of one, not a jack of all trades. I think it’s worked particularly well for me. I focus on just three to five target suburbs in my area. If you ask me about the property prices in the next suburb over, I’m completely clueless.
I became an absolute expert at everything about my suburb: the demographics, the housing types, which properties were in surplus supply, which were in demand, and the property prices. By having a very small focus and not spreading your wings too far, you do get that more intimate knowledge.
At the end of the day, that’s actually what can mean the difference between making a profit on not just a renovation deal, but a property development deal or a passive investment. It just comes back to doing one thing and doing one thing well.
Kevin:  When you’re talking about price, have you got a fixed price in your mind, or a fixed price range, that you’re prepared to buy in?
Cherie:  I am. Quick cosmetic renovations work particularly well for a lot of properties that are under the $600,000 price range. Structural renovations are more suited to property prices $750,000 and above. The reason why I say that is structural renovations only work in certain areas. In fact, structural renovations tend to work particularly well in the inner-city locations and the metropolitan ring, which is that three to twenty kilometer radius out from the CBD. By its very nature, property prices are higher in those areas.
What you can’t do is go and do a quick cosmetic renovation into a suburb that is clearly structural renovation territory, because with cosmetic renovations – painting, ripping up the carpet, polishing the floorboards, or installing new blinds – because you’re buying at a much higher property value for structural renovations, doing those simple cosmetic changes is not going to give you enough uplifting value to cover all your costs associated with the structural renovation.
Definitely structural in that $750,000 and above, in the inner-city and metro markets, and then cosmetic renovations work particularly well in the metro or the outer-metro ring, and even the regional ring at the lower price.
Kevin:  Cherie Barber from Renovating for Profit. Thank you so much for your great insight there, and we look forward to talking to you during 2015.
Cherie:  Thanks for having me, Kevin.

Ken Raiss

Kevin:  We’re going to answer a question from a listener. By the way, keep sending those questions in right through the year, because we endeavor to answer as many as we can. We try to get one into every show. If we can’t get it into a show, we’ll certainly answer it for you off air.
We received this one late last year from Ping who said:
“I listen to your show and I noticed that you have questions. I’d like to ask a question about asset protection. I understand that buying properties in trust is a good idea for asset protection. However, trusts do not distribute losses. From my experience, if you purchase in a good suburb, chances are that you will be negatively geared for the first few years. How can you take advantage of tax reduction if you purchase in a trust? Is there a structure whereby this is allowed?”
Ken Raiss from Chan & Naylor is one of our supporters and one of our experts we turn to on questions like this.
Hello, Ken, and welcome to 2015!
Ken:  I know. Last year certainly went by quickly, didn’t it?
Kevin:  It certainly did, but it’s good to be talking to you again. Ken, what would you say to Ping on that question?
Ken:  That’s a very good question. Not all trusts are the same. Their authority is derived from the specific wording in the deed. The deed is the words that create the trust, and as such, there is no such thing as one size fits all, unlike a t-shirt maybe. That’s because you can’t have conflicting powers within the same deed. That’s why you can’t put everything in there.
There are many trusts, as you say, that cannot pass on their losses attributable to holding a property. They are typically the family trusts, or discretionary trusts, and some other trusts.
With that in mind, Chan & Naylor developed a Property Investor Trust (PIT), which allows an individual to borrow to invest in the trust. The loan is to purchase an interest in the trust, not to purchase the property – so there’s a distinction there – but the banks still take that property as security.
The trust then collects the rent, and then after the real estate holding agent’s fees, or any repairs, or any other holding costs, and distributes that rent to that person who invested in the trust, and they then apply the interest. They effectively get an income from the trust. They apply the interest, and if the interest is more and it’s negative, they then get the negative gearing in their name.
But the PIT also allows for family lineage, so if you want to make sure that the in-laws don’t get the assets, that’s very important. It also doesn’t stop after 80 years. Most trusts stop after 80 years, thereby triggering GST and stamp duty. The Property Investment Trust is the only trust of its kind that the ATO has approved for this tax treatment. We have a product ruling: it’s 2014-15.
But just be very careful when using a trust. There are many other issues that you need to address before jumping in and using a trust, such as land tax, future cash flows, and any specific borrowing requirements you may have.
That’s a good question, and thank you very much for asking.
Kevin:  Yes. A very comprehensive answer there from Ken. Ping, if you want to take that further – and anyone who does, in fact – I’d suggest that you use the link on Real Estate Talk to contact Ken and his team at Chan & Naylor. They are the experts when it comes to it. That’s why they’re on the show so regularly.
Ken, thank you so much for your time, and Ping, thank you for sending in the question.
Ken:  My pleasure, Kevin. Thank you, Ping.

Gerry Mackenzie

Kevin:  I want to tell you about a very unique opportunity for you now if you have an investment property. We all know how important it is to have happy tenants: happy tenants, happy landlords. Here is a great way for you to help your tenants get cheaper power bills and maybe even make some extra money on your investment property, as well.
I’m going to talk to Gerry Mackenzie now from a company called Solar Investor.
Gerry, thank you very much for your time.
Gerry:  Thank you for inviting me on.
Kevin:  Tell me about the concept now. Fascinating, because this is definitely a win-win, isn’t it?
Gerry:  It is. For investors, it’s certainly a win-win. The win for investors is boosting their income from their investment properties, and a win for their tenants, as well, who are guaranteed a cheaper power bill than the national rate.
Kevin:  Is there still government assistance to purchase solar?
Gerry:  There is a little bit of government assistance still available, but this program is not dependent on that. It survives by itself without that, so at the moment, we actually give the government rebate back to the investors, so that is another win.
Kevin:  It certainly is. Now, we’ll talk about price in a moment, but I guess the price is dependent on what sort of solar system I need. How do I find that out?
Gerry:  You’re quite correct. We have to look at the size of the system to see what sort of return we’re going to get from that. Solar Investor looks at the property, and what we call it is we “solarize” it, so we look on the roof, we look at the plans, we look at the property, and then we advise the correct size of system for that property.
And because we’ve been doing this for a long, long time, we then look at the solar radiation in that area, and we can tell what sort of return the investor is going to get from that property. We sort that out.
Kevin:  What would I be telling my tenant, if I was going to put one of these on the roof, in terms of the benefits for them?
Gerry:  There are a few benefits for the tenant, but first of all, the most important one is that they’re going to have a cheaper power bill than they would normally have. That’s what we can categorically say. It depends on which area they are in – there are different costs of power all the way throughout Australia – but we can say that they will be around about 15% less than the national rate in their area, so they’re going to be happy with that.
Kevin:  Very happy. How would it work in terms of billing? Will I be billing the tenant?
Gerry:  No. In the past, that has been a drawback for the investors, that they would have to take liability of the bill and also do all the billing work. This is all done by Solar Investor, and the tenants have their own bill in their own name, and we sort all of that out. The tenant has their own bill with the solar-friendly retailer, and they can view their electricity bill. They can look at that, and they can see what their usage is, and they can also see where the discounts are.
Kevin:  I said at the opening that it’s a win-win, that the tenant is obviously going to get cheaper power, but then there will be money coming back to the investor, as well. Could you just tell me how I, as the investor, can earn money out of this?
Gerry:  As the investor, you have invested to put a solar system on your property, and you are expecting a return from that, and that’s what we organize. The system is on the roof, and it’s producing electricity, and as that electricity comes down into the investment property and the tenant uses it, we have a very special box of tricks that calculates all of this and data-records it. Then we can charge the tenant for power at a pre-determined rate, and there is a cut in that for the investor, so they get a very good return on their investment.
Kevin:  Thank you so much for your time, Gerry MacKenzie. That website again is Thanks for your time, Gerry.
Gerry:  Thank you.

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