26 Mar Traps for young players starting out – Shannon Davis
If you are finding it tough to get funding for a property purchase, it could be that it is not a reflection on you, your portfolio, anything you have done in the past or how you have managed your affairs but more about an APRA type boom. Shannon Davis explains.
Kevin: Shannon Davis from Metropole Property Strategists joins me. We talk about the restrictions that the banks are currently putting on lenders is probably one of the biggest concerns for property investors right now.
Shannon, as I read it, the banks are really toughening up, looking at where they’re lending, how big their books are going be. In fact, in some cases, some of the banks are saying they just simply won’t lend any more to property investors.
Shannon: Yes. I was recently talking to an investor client of ours, and they got asked for a letter from his in-laws that they could live rent-free in their house in order for the loan to go through. That was the extent of how much. And this person was well capitalized and on dual income, so they’re really tightening it up. In some areas, it’s been referred to as an APRA-type boom in that the tightening up actually has the wrong effect on prices and making the demand even more.
Kevin: Yes. There’re going to be a lot of very nervous developers, I would think, hearing the stories that I’m hearing out of places like Cairns where the banks are having their own valuations prior to settlement and they’re coming in so much under the purchase price.
Shannon: It definitely makes it hard to complete if you have to afford an extra $20,000, $30,000, $40,000, $50,000 to make the settlement occur. There will be people walking away from deposits, I would think.
Kevin: Shannon, I want to talk to you now about the common mistakes you see investors make in this market, and it probably changes because of some of the things we’re talking about – the way the banks are reacting, what APRA is doing and so on. But what are some of the common mistakes you see investors make?
Shannon: I think people like to beat their chest in trying to have a quantity approach and try and buy ten properties, but what you’ll see is maybe those ten properties will be worth $3.7 million and the investor only has like $400,000 of equity in that portfolio.
Kevin: Very high risk, isn’t it?
Shannon: Yes, high risk. It’s not about how many properties you own; it’s that difference between the net debt and the market value, which gives you your equity, is what you’re worth.
Kevin: Because without that equity you can’t gear either, can you?
Shannon: You can’t buy again. You can’t extend your portfolio. It’s the difference, really, between a fast-moving portfolio and a slow-moving one. There are people who have used up their borrowing capacity with non-investment-grade properties and are just stuck in the mud, for want of a better term.
Kevin: You must see a number of those? To help them out of it, they have to really sell down, get out of those bad properties?
Shannon: And sometimes can’t afford to sell. There’s no market there or they owe more than what it’s worth now.
Kevin: They need to make a loss, don’t they?
Shannon: Definitely, and they can’t afford to crystalize that loss.
Shannon: That’s a real sad part. They would have been better off doing nothing than investing.
That’s where we get it wrong. We think that property is always going to go up, that each property is very much the same…
Kevin: Well, they do if you buy well.
Shannon: They do if you buy well, but there are going to be times in the market where we’re not booming and there are going to be times where we go sideways, and there can even be times where we’re going to contract. When you’ve been an experienced investor, you’ve seen all those times through.
Again, it’s long term, but let’s do our research. Let’s not take advice from people who are compromised, and by that I mean like selling agents. You shouldn’t be getting your investing advice by your selling agent because they have a different agenda to you.
You shouldn’t be getting advice from someone who’s going to bring out a list and say, “Any one of these properties will be your answer,” because they’re compromised to that list of properties and they’re probably getting a commission from that builder and developer.
These are the type of traps for young players that I’m talking about, where people are taking the advice from compromised people or the wrong types of people.
Kevin: Didn’t really finish you talking about gearing, and we might do that next time we catch up because I think that’s a fascinating subject on its own – how you gear – because many people don’t understand the benefits of it. They have all this equity in a property but they don’t understand about gearing. We’ll talk about that.
Also lines of credit – and we have got about 60 seconds left. A line of credit and the importance of having the buffer for things that you’ve been talking about then.
Shannon: Yes. And again, it comes back to the equity in your portfolio and a sophisticated broker probably giving you that access to that line of credit. That can help you with your contingencies, whether it’s emergency repairs or a slight loss of employment. Once it’s been extended to you, it’s very much up to your discretion of how it’s spent, and if it’s used wisely, it’s like this big credit card that’s not really costing you anything to have but can buy you time to get out of a bad scenario, such as loss of employment, emergency repairs, a tenant absconding from your property.
Kevin: Thirty seconds. Sum it up for me.
Shannon: Begin. That would be my first advice. Begin. You have got to grow your asset base wide if you want to have that delayed gratification in the end. Time your life, don’t time your market. Do things to your personal circumstances, not to what the headlines are saying around you. And finally, have a plan. If you want to execute that plan, get some expert advice.