09 Oct Where is the next Sydney | Developing your team | How to avoid being gazumped | “The deal of a lifetime” Properties | Quit your job & work in property full time | Seller vs. Buyers Market
Ever thought of quitting your job and working on, or living off, your property full time? Is it even possible? Michael Yardney gives us a reality check. He says its possible but not easy and he explains why.
With record high auction clearance rates and properties continuing to sell well above reserve price expectations in Sydney, investors are asking the question – Where is the next Sydney? That is the question we pose of Margaret Lomas.
We find out from John Lindeman if there is a tipping point when we can see a market turn from a sellers market to a buyers market and vice versa.
Property investor and developer, Nhan Nguyen, shares some wisdom about developing your team.
Our good mate and solicitor Rob Balanda has some great advice on how to avoid being gazumped and in true Rob style he gives us a negotiation tool – not just a way to avoid being gazumped.
If you come across a property marketed with a rental guarantee, tread carefully. Buyers Agent Damian Collins outlines why he is wary of properties offering ‘the deal of a lifetime’.
Kevin: I don’t know about you, but I quite often hear people say that they want to quit their job and they want to go into property full time. How do you do it? Is it possible?
Michael Yardney, that’s the question I want to ask of you. Michael, of course, is from Metropole Property Strategists. Michael, you probably hear this a lot, do you?
Michael: Kevin, yes, I do. Look, only a couple of days ago, I heard somebody say, “Look, I want to get out of the business we’ve been in for 10 or 12 years now. We want to move into property full time.” They say that they read about it in the magazines, they hear about it. They’re wondering how they can do it. The answer is it’s not easy, Kevin.
Kevin: But it is possible?
Michael: It is possible. I think another related question, though, we probably should mention is that people say, “Michael, I’d like to buy an investment property, and. I want the income to pay for my kids’ school fees, or maybe I want to have a little bit left over and go on holidays.”
When people say, “Michael, I want to get to property full time and pay my wages, I want to get into property to pay my school fees,” I say to them something that disappoints them, Kevin. I say, “That’s not how property works.”
What I believe you have to do is rather than live off that little bit of positive cash flow that you can get out of properties if you buy cash-flow properties, is actually to build an asset base first, Kevin. To me, there are three stages of successful property investing.
Kevin: Okay. What are they, Michael?
Michael: The first one is the asset grow stage. This usually takes 10 or 15 years or more. You need two good property cycles. My strategy is to acquire high-growth properties and let them increase in value, leverage off them, and buy them again.
Then you transition slowly into the cash flow stage of your investment career by lowering your loan-to-value ratios, and then, eventually, yes you can live off your properties, Kevin. But it’s not something where you can buy a property today and then suddenly live off it or have it pay your school fees. It doesn’t work that way. Wealthy investors that I’ve dealt with have first built their assets and then transitioned to cash flow.
Kevin: You mentioned there about lowering their LVRs. How do you go about doing that?
Michael: Kevin, there are a couple of ways. First of all, you stop or maybe you slow down buying properties so that while the value of your portfolio grows with time, your loans remain much the same. Or you can actually lower your loan-to-value ratios by increasing the value of your properties by manufacturing some capital growth through properties. Or you pay off some debt, because in the end, you get to the stage where you pay principal and interest. Or sometimes you actually have a bit of a superannuation bonus as you retire and you can use that. Sometimes, you should sell a property or two, but can I put a warning in here, please, Kevin?
Michael: A lot of people have heard the concept that I’m going to buy ten properties and then I’ll sell five at the end, and then end up with five with no debt, but that doesn’t work that way. Because to buy those properties, you usually have something like an 80% loan-to-value ratio, and when you sell them, you pay some capital gains tax.
Selling one property doesn’t give you the money to have another one debt-free, so that strategy doesn’t work. But the reason you would maybe sell one or two is to lower a little bit your loan-to-value ratios.
Kevin: Given that’s the case, then, is it at all possible just to live off the rent?
Michael: People would like that concept, and let’s say you want to live off $100,000 of income a year from your rents. I say to clients, “How many properties would you need?” They’re not really too sure about that.
But if you work out that you get around 4.5% yield – and that’s generous in today’s economy – and if you owned $1 million worth of property with no debt, you’d only have $45,000 rent, but you have to pay agents’ commission and land tax, and repairs, so you’d only be left with maybe $35,000.
If you really want at least 100,000 to live off, Kevin, you have to have $4 million worth of real estate with no debt plus your own home, and then you’d end up after tax maybe with $100,000. Kevin, most people just can’t save enough or pay off that much debt to live off the rentals of their property.
Kevin: Michael, does living off equity really work?
Michael: The concept I’m talking about, you’re right, is living off equity, and prior to the Global Financial Crisis, boy was it easy. You just get a low-doc loan, no-doc loan. Today, it’s much harder, but despite all the APRA changes, I know a lot of our clients are doing it, I’m able to do it.
The concept really is you have to own the right properties, you have to have lowish loan-to-value ratios, and you have to have the right finance structures to be able to do it, but it’s definitely something you should aspire to.
Kevin: Michael, any final words of warning?
Michael: Don’t believe everything you hear or you read. Very few people do property full time. It’s hard to become a property developer full time, you need much deeper pockets than you think, and most people I’ve seen become wealthy have got a full-time job while they build their property business on the side as a part-time job until they eventually have a big enough asset base to live off their property portfolio.
Kevin: Thank you, Michael. Michael Yardney from Metropole Property Strategists. Michael’s blog, of course, is PropertyUpdate.com.au.
Michael: My pleasure, Kevin.
Kevin: Ask any wise investor and they will tell you that if it sounds too good to be true, then it probably is. This can apply to rental guarantees. Let’s find out what they are, first of all, and how you should be a little bit wary of them and what you should be aware of before you start to get involved with rental guarantees.
Joining me is Damian Collins from Momentum Wealth. They are buyer’s agents in Western Australia.
Damian, firstly, tell me what a rental guarantee is and why you think we should be cautious of them.
Damian: Kevin, a rental guarantee is usually provided by developers, whether that be residential property, sometimes serviced departments, or hotel operators. What they are providing to the investor is a guarantee of the rental return over a period of time. Sometimes they range from one year, sometimes even up to three, four, or five years.
What it effectively does is it means that the investor gets a certain level of return over that period so that they’re not subject to the vagrancies of the market going up and down. It sounds good in theory, but obviously, there are reasons why the developers offer it.
Kevin: Why do they offer them?
Damian: It’s to give that investor certainty. Nervous investors, particularly first-time investors in the market, they think, “What if my tenant leaves? What happens if something goes wrong? What happens if the rents drop?” and all those things. They provide them with that certainty of the rental return.
But of course, nothing is free. Any developer offering those sorts of rental returns has factored that into their sales price. As a buyer of one of those properties, you’re going to be paying for that rental guarantee. It’s going to be loaded into the sales price.
Also importantly, I think what we often see is that the rental guarantees are not necessarily reflective of the market. When you come to getting a loan for the property, you will often find that the buyers and the banks will only take the actual income based on the real market value, not what you’re getting offered as a guarantee.
Importantly, you have to understand that when that guarantee period runs out, you’re going to go back to the market levels, and I’ve seen them offered at 6% and 7% returns on property where the real market value is probably closer to 4.5% to 5%. Investors get lulled into a false sense of security thinking they’re going to get that rent forever, but the reality is that it’s over market and you’re paying for it, and one day, you’re going to have to pay the price when it comes back to normal market terms.
Kevin: Damian, is drawing a long bow to say that you could apply that to all properties that offer rental guarantees?
Damian: Definitely. Nothing is free in this world. Anyone offering a guarantee is either struggling to sell it and they need to offer some extra incentive for people to buy it – hence it might be overpriced – or alternatively, some other developer offering it, they have their profit margin they need to make. If they’re having to pay 1% or 2% extra rental return for a couple of years, you can guarantee that that could be 4% or 6% in extra cost out of their pocket, they’ve put that in the price, as well.
There’s certainly nothing is free in this world, and one way or the other, you’re going to pay for rental guarantee.
Kevin: If I were to see a property that seemed to be fairly reasonable on the surface in terms of its price and that rental guarantee looked fairly good, how should I proceed to make sure that I’m not going to get trapped?
Damian: The first thing I’ll be asking, Kevin, is why are they offering the guarantee? If the property was that good and stacked up on its own, why are they offering the guarantee? What’s the purpose behind it? What am I missing here? What’s hidden?
I’d certainly be doing my own thorough market research and what’s the proper and fair value for that property without any rental guarantee? And at the same time, I’d be looking at also what is the fair rental market without, obviously, this inducement of the rental guarantee at the same time? Really, do your numbers based on that.
The guarantee, it’s a nice little additional bonus but most people do get lulled into that false sense of security and end up paying too much for it because of that security. Do your homework, find out what’s the real market value of the property, what’s the real market value of the rent?
If the numbers still stack up, it’s worth having a look at. But in my experience, the vast majority of them is those extra, that guarantee is loaded into the price.
Kevin: We’re talking here about rental guarantees, of course, but could you draw the same conclusion from a property where they may offer you a Mercedes-Benz with every unit that you buy or an overseas holiday? Could you draw the same conclusion from those?
Damian: Definitely, Kevin. Again, there are two reasons why people are offering a Mercedes or they’re offering overseas holidays. It’s simply one or two things. It’s that they can’t sell them at the price they want and they need to load that in, so it’s overpriced for the real market value, and they’re using those as additional incentives. It’s either that or they’re really just looking for other ways to maintain that price.
Nothing is for free. Developers factor that into their project. Holidays and Mercedes – anything over and above just buying a normal property on fair market terms and conditions – at the end of the day, the buyer is usually paying for it one way or the other.
Kevin: Good advice there from Damian Collins of Momentum Wealth, buyer’s agents in WA.
Damian, thanks for your time.
Damian: Pleasure, Kevin.
Kevin: W shile we’ve heard about the incredible highs happening out of Sydney, and there is evidence now, as you’ve heard in the show, that the Sydney property market could be slowing just a little bit, but record high auction clearance rates and the question on a lot of investors’ lips is “Where is the next Sydney?”
One of Australia’s prominent property experts, Margaret Lomas from Destiny Financial Solutions, is going to be answering that and a number of other questions at the 2015 Property Buyer Expo. It’s on at the end of this month, the end of October.
Margaret joins us. Hi, Margaret. Nice to be talking to you again.
Margaret: Thank you.
Kevin: I’m looking forward to seeing you at the Expo, as well. It’s on in Sydney, isn’t it? Sydney Showgrounds.
Margaret: Absolutely, and it’s going to be in October. Hopefully, everybody in Sydney is going to be able to get themselves along there and have a little look.
Kevin: October 30 to November 1, so make sure.
Margaret, that’s the question. Where is the next Sydney?
Margaret: Look, that’s always a good question on everybody’s lips. But before we talk about where to go to next, let’s have a look at what’s actually been happening in Sydney. Keeping in mind that between 2003 and 2010, when every other capital city doubled in value, Sydney only went up by 17%. In some respects, the recent boom has been a little bit of a catch up, first of all, and then it overshot the mark.
If you look back over in history, it’s not unusual for this to happen to big centers like Sydney, and what will happen now is that there will be a decided flattening. It’s just gotten too overheated. It’s gotten out of the range of most people or the average homebuyer, and so we have no other way to go than flat from here.
I don’t believe we’ll necessarily lose value, although having said that, I think people who came in in the last closing part of that window because of the frenzied may have paid too much for their property and they think they’ve lost a little bit, but the market in general will probably just plateau.
Then when we take a slice at history, a ten-year reading, we’ll see that this massive boom hasn’t really done much more than what most capital cities do in any 10- or 15-year period.
Kevin: I think it’s important, too, isn’t it, to learn about buying well on a consistent basis as opposed to chasing the crowds, Margaret?
Margaret: Exactly. The thing about it is that most property investors are in it for the long term. If you’re buying and selling to get those gains, you’re not only paying capital gains tax every time you sell and losing a fair amount of money in that, but the tax office may eventually consider you a property trader, and then they’ll treat you differently. They’ll treat you as if you’re in the business of buying and selling property, and then your capital gains discounts go out the window, you pay tax on a quarterly basis, and a whole pile of other things, as well.
We have to remember that most property investors do keep their property for probably 10 to 15 years, and most property investors are doing this to be able to create a retirement income for themselves. What they’re really after is consistent growth year in, year out that they can then leverage against to buy more property. The way you get that is to understand what drives growth and to not chase the big booms, but to just chase that consistent growth.
Kevin: Yes, and of course, there’s an excellent series that I recorded with Margaret some time ago about those growth drivers. They’re still as reliable as ever, Margaret?
Margaret: Look, let’s look at them again. What we’re mainly after is an area that looks like it’s going to have pressure sustainably for a period of time. To get that kind of pressure, we need a couple of things to be happening, but we need all of them to be happening at the same time.
I don’t like it when people run out and buy in an area because they think there’s a new hospital and they see that as infrastructure, or they think there’s a new road and they see that as transport upgrades.
There are a lot of things that have to be happening – starting, of course, with population growth. But it’s important to understand that the population has to be growing within the right demographic. If the population is growing because everybody is retiring there, that isn’t a demographic that traditionally drives sustainable growth; an aging population usually has the reverse effect.
We need that population to be growing within that family demographic, and when we have families coming into an area, what we also see happening is normally they don’t move too much. They move to an area, pop their kinds into the local schools, and from there, they like to stay in that one area so that they’re not disrupting the kids throughout their schooling life.
Families become important. On top of that, we then need no new land in the area. If we have all of these families coming in but all they can do is buy the established housing, obviously, we’re going to get a pressure in that housing. When they upgrade, they upgrade within that area to another home, but we still see pressure on existing houses.
In order to keep the families in the area for a long period of time, we have to have the right kinds of services and infrastructure. We need good schools, we need hospitals and health precincts, we also need sporting facilities because these days parents are always putting their kids into all kinds of sports, and we also need plenty of family and community services available.
The last little piece of the puzzle is that rising median household income. When the median household income is increasing faster than inflation, then we also have an area that’s becoming more affluent, so they can afford to keep upgrading, they can afford to keep putting pressure on prices, so we see those properties grow.
Kevin: If you go to the website, RealEstateTalk.com.au, in the search box, just put in Margaret Lomas. A more extended version of an explanation by Margaret of all of those growth drivers will be there for you, as well.
Margaret, just before you go, we look forward to seeing you at the Property Buyers Expo, as well.
Margaret: Your listeners can get some free tickets to that. All they have to do is to go to the ticket page of the Property Buyer show and type in the code “destiny,” and they’ll get some free tickets.
Kevin: There you go. Well done. That’s a gift from Margaret, so thank you, Margaret.
Margaret: You’re welcome.
Kevin: That’s very nice. Just go to the Property Buyer Expo website –PropertyBuyerexpo.com.au – and make sure in the coupon box there you put in the word “destiny,” and those tickets will be available for you. Thank you, Margaret.
Margaret: You’re welcome. Thanks for having me today.
Kevin: A great topic I’m going to talk to Nhan Nguyen about now. Nhan, of course, is from Advanced Property Strategies, and he’s no stranger to any of us.
Good morning, Nhan, and thank you for your time.
Nhan: Excellent, Kevin. Thanks for having me, mate.
Kevin: I want to talk to you about picking your property team. We quite often talk about this, Nhan. Sometimes when people get into property, they tend to think they can do it all on their own or they don’t develop a team around them. Tell me who you would suggest we should develop into our team.
Nhan: That’s a really good point that most people do it by themselves. They haven’t really been trained to work in a team. The first couple of people you need are definitely a solicitor and an accountant. Those people are important to know because you might have to structure it in a company and/or a trust or in your personal name and put certain clauses in contracts. So definitely start with them.
Kevin: As you’re talking about that, too, I can hear people saying, “Yes, well, I’ve got an accountant and I’ve got a solicitor.” But my question would be are they on your team? In other words, tell me how you involve these people in a team atmosphere.
Nhan: Look. The thing about accountants is there’s accountants and there’s accountants. There’s a person down at the shopping center doing your tax returns or the person who’s going to help you grow and put the right structures in place for your family and distributions down the track and potential tax problems. With your solicitor, they’re going to be talking about how to structure yourself with asset protection and minimizing your tax together with the accountant.
With property, if you’re going to do development, if you’re going to subdivide, if you’re going to strata title, there’s a handful of things – like whether it’s GST, margin scheme, which I’m not going to cover – there are problems that you’re going to have to encounter and extra expenses – like land tax – that you need to really discuss with them. Tell them what you’re doing. Tell them that you’re about to expand and do property deals, so that they know to allow for that.
Kevin: By bringing them onto your team, too, you’re actually bringing someone else in who can be your ears and eyes on the ground and be listening out for things that you might be interested in. It’s just having more people on the ground.
Nhan: Absolutely, and it may come to you having to sack your accountant and/or your solicitor. I know I’ve gone through a lot of accountants and solicitors over the years because I’ve grown, my opinions have changed, and I’ve been a bit more aggressive in my property activities.
If they’re going to be talking about certain things like negative gearing or buying in your personal name all the time because they don’t want to spend money on companies and trust, you really need to challenge those beliefs.
Kevin: Yes. There are a couple of other obvious ones to have on your team, too – your real estate agent and a finance broker. They’re pretty well no-brainers, but particularly, a real estate agent is someone who can keep you in touch with those early deals or even help you sell one if you need to turn it over, Nhan?
Nhan: Absolutely. There are different types of real estate agents. There are some agents who are just happy to sell property at any price. Sometimes you can find those by talking to them and putting in low offers. At other times, there are other agents who you don’t want to buy through them; you just want to sell through them because they’re there to get top dollar all the time. You need to find out which agent is actually working for you as the buyer or the seller, whichever instance that you’re in.
Kevin: Yes. We’ve mentioned some pretty obvious ones there – solicitor, accountant, real estate agent, and finance broker – but there is one big one that I want to talk to you about and how you use them, and that is a town planner.
Nhan: Yes. A town planner is very important, especially if you’re looking at doing more than one dwelling. What I mean by that is if you’re just going to do a buy-and-hold, that’s fine, but if you’re going to do townhouses, if you’re going to do units, developments, or land subdivision, then you need to talk to someone who knows the rules, because once you add additional dwellings, there’s lots of approvals, there are surveys that need to be done, there are engineering plans, and you can’t just do whatever you want to do. You need someone who knows the process and how to get the approvals for you.
Kevin: Nhan, speaking about town planners, are there different types of town planners – small development, medium development, large development?
Nhan: Absolutely. I find that they fall into a couple of arenas. Firstly, there’s a handful of town planners just focused on one council, whichever council they’re in. Whether it’s Brisbane, Ipswich, Logan, or Moreton Shire, they have specialties, and they know the people in council. They know what they like. They know what they don’t like. So the first thing you want to look at is find a town planner who specializes in your particular council.
The second thing is there are town planners who are really good at what we call cookie-cutter approvals, which are risk-smart. For example, it means that it ticks all the boxes. It can go through quickly. There are some town planners that are really good at that, and anything that’s outside of that, they don’t really like or they take a long time to process. Those are the more difficult projects, and you will need a different town planner for that.
Kevin: It’s always good talking to you, my friend. Nhan Nguyen from AdvancedPropertyStrategies.com.
Nhan, thank you so much for your time.
Nhan: Thanks, Kevin. Thanks for having me.
Kevin: You may or may not have heard of the term gazumping. Probably, you might have if you’ve been in real estate or you’ve been around real estate people. Let’s find out what gazumping is because there may just be a way around this. While it doesn’t apply in all states of Australia, it certainly does in the two major states of Victoria and New South Wales, which is where a lot of our listeners reside.
Rob Balanda from MBA Lawyers joins me. Rob, firstly, let’s get an explanation about what gazumping really is.
Rob: A seasoned investor in New South Wales would probably think that was a strange question to ask because they know only too well. They’ll have probably been burned a number of times.
It’s Jewish. It’s a Yiddish term. It means, essentially, to over-charge or to cheat. Basically, what it means is when you think you have secured a property by signing a sales note in Victoria or in New South Wales, you think that property is now under your control – it’s off the market – but while your solicitor is negotiating with the seller’s solicitors to do the little ceremony called exchange of contracts, which takes place in three or four weeks after you exchange sales notes, the seller is like the prettiest girl in the class at school – if I can put it this way, Kevin – and is negotiating with two, three, or more other people to sell the same property to.
Kevin: Which school did you go to?
Rob: It wasn’t an all-boys one, mate.
Kevin: Obviously not.
So that’s gazumping. It’s still fairly commonplace, isn’t it?
Rob: I was talking to a chap at Byron last week. He was lamenting to me and complaining that he’d just put in two offers and been gazumped on two of them that week. His question to me was, Kevin, “How can I avoid this happening to me a third time this week?”
Kevin: I understand you do know that there is a way around this. What is it?
Rob: Yes. It’s not rocket science. What you need to do is remember the process in the two big eastern seaboard states is you start with a sales note, then your solicitor does all the searches of the property, all the due diligence, and then three or four weeks later, they sign off on the terms of the contract with the other solicitor, and you have an exchange of contracts.
In the big resource states, Western Australia and Queensland, that’s the same position we’re in when you make an offer. You make them in those two states via a live active contract, which once accepted, that is the same position you’re in three or four weeks later in New South Wales when you actually exchange contracts.
What you basically need to do is move to that Western Australian/Queensland position as soon as you possibly can. Don’t do all the searches and checks and due diligence before you exchange because in that three- or four-week period, that’s when you can be gazumped. You can have the seller double dealing you, triple dealing you, even.
“How do you protect yourself, then?” is the question. You’re going to instruct your solicitor to exchange contracts now. Don’t do the searches. Do them as we do them in Queensland and Western Australia – after the event. You exchange contracts subject to a little clause, just subject to a due diligence. Then that way, your conveyance and solicitor can do the searches after you’ve exchanged. That way, you’ve taken the property off the market, and you cannot be gazumped.
Kevin: Rob, it only just occurred to me that this could be one of the reasons why auctions are much more popular in New South Wales and Victoria. If you buy a property at auction there, it is unconditional. You’re not going through that sales note process.
Rob: Yes, and you can’t be gazumped. You can’t lose the property. You can’t be Dutch auctioned either. Yes, I agree with you, Kevin.
Kevin: Because in Queensland, when you buy a property, as you indicated, and you sign a contract, once that contract is signed by both parties, it’s a formed agreement. You can’t be gazumped.
Rob: No. The only person who can pull out after you’ve done that is you, the buyer. You control it.
But you get push back, though. Even when I talk to solicitors in these other states, they push back and say, “Oh, no. You can’t do that down here.” Well, in fact, you can. There’s no legal reason why you can’t instruct your solicitor to exchange contracts now subject to a due diligence; it’s just that they don’t usually do it with residential purchases.
Kevin: Why is that?
Rob: That’s because in between the sales note and the exchange of contract, they do all the searches. They apply for finance. They do the pest and building inspection. There’s no need, usually, by the time you get to exchange of contract stage in those two states that have any subject-to clause, they’ve all been satisfied. But there’s no reason why you can’t do it.
In fact, in New South Wales, you quite often see commercial contracts that are a little more complicated. They, quite often, are subject to a number of due diligence requirements, subject to a DA, subject to a feasibility, subject to securing other partners to bring them into the deal, this sort of stuff. It’s common enough with commercial and industrial sales in New South Wales. It’s just a mindset.
Kevin: Yes. In New South Wales and Victoria, if you do what you’re suggesting, which is put the due diligence clause in there and exchange the contracts, you’re effectively forcing the solicitors to do the type of transactions that are done in Queensland, which are almost on-the-spot contracts.
Rob: Yes, and there’s a couple of hundred years of history reasons for the resistance. You can see why they push back. They just don’t feel comfortable. It’s not the status quo.
But as an investor, you have to stop yourself being gazumped. If this happens to you once and even twice, it will burn you. It will leave you with a nasty taste in the mouth. It will cost you that opportunity. You will have missed out on the property. It might have cost you a thousand or a couple of thousand in legal fees and due diligence inquiries and stuff – all just thrown away.
The sales note to you as an investor doesn’t give you even a fig leaf of security against the risk of being gazumped. You have to get to exchange of contracts as soon as you can. If you do that, subject to a due diligence, you protect yourself. It’s just a matter of telling your conveyancer that’s the terms of your offer.
Kevin: But, Rob, what if you get push back through the agent from the seller saying, “Well, we don’t want that period of uncertainty?”
Rob: They’re still in a lot better position than they would be, Kevin, if they waited, signed the sales note, and waited for you, the buyer, to do all your searches for the next three or four weeks, and then exchange. Something could come up in the searches. The buyer can come back in that three or four weeks before exchange and even attempt to rewrite the whole deal.
I’d be pointing out to the seller, if you sign up now, subject to a due diligence, at least we’ve nailed the big ticket items – the price, the deposit, the settlement date. You’re in a lot better position as a seller signing up subject to a due diligence, rather than waiting for another three or four weeks for the buyer to carry out their searches.
Kevin: I would take it that that due diligence clause is going to be somewhere inside that excellent book of yours, which is called “Clauses Made Simple.”
Rob: Yes, Kevin. Thank you, and which you can acquire by going to my website, ClausesMadeSimple.com, and there are many more other helpful clauses.
Kevin: There are, indeed. I’ve been talking to the author of that book, none other than the one and only Rob Balanda from MBA Lawyers.
Rob, thanks for your time.
Rob: Thank you, Kevin.
Kevin: As we continue to look at what’s inside the November issue of Australian Property Investor magazine, my next guest is John Lindeman.
There are so many questions that need answering for you to find the best property to fit your investment portfolio. That places even more importance on planning and research before you buy. Property investing is a very complex matter and throws up difficult questions every step along the way.
John Lindeman has answered many of those questions in the November issue of Australian Property Investor magazine, and John joins us now. John is the Director of Property Power Partners.
John, thanks for your time.
John: It’s a pleasure, Kevin, and hello, everybody.
Kevin: John, I know that it’s only one element of the research cycle that we should be doing, but probably it’s one of the most requested, and that is how do I find the best growth areas?
John: That is indeed the most commonly asked question I have, as well. I’ve studied the performance of the housing market and the major indicators and dynamics for about 15 years. What I discovered was that there are three key dynamics to the performance of the housing market. I call them the three Ps, which are people, purchasing power, and properties. If you can measure those accurately, then you can indeed work out what’s going to happen.
But just to explain what I mean by those three Ps: people is really just population growth and a movement of people from one suburb or city to another. The problem with that is that we only measure these every five years in the census. At other times, the quarterly stats produced by the ABS are really just estimates, and they don’t do them at suburb level, so we really don’t know where people are moving to and from.
We’re not a police state, we don’t have ID cards, and we simply don’t track these things. In any case, these people could be potential renters or owner-occupiers, so we don’t really know. Even though we know changes in demand or if we could know that, we wouldn’t know what they were going to do when they moved.
The other one is purchasing power, which is then looking more at how many of these people do actually get financed to buy a property. You can get finance figures. They’re updated every month, but they, again, don’t go down to small areas.
The problem there is that some people, like retirees, don’t actually need finance. You have a huge number of people out there who are overseas investors who are borrowing money overseas, so they don’t appear in our finance stats, either. There are huge hidden numbers of potential buyers out there, which we’re not tracking.
I then looked at the third one, which is properties, and I realized that, yes, we can measure the changes in supply and demand, and we can do that quite accurately with data that’s available readily for all investors. It took me a number of years to work out exactly what the relationship of these were and how investors could use the information.
Kevin: Without oversimplifying something, how important is supply and demand to a growth area?
John: Well, it’s important because, as I indicated, it’s the only indicator that we can obtain fairly accurately and easily. The other ones, you can’t really measure, but you can measure supply and demand. When I looked at the relationship of supply and demand, I found out that it was over 90% accurate in terms of working out where the prices were likely to be rising or falling in a particular suburb.
Kevin: So supply really is number of houses on the market and demand is number of sales?
John: In a nutshell, that’s how it works. Yes. You’ll be looking on a listing site such as Domain, and you might go in there and look in a suburb and see how many houses are currently for sale. That tells you the supply of houses in that area.
Then you go to the Australian Property Investor magazine. At the back, in the market watch section, look up the same suburb and look up the number of houses that have been sold in the last year. It’s the first figure that appears after the suburbs, so it’s very easy to find.
Those two figures are all you really need, but the important thing is the relationship between them.
Kevin: I’m fascinated by this topic because I think there are some interesting stats that come out of this. If you look at supply and demand and you look at the number of sales, you get a factor of turnover. Is there a tipping point there with turnover when we can actually see it move from a buyers’ market to a sellers’ market?
John: There is, and again, it took me quite a few years to work out what it was. But as with all these fundamental statistics, it’s really quite simple once you know what it is. The relationship is when the number of houses currently for sale in a market is about the same as the number that was sold in the last year – that is, the number in the magazine – you have what I call a neutral market, and that means that prices aren’t moving up or down. If the number of sales is higher, then it’s a seller or a boom market, and if it’s lower, it’s a buyer or a stressed market. It was that easy.
Kevin: It is interesting. In other words, if no more houses came on the market in a particular suburb or area and there was enough there for sales for a year, that’s about the tipping point. That’s the balancing point. Has that changed much do you think, John?
John: It hasn’t. That relationship has been studied by a number of academics around the world, and they’ve looked at the American housing market and the British market. Other academics have studied the Australian market. All come to the same conclusion.
The amazing thing is that, as I said, it’s over 90% accurate in terms of forecasting the direction. To get the direction of change, what you need to do is to study the figures every month. It doesn’t take you very long – a few minutes – and of course, you have the API magazine, and you can look up the number of listings, so you can get these figures very easily, and they are a really excellent indicator of which way prices are likely to go.
Kevin: Yes, because if you go around Australia, there are some markets where there has been enough supply to last for two years, and that’s a good indicator that there’s a lot of downward pressure on prices.
John: That’s right. You can very quickly do little tests. Look at places like Moranbah and compare the number of properties sold in the last year to the number that are for sale right now, and you’ll find there’s about five years’ stock sitting there, so it’s a stressed market.
It’s very accurate and easy to do this, and it warns you off markets. If you’re not sure, if you have somebody saying, “Look, these are selling faster than hotcakes; get in quick or you’ll miss out,” you do this little analysis, and you say, “Hang on. No, this is not right. There are way too many properties on the market, and the prices can’t possibly be going up.”
Kevin: Yes. Make sure you check out John’s article. Your photo is up above it, I noticed there, too, John. That’s in the November issue of Australian Property Investor magazine.
My guest has been John Lindeman, Director of Property Power Partners. The web address is UnderstandProperty.com.au.
John, thanks for your time.
John: It’s been a pleasure, Kevin. Thank you very much.