<\/p>\n
Jan Somers<\/strong> details her reasons for advising investors to look first at investing in residential property and not commercial property and she has a one word reason.<\/p>\n What happens when property markets correct? Not crash but correct because as Michael Yardney <\/strong><\/a>points out, that is what is likely to happen.<\/p>\n Margaret Lomas<\/strong> <\/a>explains why positive cash flow property investment is not a strategy and how the same property, if owned by two different investors, could deliver a totally different outcome.<\/p>\n Finance broker Andrew Mirams<\/strong> <\/a>tells us what valuers look for in a property and then we get a valuer to tell us about adding value to a property. Gavin Hulcombe<\/strong> tells us what works and what doesn\u2019t.<\/p>\n Property investor and TV host Chris Gray<\/strong> has some tips on safe property investing.<\/p>\n <\/p>\n Kevin<\/b>:\u00a0 Earlier in the show, we were talking to Gavin Hulcombe from Herron Todd White, who was talking about what improvements to a property actually add value. There is another aspect about values, and I want to ask this question of a financier, and that is what, in his opinion, do valuers look for in a property, and what are the key things that he\u2019ll look at.<\/p>\n Andrew Mirams from Intuitive Finance joins us.<\/p>\n Andrew, thanks again for your time.<\/p>\n Andrew<\/b>:\u00a0 My pleasure Kevin. Thanks for having me.<\/p>\n Kevin<\/b>:\u00a0 In your experience, what is it that valuers look for? What\u2019s going to impact the valuation of a residential property?<\/p>\n Andrew<\/b>:\u00a0 There are a couple things that a valuer would look at. Probably the first key is the way it\u2019s presented, it\u2019s aspect, is it neat and tidy, is it in a good state of repair, or is it run down, does it need work? All that sort of things a valuer will look at.<\/p>\n If instructed from a bank, they\u2019re looking at how do they get out? If the client can\u2019t meet their payments and they have to sell it, what\u2019s their get out? How do they realize the property to get their funds back?<\/p>\n The first thing to get a great valuation is present your property really well. Tart it up. Make it neat and tidy, as if you\u2019re almost preparing it for sale. So that\u2019s probably the first tip: when someone\u2019s having a valuer come around present the property as if you\u2019re going to go sell it.<\/p>\n Kevin<\/b>:\u00a0 That\u2019s a very good point. I just pick you up on that, too, I think valuers will look at it very, very commercially so you take the emotion out of it and they\u2019ll look at it as a buyer will look at it.<\/p>\n Andrew<\/b>:\u00a0 Absolutely \u2013 and\/or an agent would want to sell it to attract the best possible price. If you\u2019re trying to get a premium for your property, please present it in a great manner. Also, it doesn\u2019t hurt to have some evidence with you of how you might have arrived at that sales figure.<\/p>\n Kevin<\/b>:\u00a0 Yes.<\/p>\n Andrew<\/b>:\u00a0 I guess in terms of getting to a figure, just what do they look at? There are a couple of methods they\u2019ll use. The first one\u2019s called a comparable or comparison method. The second one is called a summation method.<\/p>\n With the first one, really what they\u2019re looking at is your property might be a three-bedroom, two-bathroom, two-car-space in a suburb in Melbourne, Brisbane, Sydney, wherever it is. They look at like properties that are selling as yours, with a similar aspect, similar finishes, and what sort of market or what sort of salability they\u2019re going for in your market. That\u2019s pretty much how they get to a comparable.<\/p>\n On occasion when we get a difference of opinion, I guess it always comes down to a valuer\u2019s opinion of what a comparable is and what a client and\/or financier\u2019s opinion of what a comparable might be.<\/p>\n The second method I said was a summation method. Really, that takes into effect the value of your land, the value of the improvements \u2013 it\u2019s the house, pool, garage, landscaping, anything that might be in nature architecturally or anything else like that in relation to the property.<\/p>\n For example, in Melbourne, you can often get a great premium for your Edwardian, Victorian places with the beautiful lattice and things like that, if they\u2019re presented really well because they\u2019re unique and they have a rarity or scarcity factor.<\/p>\n They\u2019re the two methods that people look at, Kevin, when all the value they look at when they\u2019re looking to make a decision.<\/p>\n Kevin<\/b>:\u00a0 Do they use a combination of both of those methods or is it one and\/or the other?<\/p>\n Andrew<\/b>:\u00a0 It\u2019s probably fair to say a combination, but that\u2019s really property specific, then. It\u2019s probably fair to say they\u2019ll use the summation to look at what they think it would cost you to buy that land and put those improvements on it.<\/p>\n I think that needs to be supported by \u201cDoes that stack up in the market in terms of what other places that are similar to these level of improvements and features that are getting in the market, as well?\u201d It will generally be a combination.<\/p>\n Kevin<\/b>:\u00a0 Yes. That second one that you mentioned is something you can have very little influence over is. The size, the shape, the location, the views \u2013 all of those are built into the property, you can\u2019t change them. But you certainly can have some impact on that comparison method.<\/p>\n Andrew<\/b>:\u00a0 Absolutely. The level of your improvements and how you maintain them, as I said earlier, is probably the real key that you can have an impact over.<\/p>\n Just because you\u2019ve had your first and second child there, and that\u2019s emotional for you, that doesn\u2019t matter to the valuer. People aren\u2019t going pay a premium for your memories; they\u2019re going to pay a premium for the level of features and what the market is dictating at the time.<\/p>\n When a valuer does go in, if you said, \u201cWell, how then does a valuer arrive at this decision?\u201d<\/p>\n often before they even go to a property, in terms of a residential property, they\u2019ll do some research on the land, what size, and they\u2019ll have an idea of what like properties are doing.<\/p>\n Then they\u2019ll generally visit a property, if they\u2019re doing a full valuation, go around take some photos. That\u2019s where I have plenty of examples of valuers, if they think it\u2019s a bit short of what a client\u2019s opinion is, they\u2019ll take a photo of a crack in the wall or the dishes lined up on the sink, mate. So that\u2019s why I\u2019m saying, have it cleaned up.<\/p>\n Kevin<\/b>:\u00a0 Yes. Good stuff.<\/p>\n Andrew<\/b>:\u00a0 They\u2019ll measure the allotment of the land, they\u2019ll look at other physical improvements, and the level of the finish, and then they\u2019ll generally prepare and provide their report on their assessment. That\u2019s how they arrive at a residential valuation.<\/p>\n Kevin<\/b>:\u00a0 Very good insight there from Andrew Mirams at Intuitive Finance; and a great website, too. You can always link to that through Real Estate Talk, the website there. Andrew, of course, has his own channel and that will take you through to Intuitive Finance where you\u2019ll find a lot more blogs and articles, as well.<\/p>\n Andrew, thank you so much for your time.<\/p>\n Andrew<\/b>:\u00a0 My pleasure, Kevin. Thank you.<\/p>\n <\/p>\n Kevin<\/b>:\u00a0 Median-priced urban investment properties make the safest investment. That\u2019s according to Chris Gray, one of our experts, who joins me.<\/p>\n Good day, Chris.<\/p>\n Chris<\/b>:\u00a0 Hi, there. How are you doing?<\/p>\n Kevin<\/b>:\u00a0 Good, mate. Chris what are your tips for investing in these areas; these median priced areas?<\/p>\n Chris<\/b>:\u00a0 I think the main thing is to use the research companies like Residex, RP Data, or SQM Research \u2013 all of those guys. Those guys are people who study the markets for decades and decades, so they have a really good idea.<\/p>\n You can then suddenly use those guys to find out what are the blue chip areas, what are the median prices in those areas, and then check your affordability to see what you can actually afford.<\/p>\n I know Residex for one \u2013 and I never get a dollar for this \u2013 they do a top 100 report for rents or capital growth, which costs about $250. I reckon it\u2019s a nobrainer to buy one of those reports and just double-check what you\u2019re thinking of investing to see where it comes up in their top 100.<\/p>\n Kevin<\/b>:\u00a0 Well, based on your experience, where do you find the properties that actually perform better than others?<\/p>\n Chris<\/b>:\u00a0 I think the main thing to realize here is I\u2019m looking 10 to 30 years, so I\u2019m not looking for the latest, greatest thing that might flip for a year or so. I typically stay away from the CBDs because there\u2019s no limit of supply. You can keep building these massive tall towers, and they keep getting taller and taller. There\u2019s a limited demand because not many people want to live in the heart of the city.<\/p>\n Typically, it\u2019s my general rule of thumb to be roughly 5 to 15 Ks from the capital city anywhere in the world, because that\u2019s where most young people with money want to live. It\u2019s close to the beaches, the caf\u00e9s, the parks, the schools, all of that kind of stuff. Generally you get [1:36 inaudible]<\/b>, so if there\u2019s no supply and there\u2019s plenty of demand, basic economics says that\u2019s going to lead to price rises no matter what\u2019s happening in the economy.<\/p>\n Kevin<\/b>:\u00a0 Tenants being happy are pretty important to you. We spoke to you a few weeks ago about a recessionproofing your investment. One of the points you made is to make sure that your tenants are happy. If you do, then you can apply those rent increases, as well, Chris.<\/p>\n Chris<\/b>:\u00a0 Exactly. My target market for my properties is to get 20 to 35yearold suits, because they, basically, work in the city, they probably earn sixfigure salaries, they probably have wealthy parents, they have massive disposable incomes, and they worry about where they want to live.<\/p>\n They don\u2019t want to commute. They don\u2019t want to spend hours doing stuff. They want to be next to the parks, the clubs, the restaurants, and the leisure, so I think they\u2019ll pay whatever price it takes.<\/p>\n What I even knew when I invested 20odd years ago when I was 22, was I thought if you have a good job you\u2019re going to pay your rent because you don\u2019t want your boss finding out that you haven\u2019t paid your rent and you\u2019re deep in debt. That attitude seems to have worked for the last 20 years.<\/p>\n Kevin<\/b>:\u00a0 You\u2019ve developed quite a good portfolio over the years. I know even from this chat that you look to the long term. How important to you is it that you look at an investment property that if you needed to sell it, it would sell well \u2013 that is, it\u2019s popular in that particular area?<\/p>\n Chris<\/b>:\u00a0 I reckon I could sell my whole portfolio within a week, and I reckon I\u2019d get 95% to 100% of the value, maybe even 105%. Again, one of my keys is that I buy at the median price level for that area.<\/p>\n Kevin<\/b>:\u00a0 Yes.<\/p>\n Chris<\/b>:\u00a0 I want 80%of the population to be able to afford to buy it or rent it, because then I know it\u2019s in massive demand.<\/p>\n Kevin<\/b>:\u00a0 Yes. We quite often see medians improve, and people think that this is an improvement in price, but it\u2019s actually just a reflection of the fact that people are buying in that popular price sector. While it may increase in price, it doesn\u2019t necessarily mean that values are going up.<\/p>\n Chris<\/b>:\u00a0 Yes. I bought in 1990 just before the Olympics when I first immigrated to Australia in Fuju, a few beaches down from Bondai. I paid $360,000. Everyone said, \u201cChris, you\u2019re mad. You\u2019ve paid over the odds. It\u2019s going to collapse after the Olympics.\u201d\u00a0 But I knew young professionals could spend that kind of money.<\/p>\n Now that same unit is a million dollars 15 years later, so it\u2019s doubled and then some maybe another 50% or so. A million dollars sounds like a lot of money, especially to people outside of Sydney, but for the local area, people can afford it.<\/p>\n At 4% or 5% interest rate, it\u2019s $50,000 a year mortgage. If you get two young 30yearolds on $100,000 salaries, they can afford $50,000 a year in payments.<\/p>\n Kevin<\/b>:\u00a0 Chris\u2019s website is http:\/\/www.YourEmpire.com.au<\/a>.<\/p>\n Chris Gray, thanks for your time.<\/p>\n Chris<\/b>:\u00a0 My pleasure.<\/p>\n <\/p>\n Kevin<\/b>:\u00a0 I often wonder with property whether or not there are any improvements you can add to a property that would always add value, and which, in fact, are the ones that don\u2019t add value. I\u2019ve spoken to a lot of investors who believe putting in a pool is going to add a lot of value, maybe adding another bedroom might do just that.<\/p>\n Let\u2019s try and find out from a valuer what he believes does actually give you extra bang for your buck when you\u2019re doing renovations.<\/p>\n Gavin Hulcombe is the chairman of Herron Todd White Trading and also Queensland managing director for Herron Todd White.<\/p>\n Gavin, thanks for your time.<\/p>\n Gavin<\/b>:\u00a0 Morning.<\/p>\n Kevin<\/b>:\u00a0 Gavin, in your experience, are there any areas of a property that will always add value?<\/p>\n Gavin<\/b>:\u00a0 I think I\u2019m always a bit cautious about saying always, but I think there are areas where you have the best potential for adding value. I think if you start focusing on the kitchens, the bathrooms, outdoor living areas, that\u2019s what really draws a lot of the lifestyle decisions that people make.<\/p>\n That\u2019s what they see as being most important, so I think if you do it right and if you do it well and you don\u2019t get too carried away in terms of over-capitalization, I think they\u2019re the areas that I\u2019d be concentrating on.<\/p>\n Kevin<\/b>:\u00a0 Are there some areas that are purely there for lifestyle that probably won\u2019t add any value? I\u2019m citing here pools as an example.<\/p>\n Gavin<\/b>:\u00a0 Of course, that\u2019s always the first one that comes to mind. That\u2019s a lifestyle decision not a financial decision in most cases. They look great, they\u2019re great in the summers and those sort of things, but it is really a lifestyle decision; it\u2019s not a financial decision.<\/p>\n As a general rule of thumb, you would like to get about half your money back on a pool, depending on where it is. Tennis courts can be a bit the same, albeit you don\u2019t fit tennis courts on most suburban blocks. Yes, there are a few things like that, which are really about improving the livability rather than adding value.<\/p>\n Kevin<\/b>:\u00a0 What about things like double garages or even adding a bedroom to a property?<\/p>\n Gavin<\/b>:\u00a0 Look, it\u2019s one of these things that is a bit difficult to generalize. Certainly, the second garage is really important, particularly if it\u2019s a family area and the expectation is that you want to be able to garage two cars. Then yes, in those areas, the second garage is really important.<\/p>\n There are other areas where lifestyles are changing. People are saying, \u201cWell, actually I don\u2019t need a car.\u201d If you\u2019re living near city locations and everything\u2019s within walking distance or there\u2019s good public transport, then the second car is less important. Again, you probably just have to do your research and understand the local drivers of the market, rather than getting caught up in generalizations.<\/p>\n Bedrooms, they\u2019re often expensive. Any additions like that often will cost you more on a rate per square meter than what you could buy the original property for. But I think one of the things to really take into account is the cost of selling the house and buying another house verses adding additional rooms or extensions.<\/p>\n On a $500,000 house, the transfer costs alone are something like 7.5% of that, so it\u2019s a substantial cost that you lose just by selling a property and buying another one. Sometimes if you step back and say actually, if you reinvest that money into an extension or modifications, you actually end up better off rather than selling and buying again.<\/p>\n Kevin<\/b>:\u00a0 I think you make a very good point there, too, and that is looking at some of the additions you can make to a property. It probably depends on its location. As an example, an outdoor living area is probably going to be more attractive in, say, a Queensland market as opposed to a Victorian market or an area where it\u2019s a lot colder. Would that be true?<\/p>\n Gavin<\/b>:\u00a0 Absolutely. And even aspect \u2013 if it\u2019s a northeast aspect where you\u2019re adding your living area, then that becomes very livable. If it\u2019s direct west facing or it has no outlook, then the added value is perhaps limited.<\/p>\n Yes, it is the specifics, but as you say, quite rightly, if this is an area where it really does facilitate outdoor living, ala Queensland, then that\u2019s where people want to be, and certainly, they will pay more for it there then somewhere where you\u2019re exposed to the elements and it\u2019s just not a very pleasant environment to sit.<\/p>\n Kevin<\/b>:\u00a0 Gavin, thank you so much for your time. It\u2019s been great talking to you.<\/p>\n Gavin<\/b>:\u00a0 You\u2019re welcome. Thank you.<\/p>\n <\/p>\n Kevin<\/b>:\u00a0 Is Australia\u2019s property market really a precarious house of cards waiting to topple? Well, there\u2019s a lot of debate at present raging. Some say that the future for property is bright, while others suggest that the markets are set to crash.<\/p>\n Obviously, if you\u2019re considering investing in property or about to buy a home, it would be really good to know who\u2019s right \u2013 and history does actually teach us some great lessons. What can we learn from the past that we can take forward into the future?<\/p>\n Michael Yardney<\/span><\/a><\/span> from Metropole Property Strategists<\/a> has been looking at this for us, and he joins me.<\/p>\n Hi, Michael.<\/p>\n Michael<\/b>:\u00a0 Hello, Kevin.<\/p>\n Kevin<\/b>:\u00a0 Michael, what lessons can we learn from the past? The market probably isn\u2019t always going to move forward.<\/p>\n Michael<\/b>:\u00a0 No.<\/p>\n Kevin<\/b>:\u00a0 There are times in the past where it has actually checked. What have we learned from that?<\/p>\n Michael<\/b>:\u00a0 Well, no, it\u2019s not going to keep moving forward, Kevin. But I guess the first lesson is our markets are fragment. There\u2019s not one property market. There\u2019s where people get it wrong to start with.<\/p>\n Not only is each state its own state of its property cycle, but, Kevin, even within each state there are different market segments behaving differently. Some of them are geographic, some of there are different price points or different types of property.<\/p>\n The first lesson is there isn\u2019t one property market, and we have to define more clearly where we\u2019re talking about<\/p>\n Kevin<\/b>:\u00a0 You know, there might be another lesson here, too, Michael. Firstly, is there a bubble? And just because there may be a bubble doesn\u2019t always necessarily mean that it\u2019s going to burst.<\/p>\n Michael<\/b>:\u00a0 Well, some people say it\u2019s a bubble because house prices are high and unaffordable to some. But you\u2019re right, Kevin, that doesn\u2019t mean it\u2019s a bubble, and it doesn\u2019t mean it\u2019s going to burst.<\/p>\n I think we could take some lessons from what\u2019s happened in the past, because it\u2019s likely that the future will repeat itself in one form or another.<\/p>\n Kevin<\/b>:\u00a0 Has there ever been a time, Michael, where the market has checked?<\/p>\n Michael<\/b>:\u00a0 Well, the market\u2019s corrected. If we want to be honest about crashing \u2013 in other words, where it\u2019s dropped significantly, albeit for a short time \u2013 it was after the Second World War and during the Great Depression.<\/p>\n Our financial markets were very different then. The world\u2019s circumstances were. In the 1940s, house prices dropped 17% over a twoyear period. But, Kevin, they jumped back and grew strongly afterwards. And you can understand during the war why that could happen.<\/p>\n Of course, in the Great Depression when unemployment was high, property prices corrected significantly, as well. But, Kevin, no one is suggesting there\u2019s a depression on the horizon for Australia. Sure, our economy is slowing a bit, but it\u2019s still the envy of most developed nations.<\/p>\n Kevin<\/b>:\u00a0 Michael, what\u2019s happened at other times when the market has actually corrected?<\/p>\n Michael<\/b>:\u00a0 Corrected is what normally happens, and to understand what\u2019s ahead, let\u2019s have a look. Sydney was in a terrific property boom between, probably, late 1990s and the end of 2003, early 2004. It was one of the best performing property markets for that period of time; helped by the excitement of the Olympic Games.<\/p>\n But after this boom, the Sydney property market corrected. Kevin, it didn\u2019t collapse. It just corrected. Property values dropped from their peak by about 9% or so, but, Kevin, it didn\u2019t happen instantly, either \u2013 it took 23 months to play out \u2013 and of course, not all parts of Sydney\u2019s property market dropped in value equally.<\/p>\n Again, if you look at what happened in Brisbane and Perth where values peaked in around 2008, they had a really good run in the middle of the last decade, but again, property price didn\u2019t collapse. They just sauntered along for a while allowing fundamentals to come back into alignment.<\/p>\n Much the same happened in the 1990s. I know you and I lived through those difficult times, the recession we had to have after a huge property boom in the 1980s, and at that stage interest rates rose to 17%.<\/p>\n Kevin<\/b>:\u00a0 I know. Yes.<\/p>\n Michael<\/b>:\u00a0 But, again, properties didn\u2019t collapse; they just flatlined for a few years as affordability, supply and demand, and all those other economic fundamentals caught up.<\/p>\n Maybe just going back in our memories, most of us will remember, not that long ago, property prices peaked in late 2010, and that was the last time the Reserve Bank pushed up interest rates to slow our property markets down. In general, in the capital cities property prices gently eased; they didn\u2019t plummet.<\/p>\n Now, of course, if you\u2019re looking at certain very specialized markets, like the mining towns, like the holiday destinations, Kevin, like some regional areas where there isn\u2019t a lot of depth to the market by owner-occupies, yes, in those locations, property markets can drop in value significantly \u2013 and we\u2019re seeing that. But in the big locations, Kevin, unlikely to have a crash.<\/p>\n Kevin<\/b>:\u00a0 Okay, Michael, thank you for your time. We will catch up and we\u2019ll talk more about this in future shows, as well.<\/p>\n That\u2019s for your time, Michael.<\/p>\n Michael<\/b>:\u00a0 A pleasure, Kevin.<\/p>\n <\/p>\n Kevin<\/b>:\u00a0 Inside Jan Somers\u2019 book \u201cMore Wealth,\u201d chapter eight actually deals with a very interesting subject, and it\u2019s a question we get asked from time to time: why should investors choose residential property rather than commercial property?<\/p>\n The author of that book joins me. Jan Somers, hello. How are you?<\/p>\n Jan<\/b>:\u00a0 Hello, Kevin. How are you?<\/p>\n Kevin<\/b>:\u00a0 Fantastic. Thank you, Jan.<\/p>\n Now, the reasons behind that?<\/p>\n Jan<\/b>:\u00a0 Well, there\u2019s probably just one word and that\u2019s called risk.<\/p>\n Kevin<\/b>:\u00a0 Yes.<\/p>\n Jan<\/b>:\u00a0 Risk, just like the insurance ad, things become risky and they\u2019re not worth doing. Now, it doesn\u2019t mean to say you can\u2019t make money out of investing in commercial property, but in my experience and my observations, it\u2019s a lit bit hitandmiss \u2013 not a little bit, very much hit and miss.<\/p>\n Kevin<\/b>:\u00a0 Do you need a different mindset for it, Jan?<\/p>\n Jan<\/b>:\u00a0 Yes, you need a personality that can cope with the ups and downs of a commercial market.<\/p>\n Kevin<\/b>:\u00a0 Yes. Because unless you get that tenant and property mix right, you can have some pretty long vacancy periods, can\u2019t you?<\/p>\n Jan<\/b>:\u00a0 Very long vacancies. In fact, I can pinpoint back in 1992 when I was traveling a lot and back and forwards to Brisbane and Sydney and Melbourne. I don\u2019t think I\u2019ve ever seen so many vacancy signs in my whole life. In fact, I was virtually paying people to come and rent their commercial premises in Melbourne.<\/p>\n Kevin<\/b>:\u00a0 When you have to cut deals in commercial, as well, because you go into such long leases, these deals can really drag their heels for you for quite a number of years. It also impacts the value of the property, as well, Jan.<\/p>\n Jan<\/b>:\u00a0 Well, exactly, because the value of a commercial property is based on its actual lease, so if you have a property that\u2019s vacant for a long period of time, that certainly isn\u2019t worth very much as far as the value of that property.<\/p>\n Kevin<\/b>:\u00a0 Is it wise, do you think, Jan, to have a balanced mix, or do you think it\u2019s either one or the other?<\/p>\n Jan<\/b>:\u00a0 I tend to go for one or the other. I would probably put some even holiday units and apartments verging on that commercial rental frame, because it\u2019s very much up and down, too, and depends very much on the economy. It doesn\u2019t matter whether the economy is up or down; people need somewhere to live, but they don\u2019t necessarily have a place to go to work.<\/p>\n Kevin<\/b>:\u00a0 Yes.<\/p>\n Jan<\/b>:\u00a0 I tend to stick to residential. I would have to admit, whenever I ventured any further, I can\u2019t say exactly I\u2019ve got my fingers burned, but then the pie hasn\u2019t grown, either.<\/p>\n Kevin<\/b>:\u00a0 Yes. Is there a better time to be looking at commercial rather than any other time, or does it depend on the marketplace?<\/p>\n Jan<\/b>:\u00a0 Yes and yes. There is a better time, and it does depend on the marketplace; but I don\u2019t know when that time is, and I doubt that anyone knows when that time is. I guess the time to buy is when the prices are down, and that\u2019s when no one is renting.<\/p>\n If you could have bought those properties that I saw vacant in Melbourne back in 1992 and held on to them for a few years, you would have made significant gains. But, of course, no one wants to buy when the place is vacant, and of course, that\u2019s the time to buy because the value of the property has been deflated so significantly.<\/p>\n Kevin<\/b>:\u00a0 I wonder how many people actually are in business and decide that it would be a good idea to buy their premises, and it probably is for that reason.<\/p>\n Jan<\/b>:\u00a0 I think it is. I think it is. It\u2019s probably about the only time that it is a good time to buy property \u2013 when you have a business and you\u2019re the owner of that premise, because you get control over it. You don\u2019t get told what to do, what you can do, what the rent is.<\/p>\n People who do own their own land and buildings, when they have a business, it\u2019s probably one of the few times I\u2019d recommend that you do own commercial property.<\/p>\n Kevin<\/b>:\u00a0 Indeed. It\u2019s a great read. It\u2019s called \u201cMore Wealth.\u201d It covers a whole multitude of topics, and you can access that book by going to Jan\u2019s website, somersoft.com.<\/p>\n Jan, always a pleasure talking to you. Thanks for your time.<\/p>\n Jan<\/b>:\u00a0 My pleasure, Kevin.<\/p>\n <\/p>\n Kevin<\/b>:\u00a0 I remember talking to Margaret Lomas from Destiny Financial Solutions about this time last year. I said, \u201cMargaret, how is cash flow? How do you see cash flow as a strategy?\u201d and you rightly pointed this out to me.<\/p>\n Hi Margaret, how are you going?<\/p>\n Margaret<\/b>:\u00a0 I\u2019m going really well.<\/p>\n Kevin<\/b>:\u00a0 Cash flow is not a strategy; it\u2019s more an outcome.<\/p>\n Margaret<\/b>:\u00a0 Exactly. I know when we did talk about this last year, you asked me whether or not it was possible for people to use positive cash flow as strategy for buying property, and I said to you then that the thing about positive cash flow is that it isn\u2019t a strategy; it is simply a tax outcome. And because all property is different, then it\u2019s a tax outcome that will also be different for each individual investor.<\/p>\n Let me give you an example. Let\u2019s say you and are were going buy a property and we found a property next door to each other. We\u2019re going to buy them to the same price, they would rent for the same amount, and fairly similar properties.<\/p>\n But Kevin, you\u2019re very wealthy, and we all know how much money you earn, so you\u2019re in that top tax bracket. And I\u2019m a poor, struggling writer, so I don\u2019t pay very much tax at all. I\u2019m right in that bottom bracket.<\/p>\n Also, you happen to get one that has an upgraded kitchen, it\u2019s had a brand new bathroom, so you\u2019ve got a bunch of onpaper deductions that I can\u2019t get out of my property because I don\u2019t have those kinds of deductions available.<\/p>\n The bottom line for both of us will be very, very different. Even though we\u2019re getting the same purchase price and the same rent return, you may well get a positive cash flow because you\u2019re going to get back more of your tax dollars because you pay more tax in the first place, plus, you have all that onpaper, which you don\u2019t pay anything out for but you get some of your tax dollars back for.<\/p>\n On the other hand, I haven\u2019t paid much tax, so there\u2019s not much to get back. I\u2019ve got nothing on paper, so my property is likely to be negative cash flow because I didn\u2019t have those tax dollars to plug up the gap between income and outgoings.<\/p>\n Kevin<\/b>:\u00a0 It\u2019s a very good example, Margaret.<\/p>\n Let me ask you this question. People who look for positive cash-flow properties, would you say they\u2019re more risk adverse \u2013 they just don\u2019t want to take that risk?<\/p>\n Margaret<\/b>:\u00a0 Maybe. Let\u2019s just sort of talk about how people go through that process, because people call me all the time and say, \u201cLook, I want to buy a positive cash flow, and I only want to buy a positive cash flow.\u201d<\/p>\n What that mean is they\u2019re seeking a property that\u2019s going to be able to give them enough money that they\u2019re not really dipping into their own pocket. That\u2019s really what their strategy is and that\u2019s what they\u2019re aiming to achieve.<\/p>\n Now, we need to understand, as I just said, all properties are different. There is a basis that you can start on, though. Some properties, no matter how much tax you get back, will probably still be negative if it\u2019s got really low yield.<\/p>\n And if we\u2019re in a really low interest rate environment, then that makes it hard to get positive cash flow too, because the more money you pay in interest, then the less money you\u2019re going to have left over to meet all of your other costs.<\/p>\n If we\u2019re in a low enough interest rate environment, and if we also can find areas where the rent returns aren\u2019t too bad \u2013 say 5 to 6% in the minimum \u2013 then we could also find properties that have a decent amount of onpaper depreciation \u2013 so they\u2019re properties that are a little bit newer \u2013 then you have a better chance of getting a positive cash flow.<\/p>\n Now, the other thing that people have to understand is that first of all, it\u2019s unusual and unlikely for you to find a positive cash flow property that\u2019s positive cash flow from day one. When you first buy a property, remember that at that point in time your expenses are going to be as high as they\u2019re ever going to be, and your rent is going to be as low as it\u2019s ever going to be.<\/p>\n Over time, rent goes up and expenses go down because you start to repay debt. So a property that\u2019s negative cash flow can become positive cash flow within a couple of years of buying it. That\u2019s the first thing.<\/p>\n An investor should probably seek out a property that\u2019s likely to become positive cash flow as soon as possible, because it\u2019s already got good rental yield. But the trap that investors fall into is in looking for this positive cash flow, they often buy areas that don\u2019t have anything else going for it.<\/p>\n Kevin<\/b>:\u00a0 Yes.<\/p>\n Margaret<\/b>:\u00a0 The important thing to understand about cash flow is cash flow might keep you in the market because it means that you are not financially burdened by a property, but unless there are other things about that area, such as the growth drivers that I always talk about, then if the property never grows, then you\u2019re not going to achieve anything because it\u2019s the growth in the asset that get you out of the market when you retire. You have the build up a net worth in order to be able to afford to leave the paid workforce.<\/p>\n Kevin<\/b>:\u00a0 Now, you talked about growth drivers there. You and I have chatted on previous occasions, and if you only go back and search through some of the interviews that I\u2019ve done with Margaret, we actually do touch on those key drivers.<\/p>\n Margaret<\/b>:\u00a0 There\u2019s so much information out there at the moment, yet still, we have too many of the property experts hawking the same message. They talk about things that really are relevant in terms of whether or not a property is going to perform well for you.<\/p>\n People still buy property emotively, as well, so they still want to buy property according to one they can get for a good price, or one that they think they can get a rental return for without having to look at what really drives growth and the importance of those growth drivers.<\/p>\n Kevin<\/b>:\u00a0 Margaret, once again, thank you for your time. It\u2019s always great talking to you.<\/p>\n Margaret<\/b>:\u00a0 Thank you.<\/p>\n","protected":false},"excerpt":{"rendered":" Jan Somers details her reasons for advising investors to look first at investing in residential property and not commercial property and she has a one word reason. What happens when property markets correct? Not crash but correct because as Michael Yardney points out, that…<\/p>\n","protected":false},"author":176692473,"featured_media":6560,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[24],"tags":[101],"class_list":["post-25259","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-shows","tag-podcast"],"yoast_head":"\nTranscripts:<\/h4>\n
Andrew Mirams<\/a><\/h3>\n
Chris Gray<\/h3>\n
Gavin Hulcombe<\/h3>\n
Michael Yardney<\/a><\/h3>\n
Jan Somers<\/h3>\n
Margaret Lomas<\/a><\/h3>\n