Highlights from this week:
- How you can use the short term let revolution to fund a pension
- Finding ‘off market’ property – the pros and cons
- A breakthrough in funding for young people
- Opportunities to earn extra money from spare rooms and driveways
- Young investor talks about the mistakes he has made in the process of building his portfolio of 5 properties
- Risks v benefits to letting people into your home essentially from the internet
- Creating property wealth in any market
- Tips for people who want to rent out their property
A breakthrough in funding for young people – Greg Dickason
Kevin: “Housing affordability” are two words probably on the lips of most people right now – people talking about “How can we make our houses more affordable for Australian property purchasers?” Joining me now to talk about this, Greg Dickason from CoreLogic.
Greg, what sort of products are coming out now that deal with affordability, and what can we do about this?
Greg: Kevin, I think there are quite a few coming out, especially in the fintech space – and “fintech” stands for “financial technology.” There are a lot of start-ups around the country and from the U.S. that are coming in that are looking at new ways in which they can use financial products that make houses more affordable for us.
Some of those are looking at things like when you’re downsizing, do you need to sell your whole house or can you sell parts of it and rent it back and allow your new starters or first-home buyers to buy a portion of your house, for example? Others are looking at as a first-home buyer, are there new ways in which I can get into the market ready to buy a unit or a house or portions of a house?
There are lots of different technologies coming out there, especially ones that are also looking at credit and how they can actually look at your credit and novel ways in which they can score you as a borrower.
Kevin: Could you give me some examples of some of these sites that we can have a look at?
Greg: Absolutely. One of the sites from the U.S. looks at your academic record, Kevin, and from the back of your academic record, they will lend to you. This is before you even have a credit history. That enables people coming out of university, for example, to get credit early and potentially to buy into the housing market very early.
Kevin: Greg, what’s the name of the website?
Greg: Kevin, it’s called SoFi, which stands for Social Finance – that’s SoFi.com. It’s really interesting because they have started to really understand their market, which is students or people who have just graduated, and they have lent to them and worked out that they’re much lower credit risks than you’d otherwise think. They’ve started with personal loans but they’ve moved into mortgages. You can expect them to come to Australia soon. They have a large amount of capital to do that.
Kevin: This I imagine will be a great boost for first-time buyers and particularly students.
Greg: Absolutely. If you think about it, you may be a hard working student who’s achieved very well but you’re still very much starting out in life. So for somebody like SoFi to come along and say, “Hey, work with us. We’ll lend you money because we trust that your work ethic is going to mean you’re going to be successful in life.” That’s a great start.
Kevin: Watch out for it. It’s called SoFi.com.
Just while I have you there too, Greg, I’ve quite often heard about the number of bedrooms that are available around Australia or vacant. Is that an opportunity for us to maybe take up some of this accommodation and make it a little bit more affordable?
Greg: I think that it is, Kevin, and I think that’s where the sharing economy with things like Airbnb but other newer technology platforms are going to make a real difference. There are 27 million bedrooms in Australia, so considering there are 24 million Australians, that means there are three million more bedrooms than there are Australians in our country, never mind the fact that some people share a bedroom. That really opens up do we have a supply problem or do we just have an allocation problem?
Kevin: I did see a recent survey, and we mentioned it in the show, too. A Trip Advisor survey showed that 67% of travelers plan to stay in a vacation rental in 2016, and this is largely on the back of things like Airbnb. It certainly is a growing industry, isn’t it?
Greg: It is. And if you look further than that, there are 7 million garages, and if we ever get to the point where cars are self-driving and they don’t need to park at home and they just go out and earn you money when you’re not using them, what are we going to do with our 7 million garages?
Kevin: It’s interesting you say that because I also had a talk to someone else out of the States who was telling me that now it’s quite common for them also to lease out driveways – accommodation places for cars. So we’re seeing a lot more of this happen, this community sharing and this opportunity to earn a bit of extra income as well, Greg.
Greg: Yes, exactly. It’s pretty exciting, and I think it may be some of the ways we answer our first-home buyer supply problems in our country.
Greg Dickason from CoreLogic. Thank you so much for your time.
Greg: Thanks, Kevin.
Property revolution is here now – Gayle Roberts
Kevin: We’re hearing a lot of publicity about Airbnb. Let me read some stats for you, just to demonstrate how big this industry is. The digital sharing economy, one of the most lucrative parts of the industry is short-term rentals. A recent TripAdvisor survey showed that 67% of travelers plan to stay in a vacation rental in 2016.
The exponential growth of firms like Airbnb is a testament to the just how rapidly this industry is growing. To give you an idea, in 2010, 47,000 guests stayed in an Airbnb accommodation. By 2015, it had reached 17 million booked short-term stays. That’s a growth of 353 times. By 2018, it’s estimated that 20% of accommodation bookings worldwide will be in short-term rentals. Now, the reason I’m mentioning this is to just demonstrate how rapidly this has grown.
There’s a book that’s available called Room for Profit, which is written by a couple of people, one of whom will be my guest in just a moment, where they’ve interviewed dozens of rental experts around the world just to get a picture for how big this is. One of those is Gayle Roberts, who joins me.
Gayle, thank you very much for your time, talking to you from the U.K., so I appreciate you getting up nice and early to talk to us. Thank you for your time.
Gayle: Oh, no. Thank you. Thank you for having me. It’s nice to be able to talk about the book, Room for Profit.
Kevin: Now, you have a legal background, but tell me how you went about writing this book and why did you do it?
Gayle: I run a short-term rental agency in Nice in France. I’ve done this for 10 years now, so we have 180 properties on our books. This is largely people having a second home who rent it out when they’re not using it, so we take bookings for between 20 and 40 weeks a year on their apartments.
I get asked an awful lot of questions all the time about how to do it better, “What can we do for extra marketing? What do I need to do to just get the best annual return as I can?” So I decided that it was better to write a book and let everyone know about this massive industry now, because it’s just become a revolution in the last couple of years. There are so many people doing this now.
Kevin: Of course, in Australia right now, there’s a lot of talk about what seniors should be doing with their large houses, incentives to downsize, and so on. This could be an option for them. How can you use that short-term let revolution to fund a pension or to avoid downsizing?
Gayle: Yes, definitely. A lot of my clients have bought a second home in Nice because then after 10 or 20 years, they can sell and fund the retirement, and the mortgage has been paid by the guests.
But if you’re in a position where you now need to think about downsizing so that you can retire, then instead of downsizing, you might be able to just rent out your spare room, convert the garage space, and earn an income so that you don’t need to leave the house that you’ve called home.
Talking of Australia, one of the things we mention in our book in the first chapter is about Parkhound, and Australia is one of the revolutionaries of the virtual matchmakers, because Parkhound are the ones who set up the renting of the driveways. It might be as simple that if you have a really good driveway, you don’t need to downsize your house, you just rent out your driveway – and how easy is that?
Kevin: I must admit that’s something new. I hadn’t heard about that.
Tell me about the risks and benefits. I do want to talk to you about the legal issues, too, but the risks and benefit of letting people into your home, well, especially from the Internet.
Gayle: With Airbnb and sites likes ours, there are checks. With Airbnb, they’re looking at your Facebook account, your social media accounts, and then you have your bank information there, so there’s not an awful lot of risk.
Of course, there’s a risk in everything that we do. When we get in our cars and we put on our seatbelts, we’re taking a risk of driving down the road. The damage risk in real terms is very, very small. I’ve been doing this for over 10 years now. I’ve welcomed 15,000 sets of guests through our rental portfolio, Nice Pebbles, and our damage statistic is around 1%.
Of course, you have to be realistic about it. You’re going to find that you have broken glasses, missing teaspoons, but the advantages so outweigh the risk. If you’re going to be nervous about the what-ifs in this new economy, then I can absolutely guarantee that you’re risking losing, perhaps, $10,000 this year but you probably would make that far more by just accepting that the risk is small and trying to join into this economy.
Kevin: I’m talking to Gayle Roberts, who is one of the authors of this book called Room for Profit.
Gayle, can I just ask you about tips for people who want to rent out their property? What would be your advice for them?
Gayle: I think, first of all, you need to just put yourself into your guests’ shoes. That’s absolutely paramount. I couldn’t talk about the whole of Australia, it’s so very different, but why would people want to come and be in your area? What’s your location got about it? Then you’d rent your space differently for a 20-year-old than you would for a 50-year-old, so who is going to come to your space?
And then make sure that you can make it as appealing as possible for the people who are most likely to come and stay. What would you want if you are paying top dollar to stay in your home? Things that everyone can do are Netflix, coffee machines – these are easy ways to impress guests – and making the most of the space that you have.
That even could just be a spare room. If you’re next to a university, then it might be that you can open up your spare room or your garage to people visiting their son or daughter at the university or a student for the term.
Over in England, there are quite a lot of people now renting out their spare room for their children who’ve left and gone to university and then bringing in another quasi son or daughter into their home for a few years, which is funding their child’s education, because we all have those costs now.
Kevin: Just before I leave this conversation with you, Gayle, I do want to talk about some of the legal issues, because I think this is something we need to be very aware of, to make sure that we take good legal advice before we go letting people into our homes, find out about bonds and leases and so on, but also about insurance.
Can you run us through just a couple of the legal issues as you see them?
Gayle: First, renting out a room is usually okay on your insurance, but you’re going to have to check your terms and make a phone call to them. And it could even be the same for your mortgage company. If you have a mortgage, do check with them.
One of the big things at the moment – I know that New South Wales has looked into it – is you have to make sure that you’re covered under the local environmental plan of the particular council to see whether you can be letting a whole property as a holiday rental.
It’s also something that the governments I find are embracing. Over in Nice, everyone has to apply for permissions but everyone got the permissions because the government understand that if they don’t join in with this, then they are going to lose a lot of tourists, because it’s what tourists want now. They want to be able to go and stay in a home from home rather than a very bland hotel.
Everyone can work together, but the governments want their taxes, the insurance companies want to make sure that they’re not going to be in any way liable for guests burning down the home and that you have the right safeguards in check.
Kevin: They’re all issues that need to be looked into, but I want to thank you, Gayle, for joining us from the U.K., getting up nice and early to talk to us. We do appreciate that. The book is called Room for Profit.
Where are we able to get a copy of that?
Gayle: You can get this on Amazon.com.au, and the price is currently $9.99.
Kevin: Okay. Money well spent.
Gayle, thank you very much for your time.
Gayle: Thank you very much, Kevin.
Off market opportunities and traps – Michael Yardney
Kevin: You’ve probably heard of the term off-market property, and as the name implies, it’s giving you the opportunity to buy a property that’s not clearly advertised, so therefore you may get it at a good price and you certainly won’t go into competition with a lot of other people.
But is it a reality? Are they around and is this the time for the property cycle when you’ll be able to pick one up? That’s a question I want to ask Michael Yardney from Metropole Property Strategists.
Michael, I know that you’re in the market looking at properties on behalf of your clients all the time. Do you really ever come across many off-market properties, and if so, how do you find them?
Michael: Good question, Kevin. The answer is yes but they fall into two categories. Most are really pre-market opportunities. We get the opportunity to inspect and make an offer on a property before it hits the Internet. It’s really not off-market but it’s that period of time when an agent has to get their plans drawn up to put on the Internet, get the photos done. What they’ll often do is ring their A-class clients first and then their B clients on their list, and then they’ll tell the other people in the office about it, and eventually it’ll go on the Internet, but that’s a pre-market opportunity.
And Kevin, there are occasionally true off-market opportunities where, for various reasons, the vendor doesn’t want to make the sale of their property public knowledge.
Kevin: Wouldn’t an agent like to take a property to market because – a couple of reasons – one, it gives them a chance to maybe put it in competition with a few buyers, but also it gives them some publicity, Michael?
Michael: Yes. A lot of agents would prefer that, and in many instances, it’s the best way to sell a property because it’s going to have competition. But interestingly, some agents are keen to make a quick sale because they have complete control of the sale.
Let me explain it differently. If they run it in a normal campaign, the listing agent may get the initial commission but then they have to share it with somebody else in the office who brings in the client. That’s why I suggested that for the first few days, they don’t tell other people in the office about it and they give it to their A-list of clients and have complete control.
Kevin: Michael, in that case I’d really have to ask who the agent is working for. Are they working for the buyer, or are they working for the seller?
Michael: Or are they working for themselves, Kevin? A good agent will take the property to market, under most circumstances, get the best competition they can, and in this market, in Melbourne and Sydney in particular, it would often be at auction where you get a lot of competition facing each other and getting emotionally involved. In other areas, it may be private treaty. But I agree with you, Kevin, that the best opportunity is when you get lots of people there.
On the other hand, as buyer’s agents, we love buying off-market properties. Not all off-market properties are good properties or at a good price.
Kevin: Do you do any prospecting yourself, Michael – in other words, go looking for stock before it comes onto the market?
Michael: Kevin, we tend not to ring owners or knock on doors and say, “Would you like to sell?” because we really want motivated vendors, because most people will sell if you offer them a high enough price. What we do is we wait for those e-mails and calls from agents.
We get offered off-market opportunities a lot. David, one of my buyer’s agents who has been with me for 10 years but has been in real estate for 10 years beforehand, is continuously bombarded with off-market opportunities. 80% of the properties he bought last year were off-market, and 43% of the properties Bryce bought last year were off-market.
Having said that, most of the properties we see that are off-market we don’t buy, but there are a number of reasons why people do not want to go to the public arena, Kevin.
Kevin: What are they, Michael?
Michael: For example, older people. A lot of the properties we buy are older people where it’s a bit run down – because we like to add value – and they don’t want people traipsing through their homes. Others are not in good health and they’re in the position that they may be going into a nursing home. So often it’s older people who are just a bit intimidated by the auction.
Kevin: Any other groups, Michael?
Michael: Yes. Often we find people inherit a property and they get stingy. There are two or three brothers and they don’t want to pay $20,000 for the marketing campaign and the auction campaign and the photos, and they just say, “Just sell the property at any price.” And they’re usually doing themselves out of $40,000, $50,000, $60,000.
The other group that tends to be put off-market are ones that are in poor condition, that are not well-presented, with a tenant with two big dogs, or that are totally cluttered and most people can’t see through that to see the opportunities there.
There are definitely some properties that are available on a pre-market or off-market opportunity. The trouble, Kevin, is being top of the list to be called about those.
Kevin: Thank you, Michael. Good comment, and we’ll talk to you again soon. Thank you.
Michael: My pleasure, Kevin.
Young investors speaks about his mistakes – Jayden Vecchio
Kevin: By way of introduction, my next guest is Jayden Vecchio. Jayden is the director of a company called Red & Co. They specialize in finance, rentals, sales, and development management.
The reason I want to talk to Jayden and I’m really keen to get his backstory is because he is a young investor. In his very early 30s, he already has five properties and he says he’s well on his way to having 15 properties in his portfolio over the next five years.
Jayden, thank you very much for joining us in the show. I’m really keen to talk to you about what you’re doing now and where you see it going in the future. Give me your backstory. Where did it all come from? What’s your experience?
Jayden: Thanks for having me, Kevin. I started working with a couple of big banks when I was straight out of university, in 2007–08, around the time the GFC was starting to bite, which was an interesting time.
I got to learn a lot of the background of how the banks work in terms of securitization, the mortgage market. I worked my way through to private and commercial banking, where I was dealing with moms and dads and investors and learned a lot of the good things you need to do and the bad things that happen in the banks, unfortunately. Then I used that as a bit of a platform to start my own business, Red & Co, about four years ago with two other business partners.
Like you said, these days we’re basically an all-in-one property solution for people who are looking at buying, investing, developing, and selling. So it’s all been one big progression.
Kevin: You were recognized in 2016 as the FBAA Commercial Finance Broker of the Year, and that wouldn’t have come too easily, I would imagine. FBAA being Finance Brokers Association of Australia; is that correct?
Jayden: Yes, that’s right. That was quite exciting, because they’re obviously a national organization, and it was good to be recognized for the work that I’ve done over the last couple of years, especially in the development finance markets across Brisbane, which a lot of the listeners would see the cranes and the things in the sky.
I’m helping funding some pretty big projects across that – over a hundred townhouses in some cases – and then in the commercial finance markets, we’ve funded a shopping center down in Ballina, one in Yeronga, and then even a couple of office towers down Coronation Drive for some fun.
It’s not like traditional mortgage broking, which is good, because I get to see lots of different structures and things, and the good, the bad, and sometimes the ugly, and trying to help people through that.
Kevin: No doubt you learn a lot from that, too. Let’s talk about your own experiences. Interesting when you did communicate with me first, you said you’ve made probably all the mistakes. I’d question that; I think I’ve made a few mistakes that you haven’t made.
But that’s the best way to learn, isn’t it?
Jayden: It definitely is, because I know it makes a big difference when you can sit down with someone and look them in the eyes having been in that situation. Or if they’re trying to grow aggressively and want to grow a portfolio, which a lot of young people these days are aspiring to do, it’s good taking a step back and saying, “Well, just because we’re at historically low interest rates, doesn’t mean it’s always going to be that way, and you have to remember you have to have a bit in the tank in reserve, because otherwise, you can get caught out.”
Kevin: Tell me about some of the mistakes you’ve made. I am going to ask you a question to round this out about if you were to go back and do it all again, what would you do differently?
I guess it’s going to be couched in terms of some of the mistakes you’re going to tell us about now, but I believe that, like most of us, you stretched yourself financially as well at some stage. Did you?
Jayden: Yes, I bought my first unit in Sydney. I was living down there in 2009, and within 12 months of owning it, I was hooked. I knew I was going to be this property mogul, I was going to own these properties. I was ready to go at it, hammer and tongs.
Within that 12 months, my first property had a bit of equity gain, and meanwhile, saving up and trying to buy another property. In early 2010, I’d saved up enough and bought another property in the same suburb, in Alexandria in Sydney.
It was just a small, 50-square-meter unit. If you imagine a rectangle, you cut it in half and you fit a bedroom and lounge room and stuff in it, that was basically it. There wasn’t much to it, but I thought there was some scope there to do a bit of renovation, some cosmetic stuff, tart it up a bit, and potentially either rent it out and keep it, or flip it and make a budget.
What I didn’t realize was around that time in early 2010 was when the RBA was actually on an interest rate increasing cycle, so the rates went up in March by 25 basis points, in April, then also in May, and the expectation was the rates were going to keep rising.
So for me as this young property investor who just settled on my second investment property, hadn’t quite rented out my first investment property, I was trying to cash flow this, and all the while, trying to renovate the second place in Alexandria. I was painting, I was doing the carpet, and I hadn’t really set out a budget. I hadn’t prepared myself. I didn’t really know how. I thought I could do it and manage it and make it work.
Within the first month of just trying to paint the place, I didn’t realize the first mistake I made was the ceilings were made out of this Vermiculite stuff. It almost looks like a popcorn ceiling. So instead of using a couple of liters of paint, it ended up using three times the amount of paint. It blew out my timeframes, my budgets, all the while the interest rates across both my properties were going up and up and up.
It literally felt like a noose around my neck, to the point where I was in the place and it was starting to get winter, it was cold, I was sleeping in the place I was painting on my yoga mat in a sleeping bag, and I actually had to use the oven as a heater to keep me warm at night because I had to use my money towards the repayments.
It was a very low point and very uncomfortable, because I stretched myself financially. I’d basically borrowed 100% to purchase that second property, and I didn’t have a lot of savings behind me.
I obviously didn’t do a budget, didn’t think about the cash flow and worst-case scenario, so it’s definitely something that when I sit down with anyone now on the finance side – and our business definitely looks at this – you have to look beyond what the rates are today and what the situation is today: what’s the worst case and where they’re going to?
Kevin: A great lesson, isn’t it, to plan for the worst-case scenario, because just listening to that story, those two properties you just talked about in themselves probably very good properties.
No doubt you sold those, but if you’d held onto those, what sort of position would you have been in today if you had a better plan and a strategy?
Jayden: It’s one of those ones where I started out with a plan and I was going to stick to the plan until I got to that point where it was just unmanageable. It was very stressful, and you’re quite right, I ended up having to sell them.
But I actually saw the first apartment I bought in Sydney, in Alexandria for about $340,000 in 2009 recently sold for over $600,000, so it has doubled.
Kevin: That probably would have been about what you lost on that deal anyway, wouldn’t it?
Jayden: It’s one of those things where you just have to look forward. There’s no point looking back on that and what you could have done, but it’s worth taking those lessons in and working on it going forward.
Kevin: That’s part of the university of hard knocks, isn’t it? I think the thing about it too – and no doubt you’ve done this – is that you learn from those experiences and you take them into your next deal. No doubt, you’re a lot smarter now.
You tell me you have five properties. Whereabouts are they?
Jayden: They’re all in Queensland, actually. I think that’s more a case of Sydney, the prices have gone up. Also living in Brisbane, it’s good to know the market intimately. In Sydney, I was quite fortunate that I had some friends and people who knew the areas and helped me give me a bit of a leg up investing.
I think it can be hard when you’re investing to save unless you have that guidance, and I like now being able to if you need to go fix something, I can go fix it, and having a bit more control over that.
They’re all within five to eight kilometers of Brisbane CBD, a mix of houses and a few apartments.
Kevin: Over the next five years, your plan is to add another 10 properties to build it up to 15, which is what you mentioned to me in your note. Will any of those be interstate? Will you branch out and go interstate again, or will you still continue to buy in Queensland?
Jayden: I think if the conditions are right and it makes sense, I potentially will. But to me at the moment, living and working here, the focus is mostly on Queensland.
I think it’s important in any portfolio – that’s one thing I have learned – is having diversification, because like in Queensland a few years ago, if there’s a bit of a mining downturn, that can lead to broader impacts on the economy in the local area. So it’s always good being hedged against that, and obviously being diversified interstate in different markets can help protect against that.
But I think for me personally, my view is probably to keep it here where I understand intimately the infrastructure that’s going up, the projects that are happening, the developments that are in the area, the government, what’s in the pipeline, tourism, and I think it’s important in my situation having a really narrow focus and just being across those details.
Kevin: You’re still very young and you have a long way to go with your career and your business. Is there a possibility that you’ll probably look at getting into some commercial and/or development at some stage? With the number of people you know through your business, is that a possibility for you?
Jayden: Yes, the business has a development management arm, so I’ve invested some funds into some smaller projects there, and they’re all boutique, sub-ten properties. [9:24 inaudible]. Definitely involved in that, and I think that’s a good way of getting in the market where you can leverage other people’s experience and learn from their mistakes, I guess.
And commercial is definitely something that I’ve been actively looking for recently, because it can make sense within super. It can be a good investment because you can look at longer-term leases.
The only downside with commercial, as you know, is it requires a lot more capital and funding at the front end, because you can’t leverage it up as much. So it’s that tradeoff of allocating more capital to potentially get longer returns, but then how that fits in with the overall strategy. It’s important to take a step back and look at that.
Kevin: Jayden, round this out for me, if you could. Just give me the best pieces of advice you’d give people based on what you know now, probably what you would have done differently. What would you say to me if I came to you and said I want to go down the path and start to build a portfolio? What should I, and what shouldn’t I do?
Jayden: I reckon the quote that comes straight to mind would be “Failing to plan is planning to fail.” I think in my situation, I had a plan but then I actually didn’t stick to it, and if I look back retrospectively, if I’d stuck to it, I’d probably be in a potentially better position.
It’s good knowing that now and being able to sit down, take a deep breath. And if I had a bit of extra funds there and planned for that, I probably would be in better. So yes, I definitely think having a plan and then sticking to it is critical to success in property.
Kevin: Great advice, Jayden. Any other advice before I leave you?
Jayden: I think it’s always good to leverage other people’s knowledge and the advice of experts. I know when I got my first property, like I said, I had some friends down there who all owned multiple properties and knew the area to give me advice.
I think it’s the same these days. There’s so much to know in the markets, in finance, even when you’re renting out. So I think it’s important to stand on the shoulders of giants and leverage other people who have done this stuff before, have made the mistakes, and you can take away and learn and do a lot more quicker using that.
Kevin: Jayden, it’s been great talking to you. Thank you very much for your time. If you want to make contact with Jayden, if you have a few questions or you want to start to build your own portfolio, the website to go to is RedAndCo.com.au. They’re finance rentals, sales, and development management specialists.
Jayden Vecchio has been my guest. Jayden, thank you so much for your time.
Jayden: Kevin, thank you so much for having me. I appreciate it.
Create wealth in any market – Philippe Brach
Kevin: I guess there would be very few people who listen to this show who really are not out to create wealth through property investing. It’s no doubt every property investor’s dream. That’s why I was interested to pick up a book called Creating Property Wealth in Any Market: How to Build a High-Performance Property Portfolio written by Philippe Brach.
Philippe has 25 years’ international experience in real estate and finance. He’s an experienced investor himself. He has a company called Multifocus Properties & Finance, and he’s helped countless investors create property wealth.
Philippe, thank you very much for joining us in this show, and thank you for giving us your time. Congratulations on the book, too, by the way.
Philippe: Thank you, Kevin.
Kevin: Now, I can’t tell you that I’ve read every bit of it, but I’ve read enough of it to know that it’s a really interesting story. Just in the front of the book – and I want to pick up on this if I could, Philippe – I quote you: “Once I understood how negative gearing worked, I was hooked. I started building upon my education, and before long, I was going on a shopping spree. I actually bought seven properties in six months.” Many people reading that – and certainly I did, too – would have thought “Wow, that’s pretty ambitious.”
Was that a good approach, Philippe, in hindsight?
Philippe: Listen, I don’t have any regrets with what I’ve done. I was really driven by the fact that I was in corporate finance at the time and I was looking at investing my money somewhere, and when I discovered the notion of negative gearing, which is fairly unique to Australia, and me as a European person, I never experienced that elsewhere in the world, I looked at it, and as soon as I understood negative gearing, I said, “Well, that has to be something for me, because it’s a great way to create wealth with limited amount of risk.”
I went into that, and as soon as I understood, I was lucky enough to have enough borrowing capacity to go and buy several properties, and I just did that, because my approach is driven by numbers and the numbers were telling me that that approach was just almost like a no-brainer. That’s what kickstarted it.
And the other thing was that having arrived in Australia in 1997, I wasn’t going to build enough superannuation to see me through retirement, so I needed to accelerate the way I was creating my retirement nest egg, if you want, and so I was quite aggressive.
In hindsight, I probably should have spent a bit more time understanding planning rather than just diving in, but the result has been quite good anyway.
Kevin: In the era when you started investing, property was very forgiving, wasn’t it? You could make mistakes – like you maybe overcommitting just a little bit – but you’d still be able to come out of it reasonably unscathed, Philippe.
Philippe: Yes. The early days, as I call them, were actually as you say very, very forgiving. It was easy. Capital growth was there. There were no problems with refinancing, getting good deals with the banks, and it was a great time for sure.
Kevin: You mentioned there about coming from overseas and how negative gearing in property anyway is unique to Australia. Are we lucky that we have that, and do you think all the talk about abandoning negative gearing or trimming around with it, is that such a wise thing?
Philippe: Well, now that Australia has negative gearing, in my mind, it would be crazy to touch it. It’s one of these rare taxes that hasn’t been touched since 1985, and that gives comfort to any kind of investor.
When you start tinkering with taxation, it spooks people, and what we’ve seen recently in the superannuation world where we’re going to change quite a bit of the rules on July 1 this year, that has definitely driven more people towards property, because they’re saying, “Oh, my god. Now they’re changing the rules on superannuation.”
Changing things that are in place in taxation, you have to be really, really careful. As you probably remember, in 1985, when Paul Keating, who was the minister at the time, changed the rules on negative gearing, it was a complete disaster.
Is it a good idea to have negative gearing? I think it is. I think it’s a great model in the sense that it helps government to provide housing as well as getting a lot of taxes out of it, because at the end of the day, if you go back to the concept of negative gearing, it’s actually not a tax avoidance scheme; it’s actually a tax deferment scheme, because at the end of the day, you’ll end up paying your taxes back by way of capital gains.
Kevin: There are other things, too, that people don’t take into account. Look, we’ve just received our rates notices, and as an investor, we’re charged more for our rates than it would be for an owner-occupier, so it’s not all “easy street” for investors.
The other thing, too, the point that you make there about it being unique to Australia is that that’s what we’ve actually created here. Our housing stock is largely driven by mom-and-dad investors as opposed to institutional investors, which is where in the countries where they don’t have negative gearing, they have to rely on a lot of government funding and institutional organizations to provide that rental stock, don’t they?
Philippe: Absolutely. It’s actually interesting to see that it’s about 2 million Australians who invest in property as investors, and out of that, there are about 1.4 or 1.5 million who own one property. When you’re talking about mom-and-dad investors trying to create a bit of saving on the side, you’re spot on.
Kevin: In fact, I saw some research only this morning saying that there are more emergency workers who negative gear and are investors in Australia than there are professionals, as in solicitors and barristers and the like.
Can I take you in another direction in your book? You just touched on it when you first came to Australia, and that is gearing, leverage. A lot of people don’t understand the concept of leverage, using that, and also then using negative gearing to get themselves into property.
Tell me about your experience with leverage and what lessons we can learn from that.
Philippe: Leverage is a great tool to actually speed up your wealth creation, in the sense that you’ll end up borrowing to invest. In a property – let’s take the typical investor ratio – they would borrow 90%. They would put in a 10% deposit, but they’re exposed to 100% of the capital growth. If you have positive capital growth, it’s a fantastic leverage.
Obviously, it works the other way. If you don’t get the capital growth, you can be really kicked, which is what happened to a lot of people during the GFC, when they invested in shares using CFDs – the contract for difference – where you could actually leverage yourself to 95% on a share, and if the following day it collapsed, you actually magnified your losses.
The thing I like about property is the fact that in terms of crashes, if you want, compared to the stock market, it’s very mild. During the GFC, for instance, property prices went down by 4% or 5% a year for about two to three years and then eventually, after they declared that the GFC was over, pretty much property prices recovered within a couple of years. It’s all part of that forgivingness of property, which I really like.
The worst-case scenario, if you invest in property, I keep saying to my clients, “Listen. If you have a property for ten years and it doesn’t appreciate, you’re pretty much wasting your time but you haven’t actually lost your savings,” which, to me, is a big safety net.
Kevin: A big safety net, yes. Another point you make in your book, too, in the very, very early stages of the book is who should you listen to, and you make the point that property investing is, in fact, a very cluttered marketplace now. There are dozens of so-called experts or property experts who are touting their services.
It raises a point about who do you listen to and what sort of questions should you ask of the person who’s giving you advice, and how important it is to actually tailor an approach that suits the individual, Philippe?
Philippe: Yes, the marketplace is very cluttered. Everybody’s an expert, and there are a lot of self-serving people saying, “I managed to buy ten properties. I’m an expert. I can share my knowledge. Blah, blah, blah.”
But the approach we are having is more about trying to understand what the client is about, first of all, because they don’t want to listen to your story; they want you to help them with their story, and that’s a completely different angle.
I don’t believe in all the hype; I believe in the facts and figures, and that’s what I impart in terms of knowledge with my clients, and then they’re adult enough to make decisions on where they want to go. The empowerment, if you want, comes with the education and making sure people understand how it works, what the mechanics are, and also what the potential downsides are and what the potential upsides are.
Kevin: I’ll round out the conversation with this one point, which is the beautiful question you ask when you first sit down to talk to someone, and that is “What is the situation now, and what would you like it to be?” which indicates to me that whatever I’m going to package up for you is tailored to your own individual circumstances. Someone who’s much older is not going to take as many risks.
Philippe, we are out of time, unfortunately. It’s been lovely talking to you. Thank you. Let me just give the book another plug: Creating Property Wealth in Any Market. It is published by Major Street. You can purchase it on Philippe’s website, which is multifocus.com.au, and also look for it in all good bookstores.
Philippe, thank you so much for your time.
Philippe: No problem. Thank you. My pleasure.