In our feature interview this week, we catch up with Margaret Lomas and peel back the layers to find out her personal views on property investment. You will hear Margaret talk candidly about the mistakes she has made, her best and worst investment and why she is so passionate about helping others.
Ken Raiss from Chan & Naylor answers a couple of your questions about offset accounts linked to an investment property loan and potential problems and a question about the sale of positively geared property.
In this show, we preach to the converted about the benefits of investing in property, but every once in a while doubt may creep into your mind about whether you are doing the right thing so today we discuss with Michael Yardney the common excuses that stop investors. That might help re-focus you.
There’s a huge change coming for the two million people living in apartments in New South Wales and it looks like the problem is set to spread to other states. The change surrounds the collective sale and termination threshold within an apartment complex, so only 75% of owners have to agree to terminate, forcing the remaining 25% to sell. We ask if that is really fair and talk to a conveyancer about what it all means.
In property, as in life, there are no prizes for coming second. Just ask any auction under bidder – that is someone who has just missed out. Shannon Davis will have a look at the vulnerability of the ‘under bidder’ and how that can lead to some disastrous decisions.
How under bidders trip themseles up – Shannon Davis
Kevin: As auctions become more and more popular around Australia, we are finding that you need to understand about the auction process and especially if you find you’re in the position of being the under-bidder – you maybe just missed out – some critical areas where you could make mistakes in a scenario like this. Joining me now to speak from his experience, Shannon Davis from Metropole Properties.
Shannon, what do you see are some of the big mistakes that happen in a situation like this?
Shannon: I think the biggest vulnerability that buyers show is perhaps when they’ve just been an under-bidder at an auction. Auctions can be stressful. The high-demand properties usually use that mode of sale, and when you’ve missed out maybe once, twice, or three times, it can feel like the whole world is against you. Nothing pulls at a buyer’s emotions just like an auction campaign and an unsuccessful one at that.
Kevin: We are seeing a number of people who are getting very frustrated with the auction process, missing out on a number of properties and finding that they just get to the end of it and they think, “I’m sick of this,” and they end up almost making a snap decision on what could be the wrong property and even paying too much for it.
Shannon: Definitely. I call that one the fed-up purchase. There has been a lot of buyer remorse with that. They’ve missed out a few times and they’re just probably too emotional and vulnerable to really be making smart long-term decisions at that point.
I think you need to know what price you want to go to and kick yourself that someone would buy it at that point. Once you have that point, stick to your limits and you need to shut it out after that. Preparation will bring you confidence, so the more you prepare, the more you’ll know your values and missing out won’t probably hurt as much.
Kevin: Very difficult, isn’t it, for someone who really, really wants a property they love. You can see in some of these television shows where they actually go well above what they had planned to pay because they just don’t want to miss out. That emotion, take that away and maybe have someone bid for you and make those decisions on your behalf.
Shannon: Yes, definitely. It can be a competitive experience. A lot of persuasion going on with lots of agents at that time, and you’re being vulnerable to those urgings and maybe not going to make a sound long-term decision because you’re just fearing the missing out. That’s what really makes people overpay and perhaps even just buy a property that wasn’t in their original objective.
Kevin: I know, as a buyer’s agent, this is what you do all the time. This is your job, so you’ll go and represent someone at an auction, you’ll bid on their behalf, and you’ve obviously established a limit with them before you go into that auction. From your experience, in a market like we have now, how many times would someone have to miss out on a property to secure the one that they want? Do you have any stats like that?
Shannon: Yes, I think you need to make sure you’re looking at the right price range. If it’s a very buoyant market, things are creeping up all of the time, so perhaps you have to put into check your expectation for what you’re looking at and you might be looking at the wrong price bracket.
But when we’re representing people, we’re looking to make our first bid our last. We’re going to stick to our limits and we’re looking to stifle the momentum of the auction because we’re trying to do the opposite of what the auctioneer is doing. The auctioneer will start with the bargain hunters, then move up into the more genuine buyers, and then hit the real emotional buyers last and draw every penny out and pause and use lots of discussions to try to keep people on the hook.
We don’t want that to happen, so we’re not looking to pinch it; we’re looking to get it to a fair market price pretty quickly and walk away once their limits have been reached.
Kevin: As a bidder, do you use strategies to try to knock out some of the other bidders, come in with a big, powerful first bid? Do those sorts of strategies work, Shannon?
Shannon: A good first-off bid and every bid straight back out strong as the last and making sure that you have the body language and position in the auction to know where all your competition lays. The more questions and notes you can take on that, the better.
Kevin: Yes, I suppose you do also get to know the auctioneer. Do you find it easier to intimidate other bidders as opposed to intimidating the auctioneer?
Shannon: We’re doing this four or five times a week whereas other people are doing it four or five times a lifetime. An auctioneer is doing this four or five times on a Saturday, so really, it’s hard to intimidate an auctioneer, but with bidders representing themselves, it can be a lot easier.
When you go to particular auctioneer’s auctions, they all have little tells and tricks and words and phrases that they use. Over time, you get to know when it’s on the market and getting close to its end.
Kevin: Thanks, Shannon. Always great talking to you, mate. Shannon Davis, of course, is a buyer’s agent and he is the director of Metropole Properties. Shannon, thanks for your time.
Shannon: No worries, Kevin. Any time.
Selling a positively geared property – Ken Raiss
Kevin: In our Q&A segment, I’m going to welcome to the show Ken Raiss from Chan & Naylor.
Good day, Ken.
Ken: Good day, Kevin. How are you?
Kevin: Good, mate. Always good talking to you too, Ken. We have so many questions pouring in for you. People are really concerned about structures and finances and so on. Thanks for giving us your time and answering these questions, Ken.
Ken: No, it’s fantastic.
Kevin: Here’s just a reminder for you, too. Any time you have a question for Ken or any one of our experts, just send it in through the website and we will address it for you.
The first one comes from Colin: “During my ongoing seeking of information regarding property investing, I came across a brief mention of a potential tax problem. Would you please have Ken Raiss inform us about offset accounts joined to an investment property loan leading to inability to claim increased interest costs if the balance in the offset account decreases for non-business purposes? Obviously, many individuals would have their personal savings account nominated as the offset account tied to an investment property once their personal home loan is paid off.”
Ken, that was a long question but a very good one from Colin. Can you address that for us?
Ken: Yes. It is an issue that a lot of investors have problems with and make mistakes. In essence, there are two different ways you can set up a separate bank account. One is called an offset account, and the other one is called a redraw.
I’ll talk about the redraw first. The redraw is an account within your existing loan account, so if you deposit money into that account, your loan balance decreases. If you then pull it out, you then need to show what the purpose of that is before being able to claim an interest deduction. If you withdrew it for investment purposes, the interest is deductible. If you withdrew it for personal, then it’s not deductible.
That’s where the offset is very good to use because that is two separate accounts that you have with the bank. Your loan account stays, and then you open up a second account, and when you deposit into there, the bank adds the two balances together of the loan account and the second account to then apply interest.
Then when you take money out of that second account, you don’t have to explain what its purpose was because the original loan account balance hasn’t changed. You have to be very careful and sometimes insist on having an offset account because some banks will automatically put you into a redraw facility.
Kevin: Ken, what would happen if you have a redraw when you find that you need an offset?
Ken: I think go back to your mortgage broker or the strategist who helped you put the loan together, and in the majority of cases, you should be able to swap. There might be a small charge, of course, but it’s well worth doing.
Kevin: Ken, that’s a very good explanation to Colin’s question. Colin, thanks for sending that in.
We have another one for you. I’m going to get my money’s worth out of you today, Ken.
Ken: Good stuff.
Kevin: This one comes in from someone who’s just signed it as S. We’ll just go with S. “Hi, Kevin. Great podcast.” Thank you very much. “Just a question for Ken. Does a person who has a mortgaged, positively geared portfolio have to sell their property or properties to pay the mortgage in full on retirement? I’ve been told that I have to.” This person mentions the name of the bank, which I don’t think we need to mention, Ken. I would imagine that would all be same. Is that right?
Ken: Yes, all the same.
Kevin: S just wants to know, “Any information is greatly appreciated.” What’s the situation there, Ken?
Ken: You have to go back to the bank policy. In the majority of cases, banks give you loans based on your serviceability, the ability to repay. If you’re positively geared, you’re a long way ahead, but unfortunately, older people sometimes are discriminated against by the banks because they look at the term of the loan – how many years would it take you to repay back the principle? If you’re a 60 year old trying to go for a 30-year term loan, the bank says, “You might not survive that long, so maybe I only want to give you a 10-year agreement.”
Again, talk to your finance strategist and get the best terms, especially in this current banking environment where the banks are actually chasing market share and probably doing a few deals. But longer term, I think Australians are certainly discriminated against due to age when they want to get a loan.
Kevin: Ken, great talking to you. Thank you very much to the two people who sent their questions into us. Ken, all the best, mate. We look forward to catching you again soon, and I know we’ll have more questions for you.
Ken: It’s my pleasure, and thank you, listeners.
Kevin: Keep them coming in. Just send them in through the website. As I said earlier in this segment, we will always get an answer for you.
The excuses that stop investors – Michael Yardney
Kevin: I hear from time to time people who want to get into property investing and they want to do it for a long time, and I guess they’re continually coming up with excuses as to why they can’t do it. One of the things I’ve found is that the longer you delay on a decision, you’re really starting to then look for reasons not to make a positive decision.
I’m curious about what some of the common excuses are that stop investors from taking that first step or even growing their portfolio. I want to ask that question of Michael Yardney from Metropole Property Strategists.
Good day, Michael.
Michael: Hi, Kevin.
Kevin: Nice to be talking to you again. You heard what I said there about people looking for reasons not to do things. What have you found are some of the reasons or excuses they use that hold them back?
Michael: Just before I go through those, may I explain that I think they’re basically based on fear – fear of the unknown, sometimes fear of debt, sometimes fear of success – but it doesn’t manifest itself as fear. Most people try to be logical so they come out with reasons, as you say, or excuses.
One of the common ones we’re currently seeing is “I don’t have enough money to buy a property.” Now, the answer is it could be true because currently, APRA is making it more difficult, so even though you can afford to buy a property, sometimes the banks don’t allow you the serviceability – they say you can’t.
But interestingly, don’t use that as an excuse straight off. Make sure you have the right budgets. Make sure you see an investment-savvy finance strategist who explores all of the options in the market, and don’t be scared of taking on lender’s mortgage insurance because as long as you own a good property – one that increases in value – taking those extra steps to get in because as you said at the beginning, Kevin, if you don’t, the market keeps running away and you’ll never save enough to catch up with the market.
Kevin: Sometimes that excuse or that reason could be because we’re looking for something that we probably couldn’t afford anyway. Some people try to outreach their own capabilities, Michael.
Michael: Very much so, not only with investments but also with homes. A lot of people want their first home to be fantastic like the one they’ve just left from their parents but they’ve forgotten it took their parents 40 years to get to that level, Kevin You’re right.
Kevin: What’s another one of the common excuses or reasons?
Michael: People are sometimes concerned that the property market is unreliable, that it’s not safe. Again, they’re right. We know that most investors fail because they bought the wrong property and they have not bought an investment-grade property.
I think it’s important to remember that some properties are much better investments than others. In my mind, it’s probably in this current market only 1% or 2% of properties that I’d call investment grade, so it’s a valid excuse unless you do your homework and research.
Kevin: It’s not the market, is it? It’s actually the decision you make that makes it unreliable. The market’s not unreliable in itself unless you make the wrong decision.
Michael: Good point, Kevin, because the risk doesn’t lie in the market; in general, it lies in the investor, in their head space, in the decisions they have made, in the finance they have taken on, not having the buffers to see them through. You can’t separate risk from the investor who’s doing it.
Kevin: Do you think, too, we look for the quick fix, for it to happen too quickly?
Michael: Yes, I think people are impatient. We’ve become that way. That’s just our society. If they can’t seem to get there quickly, if they don’t make it quickly, they think “Oh, it’s going to take too long; I just can’t be bothered.” But it always reminds me of Warren Buffet’s beautiful saying, “Wealth is the transfer of money from the impatient to the patient.”
Kevin: You think we’re too impatient. Is that a generational thing? Is that something that you’re seeing come through in the younger generations?
Michael: I believe it is, because of unrealistic expectations, sometimes fed by the media and often fed by all those e-mails we get in our inbox every day telling stories of rags to riches and instant wealth. But they also talk about the Easter Bunny and Father Christmas, and they’re not true either when you get those e-mails.
Kevin: There is a lot of that, isn’t there? “I bought 100 properties in 18 months,” and when you really dig deep and you find out where they are, they’re not really going to grow much in value and they’re probably geared right to the hilt anyway. It’s not a good strategy.
Michael: No, it’s not. Therefore, it’s best to start real estate investment with realistic expectations, knowing that it’s going to take on average 15 to 20 years to build a big enough asset base to replace your personal existing income.
Kevin: Those types of people who talk about building those enormous portfolios, they rely very much on the people who just don’t want to do their homework. In other words, they’re looking for that quick fix, that quick answer because the majority of people don’t know what they don’t know about buying property and having tenants or investing in property.
Michael: That’s another reason that some people use, an excuse they use, not to go forward. “I don’t know about it.” It’s the opposite for some people too who have overconfidence because they live in a house, they’ve rented an apartment, and they think they know it all.
But the answer is for both of those groups, there are answers out there by doing the correct research, by finding a good mentor, by finding a savvy finance broker, and by getting an independent property strategist who’s going to give you realistic advice. If you don’t know it, get a good team around you. Probably, investment is a team sport.
Kevin: Wrapping all of this up, Michael, do you think it’s fair to say that property investment is sometimes delayed or even bypassed as a way to building wealth because people have a lack of awareness around how it really works?
Michael: We’re not taught how to do this. You’re not born knowing how to do money, and despite 24 million people in the population, fewer than 2 million people own an investment property and a vast majority of those own one or two.
We don’t get the education from our parents, we definitely don’t get it from our teachers, so you’re right, Kevin; the world doesn’t help the average person become a property investor. You have to become the pilot of your destiny, take it in your own hands, learn, research, seek mentors, seek good advisors, and then, most importantly, take action. Do something. Don’t use the excuses.
Kevin: That second to last point you made about seek good advisors is very important in light of what we talked about earlier about people just rushing in and thinking that wealth can be built overnight. It just doesn’t happen that way.
Michael: No, it doesn’t, Kevin. The landscape is littered with people who have tried it and failed.
Kevin: Indeed. Great talking to you, Michael Yardney. Thanks for your time.
Michael: My pleasure, Kevin.
Margaret opens up – Margaret Lomas
Kevin: Margaret, tell me why did you first got involved in property investment?
Margaret: Like most people, we were in the position where we’d worked as hard as we could to pay down some of our own home mortgage. Although I had owned some property since I was 20 – I’d bought my first unit with my first husband when I was 20 – we, like most people of that era, had bought and sold two or three times and never really came out of it with much. When I got together with my second husband, we built a house and were really diligent in being able to pay it down. We’d learned a fair bit about mortgage reduction at that time, which was fairly new back in the late ’80s, and had paid some money off our home and just wanted to get ahead.
Back in that day and age, the only thing that had ever been written about property investment was Jan Somers’ book “Building Wealth Through Investment Property.” I actually got hold of a copy of that – I think a friend may have given it to me – read it, and thought, “That’s something I can do, and that’s a way we can improve our situation and get ahead.”
Kevin: Do you remember some of the early lessons out of that book from Jan?
Margaret: I don’t actually remember a lot about the book, to be honest. I just remember that it gave me a desire to buy. A lot of the things that she actually advocated I don’t necessarily agree with these days. But it was appropriate for the time and place that the book was written. Her book focused very much on the physicality of property, really. It focused on buying median priced property in good suburbs and just sitting on them. It didn’t really talk about things like taxation impact.
It didn’t talk about all the things that I believe in today, which is that in some areas, you want to buy below the median, that there’s a big relationship between the income people get and what they can afford, and therefore that helps you to work out what’s going to happen to growth. There’s a whole lot of things the book didn’t cover, but what it did do is it more or less said, providing you stick to some certain rules, you can buy a property and in 20 years time, you can have enough money to retire on. That’s really what I was after – just the end goal. It gave me that end goal, if it didn’t give me the strategy.
Kevin: Yeah, it gave you the motivation. You mentioned there about the first property you purchased with your first husband, tell us about that. What do you remember about that one?
Margaret: The very first property I bought with my first husband was a unit to live in. We bought that in Cabramatta, in Sydney, which even back then, was getting quite a different mix of cultures. But, for a period of time, the entire suburb actually became a suburb where if you didn’t speak or read Vietnamese, you didn’t even know what the shops were for. Everything was written in Vietnamese at the time.
We managed to get in there at a fairly cheap price. I think we paid $29,000 for a one-bedroom unit there. We sold it three years later for about $34,000 or $35,000. But we really didn’t have a clue what we were doing. We knew nothing about real estate, like all young people at the time. I’m certain that even at $28,000, we probably overpaid for it. We wouldn’t have known how to negotiate. We wouldn’t have had anyone in our lives who knew how to negotiate with us. People just didn’t really understand real estate or even understand what we were doing in terms of borrowing.
Our first loan came from a building society, because I worked for Westpac and they wouldn’t give me a loan until I’d worked with them for five years. That was typical back then. It was very hard to get money. A local building society did give us the money to buy it. It was repaid via coupon. One day a month, I’d go down the road from where I worked, get out my coupon, and pay my $308 a month. We didn’t know anything. We didn’t know how mortgages worked. I don’t think we even knew what interest rate we were paying.
I guess from that perspective, we bought a house purely because we thought it was the right thing to do, and we thought we had to. But we didn’t buy it with any sense or with any real purpose to be able get a foot on the property ladder. It was just to have a place to live, more than anything else.
Kevin: A very familiar story. It sounds very much like our story, too. The first home we ever got was from a building society. Do you remember what year that was, Margaret?
Margaret: I should be able to. I came back from overseas – I was an exchange student for a year – in ’79, and I met my ex-husband, basically, the day after I got back. We decided to get married straight away. It was my dad who pushed us. We’d saved about $2,000, and he said, “I’ll give you $2,000 as well, and you should buy a house.” That would have been either the very end of 1980 or the very beginning of 1981.
Kevin: Interesting to hear that your dad prompted you to do that. Do you think that’s the case with a lot of investors, that they get a good example from their parents?
Margaret: Yeah. Look, some people get a good example from their parents and some people get a really bad example from their parents, as well. In hindsight, my dad was always very good at motivating me toward doing things, mostly because he always had very high expectations of me right through until the day he died.
Out of his five children, I was the one who probably had the most pressure from him, but also rose to that pressure and had the highest expectations placed on me, for no particular reason. I was the fourth out of five children, so it’s not like I was the first or the last or anything. I think it was just that he and I were very alike personality-wise, and therefore he saw something in me. We had a very close relationship.
I do recall him having the conversation with us – in exactly the same way as I’ve had the conversation with my own now-married daughter – and saying, “Look, however you can do it, just get started. Get in there and get some property. It doesn’t matter what it is, it just matters that you get it.”
I can’t say that buying that property launched me into anything – because it didn’t. We sold that one-bedroom unit and bought a three-bedroom townhouse in Macquarie Fields, which is a pretty dodgy area. Then we sold that when we moved to Perth.
We moved to Perth searching – I guess in some ways – for the Great Australian Dream. It was much cheaper in Perth at the time, which is hard to believe now, but it was cheap as chips to build fabulous properties in Perth at the time. We sold the townhouse for $38,000 to spend $52,000 on a four-bedroom house in a pretty good suburb in Perth. I came out of all of that – which we’ll probably get to in a minute – still with nothing at the end of those three property purchases. I think that was more about us. Like I said, we bought because we thought it was the right thing to do, because it was the Great Australian Dream, but none of us knew how to do it in such a way that it actually resulted in anything other than giving us a roof over our heads.
Kevin: That’s what we saw in those days, too. We bought properties to live in and we always knew they were going to be a good investment, because there was a very good chance you’d sell it for some kind of a profit. How many houses did you actually buy and sell before you realized that this might be a way to put together a good wealth portfolio?
Margaret: I’d bought the unit with my ex, then we sold that and bought the townhouse. Then we sold the townhouse and built a house in Perth. We moved to Perth for two reasons. My ex-husband was an aircraft welder and there were only two places in Australia that did the kind of work he did, and he was offered a job that paid him $100 a week more in Perth – which was a huge amount of money back then. And because we just didn’t seem to be able to get up the ladder any further in Sydney, even back then.
The story’s always been the same. Sydney’s always been over-heated. People say there’s frenzy, but it’s always been the same – except just after I’ve sold property: then there’s always been a big boom when I’m not in the market any more. We sold the one in Macquarie Fields to build the one in Perth when we moved over there, and we did have a far better standard of living there.
When we divorced, I bought that off him. Interestingly enough, I bought his half out at the peak of the market, and it was valued by the bank who gave me a really bad loan at the time – one of those loans for low-income earners that just goes backwards because you don’t even meet the interest on it. You just pay 27% of your income, and it went backwards.
It was a combined problem of… By the time I met my new husband and then we decided that we wanted to do something together, we needed to sell my house – because it was my former marital home, and there was a lot of reasons around wanting to sell it. When we sold it, we sold it for roughly $15,000 less than the value that I’d bought the other half on.
And because the loan had also gone up, I came out of that property owing $2,000. That’s what I always thought made my new husband a perfect match for me – because he had $2,000. We were a perfect financial match. His $2,000 paid my debt. We were clean and clear and zero – sitting at zero. We basically had nothing at that point in time.
Kevin: Great learning experience though, isn’t it? It drives you on to greater things.
Margaret: Yes. I was 31 at the time, when we sold that last house, and my new husband would have been 22 or 23. We had nothing. We started with zero. But certainly together, I had the experience and he had a lot of smarts, and together we were just ready to go and make something happen.
Kevin: Based on all of that experience – there’s a wealth of experience there, and I want to talk to you more about what you’re doing now, too – but just going back on that and the lessons you learned: if someone was starting in property investing today, what would be your advice to them?
Margaret: Although I believe that in life you’ve basically got to hold your breath and jump right in, I think that can be the worst thing you do in property investing – just like I did when I was 20 or 21. Had I had the resources available that people have today, then what I should have done is actually become educated first. Obviously, I couldn’t do it because the resources weren’t available, but they certainly are today.
I always use the analogy that if you wanted to be a doctor or a surgeon, for example, the first thing you do wouldn’t be an appendectomy on your mate. You wouldn’t go and operate on a friend just to see whether or not you were good at it. You’d go to college for seven years first, then you’d do the appendectomy.
But when property investors invest, they jump in and they buy, just because we have this false notion. Because we’re a nation of property buyers and property lovers, we have a notion that we’re going to be somehow innately good at it and we’re going to get it right. Then, I see the fallout in my job now, where I get investor after investor after investor who has epically failed with their first property investment – and an epic failure can set you back so far it’s not funny.
With the exception of the odd one or two where the person really was badly ripped off by a dodgy spruiker – and even that’s avoidable I think – in almost every case of epic failure you can trace the failure back to investor mistake. It’s got nothing to do with the property.
Kevin: Do you think we’ve been spoiled over the decades that property in Australia really has been quite easy to invest in? Even buying our own home, if you added it up, even though we walked out of it seemingly with a profit, it probably wasn’t as good a profit as we should have achieved?
Margaret: Oh, no. It rarely is, though. This is the thing. It’s no wonder the shares and property debate rages. This going to seem like an odd thing for someone who’s a property investment expert and a property lover to say, but in reality, the average property investment the average investor makes actually reaches the end of their investment period with a return that’s probably not as good as they would have got had they just put their money in the bank or put it in a term deposit.
Kevin: Is it because they don’t do the real figures behind it?
Margaret: Well, it’s not because they don’t do the real figures; it’s because they don’t buy well. They don’t buy properly. People will buy an apartment in Cairns because there’s a great glossy brochure that tells them how fabulous it’s going to be. Then, 15 years later when it hasn’t grown, they wonder why. What’s gone wrong? They’ll say, “Oh, it’s because property is lousy.” It’s not. It’s because you were a lousy investor. Blind Freddy could have seen you should never have bought that investment in the first place.
I firmly believe that you can improve your property investing to the point where investing in property is better than other investments that you can make. But it’s not universal. All property is not a fabulous investment. I’d even go so far as to say that, more often than not, it’s not. But that doesn’t mean that you can’t succeed at property investing and do a stellar job with your investing.
Kevin: Let’s talk about present day now, about some of the strategies you’re using nowadays to continue to build a very healthy property portfolio, Margaret.
Margaret: My strategies change all the time – let me get clear about that. I think that’s a good thing, not a bad thing. It’s not that I turn around and go, “Oh my gosh, I was wrong.” It’s that I turn around and go, “Well, the advice that I gave them, which was well and appropriate for 1990, is no longer appropriate in 2014 because everything’s changed about investing.” Everything changes all the time, and you need to be one step ahead of those changes all of the time.
I get things wrong, too. I didn’t really see the Sydney market boom coming. Although, having said that – and I was writing an article about that this morning – I think if you slice out the last year in the Sydney market, it’s been spectacular. But when we get 20 years down the track and we look back at any ten-year measurement period, we’ll still find that Sydney probably only had the same performance as most of the country. It’s just that it’s in its heyday right now.
By the time this present buyer frenzy goes away – and 2014 will be Brisbane, I’d say, and 2015 will be Melbourne – but when you take them all together and you slice a ten-year period out they’re all going to have similar performances, because they all have the same kind of growth drivers, really.
What I’m saying today is be aware that a buyer frenzy is actually very dangerous for you. If you sit around and continually wait to hear where the hotspots are from other people, or you don’t take action until you suddenly think, “My gosh, if I don’t buy now it’s all going to be unaffordable and I’ll miss out,” then if that’s your attitude, then you’re going to be buying badly all the time. The attitude has to be – and this is the same for any investment – you buy when no one else is buying and you hold for the long term.
Kevin: You have a long-term strategy?
Margaret: I do have a long-term strategy, because I think that this country is not yet at that point where it’s got adequate capacity to be able to reward short-term property investors, because of the capital gains tax we pay when we flip properties. People think, “I’ll buy property and do it up, and then I’ll flip it and do it again and again.” I know a lot of people who have done that over and over again, and when they come to the end of ten years, they’re not really that better off than if they’d just sat on them. In fact, they’re often worse off because of capital gains tax.
Unless you’ve got that time to really devote yourself full-time to the job, where you can be out and about and really hunting down the really super under-valued bargains, and you’ve got your finger on the pulse in terms of cheap tradespeople who can come in and do these quick makeovers, and then you sell them, and you keep doing it over and over again, then it’s not a property investing strategy that I support for the average everyday person who has a real life and a real job and just can’t afford the time to be doing that.
Kevin: Margaret, how often are you reviewing your property portfolio?
Margaret: All of the time – but then I’m fortunate in that my job is about property. I’m pretty much always looking at the areas where I own property. I buy property in my own hotspots, so I’m always looking at them, I guess. I review the portfolio all the time, and I do sell. People think I never sell just because I have a “buy and hold” strategy. But a “buy and hold” strategy is different to a “buy and never, ever sell” strategy.
A buy and hold strategy is where you buy property with the intention of holding it for the long term, but as you review that strategy, if you find out that you’ve stuffed up a few times, then you might find that you need to divest yourself of the stuff-ups. I’ve done that. I’ve divested myself of a few stuff-ups over time. I’ve kept a couple, as well, just to remind me of how stupid one can be when they get emotional.
Kevin: Which is the one you’ve kept that probably has you the best lesson?
Margaret: Definitely my first one, which was Cairns. It taught me so many lessons. First of all, it taught me that when you are naïve and you don’t know what you’re doing, don’t buy. When you’re a new investor, don’t hold your breath and jump right in.
It taught me that men in brown suits never tell you the truth – and if they come into your home with glossy brochures, never sign anything.
It taught me that every story has two sides. If someone gives you all of this fabulous information about an area, you can research it and probably find corresponding bad information about that same area. For example, I was told that 12,000-odd people a year move into Cairns – which was true at the time, but 14,000 moved out. It was a truth, but it was an untruth.
Kevin: It’s only half the truth.
Margaret: It’s only half the truth – and it’s certainly not the half I needed to know at the time. I learned from that that nothing can ever replace good old fashioned research of your own. But I also did learn that you can buy away from home without looking at it without it killing you. I’ve still never seen that property, ever. I’ve had that one now for 14 years, and never seen it. I’m pretty sure it’s still there.
Kevin: That’s the one in Cairns?
Margaret: Yes. It was interesting, because even though it was our first property, we didn’t have that difficulty that a lot of first-time investors have in buying sight-unseen. That’s never presented a problem to us. We’ve always been able to do that quite easily. I think that’s an investor strength, being able to do that.
Kevin: Is it to do with removing yourself emotionally from that, so that you can look at it that way?
Margaret: It is, but not necessarily for all the reasons people think. It is to remove yourself emotionally, but there are a lot of reasons you have to remove yourself emotionally. It’s not just because you may fall in love with what is otherwise not a good investment – in looking at a property you might think, “This is fabulous,” then not do the right kind of research to see whether that fabulousness is backed up by any real data and information.
But, the reverse is also true. You may hate something that is a fabulous investment, just because it doesn’t look good. I learned that when I visited the properties we had bought in Elizabeth. I went and visited them about six months after we settled, much to my husband’s disgust. He said, “Don’t go, don’t go,” and I did – and I hated them when I saw them. I was mortified that I’d bought these properties, and they’ve been great. They’ve doubled in value and doubled in their rent return in the time that I’ve had them. They’re still cheap now. They’re still not much of a property, but they’ve doubled. If you can do that all the time, that’s great. But if I had have looked at those before I bought them, there’s no way I would have bought them.
Kevin: Good lesson, isn’t it? Margaret, let me just ask you now about your portfolio. Is there a mix in there between houses and units? Is there any commercial property, or are you pretty much fixed?
Margaret: I’ve got it all, but what you’ve got to understand, as well, is that I don’t have a mix of houses and units so I can have a mix of houses and units. It just worked out that way. The reason it worked out that way is because I’m a firm believer that you buy the kind of property that the demographics demand.
Again, I was writing an article about that this morning, where I was talking about the fact that when people start to invest, often they have this false notion where they’ll say, “I’m going to start out with a unit,” because they think. “I can start out with a unit because it’s smaller, I’m biting off a smaller amount, and everything will be easier about that unit.” But it could be a big mistake. If you buy a unit in an area where everyone who lives there are families with two kids and a dog and a couple of cars, then you won’t get demand for rentals, and you also won’t get as many buyers when the time comes for you to sell it. So it won’t grow as well.
There are some areas where the units grow better than the houses because of the demographics, and there are some areas where the houses grow better. The same goes with the rents. Because I look into where I’m going to buy before I look at what I’m going to buy, I’ve chosen all the areas and then I’ve ended up with a mix of houses and units. And I also own two commercial properties.
Kevin: Given that you’re not fussed on seeing the property before you buy it, would you buy outside Australia?
Kevin: Tell me why.
Margaret: That has nothing to do with not being able to see it. That has to do with me not being able to effectively verify or trust the information that’s coming to me. Some people may be able to do that, but typically, when someone buys overseas, they are trusting the information or the research data that’s given to them by someone in that transaction – and it’s most likely going to be the person who has the most to gain out of that transaction. It’ll be either the seller or someone acting on the sellers behalf, or a middle man or whatever. So, not only can you not independently verify the information, it’s very difficult to do so.
You know, in Australia, we just know. Especially when you’ve been around long enough, you just know the websites you can trust. But if you’re buying in America, you could be going off a website that’s total fabrication, and you’ve got no real way of knowing that. We know here that we can get council information, and we’ve got certain sources of information that we can know and trust. Whereas if you’re buying in America or England or Uganda, or wherever else we want to buy, we can’t really trust that information.
But, in addition to that, even though I don’t go and see the properties and I don’t manage them myself, I know that if everything falls into a big hole, I’ve got the capacity to fly in there, land, go out from the airport to the property and say, “Right. Let’s get this sorted.” That’s very hard when you’re buying overseas.
You’ve also got to ask the question… Most people who buy overseas do so because they’re responding to some kind of advertisement that they’ve here Down Under for that overseas property. Why did those people have to come this far to sell their property? If their property is that good, the locals would buy it.
Kevin: You could say the same about the people who are currently selling properties to Australians out of America, couldn’t you?
Margaret: The American people who have come Down Under to sell the American properties? Well, that’s exactly what you say about them. Let’s not argue the fact, and I’m probably going to have some come and stalk me in the street, but that’s alright; they can join the queue.
If they’re down here selling property, has it occurred to anyone to wonder why don’t the Americans buy it? Someone said to me once, “The Americans have got no money because of the economy.” That’s garbage. I know a lot of Americans who have a lot of money, and I can tell you now they wouldn’t be touching American property with a ten-foot pole.
Kevin: They’d probably be more interested in buying Australian property.
Margaret: Probably. The other problem with it is, of course, that after you settle it’s very difficult to oversee property management from another country. America especially has notoriously bad property managers and all sorts of issues with squatters and bad tenants, and all that kind of stuff.
Kevin: Yes. It’s a totally different system. Let me ask you about research for a moment. How much time do you recommend someone should spend researching an area, and researching a property, before they make the decision to buy?
Margaret: As much as it takes for them to answer the 20 questions and be sure they’ve done everything and have left no stone unturned. Having said that, of course, you can’t have the old “analysis paralysis.” I get a lot of people who actually use the research as a crutch or an excuse for not buying.
People have a remarkable number of excuses. Even those people who say, “Yes, I want to buy a property. I’m definitely ready. We need to do this, ” will still make excuses. I see it every day. They’ll have all manner of excuses. “My daughter’s ballet school burned down, and we had to remake all the costumes, so we couldn’t do it this week.” Pretty soon, you wake up and you’re closer to retirement than you’d realized, and you haven’t planned. You start to have all that regret that you didn’t do it when you could do it. People put all sorts of barriers in their own way.
The research is one of those things that is crucial that you do. You must do a lot of it, and you must independently verify any written research that’s coming from anybody else. You also must learn how to read that research and overlay it over future matters, to work out what it means tomorrow. It’s fine to get research that says, “X area has grown by 15% a year for the last three years.” It doesn’t mean anything to you. You have to know what’s going to happen in the next ten, not the last five. You’ve got to learn how to overlay the information you’re getting over future matters, so that you understand what it means and where it’s going to take that area.
But by the same token, don’t be so long in doing the research, and don’t use it as an excuse. Investors say to me all the time, “I can’t buy yet because I haven’t done enough research.” You’ve got to buy sooner or later because property isn’t going to buy itself and put it into your portfolio.
Kevin: Great advice. I want to ask you one more question before we have to close off. What’s the most important piece of information, or the most valuable piece of information, anyone’s ever given you about investing in property?
Margaret: That’s a really hard one, because people don’t seem to be brave enough to give me advice.
Kevin: Go back to the early days. Maybe your dad?
Margaret: Dad never gave me any property investment advice because he never invested in property himself. He bought property to live in, but he never invested. I use the term “invest in property” as being very distinct from buying owner/occupier property. I think there’s a big difference. There’s a difference in how you buy it, and there’s a difference in what you buy. What you would buy to live in is entirely different to what you buy to invest in. That’s really important.
Kevin: It’s a different mindset, too, isn’t it?
Margaret: It’s got to be a completely different mindset. It’s when you start blurring the lines between the two that you start to stuff up and make errors.
One of the overarching pieces of advice that Jan Somers probably gave through her book was that there was really nothing to be frightened of with property, and that you pretty much needed to make the move now rather than wait around. My capacity to be able to always make the move and recognize when I’m putting up my own barriers and then remove them has led me to be able to continue to buy property. I haven’t always got it right. I’ve bought duds, and I’ve bought fabulous properties, as well. That’s pretty much what most people will do if they buy often enough.
Probably it would be the advice that Jan Somers gives: don’t be afraid of it, because it’s not going to kill you.
Kevin: Margaret, based on your experience over a period of time, what would you say is the most critical period for investors, when they’ll either get it right or get it very wrong?
Margaret: I think one of the things all investors have to know about investing in property is that in those first five years – what I call the “build phase” of property – you’re not going to see a lot of results typically in those first five years. You might. You might hit it lucky. I believe that in all well bought property, over a ten-year period, there’s going to be at least one period where the property performs exceptionally well and has a really good boom year. But that boom year might not come until year seven or eight. Or it might come in year one, and you could be one of the lucky ones who just gets it right straight up, and you get that in the first year.
Typically, for most investors, those first five years are the build phase, and you’ll spend that first five years taking one step forward and one step back. You’ll buy property, but because of all the high costs in Australia of buying property, you most likely wont even get the gain in that first year to recover those costs, and you’ll feel like you’re behind. Unfortunately, that’s very debilitating, and you can be forgiven for thinking in those first five years, “This doesn’t work, property’s no good, I’ve bought a dud,” and really lacking in confidence. If you can break through that five-year period and get into that second five-year period, that’s really when everything starts to happen.
In my own portfolio, we bought the first property, and it was two years before we bought the second. It was another year before we bought the third. We really struggled to get seven in our first five or six years. But in the seventh year, I think we bought eight properties in that one year, because all of a sudden, we’d laid the groundwork. We had a reasonably wide investment base of seven properties, and all of those properties started to come into their own around about the same time. Our equity was suddenly growing very quickly.
I guess my advice to investors is to hang in there and have the right expectations. Don’t expect that you’re going to get this right straight up, but unless it’s a real lemon, keep the property in the portfolio. Keep hanging in there. Keep plugging away and adding to the portfolio for the first five years, and it will start to kick on from five years on.
Kevin: Wonderful. On that note, Margaret, we’re going to say thank you very much for your time. It’s been great talking with you, as always. All the success for the future, too.
Margaret: You’re welcome.
Why you might HAVE to sell when you don’t want to – Garth Brown
Kevin: The days of a single apartment owner holding out against a developer are over, certainly in New South Wales after changes to strata title law were passed and came into force on the 1st of July. Now there are other state governments who are echoing that they may do exactly the same thing, Queensland being one of them. I thought we’d take a quick look at what the impact has been, if there’s been any impact already in New South Wales. Joining me to talk about that from Brown & Brown Conveyancers is Garth Brown.
Garth, thank you for your time.
Garth: Thanks, Kevin.
Kevin: Explain to me just briefly what has happened, and then we’ll look at the impact of it. What does this law actually mean?
Garth: What it means now is if 75% of the owners of an apartment building, if they agree to sell to a developer to knock down the building and put up a new complex, they can do that rather than have the agreement of all the owners.
Kevin: Is it just on a redevelopment proposal? And why have they done this?
Garth: The government is trying to increase the availability of units and apartments in housing. There are a lot of older units that are in a very good position in the inner city [1:15 inaudible], and the government believes that by reducing the amount of obstacles to developing bigger properties and higher towers of strata complexes, that will alleviate the housing problem.
Kevin: It seems very unfair to me. You have some people who have probably lived in some of these apartments nearly all their lives, and then all of the sudden, they find that they have to move. From their perspective, I guess they’re saying, “Everyone’s just getting too greedy. Why can’t I stay in my own place?”
Garth: I can understand that if you’ve been in an apartment building for a long time and you don’t want to go ahead with it. There is a bit of a convoluted process after the 75% agree to it. You can look on the Internet under “New South Wales changes in strata law.” There are about 13 different steps that need to happen, and then there’s the Land and Environment Court at the end to give it the seal of approval.
Kevin: How big is the impact of this going to be? How many units and schemes are there in New South Wales?
Garth: This is pretty amazing. There are apparently approximately 2 million people who live in unit complexes in New South Wales. I think the state’s population is about 7 million. You have 75,000 strata schemes – no doubt, most of these would be in the Sydney area – and they’re worth about $350 billion in assets.
Kevin: We’re only looking at one element of the change that’s come into place here. There are other reforms focused on a lot of the smaller irritations with strata life, such as changes to bylaws, going digital, pets, smoking, increased accountability for strata managing agents, and so on. But this is the one that really stands out because it’s going to impact so many people, especially elderly people or even tenants.
Garth: Definitely. Elderly people, if you have the majority at over 75%, it’s going to be hard to change that decision. And with tenants, it’s the owner who makes the call.
Kevin: What mechanisms are in place to make sure that those who don’t want to sell are going to get fair value?
Garth: What would happen is that you would have a valuation conducted by the developer – I assume you could also conduct your own valuation – to receive market price for your unit. I believe the developer will also probably offer you incentives like moving costs and other costs like that to help you move to another area.
Kevin: From my reading of this, there’s no compensation that’s going to be made available to tenants, though. I guess if the owner has a tenant in there and they’ve negotiated a sale through the strata title, maybe they would have to compensate the tenants for breaking the lease, anyway.
Garth: Yes, that’s right. It all gets back to how much is offered in the beginning and whether it’s a workable business solution.
Kevin: We’ll watch this with interest. Have you had any feedback at this point in time, or is it just early days yet to see how this has impacted?
Garth: It’s early days. I believe it’s just been passed into law. It comes into effect in November. But it’s always been an interesting question if you’re an owner in a strata complex: do all the owners have to agree to it for a developer to come in, knock it down, sell out to them, and put up a new complex? Now, it’s just 75% of the ownership.
Kevin: We’ll watch this with interest. Thank you very much for your time. Garth Brown from Brown & Brown Conveyancers. Thanks, Garth.
Garth: Thanks, Kevin.