Shannon Davis is with us to give some advice about selecting the best area and the best property in that area.
Kevin: My guest in studio this morning is Shannon Davis from Image Property and also Metropole Property Strategists.
Good morning, Shannon.
Shannon: Good morning, Kevin.
Kevin: I want to talk to you about how you go about selecting an investment property: what are the criteria, what are the areas you should look out for, what are the areas you should avoid? We’ll talk about Shannon’s picks, and we’ll look at why you’ve picked those.
Things that you should avoid when you’re selecting an investment property. You help investors to put together a portfolio all the time. What are the things that ring alarm bells for you when you’re looking?
Shannon: I think everyone knows a little bit about property, so I think their bias is something that…
Kevin: Everyone knows a lot about property.
Shannon: We all live in one and we’ve seen people buy them and stuff, but sometimes the worst advice can be free advice. I think everyone has a bias. I think investing to that bias might just harm you.
Kevin: Explain what you mean.
Shannon: You’re a bit of an expert on where you live, but is that area a great capital growth area? It may not be. You might be living there because of work. Say, you’re in the military and you’d been placed to an army barracks and you buy near there, but has it got the recipe for growth? And that is a rising population, strong confidence, and limited supply. That’s going to push your house prices up.
Kevin: Yes, we get very comfortable about the area that we know. Are you saying that we should – well, obviously – broaden that net, but become more comfortable with more areas?
Shannon: Yes, become an expert on more areas, and there’s a lot more advice. I think the property market is quite transparent these days, so I think you can school yourself up and do more research on what are the factors that are going to be driving prices.
Kevin: The research is there. It’s very easy to get that research and get a bit of understanding. Sometimes, I think there’s probably too much research and we almost go into information overload.
Even the simple basics of understanding what gearing is all about, because I talked to a number of people who have a lot of gearing in their own home that they’re not really utilizing. They’re saying “Well, I’d like to get into the market but I just don’t think this is a good time, I don’t really have the cashflow to do it.” Yet you find they probably have $500,000 worth of equity in their home that they could actually gear against.
I did an interview with Michael Beresford from OpenCorp during the week and we talked about accessing equity in your property. Do you find that? Is that something you talk about as well?
Shannon: Yes, sometimes they have a bit of a lazy balance sheet. I think instead of timing the market, time your life is something that I’m really keen on. So, if you have the equity there and the serviceability in this era, it’s very important for your investing, then the time is right for you.
Stop worrying about the headlines and all the bearish commentators out there, because for some people it’ll never be right; for them, probably, cash in the bank is the way to go. But if you have the right circumstances, your job security is there and there’s capacity to invest further, then it’s the right time.
Kevin: You talked about bias before, and sometimes the information we get or the feedback we get from family and friends is “Oh, no, this is dangerous. You shouldn’t be doing that.” I think that actually wears a lot of people down. That’s one of the reasons why they don’t go out and take those risks.
Shannon: Yes, definitely. Success is an action sport, so sometimes you just have to filter out those people, and if they have very little success to show for their time as well, I think it’s an easier job to ignore that advice.
Kevin: What are some of the other things?
Shannon: Is it going to be a good long-term fit? So, maybe not the way you like to live, but are there the right factors? If you’re, say, a family, and you’re used to a large kitchen, the way you’re investing maybe if you’re looking at apartments might not be that way and so needed. I think you have to make sure that you have a fresh approach to it and not always filtering it through what you would need.
When we’re looking for property, you don’t want to rush in. You don’t want to get fed up, then just make a purchase for the sake of it; it has to be a long-term fit. I think the most disappointing thing for me is when I see investors selling a property within two years. Just all those entry costs, the stamp duties and the agents’ commissions…
Kevin: Sometimes they have to do it because the planning wasn’t there to start with, the structure wasn’t there. I don’t want to put words in your mouth, but I think what you’re saying here, basically, is make sure you have the plan before you buy, and it should be a whole plan.
Shannon: Yes, definitely.
Kevin: Which leads me to another topic too. I know you haven’t quite finished going through those yet, and we’ll come back to that. Renovation. A lot of people go into renovation. The days of you hook a property, you do a bit of reno, you flick it over, and make some good money. I question nowadays whether that is a good strategy, whether it’s even possible.
Shannon: Yes, many times they would have made money in a rising market anyway without doing any of the work. But yes, renovations at the moment, we have high labor costs and high parts, and so it makes it hard with the transaction to make a good profit there.
Kevin: Johnny is on the line. Good morning, Johnny. How are you doing?
Johnny: Good, thank you. Investment properties: had a woman hassling me from down the Gold Coast regarding me buying an investment property and paying back interest-only.
Kevin: Okay. Shannon?
Shannon: I think interest-only can work. It’s definitely a strategy that investors use, and it’ll allow you to grow your asset base wider than undergoing a debt repayment strategy. But the circumstances need to be that you need that capital growth.
Kevin: I think the other consideration too – Shannon, I’d love your feedback on this too – is what the banks are doing. They’re trying to discourage a lot more of the interest-only loans, and I think you’ll find that there are a lot of penalties that come with it.
I think you have to have a bit of a mixture in your portfolio: some interest-only, some principal and interest, but I think it’s always a good strategy in this market to be paying down some principal. Shannon, what do you think?
Shannon: Yes, debt repayment is a guaranteed wealth strategy, so it’s needed, and it should be part of everyone’s investment portfolio. Interest-only does allow you to get that asset base a little bit wider and get there a bit sooner. It’s a tax deduction as well. Just because a property is for investment doesn’t mean it’s investment-grade, you just have to make sure you have a limited supply, growing population, and plenty of jobs in the area, and you’ll get most of it right.
Kevin: Johnny, we have a copy of Your Investment Property magazine. It’s actually dealt with in there. There is an article on principal and interest and interest-only as well, and also gearing. So, you might find that an interesting read. Johnny, we’ll put that aside for you, okay?
Johnny: Okay. Thank you. Have a good day, guys.
Kevin: Stay on the line, mate. We’ll get your details.