Your Money Your Call 08/02/2016 | Sky News Business
Momentum Wealth’s Managing Director, Damian Collins, joins host Margaret Lomas and Steve Waters from Right Property Group to discuss how to make simple improvements to add value to your property and what to look for in a property bargain, as well as answering viewer questions.
Check out the video above and transcription below.
Margaret Lomas, Presenter: Hello, and welcome to a fabulous week in property. I’m Margaret Lomas, and I’m looking forward to the show this evening, and I hope that you are too. This week, as we always do, we’ll answer your questions, bring you the latest news and information about property investing, and, of course, discuss a couple of relevant investing topics.
Here to help me tonight, I’ve asked into the studio Damian Collins from Momentum Wealth, and Steve Waters from Right Property Group, and tonight we’re focusing on how to make simple improvements to add value to your property, and also what to look for in a property bargain.
We’d like to have in your calls, and so you’re invited to contact us at any time during the show with your comments, questions, or to just get some guidance. So, get to the phones right now and call us on 1300 30 34 35. Tweet me @MargaretLomasAU, or email me now at email@example.com.
Welcome to the program tonight, and welcome to you both.
Damian Collins, Momentum Wealth: Pleasure, Margaret.
Steve, The Right Property Group: Pleasure, thank you.
Margaret: Damian, we’re going to start with you. What sorts of things should someone look for when they’re trying to get a bargain property?
Damian: One of the, I guess, biggest concerns I have, Margaret, with the word “bargain” is that people often chase sometimes dud properties and they think, “Well, I’ve saved an extra 20 grand or 30 grand. I’ve gotten myself a bargain, I should be happy,” but in the long run, you’ll find that that discount, if it’s an underperforming property, will easily be outweighed by the loss of capital growth. So…
Margaret: Yeah, I guess people really get confused, don’t they? Because, they think if they can get a cheap property, they go for price, and then they ignore some of the really important fundamentals, don’t they?
Damian: And, I guess it’s human nature, they get, “Oh, I got a deal, I got a bargain.” But, you know, if it’s something you’re going to utilize and consume, it’s a different story, but for an investment point of view, it’s got to be something that’s going to be long-term.
Margaret: Okay, so what are the things in it that we’re looking for?
Damian: So, really, I guess, three key things that we look for is, it’s got to be near… infrastructure that’s coming is going to make the area more popular, more accessible, more desirable. That’s ultimately what you’re looking for. So, has it got trains, roads, cafes, schools, whatever appeals? And, in some areas, cafes might be very important, other areas, less so. It just depends on what drives people to that area.
The other thing you want to be looking for is also…very importantly, is limited supply. I often see people buy properties in areas that have got good infrastructure. But, if there’s lots of extra supply that can come onto the market, well, that developers will bring in eventually, that’ll hold back some of the price growth. So, they are two really important things. And, I guess the other thing I look for is an area that’s underrated. That’s where you’re going to get that outperformance. So, the bargain might be relative to another suburb that’s maybe a couple of suburbs away, but the market, for whatever reason, hasn’t re-rated.
And, we always see that ripple effect when an area starts to become popular, people get out-priced and they’ll start to move in surrounding areas. So, try and buy into a suburb or an area before it’s re-rated in the market. That’s how you get your bargain.
Margaret: Damian, I often find that people mistake what makes a good buy, so they look for, very often, the wrong things. Often, they might be looking for the kinds of features in property that they’d want in a house to live in, or they might think, “If I can buy right on the beach, then it’s…” People get this mistaken impression that a beachfront property is always going to do really well. So, what are some of the common misconceptions about what makes property grow well?
Damian: Well, you mentioned that exactly right. So, a beach suburb or beachfront property sounds good in theory, but if the market’s already priced that in and they know that it’s a fantastic location, and, as you’ve seen, over longer periods of time, some of the blue-chip suburbs have actually… what we consider blue chip have underperformed.
Margaret: Yeah, they did… iconic locations, first go bad in a downturn.
Damian: Exactly. So, you don’t want to be focusing on the things that everyone knows are popular. You’ve got to think about, very unemotional and it’s very hard because most people buy an emotion, justify with logic. That’s, again, human nature. So, they’ve really got to try and put as much logic into it as possible, talk to your local agents, obviously always recommend use a good buyer’s agent, of course. But, you know…
Margaret: You know any?
Damian: I know a couple of them, but, understanding what is driving demand in that area. So, in some areas, it might be the school, it might be near the amenities or cafes. As a whole, it’s going to be different suburb-by-suburb, so find out what really attracts people to that area.
Margaret: And, Steve, just quickly, it’s not going to be, you know, the beautiful fixtures and fittings, and the fabulously highly-polished floor, and those kinds of things that actually get more money for a property but don’t really add value.
Steve: Yeah, and I think it’s very important to be able to establish any of the works that you do, is it there to add value? Is it there to add cash flow? Because, how you take on those renovations will be a determining factor. So, for us, if we don’t want to spend a whole heap of money, but yet get value for our dollar in terms of added value and not so much cash flow, we’re going to be looking at things like…I’m a big fan of curb appeal. From the very get-go, your potential value of your potential tenant or your potential buyer is going to have a, you know, an image imprinted into their mind. Front door, that’s another one, and, of course, I like little things like door handles, grout, cleanliness, paint, all that sort of stuff.
Margaret: Okay, I want to come back to that in a moment because I really want to explore that a bit further later on, but let’s go to the phones, and Ben from Brisbane.
Welcome to the program, Ben.
Ben: Hi, Margaret.
Margaret: How are you going?
Ben: Good, thank you. Just a question. I got an investment property, and I might be in a position to pay it off shortly. I’m just wondering from the bank’s point of view, would I be better off paying off the current one, and then draw against it for another one, or just sort of rent, you know, invest both out?
Margaret: Okay, so let me just get this right. You’ve got an investment property and you’re wondering if you should pay it off, draw back on it to buy another one?
Margaret: And, where does your own home fit into this picture?
Ben: Well, I’m currently renting.
Margaret: So, you’re renting at the moment?
Margaret: Okay. What do you think, Damian?
Damian: Ben, that’s a very good point. If you’re renting, I would certainly not be putting any of my investment property… as long as you’re a diligent saver, I’d be putting it all into an offset account because if you pay off that investment loan, once you redraw on that again to buy your own principal residence, that will become non-deductible debts. So, please put it all into an offset account. Again, you need to be disciplined so you don’t spend that money, and that will then get you a deposit, and hopefully, one day you’ll be able to buy your own home. And so, obviously you’re in a great position. You’ve got an investment property with very little debt, so that’s fantastic, but definitely put that money into an offset account. And, if you’re looking to buy another investment, then I’d be looking at borrowing against the equity that you currently have.
Margaret: And, would you concur with that, Steve?
Steve: Absolutely, 100%, and furthermore, I think you’ve hit the nail on the head. You’ve got to be very, very studious and very diligent in what you do with that money, otherwise it will just go.
Margaret: Yeah, look. It’s a difficult one when you’re renting, and I certainly agree that renting can be a good idea if you are investing in property, but if you are deciding that at some time in the future you may want to buy your own home, then only put as much money as you need to in that loan, and then from there, you can draw back on the equity. Of course, if the investment property isn’t growing very well, and you want to be able to invest again, unfortunately you do have to use your cash in that investment, and either paying it off the investment property and drawing it back or using it as a deposit on the next one, the net effect is still the same. I always encourage all of our clients to think about all property as one value and all debt is one lot of debt, except for the family home which is a separate debt, and then think of it that way as to where your money should go.
If you’re planning to rent forever, and some people are very happy doing that, then it might be okay for you to start pouring all of your money into that debt reduction. Maybe even down the track you might end up selling a property in order to extract the money to put into your own home, and that’s also a plan that I’ve seen many people undertake as well.
Most importantly, find a good qualified property investment advisor and get some advice that’s specific to your individual circumstances, because everybody is different and everybody has a different period of time ’till they retire, they have different needs for now, they have different cash flows, so there’s a lot of things that are different. That’s just some very general advice for you.
Damian, just going back to what you said about blue-chip properties, you know, people have talked about blue chip for a long time, and I think it’s really important to point out to the investors who watch this show really that I think “blue chip” is really a word that should be reserved for your owner-occupied property. You know, we want to all live in a blue-chip suburb, don’t we? Because, it means that it’s probably already grown very well, it’s probably got, you know, a good neighbourhood, and schools, and the infrastructure. But, as far as I’m concerned, once a property is called “blue chip,” I think usually its best period of growth is probably already behind it. It will still grow, but its best period is behind it. You want a pre-blue-chip suburb.
Damian: Well, that’s exactly right, and that’s the ones that we target, is.. not the blue-chip areas because everyone knows they’re popular. You’re not discovering any undervaluation, or re-rating, because everyone knows they’re popular, so what we look for is areas that might be considered middle or lower middle socio-economically, but they’ve got all the right infrastructure and demographics and things are happening in that area that are going to mean more middle-class people, and ultimately middle-to-upper-class level, I guess, in terms of income are going to want to move in that area, they’ll pay more for your property. And, it’s just that small outperformance each year, just that 1% or 2% that, over 10, 20 years is where you really make your money in property.
Margaret: Yeah, look, absolutely. And, I think it is important that everybody does realise the differences between what you’re looking for in a property to invest in and what you’re looking for in a property to live in, because they are two very different things.
Let’s go back to the phones, and Matthew from Sydney. You’ve got a question for us, Matthew, about buying an apartment.
Matthew: Yeah. Thanks, panel, for taking the question. Look, I just wanted the panel’s views on Parramatta, southern Sydney suburb of Parramatta, looking at two-bedroom apartments probably over a 10-year horizon. Just wanted your views on the growth prospects there, we’re a little concerned about a potential oversupply maybe.
Margaret: Okay, Steve. I guess, you know, Parramatta has had a pretty good run, does have a fair amount of supply coming online. What do you think about Parramatta now?
Steve: Look, I still think it’s got growth. I think it’s got legs. I’d be very, very particular in terms of what type of unit that you did invest in Parramatta. I’d be going for one of the older established blocks preferably with a good cost to operate, so a low-body corporate, something that’s structurally sound, probably steer away from the newer types of apartments that are going to have high-body corporates with elevators, lifts, pools, and what-have-you. I still think the growth is there, be at all, but I don’t think it’s going to break any records over the next couple of years. But, from a longevity point of view, I rate it.
Margaret: Let’s put out some views, though, Steve, that when we talk about looking for a low-body corporate, we don’t want it so low that the body corporate’s unhealthy.
Margaret: It is important that people realize that money that you would otherwise spend on your own home for upgrades, and future renovations, and future repairs is really all you’re saving toward in a body corporate. And, I’ve seen plenty of buildings where the body corporate fees are too low, and when they buy into it, then all manner of things go wrong and special levies have to be raised.
Steve: Yeah, absolutely, and we urge all of our clients to actually become part of the body corporate committee or the owners’ committee, take a vested interest into the property itself because you are paying for it, and to always remember that the body corporate fees are actually split into two different funds: the admin fund and the sinking fund. And, I like to personally think of it with my properties, the sinking fund or the body corporate fees is just this kitty that I keep contributing to that’s going to take care of all the external maintenance and repairs hopefully.
Margaret: Yeah, absolutely.
Damian, if not Parramatta, then is there a better option right now?
Damian: Matthew, look. If you’re braver you’d actually look outside of Sydney. I think Sydney has obviously done fantastically well over the last couple of years. And, as most people do like to invest in their own home town, again, I don’t know if you are from Sydney, but you all want to have a look at Brisbane, if I was you. I think areas like Chermside and Nundah…again, these areas we like, that are already starting to be re-rated a little bit, but, you know, we think have better upside.
Don’t think anywhere in Australia, you’re going to get rich next year, I certainly don’t think, but I think you’re going to see more upside in Brisbane. My only concern with Parramatta, yes, great, effectively the second city outside of the central Sydney CBD, but you will have…you already are starting to see that a lot of higher density, and so, yeah, be careful on that. I wouldn’t buy one of the newer ones, and even the older ones, make sure it’s a well-maintained boutique complex that’s going to be in good demand because there is a bit of a risk of supply there.
Well, it’s good to have you on board for the show tonight. If you have a question or a comment, and you also want to be in the running to win a copy of one of my books, then get to the phones, the email, or even to Twitter with your question. At the end of the show, one question scores a copy of my book, “Investing in the Right Property Now!” which is a great book about growth drivers. Call us on 1300 30 34 35, tweet me @MargaretLomasAU, or email firstname.lastname@example.org with the question. Make sure you wait ’till the end of the show to see if we choose your question.
Well, it is time now for us to take a short break. Don’t go away, though. When we come back, we’ll take some more calls and answer some emails.
Always a pleasure to have your company on the show tonight. Damian Collins from Momentum Wealth is with us, along with Steve Waters from The Right Property Group, and they’re standing by to take your calls, so don’t waste any time. Call us now on 1300 30 34 35, tweet me @MargaretLomasAU, or you can email us on email@example.com.
Now, Steve, just before we go to the phones, we talked briefly about some of the things that you can do to add value to a property for not much money. We know that adding a room is going to add value, but what sorts of things can you do to add some value?
Steve: Like I briefly mentioned, curb appeals is a big one for me. It doesn’t take a lot of money to, say, lay turf, clean out the clutter. Front doors are very, very important to me as well where you have good front doors, only a couple hundred dollars, plus some labour to hang, and then, as you walk inside, just cleanliness, so painting is not expensive, especially if you do it yourself, or pour in some sweat equity, as we call it, and little things such as your door handles, your shower handles, and things like that, which are so…
Margaret: And, can they easily be changed? Can’t they? They’re quite…it’s quite…
Steve: Well, you don’t have to be a professional to do it. And, although it’s something that’s not highly recognised if you were to walk into the property, it pulls it all together I believe, and more so especially if you paint, it’ll only highlight what you haven’t done, more so than anything.
Margaret: Yeah, my son moved into a new property on the weekend, an old property. It had red carpet and it had sort of yellowing on the walls, and the kitchen, the basics was all right. It had like, black Formica bench tops and white covers, and they have these big plastic black handles on them. So, he just took those off, put some nice little chromies on there. And straight away, everyone walked in and went, “What have you done to the kitchen, Margaret?” And, I went, “I just changed the door handles.” I mean, it was actually enough to make a big… and I hung a blind in the window. It’s amazing the difference that it made.
Steve: And, actually you don’t have to spend a lot of money essentially, especially if you’re on a budget.
Margaret: What are some of the things people spend money on that don’t really add much value then?
Steve: You briefly mention it. I’m a firm believer, if you add another bedroom, you shouldn’t be taking away from any of the other living space within the house. A lot of people tend to add that…say, that fourth bedroom, they turn the dining room or the living area into the fourth bedroom, and it actually devalues the house, takes away the cash flow, the rent, because people can see straight through that. One of the other things, I think, where people perhaps go a little bit overboard is on the soft furnishings, so you have the quality of the carpet, be at all that it has to be decent, you don’t have to spend, you know, tens of thousands of dollars. Same with the kitchens and the bathrooms, you can get away quite effectively.
Margaret: Oh, gosh, Masters and Bunnings these days, they have fabulous things. You can do a kitchen for five grand, plus a little labour to get it in these days.
Steve: Yeah, and you might get some cheap kitchens out of Masters very soon.
Steve: Fire sale.
Margaret: Okay, goodo. I guess I shouldn’t have mentioned that.
Let’s go to the phones, and David from Sydney. How are you going, David?
David: Hi, Margaret. Thanks for taking my call.
Margaret: You’ve got a question about tennis courts. I don’t think we’ve had that question before.
David: Yeah, I’ve got a tennis court in the backyard, and whilst we’re not really tennis players. When we bought the house, it was just a field, a fantastic area for kids entertaining, and it has proved to be so. But now, as we potentially contemplate selling the property, I’m just wondering whether it’s a plus or a minus. Like, does it reduce the buyer pool to a specific group? And just.. so I’m interested in the panel’s view.
Margaret: What a great question?
Damian: I’ve never heard that one before.
Margaret: I’m trying to think about me, and I think I probably wouldn’t buy a property that had a tennis court because I think I’d be thinking, “Okay, I’m not going to play tennis on it,” and I guess it depends, too, on whether it’s reduced outdoor area. Like, if it’s two acres and it’s got a tennis court, then, “Sweet, let’s take the tennis court and turn it into a basketball court,” but…
Damian: I guess, David, also, it would depend on the maintenance on it. As we all know, pools are very high maintenance and take a lot of work. And, if it’s a lawn one, I’m guessing that’ll be certainly high maintenance. If it’s concrete or… clay it might be less maintenance. But, look, I guess it’s, would you put a tennis court in on a property? Generally, if you didn’t have one there, you’d say no. I couldn’t think that that would increase the value significantly relative to the cost. As you’ve said, it’s a unique product, and even lots of people who do play tennis probably don’t want the hassle and taking up all that room and the maintenance, and they’re happy to go and play at their local tennis club, of which there’s lots in Australia.
But, now you’ve got it in, would you take it out? Probably not, unless it was really significantly impacting your outdoor living area. Otherwise, yeah, it’s not worth the expensive of ripping out. You might get that person who thinks it’s great. And, if it’s not taking up too much of your outdoor living area, it may not impact other people who are looking at buying it.
Margaret: I think that’s the key, isn’t it, Steve? I had a friend who had a tennis court once, but all she had was a tennis court, no backyard. And, I can remember thinking, every time you have a function, you all got to have it all on the tennis court. And, just how much can you decorate a tennis court to make it look nice?
Steve: Yeah, you’re hard up, and I agree, I think if it’s a concrete surface, it’s going to cost you a fortune to get rid of. I’d be inclined to this perhaps pretty it up to the best of your ability and then…
Margaret: Can’t you just build a rockery over it. If it was a concrete surface, take down the fence and build a rockery, some waterfalls…
Steve: Put a granny flat on it.
Margaret: Put a granny flat on it. Now, there’s an idea, David. Put a granny flat on it. Look, I think the consensus is that… and it depends, I think, too, David on where you live, and, you know, the clientele who are going to be buying your property, but I think the consensus is that it probably wouldn’t increase the value. It may not decrease it, either. And, if it’s easy enough to turn it over into a garden, then we probably would do that, but if it’s going to cost you an arm and a leg to do that, I don’t think you’ll get you’ll get the money back in increased value on the property by changing it over.
Well, in our first email tonight, Damian has a question about his loan, and he asks, “Hi, Margaret. We’re in our early 30s with a combined income after tax of just under $100,000. Our principal place of residence house and investment property have equity of $550,000. We’re thinking of a family and heading down to a single income of $50,000 for one or more years. We’d like to know if refinancing and buying another entry-level property, possibly north or south of Brisbane is a good idea, before we drop income. We could always sell the Melbourne investment property to reduce our principal place of residence to near zero if there’s a cash flow shortage.”
I have friends that are stuck with children…don’t think he means stuck with children, they’re stuck, with children, and can’t seem to get more loans for large investments like property with modest incomes like ours. Can be a problem, Steve, can’t it? Borrowing, when you’re down to one income.
Steve: Yeah, and I think a little bit of forethought will go a long way. If you were to…so, you mentioned selling the property. I’m not so sure about that, either because, you know, there’s obviously the capital gains and other tax implications, and what you end up with may not be what you thought to begin with. What I do like, though, however, is that you’ve mentioned a couple of good areas being north and south of Brisbane, and entry-level. Whether you would perhaps take the equity out now and do that, that’s a tough call not knowing the financial circumstances, having a first child to the mix. It’s a big step, and I’m not quite sure if I’d take that risk at this stage.
Margaret: Yeah, it is a risk, isn’t it? And, that’s really what…we’ve got to be…you’d think that safety first, I think, Damian.
Damian: Yeah, Damian. I guess the issue is going to be, if you’re down to $50,000, you’re, more than likely, I imagine, going to be servicing existing loans, including a new property out of your capital, and now that becomes risky, especially we’re in an environment where, you know, we don’t expect substantial capital growth rates in the next couple of years, generally across the board within Australia.
So, look, we don’t know when your partner’s likely to go back to work. If that happens in maybe 12, 18 months, or two years, you might be able to wear that, and your partner gets back into a working circumstance. If they’re not planning to work, you know, for five to seven years, and you can have a number of children, well, on $50,000 here, that seems a bit risky to me. Ultimately, it’s your call. You’ve got to take into account the risk, and the fact that you might be capitalizing interest, that is definitely a risky strategy. But, yes, with the…children are great, but from a servicing point of view, they’re a big liability. So, if you are down at one income with having kids, you’re probably going to struggle to borrow again in the near term.
Margaret: Yeah, it’s some good advice from the panel there for you. The thing that worries me the most is that even though you say you can always sell the Melbourne investment property, if you do get into trouble, property isn’t overly liquid, and you certainly wouldn’t want to be up against it at a time where suddenly the market has turned, it’s gone quiet, you can’t sell that property, you’ve got to take a loss on it or you get out of it for a lot less than you want to because you’ve been forced to do so.
I never like people to overcommit, and I think you’ve got two properties on $100,000 already. I’m sure you can probably afford that third. But, unless it’s really going to look after itself and be a very positive cash flow, in which case, make sure that it is in a growth area, and certainly you can get some good positive cash flow properties in South Brisbane, so, you know, you might be able to do that. Just be very, very aware of the risks on the way in, and have a back-up plan. Ask yourself, “What would happen if everything went horribly wrong? Could we afford to live on that $50,000 if we couldn’t get rid of the other investment property?” And, do your cash flows and budgets before you make that decision.
Well, it is time for us to pop off for just a quick break, but we will be back soon. Now, if you have a question for us, call to join the queue on 1300 30 34 35, tweet me to @MargaretLomasAU, or email us on firstname.lastname@example.org. You never know you could win the question of the week. We’ll be right back.
Thanks for tuning in tonight for our property edition of “Your Money Your Call.” I’m Margaret Lomas from Destiny, and tonight, Damian Collins from Momentum Wealth and Steve Waters from Right Property Group are here and they are ready to take your call. So, call us right now on 1300 30 34 35, tweet @MargaretLomasAU, or you can email us on email@example.com.
Now, just before we go to the callers, the Property Council of Australia has issued a parliamentary committee submission to highlight the potential political consequences of changing negative gearing policy. In a blunt message to both parties in an election year, they say that 430,000 people living in marginal electorates would be impacted by changes to negative gearing. The Property Council warned a parliamentary committee into tax deductibility that changing the policy would be playing with the financial futures of people who live in the most marginal seats. According to the Property Council, new data has revealed that over 430,000 Australians who negatively gear an investment property do live in those marginal seats held by the government and the opposition.
Now, I heard a headline this morning, or I think it was on TV this morning, and the headline was: The government is preparing to scrap negative gearing. Now, is that scare mongering, and is that an overstatement of the facts or not? You know, there’s no decision made. Someone mentioned it again, but there would have to be legislation passed through Parliament, both sides would have to agree. I think the government knows what havoc it would cause. But, all of a sudden, I can imagine investors out there are all panicking, and they’re all be saying to each other, “They’re scrapping negative gearing.”
Damian: It goes around in circles. So, the GST is on the table, and it’s off the table now apparently, and they’re looking for money. Obviously, they’ve got a big budget deficit. But, I just saw those stats from the Property Council, and some of those… I read that over the weekend, in some of those marginal seats, there’s 8000 negatively-geared investors and a margin of 800 seats. You could be pretty brave marginal seat holder to support the government and agree to that policy.
Look, I think the talk is… I read and heard today as well, but they might cap it at maximum number for properties potentially three or something…
Steve: Hope not.
Damian: I hope not, too. And, the other thing possibly makes more sense is, the biggest argument, I guess, is when you sell, you get the capital gains discount, but you’ve got the deductions at your marginal rate. But, maybe when you sell, some of it’s back at your marginal rate. That makes a bit more sense, I think. But, just stopping it is going to…ultimately it’ll put rents up, end of the day, that’s what it is, and it will hurt the people who can least afford it. So, crazy stuff, and, look, it’s just all going… I bet, one thing we can be certain of, if you own a property today, they will not make a retrospective. Both parties have said that. So, you’ll be right if you’re already own property.
Margaret: Or, so you should run out now and buy as many as you can possibly afford, and get them into your portfolio because it’ll take a year, to a year and a half for that kind of thing to get through legislation.
Steve, in my investing lifetime, it’s the third time this has been on the table, the third time, and that doesn’t include the time that they actually went ahead and did it, and then retracted 18 months later.
Steve: Look, it just goes round and round, I think, at the end of the day. And, as blasé as this may sound, it’ll be what it’ll be, and there’ll be an opportunity there for the savvy investor, if it was to actually progress to that level. But, there’ll also be some massive hurt, as well, as if…you know, for the potential investor that develop, or whatever it may be. If I was a betting man, will it happen? Not in its full sense, I don’t think it will.
Margaret: Yeah, no, I don’t think so, either. And, I think, you know, even the cap, I don’t think it’s going to work because there are a lot of average income earners who have five or six properties, and I just don’t think that it’s possible for them to…
Damian: It’ll have a flow-on effect throughout the whole economy, especially today’s…yeah.
Margaret: Crazy, crazy stuff.
Okay, well, let’s go to the phones, and Ang, how are you going?
Ang: Hey, guys, how you going?
Margaret: Good. What can we do for you?
Ang: Victoria, so budget of 750. I’m looking at buying…it’s from an investment perspective, either a house in Preston Reservoir area, or an apartment in the city, St. Kilda, Armadale, Elwood, considering growth in units the last year have been 5.3, I think in-house is 13%. Just wanted your opinion on what the better option was for a 750 budget.
Margaret: Well, I’m not a betting woman, but I think I know what you’re both going to say. I’m going to start with you, Steve.
Steve: Steer away from inner city is probably the first thing I’d suggest. And, if you’ve got a 750 budget, I’d be potentially breaking that up into perhaps three, four, two different properties with higher cash flow, something with a little bit better growth potential than the inner cities, which are going to become oversupplied, if they’re not already.
Margaret: Yeah. Preston Reservoir. It is a lovely place to live, it’s really up and coming as well, but do you think that’s the kind of area that makes a good investment?
Damian: Ang, I concur with Steve. I certainly wouldn’t be buying apartments in St. Kilda and those other areas you mentioned, so keep away from that. In terms of Preston and Reservoir, I think they’re good areas, but they have had a bit of a re-rating, and they’re certainly not blue-chip as we said before. But, you might want to look maybe out in towards Frankston, and maybe come a bit further in from that area. That freeway has certainly made that area very accessible, the bypass. But again, 750 is a lot. Look, it’s difficult in Melbourne now to get too much even for half of that if you’re going to be in up with a long, long way out, but, maybe look at splitting it up potentially into maybe a city property, and maybe something a bit more regional because 750 is a lot. But, certainly, yeah, keep clear from those apartments.
Margaret: Ang, I’ve done a bit of research into the Melbourne market recently to try to work out where the best buys are. And, in fact, we’re not seeing it in the inner ring, definitely not apartments. We know that the apartments are headed for trouble because they just keep improving more of them and there’s literally, you know, hundreds and hundreds, if not thousands coming online in the next three to four years with the new approval. So, I would definitely…that’s going to impact on any of those apartment markets, so I’d definitely stay away from those.
In terms of the middle ring, I’m not even picking those because, at the moment, I think they’re under interest right now, and they’ve actually done very well. As you’ve quoted, 13%, most of that has been in that middle ring. If you go into the outer ring where we see…just the edge of the outer ring where we see blue-collar workers and lots of employment, I’m talking around Deer Park, Tarneit, even Sunshine West on the west side, and on the east side, Carrum Downs and the areas that ring around Patterson Lakes. It’s quite a paradox where you see Patterson Lakes with prices around the $600,000 and $700,000, and right next door in Carrum Downs, you can buy in for $300,000. And, we will see that ripple effect happen there. We won’t have Carrum Downs go to $700,000, but we will see it pulled up by those surrounding suburbs.
I think there are better areas to look at than those ones that you’re looking at at the moment. If it is for living in, it’s a different situation, remember. But, for investment, I think you need to do a little bit more research on where to buy, and a bit more research on those growth drivers.
Pauline, you’re also from Melbourne. How you going, Pauline?
Pauline: Yeah, good. Thanks, Margaret. How are you?
Margaret: I’m very well. What can we do for you?
Pauline: Well, my question is about managing investment debt. Myself and my husband, we’re in our early 50s, and we have six properties and our PPR. We’ve got about $20,000 left on the PPR, and I was looking at just from now on drip feeding that and turning my attention to the investment debt. Now, that debt, we have an offset account against, and my question is, is there any difference in putting our money into the offset accounts or paying down the actual investment lines, because if we pay the loans down, we have less interest to claim a deduction on? So, is there any difference?
Margaret: So, of course, no difference in terms of less interest because in an offset, you’ve got less interest to claim a deduction on, anyway, same nils on gain. What do you think she should do?
Damian: Pauline, I always think…again, you need to be able to manage the debt, and it sounds like you can. You’ve got six investment properties and very little personal debt on your home, so you probably are someone who’s astute with their money. But, the thing is, if you pay down the investment debt, you ever decide you want to take a trip overseas, $20,000 of $30,000, you don’t have the cash and you draw that against that investment property, it suddenly becomes non-deductible, and could potentially permanently tarnish that loan while it’s in that state. So, I would always recommend putting money against… in offset accounts.
Now, some people have this…because you are saving, you’re only paying the interest on the net debt. So, that’s just a simple example, but $500,000 investment loan, $100,000 in an offset account, it’s exactly the same as paying it off from the cost of interest. You are paying the same amount of interest over the long term.
So, I’d always recommend putting it in an offset account. Once you know, “Never ever again am I going to need that money, I’m done and dusted,” then maybe pay it off. But, until that time, I’d keep it in the offset account just in case you might want it or need it for something that’s non-deductible.
Margaret: Yeah, it’s a good point, isn’t it? Because, if you need that money, you can’t drag it back out. If you drag it back out of an investment debt, a lot of people don’t realise that the tax office sees that then not as investment debt anymore, they see that as personal debt the minute you pull it out.
Steve: I think, having the liquidity is ever so important, especially at that time of your life. I mean, you obviously can handle debt and you can manage it well enough having a portfolio of the size that you do, but having that liquidity about you is ever so important at this stage.
Margaret: You know, Pauline, the only time that I ever recommend that somebody pay off debt instead of either holding in offset or even having potentially a line of credit where you can split off little bits that you earmark per person, and for investment debt, the only time I ever recommend that people don’t do that is when they can’t trust themselves and they’re not good at managing money. Some people, when they have an offset account, see that money as available for them to spend, and they’ll spend it on things that maybe they could go without. If you are disciplined, keep it in offset. If you’re not disciplined, get it paid off the loan and make sure you can’t get it back out of that loan as extra repayment, re-drawer.
So, it’s really going to be up to you. The net effect is no different, either way. So, you’re going to have the same net effect, except for the fact that if you paid off investment debt and later need it for a personal need, it’ll become personal debt, and then you’ll be a little bit upside down financially. So, make sure that you are very disciplined before you go ahead.
Now, many property investors think about becoming developers at some stage, and Lindsay has been thinking about that. So, he wrote to us, and he said, “We have five investment properties and we feel that we’d like to extend our portfolio faster by getting into property development. Would you recommend property development, or is it too high a risk?”
Margaret: It’s a really good question, and I think I get asked that at least once a week. Developers make money because they do it all the time essentially, and they’ve land-banked the land originally. I’m not in favour of people buying a DA-approved block of dirt and then becoming a developer. I think the risk is too high. If you really want to fast-track the portfolio, then probably better look to perhaps buy a block of units and strata subdivide, something with a little bit more risk, and leave the development to those that do it all the time. I’m just not a fan of it. I think the risk is too high.
Margaret: What do you think, Damian?
Damian: Lindsay, I agree with Steve. Look, I mean, I’ve developed and expanded my portfolio, but I’m obviously a professional in property and I know what I’m doing. Now, a lot of people, particularly in the market has been running strongly, they get all excited to hear about these stories of developers who’ve bought something for a million and flipped it at eight months for 2 million, or they’ve made a huge amount of profit on a development. But, what you don’t hear on the other side of the boom, when the market comes off, a lot of developers go bankrupt. So, if you’re looking to develop to sell, it’s very high-risk. You’ve got to time the market correctly, and it could ruin all your plans you’ve put together so far. And, it’s a profession in itself. Developers are professionals. It’s a business, it’s not a hobby, and a lot of people go into it in a hobby format end up burning money.
What you might want to do is maybe buy a site that, at longer term, has better development potential, that maybe you might develop into two, three, four units yourself, that might give you a bit, you know, of development profit at that stage, but you’re holding onto them for long-term investment. That’s probably the better way for most passive investors to speed up their portfolio a little bit more quickly, by doing a small-scale development to hold onto for rental purposes.
Margaret: Now, be honest. Even you, as a professional, I bet you’ve blown the budget a few times in your developments.
Damian: Oh, absolutely.
Margaret: Always do that, just always do…
Damian: Builders go broke. Many things can go wrong, and you don’t want to put your eggs in one basket, but it’s a profession and if you know what you’re doing, you can certainly make some good money. But, it’s not for the hobbyist to go in, and that’s a lot of people who get burned that way.
Margaret: Yeah, they absolutely do. Let me tell you, by the time that you pay all of your council levies, all of your contributions, all of your subdivision costs, all of your driveways, and earth removal, and demolition, and fence removal, and putting in power and putting in water, and all the things that you have to do…and, I’ve only mentioned probably a tiny number of the things you’ve got to do before you can even get out of the ground, and all of that time you’ll be borrowing to do that and paying the interest on the loan with no income coming in, a lot of people fail to add on to the cost the interest for the year-to-year-and-a-half, and it’s going to be a year-to-year-and-a-half that you are drawing on loan funds and you’re not making any money on it. So, that adds to the cost of that development, and it means that it’s very, very difficult to bring in a development on time, and to budget.
I don’t think I’ve ever met anyone who has done so. I’ve tried some small developing myself, and, look, it’s hard work, so you also have to have the time to do it. If you don’t have the time to do it, it’s going to take even longer, again. Get a few more properties under your belt maybe, maybe think about granny flatting, if that’s appropriate for where your properties are. Maybe think about upgrading the properties that you’ve got if you want to add a little bit of value, but I’d leave the developing just for now.
Well, thanks for tuning in. It is time for a break. But, when we return, you will have another chance to get hold of a copy of my book “Investing in the Right Property Now!” but you’ll have to ask a question, and then you have to have it selected. Call us now on 1300 30 34 35, tweet @MargaretLomasAU, or you can also email us on firstname.lastname@example.org.
Welcome back to the show, and thanks for staying with us. I’m Margaret Lomas from Destiny, and joining me is Damian Collins from Momentum Wealth, and Steve Waters from Right Property Group.
Now, I’m sure you also have a question for us, so grab the phone and dial 1300 30 34 35, tweet @MargaretLomasAU, or email us on email@example.com.
And, Neil from Avoca Beach has a good point to raise, and he says, “Just after your thoughts on the vendor having to supply a building and pest inspection to prospective buyers… This independent document would allow purchases and the banks to see up front any faults with the property.”
Steve, of course, I’ve been doing it in camera for a year or two now.
Margaret: What do you think of the idea?
Steve: I think it’s good, but it would only be one piece of information that I’d rely upon. Essentially, I’m always going to order my own pest and building report, someone who I’ve employed. That way, there’s no possible way of perhaps a little bit of prejudice one way or the other. It’s not a risk I’m willing to take, but I like the idea, I like the concept. In fact, some mortgagee in possessions also do the same thing, and they’ll provide a pest and building report with the properties that they’re selling. I think it just cuts down the time. It will potentially cut down those that will or won’t enter into the property, or even consider purchasing it at the end of the day.
Margaret: Really, I think it should be the responsibility of the seller to prove that they’ve got a property in good order, don’t you?
Damian: Yeah. Look, I think it’s generally a good idea, particularly when I… you go to auctions and you see a lot of bidders, and six or eight people will spend the same amount of money on a building and pest inspection. And, of course, a lot of them, at least all but one are going to miss out on that property, and it’s a lot of money down the drain for those potential buyers. So, I think, in those circumstances, that makes sense. In Western Australia and Queensland, you can buy the property subject to getting the building inspection, so you don’t need to get it before you put your offering. You can quite easily…and it’s pretty standard…
Margaret: You still have to get it done, pay for it, and pull out. You know, I mean, you can sort of do that here as well. You can not exchange, but…
Damian: I guess the issue of the reluctance around the circles from the seller’s point of view, and a lot of inspectors are, the inspector’s report will say, “My liability only extends to the person paying for it,” which is the seller. If someone said they have missed something, missed some termites, the buyer buys it, and they go. They don’t have a contract with that pest inspector, so that’s where it gets a bit murky.
Margaret: And, maybe that will change under the…
Steve: That’s it. I mean, we get hundreds of reports every month, and the difference between some of the providers of those pests and building reports is remarkable.
Margaret: Yeah, chalk and cheese, aren’t they?
Steve: There could be no termites, and then there is termites. And, that’s why, I think, I’d rather, as a purchaser, rely upon the person that I’ve engaged to do the reports for me. Now, having said that, the one or two times I have sold a property, I have got a pest and building rapport purely because, not to provide any potential buyers, but I want to see what I’m offering up. Is there anything that’s going to kill a sale for me?
Margaret: So, you’re not nice like that. You’re doing it because you just want to be nice to the purchaser?
Margaret: Can’t help that, but, yeah. Look, we think it’s a great idea. I think it’s a great idea. I think it should be done. I think it’s the… you know, in Victoria, they have vendor disclosure statements where you have to disclose any faults with the property. Yet, in New South Wales, for some reason, vendors think they don’t have to tell their buyer anything, and the law almost supports that. I mean, surely if you bought something with a known fault, you’d have some other law you can get the seller through, but certainly not real estate laws. So, I think it’s great to have that kind of disclosure up front.
Troy, welcome to the program. How are you going?
Troy: Oh, good thank you. How’s yourself tonight?
Margaret: We’re really well here, as you can see. We’re ready to help you. What can we do for you?
Troy: Actually, I have an investment property out at Upper Coomera, but the negative gearing is starting to get to a situation now there where the tax breaks aren’t quite there, like, we’ve owned it for seven years. Also, I own a house in Casino, New South Wales, which is our primary residence. And, I’m just wondering whether it’s worth hanging on to the property at Upper Coomera, and just, you know, pay the property off for the next few years and see what happens, or do we sell it because, at the moment, we can basically sell it for, not making a lot of money, but we can make a very slight profit, cover the cost, and then put the equity into somewhere else that may be more, you know…that can make a bit more percentage-wise?
Margaret: Okay, I always worry, Steve when people say that they want to get rid of a property because they won’t be able to negatively gear it anymore, which, of course, means it’s going to go into a positively-geared situation where they’re making more income on it than they’re actually getting. Really, you shouldn’t be investing for the negative gearing benefits. Nothing’s been said here by Troy about, asking the question, you know, what about growth? And, do we think Coomera is going to grow in the future? And, that’s really what you should be out to get.
Steve: At the end of the day, that’s what you want, the growth. But, at the same time, trying to run your portfolio, trying to invest around tax breaks is just not sustainable in any way, shape, or form. I would be looking at the growth potential of the area, and whether it’s going to help me or not. Having said that, and you asked a very good question, if there is no growth prospect there and, for whatever reason, the property is starting to burn a hole in your pocket excessively, should you just cut your loss and run, and perhaps move any equity that you do have into a better-performing investment? That’s something that you really need to run the figures and the numbers, time and time again before you make that decision.
Margaret: That’s a different story. I’m assuming this isn’t burning a hole in his pocket at all. I’m assuming these negative gearing tax breaks are coming to an end. It means that he’s going into a positive cash flow situation on that. So, it’s actually getting him money.
Damian: I agree, Troy. The amount of people who come to me and say that…similar to what you say, “Oh, it’s not going to be negatively geared anymore, should I sell it, or?” It seems to be a problem. Well, you know…
Margaret: They told me they’re accountants. That’s why. Accountants are all about the tax break.
Damian: But actually, at the end of the day, though, I want all my properties to be positively geared, because that means I’m actually making money. Negative gearing might help you depending on your tax bracket, anywhere from 30 cents in the dollar maybe to 50 cents in the dollar, and at the end of the day, you’re still paying some of that out of your own pocket. Obviously, depreciation is a non-tax deduction… a non-cash deduction, I should say. So, don’t be afraid of positive gearing in its own right, because that’s good. That’s ultimately what we want all our properties to be, positively geared. They might set off negative, depending on interest rates, and the rental yield, and growth prospects.
But, yeah, the second question obviously is Upper Coomera… look, I think you obviously need to have a good look at that. It hasn’t done particularly well for you, but there’s a lot… we couldn’t just give you a straight answer because we need to obviously…you need to see a property investment professional, maybe your accountant to help you, as well, calculate all the potential capital gains, costs in and out. And, if you’re going to lose too much, maybe it doesn’t make sense to sell and rebuy.
Margaret: Here’s the thing, Troy. If your property is headed into positive cash flow territory, what it means is this: you have money every week left over after you pay everything off. And, what you do with that money is you pay it into the loan, if you don’t have a loan of your own, or put it into offset. And, what that does is it buys equity even in a slow market, and equity is what allows you to leverage again into another property. So, you want more equity so that you can then use that as the deposit for the next property. A positively geared property is great because what it means is that in those years where the property doesn’t grow, you still get equity because you’re getting that positive cash flow to buy that equity.
Now, having said all that, if you had a positively geared property that was in a really lousy area that never grew, you may think about selling it, because positive cash flow alone is not enough for a property. But, if you’re in an area that has the potential to grow, as well as get that positive cash flow, it’s a nice mix.
Now, I’ve never been a fan of the Gold Coast, and I’m still not. However, when I do talk about suburbs of the Gold Coast, Upper Coomera is one of the ones that I do like. It’s right up close to the border of Brisbane, up near Beenleigh there, and that area is really strong, and I see it waving out to Upper Coomera. The only reason Upper Coomera hasn’t moved recently, because it is full of families and infrastructure, is because when all those new developments there were sold, they were sold at well over their intrinsic market value. That area’s been playing catch-up, and I think it’s going to move again in the not-too-far distant future.
It’s time for a few more messages, but when we return, you’ll have another chance to get your questions answered simply by calling us on 1300 30 34 35, tweeting @MargaretLomasAU, or emailing us on firstname.lastname@example.org.
Great to see that you’re still here for “Your Money Your Call” tonight where Damian Collins from Momentum Wealth and Steve Waters from Right Property Group are helping me to take your questions. Now, you can still get yours into us tonight, and you may even be this week’s book winner. Call us now on 1300 30 34 35, tweet @MargaretLomasAU, or email us on email@example.com.
Tony from Melbourne. How you going, Tony?
Tony: Good, thanks. I love the show, Margaret.
Margaret: Thank you.
Tony: Margaret, the question is: I’ve got a property in East St. Kilda in a block of seven. It’s about 40, 50 years of age and, what I’m wondering is all this new property coming on to the marketing and all the new stuff, is that going to affect capital growth of that older property, going forward?
And, if I can quickly sneak in another question, that is: is there buying opportunities in these mining towns like Mackay, Karratha? Yeah, that was the second question?
Margaret: Okay, I’m going to give you the unit question, or do you want the mining question?
Damian: I’m happy with either, but, Tony, I’ll start with the unit one. Look, yes, there’s no market, a market of older units can operate in a bubble outside the impact of newer units. So, if there’s a lot of newer units, people are spoilt for choice. If they come back a little bit in newer units, which they’re likely to, it’s going to have some impact. Now, what you might find a block of seven, East St. Kilda, you might find that, if it’s on a big enough land parcel, maybe the highest and best use of your site might be a development site, so you might be lucky and developers might come along and try and….
Margaret: Or, Damian, you know what Melbourne people are like, they love quirky, they love that old stuff down there.
Damian: Yeah, kind of retro.
Margaret: So, if it is one of those nice Art Deco buildings, that could be a different story.
Damian: Yeah, absolutely. If it’s got some particular character, it’s hard to know some of them are, I know East St. Kilda fairly well, just the old ’60s-style block of flats that are pretty ugly, and you’ve got some beautiful Art Deco ones. So, all those things come into the mix, but as a general rule, they will suffer a little bit but I don’t think they’ll suffer certainly as much as the newer units.
Steve: Look, essentially, the question was: will there be some sweet little deals around the mining towns at the moment? Look, possibly, but just because it’s cheap doesn’t mean it’s a good deal. I’d be sort of holding on to my money, looking in other areas. I don’t think there’s any perhaps value there. There’s certainly a lot of risk involved. I don’t see commodity prices really doing anything spectacular in the near future. I’d be kind of holding back. And, to be honest with you, it’s not the kind of property or investment area that I’d want to be in.
Margaret: Look, I’ve got to be honest with you, Tony. The mining towns will eventually come back. I don’t think when they do come back they’re going to go anywhere near where they went. Moranbah is an example. People were buying shacks up there for $750,000 and $800,000. They were getting $1500 to $2000 a week, and they can’t sell them today for $100,000. Now, they may come back, they’ll never go back up there again because everybody’s gotten smarter. The mining companies are building their own accommodation, the governments are releasing land to take the heat out of those markets. And, that’s what they did, and it all worked, and then, of course, commodities all fell in value and mining started to shut down a little, not that it shut down completely.
Now, what’s going to happen is the actual operations phase of many mines is due to recommence in 2018 to 2020, and we will start to see little bit of interest in property there. But, to be honest, it’s a bit of a wait for that to happen. You’re looking at four years. You’re going to struggle with the tenant… Vacancies are up to 20% and 30% in a lot of those areas. And, before that operation phase begins, again, I can tell you those mining companies are going to be ready with accommodation for their workers, and the local houses aren’t going to be rented. So, I really don’t think there’s any opportunity in mining towns. They’re just too risky. If you’re a risk-taker and a gambler, and you’ve got money to lose, we could be wrong. Give it a go, but I don’t think we are.
Joe from Sydney. Welcome to the program, Joe.
Joe: Oh, good evening, Margaret and panel. Thanks for taking the call.
Margaret: You’re more than welcome.
Joe: I’m after a little bit of…well, picking your brains about three areas I’m looking at investing. I’m liking the look of sort of the Frankston, Seaford area in Victoria, and also the sort of Nundah, Virginia area in Brisbane. But, I’m also considering sort of Kippa-Ring, Redcliffe, that sort of area as well. Now, for someone who was looking at a medium-term growth, so let’s say, the time frame is three-to-five years, which of those areas would you pick, and why? And, if none of them, where else should I be looking?
Margaret: OK, I’m going to give you a short time each to have a go. Steve.
Damian: If I have to have a pick, it would be Brisbane. However, I’d be just pulling back from that inner city ring, if possible. Preferably I’d be…if I wanted that three-to-five-year time frame where I’m going to make a little bit of money with growth and cash flow as a combination, I’d probably be in that 20-minute ring outside of Brisbane. I think there’s going to another supply in the areas that you mentioned.
Margaret: So, you like Nundah and Chermside, which is, of course, really in that more 5-to-10-kilometer ring there?
Damian: Yeah, Chermside is about 10 kilometers out. It’s one of the strategic areas of Brisbane identified, so you expect to see a lot more government investment in the area. Look, I don’t think, again, Brisbane or any of the cities are going to, you know, run away in the next three-to-five years, but I think you’d do better in Brisbane, although the area you picked in Melbourne, I do like. Frankston, Seaford, it’s a good spot if you’re going to go to Melbourne. But, I’d be sticking with Brisbane, and Chermside would be my pick.
Margaret: You know, it’s funny, if you watched this show from when we first began, which we work out tonight, is almost nine years ago, to the day, with the very first show, if you go back, I think we can find it on my website somewhere, you’ll see that the very first area that I ever recommended anyone investing was actually Frankston, and that was on my first show here. And, it’s done very well in that time, and it’s still poised to do better again.
My money is on Kippa-Ring, Redcliffe area, though, not so much Redcliffe because that’s already gone up into Deception Bay, back into Rothwell, even Mango Hill which is a little bit more expensive but right there on that freeway, because that whole northern suburbs area is burgeoning and it just hasn’t quite taken off yet, but properties are really well priced in the very early 3s and even late 2s, you’ll get something up there. You’ll get a 6% rental return, and the three-to-five year period is exactly right for that area, because no one in Brisbane’s realised it yet, but with that new rail line into Rothwell, and all sorts of other infrastructure happening all of a sudden, everyone who’s watching this show today and don’t do anything in five years’ time will go, “Oh, yeah. Margaret said that five years ago.” So, maybe get in now on it, and I think you’ll do pretty well.
Now, we have an email from Daniel who asks, “I’m 28 and I live in North West Sydney. We’re building our place of residence in Kellyville and I have five investment properties.” Well done, at 28. Go, boy. “We will have a lot of equity to use once the build is complete. Would you recommend to start putting a few granny flats on my investment properties in Western Sydney, or use that money to invest in other properties?”
Margaret: Wow! This is a tricky one, Steve, because, look, I like granny flats as well as the next person, but I think, I believe, the whole granny flat build also needs good market timing, and I’m just questioning whether it’s the time.
Steve: Well, I agree. I think you’ve missed the boat with the granny flats in that Western Corridor throughout Sydney. And, the other problem I have is the amount of granny flats that have been built throughout that whole sector, on top of the fact that a lot of those granny flats actually look like shipping containers.
Margaret: Yeah, they do. I thought you were going to say something else there when you started the “SH” word.
Steve: Shipping containers.
Margaret: Worried I was going to have to…I’ve got my little button under, the little mute button.
Steve: And, I also think that the time has been and gone for that. There’s perhaps an argument to suggest also that the tenant quality for the granny flats is a little to be desired, and therefore, the actual net rent back to you is actually not as fantastic as it seems to be because you need that tenant mix between the main house and the granny flat because you’ll have people moving out from one or the other, plus the first week’s rent that the agent will take. So, the net rent back to you is not that good. In terms of taking the equity over the principal place residence, if that’s what you deem where your portfolio and your life is up to, I’d be looking perhaps more to get into the next area, which is perhaps a different state, and buying properties that perhaps have the potential to put the granny flat in the next two to three years rather than doing so now.
Margaret: You know, Damian, I’ve seen granny flat developments that have been really good ones where the house really lent itself to them, and had a big backyard, they were able to make it look like an actual subdivision with a battle-axe block almost behind. I’ve seen that really well done, and under those circumstances, private driveway, it’s like two houses. But, I’ve also seen it badly done where it is…it’s like a box stuck in the backyard where someone has to go down the side passage to get to it, they don’t have parking, and it’s really creating almost like a social housing problem in some of those areas.
Steve: I think it’s going to be a massive problem in the future. And, if we go back to that Western Corridor where a lot of that is, you can literally reach out and touch the granny flat next to you. I think there’s going to be problems in years to come. On the other side of the coin, a well-built granny flat, I think, will add the value, will add the cash flow. As an example, we just did one up in Brisbane where we put a two-bedroom granny flat on for $159,000, separate entrance, plenty of wide access, fenced off. It’s almost…yeah, like it’s proper subdivision, but it’s not…
Margaret: Or, if you can get one that’s on maybe, you know, two-street frontages or corner block, you put one in behind a corner block. That’s a different story, isn’t it?
Damian: It is. And, Daniel, look, a lot of granny flats, as the panel’s mentioned, in a lot of cases, they end up being not… they don’t end up getting much value, particularly… some can, but our experience with it and valuers particularly, is that they don’t tend to value them at much more, in the vast majority of cases, than what you’ve actually spent on the property. So, what you’re looking at there is two different strategies. You’re either looking at granny flats for cash flow, and… or you’re looking at maybe investing other properties, you’ll get more capital growth. So, hard to answer that question, but, just be very careful, there’s bit of an oversupply in granny flats in a lot of areas now.
Margaret: Okay, now, I believe we have another caller on the line, and this is Michael from Sydney. Hi, Michael.
Michael: Hi, guys. I have an apartment, two-bedroom apartment in Bowen Hills. I’ve had it for a couple of years. It’s an older one, sort of built early ’90s. It’s got a bit of size about it, should have been a block of sevens. Question I’ve got is, there’s so much supply going in around that Newstead region, the yields being about 6% now. Look, I’m originally a Melbourne guy, and I’ve sort of lived in Brisbane for a couple of years, but don’t live there anymore, and I’ve sort of got a theory that just around the rental market up there, that once these apartments all come on, I’m just not sure how many people can actually afford, you know a price tag something in the 500 to 600 bucks a week just with the amount of Government work up there. So, yeah, just interested in your views, if you think maybe to hold or maybe time to tip it and move on.
Margaret: Look, it’s a good point, and I agree. I think…it’s like Brisbane is creeping up with a very secret oversupply that no one’s really picking at the moment, but we’ve had a lot of things happen. You know, back to the floods and the GFC, then a lot of projects were put on hold, and all of a sudden, they all came back together. And so, we are seeing this oversupply creep up on them, and I think Michael is right.
Damian: I think you’re right, Michael. There’s a lot of supply of apartments coming into, you know, the near-5k ring around Brisbane. And, look, whether or not to sell is always a difficult one because we don’t know your entry price. I’ve looked at examples with clients, and sometimes they can lose 25%. By the time they sell, the sales cost, stamp duty to rebuy, and also the capital gains, it could suck up 25% of the value of what you got. So, it’s a lot more to think about it, but you want to be cautious. So, I think, in, you know, a year or two’s time, you’re going to find you’re getting less rent and your capital growth outlook’s going to be pretty soft for a while there.
Margaret: So, Steve, I guess the question that Michael needs to ask himself is, “How low can I go and rent to still cover my costs, and so it doesn’t cost me a lot of money to hold?” Because, oversupply does work its way out. That sometimes can take two years, it sometimes can take five years. In Melbourne, it’s probably going to take a good 10 because there’s so much of it. It’s not as much in Brisbane, but there will be some. So, can he continue to hold through that? Because, I don’t think the values will be hugely impacted. I don’t think they’ll be a little bit impacted, but not that much.
Steve: Yeah, I don’t think the values will be too much impacted, but I think the cash flow, as you mentioned, will be. He’s actually very lucky. He’s got a small complex, a rather large unit compared to what’s coming onto the market, and that’s going to be an attraction to a certain type of renter. I think, as you mentioned, getting the deposition right, getting the cash flow right, perhaps even locking in interest rates just to take care of the cash flow to ride out this, perhaps, oversupply situation, which is going to happen, but, as you said, it’s not going to last forever. And, as quick as turn things turn into an oversupply, they turn into an undersupply just as quickly. And, being able to capitalize, perhaps, on the next up to another cycle is something to consider.
Margaret: Yeah. Look, Michael, I never like to see people coming out of a property unless they absolutely have to for financial reasons. So, I’m the first one to advise someone to disinvest if they’re present financial circumstances are taking a big hit and / or if the property isn’t showing any signs of really doing something for them in the coming three-to-five years. You know, you can go without food for probably a year or, say, you know, the bare minimum of food for about a year. But, once you get past that, it gets a little bit old-hat and it’s not so much fun anymore, while you’re waiting for your property to grow.
So, I will definitely advise people to disinvest if they think the time has come. But, I don’t think you’ve put up a good-enough case for disinvestment in your case, unless you are struggling financially in it. So, I do advise you to go away and have a look at your cash flows, have a look at how low your rent can go so that you can still hang on to that property. If you’re starting to have to put in a good amount of money like 100 a week, then all you’re doing then is losing the money slowly rather than quickly up front in selling costs and capital gains tax. So, it really becomes a financial proposal, I guess, because I don’t think you’re going to be impacted too negatively in those values, and I think, down the track, you’re going to come out of it and it’s not going to be too far down the track. So, have a good long think and do some numbers.
Thanks for tuning in. It is time for our last break, but when we return we’ll answer the last few questions and also some more email. If you’ve got one, call us now 1300 30 34 35. Don’t forget you can tweet me @MargaretLomasAU. You can email us also on firstname.lastname@example.org.
Welcome back to “Your Money Your Call.” I’m Margaret Lomas, and it’s been my pleasure tonight to host Damian Collins from Momentum Wealth, and Steve Waters from Right Property Group. Our lines are closed for tonight, but we do have time for these last questions.
First of all, Brad from the Gold Coast. How are you going, Brad?
Brad: Good. Thanks, Margaret. Thanks for taking my call.
Margaret: It’s my pleasure.
Brad: I just have a couple of questions. I just want to add to my portfolio of properties in Queensland and Western Australia, and I’ve identified Playford in South Australia, and I’m just wondering if you agree, and if so, what suburbs in that area might be the better ones to go for. And, a second question, just with all these granny flats, when you have granny flat, do you pay double the rates?
Margaret: Ah, good question.
Brad: Thank you.
Margaret: Okay, you can answer the rates question first, Steve.
Steve: Potentially, yes is the short answer. If you subdivide the property, well then, you are going to be up for two rates if you have the two different titles. Look, granny flats are a great way to add cash flow. They’re going to be on the right block, as we’re discussing a little earlier on, with enough side access, a good cost to operate, and have the potential tenant there, of course. Now, coming… the second question was, what we think of Playford down in South Australia?
Margaret: Elizabeth, Devon Park, all those areas are part of Playford Shire?
Steve: Yep. I don’t mind it, to be honest with you. In fact, I think it was only a couple of months ago you and I were talking about Adelaide, and how it’s going to be the dark horse, and it’s now starting to prove that very much so.
Margaret: It’s doing pretty well, I thank God for that. Because I’ve got a lot of property down there. I took a bit of a stab in the dark there, and I’m developing some of them. What do you think of Playford Shire?
Damian: Look, I guess, South Australia, unlike my two panelists, it’s a nice place to visit and go to the Barossa Valley, but…
Margaret: You go through Playford Shire when you go to the Barossa Valley, as it turns out.
Damian: Well, I’ll stop there on my way next time I go through, but I’m struggling to see… look, Adelaide’s price is certainly, they’re cheap, there’s no doubt about it. When you compare to what you pay in Sydney and Melbourne, it’s just incredibly cheap, but what is the catalyst for property prices to increase significantly? Now, obviously, auto industry we know is on the downturn. Population growth is not strong, so it’s not… as I said, a beautiful city, but until they get some population growth and strong economy there, I can’t see… it’ll, as I said, might do reasonably well in the next couple of years just because it is cheap and the other cities have run ahead, but I’m looking at a 10-year time frame and I just don’t see what’s going to drive it to outperform over a 10-year period.
Margaret: Well, let me tell you what happens in Adelaide, it grows every year. It doesn’t grow by a lot, but it grows every year like three and a half. For me, Adelaide is where you invest if you don’t want to take too big a risk because you’ll always get growth, but you do have to pick and choose. And, at the moment, I would be more inclined to be going South rather than North, because…and, I don’t think the whole enclosure up in the Playford Shire will have a long-term impact, but everybody else does. So, at the moment, we’ve got a bit of a problem with people not wanting to buy there. Once the Holden plant has closed, and everybody’s moved on and realized that it’s a drop in the ocean and it’s no big impact, then people will come back, and then some into the Playford Shire.
Meanwhile, the Onkaparinga Shire is going great guns, and we’re seeing far better than average growth down in that area for a couple of reasons. There’s not a lot of new land now. It is beachside, and people have that sentimental connection to the beach. You can live two or three streets back from the beach for $300,000 or less down there. And, they’re now building some great schools. They’ve got the big bus depot down there as well at the Onkaparinga Shire, and the train line going to Seaford. So, there’s a lot to be said for that area.
Just on those rates, you won’t pay double rates, but what you will have to pay with the granny flat is an extra cost for more bins and for those extra services. So, it’s not extra-ratable land, but it is an extra cost with every time you need another bin, and another recycling bin, and you need those collected, then that does add to your costs when you do build those granny flats.
We do have a tweet from Luke, and Luke asks, “Perth houses saw an increase last quarter. Is the tide turning?”
Margaret: Finally. Do you remember how many years ago, when I came over to the Perth Expo, and everyone’s talking Perth up, and talking Perth up, and I was the only one who was saying, “No, no.” And, everyone hated me because, obviously, Perth people just don’t like you saying… and it wasn’t any bad things, I just wasn’t saying good things, and, of course, it didn’t really do much since then.
Damian: Yeah. Look, it’s been an interesting market. Some of the areas and some properties even though the overall market hasn’t done particularly well, have performed quite strongly. Forrestfield has done well. We’ve got a lot of properties there for clients. Also, the Belmont, Kewdale region, come back a bit in the last 12 months, but some of those properties we bought for 450 ran up to 800, now have come back, again, into the sort of mid-6s to high, towards 700.
So, look, overall, the market has still probably got 12 months of softer conditions. No one can say if it’s going to go up or down. I saw one forecast today say it might go down a few percent. Look, I don’t certainly see it running away this year. Will it drop a few percent? Who knows? But, if you’re looking at Perth the long term, the mining cycle goes ups and downs, but certainly, long-term, still got good population growth. They still need our resources in Asia, that’s not going away. Agriculture is there. So, your long-term 10-year horizon is good. Next 12 months, it’s not fabulous, but it’s good opportunity to buy something you can lock away for your 10-year portfolio.
Margaret: And, let’s face it, there’s some parts of Perth where you get some good cash flow with your money and the properties are pretty good, and where else but Perth can you buy a house that’s got a living room, a dining room, a lounge room, games room, an outdoor alfresco area, cinema room, and 75 living rooms, and 15 bedrooms, and a bathroom for every bedroom, and it’s just your normal every-day suburban house?
Damian: A few McMansions around, I’ve got to say.
Margaret: There’s a lot of them there, and, you know, you live there, you have to keep up with everyone else, you got to have one as well. You can’t have everything, but… so, yeah, it’s a great place to leave as well. Love Perth, and, in fact, three of my children were born there. So, don’t send me letters about… yeah, don’t send me any letters.
Okay, before we finish up for tonight, just as a final word on those things that don’t add value to your property, we talked about the fact that you shouldn’t be reducing your living areas, but, you know, people go and do a lot of really silly things, I’ve noticed, like, you know, they’ll build man caves, or, you know, they’ll add things into their houses, like special things in the kitchens, spend extra money on better fixtures and fittings. And, as you say, you need good quality, but you don’t need to really go over the top. If you are trying to add value to a property, you’ve got to keep it simple, haven’t you?
Steve: It has to be simple. And furthermore, any of the tradesmen that you use, if you are going to do a renovation, and just as a side note, make sure they’re licensed and insured. The amount of bad quality workmanship that we see in a day-in day-out basis is just unbelievable. And often, a bad renovation, if you’re taking over, it’ll actually cost you more than actually starting from scratch.
Margaret: Well, that’s certainly some good advice to finish on for tonight because that’s all we have time for this week. And, next week, I’m afraid that I’m off, again, just for the night, dealing with a couple of health issues. Hopefully, my recovery won’t be too long, and I’m hoping to be back, again, on 22nd of February. Next week, Michael will take the reins, again, for me, and he’ll be joined by Brad Beer and Ian Rodriguez. So, get those tax and depreciation questions ready to go, and I’ll forward them on to Michael.
Thanks to Damian and Steve for helping me tonight. They’ve both done a great job, and they’ll be back, again, on a future show.
Now, thanks to all of our callers. We’ve had a great night and some excellent questions, I have to say. This week, question of the week goes to Ang. Now, Ang, you weren’t sure where you should spend $750,000 in Melbourne. We gave you some advice contrary to where you were looking. If you can now email me to email@example.com… now, that may well come up on your screen in a moment, but…yes, there it is, firstname.lastname@example.org, then I can send you your book.
Now, if you don’t know what my company Destiny does, well, the answer is, everything that you need as a property investor: education, mentoring, support, and finance as well, we’re certainly experts in that area. And, this month, if you book a consultation online at destiny.com.au and mention Your Money Your Call, you’ll get a copy of one of my books.
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Thanks for being with us tonight, and I’ll see you in two weeks.