Your Money Your Call 12/01/2015 | Sky News Business
The first property edition of Your Money Your Call for 2015, hosted by Michael Teys CEO of Block Strata. Michael is joined by buyer’s agent Simon Pressley, and Momentum Wealth managing director Damian Collins.
Check out the video above and transcription below.
Voiceover: The information featured in this program is general in nature and should not be relied upon. Guests appearing on the program may have commercial arrangements with some of the companies mentioned. Before making any investment, insurance, or financial planning decisions, you should consult a licensed professional, who can advise whether your decision is appropriate for you.
Micheal Teys, Presenter: Good evening, and welcome to the property edition of “Your Money, Your Call”. I’m Michael Teys. Tonight, as usual, you can ask the panel any question you like about property investing. So if you’d like to join the conversation, call us now on 1300303435 or email us on firstname.lastname@example.org. And while we wait for the phones to ring, let’s see what’s making news in property today.
While 2014 saw house prices in Australia’s capital cities continue to increase, rents lagged behind. According to Call Logics RP Data’s latest rental report, house rents across the capital cities increased by just 1.2% over the year, with the median rent stagnating at $430 per week in the final quarter. The slowing rental market was also reflected in the performance of rental units last quarter. And the one-time bearish strategist at Morgan Stanley, Gerard Minack, has addressed his housing market concerns in his first expansive interview in 18 months. He’s told the Australian Financial Review, “When we get across the board unemployment, then we’ll get an across the board downturn in house prices. It’s just a matter of time.”
Minack’s comments came just ahead of ANZ announcing its latest survey that showed job advertisements rose in a further 1.8% in December to record the seventh consecutive monthly rise in seasonally adjusted terms. Job ads have now trended higher for 14 months and are up 11.4% over the year to December. The ANZ Chief Economist, Warren Hogan, said, “The good news is that the economy continues to produce new employment opportunities. The bad news is that this has not quite been enough to counteract the flow of new workers into the economy, plus the ongoing loss of jobs in certain sectors.”
Damian Collins, Managing Director, Momentum Wealth: Thanks, Michael.
Michael Teys: And a Happy Happy New Year to both of you.
Simon Pressley, Buyer’s Agent, Propertyology: Micheal to you.
Michael Teys: So as we kick off the year, there’s some news of increasing job prospects for some people which I think is fantastic given the unemployment problems that have been reported towards the end of last year. Simon, your views on how that impacts on the property markets generally.
Simon Pressley: Well, economic development we’ve always maintained as a precursor to property price growth. In fact, the number one thing that drives property prices is the economic development. If you just look at Sydney over the last two years, we were looking at some statistics just last week, 52,000 jobs were created in Sydney in 2014 of a total of 134,000 in Australia. So there’s no coincidence that you had the jobs growth in Sydney and the price growth that went with it.
Michael Teys: Interesting. And in Brisbane, your home town?
Simon Pressley: Brisbane, from a jobs growth perspective, wasn’t fantastic. I think it was about 8,000 jobs created in Brisbane in last year, but the good thing is it’s positive growth. And I think unemployment rates in isolation can be sometimes a bit rubbery and misleading about what’s really occurring. As long as you’re creating some jobs, your economy is heading in the right direction.
Michael Teys: Good, and the election, how does that affect the local property market?
Simon Pressley: I think it will be interesting, the fact that it’s been a snap election…
Michael Teys: It’s a quick one.
Simon Pressley: We haven’t got months of speculation and negativity and everyone with hands in pockets for a long period of time so…
Michael Teys: We can all be thankful for that.
Simon Pressley: That’s a good thing, but I think the outlook for Queensland’s economy is actually an exceptionally healthy one. If we start at the top of the state, you’ve got infrastructure projects all the way down that luckily kick off at different stages over the next couple of years. There’s a big alumina project in Weipa, Cairns has got port and airport expansions.
Michael Teys: You might be on Campbell Newman’ team before long. Keep talking it up. Damian, you’re from the West?
Damian Collins: I am.
Michael Teys: How are things over there?
Damian Collins: Look, unemployment is still relatively low, even lower than most of the eastern states, but there’s no doubt it started to pick up a bit. Interesting we obviously track it very closely in our client base, and a few people lost jobs, most have got them again. The ones who seem to be suffering are Engineers, that’s the sector…because there’s no other front end work, that’s a sector that suffered the most. But overall, the economy is still tracking on okay. We’re still the fastest-growing state in the nation. But look, the confidence is down at the moment just because of what’s going on in the mining sector.
Michael Teys: Western Australian confidence being down means that you’re still robust and buoyant about most things?
Damian Collins: Well, it’s a pretty confident state.
Michael Teys: It’s a pretty tough place. You’re right.
Damian Collins: Actually, Victoria’s I’ve noticed the difference over there, but the…look it has certainly this time around dented confidence a bit and particularly…
Michael Teys: I always claim my Queensland heritage when I’m in Perth because they seem to hate Queenslanders a little less than they do other people in the area.
Damian Collins: Just marginally (laughing).
Michael Teys: So as we start the property investing year, Damian, you’re advising clients all the time on where to buy property. What’s the top of your mind at the moment?
Damian Collins: Look, I think in most locations around Australia, you’re not going to see a standout year in 2015. In the West, we think it’s going to be fairly flat. Maybe a couple of percent growth. Certainly, Sydney’s still got a little bit of legs in it, but it’s coming to an end. In terms of the capital growth, it’s just now getting to unaffordable levels, and with it, such an investor dominated market, only 50% of the loans, it’s just obviously a sign of the topping out of the market. Certainly, Brisbane, in terms of the capital cities, we think will probably be the best performing city around Australia, and Melbourne will do okay. But overall, it’s not going to be a year for investors to be making significant capital growth rates, generally. Certainly, some properties and some individual suburb locations may do particularly well, but as a general, it won’t. And I think it’s a good year for investors to be looking to put something in their portfolio that’s going to be good for 10 years, not just focused on the next 12 months.
Michael Teys: And Simon, I know that one of your adages is ‘it’s not when buy, it’s where to buy’.
Simon Pressley: Certainly.
Michael Teys: And on that basis, are you prepared to let us have any of your insight on what’s good buying for 2015?
Simon Pressley: Yeah, well, our office is always very particular about our intellectual property, but I think probably markets, in general, have returned to quite a normal cycle. 2014 was the story of Sydney, but just about everywhere else around Australia was back to normal, and I think 2015 is going to be more of the same there. The industries, we focus a lot on industry drivers, and I think tourism related locations, agriculture to a degree, and construction. And I think the mining boom has been replaced with the construction boom. So they’re the sectors for investors to really watch.
Michael Teys: Good. All right, well, we’ve got our first caller tonight. I think we’ve got Pauline on the phone. Is that right, Pauline?
Pauline, Caller: Yes, hi.
Michael Teys: Hi, how are you? Welcome to the show.
Pauline: Yeah, I’m good thanks.
Michael Teys: Good. How can we help you?
Pauline: It’s really a question for you. I’m a Body Corporate Secretary with a for a groups of units.
Michael Teys: You’re lucky…you’re a lucky person then, it’s a good salary isn’t?
Pauline: Yes it is. Now, I’ve got a dispute between residents. All the units have a glass sliding door on them. And they also have a sliding security screen door as well. And this particular unit, they’ve gone and put a different door on there. It was disputed a few years ago with who was going to pay for it. And the owner was told it wasn’t common property. So he put a different one on, and it looks quite sort of…doesn’t look good, and we would like him to replace it because it’s different from the other units. So he won’t pay for it. And I’ve looked up the Queensland Community Management legislation for common property, and it’s a bit ambiguous because it says all windows and doors that border on to common property are the responsibility the body corporate. It talks about doors and fixtures. Now I’m wondering whether a sliding security screen is a door fixture or are they talking about locks and handles?
Michael Teys: Yeah. Look, Pauline, your question is a common one, and a lot of disputes in body corporate centre around the misunderstanding or a lack of clarity about what is common property and what’s not. It’s important for viewers to realize that the laws are different about these things in every state and territory in Australia, which is our way, of course, to make things as complex as we can. But we have eight jurisdictions for Strata Title property in Australia, and they’re all different. Now, in Queensland, it’s going to depend whether you’re a town house type development or a unit block. But generally, the starting point is that the door, the window, and the screen will all be common property and therefore the responsibility of the body corporate. So unless your strata plan says something different then that’s likely to be your position. So the starting point is to go to the plan and then to determine it from there. In terms of making alterations to that then that should only be done with the consent of the body corporate, of course.
So I hope that helps. I won’t bother going to the other gentlemen on that question because I’m reasonably certain that that’s my field. And that will be the answer that you’re looking for, Pauline. So have a look at the website of the Body Corporate Community Management office in Queensland. It’s got some really good information about what common property is and how it should be repaired properly.
All right, we’ll take our first email now and that comes from Lana who wants advice on her second investment property. Lana writes, “I currently own a one bedroom apartment in Flemington. I have $50,000 in equity and next year would love to buy a second property. I’m wondering where you see value for investors under $350,000 urban or rural in capital gains and also decent cash flow as my current property is still negatively geared. I’ve owned it for four years.”
All right, panel. There’s a good general question to start us off. Damian, you talked before about the lack of affordability in Sydney. It’s still possible to get property in Sydney under $350,000. What would you be saying about that, and how would you answer that question?
Damian Collins: Well Lana, obviously, with a $350,000 budget you’re obviously constrained in a lot of properties in the capital cities, but I’d certainly be focusing on…and you mentioned cash flow another issue as well. So you might need to go into some regional areas, certainly one in Victoria, Ballarat, the yields are pretty good. You can get properties in the $200,000 price bracket. If you’re going to the capital cities, you’re going to struggle to get…you can get properties for under $350,000, but you’re going to struggle to have a huge selection, but there will be something there. I think one thing to always be aware of though it’s about the land component value, and even in apartments, there is an implied land component value or locational value. So just always be focusing, making sure you’re getting enough implied locational land value, so that’s what gives you the capital growth. The buildings, ultimately, over time do fall down in value.
Michael Teys: All right, and Simon?
Simon Pressley: I think, Lana, you’d be first best getting some property investment advice and review your strategy before looking at location. $50,000 equity is a little bit skinny, but hopefully, you’ll get a bit more growth in your existing Flemington property over say the next 12 months. But reviewing your investment strategy and getting a professional look at both your capital and cash flow, you might be surprised what sort of opportunities you have, and you might have more capacity than what you actually realise. But in regards to capital city versus regional locations, neither is better than the other. There’s always going to be good capital cities and good regional locations to invest in.
Michael Teys: So, Simon, you’re a property buyer’s agent and researcher?
Simon Pressley: Correct.
Michael Teys: Tell me how people go about accessing services from a buyer’s agent and what a buyer’s agent does?
Simon Pressley: Well, Michael, the buyer’s agent service I guess is the transaction of sifting through a number of properties in a particular market, finding an individual property, and negotiating the lowest possible price for a client. The research part of it is done before that. And Propertyology I guess it’s akin to what a stock broker does for a share investor, is studying this big country called Australia first and foremost. And that will uncover all sorts of investment property opportunities, and then the buyer’s agency is finding the right property in that lane.
Michael Teys: And how is that service different to a real estate agent?
Simon Pressley: Well, a real estate agency obviously works for the property owner or the vendor. So they’ve got a vested interest to talk up features and benefits of a property, and then to try to get the highest price from prospective buyers.
Michael Teys: So acting on behalf of the purchaser, you can deal with the agent acting on behalf of the seller and get a good outcome?
Simon Pressley: A buyer’s agent works for the buyer only, yes.
Michael Teys: All right. Well thanks for tuning in, and as usual, tonight we’re giving away one of Margaret’s books. Every Monday night, the panel chooses one question from either the emails or the calls, and this week the best email will receive “How To Achieve Property Success”. All you have to do is call us on 1300303435 or email email@example.com with a question, and then make sure you’re watching at the end to see if you are tonight’s winner. We’ll take a short break now, but when we come back, we’ll take more of your calls and emails.
Michael Teys: Welcome back. I’m Michel Teys, and joining me tonight is Simon Pressley who’s a buyer’s agent with Propertyology and Damian Collins of Momentum Wealth. We’ve been chatting about different aspects of property investment and how we see the year shaping up for you investors. If you have a question or you’d like to ask us, including on my field of strata property law, grab the phone and call us now on 1300303435 or email us on property@skynews. Now before we take the next caller, Simon, did I get that name right?
Simon Pressley: Close, Michael.
Michael Teys: Close.
Simon Pressley: Yeah, 10 points for effort.
Michael Teys: I’ll try again in the next break.
Now we’ve got Mo on the line. Hi, Mo. You’re calling from Gladstone. Hello, Mo? Mo, we seem to have a problem there. All right, so we’ll take Mo’s call in a moment when he can call back.
For now, we’ll take another viewer email. And our questioner asks, “Please confirm if the current Sydney price boom has exceeded pre-GFC heights across similar sectors.” Well, it’s short and to the point, gentlemen, but I guess it leads us into a discussion about what has been the hottest market in Australia, the Sydney property market. And Simon, I know we were talking before the show about what GFC. How do you answer this question?
Simon Pressley: Well, it is true that post-GFC, the six or seven years that’s been, Sydney has performed significantly better than the corresponding six or seven years previously. But it’s the only capital city that’s done that. I think in times when we’ve had a Sydney property boom, we can lose sight of the fact that Sydney officially has been the worst performing capital city in Australia since the Sydney 2000 Olympics. Leading up to the GFC, it performed miserably. And obviously, the last couple years have been spectacular, but they had a lot of catching up to do.
Michael Teys: And so the lesson in that is what, Damian?
Damian Collins: Well, Sydney this time around is not quite as strong as it was in the early 2000s, but Sydney had a very strong run just after the Olympics up to 2003, and then basically flat lined, and barely did inflation rates for another six or seven years thereafter. So, look, the run-up hasn’t been as strong this time, but what concerns me is the stronger it goes this time, the longer the hangover is going to be and the flat line period. Because it just gains on all measures, and certainly, Sydney is the largest city in Australia. It does have a shortage of land with all the national parks. So it’s always going to be the most expensive. But affordability is really pushing up there when you’re meeting prices of under $1,000 and the average wage is actually less than WA and less than in Canberra. It’s just going to get to a point where prices can’t keep going up, and as I say, it’s been very investor driven this time around as well.
Simon Pressley: Affordability is the key.
Michael Teys: Affordability you say is the key, but I guess it also makes the point, doesn’t it, that when we talk on the show a lot about diversification, and where you’ve got markets like Sydney which are doing these erratic things over long periods of time, it really makes the point, that you’ve got to have your portfolio balanced so you’re exposed to a number of different markets at different times.
Simon Pressley: Much in the same way a share investor would do.
Michael Teys: Exactly.
Damian Collins: They wouldn’t have 100% of banking stocks, you know? You can use some different stocks in there.
Michael Teys: Exactly, so it’s real. And I guess, Simon, from your point of view, people that come to you are looking for research and are looking for a buyer’s agent so are probably more educated and seasoned than most. A lot of first-time property investors, Damian, you probably agree with me, want to buy in their own back yard, don’t they? They want to buy that place that they can drive past and touch and see and feel and think that they can go and fix up if it needs fixing up and that sort of stuff, which is frustrating isn’t it?
Simon Pressley: Yeah, look a lot of investors do like to stick to their own backyard, and look if it’s in a good capital city that’s got good long term growth and hasn’t gone through a very strong period where it’s locked at a flat line for a long time. If that’s what they’re comfortable with, I guess that’s okay, but often, the best property is not in your backyard and certainly even in the same city, most likely, and definitely not in the same suburb.
Michael Teys: Simon, you’ve got to buy something that the bulk of people renting are going to want…
Simon Pressley: Exactly.
Michael Teys: As opposed to the emotional side of buying your house and feeling quite attached to the suburb.
All right, well, we’re going to take an email while we wait for Mo, and this one comes from Arsham. “We are a young family moving from Sydney to Brisbane looking to see what would be the best suburb for long-term growth in a 10-kilometer range from Brisbane CBD to buy. Also, is it better to buy a house or a unit and the price range is under $700,000?” Well, Damian, I put this on the show because I like to argue with you about houses and units. So I thought we’d just get it on nice and early in the beginning of the year, and get it out of the road. So why don’t you go first?
Damian Collins: Well, actually, one of the suburbs that we like in Brisbane is as Nundah. It’s got a train, it’s has a good cafe district, and is certainly one of the areas that we like to buy. In terms of the argument about units versus houses, I’m not against units and I’m not for houses. What I am for is a land component, because that is what goes up. And, certainly, on a unit, if you could find in a good location you might find the implied land value of the unit may well be 70-80% of that value and the building might be only 20-30%. That’s perfectly okay, but what I find is that for most units, particularly new ones, is that the implied land component value sometimes is 10-20% and the rest of it is building. Now, buildings depreciate, and you get a depreciation allowance for good reason because the buildings do go down in value. So I’m not against units and I’m not for houses, but what I am for is land component value because that’s what makes you money.
Michael Teys: And so when you look at a unit block in Nundah, tell me how you work out the implied land value content.
Damian Collins: So if you’re looking at a unit, basically, we work on depreciated replacement cost. So if we know a two bedroom unit might cost say $200,000 today, and if it’s say 30 years old, its depreciated implied replacement value may well be somewhere in the order of $70,000, $60,000. Again, it depends on what work has been done to it, if it’s in original condition or not, and then the remaining component is effectively implicit land component value. It is a little bit harder on units and it’s certainly easier on houses, particularly if there’s comparable land sales around, a little bit more difficult on units, but that’s the best way to simply…the implicit value after taking away the depreciated replacement cost of the building.
Michael Teys: And, Simon, Brisbane 10K radius there’s plenty to pick from. Nundah is an area that Damian’s mentioned. What are your thoughts on houses and units in that circle?
Simon Pressley: Yeah, it was an interesting question. I took from the question that perhaps they’re moving from Sydney to Brisbane, so, therefore, looking at a principal place of residence. And if I’ve understood that correctly, then it largely doesn’t matter. It’s more a personal decision which is going to be based on lifestyle and proximity to work, a very personal thing as opposed to a financial thing. If it’s an investment decision, with $700,000, I’d suggest you got the whole country to pick from, and wherever you’re moving from or to is largely irrelevant. With $700,000, you perhaps could be looking at two properties or even three properties. Specific to Brisbane, look, houses and apartments in different pockets are okay. There is a lot of development under way for new inner-city apartments, predominately in the three-kilometre ring from the CBD, would be buying apartments in the middle ring, and a couple of pockets for those houses.
Michael Teys: That’s more out towards Cooperoo…
Simon Pressley: On the south side, further out…
Michael Teys: On the south.
Simon Pressley: Some units development going on there, but sort of…yeah, from that three kilometres to say that eight-kilometre ring north and south side of the river.
Michael Teys: And what about the land content point that Damian makes? Do you subscribe to that thought?
Simon Pressley: Well, I have a different view. When the sale sign goes up or when we get the valuer to come out to value the asset, even if you’re holding it, they don’t value the land component and the building component as two separate things. We don’t put two for sale signs out, so in selecting a dwelling style, first, we start with the investor’s budget. Second, we look at industry drivers and direct us towards different locations. Once we’ve picked the location, then we start at the supply and demand of different dwelling styles within it. So in some cities where only looking for say two bedroom apartment. In other locations, we’ll only buy a three or four bedroom house. It does vary.
Michael Teys: Good. All right, well, I think that’s nicely covered that topic. It is, of course, the case that units are now the predominant form of housing being built. So it is here to stay, and I think the rules aren’t changing. I’d like to see some valuation work done on long term resells of apartments versus houses. I think it would help people in their buying decision. It doesn’t seem to be a lot of it around at the moment. So perhaps that’s something we can get our industry associations to have a look at.
It’s time to take another break, but if you do have a question for us, give us a call and you might win one of Margaret’s books. And tonight, we’re giving away “How To Achieve Property Success”. Call us on 1300303435 or email us at firstname.lastname@example.org with a question. And make sure you are watching at the end of the show to see if you are our winner. We’ll be right back.
Michael Teys: Welcome back to “Your Money, Your Call,” and thanks for staying with us. Before we go to the phones again, I want to tell you about the Sydney property-intensive that I’m part of and kicks off on the 28th of February in Sydney. Your regular host, Margaret Lomas, has hand-picked a team of top property experts in Australia. We’ll be touring the country starting off with Sydney for a special event which we’ve called our one-day property intensive. This one-day seminar is designed to educate property investors regardless of where you are in your property investing journey. And unlike so many property seminars, we won’t be selling any property or expensive education packages. All we’ll be selling is our expertise for the day. It’ll be a great day full of property education and giveaways, and with tickets at just $410, you can’t afford to miss out. We’ll only do this once a year, so go to yourpropertyteam.com.au now for your instant booking confirmation.
Gentlemen, we get a lot of callers talking to us on the show about wanting information about property investing, and sadly, some of them end up going to the seminars that are quite slick and involve some high-pressure selling. Damian, have you had experiences with that sort of thing on behalf of any of your clients?
Damian Collins: Yeah, look, unfortunately, we have. We’ve seen people have come to do business with us, and they might have bought a property through one of these seminars, and sometimes they’re horrified to see what the valuation comes in when they’re trying to refinance it. So look, my thoughts, obviously, investors want to get education, certainly be doing your homework. Who are the people behind it? Have they got a good track record, have they got satisfied clients, but importantly, if something’s for sale on the night, then I’m very sceptical. Because a professional service provider, they certainly got…a lot of people do seminars. You’re obviously doing them, we do them for our clients, but ultimately, we’re giving them education knowledge, and then, yes. Obviously, there’s a service they can use, but there’s no high-pressure sales tactics on the night.
So if there’s something on the night you must get it on the night with the education pack with some special discount, or alternatively, they’ve got a property that all the points in their seminar…it’s just miraculous that that property just happens to answer all the questions, I’d run a mile from it. Because ultimately they’ve got a product to sell versus giving you information. So you never buy on the night. Always go and walk away. And if you still think it’s a great thing to look at in a week later, well then, so be it, but I always say walk away on the night. Never buy anything on the night.
Michael Teys: And, Simon, what’s your experience?
Simon Pressley: Look, the common denominator for any trap in property investing is always the new property. Buyer beware, anyone who’s contemplating going to a seminar. As Damian said, often they sound very convincing the first half hour or so, and then towards the end, they bring out the glossy brochures. It’s just so easy to catch an investor out in property. Jazz words such as population growth and infrastructure and a few graphs here and there, and they think they’ve got this research.
Michael Teys: And it’s always when it comes time to settle off the plan or to refinance that you’re going to find it $60,000 or $70,000 or $80,000 underwater and that hurts, doesn’t it?
Damian Collins: They don’t always know that, because the way they structure the finance, often they’ve got finance associated with it, and they cross collateralise. Now, if you’re buying a property and you had your own deposit and costs from maybe your home and you’re buying a property separately and separately finance, you would see the valuation coming along. But what they often do as part of their strategy is they cross collateralise everything. So if you’ll say you had your house for $700,000, you had a $200,000 home loan, and you bought this property in the bell came in from $60,000-$70,000 under, you might not even know because you got that much equity in your home. So another reason you never ever cross collateralise with these groups because it doesn’t become transparent to the valuation of that property.
Michael Teys: All right, well, some good advice there, and hopefully, our viewers won’t fall for that trap this year.
Now, our next email is from Graham. Graham writes, “I’m considering buying a two bedroom home unit in my self-managed superannuation fund that is in pension mode. Ideally, a unit in a small block, say six ground level units. The areas I’m looking at are the Caloundra, Kawana and Toowoomba areas. Do you have a preference?”
All right, well, Damian, I wanted to bring that question to us tonight because it references the self-managed superannuation fund, which is something that no doubt both of you have had a lot of experience with. But, Damian, tell us how people can use that for investing in property and what are the tips and traps for that?
Damian Collins: Simon and I were talking about that tonight. There has certainly been an increase in people using self-managed superfunds to buy property. Generally, the structure of set up is, if you’re borrowing, of course, if you buying it for cash you can just buy within the self-managed superfund itself, but if you’re borrowing, you need to set up a limited recourse borrowing facility. And that’s done through a separate bare trust holding, often with a separate, or always with a separate trustee, and generally most banks want a corporate trustee. So it can cost anywhere, if you’ve already got your superfund set up, can cost between another $4,000-$8,000 to get the bare trust set up. The lending rates a little bit higher. They’ve come down but they’re a little bit higher than you would on the conventional loan, but they can be right for the right client at the right stage of their life. So, for myself in 40s, I wouldn’t be doing it yet because… with retirement a long, long way away still, and the fact is you can’t gear against the property, that’s the important thing. For someone building a portfolio, most people generate the additional equity through capital growth. Creating the superfund you get capital growth, but you can’t borrow against that. You can only borrow to acquire, and you can refinance the loans if necessary. But you can’t borrow against that in the value. So it’s very much your last property strategy in my mind. So the clients who we’ve had who’ve been using it have been in their 50s. They go salary sacrifice. The good thing about it is you can pay off your principal, off the loan, effectively tax deductible by salary sacrificing. But again, the important thing is it’s got to be right for you at the right stage of your life. And also make sure you go and seek advice from someone who’s not against property. So a planner who knows…
Michael Teys: Hard to find
Damian Collins: Sometimes it’s hard to find…
Michael Teys: Very hard to find.
Damian Collins: Go talk to someone who knows…understands it, and see if it’s right for you at that stage of your life.
Michael Teys: Simon, is it is a strategy that you’re using in your practice?
Simon Pressley: Look, I personally got a self-managed superannuation fund, and we’ve helped plenty of property investors with the acquisition of their property. Yeah, I think it’s fantastic that’s through self-managed super, a lot more Australians are taking an active interest in their retirement. Whereas without self-managed super, superannuation was that annual statement that we got that we just threw in the drawer had no interest in. However, a lot of people are setting up self-managed superannuation funds with very little knowledge about property markets and still buying a dud asset. The fundamentals of buying a really good investment asset don’t change whether it’s inside super or outside super.
Michael Teys: And I’ve got a view that when the government starts to want to regulate the property market more, that they’re going to have a real good look at the self-managed superannuation fund, investment strategies, and property. And I wouldn’t be at all surprised if we see some discussion this year or next about that being watched. I know the Reserve Bank…if you read the Reserve Bank statements, they’re concerned about the amount of money pouring into property through that avenue, and whilst it’s unlikely that that would ever be retrospective that they’d unwind that, it might not be something that’s here forever.
Damian Collins: The Murray inquiry did recommend perhaps to look at curtailing it.
Michael Teys: And if you look at curtailing that compared with the political ramifications of curtailing negative gearing, it’s a no-brainer that they’ll regulate the superannuation fund before they touch anything else.
All right, well, we have a caller on the line. William, are you with us tonight?
William, Caller: How are you? Yes, I’m with you.
Michael Teys: Good. We’re having a patchy night and getting our callers to hold on so thanks for doing that. How can we help you?
William: I got a unit in Atwood Victoria. I paid $389,000 for it. It’s three bedroom, two bathrooms, and three toilets, and it’s very nice, brand new, 238 square meters of land. But when you were talking about units before, and apartments, aren’t they two different things?
Michael Teys: Well, look yeah. The terminology is interchangeable, I suppose. The word apartment is American in its application to what they would call condominium living. So that the terms units and apartments are used interchangeably. I suppose some would say that the general distinction is a unit which is a high rise and perhaps a townhouse which is more representative of something on flat land. But look, all of those terms are used interchangeably, and what’s important is that you’ve got to look at the plans and understand what you’ve bought. So it sounds like you’ve got yourself quite a large apartment, and whether it’s called a unit or whether it’s called an apartment is really not to the point. When you go to the to the act, if you’re looking at the law at any point or if you’re looking at the websites, make sure that you have a look at the proper terminology in your state, and that will help you understand exactly what you own.
All right, James. Hello, James. You’re from Sydney?
James, Caller: Thank you for taking my call.
Michael Teys: You’re welcome.
James: I’m 45. I live and work in Oakland. I’ve got a house there which is fully paid off. I’ve got two investment properties in Sydney. One in Huntersfield and one in Surrey Hills, and both are rented. And I’m easily able to pay the mortgage. Now I’m thinking of investing in an apartment building in Perth facing the Swan River, and it’s going to be built next to the Ritz Carlton. And I’m thinking of buying it off the plan. It’s on the 10th-floor, worth about $1.3 million, and the down payment is 10%, and then we pay the balance in three years’ time. Should I buy there or should I buy any other property in Sydney?
Michael Teys: All right, and the $1.3 million property that you’re looking at buying is for an investment as opposed to a place of residence?
James: Investment, yeah.
Michael Teys: All right. Well, I’m sure we’ve got some advice there. We’ve got our leading commentator on the Perth market with us tonight. Damian, it’s your hometown, so lead us off in the discussion.
Damian Collins: James, so I know the area that you’re talking about. So for the viewers, Perth has got quite a significant redevelopment, Elizabeth Quay, where they’re building…basically cutting out a lot of the land and leading the river coming to it, and bringing basically the river back to the city. So in terms of location, it’s an outstanding location. It’s obviously right on the waterfront there. And so with apartments that are unique and in some respects irreplaceable, which is waterfront type properties, certainly they’re going to be in high demand. You see around Sydney the waterfront properties do particularly well and certainly have performed strongly in terms of capital growth. Not all of them, but certainly that’s a good factor for it. But however, from an investment point of view, $1.3m is a lot of money. Yes, you’re not settling for three years, but your rental yield is going to be pretty ordinary.
At the moment, in Perth in the city, the apartment market is pretty soft. We’ve seen that rents have come back 15% in some cases, and the deal, even in a strong market, you just don’t get the yield on those sort of $1.3 million properties. You might get $800 bucks a week. That’s pretty poor yield. If I was buying an investment property, I’d be looking at maybe three at $450,000 each rather than buying one at $1.3 million.
Michael Teys: Yeah, and Simon?
Simon Pressley: I definitely agree with Damian in terms of not spending $1.3 million, whether it’s Perth, Sydney, wherever you wish. Multiple properties there are at least I would have thought. Our outlook on the Perth market…I actually…Sorry, Damian, I think Perth might actually go backwards in 2015 largely due to the downturn of Iron Ore and a lot of job losses that Perth has already seen, and a lot of extra supply coming on the market. James, you mentioned you already own two properties in Sydney. Australia is a big place. You’ve got 9.6 million properties to pick from. So far, you’ve mentioned two cities, so I’d encourage you to really widen your net. With $1.3 million capacity, you can invest in all sorts of locations.
Michael Teys: And look, I’d add to that, James. When buying off the plan, you need to be very careful about a whole range of things. Firstly, the quality of the person that is behind the property, and look at their track record. Most states in Australia will not have insurance and home warranties that protect you on something which is 10 stories or more. So be careful about who you’re buying from. I don’t know who is behind this development, and I don’t need to know. It’s general advice that you should really look at the pedigree of the developer. You’ll also find that there will be very little flexibility in changing any of the terms of the contract. So the contract will be thick and oppressive, and you’re probably going to ask some poor conveyancer or solicitor to do it for $800 or $900, and nobody is going to read the contract for that price.
So make sure that you go see a solicitor who is going to read the contract and explain to you what you’re buying, and what are the rules and the regulations that are going to apply for that property. The Western Australian Strata title property laws, as Damian reminded me before the show, are under review at the moment. They haven’t been reviewed since 1985. So by the time this property comes onto the market, there will be a new set of laws applicable to Strata title property in Western Australia. It’s worth getting some advice on that. So off the plan purchasing can be a good opportunity, but it can also be a real problem for people. There’s hardly a high-rise built in this country at the moment that doesn’t suffer from significant building defects within the first couple of years of being built.
So be very careful what you’re buying, how it’s being put together, and what are the plans and the specifications so that you know exactly what you’re getting when it does come time, but hopefully you’ll take the advice of the panel and look elsewhere for a better-diversified group of properties that isn’t going to put $1.3 million at risk on one particular investment. I hope that helps you.
This is “Your Money, Your Call,” and we’re going to take a short break, but when we return, you’ll have another chance to get a copy of Margaret’s book “How To Achieve Property Success,” by calling now on 1300 30 34 35 or email us on email@example.com.
Thanks for joining me tonight. I’m Michael Teys, and with me tonight is buyer’s agent Simon Pressley from Propertyology and Damian Collins of Momentum Wealth. If you have a question for us, call us now on 1300303435 and we’ll do our best to fit you in, or you can email us on firstname.lastname@example.org.
Now, Paul, you’re calling from Melbourne. Hello, how are you?
Paul, Caller: Hello. Mr. Teys, may I call you Michael?
Michael Teys: You can call me whatever you want, Paul.
Paul: Michael, thank you, Michael, I’ll call you Michael. And thank you the rest of the panel. It’s a great show.
Michael Teys: Thank you.
Paul: And my question crosses over a few issues. I was lucky enough to be at a mortgages auction only in recent months, and I was the successful buyer. After the property went on to the market, when it was announced that a certain price was achieved. And the particular bank being in possession of this unit’s mortgage allowed it to go and it looked like a good buy at the time. And so I kept going a little bit further up, but unfortunately, it kept going and going and going, but it’s a very, very prestigious property and it was just under a million dollars. And I was as I say the successful bidder, and the agents were very thrilled because they got a brilliant outcome and everybody was happy. And I thought, well, I’m a little bit nervous because I paid just under a million dollars for real estate property, but we got a magnificent phone call just shortly after that process and they said, “Look we’ve got a wonderful offer for a tenancy.” I was hoping to have it as a negative gearing proposal over a few years and it would be a wonderful project. And I thought I could manage it over all and I had everything worked out. And it was all approved by the banks so everything was working happily. And then I got a five-year tenancy which is very rare as we all know in tenancy arrangements. And when the agents proposed it, I said, “Wow. This has turned out not a negative gearing proposal. It’s turned out to be a positive gearing proposal.”
Michael Teys: What a shame. You’ve made some money.
Paul: Yeah, absolutely. So now I think I’ll be contributing a little bit to the Victorian budget, and hopefully, we might be able to make some decisions about a positive gearing for them. And I won’t be one of those people that would be taking away some money from the budget outcome.
Michael Teys: Let’s get some advice from Damian who’s our recovering accountant on the panel.
Paul: Okay, the recall questions revolve around should I just bite the bullet and rent the property over a three to five-year plan, or should I consider the next one that came up? There was a very good proposal that came up from the agent saying, “Look, we’ve had another really great developing niche. You’ve just paid under a million dollars that was rounded off at just around $980,000.” Then he said, “Look we’ve got an offer of $1.2 million dollars as an offer on the property.”
Michael Teys: Well, let’s see what the panel’s got to say about Paul’s situation. Paul likes to yarn, likes to tell a story, tells a good story, and sounds like he’s had some good fortune then. Damian, you buy it for $980,000. You sell it for $1.2 within months. What are the tax implications of that for Paul? Now, we can’t give specific advice, but generally speaking, if we’re looking at short term flipping of properties, what’s the tax implications?
Damian Collins: Well, even if you bought for investment purposes, you would be subject to the capital gains rate, but because you’ve sold it within 12 months, there’s no discount of the capital gains rates. So the full gain after your expenses, after your stamp duty on the way in, and you’re selling fees on the way out are going to be subject to your marginal tax rates. So you said $980, you’re selling for $1.2. Let’s say we have $65,000 in expenses, you’re still going up about $150,000, and depending on your tax rate, you could be up for half of that in tax. So I’d be certainly thinking about holding it for 12 months, and it’s the contract date that’s relevant, not the settlement date. So always be aware that it’s the contract date that you should be thinking about. And yes, so you could be up for a substantial tax bill.
Michael Teys: All right, Simon, what about a five-year tenancy?
Simon Pressley: Five-year tenancy. I’d be a bit wary about that. I guess you’ve got secure income for five years which you really would have multiple tenants over five years with some vacancy, so that’s the good thing. However, if rents were to increase over that five-year period unless you specifically write something in that tenancy right from the outset to give you provision to adjust those, you’re going to miss out on that. If it turns out it hasn’t been the best tenant, that’s five years of pain you need to put up with as well. So a really good property manager would be the best person to guide you on that five years I would have thought…
Michael Teys: It’s a big ask, isn’t it? And particularly, in Australia where vacancy rates sit somewhere between 1 and 5%, it’s not a huge issue, is it?
Simon Pressley: No.
Michael Teys: Most of the time. If you’re meeting the market and being sensible about the rentals that you’re seeking, you’re going to find a tenant, aren’t you?
Simon Pressley: Yeah.
Michael Teys: And I notice Margaret during the week issued a tweet saying if you’re having trouble finding a tenant, drop your price by $5 every day until you meet the market, and I thought it was excellent advice. Because you’re better off taking that tenant at a modest rent than having a one or two or four week stint with no income at all. So I’d be careful about a five-year lease. I think from the tenant’s point of view it’s fabulous but not so much from the property owner’s point of view. So maybe breaking that down into some options or something like that might be good for Paul.
Michael Teys: Damian, Paul’s had a windfall. He’s bought well. There’s an offer out there which presumably represents market value. How else could he use that equity to develop an investing strategy by keeping the property, not paying the tax, the capital gains tax, but also accessing the wealth that he’s created in that property purchase to do something else?
Damian Collins: Yeah, and look, it was also interesting. He’s worried about positive gearing. I wish all my properties were positively geared. I think that’s something people talk about but they won’t…positive gearing is good for your property, but look, one of the things he could certainly do would be looking at leveraging against that gain. Now, of course, he needs to valuater to say it’s worth $1.2m, that’s the problem. You might find valuers may not value it that quickly at a higher price. But look, that gain can be used to borrow against to buy more properties.
Michael Teys: All right. Well, that’s good news for Paul, and Paul, I hope that information that we’ve given you helps you make the most of the situation that you find yourself in.
Well, we’re almost out of time, and I hope you’ve enjoyed our show this week. Thanks also to all our callers. This week, our question of the week goes to James. And although James is an experienced property investor, we think that he could really get some benefit from Margaret’s book. So James, if you could email us on YourMoneyYourCall@destiny.com.au, Margaret will send you your book.
Thank you to our guests Simon Pressley and Damian Collins. Before we go, one more reminder to go to yourpropertyteam.com.au to get your tickets now for our one-day property-intensive in Sydney on 28th February 2015. I’ll be back on the show soon, and in the meantime, you can follow me on Twitter at Michael Teys, and make sure that you check out my new website blockstrata.com.au. Thanks for being with us, and good night.
Voiceover: The information featured in this program is general in nature and therefore should not be relied upon. Guests appearing on the program may have commercial arrangements with some of the companies mentioned. Before making any investment, insurance, or financial planning decisions, you should consult a licensed professional who can advise whether your decision is appropriate for you.