The secrets to retiring wealthy through property.
There are many ways to increase your wealth; from saving for a deposit on your first home, buying it and then using it as a source for wealth, to setting up a self managed super fund or even building up a property portfolio. However, unless you’re a real estate agent, broker and investment analyst all in one, you can’t expect to do it all by yourself. Ben Kingsley, CEO and Founder of Empower Wealth tells us how important it is to use a professional when it comes to dealing with your finances.
- Property Investment analyst and advisor
- CEO and founder of Empower Wealth
- Qualified Property Investment Advisor (QPIA)
- Licensed finance broker
- Licensed real estate agent
- Chair of the Property Investment Professionals of Australia (PIPA)
What decides how much a home is worth?
Technically speaking a property’s value is determined no differently than other saleable items. Value is determined based on supply and demand. If there is a shortage of supply and a pent up demand you will over time see values grow.
Again technically speaking, in terms of the breakdown of value, the land historically is the appreciating component and the improvement (dwelling) is a depreciating component as it suffers from wear and tear.
Listen below to our interview with Ben Kingsley about property investment
Skip ahead to [29:35] to listen to Ben.
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What key factors have an effect on property prices?
What’s interesting about residential property compared to other types of properties is that it contains "emotional currency" because 70% of the potential buyers are owner occupiers, meaning that values are influenced more by human interests and human behaviours. When emotions are involved it is proven that buyers will pay premiums to secure property in locations they have a strong desire to live in.
So when you’re studying the factors which affect values in property your analysis needs to be in two parts:
The local economy / economic activity.
In some markets this influence is more important than others. By this I mean the bigger the local economy the less important it becomes in finding one investment grade property. Let me explain – If you are buying one investment property in the Sydney market and the general economy of the city is slow or soft, given the huge choice, you should still be able to identify quality investment grade properties within such a large market. On the flipside if you are buying into a smaller mining town, the local industry will effectively determine your success, so understanding the local economy is vital in your research.
Human interests and behaviour.
Human interests and behaviour. This is the study of demand – ‘why people want to live where they want to live’ and how determined they are to live there. Usually an area becomes popular and desirable when it has great lifestyle drivers, like the ‘liveability’ of the area; its access to leisure activities and by the conveniences of the area, given people have less and less free time. Buyers will pay a premium to have the things they want and saving on travel time is one of them.
How long should someone look and research before buying an investment property?
That depends on how important the returns you’re seeking are. Given that property delivers two forms of returns, capital growth and rental yields, there are many proven (and many more unproven) ways to create wealth through property over the medium to long term. Personally I’ve been studying and analysing property for investment purposes for almost 20 years and I’m still learning more and more about how to achieve an outperforming result when investing.
I’m certainly not advocating to research property for as long as I have, but if you are looking to get a great return from your investment, I would suggest a minimum of 100 hours research wouldn’t be a waste of time.
However, I must be clear here – research is looking at demographics, communities, planning regulations, levels of current stock and future approved stock to enter the market you are studying. On the demand side, you want to gauge buyer activity, like auction clearance rates, days on market, affordability measures against incomes and area desirability.
And research isn’t just searching for property on the internet or taking for granted what someone who is trying to sell you an investment property says or trusting their ‘so called’ research. It really is a science and those who treat it with the respect it deserves will do significantly better than most.
If you don’t have the time or inclination to do this, then you can always look to use the services of a property investment advisor or property analyst who does this as professional career. You are talking of potentially hundreds of thousands of dollars in valuation differences over a 10 to 20 year period so the pay-off if you get it right is there for those who are prepared to put in the hours or get a professional to do it for them.
If I’m just starting to invest in property is it a wise idea to buy the property in partnership with a friend or relative? Why?
We see people coming to our business who are considering or who have already undertaken this option all the time. When we ask most of them as to why they have or why they want to do a joint venture (JV) or partnership set up, it’s usually because they think it’s the only way in which they can get into the market or deep down they feel some comfort in not going it alone.
My experience in this space after meeting and advising these clients is that after five years or more, their original circumstances have now changed and anticipated benefits in most cases haven’t yet fully been realised and because of this or because they might have had a falling out with the other partner, they are keen to get out of the JV or partnership so they can move on with their ‘new’ lives.
Additional risks with this strategy is that it can impact you on your future borrowings for maybe a new home or another investment property. Lenders will always protect themselves to ensure they get the money they lent back from the borrowers. In JV cases the borrowers need to understand they are both joint and severally liable for the debt obligation, meaning that if one of the parties doesn’t come good with their money to service the loan, the other party will have to service all the debt, otherwise the risk of default on the loan is very real.
When I’m advising my clients who are considering this as an option, I strongly encourage them to get a written contract drawn up so it is very clear that this is a business transaction and one that requires level heads and forward planning. We also encourage them to put minimum holding terms within the contract to ensure they don’t sell the asset too early and lose money. It is best if they get this agreement legally drawn up to avoid confusion or misunderstanding and to ensure they get professional advice from someone with experience in these matters.
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Why invest in property instead of shares or term deposits?
This old chestnut. I’m not someone who preaches far and wide on this question of which is better or worse, as I’m someone who has a share portfolio as well as a property portfolio. I’ve taken action to study shares in my time along with my property studies and research. In my humble opinion property has some benefits as an investment that I can’t see working with other investment classes such as shares and terms deposits.
Reasons to invest in property
A) Property has historically been less volatile than equities. Volatility is very dangerous when you have a leveraged position (borrowed money) as part of your strategy. Imagine using $100,000 of your own money and borrowing $300,000 to buy an asset worth $400,000 and within a very short period of time, its value drops by 50% and you have now have a value base of $200,000, but you have borrowed $300,000. Historically, investment grade properties simply don’t do this, but history has shown several occasions where shares have.
B) This next point might be a bit controversial, but no other investment asset is so important to government revenue. All levels of government have a vested interest in the value of property going up. Federal governments receive capital gains revenues, state governments receive stamp duty revenues and local government receive rates revenues. And these revenues are significant amounts of money to all levels of government, money each level of government cannot do without, so in my view investing in residential property is almost a ‘government backed investment.’
C) Control and influence – property’s tangible asset value can be influenced through improvements and good management. Plus, you can’t usually buy small amounts of shares within property, so full ownership gives you greater control over the asset to maximise its returns. Shares don’t give you this control and influence unless you are a billionaire!
Planning ahead, what should I do with my property when I retire?
Capital gains always loom large for those who consider property as a long-term investment, but as I advise my clients, if you never sell the property, then it’s not going to be a problem for you.
Why wouldn’t you keep a quality investment grade property so you can enjoy the ongoing rental income for your retirement? It’s my advice and it’s what I strive for when I’m building property investment plans for my clients. That way these clients of mine have the ability to pass on a significant estate to future generations.
On the rare occasions I’m advising a client who doesn’t have anyone to pass on their properties to, we may consider a stage sell down so they can enjoy even greater income during retirement, but again this will be on a case by case basis and it’s my job to build significant wealth first and then deal with a problem we’d all like to have.