Marc
Hello and welcome back to part two of the property podcast series on pocket money. Last week, Sally, we spoke to Michael Yardney about first home buyer mistakes. And this week, we're tackling what not to do, but from a property investment angle.
Sally
So, Michael is a property expert. So he gave us a lot of tips, but you've invested in property before right, Marc? So surely, you know, there were a lot of experiences that you had that I'm sure you wish you knew about beforehand, right?
Marc
Definitely. And I dare say my shoddy investment strategy is going to come under fire from Michael in the proceeding interview, but we'll see.
Sally
So from rushing the decision making process to I guess, forking out more than you need to, these are some of the mistakes that you should avoid making if you're about to invest in property.
Marc
That's right. Yeah, we're going to cover it all.
Sally
Welcome back, Michael. Thanks so much for joining us again. So last time we were talking about first home buyer mistakes, but today we're going to be talking about property investing mistakes. So probably a little bit of overlap there. But definitely some new tips to pick up.
Michael Yardney
Definitely, because in Australia, there are 2 million property investors, and most Australians want to buy a home first and then buy an investment property. But as we've discussed, some people do it the other way around; they rent where they can afford to live, but can't afford to buy and buy an investment property first. And most people buy an investment property to gain a form of financial independence in the future. But it's important to educate yourself first and get it right because most property investors fail. Interestingly, it's been shown that 50% of people who buy an investment property sell up in the first five years; they've actually got it wrong and when they sell up they're actually usually doing it as a loss as well. So they're paying a huge learning fee to the market. And somebody else, the developer who sold them the dud property, or the vendor who's made a bit of a killing because the investor has overpaid – they're at the other end and they're making some money. So let's talk about how not to pay those learning fees to the market.
Marc
So let's start with number one: making hasty decisions. How long should you spend doing your research before buying a property?
Michael Yardney
Well, let me give a little disclaimer up-front. I think you should actually be doing this as part of a team, not yourself. So you should be having a buyer's agent to help you, protect you and level the playing field. But a lot of people want to do it themselves. So okay, how many properties do you need to see? The thing is most people buy their first investment close to where they live, close to where they want to holiday. If you're older, close to where they want to retire, because they think they know the area. Knowing the local neighbourhood, searching for a property is not the same as researching and understanding the fundamentals. The investment fundamentals of the location such as supply and demand, infrastructure that's going to increase different zonings. the demographics of the area. Are there lots of owner occupiers, are there more tenants? So you really need to do the homework and research and it's often said, you've actually got to visit 100 properties, see what sells, see what they sell for, understand what doesn't sell. So that's one of the big learning fees; Oops... I bought the wrong property. Because it felt right. The thing is, when you start off as a beginning investor, you actually don't have the perspective of what feels right. So you're actually buying with emotion, and sometimes it takes a while to realise it's a dud.
Marc
Yeah, especially if you live in Sydney, like FOMO is just such a big thing. And it's so easy to get swept up in the whole like, Oh, I need to buy now, like I need to buy in the next couple of months because you know, property prices are going to rise. And yes, it's easy to get swept up in all of that.
Michael Yardney
Very much. So, of course, it's normal. We're human. And that's again why you need somebody to balance things out. Now, of course, there's the other side of it as well, Marc. There are some people who are so analytical that they have analysis paralysis and they're waiting for everything to be perfect, for the time to be perfect, for interest rates to be perfect, for the market to be perfect. And the answer is, it never is. So they keep missing out. So there's two groups of people: some are getting in too early, some are getting in too late.
Sally
Yeah, it seems like quite a balancing act to figure out when is the right time. So yeah, I guess that's when getting the help from a professional can can really give you that step up.
Michael Yardney
Sally, do you want to know when the right time is?
Sally
Yes, tell me please.
Michael Yardney
20 years ago! Well, 40 years ago, when I bought my first property for $18,000, and it was an investment, I was still living at home with my parents, and I got $12 a week rent and I was excited. But having said that the second best time is now because timing is not that important. Because even if you get it 5,000, 10,000, 20,000 cheaper, in 10 years time, well-located properties in our capital cities double every 10 years. We've just done some research at Metropole a couple of weeks ago, going back 40 years, all the statistics, and Sydney grew at about 7.4% on average, over the last 40 years, Melbourne 7.9%, Brisbane 7.3% on average capital growth; if a property grows at 7% per annum it doubles in 10 years; the other states had slightly lower capital growth but in the high 6%. So if you buy a good property, it'll double but that means that if you buy it for 10,000 less or a bit more today, it's not going to make much difference; it's the capital growth and as an investor, you don't pay tax on that increased value of your property. And as an investor when you eventually retire you shouldn't sell your properties by the way. When you eventually retire, most of the money you're going to have isn't going to be the rent you've earned or the money you've saved or the tax you've saved, it's actually going to be the tax-free appreciation, capital growth of your property. So that's another big mistake people make. It's the Oops, I've got no capital growth mistake, because they've paid too much up-front or they've bought the sort of property that isn't going to go up in value. And one of those groups of properties is those large apartment complexes that were built more for investors rather than owner-occupiers. Where at the moment when they're settling the valuations are coming in below contract price, but it's because there are so many of them. And because there isn't a good secondary market for them, that a lot of those buildings have no capital growth, no increase in value, and no increase in rent for up to a decade. And that hurts.
Marc
I can see the Opal Towers from where I live so that's a good reminder, a daily reminder. Let's go on to the next point which is thinking like an owner. So this can probably be a bit of a hard one to overcome. So what are your tips for that?
Michael Yardney
Interestingly, as an investor, I do think you've got to understand what owners want, but not what you want. Let me explain: I think an investment-grade property is one that appeals to owner-occupiers, because it's not one that's built for investors. All those high-rise towers we've talked about were basically built for investors, many of them for overseas investors, and they're not the sort of people who are going to keep pushing up the value of those properties, especially since a lot of the foreign investors have gone. So I like the sort of property that has strong owner-occupier appeal, because it's people who are owner-occupiers who are going to buy similar properties, not that I want to sell my properties, and push up the values. But that's not necessarily how many beginning investors think. So it's not that I would love it, I would want to live in it, I could live in it, it's not my personal tastes. Instead, try and walk in the shoes of the typical local buyer who would buy similar properties in the area, and of course you've got to understand what tenants want as well, so it's not what appeals to you, at your age and your stage of life.
Sally
I can imagine that being a really difficult one to overcome. And it's a good thing to think about before you are in the moment because, you know, like we were talking about in the previous episode, when you're doing your research and you're buying based on your emotions, you know, you'd be thinking, Well, I'm spending my money on this. So you know, if I want a pool this should have a pool, but yeah, you need to think about, yeah, what the tenants want and what other owners would want rather than maybe your own preferences, which I think is a really good tip.
Michael Yardney
Because it's an investment, it's numbers and figures. Let me maybe say that most properties are not investment grade, so anyone can live anywhere, and any property can become an investment property. You kick out the owner, you put a tenant in and it's an investment property, but it's not investment grade. As I said earlier on, a lot of investors sell up but the other statistic shows that of the 20 million property investors in Australia, the majority, around 90%, never get past their second investment property, which means they never get the financial freedom they are looking for. In all of Australia, tax office statistics show that there's just over 20,000 investors who own six or more property. That's it! 20,000. And interestingly, a lot of those own a number of dud properties, so it's not that good either. So you've actually got to do differently to what most people do if you want to get the results that most people don't get, otherwise you're going to get the results everyone else gets, so you shouldn't have the emotional hat on. So investment grade property to me is one that is in the right location. So let me say that location is 80% of the heavy lifting. We spoke a bit about research before but for investors, the research involves finding areas that are going to have strong capital growth because as we said before, capital growth is what's going to increase the value of your property. But interestingly, as the property goes up, the rent goes up as well. So the research is looking for areas that not just have done well in the past, because past performance doesn't always translate to the future. So I look for areas that have got economic growth, because when you go to economic growth, you get jobs growth, and when we have jobs growth, people want to come in there. And when people come in there, they actually need to rent or they need to buy. And so we look for areas that are going to outperform because of economic growth. And we also look at the demographics. Now this is not a judge of people. But I look for areas where people's wages, the disposable income, is higher than average. The Census actually gives us this information. It breaks down every postcode and shows you people's earnings, people's demographics, and I look for areas where disposable income increases more than the average for the state. Because if you think about it, what these people will have is more income and they're not only going to buy smashed avocados and lattes and nice cars, they're going to buy houses and renovate them, so location does 80% of the heavy lifting. And then within that location, I look for the sort of property that's going to have owner-occupied appeal like we said, I'm going to look for a property that has a high land to asset ratio. It's the land underneath that goes up. We said it a moment ago: it's the location that pushes up the value of the property. Now, that doesn't mean you have got to buy a house, it could be a townhouse, or could be an apartment, but I want an apartment in those older blocks, those lovely blocks where there's 8, 10, 12 – I'd rather own a 12th of a block of land in Coogee or Bondi in Sydney or St Kilda in Melbourne, in the nicer suburbs of our capital cities, than 100th or 200th of one of those big towers there, so it's not how much land, it's the land to asset ratio. I like buying something below its intrinsic value. You're not paying a premium to developers or marketers so we don't buy new and off the plan. I like something with a twist, something that's a bit unique, something a bit special about it. What I really like is property that I can add some value to over time, something with a bit of renovation potential, something that I can manufacture some capital growth, not just leave the market to do the heavy lifting.
Sally
Yeah, that's definitely a good thing to think about. And the next mistake was paying over the odds. So can you walk us through that one?
Michael Yardney
Well again, with most new properties, you're actually paying above intrinsic value, which I said a moment ago, because there's too many fingers in the pie. All those glossy brochures that you see, all the full-page ads in the Saturday papers, all the ads online, somebody's got to pay for that and the marketing and the display suites. So therefore, in general, I would be avoiding the new and off the plan properties because you overpay and that's shown when they come on completion, have to get a valuation and the majority of properties that were bought a couple of years ago, today when they're completed, off the plan properties, contract prices are significantly more than the valuation and you've got to make up the difference. But the other thing is also a lot of investors are a bit too timid to make a lower offer on an established property as well. Again, partly the fear of missing out, as we said, possibly because in our culture in Australia, we're not as good at negotiating and they're dealing with a professional negotiator on the other side; estate agents are taught how to negotiate, they spend a lot of time on that. And so that's a learning fee that a lot of first time buyers and investors have got, they're buying with their emotion and paying too much – and for many years, it's not just the price of the property, you've got a bigger mortgage, you paid too much stamp duty. So be very cautious about what you pay and do your research. Find out not what other properties are asking on the Internet, or in the papers – find out what they've sold for and again, that's where it's sometimes hard to get the updated research – that's where a buyer's agent will help you – and you've got to then compare like with like, in other words, is that other two-bedroom apartment that sold similar, does it have a similar outlook, does it have a similar size or similar facilities in it, so compare like with like.
Marc
Another common mistake that property investors have is underestimating their running costs. How different is this from buying a home?
Michael Yardney
Interestingly, it's very similar costs, Marc, but what a lot of investors are coming from is people who are investing or buying an investment before they buy a home, don't recognise that they've actually got to pay the rates and taxes, and land tax which is a cost that they don't necessarily have to pay if they own their own home. Now there's a land tax threshold and each state's got a slightly different one. But there's also the maintenance, the owners' corporation, some taxation costs, so it can cause cash flow issues if you haven't budgeted for them.
Marc
Yeah, there is always unexpected costs, like I remember there was a storm in Brisbane and that ruined a shade sail on my property and it was like – gonna have to replace it. So yeah, there's always these unexpected costs that come up.
Michael Yardney
Now you can mitigate against some of those things. So you should insure yourself as well. And people don't always take out landlord insurance; landlord insurance actually covers you for tenants leaving, doing damage, not paying the rent. And that's different to insurance of the building, the shell, that covered for the storms that you were talking about before as well. And that's one of the things I like about residential real estate as an investment, you can actually minimise your risks, because you can insure against a number of things for it. And another way of insuring yourself is by getting a good education so that you're not making mistakes.
Sally
And I think the last point links in really well to the next common mistake, which is having no spare funds to use as a buffer for you know, said emergency costs. So how much do you think should be put aside as, you know, spare or savings when looking at the total amount that you are budgeting when you're looking into buying it?
Michael Yardney
That's a really good question, Sally, because how much buffer you need depends a bit upon your cash flow. So if you're in that sort of job where you're actually spending almost everything you're earning and you don't have a lot of spare money, then you actually need a bigger buffer, than somebody who can maybe work an extra shift or see another patient if they're a doctor or do another operation or do something and get a bit of extra money if they suddenly need some more, or get another commission. So therefore it a depends a bit upon your spare cash flow at the end of the day. And it also depends upon how many investment properties you've got. But things always do crop up. There are vacancies, there are repairs. At other times, there were rising interest rates, which there isn't now. You need to set aside some money for a rainy day and some people have a credit card for that instead; I'm not sure that's a particularly good idea because that can end up being quite costly because you won't necessarily be able to pay it off at the end of the month. So it's financial discipline that's important. One of the things we haven't mentioned in our chat today is that residential real estate investment is really a game of finance with some homes thrown in the middle. So what you need to do is get the right finance to allow you to buy the right property. And the right finance isn't necessarily the cheapest rate. It's actually one that gives you a level of flexibility. And you've got to have the finance to buy you time. Smart investors buy themselves time to ride the ups and downs of the cycle. We've been through a downturn in Sydney and Melbourne in particular, but if you didn't have to sell and if you were able to ride that through, the market is now picked up again and in 10 years' time the value of your property will have doubled even though it went down 10%-15% over the last little while, so get the right finance to see you through the ups and downs, so you're not caught out.
Marc
Yeah, that's very wise words. So okay, so to finish this off, Michael, another mistake that investors make is going solo. So I personally used a buyer's agent when I bought my first property. But on the other hand, someone I know who's pretty successful in property has chosen to do it all themselves and manages their own property and, you know, takes care of their tenants' needs. What is non-negotiable when it comes to what experts you should be using when buying investment?
Michael Yardney
Well, don't ever, ever, ever manage your own property; that is being stingy and you're going to get yourself in trouble because when everything works nicely, it's okay. But in fact, the legislation keeps changing. And it's changing considerably to the favour of the tenant in Victoria and in New South Wales. And it's got to do with all sorts of things, from are they allowed to let out part of the rooms on Airbnb or are tenants allowed to put hooks on the wall, or what happens if there's damage there? Let me give you a really good example: a couple of days ago, one of my own properties, the tenant complained that the heating wasn't working. And so a property manager got an air conditioning guy to go out and check the heating. And you know what happened? The tenant had closed the vent. We were billed for $260 for the call-out cost, which is fair. Now, who has to pay for that? Me, because I called them out? Or my property manager or the tenant because they didn't do it right? So you've got to understand what your rights and what your responsibilities are as a landlord, and what you can claim back from the tenant and what you can't, because the tribunals, VCAT, QCAT in the various states, are very much on the side of the tenant, and the reason for that is because there have been some slum landlords and people not looking after the tenants. So I'm suggesting you need some smart people, because a property manager does a lot more than just collect rent. They keep up with the legislation. And if things go wrong, they protect you. They make sure that you've got your insurance in place, they pay out of the rental, your rates and taxes, so at the end of the year, you actually get one statement. It's not a job to be taken lightly. And so that's one of the non-negotiables, in my mind. Trying to do it on your own, it's just too hard, especially when you're starting. So I think it goes right back to the beginning of formulating a strategy. Most investors don't even have a strategy. The strategy is I'm going to buy an investment property, the strategy is Ooh I like that property, and then I'm going to buy it. It's the other way around. You've actually got to understand why you're doing it. Is it for capital growth or is it for cash flow, is it for a combination of both? You've got to get your finance right. You've got to get your ownership structure right: you'd buy it in your own name, you'd buy it in joint names with your spouse, your partner, your life partner, you'd buy it from your family trust, so you can pass it on to others. So all that has to happen up-front of finance strategy, wealth strategy, sometimes you need to see a financial planner. So in my mind to be successful investor, you need more than a buyer's agent who's actually implementing the plan, you probably need more than a property strategist. You need somebody who can look after you holistically, because if you don't, you can only end up in that category that most investors are in and they never get past the first or second property. So yes it does cost to do these, but it's sharpening the saw before you cut down the tree. It's the planning that you do in other areas of your life or in business as well. Because the initial cost up-front is an investment. If you don't do that it can be very, very costly. So I've found that getting professional advice isn't expensive. To me it's an investment. There's all sorts of other expertise you can have as well or need as well. And it's also really hard to understand who to believe. That's the big, big trouble at the moment. Because property advice, investment advice is not regulated. It is for financial planning. It is for insurance. It's for stocks. But while a lot of people have a licence to sell real estate to be a buyer's agent, you don't need a licence to give property investment advice. And so therefore, a lot of people get taken by scammers, by spruikers who've got a vested interest who are not on your side. So that's another learning fee, "I got eaten by a shark" learning fee where if you don't pay your advisors, you're the product. You're not the client.
Marc
Yeah, that's a great point.
Sally
That's a very, very scary thought. But yeah, again, it just shows you need to do your research and, and make sure that who you're working with is legitimate and reputable.
Michael Yardney
Sure. So how do you find out? Well, I mean, there's lots of Google searches now. That's really easy to do as well. There are people who join professional organisations and PIPA, the Property Investment Professionals of Australia, which in fact, we were founding members of many, many years ago, you'll find people with professional qualifications, QPIA, that are professionally qualified property advisors. And you've got to find somebody who's independent. And the other thing is, you've got to find somebody who, say, don't have a stock list to sell you, but also who, as I said a minute ago, has a more holistic approach. And if you live in Sydney, you may not be able to afford Sydney. So if you've got a $500,000 budget and Sydney, all you could buy is a double garage, while in Brisbane, you can actually buy a home. So you should be able to speak to somebody who isn't just going to talk about their own state. And that's why going directly to a buyer's agent in my mind isn't enough because they're not going to be able to tell you, buy in other states. So people in Perth where the market is still flat probably shouldn't be buying there, but they should be speaking to somebody who says, You know what, the Brisbane market actually is rising, it actually hasn't dropped as much, or Sydney and Melbourne have great countercycle opportunities. So yes Sally, as you said, be really, really careful who you listen to.
Marc
Yeah. And as an extra note, I found personally, going to the property chat forums was great, because you can actually hear from people who have used buyer's agents or mortgage brokers in specific areas that they might not live in. And they will give you like, usually a pretty honest account of what they thought of them. And so I think that's also a good resource.
Michael Yardney
Definitely.
Marc
Cool. Well, thank you so much for that, Michael. I feel like I have learned a lot and I wish I could go back in time now and re-buy my first property, so I wouldn't have made some of these mistakes.
Sally
The final point I guess I'd like to make is property is very forgiving. So yes, you did make mistakes, but you are in the market and the market moves up and the markets move down. But when you look back in 10 years' time, you're going to be so thankful. Just like I am that I made that $18,000 investment. I took a 30-year mortgage for $18,000. And I went halves with my parents because I had no idea how we were ever going to pay it off.
Marc
Well, was it $12 a week you said, in rent?
Michael Yardney
Remember, in those days the family car was the Holden Kingswood. And that cost $2,000.
Marc
Times have really changed.
Michael Yardney
Again, that's the power of owning income-producing capital growth assets.
Sally
So does that mean that houses are going to be like 100 million dollars in 40 years' time?
Michael Yardney
Well remember, though, in those days, a car cost $2,000. Today, the equivalent costs $35,000 to $40,000. But that's one of the problems of Australia, Sally, so don't all over the world. And in fact, not all over Australia. You could buy in regional Australia, you could buy whole acres for what it would cost you to buy a property in Sydney or Melbourne. But it's an issue living in the best country in the world at the best time in history, in seaside, in bayside, in water suburbs or cities. So remember, we live in four capital cities that are all on the shore, that we've got a queue of people wanting to come to Australia. When my parents migrated in 1956, when I was only three, Australia paid immigrants to come here. They encouraged them to come here, because people didn't want to come. Now we have more people wanting to come than we can place and they're coming with jobs, they're coming to form families. So it's the strong population growth. Remember, we're growing faster than any other developed nation. We're growing at about 1.6% per annum. And by 2030, our population is going to go from 25 million that we are now to 30 million. We're going to have all those extra people wanting to live in much the same sort of place, and they're going to be able to afford to because they're going to have jobs. That's what's going to push up the value of properties in Australia, Sally.
Sally
Wow, first world problems, am I right?
Michael Yardney
Exactly right. Because, there's a lot of countries that have an under-supply of properties. I visited Mexico a couple of years ago, the whole population of Australia 25 million people in Mexico City, there was a huge under-supply properties. But property values didn't go up because people couldn't afford it. Go look at Japan with its very wealthy people, but an ageing demographic and not a lot of new people coming in. And so therefore, what happened is there's been deflating and property values and asset values have gone down for a long time. So you need a combination of both those things: population growth and the wealth of the nation. And that's what's going to underpin property values in Australia in the long term.
Marc
That's great. Thank you so much for that, Michael. Thanks for your time today and thanks for everything.
Michael Yardney
My pleasure.
Marc
Okay, Sally.
Sally
I'm ready to invest.
Marc
You've got your mistakes for first time buyers covered. Now you've got them covered for investors. Do you feel like you're ready?
Sally
Yes. I feel like I'll still manage to make a couple of mistakes along the way. But also, can you lend me some money? Well, thanks so much for joining us on this wacky journey. Once again, everyone if you enjoyed it, feel free to subscribe wherever you listen to your podcast. As always, leave us a review. And make sure to follow us on Instagram at Pocket Money Podcast.
Marc
Yeah, let's be pals. Internet pals.
Sally
The best kind of friends, Internet friends. Until next time. Thanks for listening to Pocket Money from Finder
Head over to finder.com.au/podcast for the show notes for this episode.
