Property Investment

Ben Crowther 0:07

Oh. Okay, great. Well, we'll come back around to Yes. Yep. I thought this this this time, we could talk a little bit more on the investment side of things as we, we talked to him to talk a lot about first-time buyers stuff last time, I thought I have a few questions about some investment and see. See what you've got for us? Yeah, definitely. Alright. Okay. So I guess first things first, what why should someone look for an investor in investing in property?

Allen Chan 0:46

Well, I'm speaking out of my own experience, right? I guess, you know, in having an investment property, generates rent, you know, and it covers all the expenses associated with that investment property. It's what I call probably semi-to-passive income, right? What is semi passive income, well, going into a job, or working for a business actively you're you're going they're spending your time. And after you spent your time or added value, you get a return on your money, right? So that's active income, versus if you purchase an investment property. Regardless, if you're working or sick, not there, there's still a tenant that hopefully pays for your rent, right? Or you're on your property, and they've recovered all the expenses. Any leftover is what we call passive income. So that's probably one of the major reasons that people want to invest in investment property. Secondly, I guess over time, and this is, through some historical data, if we bought a property, probably when I was born, or 10 years ago, or 20 years ago, at a relatively good price, there's a thing called appreciation to the property. I mean, not all properties appreciate. This is not advice. But it's more like over time, through inflation, and other factors, like your same house will be costing a lot more higher than what it was bought originally. So with that process is probably called capital growth. So that's another reason why people would miss it. In fact, Ben, last two years, with the pandemic, people fought houses were going to go down or the other, you know, go down into the value. But in fact, it's done the exact opposite, which has gone up in value. So we bought, you know, let's say, two years ago, a property at 500,000. It could go up in value. And let's say we reevaluate today are sold in today's market at 650. You know, the capital growth, if we were to sell it today is 150,000. before taxes, of course. So that's another reason why people want to go into the market for that capital appreciation. And thirdly, I guess, they have options and choices. And just with that scenario just explained to you, if you made 150,000, you know, you pay your taxes, and that would allow you to have a deposit for your next home, potentially, or buy another investment property. So therefore, they're probably some of the major reasons why people go into investment property, then.

Ben Crowther 3:23

Yeah, well, you sort of you now my next question, then was what what are the benefits of having an investment property? And you've you've nailed that one already. Um, so what are some of the drawbacks to investing?

Allen Chan 3:41

Yes. So I think in terms of investment property, the the risk associated is when you have rent, but there's a lot of costs in you know, holding this property. So for example, it could be repair cars, it could be interest costs, right. And that's more than what the wrench generated. It's a technical term accountants call it like negative gearing. But some, some people and in different circumstances, would want that strategy. But it's costing you more to hold it, right. So that's one of the setbacks. Secondly, when you're buying a property, let's say the 500,000 that we use previously, if it goes down goes down in value, right? After a few years or even a long period of time. It hasn't generated the capital growth that you wanted. So that's probably one of the drawbacks. And I think the third one, which I was looking for was, you don't have a tenant, right? You don't have someone renting your property. And it's costing you a lot to repair before it's in a rentable value. So without doing research, you're buying a property, the bathrooms going to leak, you know, the kitchen, is something's not in shape. So tenants are not willing to pay that rent and therefore, it's costing you because there's still grades, water have expenses. So I think at the end of the day, we want to do that research and make sure that one is rentable. Right. Secondly, is a covering my costs? And thirdly, is that in a good suburb that over long time will go up in value and make a good return on your investment? Yeah.

Ben Crowther 5:19

Yeah. So well, I guess is there's the unexpected. Again, we I know, we discussed it last time, but COVID is, well, you know, people were people didn't have jobs. But then the there was, things put in place where the government where landlords had no recourse to remove tenants who weren't paying, could they? So that's, that's, that would have been a big drain on a lot of people who, who relied on investment properties.

Allen Chan 5:47

Yeah, and I guess, you know, it's part of, you know, working with advisors or with mortgage brokers is making sure you do a budget and have a good buffer in place. There is another factor, which probably in the first one, you said, the benefits, you know, we love investing in property, my own self, because, you know, I love this concept of OPM and, and for those that are listening, or watching, OPM stands for other people's money, right. So the bank's money, which, you know, if the property value goes up in value, and you have that borrowing capacity, allows you to extract that for a better use. Yes, you have to pay interest, but that's can create some sort of buffer in investing in a portfolio of properties been?

Ben Crowther 6:34

Great. So you've also just briefly touched on negative gearing. So I guess the next thing I would want to know is, other than the drawbacks once you've actually invested but what are the risks involved in investing?

Allen Chan 6:51

Well, I think it comes back to firstly, you know, what, not knowing, right? You know, what you're buying, I mean, anyone can buy a real estate, you by going on real estate.com dot you given yourself and myself can borrow from the banks, for example, doesn't take much skill in terms of making an offer, right. So for example, I mean, our office in Parramatta, like if you were, I mean, today's terms in 2022, a two bedroom unit when the market value is at 750, for example, and you go out there and buy at a million dollars, I mean, any seller would want you to buy that probably, but as a result, you've probably overpaid for that price. So what does that come back to it comes back to lack of research and not understanding what the market is, you know, accepting for a two bedroom unit in Parramatta. Right. So, that's number one. So you're overpaying for that particular asset. So that's probably one of the risks. Secondly, not doing enough research on the property in a rentable state. So it may look really nice as you on the on the pictures right in online these days, but they've done a renovation, so it could be leaking some sort of damage in soil you're not aware of, so it's costing you more money to repair it. So initial capital. And lastly, I guess rent, you know, not enough rent to cover the associated costs. So cost means, you know, the interest rate if you're borrowing to hold this property, that particular council rates, you know, in each state, because they may vary in costs a bit more in various states, water rates, which I mean, don't may not differ as much. But I think those costs, land tax will be another thing, like, depending on circumstance, you need to speak to your accountant. That's a additional risk or costs associated in holding that property. But I think lastly, is buying an asset we mentioned, if it's apparent that a unit today at 750 goes down in value, there is not much of a return in investment. So these are the risk associated.

Ben Crowther 8:55

I saw I guess less you said mentioned with your account, but you there should be a risk management plan. You know, we've discussed it before, but your finances should be treated like a business. So before you make any, any business transaction, you put together a risk management plan, don't you?

Allen Chan 9:12

Yeah. And I think having that clarity is how I write. People don't plan to fail, but they fail to plan. So I think as simple as having a discussion with your accounting mortgage broker, a plan a good one to kind of say, this is what I'm doing. Based on my circumstance, where am I at? Right? I think that's the first question. And secondly, where you'd like to go. And then I think third question is, Can I do it right? Or, you know, they break it down into bite sized pieces, because they want to overshoot that a I want to get 10 But hey, let's start off with one investment property. We can work our, you know, ladder to 10 and 10 is a good number. But look, I mean, any number is a good number but also another clarity on those and I often I As my clients is, it's not how many properties you have is, you know, how many properties are generating that positive cash flow, right, that I mentioned. Right. So a question I always ask is that, you know, positively geared which is like bringing money in neutrally geared after, you know, naturally D, which is just, you know, it sustains itself are negatively geared, it's costing you money. And other question is before and after deduction. I mean, all these questions, some clients don't even know where to fight. So therefore, I just can see which level they're at. They haven't gone to the depths of understanding the numbers, or spoken with accounts and maximize or minimize allowable deductions for the investment portfolio. Sorry, that's a lot of information. But

Ben Crowther 10:45

no, it's but I think it's up it's useful because I think the media paints a certain picture of of investing. You know, it's a no fail, you know, you see these things on social media, invest, invest, invest, but if I suppose you only ever hear about the the success stories through the media, you don't hear of the nightmares that have taken place.

Allen Chan 11:08

Yeah. And I guess, you know, there will be some learnings including my investment journey, there are learnings as well, like, sometimes you don't sell, you know what you bought it, you sold it a bit of a loss, but I remember my kind of my first investment property, it was in the Melbourne area, some of you guys may know in St Kilda, but it was very negatively geared it's costing cashflow. But negative d is on paper until you kind of sell it and realize a profit or cut your losses is actually kind of like made the wrong decision. If that's the case. So I agree with you, Ben, it is important to highlight that out of, you know, investing, there are going to be some good choices and bangers they call it right that you're gonna be like, you know, investing in in some, you know, not so much. Right. So I think it's as long as you make more wins than your losers, and get some education along the way, right? Because people, like we said, you both can borrow when we just go into real estate and just, you know, pick between Edie miney, moe, that's not the best way to miss I guess.

Ben Crowther 12:14

Yeah, gut instinct is fine. But, you know, a little bit of research to back it up doesn't hurt. Yeah. So is there any way when you we've been talking about rentals, using the property as a rental? Is there any benefits to her just having a second having it as a second home? I suppose obviously, that's just another mortgage to pay if you don't have someone in, in the home. But it certainly is there any positives or negatives other than, you know, dealing with problem tenants? Between a rental and second home?

Allen Chan 12:52

Well, I guess let's let's start off with, you know, second home as, like a holiday home that you're going to be utilizing. Right. So there's no rental, right? Well, I think, firstly, you need to have your deposit or may depends on your situation, of course, but there's no rental coming through. So it's making sure that you or partners that you're investing in, can service the mortgage, then you can use it for your own use, right. So mainly, that was the investment strategy, you're really betting on the capital appreciation in that particular holiday home. So either over a period of time or your personal use. So I mean, in terms of passive income, it doesn't because you're just going for holidays yourself, right? So I mean, if having a second home was a holiday home, and you are listing on Airbnb, or with an agent generating income, I've seen clients I've done well from, of course, and clients that haven't gone well, because I've done well, because they haven't rented out to enough tenants, right? So there's always two sides of the coin. Now, the only thing if you're doing holiday rental is just be mindful, speak with a really good mortgage broker that have done their research. Not all lenders will accept that, hey, if it's above market rental at 10%, that they will take that as a, you know, borrowing capacity or servicing income. So we just need to be very clear how much percentage that will be used. And that could jeopardize your borrowing capacity, right? So or the LVR may change LVR, meaning that loan to value. They won't lend that at 80% and could be slightly less depending on the lender. Lastly, you said if it's second home like not for holiday, purely for rental rented out to another family, then yes, that's kind of increasing your investment property portfolio, not a short term late stay in terms of rental it's a long term are usually with a real estate agent. And that's the common practice which lending wise is more favorable and lending for favorable and And yeah, it's just got all these different options. So I guess in answering the question, then it's just knowing what type what you're going to be using it for. And you know, is it going to get cashflow? Are you just purely investing for the capital growth? So again, going back to some of the earlier questions to understand what's the strategy that you're going for, in terms of investing property?

Ben Crowther 15:22

Yeah. Okay. Now, that all makes sense. So we've talked about research, but what, what sort of research should we be going through before we invest? So, you know, I understand that speaking to a mortgage broker and and financial planners, great, but is there? Is there some way that we can go to look at look at market values, things like that, that all that can help people make decisions?

Allen Chan 15:53

Yeah, definitely. I guess, you know, when I kind of invested in all my years of investing, research, research, research is the key, right? It's like in real estate, location, location, location, right? That's one factor. In fact, I feel when I bought my investment property that I made money on just, you know, I use like, residential reports, what's residential report? So residential looks at, you know, RP data, or data, that's property that's been selling? And then, you know, what's the data kind of do some forecasts and say, Hey, which suburbs are going to be, you know, increasing, right. So just as a guide, of course, gives you an idea what the median price and then within that particular suburb or region, you can negotiate down further with a particular real estate agent, right. Secondly, I guess I kind of through investing in Queensland, there's some reports like irbis report, a common practice was pie, PB population, right. So I guess, you know, any suburb that had no population and increase, of course, the real estate would go up in value i for infrastructure, in terms of the roads, schools and things that's going through, and lastly, employment, right. So is there in my close employment hubs, of course, pandemic has released, you know, shifted that need because people working from home, and you can see as a result, like, I mean, we're here in Sydney, what happened to the outer regions of Sydney, the prices have boomed right, in the regional areas, in places like Central Coast, Wollongong, or because you as long as you have an internet, some some employers allow you to work from home. So I guess, the pandemics given us you know, you know, think in terms of going back, what are the reasons a property goes up. And I think that's probably where you should start with, and then into the real estate is to negotiate height with an agent. I always got taught by mentor, you always make money when you buy, not when you sell, right? So I mean, not to zero, of course, if you're buying a property at zero, your broker may their market value. So I feel that's an interesting skill or important skill to understand. So in terms of investing, so but then the question is, do you have the time? So in a, I guess, in this energy, we we don't provide that advice, specifically, but we work with a group of experts because we believe creating your wealth requires a group of trusted expert that's doing this all the time. Right. So some of our buyer's agent some could be investment wise agent, right? Could be existing could be brand new, it could be apartments, house, a land, it could be existing property. So I feel everyone is different. If I was a class, everyone even kind of like, Hey, this is what they should be doing, then we all be focused on that. But the reality is that we all different, but we can always ask where you at where you want to go. And can I do it right there the frequents. Right.

Ben Crowther 18:59

Well, that's, that's fantastic. In fact, I might, I might make sure that some of those things you just mentioned will will pop in the description as well, so that people can have those resources to have a look at as well. Yeah.

Allen Chan 19:09

Well, I mean, what help people Yeah, I mean, there's there is a science to investing I mean, we're making more income, we're saving more money, the natural tendency is you will invest in either cash or real estate or shares, right. So I mean, into the science, I mean, once you have that 20% Or you have equity in your home, you may not need any cash right? So that's why it's talking to an expert to see where you're at because I don't know what you study been like in university What did you study? I'm just curious,

Ben Crowther 19:38

like, marketing and actually film production.

Allen Chan 19:43

Right. So I mean, you will be very expert at that because you're doing that all the time. But you know, if I was to ask you marketing, your or fuel production, you probably have a list of steps, just like you know, talking to a investor or mortgage broker. I've done it myself right many times, so small asking, Hey, where should I start? So and I think the reality is also like, Hey, can I do it? Or if I can't do it, not to get disappointed, but hey, what's the gap? And how do I get there? Because that's kind of like, you know, people get disappointed. They can't do it now, but doesn't mean your income doesn't increase doesn't mean you may not get more money in the future. Right? So not now doesn't mean not needed later, then. Yeah.

Ben Crowther 20:24

Yeah, yeah, I suppose there's so many different variables, isn't there? It's just a matter of, and like I said, if the more you research, the more you understand it, the more you understand your own situation. I think that's, I think that's important.

Allen Chan 20:36

Yes, that's right. Yeah.

Ben Crowther 20:40

Yeah. Okay. So when you we've mentioned deposit a few times now, is there any way to leverage say, my current home, or other investments as collateral for new investment?

Allen Chan 20:53

Yes, definitely. So this is kind of our strengthen what I've done with my portfolio to grow from, you know, single digit properties to you know, double digits, is what we say, OPM, other people's money. I mean, there's a nutshell is more around, people focus on Ray light, and there's definitely you can get cheap rates online, with mortgage brokers, and so forth. But when it comes to investing in equity, like in property, and especially the No Money Down strategy, or using equity is to get a valuation done, right, with a particular lender. Now, same property, different value is just like, you know, what's the color of your shirt, then, like people will say, is a blue, the gray, right? There's different opinions, just like in the valuation of property, they use numbers, but you know, could be worth 1,000,001.1 1.2. But if you're purely going there, because of the equity, where, you know, the lending is 80% of the valuation value, would you want to accept a lender that gives you a valuation pin at $1 million, or $1.2 billion? Now, disregard the rate? Now? I mean, most rates are very similar, but let's assume rates, they're like, you know, very much the similar the same, right, you know, what would you go for? I mean, simple answer is the 1.2, isn't it? Right? Yeah. Because it will allow you more OPM, given your borrowing capacity permits, which then allows you to leverage on a potentially higher property or more money for other use in terms of investment shares, and so forth. So I think when people focus on the rate, right is important. But when it comes to investing your equity, or OPM is also important to kind of like, you know, leverage on additional properties. Just like if I was asking that question, Ben, if you had the chance two years ago, you know, how many if we know this data is going up? How many probably would you have invested? If you had that chance again, then?

Ben Crowther 22:53

Yeah, well, that's.

Allen Chan 22:57

Therefore, if you got an extra 100k To buy a property, it wasn't about the interest rate. It's probably about the mindset advice, the massive action, right? The mindset, right, or the psychology as well, right. So all factors come into play when it comes to investing. So that question, sorry,

Ben Crowther 23:16

no, no, you do. Sorry. Just having a little bit to think about there for a second. Okay, so we've talked about that aspects, but But what about using your super in order to buy an investment property? I'm not sure I know, Scott Morrison had some plans, but they seem to have gone by the wayside now. But, yeah,

Allen Chan 23:37

well, I think, definitely, there's different structures and probably a bit before that, then yeah, the answer is yes, you can purchase in your SMSF. Now go into what are the factual, you know, minimum deposit requirements that you need. But I think usually when people go investing, they're buying their personal names or bid, if you're a bit more advanced, you know, tenancy in common, which means that a set percentage, you know, maybe the wife earning different income, so different percentages assigned, then they go into, possibly in family trusts, right, which we do as well into the lending. And then lastly, is the SMSF. So is there any questions? Yes. And the factual from well, there's a bit like a lot of people, including financial planners, and they go, Oh, well, yes. lenders don't do SMSF lending anymore. So we want to give it a bit of a myth bus. And the answer is no, they still learn, but not the major for banks, of course, but there's other lenders that will provide the funding. So the next question is, what do we need? For a residential property? You'll need a 20% deposit as a minimum, so let's use numbers like 500k investment property, you will need 100k which is 20% of the property value, plus the associated stamp duty costs, differences takes different amounts, of course. But let's assume that it is 20,000. Then you need 120,000, which is 20% plus injury. Now speak to your financial planner and accountant, mainly financial planner, because, you know, is this the best thing for yourself? Because they may want to have you have some liquidity after buying. So, you know, so you're not heavily just in one asset class that you're more diversified. So meaning that buying off the bind as half a million dollar investment, probably, you still have 50,000 cash in shares or other asset classes is a diversification. So, Linda wise, they call it liquidity. Some lenders don't need that liquidity requirements. So simple answer 20% Plus, they actually for commercial 30% Plus stamp duty, which is in today's you know, terms 2022 In May, unless lenders change their policy. Right. So, that's where we're

Ben Crowther 26:00

at. So let's see what happens over the next couple of months.

Allen Chan 26:03

Yeah, I mean, you touched on, you know, a bit on politics, we've, obviously, government changing hands, we're looking closely, and I'm sure with these podcasts, and then zooms, we want to update, how does that really affect you into mortgages, right? Definitely, rates, if it goes up, it does affect your mortgage, but it could be certain policy that is for the current government could impact the way that you choose your investments. So that's why it's important to check in with us. Not every single week. But I guess, if we have quarterly or monthly updates, we want to keep you posted, because that could impact your decisions. Yeah. Yeah, for sure.

Ben Crowther 26:42

Um, so we've spoken about it, is there a limit? I think you just briefly touched on it, is there a limit to how much of your super you can use simply because I know that that's sort of your fallback plan. So is it limited how much you can take out of that so that you don't, if at all does go pear-shaped on you, you're not in a bad situation,

Allen Chan 27:10

I think we need to understand a bit on the lending, most of the lenders that provide this super self managed super fund lending is a non recourse arrangement, which means if Touchwood something happens, they're limited, like they can only recourse that particular property. And in that structure was probably in the US. And that's what sparked the GFC. Now, not saying hey, this is what's happening in there just means if something, you know, tenants didn't pay and you couldn't repay it, then they will just sell the property and recoup the costs, right? Or losses, right. But in your super, I guess you you would have buffers and even if there was no tenant, if you're working and there's some contributions into the super, then it allows to pay for the mortgage of course, right. So that's why having a buffer, these are the conversations we need to have with the mortgage brokers or your advisors. It's not investing to the every dollar that you have, or access that you have. It's about having a backup. And this is like where when I talk about psychology or your risk profile, then it's quite important which risk profile the financial planner will go through, like a bit more. So you conservative, you're aggressive, right? So regardless of conservative or aggressive, you still need to have some buffer, right? Because we want to cater for the worst scenario, right? So just like myself, I have all my properties are not rented. I've got enough buffer for ex that, you know, would be you know, I can I can last fall, but at the same time, I'll be gone to my real estate agent, why are these properties not rented out? Or reduced rent whatever strategy may be right. But I think when you're in that particular, you know, investment, you would talk to people like us or other people to look at strategies that you can alleviate that risk, if that makes sense. If I'm saying there's no risk, that's, you wouldn't be watching this. Everything there is

Ben Crowther 29:11

risk versus reward isn't it

Allen Chan 29:14

Yeah, but I think it's to be in the game to win it. But at the same time, what I learned is not just in the game hastily. In the game, given you asked yourself the sort of like thought-provoking questions or risk management questions. And then hey, look, I kind of like a comfortable route that risk to go ahead. If you didn't invest, like just like a pandemic two years ago, or let alone like 10 years five years ago, you would not have benefit from property investing because you're not in the game. Yeah, so simple as that. So but I think like if you obviously leverage a lot higher, there's certain risks versus if you're using more money and less of the lending, right? So the return and will vice versa, right? So but best like what we're doing speak to someone that knows what they're doing, because it's all good like to go, hey, I want to do this and I haven't spoken to enough people to compare or research right, then it doesn't move that plan forward, does it?

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