Highlights from this week:
- What will happen to Gold Coast property prices before and after the Games
- Where to buy on the Coast NOW
- Why these are not ‘boom’ times’
- What is ahead based on what has already happened
- Who is at risk from cross collaterisation
- Getting the right property investment strategy for your situation
We can’t say the word but here is what it means – Andrew Mirams
Kevin: It’s probably one of the hardest phrases to say and certainly one of the hardest terms to understand in property investing, and that is cross-collateralization. I have to be very careful when I say that. Andrew Mirams from Intuitive Finance joins me.
Andrew, I’ve always struggled with those words, but tell me about the meaning behind cross-collateralization.
Andrew: I was going to ask, Kevin, firstly if you could start by saying it three times really quickly. It’s not the easiest thing to say, is it?
Kevin: That’s not going to happen, I can tell you.
Andrew: We might often call it cross-securities or something like that to break it down because not everyone understands what cross collateralization means. To understand what it is in the first place, your collateral is your property or the equity you have in your property.
Where a lot of lenders go with this is they will often link two or three or numerous properties to use that equity but it just intertwines all the properties into one big bundle. It’s a philosophy of ours that we don’t think that’s in the client’s or the investor’s best interests. We think that more favors the lender.
Kevin: So what can the lender do if you are cross-collateralized like that? What are some of the dangers?
Andrew: One of the key dangers I think is you really lose your flexibility. As soon as you have an all-in-one, and say you had a property in Melbourne that had gone up really strongly and you had one in Sydney that had gone up quite strongly but then you were exposed to the Perth market as well and it had gone down or you had a mining town or something like that, and so the Melbourne and Sydney have each gone up by $100,000 but the Perth and the mining town have each gone down by $100,000, your net equity is still zero.
Even though you have really good growth in a couple of your properties, those laggards are actually holding your portfolio back. By having them split out, you have a lot more flexibility where you could take advantage of those increases in equity. While the banks might be aware that you might be sitting on some negative equity or something or the other, they won’t force sale or anything like that as long as you’re meeting your normal commitments. So the loss of flexibility is one of the huge disadvantages to cross-collateralization.
The other thing is if you were to make a change to your portfolio – sell or want to refinance one out – that can often trigger then a revaluation on all your portfolio, and in the example I just gave, it might mean that any event or anything you’re trying to move forward with might actually end up with a nil outcome.
Having to re-trigger or get valuations done on all your properties, obviously the markets will move at different times and phases, so you don’t want to put your portfolio at risk there.
Kevin: How do we go about avoiding that? Is it a matter of going to different lenders for different properties?
Andrew: Look, you can certainly do it at one lender; you don’t necessarily have to go to different lenders. But that is one of the key things for those with larger portfolios and things like that. I think having numerous lenders on your side can be an obvious advantage to avoid that cross-collateralization, but you can avoid it even if you are still just that one lender. It’s just specifically having individual loans on individual properties.
Kevin: It all depends, I guess, on how you look to the bank, isn’t it, and how you present yourself, Andrew?
Andrew: Yes. That’s the thing: if you have your whole portfolio bundled into one lender and everything’s all in one, you’re going to have difficulty in changing vendors, you’re going to have difficulty in accessing your equity, and you’re limiting your choice. Lenders change their policies all the time. You might have one fixed rate in there. That can have a massive impact on your ability to move your portfolio or continue to invest or move forward.
The flexibility and the limiting choices by having everything all in one and all cross-securitized are some of the real keys to why we advocate to not do it.
Kevin: Just to sum it up for me, mate: the key points out of this?
Andrew: The key points are have individual loans on every individual property. Sure, you want to use your equity where there’s been equity gain, but you can do that simply with a second facility against that. You don’t need to add or cross properties.
You want to have more choice than less. You want to have more flexibility than less. You want to be able to continue to move your portfolio forward. And in our opinion, having them cross-collateralized works for the lender and not for you in your ability to do that.
Kevin: There’s an article that we’re going to link to. We’ll send you the link. It’ll be at the bottom of the transcription section on this interview with Andrew, so use that link. That takes you to an article I think you’ve written that gives a bit more detail.
Andrew: Absolutely. It has some keys and actual debt structuring. It has some good diagrams and things like that in there about how you access the equity and how to avoid cross-collateralization. Hopefully that’ll give people a bit of a heads-up, and of course, we’re here for anyone who wants to get more information.
Kevin: Look for that link at the bottom of the transcription on Real Estate Talk. It’s there for you right now.
Andrew Mirams from Intuitive Finance, thank you so much for your time.
Andrew: My pleasure, Kevin.
It has not been stellar as we may think – Kevin Brogan
Kevin: Vibrant property market conditions over the last seven years of this decade could easily have many of us believing that we’re again in boom times. However, research by CoreLogic confirms that with the exception of Sydney, capital gains performance was substantially lower than for the last decade. Sydney is the only city that’s actually recorded higher levels of value growth this decade compared to the last.
I know that’s rather confusing, let me try and unpack all of that. To help me do that, Kevin Brogan joins me from CoreLogic.
It can actually be very confusing when we talk like that, but let’s firstly focus on what happened in the years 2000 to 2007, if you can, Kevin, and we’ll have a look at what happened between 2010 and 2017.
Kevin B: Our head of research, Cameron Kusher, has done a comparison of the levels of growth both on a combined capital city basis and on individual capital cities, taking two base dates, the first being from the year 2000 and the second from the year 2010. So we’re comparing the growth over the first seven years of each of those decades.
As you pointed out, Sydney is one that deserves particular note, because in fact, it is the only capital city where we’ve actually seen a growth in excess this decade of what it experienced last decade. Between 2000 and 2007, the increase that they had was 61.1%; over 2010 to 2017, we had 78.3%.
Kevin: Let me just stop you there, because as you pointed out, that is the only capital city that’s shown growth in those two seven-year periods. All the others have actually declined. Just before we go on with the other capital cities, interesting to note in that period of 2000 to 2007 that Sydney actually recorded the lowest growth of all of the capital cities. Some of them, Perth up around 199%, Hobart 198%, even Darwin at 97%. It’s interesting when you look at the dynamics of what happened over that seven-year period.
Kevin B: It certainly is, and with Sydney, there’s actually a link perhaps to your next guest, and that is of course the period from 2000 to 2004 was directly in the wake of the Sydney Olympic Games. So within Sydney, between 2000 and 2007, the bulk of that increase was immediately after the Olympic Games. Once it reached 2004, things suddenly started to taper off, so the bulk of that growth was in a very concentrated period and the beginning of the period.
Kevin: Interesting, because that, in fact, was the time when Sydney grew less than any other capital city in Australia.
Kevin B: Yes. These figures have actually thrown out some really interesting talking points, I think. If you compare the performance of Sydney perhaps to some of the other capital cities, if we take Perth as the example that you mentioned, almost 200% growth between 2000 and 2007, that is possibly the most significant difference in performance, because from 2010 to 2017, we’ve seen a 3.3% retraction. That’s probably the most stark contrast.
Kevin: Absolutely, yes. Darwin was the only other capital city that recorded regressing figures – came back by 5%, I believe, between 2010 and 2017.
Kevin B: Yes, that’s absolutely right, as against a performance in the previous decade from 2000 to 2007 of 97.3%.
Kevin: Let’s quickly run through what happened 2000 to 2007. Sydney, you have already told us the growth was 61%. Take me through the other capital cities, if we could.
Kevin B: In Brisbane between 2000 and 2007, you had a 147.2% growth. At the moment, 2010 to 2017 is 6.6% growth, so it is a much more modest growth. It’s not dissimilar to where I am in Adelaide, where we had growth of 124.4% compared to about 11% for the current decade.
Hobart is an interesting case. That was 198% in the previous decade. We’re looking at 3.4% now. But the other overlay we need to put in there is Hobart is a sort of up-and-coming capital; you’re actually seeing some really decent growth right now.
Kevin: That is a capital city that’s been predicted by a number of people as having exceptional growth potential. There are even some who are now saying that growth is almost at an end. That’s not great growth, 3.4% over the period of 2010–2017.
Kevin B: No, that’s right. The most recent trend is for greater growth, but you’re quite right about the fact that if you’re going to sustain growth, you’re actually going to need an economic base from which to grow, so the concern for Hobart might be injections of population, migration, and job opportunities, employment opportunities, because they need to underpin any sustained growth.
Kevin: Canberra was interesting to me, 133% growth between 2000–2007, and between 2010–2017, we’ve already seen 24% growth. That really surprised me, because that’s a much more stable market than I would have thought, Kevin.
Kevin B: It is. Canberra has been performing very well recently, and that’s on similar grounds to Hobart, and that is you’re actually getting decent capital growth but you’re also getting good rental returns.
I think we’ve spoken before about the fact that if you have runaway capital growth, sometimes the rent returns fall behind in terms of the percentage yield. Canberra is one of those areas where we’ve seen a fair bit of growth, particularly in houses.
One of the other reports we sent out this week was about pain and gain. You’re still seeing people selling units for perhaps less than they paid for in Canberra, but the housing side of things is actually pushing ahead quite strongly.
Kevin: Kevin Brogan from CoreLogic, thanks for your time, mate.
Kevin B: Thank you very much, Kevin.
Gold Coast booms – Diaswati Mardiasmo
Kevin: I mentioned at the start of the show, interesting to have a look at what’s happening on the Gold Coast. The Gold Coast has been one of those markets we’ve been watching, particularly with the Commonwealth Games coming up.
A new report from PRDnationwide has shown that there is a great legacy. New data predicts that the Gold Coast residential property market will grow at a higher rate than was experienced following the Melbourne Commonwealth Games.
To get a bit of a feel for what the growth was like in those capital cities, I’m joined now by the research manager for PRDnationwide, Diaswati Mardiasmo.
Diaswati: Hi. Good morning.
Kevin: Tell me about the Gold Coast. Interesting that you’ve done that comparison between the Gold Coast and what happened in Melbourne. What have you actually found out, and how long will that flow-on effect last?
Diaswati: The reason why we did a comparison to not only the Melbourne Commonwealth Games but also the Sydney Olympics back in 2000 is because we really wanted to base our data on those case studies to see what actually happened in those places after they’ve hosted an international sporting event. Back then, we made sure that when we looked at past case studies, we didn’t just look at Melbourne or Sydney; we actually looked at the area in which those games were held.
For the Melbourne Commonwealth Games, it was held around the Parkville area, so we looked at data from that particular area. We saw that in 2005, prior to the Games, the annual median price growth was 6.2%, but on the year of the Games and the year after, it increased by 11.4%, and then it continued to grow for the next 24 months, so that’s almost doubled. Sales transactions actually increased by 33% between 2006 and 2007. That’s a year after the Games.
Kevin: Have you been able to identify the suburbs that you believe will get the greatest growth, and is it because they are close to those new facilities that are being built?
Diaswati: The effects of the Gold Coast Commonwealth Games will be seen all around the Gold Coast, but you are correct, there are certain suburbs that have been star performers, I would say, or the ones that have had that real flow-on, positive effect. You’re looking at places like Ashmore, Carrara, Coomera, Oxenford, and Southport, because this is where most of the Commonwealth Games-related infrastructure or new buildings or new stadiums are being developed at the moment.
Kevin: Diaswati, what are you predicting in those areas in terms of what the growth could be compared to what it has been?
Diaswati: We’ve done this report for three consecutive years. The first one back in 2015, the median growth in places like Ashmore and Southport and Carrara, for example, were only around 3%, 4%, maybe 4.5%, and now, Ashmore is at 12.6% for houses, Carrara is at 11.3%, and also Southport is at 6.6%. So over the past couple of years, we’re seeing these places grow from that 3% to 4% growth to almost double, and particularly so in Ashmore.
We’re really predicting – based on the case studies that we’ve done in Melbourne and Sydney – that there will be more onset growth not only when the Games happen but also after the Games.
Kevin: That’s an interesting point. We’re building up to the Games now, and it’s likely to go for a couple of years after that. Do you think that the increases that we’re going to see on the Gold Coast will be greater than those we saw, say, in Melbourne?
Diaswati: In a way, I would say so, and the reason for that is because we’re in a place at the moment where the property prices and the property market is hotter than back then. We’re talking about 2005, 2006, and 2007, whereas now at the moment, we all know that the property market is way hotter. We are getting more sales and interstate migration and also people buying from Sydney and Melbourne because the Gold Coast is more affordable than, say, Bondi or Brighton. We’re also getting a lot of the tourists and the Chinese buyers playing in the market as well.
The current market conditions are very, very supportive of the Gold Coast performing better after the Commonwealth Games than Melbourne and Sydney when they held their Games.
Kevin: Diaswati, thank you very much for your time.
Diaswati: No worries. Thank you so much, Kevin.
Picking the right investment strategy – Michael Sloan
Kevin: I received an interesting book in the mail the other day. I don’t talk about every book that I receive because we actually receive quite a lot, but this one I do want to talk about because I think it has a lot of really great information, and I’m going to recommend that you pick up a copy of it. It’s called The Formula to Successful Property Investing written by Michael Sloan.
By way of introduction, Michael is the co-founder and managing director of the Successful Investor. He is a qualified financial planner, mortgage broker, investment property advisor, and external property advisor to NAB. He joins us to talk about the book and other related issues.
Michael, welcome to the show. Thanks for your time.
Michael: Thanks for having me, Kevin.
Kevin: It’s a good read. I’m going to pick up a few points in there. Firstly, the name of the book, The Formula to Successful Property Investing, leads me to believe that there is a formula. Is there a formula, and do you tell us what it is?
Michael: Maybe that’s a little bit of a trick title because my main point is that there is no one way to invest in property and when you see someone who calls themselves out as an expert and they say there is, that really is going to be a flawed argument.
Kevin: Is that because people have different risk profiles? Is that what it’s about?
Michael: People are so different, aren’t they? Their borrowing capacity, their capacity to handle cash flow on a property, what’s right for them, what time they are in their life, what their plans and goals are. You get people saying you should only invest for cash flow, only invest for capital growth, and none of that is right across the board.
Kevin: It’s really up to the individual where they are in their life, I guess.
Michael: Exactly, yes.
Kevin: I want to ask you a couple of specific questions about out of the book, and there is so much information that we’re only going to be able to deal with a couple.
Michael: Yes, sure.
Kevin: Can we talk about leverage? I think this is an area a lot of investors don’t understand or they miss a lot of opportunity. Can you explain what leverage is, and how can we take advantage of it?
Michael: Yes. In a simple way, it’s a way of getting more out of what you have. If you have $100,000 in the bank and you happen to get 6% growth in that $100,000 for the next 12 years, then the $100,000 will double in value to $200,000. Now, if you leverage – so using that $100,000 to borrow funds – you can buy a $400,000 property. At 6%, that $400,000 property in 12 years will be worth $800,000. You’ve taken your $100,000 and turned it into $400,000 of equity in a property in that time, so that’s the power of leverage.
Everyone has to decide what the right amount of leverage is for them. Some of the people who I’ve seen use leverage the most, the highest rate of leverage, are those in their 50s who’ve had issues in their life that mean they need to do some catching up if they want to have a decent retirement. They will leverage higher – at maybe 90% – to get more property. But someone in the earlier life should be conservative with their leverage, because the higher you leverage, the more risk you take, as well.
Kevin: Yes. As you become a good investor or a successful investor, the funds that you build up in the property – and you gave us that example there of investing $100,000 to make $400,000 – that $400,000 then can be leveraged again, can’t it, without affecting that first asset that gained it for you?
Michael: Exactly, and not even at the end of the 12-year time – somewhere along the way. People don’t even need cash to leverage. They’re using equity in their home, so they’re just using the difference between the value of their home and the loan. If there’s enough difference there, that’s equity and they can use some of that equity to leverage into a property.
At the moment, we have clients buying properties that are positive cash flow, so they’re not putting any money towards their property. They’re facilitating the purchase but they’re not putting any of their own funds towards it. They’re using their equity and they’re using their income to go to the bank and say, “Give me a loan.” So not even using cash to leverage; they’re using equity in their home.
That’s where people really make the money, and a lot of people don’t understand that it’s available to them.
Kevin: That’s right. That’s why I’m suggesting that you pick up a copy of this book, because Michael does actually deal with leverage quite well.
Can I take you to another part of the book? Page 130, actually. I don’t expect you to open that page because you’ll know what’s on it – the part where you talk about avoiding these properties. I think there’s some valuable lessons in there. Maybe you could skip through some of these for us and tell us some of the areas we should be avoiding and why.
Michael: That comes from my first years as a mortgage broker, when I met and interviewed literally over a thousand people – people who made money, people who lost money, and people who didn’t get started. From those people who lost money, I learned so much from them because I saw all the mistakes that they made, and I always thought “Gee, I wish I had five minutes with you before you bought that property.”
There’s a great story out there about lots of niche market properties in particular. There’s a great story about student accommodation. There’s a great story about this beautiful hotel resort on the beach. And a great story doesn’t mean it’s a great investment property.
Student accommodation is certainly one to stay away from. So many people have lost capital growth on that, it’s not funny. Holiday accommodation is another, and some serviced apartments. They might give you good cash flow, but if you’re losing capital when you invest, what’s the point?
Kevin: Yes. Things like backpackers, I noticed you mentioned that in there too, and retirement accommodation.
What about buying overseas? Are you believer in that? We’ve heard a lot about USA properties.
Michael: I’m a big believer in not doing it, Kevin. Look, if there’s a bandwagon, people will jump on it, and there was a bandwagon after the GFC when so many cheap properties were available in America and people saw a way to make money out of that. There’s a lot of really sad stories about what happened to people who have bought over here – literally lost their life savings.
You’ll read in magazines about a couple who sold their home and went to America and bought five houses with that money, but you never see what the outcome is. Often, it’s a complete disaster – people losing everything that they have.
What I talk about investing is investing should be you buy an investment property and get on with your life – and minimize the risk while you’re doing it. It’s like people who renovate: as soon as you start renovating or you plan to renovate for profit, you go into business, so you have to say “Is it suitable for me to go in this business?” Do you really have the expertise to be buying the property halfway around the world?
Kevin: Exactly. We’re almost out of time, but I just wanted to quickly touch on a couple of others, not ask for an explanation. In the book, you talk about things like storage units, apartments without carparks, commercial properties, holiday accommodation, hotel and motel rooms. There are so many areas, and you give a great definition as to why you should avoid those areas.
Look, I strongly suggest you get the book, life lessons from a 20-year veteran of the property industry, Michael Sloan. You might want to give away your age there, Michael. Thank you for joining us. The book is called The Formula to Successful Property Investing. Look for it in all good bookstores. The author is Michael Sloan.
Michael, thank you very much for your time.
Michael: Thank you, Kevin. Cheers.
Learn from last year – Michael Yardney
Kevin: It doesn’t matter how long you’ve been involved in property investment, there are always lessons to be learned. Let’s try and look back on last year, 2016. What can we take away from there that we can bring into this year? Although we’re pretty well into the year, still, let’s hark back. Michael Yardney joins me to do just that.
Good morning, Michael.
Michael: Good morning, Kevin.
Kevin: What are the lessons that we can take forward? What did you pick up out of 2016?
Michael: One of the big lessons – the reminders, I guess, Kevin – was that property is a game of finance. Last year, many investors found their borrowing capacity decreased considerably as the banks increased their serviceability criteria, and this is going to happen even more in 2017. APRA and ASIC are both making it harder for the banks, and there are some new regulations coming out, so it is going to be even more difficult for rental-dependent property investors.
So remember that property is a game of finance, get the right people on your team, have the right finance structures in place, and have the right sorts of properties – the sort that the banks like to lend against, Kevin.
Kevin: Okay. Next one?
Michael: I think the other lesson that came out of the last year was how fragmented our property markets are, and even though we have got the same interest rates, the same tax environment, and the same federal government, Sydney and Melbourne in particular were defying the constant predictions of a looming property crash. It really has a lot to do with their economic growth, their population growth related to the jobs that are being created, and the wages growth. Conversely, Perth and Darwin are struggling due to the resources downturn.
So remember, our property markets are fragmented, and even within the states, there are still good patches and patches that I’d be avoiding.
Kevin: One of the things I found too, Michael – and I talk to a lot of people as you know about the property market – is really, when it’s all boiled down, no one really knows what’s going to happen, do they?
Michael: That’s a really good lesson from last year, Kevin, because at the beginning of the year, a lot of people make predictions, and there were one or two who are pretty well on the money but a lot of the larger research houses despite all their homework and research got it wrong, because there are always X factors coming in. That’s happening from external, like Brexit and Donald Trump in America, and from internal things like interest rates dropping even more.
So what you have to do is take into account what you’re reading and hearing from the experts, but remember that there are always going to be changes that despite the best predictions are going to mess up your plans.
Kevin: Can we talk about negative gearing? We saw a bit of an attack on that last year, and there’s still talk about it even now. Is it likely to change?
Michael: It’s going to be on the agenda as the Budget comes up. It is every year. It was last year and the year before. I don’t think the government really wants to tinker with negative gearing, but it’s being forced to find money somewhere and it’s forced to placate a group of people. The other big issue is affordable housing, so they’re talking about how to make housing more affordable, but that’s not going to be by getting rid of negative gearing.
Negative gearing is a political football, but with about 1.2 million investors using that as a tax deduction and with 70% of people owning their own home, the government doesn’t want to make housing values drop to make it more affordable for a small group of people. I see the government probably not making any major changes that are going to affect us, at least this year.
Kevin: We mentioned already that there’s a lot of uncertainty in the market and no one really knows what’s going to happen. That actually just breeds all those doomsayers – those people who it’s so easy for them to say the market is going to crash – and we saw a continuation of that last year, didn’t we?
Michael: We did, and that’s a good lesson to bring into this year, because while there have only been one or two of them, they will be out again talking about a property market crash.
Will the property markets correct? Of course, they will – they always do – and if they do, it will be a minor correction in capital cities and particularly of investment-grade properties or quality homes. But fear is a powerful emotion and the media loves using fear to grab our attention, to grab the clicks, to make us buy the newspapers.
I never really understood the motivation behind all those people who want property values to drop. I don’t know; maybe it’s jealousy, Kevin.
Kevin: Maybe. Have you noticed that the smart investors actually change their system at all? Have they changed it or tinkered with it?
Michael: I think one of the lessons from last year is that those people who have a system stopped the emotions getting into play, so therefore they made their decisions based on a strategic discussion as opposed to emotions or speculation.
I think this year as our markets remain fragmented and some areas are still going to be suffering, those with a system are going to be ahead of the pack.
Kevin: We did see a lot of the price increases – particularly in Sydney and Melbourne – off the back of that fear of missing out that you and I have spoken about. Is that something we’ve taken into this year as well?
Michael: I think that’s a good lesson, Kevin, that some people are going to miss out again, because some people are waiting for the market to correct. Some people are waiting for everything to be right. Some people are waiting for that property that is going to work perfectly for them.
That doesn’t mean you should take advantage of any opportunity or every opportunity. You heard me say before that I’ve made more money by saying no to things than yes to things. But having said that, there’s no 100% exactly right, correct investment, so you have to know where you want to head, have a strategy behind it, and then don’t miss out, Kevin; take action.
That’s a big lesson, because those who are sitting on the sidelines are missing out on one of the biggest booms that has occurred in the last decade, particularly in Melbourne and Sydney. But the other capital cities are catching up too, Kevin.
Kevin: They are indeed, Michael. On that note, we’ll say thank you, some great lessons out of last year that we can look at for this year.
Thank you for your time, Michael Yardney.
Michael: My pleasure, Kevin.