Property is a brilliant asset class for creating wealth – so why aren’t more of us doing it? Great question and one that I ask Michael Yardney. Statistics reveal that only a small number of Australians actually put their money into any properties beyond their own home and Michael says there are 2 main reasons. Hear what they are and how to overcome them – if that’s what you want to do.
Kevin: There’s no doubt about it. Property certainly is a brilliant asset class for creating wealth. That’s what this show is all about, of course. We talk to successful investors. I often wonder why more people aren’t doing it. Maybe they’re sitting back and waiting for the market to change or to improve.
If you’re sitting there listening to this now and maybe you’re wondering why you’re not in the market at this stage and what are the things that are holding you back, Michael Yardney joins me to discuss this point.
Good day, Michael. It’s a frustrating question I know I’ve asked you on many occasions: if it’s so good – and we know it is – why aren’t more people doing it?
Michael: I guess it’s because they are scared. In general, I think the fear falls into a couple of categories: making a mistake and losing money, or some of them actually just believe that they don’t have the know-how or the knowledge to do it successfully.
Personally I’d be more afraid to end up relying on my savings or superannuation or the government to look after me for my financial future in my golden years, Kevin.
Kevin: Michael, give me a bit more detail about some of these fears.
Michael: I think currently at the stage of the market where the markets are more mature, some people are concerned “What if my property doesn’t go up in value? What if the cycle turns? What if my property goes down in value?” I think it’s important to understand that it will. At some stage the market will slow down and all properties – even good investment-grade properties – will track down a little but.
Yesterday, I actually discussed this with a client, Kevin. I said to him, “You’re right. The Sydney market is very strong and it’s quite possible your property is going to drop. It could be 5% or 6%. Imagine if it drops 10%. We’re only back to where it was last June.”
It’s not going to happen overnight, and good quality properties where the markets are deep and where there are lots of people buying, selling, moving house, moving up, they don’t drop much in value at all.
That’s just the way the market works. Don’t be scared of it, Kevin.
Kevin: Analysis paralysis is another one, too, Michael. We can spend a lot of time educating ourselves, analyzing the market, and waiting for it to be right. Do you see that as a bit of a problem?
Michael: It is a fear, Kevin, because people fear they don’t have enough knowledge, and the answer is you never will. In fact, the beginning investor who thinks he knows it all is probably more dangerous to himself than the person who recognizes that they need to know more.
But there’s a happy medium there, so I think it’s important to get going knowing that you don’t know it all but having some good people around you who can help you with the bits of information you don’t know.
Kevin: Michael, another thing – and this happened to me – was some of the advice that I was getting from other people, especially as you incur more debt. Well-meaning people –like parents and brothers and sisters – say, “Wow, do you really know what you’re doing? This is a lot of debt that you’re taking on here.”
Michael: Kevin, the fear of debt has been one of the biggest things that’s stopped people getting involved in property investment. I know in all my seminars I say, “Hands up anyone who’s scared of debt,” and most people giggle a bit but don’t put their hands up. Then I say, “Hands up somebody who knows somebody who’s scared of debt,” and they all put their hands up and have a bigger giggle, because we know that that’s one of the common things that holds us back.
The question is what sort of debt? You can have good debt, which is against appreciating assets. You can have necessary debt, which is non-tax-deductible debt but debt against your home. And you can have bad debt, which is debt against depreciating assets – doodads, toys, things that go down in value. But good debt against appreciating assets in my mind isn’t a risk at all.
Kevin: Michael, I can hear many people saying, “You make it sound so easy, but gee, there are a lot of ongoing costs involved in property investment, as well.” This could be one of the reasons that holds a lot of people back as well, Michael.
Michael: Yes it is. You’re right, Kevin. It’s nice having the rent come in but you have all of the outgoings – the insurance, the maintenance, the strata fees, vacancies. And that’s what scares people a lot: the vacancies. “What if the rent doesn’t come in?”
These can all be handled, though, by a sensible financial structure, by having an offset account or a financial buffer, and a good mortgage broker can help you with this to make sure that you don’t overcommit yourself.
Yes, it’s important to recognize it, but once you do, you can then work within your financial parameters so that you don’t overcommit, Kevin.
Kevin: Michael, let me ask you a question just in closing out – and this comes from left field without notice. That is, what about the skill that you need to become a landlord? What have you found in going from sometimes being a tenant to being a landlord? Is it a mindset shift?
Michael: Many people are not made out to be landlords, Kevin. In fact, most successful property investors know how to do it. Those who fail are the ones who get too emotional about it. First of all, some try to be cheap and do it themselves, and they get themselves into trouble. You shouldn’t be dealing with tenants. You should have a property manager to protect you.
But the other thing is expect that you have to have repairs, expect that the hot water service is going to blow, don’t be disappointed when the tenant moves out. Don’t take it personally. It’s just a business.
Get a good professional there to protect you, having a good property manager. Just understand that there always will be outgoings and don’t get emotionally involved in the little ups and downs of being a landlord.
Kevin: The other thing, too, Michael, I find is you have to delegate to your property manager. You have to give them the opportunity to manage it for you if they’re good. But you cannot abdicate. You still have to be involved to a certain extent. As you said, you have to be prepared for some of those things that are going to happen.
Michael: Yes, you do. Interestingly, this week, I had a discussion with somebody who was upset because they have to carpet and repaint their property and they hadn’t got the money for it at the moment. I said to them, “But remember when we first set you up, we actually got you a financial buffer. How much is in there?” And he said, “I have $60,000.”
I said, “That’s exactly what this is for, John. Don’t be upset that it’s going to cost you $6000 to do this, because every five to seven years, you’re going to have to put in new carpet, and every ten years, you are going to have to repaint it. It’s just the cost of doing business.”
And because he had the money there – which he didn’t want to touch, but that’s what it was there for – he’s okay now. He’ll get a good tenant because he’s got a well-presented property, and life moves on.
Kevin: Good talking to you. Michael Yardney from Metropole Property Strategists.
Michael: My pleasure, Kevin.