Financial planner Stephen Vick outlines what makes investment grade property and why a focus on growth rates will outperform most other strategies including renovation.
Kevin: My guest in studio is Steve Vick. Steve is the managing director of Nexus Private Wealth Management. Steve from a financial planner’s perspective, what constitutes good or investment-grade property?
Steve: Investing is really a lesson in mathematics. You might be surprised to know that the difference between, say, 4% growth and 6% growth on a $500,000 property is over half a million dollars in net profit. If I hold a $ 500,000 property for 20 years, if I compare somebody who got a 4% return versus somebody who got a 6% return, the person who got a 6% return would earn more than half a million dollars more than the person who got the 4% return. So, you can see that the growth is incredibly important.
Now another thing that the research tells us is that there is a very high correlation – or relationship – between properties that are close into the capital cities and higher growth rates. So, the closer you come in, generally the higher the growth rate. There are always outliers to that data and you have the hotspots and all that sort of thing, but my firm belief is that property is a long-term hold strategy.
You can see from those numbers that people who try to make their money in the acquisition process or even in the renovation-type process, the numbers that they make are completely insignificant when they compare it to just focusing on very good growth rates.
Kevin: And when you do look at renovation and you look at how much effort and energy and risk has to go into getting that property for what sometimes – by the time you look at the taxes and other things – can be relatively a small amount of money, you have to do it quite a lot during the year to make it even come anywhere near the kind of growth you can get out of a passive well-positioned property that’s going to earn, say, over 20 years, isn’t it?
Steve: Yes, I talk to clients about this all the time, and I hear a lot of experiences. Most people generally say they put the first three renovations down to the experience. It’s like anything; if you become very good at something, then you can add genuine value. But unless you are extremely good at that and you like spending your weekends doing that and you have the capacity to be able to make a couple of mistakes in that area and you love doing that, then that’s fantastic. But if not, you’re perhaps better off using your efforts to do what you do best.
Kevin: It comes down once again to looking at this as a business. If you are going to go into renovation, don’t think you can do it and make a lot of money by being a part-time renovator while you continue with your job. It needs to become a full-time position: this is what you focus on, this is your business.
We talk to Cherie Barber quite often in the show, and she will say you need to look at it as a business. It’s her business, she makes a lot of money out of it, but that’s all she does. Seven days a week, in some cases. I don’t think she works seven days a week, but she’s at it full time.
Steve: A lot of people that I see who make money during renovations, they’ve usually made money because the way they have bought very well in the first place or they’re in a rising market anyway. It usually has very little to do with a brilliant design skills.
Kevin: You’ve done some research into this area about high growth rates, low maintenance, and so on. You know what constitutes a good investment property? Is it about position?
Steve: Certainly, location is incredibly important. We see employment as one of the primary drivers. People don’t want to send an hour or two hours in their car every single day. The RBA has recently put out a paper, and they show that there is a widening gap between the premium that the people would pay to be closer into the CBD. And that gap is getting wider – they say this in their paper – and a lot of that has to do with the aging population.
They can’t afford to look after the quarter acre block anymore. They’re moving into apartments, they’re moving closer in, and they need to be closer in because they need a life. They need to be able to go to restaurants and cafés and theatres, and if they’re more than about 10 minutes out or so, you’re basically living in a cul-de-sac.
They indicate that the Baby Boomers the next 20 years will be one of the primary drivers for why that gap between being further out and closer in will widen over the next 20 years.
Kevin: Is this one of the things you think that will hold the property market back – this lack of infrastructure, not enough tunnels, not enough way to move people around?
Steve: It depends on your perspective. If you’re an investor and you’ve bought well, it won’t hold you back at all. Like Sidney and every other capital city around the world, it will be quite annoying for those people who are forced to leave further out of the city. The services and the amount of time that they have to spend in their car each day is going to get longer, of course. But certainly, it provides also a great opportunity for investors.
Another mistake that I see people making quite often is mistaking growth for capital growth. They might have an area where there’s fantastic infrastructure, there’s a lot of migration, there’s a lot of population growth, but there’s also a lot of supply.
If you go out on the fringes of the city, there’s enough land out there to keep going for the next 50 years or so. They don’t have that restraint of supply, and that keeps capital growth down. Whereas, of course, the closer you come into the CBD, whether it’s apartments or houses, you have a limitation of space available, and that is what drives prices up over time.
Kevin: Just before I let you go, if I could, your take on what the banks are doing to dampen enthusiasm for property investors – driven largely by the fact of what’s happening in Sydney and the fact that they are saying that property is now quite unaffordable. Is this just a Sydney problem?
Steve: Anecdotally, we are hearing from vendors out there that now if raising interest rates and raising serviceability criteria wasn’t enough, now there seems to be anecdote evidence to say that some of the banks are instructing their valuers to lowball valuations depending on whether it’s an investor and an owner-occupier.
Of course, that’s seriously harming some people’s lives. Some people who have gone into contracts a bit on the margin, those people are losing deposits, losing $40,000 or $50,000 if they can’t complete on the a project.
Kevin: Thank you very much for joining us, Steve. Steve Vick was my guest, managing director of the Nexus Private Wealth Management.
Steve: Thanks, so much Kevin.