03 Mar 9 important money tips + How to improve the income of your rental + What’s best – new or established?
Sonya asks if a depreciation schedule is a good indication of a unit’s value. It appears an agent said it is just an estimate. Brad Beer from BMT Tax Depreciation sets the record straight.
The risk or otherwise of relying on rental guarantees is something that we get asked quite often. I seek Damian Collins opinion on that.
How often have you said – “If only I knew then what I know now, how differently things would have been.”. Well as Michael Yardney points out, it might be too late for you and I but he gives us 9 lessons about money we should be teaching our kids.
My good friend Margaret Lomas is back with us from Destiny Financial Solutions and star of that great show on Sky TV, Property Success with Margaret Lomas. We chat about buying new and/or established property. Which does she prefer?
If you’re looking for some clever ways to improve the income of your rental property, stand by, because that’s exactly what we’re going to be talking to Miriam Sandkuhler about. Miriam is the founder of Property Mavens, a property advisory firm helping investors buy the right property, and they also help with vendor advocacy.
Is a depreciation schedule a good indication of value? – Brad Beer
Kevin: I had a question from a listener during the week who writes, “I inspected some units currently being constructed and was shown a depreciation schedule. The agent said it was just an estimate. How reliable would it be, and is it risky using these estimates to calculate the unit’s viability?”
To answer that question, a man who knows all about tax depreciation schedules, Brad Beer from BMT Tax Depreciation. Good day, Brad.
Brad: Hi, Kevin.
Kevin: Sonya’s question there, is that something she should be cautious about?
Brad: It’s an interesting question. As quantity surveyors, we do a lot of estimates of what sort of depreciation might be available. The important thing is looking at who it’s being prepared by. Has the builder prepared it? Has a specialist quantity surveyor prepared it? What exactly the numbers are made up of. Have a look at it.
Now, we have calculators on the website you can use to check against. You can talk to us or someone who’s reputably doing depreciation. It should have a minimum and maximum range of depreciation potentially available.
Obviously, it’s an estimate. When we’ve done that as an estimate, we don’t have all the information. But we’ve done a lot of depreciation schedules, so if we’ve done it, and we know what we’re doing, we should come up with numbers that you should be able to rely on being pretty close to the truth.
Using the minimum or a bit less than the minimum to be really safe is the thing to do. Making sure it’s prepared by someone who knows what they’re doing is the important thing.
Kevin: Are these depreciation schedules, or the supply of these, regulated in any way, Brad?
Brad: The regulation is not very heavy as far as an estimate like that. The costs that are used for the purpose of depreciation – a quantity surveyor’s cost – will be acceptable. Sometimes a thing to be a little bit wary of is when it has an agent or someone who is selling you the property. It’s probably in their interest to make the numbers look high, so you really want to double-check it or make sure it’s done by a reputable company that’s not prepared to move the numbers to help sell the unit. That’s the thing to be really careful of.
Kevin: How would you check out their credibility? Go to their website?
Brad: Go to their website. Ask your accountant, “Have you used their report?” Have the accountant have a look at that. If it’s not done by a depreciation specialist, get a depreciation specialist to actually have a look at it.
Kevin: That’s actually a very good point – going to your accountant – in all of these things. If you’re buying any property, you should always be checking with your accountant and your solicitor, and running it by them anyway.
Brad: If they’re an accountant who deals with property investors – and if you’re a property investor, you probably want that to be the case – they will probably have specialist depreciation guys that they regularly do use. Maybe the accountant would want to ask their contact, just to get a double-check on that to make sure it’s not something done by the builder or something to make it look more than it really is going to come out at.
Kevin: Is it reasonable that someone would want to get their own depreciation schedule done even if they are looking at buying? Would that help them substantiate those figures, Brad?
Brad: That’s most definitely the certain way as a potential buyer of any property, not just one that’s new that has a depreciation estimate done. There are calculators on websites, and they’re free. You can go in and use them to check and see. Put some of the information in yourself, and see if it comes out close to what’s been provided.
You can always talk to my guys about your particular property, and send us some photos. We’ll have a discussion and give you a rule of thumb based on what we can see. We don’t charge for that to have a bit of a look at it.
If you want to be certain, you get one done properly, absolutely, but normally it’s done after the fact. We can get pretty close with an estimate, and we’ll give you a range. Whenever you’re plugging in and crunching your numbers on property, it’s always good to be conservative to start, and then at the end of the process anything else is a bonus.
Kevin: Very good advice from Brad Beer, one of our recommended suppliers. Of course, all BMT Tax Depreciation’s details are on our website, and you can check out their featured channel, as well. Lots of great information there for you, and in fact a link straight back to their site, as well, if you want to check that.
Brad, thank you so much for your time. We’ll catch up again soon.
Brad: Great. Thanks, Kevin.
Rental guarantees – be careful – Damian Collins
Kevin: Ask any wise investor and they will tell you that if it sounds too good to be true, then it probably is. Now, this can apply to rental guarantees. Let’s find out what they are, first of all, how you should be a little bit wary of them, and what you should be aware of before you start to get involved with rental guarantees.
Joining me is Damian Collins from Momentum Wealth. They are buyers agents in Western Australia. Damian, firstly, tell me what a rental guarantee is and why you think we should be cautious of them.
Damian: Kevin, a rental guarantee is usually provided by developers, whether that be residential property, sometimes serviced apartments, or hotel operators. What they’re providing to the investor is a guarantee of the rental return over a period of time. Sometimes they range from one year, sometimes even up to three, four, or five years.
What it effectively does is it means that the investor gets a certain level of return over that period, so they’re not subject to the vagaries of the market going up and down. It sounds good in theory, but obviously, there are reasons why the developers offer it.
Kevin: Why do they offer them?
Damian: Well, it’s to give their investors certainty. Nervous investors – particularly first-time investors – in the market think, “Well, what do I do if my tenant leaves? What happens if something goes wrong? What happens if the rents drop?” All those things, they provide them with that certainty of the rental return.
But, of course, nothing is for free. Any developer offering those sorts of rental returns has factored that into their sales price, so as a buyer of one of those properties you’re going to be paying for, that rental guarantee is going to be loaded into the sales price.
Also, importantly, I think what we often see is that the rental guarantees are not necessarily reflective of the market. When you come to getting a loan for the property, you often find that the valuers and the banks will only take the actual income based on the real market value, not what you’re getting offered as a guarantee.
Importantly, you have to understand that when that guarantee period runs out, you’re going to go back to the market levels. I’ve seen them offered at 6 and 7% returns on properties where the real market value is probably closer to 4.5 to 5%. Investors get lulled into a false sense of security thinking they’re going to get that rent forever, but the reality is that it’s over market, and you’re paying for it. One day, you’re going to have to pay the price when it comes back to normal market terms.
Kevin: Damian, is it drawing a long bow to say that you could apply that to all properties that offer rental guarantees?
Damian: Look, definitely. Nothing is free in this world. Anyone offering a guarantee is either struggling to sell it and they need to offer some extra incentive for people to buy it, hence, it might be overpriced, or alternatively, some other developer offering it, they have their profit margin they need to make. If they are going to pay 1 or 2% extra rental return for a couple of years, you can guarantee that there could be 4 or 6% in extra cost out of their pocket. They’ve put that in the price, as well.
There’s certainly nothing for free in this world, and one way or the other, you’re going to pay for a rental guarantee.
Kevin: If I were to see a property that seemed to be fairly reasonable on the surface in terms of its price and that rental guarantee looked fairly good, how should I proceed to make sure that I’m not going to get trapped?
Damian: The first thing I would be asking, Kevin, is why are they offering the guarantee? If the property was that good and stacked up on its own, why are they offering the guarantee? What’s the purpose behind it? What am I missing here? What’s hidden?
I’d certainly be doing my own thorough market research on what is the proper and fair value for that property without any rental guarantee. At the same time, I’d be looking at also what is the fair rental market without this inducement of the rental guarantee. Do your numbers based on that.
The guarantee is a nice little additional bonus, but most people do get lulled in that false sense of security and end up paying too much for it because of that security. Do your homework, find out what’s the real market value of the property, what’s the real market value of the rent, and if the numbers still stack up, well, it’s worth having a look at. But in my experience, the vast majority of them, that guarantee is loaded into the price.
Kevin: We’re talking here about rental guarantees, of course, but could you draw the same conclusion from a property where they may offer you a Mercedes Benz with every unit that you buy or an overseas holiday? Could you draw the same conclusion from those?
Damian: Definitely, Kevin. Again, there are two reasons why. People offering a Mercedes or offering overseas holidays, it’s simply one or two things. It’s that they can’t sell them at the price they want and they need to load that in, so it’s over priced for the real market value and they’re using those as additional incentives. It’s either that, or they’re really just looking for other ways to maintain that price.
Nothing is for free. Developers factor that into their project. Holidays, Mercedes, anything over and above or just to buying a normal property on fair market terms and conditions, at the end of the day, the buyer is usually paying for one way or the other.
Kevin: Good advice there from Damian Collins from Momentum Wealth. They’re buyers agents in WA. Damian, thanks for your time.
Damian: Pleasure, Kevin.
9 great money lessons for kids – Michael Yardney
Kevin: Often in our program, we get to talk to a lot of very talented people around Australia about money, finance, about investing, and one of the questions I love to ask them is what are they teaching their children about property investing, about saving money and building their wealth?
I’m going to pose that question today of Michael Yardney, because I know Michael has done me a favor and he’s listed down the nine top tips or important steps that he believes all people should be teaching their children about financial control and independence.
Michael, welcome to the show.
Michael: Hello, Kevin.
Kevin: I thought it would be wonderful if you could just take us through what you see as those nine important steps, Michael.
Michael: It’s important to teach your children about money because we’re not born knowing how to do money. And the apple doesn’t fall far from the tree, so we learn a lot of our habits about money and wealth from our parents – the things that they say but also the things they don’t say and also the way that they do things with it, whether they’re savers, whether they’re teachers.
So, I’m sure the conversations around Kerry Packer’s home, James Packer’s table when he was young was very different to what you and I heard from our parents when we were young, Kevin.
Kevin: Indeed, mate.
Michael: And that would have influenced him very much so.
I think as a parent, it’s important to teach your kids about money, and I think it’s worth looking at those points. What I came up with, the first one is that today’s debt equals tomorrow’s slavery.
When we’re young, we tend to think in really narrow time increments. We’re really looking for immediate gratification, and often delaying something that we really want is too hard to do. But unfortunately, this leads a lot of young people into a credit trap, because they can buy things with credit cards, with store cards, with no interest for so long, but today’s debt is robbing them of tomorrow’s lifestyle.
I think one of the early things one has to teach people is to limit your debt obligations when you’re younger, which means you’re going to have more control of your life when you’re older, Kevin.
Kevin: Yes. The second one you say is he who dies with the most toys is not the victor, and that is a great lesson in life, isn’t it?
Michael: Kevin, I liked my toys when I was young; in fact, I still like them now.
Kevin: Who doesn’t?
Michael: Of course. But they are a difficult enemy, because we tend to spend on short-term gains, short-term pleasure, things that decrease in value. But it’s so difficult when you see these things on TV, you see the glossy magazines, consumerism is all around us. But it takes the lessons of life as you get older to learn that true wealth is what you’re left with when you lose all your money, when you lose all your possessions. It’s a hard lesson to learn as you’re young, Kevin.
Kevin: It is. And point number three, taking responsibility, which is a key thing, I think. We need to teach our kids how to do that, because that makes you the master of your own destiny, Michael.
Michael: Very much so, Kevin, because it’s so easy to play victim and blame others. Kids do it; adults unfortunately still do it as well. What you have to do is be responsible. You are where you are today because of all the decisions you’ve chosen to make and all the decisions you’ve chosen not to make. So, rather than blaming the system or the education or other things, be responsible, be in control of your life.
I guess you should be the pilot of your life rather than just a passenger being dragged along by the world.
Kevin: Indeed. Michael, one thing we do talk about is this younger generation. I know that’s a broad term and I shouldn’t use it, but the younger generation seem to want everything at once. Patience is a virtue, isn’t it?
Michael: It is, but it’s really hard to learn. A lot of psychological university studies have shown that those who are successful later in life have the ability to delay gratification. They’ve even done these studies with young kids where psychologists put them in a room with marshmallows and said, “I’m going out and I’m coming back in five minutes. Those of you who actually don’t eat them now but can wait five minutes can have an extra one.” Some kids couldn’t hold off, and I guess that may have been me when I was young, if you were to put a marshmallow or a chocolate in front of me.
Kevin: What are you talking about – when you were young? You do it now.
Michael: Yes, I know. I saw you thinking that as I was saying it.
But really, what happened was it was shown that those who could delay gratification as a kid were able to do it later in life and that actually opened up a whole wide range of other opportunities.
So, those who are able to invest in their education, to go to university, or to go and get a trade and do an apprenticeship, later on in life will be rewarded for it. Yes, patience is a virtue, Kevin.
Kevin: Another one that I think needs to be taught, too, is that people who do well in life are not necessarily just lucky.
Michael: Sure, luck does come into it a little bit, but really, I see people who get lucky and win the lottery or get an inheritance, and that they don’t keep it, either. You actually have to be the right person – in other words, with the right headspace – at the right time and understand and appreciate that, as well.
I think luck has very little to do with it, and hard work has a lot more to do with financial success and success in other areas of life, Kevin.
Kevin: Earlier, Michael, we talked about patience. Number six I think deals with risk, doesn’t it? You don’t need millions to achieve financial freedom. Interesting that so many wealthy people actually have a lot of debt, too.
Michael: Yes, they do. I think the other point here is that to feel wealthy, you actually have to feel gratitude. We all know millionaires, multimillionaires who are all miserable sods and don’t enjoy or appreciate life and people who don’t have as much money enjoying life.
One of the lessons I’ve taught my children – and I suggest others do – is be grateful and appreciate what you have, because unless you have gratitude, unless you appreciate your life, you’ll never be wealthy, no matter how much money or how many properties you have, Kevin.
Kevin: Michael Yardney from Metropole Property Strategists sharing here with us the nine lessons that everyone should teach their children.
Lesson number eight, a very simple one, but I’ve heard you talk a lot about it before: spend less than you earn and invest the rest.
Michael: It’s a golden rule of financial freedom that if you spend more than you earn, you’re always going to owe other people money. So, the suggestion is to invest or save at least 10% of your money right from the beginning. Build that habit early in the piece, then invest, and when you have got enough, you can reinvest. And then eventually, you’ll be able to appreciate and enjoy life.
It really means that in the short term, you’re going to actually have to make some compromises to be able to enjoy the later part of your life.
Kevin: Michael, the final one – number nine – is one that I wish I’d been told when I was young, because it is so true. Tell me about it.
Michael: What I said was that youth won’t last forever, so use it wisely. I think the comment here is enjoy it in two ways: number one, enjoy the journey, because if you don’t, you won’t actually enjoy the destination. But the other is take advantage of time and compounding. Because if you would have bought one property 20 or 30 years ago, it doesn’t matter where almost in Australia, look how much better off you’d be today.
Who wouldn’t like to have bought their parents’ house for the price they paid 30 years ago, and then just used the benefits of timing, compound, leverage? One of the things that Albert Einstein said is that leverage is one of the most powerful forces in the universe.
So, the message to my kids is to start saving and investing early in life, because that’s much more likely to secure your financial future.
Kevin: Wrap it up for me, Michael. Give it to me in a nice, neat parcel. What’s the bottom line?
Michael: Wealthy people do certain things every day that set the apart from everyone else. Wealthy people have good success habits that they’ve learned from their parents. These habits are the reason for the wealth gap in Australia – and, in fact, all over the world – the reason why the rich keep getting richer.
As parents, we’re likely to be the main mentors of our children when they’re young, and we’re definitely going to be among the most influential one for our children. So, unless we teach our children good money habits to help level the playing field, the rich are going to continue to get richer and the poor will continue to be poorer.
It might pay them – literally – to give them a bit of your time, Kevin.
Kevin: Indeed, it will. Michael, thanks once again for your insight and your time. Michael Yardney from Metropole Property Strategists, and of course Michael’s blog, Property Update.
Thanks, Michael. We’ll talk to you again soon.
Michael: My pleasure, Kevin.
What’s best – new or established? – Margaret Lomas
Kevin: My good friend Margaret Lomas is back with us from Destiny Financial Solutions and star of that great show on Sky TV, Property Success with Margaret Lomas.
Kevin: Good to be talking again. Margaret, the specific question for you today is a question I get asked quite often: is it better to build with a buyer-established property? I guess here, you have to take into consideration depreciation, as well.
Margaret: Yes. Look, I guess one of the things that the spruikers always try to do is convince everybody that they need to buy new so that they get the maximum depreciation. But in reality, a property that’s a couple of years old doesn’t have a big difference in its depreciation than a brand new one, which a lot of people don’t realize.
The construction depreciation is, of course, exactly the same every year for 40 years, which is 2.5%. The fixtures and fittings in that first year or two, they don’t really age that much, and there’s not a big difference in the depreciation that you can claim.
The reason why the spruikers like you to buy the brand new one or to build the brand new one is because generally there’s a fair amount of builder profit in there and they can get a good cut of that in the form of a commission.
I always feel, as well, that from an investor’s point of view, if they’re buying that brand new property, they’re more than likely paying a little bit more than it’s probably worth or than they could pay for that property that’s two or three years old, but they’ll get the same rental yield as the older property.
Kevin: It always strikes me, too, that new properties purely by definition are going to be built in areas where you’re developing a lot of new stock, and it does actually take a while for them to actually start to gain any increase in value, Margaret?
Margaret: Exactly. The reason that is, is because most often when they’re being built in a new area, even if it’s in a suburb that’s already established, it’s very, very difficult to really work out what the true market value of those properties are.
Market value is never really established until a secondary sale takes place. Whenever properties are being sold and resold and resold, then we know what the market value is, because it’s whatever the market pays.
When people buy a brand new property, which could be either off the plan or just newly built, really the buyers pay what the developers are asking them to pay. Very often, they do that because most people when they buy a new home, they’re buying it with a view to living in it, and when we live in a property, we are often happy to pay that bit of a premium to get the kind of things we want in a home or to get the lifestyle that we’re after.
When it comes to being an investor, though, the extra premium that you pay to get that brand spanking new property is very often not seen returned to you in increased yield, and it ends up being, as you say, that you have to wait that period of time for the market to work out what it’s really worth, and very often, it will stay quite flat for quite a few years.
Kevin: Another reason why I tend to like more established properties is because they’re going to be built in established areas where you do have all that infrastructure. If you’re going to be attracting tenants, they like to be in areas where there are good schools and where there are lots of shops. But in some of those new areas, those things don’t happen until you get a fair number of houses in there.
Margaret: That’s very true. The other thing about a property that’s a couple of years old, maybe up to five years old, is it’s a little bit less that brand new car, which by the way, also loses value when it drives out of the driveway. When you get a new car and it takes you that little while to work out the bumps and sometimes when you buy that new car, there can be things that go wrong with it.
When you buy a property that’s a couple of years old, it’s already settled, you know how it’s sitting, you know whether it’s going to have cracks. There’s many things you can already know about a property.
Most houses last 50, 60, up to 100 years, certainly in the olden days, then there’s not that big of difference in the big scheme of things between the brand new one and the five-year-old home. I can tell you in ten years’ time, a five- and a ten-year-old property don’t look much different at all.
Kevin: Very good. Very practical advice from Margaret Lomas at Destiny Financial Solutions. Margaret, we’ll get you back in a few weeks’ time. I want talk to you because I know you’re across all of the Australian suburbs, but I’d love to have a talk to you about what you see are the up-and-coming suburbs if you’d join us again in a few weeks’ time?
Margaret: I would love to do that.
Kevin: Good on you. Margaret Lomas from Destiny Financial Solutions.
How to improve the return from your property investment – Miriam Sandkuhler
Kevin: If you’re looking for some clever ways to improve the income of your rental property, stand by, because that’s exactly what we’re going to be talking to Miriam Sandkuhler about. Miriam is the author of a great book I’ll tell you about in just a moment, but she is also the founder of Property Mavens. They’re a property advisory firm; they help you buy the right property, and they also help with vendor advocacy.
Miriam, let’s look at the best ways that you’ve found to improve the income of a rental property.
Miriam: Kevin, it’s really about understanding who your demographic is – who is the tenant you’re targeting who’s going to want to actually rent the property from you? It’s a case of the property itself, the surrounding vicinity, the suburb, who you’re likely to attract, and what it is that they’re going to want.
When you have the ability to understand that and do the research, then you’re in a better position to make sure that you can do what’s required to your property to extract as much rent out of it as you can.
Kevin: For someone who may be struggling a little bit with their property – in other words, it may be untenanted for a while – a good idea might be just to go and immerse yourself in the local area and maybe find out why it’s not renting. It’s not always about price, is it?
Miriam: No, it’s not about price. Frequently, it could be the physical size of the property itself. It could be the features that it may or may not have. A perfect example would be an inner-city suburb where you have high density, you have older apartments with a whole lot of new apartments being built close by, and you have tenants who are prepared to pay a little bit more for something shiny and new, whereas your tired old apartments may be inadequate and unappealing.
That’s where something like a cosmetic renovation might come in. You might need to do new carpet, new paint, new window furnishings. If that’s not adequate, and the property manager is advising you that tenants want more, that’s where you’d start looking at possibly putting in a new kitchen or a new bathroom, but making sure that you don’t overcapitalize in the process.
Kevin: That was going to be my next point. You have to make sure on all of these things that you do not overcapitalize. What’s your experience there about making sure that that doesn’t happen?
Miriam: Work on a percentage of your purchase price of your property. If you spent, say, $400,000, and you have one of these apartments that might be a bit tired, only be putting 1.5% of the value of the purchase price into the renovation on the bathroom. If you spent $400,000, don’t spend more than $6000 updating the bathroom. You can do it affordably and within a reasonable budget nowadays. You can go to organizations like IKEA or Masters, and they have got more affordable options for you. The same with the kitchen. You don’t want to spend more than that 1.5% or 2% of the purchase price.
Work on a percentage, stick to that budget, and do the best you can with the money that you have.
Kevin: And remember, too, that you’re not really renovating it to suit yourself; you’re really renovating it for your target tenants.
Miriam: Absolutely. Talk to your property manager, talk to other property managers, find out what tenants want, and then, if it’s a case of extra bells and whistles, maybe if you throw Foxtel into the package, that might appeal to them. It may be that you need to put a gardener in if it’s a really great property but it’s a high-maintenance garden.
Start thinking laterally and creatively. Ask the property manager what the feedback is from prospective tenants, why it doesn’t appeal to them, and then come up with creative solutions, but make sure that they’re affordable. Make sure they’re not going to blow the rent out so that ultimately it doesn’t appeal to anyone.
Look, maybe it comes down to have you bought the right property and is it in fact going to perform how you need it to? Sometimes it could even be a tough lesson that it may be one that you need to let go of.
Kevin: I guess sometimes, too, you have to remember that any improvement you make is not necessarily going to help you get more rent but it may just help you make sure you keep your tenants in there and that you really reduce that number of vacant days.
Miriam: Absolutely. You don’t want it sitting on the market for weeks and weeks on end. It’s about being pragmatic in a really reasonable and fast time frame so that you can do whatever it is you need to do as cost-effectively as possible to make sure that it’s tenanted. You do not want a property languishing and costing you hundreds of dollars a week in mortgage repayments and not having any revenue coming in to offset that.
Kevin: At the start of the chat with Miriam, I mentioned about the book that Miriam has written. It’s called “Property Prosperity: Seven Steps to Investing Like an Expert.” You can get more details on that at Miriam’s website, as well, Property Mavens.
Miriam, thank you very much for your time.
Miriam: Thanks so much, Kevin.