24 Apr 9 Money lessons to teach your children | What’s better capital cities or regional properties | Why to avoid Hotspots | Off the plan purchases + more
In today’s show Michael Yardney tells us the 9 important money tips to teach our children and Pete Wargent wades into the debate about capital cities versus the regions and where we are seeing the best growth.
Chris Gray explains why he is not a great believer in hot spots and tells us where he prefers to invest and why.
Ken Raiss explains about how trusts protect landlords and we get another warning about buying off the plan from Rachel Barnes.
Carolyn Boyd looks at why so many people are being lured into living in apartments and points out some issues you should take into consideration if you are considering investing in units.
Plus lot’s more…
Kevin: There’s no question about it. Apartment living in Australia is certainly surging. There are a couple of reasons for that, possibly. One is affordability. The other one is definitely lifestyle. I read an interesting article that was written by Carolyn Boyd, who is certainly no stranger to us and has written many great blogs on behalf of Domain and spoken to us in the show, as well. She joins us.
Carolyn: Hi, Kevin.
Kevin: It’s great to be talking to you again. I was really interested in your piece. I mentioned there about two things: affordability and the other one is all about lifestyle. Are they the only two major reasons, do you think, behind this surge in apartment living?
Carolyn: I think they certainly are the two main drivers, and then there’s also a demographic change with the aging population – people getting older and then selling off their house and then moving into often a large apartment to downsize.
Then there’s the other change, as well, some of the cultural change that we’re seeing, particularly people who are moving from other countries who are very used to apartment living actually preferring that style of living over having a house, because that’s what they’ve grown up with.
Kevin: Of course, there are several different profile buyers. There are first-home buyers, downsizers, investors, and I guess to a lesser extent, young families. But developers are certainly responding to this, and a lot of it has to do with land supply, as well, Carolyn, making the most out of the land we have.
Carolyn: It certainly does. Particularly in those infill areas closer to the city, it often makes sense to put apartments in those places. In fact, of course, local councils and governments are somewhat pushing that, although that is a bit of an area where people aren’t always happy to have very high-rise apartments, but certainly to get a bit more density close to the city and close to infrastructure to make a reasonable argument to put in more high infrastructure like train lines and light rail lines. You need that population sometimes to drive those projects.
Kevin: Yes, we’re seeing a lot of creativity coming into the planning of some of these high-rise apartments, too, with no need to have as much parking, so there are some releases there from the council but also even in greening. We’re seeing a lot of greening happening on the top of these buildings, Carolyn.
Carolyn: Yes. There are some great projects, Kevin, where you’re seeing green roofs. Also, There’s a project here in Sydney where they have a device that reflects light back into the internal courtyard or the area between the buildings, so you’re seeing some innovation come through, which is fantastic.
Some of these roof-space gardens are a good idea because it’s making use of a space previously that may have just had the air-conditioning units and that type of stuff on it. But instead, now you are seeing more examples of where people are putting in barbecues and shared garden facilities that are actually usable space on the rooftop.
Kevin: I know you’ve researched this, Carolyn, as you always do. But for anyone considering getting into an apartment, what are the main considerations they should bear in mind?
Carolyn: I think the old saying, of course, “location, location” is just as important in an apartment, because you need to be or preferably would be in bigger cities where there’s traffic congestion, close to a transport link, and then preferably close also to things like shops and some facilities.
I think this is something that pops up when people downsize. They often think that they’re going to move to other suburbs, and they end up often sticking around their own suburb but moving closer to facilities that they’ll use as they get older. That’s definitely one thing.
Another thing is, and this is particularly pertinent if you’re buying off the plan, is to really know who the developer is and who is behind the project. Research that. Go and find out if there have been any problems with previous developments they’ve done. Don’t be afraid to knock on people’s doors and talk to them or ask among your circle of friends to see if they have bought into any of their previous developments. That’s a big one.
Another important one – again particularly for off the plan – is understanding the apartment size and layout, and when you look at those plans, what that really means, how big those rooms really are, and what you’ll really fit into them. Sometimes it’s quite difficult to get your head around that when you’re looking just the floor plan.
Kevin: I guess other important considerations, as well, Carolyn, if you are downsizing, there’s a likelihood you’re going to have a pet, so maybe even check with the body corporate on what you’re allowed to have with pets.
Carolyn: Yes. Some apartments do now allow pets, and that’s fantastic, but you do need to know. I have heard sad stories where people have thought that the development they’re buying into is pet-friendly and found out later on that it’s not, and that obviously creates a huge difficulty because your pet is often part of your family and it’s very hard to move without taking them with you.
Kevin: I guess still for younger buyers, you have to consider what’s coming up in the next five to ten years. If you’re going to start a family, maybe apartment living isn’t going to suit you, so you would want to move out of that and then have it rented, so making sure that it’s in one of those areas that is going to attract good tenants, Carolyn.
Carolyn: I think that’s absolutely right, Kevin. It’s often hard for people in that pre-child stage to imagine what it’s going to be like next and to understand just how much of an impact having children has on the way you live, so do think of that. “Is this something I could live in for a while? If I do decide to start a family, can I live here? Or if not, can I rent it out?”
Therefore, you would be looking a bit more from an investment perspective then – looking at vacancy rates in a local area, looking at how quickly you might be able to sell that apartment if you need to. Is it going to be one of hundreds of similar apartments on the market, or is it something a little bit different that would stand out from the crowd if you need to sell it?
Kevin: Thanks for your time. Carolyn Boyd, thank you.
Carolyn: Thanks, Kevin.
Kevin: A question I’m asked all the time is, “Is there really a hotspot?” I guess this comes about because people love to think they’re going to get there before the rest of the crowd. I’m interested to know about this, and it’s a conversation I’ve had a number on a number of occasions with Chris Gray, who is a buyer’s agent from Your Property Empire and also a host of the Sky TV show of the same name, Your Property Empire.
I wonder, Chris, does this come up in your dialogue with people, as well?
Chris: You’ve hit the nail on the head there. Everyone wants a bargain, everyone reckons they got it for the cheapest price, and everyone thinks they got into the right area – the next up-and-coming one – at the right time.
Definitely, there are hotspots around Australia and around the world, but it’s like picking stocks; if you really are a genius and you can pick the lows and highs, you can make a fortune probably even if the market is going down if you pick the right kind of properties. But even the experts at Residex, RP Data, and SQM Research, most of those guys say they can understand trends but they can’t pick the peaks and the troughs.
I’ve been buying property for 20 years – we buy maybe 50 or 100 per year – but we don’t try and do that. Most of our clients are generally higher income. They’re not trying to get rich overnight. They know that slow and steady wins the race, so more they’re going for the classic Bondi Beach in Sydney or St. Kilda down in Melbourne, and they’re trying to say, “I want nice consistent growth. If a GFC comes up, I don’t want it to halve in value. I don’t expect it to double, but a nice 5% or 10% forever suits me.”
Kevin: I remember back, and I’m sure you would too, several years ago when one of the major hotspots was anything around a mining town, and I guess you only have to look at some of those now to realize that while they may have been hotspots in their time, they can also crash as fast as they can go up.
Chris: That’s the problem. We’ve had lots of clients who have gone to the seminars and gone to the various property expos – you can always tell what the flavor of the month is by the property expos, whether it’s U.S. property or mining or whatever else – and they’re saying, “I’ve got 25% yield and X percent growth,” and all the rest of it, but now they’re potentially getting zero yield and suddenly their $800,000 property is only worth $400,000.
That’s the thing. A lot of the seminar people have all the knowledge and they know what they’re doing and they’re getting in and out at the right time, but unfortunately the average punter on the street quite often is getting in a few years too late and they’re going to miss the boat.
Kevin: Generally, I find people who are looking for hotspots are really looking to get in and out quickly, as opposed to the strategy you’re talking about there, which is blue-chip, which I guess is buy and hold. Chris, is it?
Chris: It is. You do a regular radio program, and I do a regular TV program. The hardest thing for me is to try to talk about something new, because in my mind, in my book, nothing has changed for 10 or 20 years, because those suburbs haven’t really changed. We just buy when we have the cash to buy and we hold on.
It’s not sensationalism; there’s nothing newsy about it. It’s kind of boring. They’re not the most beautiful properties. They’re the ones a block back that are kind of dirty and old, but they’re in the best locations and we can improve them.
It’s not newsworthy type stuff; it’s the old hare and the tortoise. The tortoise just keeps going, but at the end of the day, it reaches the end. Whereas if you’re the hare, maybe it works out one decade, maybe it doesn’t work the next.
Kevin: Chris, with blue-chip types of properties that you’re talking about there, are they all necessarily inner-city properties, or do they vary in their location?
Chris: My philosophy from going to lots of seminars and reading lots of books is that I typically avoid the CBD because there’s no limit of supply – generally, you can keep building these massive towers – and there’s limited demand, because not everyone wants to work in the heart of the city, especially when they have families and they want fresh air and everything like that.
I’m an advocate of going the 5 K to 15K – or 2K to 15 K in certain suburbs – to get the area where there are three-story-high limits, so there’s no more supply of property. All the properties are built up next to each other, so you can’t physically build another property. There’s lots of demand from the young professionals, the 25- to 35-year-old suits who will always have jobs” because they’re young and adaptable. They probably have wealthy parents, as well.
They might be earning $75,000 to $100,000 each, so you get two people in a unit and they’re earning $200,000 or $300,000. That’s why these young people can afford million-dollar properties and million-dollar rents – because they’re earning a lot of cash.
From what I’ve heard from Residex, who has come my show for donkey’s years, he says affordability is a problem around Australia and around the world, but it’s not in these suburbs because these young kids have cash and they have cash to spend.
Kevin: It’s always good talking to you, Chris Gray. You can catch Chris, of course, on Sky TV.
Chris: Fridays at 6:30.
Kevin: It’s called Your Property Empire, Fridays at 6:30. Chris, great talking to you. Talk to you soon.
Chris: My pleasure.
Kevin: A few weeks ago, we answered a question from Dimitri to do with trusts, and following that, I received an e-mail from Will. Will, thank you for that, a follow-up for Ken Raiss, who will be with me in just a momen.t
The question for Ken comes from Will, and it says, “Re purchasing investment property in my own name versus a trust. On today’s show while answering Dimitri’s question on a similar topic, you stated there’s another issue, as well: asset protection. If you have too many assets in a trust, then if one tenant sues, it could be a house of cards that falls down, and all your assets then in that one trust are at risk.
“My landlord insurance policy covers me up to $20 million in liability, I can’t think of any unfortunate situation where all of that would be used it. Is asset protection merely an additional feature of trust structures rather than a predominant reason to set one up?”
Ken Raiss joins us from Chan & Naylor. Ken, thank you again for your time.
Ken: No, it’s a pleasure, Kevin, and great question from Will.
Kevin: It is indeed. Let’s step about answering it for him.
Ken: Trusts really have four main benefits. Asset protection is one, because you don’t own the assets. Flexibility, cash flow, and estate planning are three other quite significant reasons. You should also have a company as a trustee of your trust, not the individual – because for asset protection reasons, the company closes the loop.
While a lot of people say they have insurances and they hope that their insurance cover is enough, we have to be careful: will the insurance company pay off? Because if they believe part of the responsibility lies with you, then they won’t always cover it. Such as you need to do a repair, you may not do it in time, your agent may not tell you in time, or there could be issues with fire.
A lot of people sometimes are underinsured. If their property burns down, burns down the property next door, they’re up for the difference if they’re underinsured. There are many, many reasons why insurance cover wouldn’t be enough, so that’s one of the reasons then people have limited assets in a trust, just in case.
But what you can do is you can protect just your equity in a trust by doing things such as the Equity Bank Trust.
Kevin: What is that again, Ken?
Ken: It’s the Equity Bank Trust. What we do is we shift all the equity from either your personal names or from trusts into a much more secure area that carries normally no liabilities. When you do that, you get asset protection without triggering the normal taxes such as capital gains and stamp duty. We transfer the equity, not the physical asset.
Kevin: This is something that can be done through Chan & Naylor?
Kevin: We’re hearing some horror stories with rental units, too, where tenants fall off decks or broken steps and so on. That liability issue that you talk about there, Ken, is a very, very real one, isn’t it?
Ken: Correct. I think particularly in today’s environment, we shouldn’t assume the insurance companies will always pay.
Kevin: Yes, indeed.
Ken: They’re looking for reasons, and sometimes they can just drag you through the courts and even if you’re right, the mere pressure of finding money in time means you’re out of pocket and you could lose everything.
Kevin: No doubt, we will have been an early-warning device for a number of people. If you would like to find out more about this, you can contact Ken Raiss at Chan & Naylor. They’re our trusted advisors.
Ken, once again, thank you for answering Will’s question. Great talking to you, as well, mate.
Ken: That’s a pleasure, Kevin, and thank you, Will.
Kevin: I wonder if you, like me, have asked yourself this question: if only I knew then what I know now, would I have done things differently?
I’m going to ask that question right now of Michael Yardney from Metropole Property Strategies. Good day, Michael.
Michael: Hello, Kevin.
Kevin: Have you ever asked yourself that question?
Michael: How often have I asked myself that? There are so many things I’d do differently in my personal life, in my business life, and definitely in my investment life.
Kevin: One of the great reasons why you should ask yourself that question, too, Michael, is so we can pass on so much great information to our kids, can’t we?
Michael: Yes, we can, because most of us haven’t been taught how to handle money by our parents.
Kevin: Michael, what lessons should we be teaching our kids?
Michael: Kevin, one of the first lessons is today’s debt can equal tomorrow’s slavery. When we’re young, we tend to think in narrow, short time increments. We want immediate gratification. We don’t often like delaying purchases of things we really want.
Unfortunately, this leads a lot of young people into a credit trap, where they borrow using high-interest rate store cards or personal loans only to pay back thousands of extra dollars of interest, owing people money for a long time, and that robs them of the ability to use their money in the future to use it more effectively like investing.
Kevin: I suppose when you’re young, too, Michael, you become very blasé about debt, don’t you?
Michael: You do. Again, there’s good debt, there’s necessary debt, and there’s bad debt. We’re really here talking about bad debt for toys. We all like our toys, Kevin – at least I know I do – but our expectation often is that we see in all these magazines that other people have got the glossy toys, the big computers, the fancy phones. Consumerism is the new black.
And the truth is positions don’t make for a rich life. It’s the experiences and the people, the things that money can’t buy that makes us truly wealthy, Kevin.
Kevin: Michael, I think, too, sometimes when we’re young, we tend not to take responsibility.
Michael: It’s everyone else’s fault, Kevin. It’s your boss’ fault, it’s the employer’s fault, it’s the government fault. The fact is there are no rich victims. However, unfortunately, people are too quick to blame others for perceived failures in their own lives. Yes, that is a good lesson to teach your kids – that you actually have to take responsibility for all the things that you choose to do and all the things you choose not to do, Kevin.
Kevin: Indeed, mate. What’s the next one?
Michael: Patience and waiting. In fact, it’s been shown that people who have a longer time perspective and are patient are more likely to achieve things not just financially but in other areas of your life. If you know that it takes time and hard work to invest and eventually get a deposit, save up, get a deposit, buy a property, be patient, wealth is a transfer of money from the impatient to the patient, Kevin.
Kevin: Michael, what about all those lucky people, though?
Michael: Yes, everyone else is more lucky than me. I think you and have been around long enough to know that luck’s made through hard work. Many of us like to attribute the success of others to good fortune or the fact that they had rich parents or they were in the right place at the right time or they knew the right people. In fact, it’s really only a small group of people who’ve lucked out by winning the lottery or successfully been at the right place at the right time.
Find something you’re passionate about, make a living doing it, and then you’re much more likely to enjoy the work – it won’t be hard work – and then you won’t be struggling and you’ll be lucky.
Kevin: How much do you need, really, though, to strive to get financially free?
Michael: It’s interesting when you look at most Australians, they’re going to earn millions and millions of dollars over their lifetime. People don’t believe it, but multiply your average wage by 20, 30, or 40 years of work, and you’ll actually find that you’re going to earn millions, but most people never save it.
It’s really not how much you earned, but you have to learn to spend less than you earn, save it, invest some of that, and eventually move to the point of becoming an investor. Financial freedom has nothing to do with how much money you’ve earned, but on the relationship you have with money and learning financial fluency, Kevin.
Kevin: I guess the other thing, too, Michael is that you’re not going to remain young forever, are you?
Michael: No, you’re not. I guess one of the ways you can look at it is you can just live for now because you don’t know – the old “eat, drink, and be merry, because tomorrow you die.” But on the other hand, if you’re young, you have time on your side, and that’s one of the great things about real estate and compounding. It relies on money, but it also relies on time. If you start early enough and start saving and start investing, you’re going to have the universe at your feet, Kevin.
Kevin: Wonderful. The bottom line, Michael?
Michael: Wealthy people do certain things every day that sets them apart from everyone else. Wealthy people have good daily habits that they’ve learned from their parents. These habits are the reasons why the wealth gap unfortunately keeps increasing in Australia. The rich keep getting richer.
We’re only likely to be as good as the mentors and the people who learn from, so it’s important for us to teach our children good daily success habits and level the playing field. There’s no reason why our children can’t be amongst the wealthy people in Australia.
Kevin: Indeed, and on that note, Michael, we say thank you very much.
Michael: My pleasure, Kevin.
Kevin: Earlier in the show when I was talking to Carolyn Boyd, we mentioned about the number of people who are now buying units, opting to live in apartments, and there are a lot of reasons for that, of course. There are budgetary reasons, but there are also lifestyle reasons.
Many, many people are drawn to the glossy brochures of the new developments, wanting to get into a brand-new apartment, but there are some things you need to consider if you’re going to be buying off the plan. Many people will warn you not to do it.
Rachel Barnes is a market commentator. She also has a website called Investor Friendly Agents, working with agents who want to work with investors. Rachel, I’m keen to get your take on this, on what advice you’d be giving to people who are considering buying off the plan?
Rachel: Thanks, Kevin. I’d say buyer beware basically – whether you’re an owner-occupier or you’re going to be an investor. Generally, I deal with investors, so that’s where a lot of my feedback comes from.
One of the things I find is that first of all, there’s a price that you’re getting in at, because it depends how you’re buying the property. If you’re buying direct from a developer, it’s normally not quite so bad, but there are a lot of people in between these days, and it’s that in-between where you can pay anything up to at least $50,000 extra for a property than if you had gone direct. There are a lot of commissions to be made for people in this type of environment.
Kevin: Is it a matter of doing your homework and make sure that you’re not going to be paying over the odds, even if it is new and nice and bright and shiny?
Rachel: That’s the thing. If you’re an owner-occupier and even an investor, sometimes you get a bit emotionally attached because of those brochures. But let’s get back to the facts. The fact is if you’re buying an apartment, you have to firstly be careful of how much you’re paying, as you say. That’s going to be one of the key things.
Secondly, what’s going to happen with that property? What are the body corporate fees going to be? Who’s going to be managing that? What’s the cost involved in that? Is there going to be a sinking fund? You need to know all those sorts of details.
On top of all that financially, if it’s investors, for example, and you’re going into it with, say, 50 other people who are going to be buying at the same time, how many people are going to be putting their property on the same rental market as you? You’re going to be competing basically on price, because there’ll be no difference in other parts of that complex.
Kevin: By definition, buying off the plan means you’re buying off a plan. In other words, it hasn’t been constructed at that time, and you have to take at face value a lot of the assurances given to you by the developer as to what the finishes are going to be like, as well. I’ve seen a lot of people come unstuck in that area, Rachel.
Rachel: Absolutely. Remember, what you see in a glossy brochure is just the artist’s impression. What you actually get can be completely different. That’s where it’s sometimes a lot safer to look at something that’s existing, because you know what you’re getting. When it’s off the plan, the developer could go bad; they could cut back on some things that they hadn’t intended to or that they did intend to, which is even worse.
You never really know who you’re going to get or what you’re going to get. You have no idea what your neighbors are going to be like, and that can be a huge concern sometimes.
Kevin: I do feel sorry for people who look at developments, have absolutely fallen in love with it, and have made the decision to buy it. What are some of the things that they can do to make sure that they’re not falling into any of these traps?
Rachel: One is just to confirm with the person who’s selling it to you, are they a seller’s agent? Are they getting sales commissions? Let’s get some transparency here. Exactly how much are they making on this deal? Because some of them don’t have to tell you, and they’ll just say they’re receiving commission. You want to know exactly how much.
If you can talk to the developer, that’s even better, or find out – through perhaps RP Data – what’s been sold in that area so you get a bit of an idea about whether that’s going to be a reasonable price.
Just to give you an idea, I know some overseas investors pay a price for an apartment that may be inflated even five years down the track, because they don’t know what they’re buying, and they don’t know what the comparison sale would be in that area.
Doing your due diligence on the area is going to be crucial, as well. Have a look around and see where they’re up to in comparison with where they should be. Find out more about the developer’s history. Have they done a lot of developments? Have they got some good groundwork behind them? Are they reputable? That’s some of the due diligence you can do even before the property’s been built.
Kevin: That’s great advice, Rachel. Rachel’s website is Investor Friendly Agents, helping agents work better with investors. That’s who we’re talking to right now. Of course, Rachel is a market commentator, as well.
Rachel, thank you for your advice, and we’ll talk to you again soon.
Rachel: Fabulous. Thanks, Kevin.
Kevin: You might recall last week I was talking to Peter Wargent – Peter, of course, is a buyer’s agent from AllenWargent – on the back of a report that Peter wrote that I read in Michael Yardney’s property update, which is where over the next 25 years, through to 2036, Australia is projected to soar in terms of its population by ten million heads up to 32.4 million.
Peter, I wanted to follow on from our discussion last week. Welcome back to the show. Thanks again for your time. I wanted to ask you about what impact this is going to have as we look at cap city markets versus the regions.
Peter: The latest ABS Family and Household Projections through to 2036 implied that we’re going to need a huge number of households, an extra 4.3 million households, over that time, which will take us to a total of 12.7 million. The projections show where those households are expected to be required. The four markets that will require the greatest number of households will be Sydney, Melbourne, Brisbane, and Perth.
The greatest number will actually be required in Melbourne – 938,000 households, which is a huge number. But the good news from Melbourne’s point of view is that at least it doesn’t have an inherent under-supply. At least it’s coming from a position of a fair number of dwellings on the market. Sydney, on the other hand, is coming from a position of under-supply, so it’s got a heck of a lot of building to do.
Kevin: What about the Brisbane market? Is that under-supplied at present?
Peter: The Brisbane market is a bit of a two-speed thing at the moment. As you know, I’m living in Brisbane these days. The unit market in particular around the inner suburbs has a huge number of approvals being pushed through.
The unit market has seen approvals over the last 12 months at record levels – more than 12,000 – so as those units start to come online, I suspect we’ll have an over-supply of particularly high-rise dwellings. There’s a new tower to go in, the Skytower on Margaret Street.
But there are also a lot of approvals for suburbs around the CBD, so I think it’s a bit of a two-speed thing in Brisbane. Particularly, high-rise units will end up in an oversupply position. Houses is a slightly different market there.
Kevin: Last week we talked also about those lone households and the fact that we’re staying in our houses much longer. But with that increase in the number of properties that are required, is that going to reflect in the properties being a little bit different? Are developers going to need to respond to this, Peter?
Peter: Yes, and I think we’re already seeing that to some extent. The increase in the number of childless couples projected and the increase in the number of lone households projected is going to see a huge increase from medium-density type property demand. That average household size is projected to fall to 2.5 over the next 25 years.
We’re starting to see that already in the latest building approvals numbers. Units and apartment approvals are actually at the highest level they’ve ever been now in Australia, and we’ve approved more than 205,000 dwellings for construction in the last year. That’s a record high.
Kevin: Who will be the winners and losers if we look around Australia at the impact of this over the next 20-25 years?
Peter: The latest population growth figures suggest that interstate migration is actually falling as the mining boom passes its peak or has passed its peak, so therefore we’re seeing a lot more people in Sydney and Melbourne stay put rather than migrate to the mining states. In short, it’s putting a huge amount of pressure on Sydney’s and Melbourne’s property markets and infrastructure.
In terms of some of the other areas that’ll be winners, we talked last week about some of those Queensland regional markets expected to grow – Gold Coast and Sunshine Coast – but also Mackay, Townsville, and Rockhampton are several of the Queensland markets that are expected to see a big rise in demand for property.
Kevin: Pete, always good talking to you. Thank you very much. Pete Wargent, of course, is a buyer’s agent from AllenWargent. Pete, thanks again for your time.
Peter: My pleasure, Kevin.