06 Oct Can APRA get tougher? + Buy a brick and become an investor + Borrowers band together to lower rates
Highlights from this week:
- Finance expert says “Get ready for it to get tougher to get finance”
- How anyone can become a property investor
- The role of the quantity surveyor
- The HashChing property finance investment model and how it can save you thousands
- How to make sure your investible debt or your deductible debt is working for you
- Why electronic conveyancing is now the norm in most states of Australia except for Queensland
- Property investing like buying shares
Can APRA get any tougher? – Andrew Mirams
Kevin: I did a video recently with Andrew Mirams from Intuitive Finance, and we talked about the changes with APRA, more changes on the way, even getting tougher for property investors. I’m going to continue that conversation in today’s show. Andrew joins me once again. I want to talk about financial buffers.
Good day, Andrew. How are you doing?
Andrew: I’m doing really well, Kevin, thank you. And you?
Kevin: Good, mate. Fine, thank you. As we said in that video, things are likely to get a bit tougher. Do we need to be thinking more about increasing that financial buffer? And maybe you might just describe what it is, Andrew.
Andrew: Yes, I think that’s a great point. Firstly, what is a financial buffer? We hear that thrown around quite regularly, and I think the average investor, someone doing it for themselves or thinking they know what they’re doing, probably doesn’t set themselves up correctly with these sort of things.
Any business, anyone running inventory or stock and things like that, has an overdraft that they trade through. It allows them to buy and sell their stock and deal with short-term cash flows and things like that.
In property investing, that’s exactly what a financial buffer is. When you’re buying investment properties and buying properties, it’s time that makes you money. The asset will make you money, but it only makes that over time. So, you want to buy time, and that’s exactly what a financial buffer really is.
Kevin: How big should that buffer be?
Andrew: That’s a great question, Kevin. Everyone’s situation is very different. You have your first-timers starting and they might be in one position, and you have your mid-tier investors and then your student investors.
But whenever someone has enough equity to at least buy a property or another property or something like that, I always try and look at what their rent is going to be and then what their costs might be.
Let’s say they’re going to earn $20,000 a year in rent but their costs are going to be $30,000. There’s a tax consequence and everything like that. We don’t talk about that; we just look at the net cash flow there of $10,000 a year.
We’d always like to try and have at least half of a property cycle. We talk about a property cycle being that seven to ten years, so always at three and a half to five years as a minimum. Hopefully that’s bought us enough time for the property to improve, and then we re-evaluate from there.
It’s costing you $10,000 a year, depending on your properties or whatever, and we do a little bit of analysis around that. It depends on what state you’re in, what rent yield, what your overheads are, and what type of property it is – body corporates versus a house and things like that. There might be maintenance.
We try and factor all of those things in and do a little bit of a back of an envelope and say “It’s going to cost you X amount. Now let’s try and multiply that by five times.” I think that’s probably a pretty good buffer to have. If you didn’t have to worry about your property for the next five years because you had the resource there to fund that, I think that’s probably a pretty good position.
Kevin: Over that five-year period, too, that situation, you would think it’s going to get a little bit better – wouldn’t you – as you pay down a bit of that debt, as well. So that buffer, while you wouldn’t change it, becomes even better the longer you keep it.
Andrew: Yes, it should do. Really, any client who has a home loan and then they’re buying an investment property for the first time, you want to make sure your personal exertion income is still going towards reducing the non-deductible debt, and you want to make sure your investible debt or your deductible debt is working for you.
While one might be coming down, the other one might be going up. But at the end of the day, what we’re trying to do is base it from your personal circumstances, making sure you have a personal buffer, that if you want to go on a holiday or there are some urgent repairs to home or your car needs to be replaced or something like that, that you have sufficient personal resources.
Then where we can, we want to make sure we also have… We don’t want to buy a property and then in a year, we’ve put someone in jeopardy that they have to sell because you won’t make money necessarily in a year. It’s over the journey that you really make money. By buying the right asset and then giving it time to grow is where you’ll make your money in property.
Kevin: At the opening of this chat, I mentioned about the Skype interview that you and I did, the video about APRA. Go back and have a look at that, too. It’s simply called “Are There More Changes on the Way from APRA?” Have a look at that because inside there, we talk about how the banks will start to look at you. You need to be looking at your disposable income.
I would imagine, too, Andrew, if you’re going to go to a bank and you talk intelligently about your buffer and you talk about what you’re suggesting, they’re going to have a lot more confidence in you as a borrower, aren’t they?
Andrew: Yes, if you’re a little bit more astute, you set yourself up well, and you get to the right people who can explain and articulate that, then yes, you’re going to get a far greater hearing because there is a lot more scrutiny on living expenses, there is going to be a lot more work around that.
There’s a lot of work being done to make sure that people aren’t over-extending themselves. So, by having yourself well-resourced with the right buffer in these times, it’s going to buy you that time.
We are going into a bit of a credit contraction. We started it a couple of years ago, and we’re still going through it where we have two markets – Melbourne and Sydney, particularly – over-heating and the regulators have some concerns there. They’re just trying to slow the markets down to a more normal pace, which from your and my perspective, Kevin, makes good sense.
Kevin: It does.
Andrew: We want slow and steady growth, not the boom/bust cycles because that’s not good for anyone. We don’t want to over-expose people and so probably, we haven’t been doing enough analysis around clients’ living expenses, people’s living expenses. Let’s get that right and then look at what their borrowing capacity is.
Make sure you have an adequate buffer in place. You’re better to have it and not need it, in my opinion, because when you need it the most is when you’re least likely to get it.
Kevin: As I’ve said a few times in here, it’s how you look to the bank. You could be even smarter than that. You could go and talk to Andrew and his team at Intuitive Finance who will take care of all of that for you and make sure you do look good when you talk to the bank.
Andrew Mirams from Intuitive Finance, one of our regulator contributors. By the way, if you have a regular question for Andrew, fire it in through the website. I’ll pass it on to him, and we’ll make sure that we answer it in one of our forthcoming shows.
Andrew Mirams, Intuitive Finance, thanks for your time, mate.
Andrew: Thanks, Kevin. We’d love to speak to anyone who thinks they could do with our assistance, and appreciate your time.
Is there a QS on your team? – Brad Beer
Kevin: One of our regular guests on the show is Brad Beer from BMT Tax Depreciation. Today, I’m going to talk to Brad about the role of a quantity surveyor – and Brad has mentioned this on a number of occasions – and find out a little bit more about what they actually do.
Brad, welcome to the show. Thanks for your time.
Brad: Thanks, Kevin. Great to be here.
Kevin: Brad, tell me exactly what is a quantity surveyor?
Brad: Kevin, a quantity surveyor is essentially someone who specializes in the measurement and estimating of buildings. I did a construction management degree or building degree, and I come out of that learning some quantity surveying skills.
We’re guys who can get the plans of a building and we can measure up the amount of concrete, the amount of steel, we can count the bricks and count the tiles if necessary based on a set of plans, and then from that, work out what it actually costs to build that building in the place it’s being built. We take the materials, we measure how much of them there is, we can cost them, and then actually get in there and building a building out of them.
People think when you say surveyor, you’re one of those guys standing on the side of the road but it’s a different science. It’s measurement and estimating to do construction.
Kevin: Quantity surveyors, it seems to me, can choose to get involved at any stage of the construction process. BMT’s focus is in tax depreciation. What is the reason behind that? Why did you choose that part?
Brad: We started back 20-odd years ago now in a wider range of quantity surveying. One of my original partners actually came out of a traditional quantity surveying firm, and they get involved in cost plans at early stages, working with the builders, and working with the banks.
But this area of tax depreciation, which is one of the areas that BMT is focused on, having seen the traditional quantity surveyors don’t focus or put so much energy into that niche area of the market and learn the tax rules as well as they possibly could and should meant that we started a business in tax depreciation schedules just specializing solely on that by just marrying the quantity surveying skills with some tax expertise as well, which are the two skills you really need to marry together to get the maximum deductions out of those properties.
Kevin: Brad, is there any guiding legislation under which quantity surveyors are recognized?
Brad: Yes. For the purpose of depreciation, Taxation Ruling 9725, if you really want to read it up…
Kevin: That’s heavy.
Brad: …Says where the construction costs are not available for the purpose of depreciation, then the tax office will accept a relevant estimate done by a professional such as a quantity surveyor. It doesn’t say a quantity surveyor is the only guy who can do it, and it never mentions one particular quantity surveyor or anything like that.
The ATO or the government won’t legislate a particular organization, but they’ll recognize our costs where those costs aren’t available because we’re the guys who normally count bricks and tell you how much they should cost. These claims are related to a portion of those costs, and because we know how to estimate costs, they accept those numbers.
Kevin: I would imagine, from what you’re telling me, that it would be advisable to get involved with a quantity surveyor fairly early in the construction process, almost at the planning stage.
Brad: It depends. On large projects, quantity surveyors get involved more to make sure and check on the construction costs, but for the purpose of depreciation, just having that question at the start is really good to see is there anything we can change that is going to help to maximize those deductions?
There is not a massive amount of things to change in a residential house or a unit. And with a unit, you’re not making those decisions – someone who you’re buying it off is a lot of the time. But knowing and crunching these numbers prior to building these things, and if there are any decisions to be made, then talking early doesn’t cost you anything and is definitely a good idea.
Kevin: Who monitors quantity surveyors? Is there an industry body to govern them?
Brad: We have, like most industries, the Australian Institute of Quantity Surveyors, or the AIQS, of which I’m an associate member and a number of the staff here are. Also members of the Royal Institute of Chartered Surveyors, which is wider in the surveying world, and I’m also a member of the Auctioneers and Valuers Association, which is not so much monitoring there, but we’re valuers for the purpose of plant and equipment valuation, just to make sure we understand those methodologies.
On top of that, as a quantity surveyor that does a depreciation schedule, the Tax Practitioners Board We have to be registered tax agents, which I am and the business is. The idea of that is in order to do a deprecation schedule, you need some tax knowledge and experience, as well, so you have to go through a process to make sure you’re registered as a tax agent to do a depreciation schedule for a property investor.
Kevin: Brad Beer, BMT Tax Depreciation, thank you very much for your time.
Brad: Thanks, Kevin. Always great to be here. Thank you.
Buy a brick and become an investor – Anthony Millet
Kevin: Several months ago, I interviewed the CEO for BRICKX. I told you about that company. Well, here we are 12 months down the track. They are still going. Not only are they still going, but they’re absolutely booming. Anthony Millet joins me. He is the CEO for BRICKX.
Congratulations. Happy birthday, too, Anthony, by the way.
Anthony: Thanks very much, Kevin. It’s great to be back.
Kevin: Twelve months. A fascinating model. Just walk me through again how the model actually works and how people can become involved in it.
Anthony: The BRICKX website is available to everyone. They can go online, sign up very easily, and they can invest in residential real estate – currently in Sydney, Melbourne, and Adelaide – for under $100. The average portfolio is $2200, so they’re a lot bigger than that, but you can get in for under $100.
The way it works is our expert buying team finds existing properties in highly desirable locations within Sydney, Melbourne, and Adelaide at the moment. We put them into an individual trust, so one property per trust, which is split into 10,000 units, or bricks, as we call them. Investors can then buy anything from one up to 500 bricks, or 5% of the property.
All the properties are rented out, and when the rental income comes in, the professional property managers pay the water, the council, the strata, and all the other expenses, etc. The rental income that remains is then distributed amongst all of the brick-holders on a monthly basis. So every month, every brick-holder will get their share of the rental income.
In addition, investors can make money from the capital growth of the property, and as the property changes in value, we update that brick price, which shows you the uplift – or if the property goes down in value, it could be a downward fall in the value of the property.
What’s also quite unique on our platform is the ability for an investor to be able to put their bricks up for sale at any time they want. So, you’re not investing on anyone else’s time horizon. You put up your brick when you want, when it suits you.
Kevin: The properties, you mentioned there you have an expert group who actually seek these properties out. How successful has that been? In other words, what is the percentage of properties that have improved as opposed to those that have fallen back?
Anthony: We haven’t had anything that’s fallen back yet. We’re invested in Sydney and Melbourne mostly, so we’ve been in some pretty strong markets there. The best performing asset that we’ve had over the last 12 months was a house in Annandale in Sydney that is up 22% since a year ago. And we’ve been pretty successful at being able to acquire assets.
The great thing about our property team is that we’re focused on value assets and we’re not emotional buyers, so we’re generally not going to auctions because we never win at auction. We’re looking for those properties where we can get a really good deal that represents what we think is good fair market value for our investors.
Kevin: Anthony, what have you learned about the profile of your average investor?
Anthony: We have those at the age of 18 to 30 who are entering the property market for the first time – some just dabbling, others saving their housing deposit in line with the market – to those over 35 and upwards who are generally using this as a diversification strategy, now able to invest some of their savings in high-quality residential real estate alongside shares and cash, etc., whereas they may have been excluded from buying this asset class before.
Kevin: Of those people who have decided to sell for whatever reason, has that been a difficult process? How does that actually happen?
Anthony: One of the key benefits of the BRICKX platform is the ability to be able to put your bricks up for sale at a time that you choose – and also at a price that you choose. That mechanism and that process has worked really well since we launched.
We’ve had about 25% turnover of the investments on the platform, and that has been across a median time of 12 hours. So, it’s taken a median time of 12 hours for someone to be able to sell their position in residential real estate, which is obviously a lot quicker than it would take you to sell an entire home.
Kevin: It’s a bit like having a share portfolio in a way, isn’t it?
Anthony: It’s similar, but you’re building a portfolio of units within individual different properties. We find that in terms of the ease of the process, people are able to access the website via any kind of device and it’s very easy to buy and sell bricks.
Queensland solicitors have had enough – Peter Maloney
Kevin: Electronic conveyancing is now the norm in most states of Australia except for Queensland. Frustrated Queensland property lawyers are seeking answers from the Queensland government after repeated attempts for clarity on the timeframe of the formal introduction of electronic conveyancing have been ignored.
According to legal technology firm GlobalX, 84% of Queensland lawyers and conveyancers support the move to electronic conveyancing. So why the holdup? I asked GlobalX CEO Peter Maloney.
Peter: Well, Kevin, it really is a result of a lack of action from the Queensland government. We have one government in Australia that has passed the national laws to enable electronic conveyancing, passed the revenue laws to enable electronic conveyancing, but it’s the only state in Australia that is left to announce a pathway for the industry to make the change.
Kevin: Is Queensland the last state to convert?
Peter: It is of all the major states. I’ll give you a scenario. In Western Australia, Victoria, New South Wales, South Australia, the only way to lodge a standalone discharge on a mortgage is electronically. That’s for consumers, for commercial transactions. By the end of this year, every state will have refinances electronically lodged. By the middle of next year, every state will have caveats lodged electronically, and by the end of July 2019, every state will be doing full financial settlements on property transfers electronically.
And Queensland is the only state that hasn’t made any announcements for any instruments to be conducted electronically.
Kevin: So, what is the impact of the delay? I imagine it’s having a big impact on some firms that are across borders.
Peter: That’s right. You take a legal practice that’s operating in the Tweed Heads region, and those solicitors are operating across both New South Wales and Queensland, so it’s two states, two systems.
Or you have the scenario where you have major law firms around Australia implementing significant process changes to cater for electronic conveyancing, and they’re having to do that in the absence of their Queensland office. Their Queensland office – to be up front with you, Kevin – is just being left behind, because the government is not providing the direction.
Kevin: Of course, we have a lot of cross-border purchasing, too – people out of Queensland buying property in New South Wales and vice versa. I imagine that’s further complicating the issue, isn’t it?
Peter: It is. The industry is trying to transition really smoothly, instrument by instrument, to the digital world, and it’s very difficult if you have all the other major Australian states providing industry guidance and you have one that’s remaining silent on the topic.
Kevin: The current paper-based process in Queensland means that five separate documents have to be fully signed. Just one missing signature – as I know – can completely derail a settlement. That’s certainly enough reason to make the change, I would have thought.
Peter: That’s right, and this is where the Queensland Law Society has to step up, has to be providing advisory services on behalf of the solicitors of Queensland to say “It’s enough.”
Kevin: Is that where the holdup is? Is it with the Law Society?
Peter: The Law Society made statements, certainly. I’m not sure they’re driving as hard as they could into government to force the government to come to the table and have a discussion about a smooth implementation timeline.
But back to the documentation, the paper-based process, if you miss one signature or have an incorrectly spelled name on a transfer of title or a mortgage instrument, that property settlement will fall over, and for the consumer at that moment, they will not be able to move into the house they thought they had bought until settlement is rescheduled.
Kevin: I was going to ask you what the move to electronic conveyancing has meant to consumers. It’s obviously a smoother process.
Peter: Absolutely. In every other state, the benefits are being reaped. For example, even forgetting about a transfer of title, say for example, you have an urgent family law matter that requires a caveat to be assigned to a property. In every other state bar Queensland, it’s done via the computer and it’s lodged on the title within seconds.
In Queensland, the solicitor is filling out a caveat notice, printing it, signing it, and walking it down and lodging it over the counter with the Register of Titles. It is lunacy. And that’s why instrument by instrument, the change is needed.
Kevin: Are there any concerns about security, doing all of this over the Internet?
Peter: No, there is nothing different in Queensland that would raise an issue around security that the other states haven’t already done. And the irony of it, Kevin, is that Queensland state government is one of the largest shareholders of the electronic conveyancing platform PEXA. They own 5.5% of the actual platform and were one of the early seed funders into the development of the platform.
Kevin: Was that under the current Labor government, or was that the previous government?
Peter: That would have been under the previous government. So, it came out of COAG in 1996, and capital would have been raised between 1996 and 2010.
Kevin: There are certainly a lot of questions to be asked here of the state government but also probably of the Queensland Law Society, as well.
Peter: Often, one of the issues that’s raised in Queensland by both of those parties is if we lay down a timeline for the introduction of electronic conveyancing, there is only one electronic platform in the market, which is PEXA, and that might therefore cause competition issues.
But the reality is in the Australian economy, PEXA have invested $300 million in developing the platform, which is owned by state governments and by the banks, and under that structure, there is no other private business that has $300 million to spend on building another platform.
Kevin: Yes, a lot of questions to be answered here. Peter, we’ll follow this with interest. We’ll try and make some contact to the state government in Queensland and also to the Queensland Law Society to try to get some answers, as well. But Peter, thank you very much for your time.
Peter: Terrific to be with you again, Kevin.
Borrowers band together to save – Mandeep Sodhi
Kevin: There’s a lot of talk about financing currently in the property market. I’m going to talk now to a gentleman I haven’t spoken to for a little while, but it’s good to have him back on the show, Mandeep Sodhi from HashChing.com.au.
Mandeep, thank you so much for your time. Good to be talking again.
Mandeep: Thank you, Kevin, for having me on your show.
Kevin: My pleasure. Tell me about HashChing and how you can help us get some finance for property.
Mandeep: On HashChing, we have two models. One is do it yourself, which is using the group buy concept. We’ve just recently launched it a week ago for consumers who are pretty much residing in their own place, which is owner-occupied, looking to refinance above $500,000.
We get them to join a group of borrowers with similar characteristics. Let’s say we get ten applicants who join a book of $5 million. Once we collect all the information about them, then we ask the banks or participating lenders to bid on the book. Right now, we have four lenders: Switzer, Mortgage Ezy, Pepper Group, and Gateway Credit Union who are trialing it. Once the book is completed, they start bidding on your whole book.
We believe that the group buy concept has been around – it has been tried on getting a good value on your electricity bills and also through the Groupon website – but no one has done it properly for home loans, so we’re now trialing it for the first time in the home loan space.
Kevin: Yes, it’s a fascinating concept, and I can see – as you say – it’s working well in other areas. Let’s talk about financing, because financing is rather personal. You get different people at different levels, so you’ll have a different group of people in the book. How do you work out “Oh, I might have a good credit rating but then I don’t want to be lumped with someone who’s not, because that’s going to affect how much I pay”?
Mandeep: We do have some strict criteria. You can only join a book if you have a minimum of 510 credit score. And don’t worry; we’ll do that check on your behalf, and it’s not recorded on your file. We also allow only those borrowers who have been with their current bank for a minimum of three years. So, as you can see, there is a strict criteria to join that book, because we want all the borrowers to have similar characteristics, and then only the banks would bid on it.
But in any case, if you don’t fit the criteria, then we pass you on to a broker in your local area who’s registered and verified by us, and they will look after your circumstances and still get you a better rate.
Kevin: Have you got a feeling for how much someone is going to save by joining one of these books?
Mandeep: On our platform right now, we have rates starting from 3.56%. So, the pressure is back on the lenders who personally can see the rates that are being advertised by the brokers, but also consumers have now expectations that “Hey, I can see 3.56% on the HashChing website, so I’d better be getting a better deal from the lenders if I’m joining a group and waiting for five days for lenders to bid on my book.”
Kevin: When I join a book and if the successful bank comes in and we all agree in the book – or you agree, whatever the case may be – that we’re going to go with that particular bank, does that bank then have an association with me as an individual, or is it that overall book?
Mandeep: The bank has to firstly place a bid on the whole book. You as a customer do not have to go with that lender. If you feel that another lender out of the participating lenders has a better value but they’re not the cheapest, that’s fine as well. You can still go with the other lenders. But 50% of the book has to go with the winning lender to be able to get that rate.
We then connect you to that lender and they will discuss with you in person how they can proceed and get you that rate.
Kevin: Have you got some history here, Mandeep? Has there been a book that’s been successfully completed?
Mandeep: No, we’re running the first book now. We only opened it last week. We’ve already received $1.12 million worth of applications out of the $5 million. So, there are two applicants. We’re just waiting for another four applicants.
Saying that, we’ve already received 22 registrations, so they are still in the process of uploading documents. As I mentioned, it’s a do-it-yourself process, so the consumers will have to upload all the documents themselves. But if you need some assistance from a mortgage broker, then we can connect you to the mortgage broker as well. But then you’ll have to move out of the book.
Kevin: It’s a fascinating concept, and it’s a going to be interesting to watch. Have you got a feeling for when the first book is going to be complete or ready to have an offer taken?
Mandeep: We only need seven more applicants now to join the book, and as I mentioned we already have 22 applicants in the registration process who are just uploading the documents now. So we are expecting it to finish by the end of this week.
You have to hurry up if you want to join the book, but that’s fine; we have the next book starting as soon as the first book closes. The second book opens up straight way once the first book is closed, so it’s not that you’re missing out on the book.
Kevin: Okay. You can get all the details at the website HashChing.com.au.
Mandeep: Correct. You can either go to www.HashChing.com.au, or you can directly go to groupbuy.HashChing.com.au and you’ll get more information there.
Kevin: There you go, HashChing.com.au or groupbuy.HashChingcom.au. Mandeep, thank you so much for your time. Congratulations on what you’re doing, and would love to get an update once you get that first book going.
Mandeep: Thank you, Kevin. Thanks again for having me on the show.