Cash in on short term rentals + Brisbane ‘shapes up’ + Expert questions negative gearing + Picking a turning market

Cash in on short term rentals + Brisbane ‘shapes up’ + Expert questions negative gearing + Picking a turning market

Highlights from this week:

  • Cashing in on the short term rental market
  • What is behind the cooling market?
  • Brisbane about to grow up
  • What is all the fuss about negative gearing?
  • 5 tips to get your property tenant ready
  • Should APRA be happy with what is happening?
  • SEQ development ahead
  • How to tell when you lose control of the negotiations

Transcript: 

Cashing in on the short term rental market – Quirin Schwaighofer

Kevin:  There’s no doubt in my mind that the popularity of the short-term rental market is absolutely booming. You only have to look at the popularity of sites like Airbnb, more and more people learning how to harness some downtime in their property to make additional money. Sites are springing up to help this happen. One of them is a site called MadeComfy.

Recently, Sarah Megginson from Your Investment Property and I caught up with one of the co-founders of MadeComfy to talk about their tips on how you can prepare or better prepare your property for the short-term rental market, because you can do it right, you can do it wrong, and believe me, there are some big mistakes you can make, and that’s going to have a big impact on the income that you can make.

I ask Quirin, who is a co-founder of MadeComfy, to detail for me his top five tips on getting a property ready for the short-term rental market.

Quirin:  The very first thing that is often forgotten is to look into the reason why you are doing that, what your goal is, and also what the potential of your property is. That’s a very important bit, because not every property is suitable for short-term renting. It depends a lot on the location where it is. Is it in a tourist or business hotspot?

What is the potential earning for your property? When we engage with a customer, we provide a 12-month revenue prediction, pretty much compare that with long-term to have a clear understanding what is the potential of the property, and does it make financial sense?

Kevin:  Your second tip is that you need to understand your competition. How do you go about doing that?

Quirin:  You have to understand you’re not the only one who’s out there. We list properties of our customers on platforms like Airbnb, Booking.com, TripAdvisor, and others, and there are other people also doing that as well. It’s really important to understand who are they, and what is there? Also what the property looks like and what is the price point?

It’s a marketplace, and you can only generate the return that people are willing to do. The competition is important on that.

Kevin:  Quirin, do you find it’s necessary for people to do any major renovations before they put their property on to the market?

Quirin:  It is an important part to present a property that is nice and comfortable – nice and comfy. If you have a new property that was built in the last ten years, then you maybe have to worry less about that. You might have a place that is a bit older, and it’s important to understand what is the condition of the kitchen or the bathroom?

They are areas that guests look at, and they create a perception of the whole property based on that. If the kitchen hasn’t been renovated for 25 years, it might require some touch-up work. The same with the bathroom, it’s important that it looks simply clean.

The other one is simple things like painting, the flooring, some accent walls. So, a few things you can do on the renovation side that will make sure you are on the top 10% or 20% of the short-term rentals in your neighborhood.

Kevin:  How important is the furniture and styling and all of that in terms of the presentation overall?

Quirin:  By touching up, properties and making sure they look quirky and comfy, the potential revenue went significantly up. Things like your living room, your bed, so it’s an important part to look at (a) the look and feel and then the quality of the furniture.

Kevin:  All this is fine – you can have a great looking property – but if people aren’t treated well when they arrive and the place doesn’t look clean, then all of this really doesn’t matter.

Quirin:  Yes, in the end, the main product you provide is the service to guests. That starts with the booking. You need to set out the price of the property; that’s a big thing. It’s currently mainly an amateur-ish dominated market, so there’s a lot of potential to price it a property smarter than others do.

It’s about the cleaning, and cleaning is not like the domestic cleaning; you need to provide cleaning that is at a hotel standard, and you need to wash and provide linen and towels and amenities on a regular basis. That can be every two or three nights when you have a new check-in.

The last one is, of course, to actually think about how to check in your guests. They might arrive at 8:00 p.m. on a Sunday or at 6:00 a.m. in the morning, so you need to be able to coordinate that.

Lastly is the maintenance. Things do go wrong, air conditioners stop working, locks break, all these things happen, and you don’t have weeks to fix that; you have hours, so a guest doesn’t cancel the booking and get a full refund, and you end up having no one staying in your place for a week or two.

Kevin:  Yes, it’s a great service. And a lot more information, too, in that podcast you’ll find on the website. It’s in the Your Investment Property magazine channel. Go and check it out for yourself.

Quirin, congratulations on your work. MadeComfy.com.au is the website. And thanks again for your time.

Quirin:  Thank you very much, Kevin. It was a pleasure.

What is causing the slowdown? – Andrew Mirams

Kevin:  We continue to see the housing market moderate around Australia, so I wonder, given that we’re talking here about investors whether APRA’s intervention has actually had the desired effect. Andrew Mirams from Intuitive Finance joins me.

Good day, Andrew. How are you doing?

Andrew:  I’m doing really well, Kevin, thank you, and you?

Kevin:  Good, mate. So, this screwing down by APRA, is that what’s happening here? Is that what we’re seeing?

Andrew:  Oh, that’s an affectionate term, Kevin, “screwing down.”

Kevin:  I look at it as like tightening the screw down on this a bit.

Andrew:  Yes, very good. They’ve largely achieved what they’ve wanted to achieve, and to the point that even Wayne Byres, the chairman of APRA, came out a couple of weeks ago saying that the whole ideology behind it was a temporary measure, just to make sure that investors weren’t getting out of check, as they probably were in Melbourne and Sydney predominantly, and they just needed to regulate markets to make sure we have a balanced housing market and to make sure that first-home buyers did have opportunities to buy in the market where the investors, in Sydney in particular, were really running ahead and making it hard for people to just get into the market.

I think what they’ve been able to do is limit loan-to-value ratios – what we call LVRs – to investors, not putting much in. They’ve been able to reduce some interest-only lending and the potential that when people come out of their interest-only loans that they won’t be exposed and unaffordable in terms of their new rates and their new rate payments that they’re going to be up for.

So, yes, a lot of their measures have absolutely had the desired effect. We’re not seeing the markets just moderate, which is, for all property investors, a good thing. None of us want boom-bust cycles, Kevin.

Kevin:  Are we likely to see more toughening measures from APRA?

Andrew:  I think they’re quite comfortable, now that we’re seeing actual signs in the marketplace of the markets moderating. I believe that they’ll just sit and watch. I still think – and we’ve spoken about this before – that a little bit of work about the people’s living expenses and just doing really due diligence and analysis around what people are actually spending and what’s going in and out of bank accounts, I still think there might be a little bit of work still just to play there.

But otherwise, the banks have really responded really well to the regulatory requirements. They’ve put all their measures in place. They’re within all of their caps, to the point now that we’re starting to see a little bit of interest rate action and rates actually starting to decrease so that they can attract new business.

Kevin:  Really? So, you’re getting that feedback from the banks, eh? Is that what they’re doing?

Andrew:  Yes. Now that their 10% year-on-year investor caps are all in order and the interest-only caps are in order, we’re starting now to see that the banks are… They’ve always been open for business; they’ve just had to follow the regulator’s rules. And now that they’ve done that, they have their houses in order, so to speak, yes, absolutely, they’re open for business – to the point that I even suspect that we’re going to see a little interest-rate war early in 2018, with the banks really actively competing for new business and looking to just manage their volumes, but certainly where they have room to move it, there will be some attractive offers out there.

Kevin:  You and I discussed this in a recent video interview, and that is the health of the Australian banks, how healthy they are, given the fact that they are so heavily regulated. How does the banking system in Australia compare to some of the overseas markets, Andrew?

Andrew:  Yes, really well. I think our Big Four consistently rank in the top ten banks in the world, based on their strengths, their profitability. Everyone has a go at our banks making money, but we’d much rather them making money than being closed, because at the end of the day, if we don’t have a sound banking system, none of us can borrow for our homes, for our investment properties, to try to leverage and enjoy the lives that we have. If you can invest and get ahead and enjoy that lifestyle, well, we all need leverage and the lenders to assist us with that.

So, we want a very sound banking system, and our banks stand up as well as any of those around the world. The regulators have been asking them to put more capital aside, so that they have nice big buffers so that should we have a little jolt in any of the markets, or we’re seeing sales of people who are over-committed, they’re pretty well positioned to be able to fund that.

Kevin:  Yes, you’re right; we are very critical of the banks and their profit levels. We can always hear the community moan when they do talk about their profit levels, but you have to take your hat off to them; they balance it well. And I think if you dig a little bit deeper, you’ll see they also do a lot of really good community work. So, it’s not just the banks screaming out for money.

Andrew:  Absolutely. And the Big Four, Kevin, just remember they all employ about 25,000 to 30,000 Australians, so they’re quite large employers and really good contributors to our economy.

Kevin:  Well, apart from that, too, they also have shareholders, and they have a responsibility to their shareholders to return those profits.

Andrew:  And their actual return on investments… Everyone focuses on the billions of dollars, but the actual return on the investment isn’t as massive as what… The average business owner is making the same return. They might find they might not be able to get money from the bank.

Kevin:  It’s a good opportunity, too – I know we’re talking to investors here – to maybe go and buy some bank shares. You could do a lot worse, Andrew.

Andrew:  Yes, you always can. [5:47 inaudible] paid dividends. They’ve always been quite a sound investment.

Kevin:  It’s always good talking to you, too, mate.

Andrew Mirams, of course, is one of our contributors, a regular contributor, and a supporter of the show, too. We like you to support our supporters, and you can do that by contacting Andrew and his team by using any one of the buttons on Real Estate Talk.

Thanks, Andrew. All the best, and talk to you again soon.

Andrew:  My pleasure, Kevin, and all the best to you, too.

Brisbane about to ‘fire up’ – Brett Warren

Kevin:  Just like shaping a personality, that’s how we shape our cities for the future. It’s always good to look ahead. What’s a city going to look like? How’s it going to be? What’s it going to be like to live in it? That’s the topic of this conversation.

I gave that title to Brett Warren, who’s written some fascinating articles about the future of Brisbane, where it’s headed, and he joins me now to talk about this.

What did you make of the title, Brett, and what do you think about the shaping of Brisbane?

Brett:  Hey, Kevin. I think it’s an exciting decade coming up. Obviously, there haven’t been many positives on the horizon in the last decade, with the floods and the GFC and the mining downturn. But a lot of my research is looking at what Brisbane may look like in the next five or ten years, both physically and also economically and financially and things like that, and I must say, it’s certainly a lot more exciting and there’s definitely that light at the end of the tunnel.

Kevin:  When you go through tough times like the floods and some of the things that we’ve had – change of government and so on – it makes you a bit tougher. It makes the city more prepared for those sorts of events. We look back at some horrific cyclones in Queensland and so on, but you come out the other end a lot stronger and lot more ready for it, don’t you?

Brett:  Yes, absolutely. And you don’t take things for granted. You probably don’t overextend yourself as much, and you keep within your own comfort level a bit more. I think that’s good, because you don’t go through as many of those boom-and-bust cycles where people are getting carried away in other areas and stuff like that.

Yes, most definitely, people are a lot more focused on the shorter term.

Kevin:  What does your research reveal about what Brisbane’s going to be like to live in in the next decade to 20 years?

Brett:  It’s pretty exciting. If we start from an economic point of view, obviously, Queensland has been very resources-oriented, the mining and things like that. And that’s where we’ve really struggle in the last decade, when we’ve lost probably one of our biggest employers and influences in the economy in Brisbane.

So, the first thing we have to do is transition our economy. At the moment, you’ve seen the construction and infrastructure boom, which is taking over the mining downturn and re-employing a lot of those people. That will probably last another five or six years as some of those bigger infrastructure projects we’ll mention shortly will take on.

But we need to transition to more of a services industry, just like Sydney and Melbourne. They’re the kind of industries that they’re financial recession-proof kind of industries, because people always need those services and stuff like that. So, you get a lot more resilience in your economy.

A good example is Western Australia. It’s very boom or bust, because 80% of their economy is the mining and things like that, and when that’s not performing well, everything else suffers.

Kevin:  It’s like some of the smaller regional areas, if there’s only one major industry in that area, it becomes quite vulnerable to downturn, doesn’t it? But if you have diversity, then you have strength.

Brett:  Yes, absolutely. And importantly, diversity in things that are recession-proof, like we just talked about – the services industry. People always need doctors and financial services, hospitals, airports, central business districts, stuff like that.

Moving on to the next one, the exciting thing for me is to see some of these projects that are happening within the next five years that will influence the next five to ten years. Kevin, if we start at the CBD, that Queens Wharf project, that’s a huge project, and that’s really going to put Brisbane on the map.

There are seven-star hotels going in there. There are big amphitheaters and waterfront restaurants and dining. That’s a real lifestyle precinct, and that’s what draws people to Brisbane.

Kevin:  What other projects have you seen on the horizon that are exciting?

Brett:  You probably would have heard me talk about the second runway at the Brisbane airport there. Our airport is going to really expand quite rapidly. Let alone the runway and the airport precinct, there are a number of things happening in that are really going to drive economic growth.

But even the airport, there are four Chinese airlines that have come in out of China from different locations that haven’t serviced Brisbane before. So, you think back to the 1970s and 1980s when the Japanese led that tourism boom to the Gold Coast. Potentially something could happen in Brisbane, obviously, but more importantly in South East Queensland and Northern Queensland as well.

People who’ve never had the option to come to Brisbane and those kind of areas before will probably come out here in droves, and we could become the playground of that Asian quarter there. So, that’s another exciting project that’s happening, as well.

Kevin:  What are you seeing on the horizon for health?

Brett:  Our hospitals are becoming major employment hubs, Kevin. There are a few people talk about hospitals in different areas coming up and things like that, which is fantastic, but you look at our three biggest hospitals – the Royal Brisbane Woman’s Hospital, the PA, and the Mater – they’re not just hospitals.

The Royal Brisbane is about to get the Herston Quarter put in there, which is a another huge development that’s going to draw specialist fields in age care and things like that. You have the Mater that’s had the children’s hospital there. And the PA has a lot of those research facilities and stuff like that. So, they’re becoming massive employment hubs within themselves.

I think in the next five years, probably 20% to 30% of Brisbane’s employment will be in those fields. So, again that’s leading that transition from mining and construction into that services industry, and they’re the industries that attract people from overseas, people from interstate to work in our great state, as well.

Kevin:  Let’s walk away from services at the moment, and have a look at the lifestyle. What’s happening around the state and particularly in South East Queensland and that area?

Brett:  Again, Sydney and Melbourne have huge lifestyle precincts and things that draw people to the city. Brisbane has that a little bit but we’re going to start seeing… I’ve already mentioned the Queens Wharf project. We have the Howard Smith Wharves and things like that. We’re transforming the Ekka area at the moment with King Street and those kinds of lifestyle facilities.

Brisbane Live is another project that’s in the pipeline that’s quite exciting, which is an amphitheater above Roma Street parkland. The benefit of having that above a transit hub, like a railway station, is it’s accessible to everyone around Brisbane. There are concert facilities there and things like that, and those types of things are what attract people to the inner city. And high walkability, easy access to get around.

It brings people in from overseas. It brings major artists in, and also people who come along with them. That’s a huge thing that I think Brisbane has probably missed a little bit out on, but something that’s definitely on the horizon.

Kevin:  We’ve seen some tremendous advancements in some of the suburbs that surround infrastructure improvements. We’ve seen the tunnel development in recent decades. What impact do you think all of this development is going to have on the property market, Brett?

Brett:  Like I said, Kevin, let’s compare it to the last decade. There’s been a few and far projects that have evaporated or not taken place at all, so I think the next decade will be really good. It’ll drive jobs growth. And wage growth has been really poor lately, so hopefully there will be some more wages growth and things like that.

Around that inner city precinct, when jobs are being created and people are being attracted to that area, there’s a greater demand for housing. So, capital growth and properties start to grow again, rents start to grow again, and everything starts to get moving.

So, very, very optimistic about what Brisbane will look like. And financially and economically as well as from a property-investment perspective, the next ten years is really, really positive.

Kevin:  Brett, great talking to you mate, thank you. And a great insight as to what Brisbane is going to look like in the future. So, thank you for your time.

Brett Warren, of course, is buyer’s agent. He works at Metropole Property Strategists in Brisbane.

Thanks for your time, Brett.

Brett:  Thanks, Kevin. Good to be with you.

Too much fuss about negative gearing – Ian Rodrigues

Kevin:  We welcome into the show Ian Rodrigues. Ian is from BishopCollins.com.au.

Firstly, hello and welcome to the show, Ian. Nice to be talking with you again.

Ian:   Yes, always good to be here, Kevin.

Kevin:  Ian, I’ve had a question from Carmel Taylor. You and I have talked about this off air; we’ve had several discussions about it. I’ll quickly read it.

Carmel writes: “I’m struggling to see the benefits of negative gearing and I’m wondering what all the fuss is about. Would someone please explain why it even exists? It does not make sense to be losing money on an investment.”

Carmel, you raise a few very good interesting points there, and I know that Ian will be champing at the bit to talk about this one.

Ian, what would be your comments initially to Carmel?

Ian:   I’m in total agreement with Carmel. Negative gearing is one of those things that is a pet topic of mine that people misunderstand and then it gets a bad rap and people think there’s something wrong with gearing overall.

The first point I’d make to Carmel is gearing to buy property – which means borrowing some money to buy a quality investment asset – there is absolutely nothing wrong with borrowing money to buy a quality investment.

Two things, one is you’re borrowing money, so you’re using the bank’s money to magnify your investment return, and you’re buying a quality investment asset. They’re the two key things that I like about gearing.

Kevin:  That process you just talked about, that is gearing.

Ian:   Gearing full stop; we haven’t talked about negative gearing yet.

Negative gearing is a point in the investment cycle where you’re outgoings exceed your incomings and you’re making a loss – either a cash flow loss or a tax paper loss – and getting some tax benefits back in those early years.

But the point I’d make is if you’re going to be negative geared forever on an asset, you probably have a pretty poor investment because at some point that asset should become positively geared, where the income is greater than the outgoings, particularly from a cash flow point of view.

A tax loss is another thing; that’s a benefit you can get. But to me, if your investment is not going to ever be positively geared from a cash flow point of view, you are hoping for or backing yourself that you’ve picked an asset with incredible capital growth to make up that.

Kevin:  There’s enough data and information to allow you to be able to assess how long it’s going to take for you to turn it around from being negatively geared to be either neutrally or positively geared, isn’t there?

Ian:  I think there is. The thing about it is there’s enough data to say “This is what I’d expect to happen with capital growth and where it will head,” but I think you could be the best in the business but no one has a crystal ball to predict how markets and investment values will move in the future. Anyone who tells you they can do that on a share market or property market, no one can guarantee it because it’s not guaranteeable; it is subject to future things that may or may not happen.

I still think you can make a pretty good investment decision, notwithstanding that, but it can never be guaranteed. So, the income is more known, what you can rent property for is more known because you have a lease agreement and money comes in each week or month. But capital growth is predictable but not as certain.

Kevin:  When someone comes to you and says, “Ian, I want to develop a strategy, and I’m interested in talking to you about negative gearing,” what would be the first comment you’d make to them?

Ian:  Usually, they’re looking at it from a tax savings today point of view, and when you look at the investment, they will get some tax savings for the first couple of years, which is great. They get a refund from the tax office, and money back from the tax office has a special character to it, I think. People value that more.

But ultimately, you need to plan for when that asset is going to become positively geared and when you’re going to sell it and make this capital gain, as well. If it doesn’t make that… The point is I think saving some tax is a good thing in the short run, but I want to be paying lots and lots of tax, which is a funny thing for an accountant to say, isn’t it? Because if you are, you must be making lots and lots of income or capital gains.

Kevin:  Quite often, I’ve been to an accountant at the end of the financial year and he said to me, “Oh, you’ve made all of this money,” but there’s nothing in the bank account. That’s always fascinated me, Ian.

Ian:  Yes, profit and cash flow don’t often match up. But there are plenty of things you can do to minimize tax and that’s what we’re advising our clients on. As I’ve said many times, you can have the same economic transaction in different tax structures and have an outcome that’s 50% tax or no tax.

You do need to get advice about structure, but don’t get carried away with negative gearing being this tax saving bias for your decision. You still need to buy quality investments and you still need to structure it right, and it should be positively geared eventually.

Kevin:  Well said, Ian. Thank you very much for your time. Ian Rodrigues is from Bishop Collins Group, and you can reach them at their website, BishopCollins.com.au.

Ian, thanks for your time.

Ian:  Great, Kevin. All the best.

Picking a turning market – Josh Masters

Kevin:  Got a question from a listener who wanted to remain anonymous, so we respect that. No problems. By the way, too, if you have a question or a comment, all you have to do is send it in through the website and we’ll have it answered, as we will in this case because I’m talking to another one of our regular guests, Josh Masters, who is from Buyside.com.au. They are buyer’s agents.

Hey, Josh, how are you doing?

Josh:  Good morning, Kevin.

Kevin:  Good to be talking to you again. The question is “How do I know if it’s a buyer’s market or a seller’s market? The news seems to change every day. Are there some indicators that would help me work it out?” What a great question, Josh.

What would be your response, mate? What do you do?

Josh:  It is a great question. I can understand why there’s some confusion, because the markets are doing different things at different times. You look at Sydney, you look at Perth, you look at Darwin; everybody is operating on their own cycle, in a way.

Now, to define this question a bit more, buyer’s versus seller’s markets, what does that mean? A buyer’s market is typically when the buyers have a little bit more control in the negotiation. For example, there might not be as much demand out in the marketplace and buyers can call the shots, in a way.

In a seller’s market, it’s quite the opposite. This is what we would call a heated market or a really hot market. This is where sellers get to call the shots. Buyers are coming in and there’s probably multiple buyers at a time and they’re putting in multiple offers, and that’s how we define it.

There are a couple of ways you can look at this. As a top-down approach, you could look at what the markets are doing in the research reports. Things that we would look at, we would go to CoreLogic, we’d go to Domain, REA, and Property Observer, look at what the stats are bringing out in terms of where these markets are at a particular point in time. If Sydney has been going very, very strongly, there’s a good chance that that is a seller’s market, for example.

Now, as a buyer’s agents, we are operating on the ground. We’re doing the grunt work and doing the leg work, meeting buyers and sellers face-to-face every day, and we would take almost different indicators.

To give you an example, in a buyer’s market, for example, if you walked in to an open home and there were very few people there, that would indicate a buyer’s market because you might be the only buyer and that seller is almost desperate to sell their place; there are just not enough buyers out there. So, that could be a good indicator.

Properties tend to stay on the market for longer, so you might be looking at a place on the online portals and that property might be sitting there for a much longer than they would normally. You could also be the only one making an offer, for example.

Now, in a seller’s market, it’s a lot more aggressive. If you turn up to an open for inspection and there are 30 groups going through at the same time as you are, that’s probably a seller’s market, indicating that the prices in that area are probably going to be pushed much higher than they would normally.

This is the time that we see sign boards going up in front of a house and suddenly it’s sold within a couple of days. You’ll also probably be fighting multiple offers over the time.

Now, what I would say, though, is that when we’re looking for properties, if we find an investment that effectively is ticking all of the boxes – i.e., it’s a good location, low maintenance, it’s affordable, there tends to be good rental growth and price growth attached to it – then it doesn’t really matter whether it’s a buyer’s or a seller’s market.

I would say don’t get caught up in whether the news or the theory is it’s a buyer’s or a seller’s market because a good property is always a good property and there will generally always be a demand for that property. I use a saying: hope for a buyer’s market but assume it’s a seller’s market, if that makes sense?

Kevin:  Yes, it does. And I think a lot of people make the mistake of trying to time the market, as opposed to time in the market, as well, Josh.

Josh:  Absolutely. What I find is if there is a good property out there, it doesn’t matter whether it’s buyer’s or seller’s market; we are aggressively going after that property because we know that in the long run – and even in the short to medium term – if we get that property in that portfolio, then it’s going to serve us very well.

As you know, Kevin, property is a long-term investment. It’s not about what it’s going to do tomorrow, but what it’s going to do for you in ten years’ time. The leverage and compounding effects of a good investment at the start can have massive effects on the portfolio over 10 or 20 years.

Kevin:  Great advice Josh. As always, we appreciate your thoughts. Thank you for joining us in the show. Josh Masters is from Buyside.com.au.

Josh, thanks for your time.

Josh:  Thanks for having me, Kevin.

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