04 May Create wealth in any market – Philippe Brach
Philippe Brach has more than 25 years experience in the international corporate world specialising in finance, accounting and investment. He is a fully qualified and experienced real estate agent, concentrating his attention solely on investment opportunities around Australia. He has written about his experiences and joins us to discuss his thoughts on creating property wealth in any market.
Kevin: I guess there would be very few people who listen to this show who really are not out to create wealth through property investing. It’s no doubt every property investor’s dream. That’s why I was interested to pick up a book called Creating Property Wealth in Any Market: How to Build a High-Performance Property Portfolio written by Philippe Brach.
Philippe has 25 years’ international experience in real estate and finance. He’s an experienced investor himself. He has a company called Multifocus Properties & Finance, and he’s helped countless investors create property wealth.
Philippe, thank you very much for joining us in this show, and thank you for giving us your time. Congratulations on the book, too, by the way.
Philippe: Thank you, Kevin.
Kevin: Now, I can’t tell you that I’ve read every bit of it, but I’ve read enough of it to know that it’s a really interesting story. Just in the front of the book – and I want to pick up on this if I could, Philippe – I quote you: “Once I understood how negative gearing worked, I was hooked. I started building upon my education, and before long, I was going on a shopping spree. I actually bought seven properties in six months.” Many people reading that – and certainly I did, too – would have thought “Wow, that’s pretty ambitious.”
Was that a good approach, Philippe, in hindsight?
Philippe: Listen, I don’t have any regrets with what I’ve done. I was really driven by the fact that I was in corporate finance at the time and I was looking at investing my money somewhere, and when I discovered the notion of negative gearing, which is fairly unique to Australia, and me as a European person, I never experienced that elsewhere in the world, I looked at it, and as soon as I understood negative gearing, I said, “Well, that has to be something for me, because it’s a great way to create wealth with limited amount of risk.”
I went into that, and as soon as I understood, I was lucky enough to have enough borrowing capacity to go and buy several properties, and I just did that, because my approach is driven by numbers and the numbers were telling me that that approach was just almost like a no-brainer. That’s what kickstarted it.
And the other thing was that having arrived in Australia in 1997, I wasn’t going to build enough superannuation to see me through retirement, so I needed to accelerate the way I was creating my retirement nest egg, if you want, and so I was quite aggressive.
In hindsight, I probably should have spent a bit more time understanding planning rather than just diving in, but the result has been quite good anyway.
Kevin: In the era when you started investing, property was very forgiving, wasn’t it? You could make mistakes – like you maybe overcommitting just a little bit – but you’d still be able to come out of it reasonably unscathed, Philippe.
Philippe: Yes. The early days, as I call them, were actually as you say very, very forgiving. It was easy. Capital growth was there. There were no problems with refinancing, getting good deals with the banks, and it was a great time for sure.
Kevin: You mentioned there about coming from overseas and how negative gearing in property anyway is unique to Australia. Are we lucky that we have that, and do you think all the talk about abandoning negative gearing or trimming around with it, is that such a wise thing?
Philippe: Well, now that Australia has negative gearing, in my mind, it would be crazy to touch it. It’s one of these rare taxes that hasn’t been touched since 1985, and that gives comfort to any kind of investor.
When you start tinkering with taxation, it spooks people, and what we’ve seen recently in the superannuation world where we’re going to change quite a bit of the rules on July 1 this year, that has definitely driven more people towards property, because they’re saying, “Oh, my god. Now they’re changing the rules on superannuation.”
Changing things that are in place in taxation, you have to be really, really careful. As you probably remember, in 1985, when Paul Keating, who was the minister at the time, changed the rules on negative gearing, it was a complete disaster.
Is it a good idea to have negative gearing? I think it is. I think it’s a great model in the sense that it helps government to provide housing as well as getting a lot of taxes out of it, because at the end of the day, if you go back to the concept of negative gearing, it’s actually not a tax avoidance scheme; it’s actually a tax deferment scheme, because at the end of the day, you’ll end up paying your taxes back by way of capital gains.
Kevin: There are other things, too, that people don’t take into account. Look, we’ve just received our rates notices, and as an investor, we’re charged more for our rates than it would be for an owner-occupier, so it’s not all “easy street” for investors.
The other thing, too, the point that you make there about it being unique to Australia is that that’s what we’ve actually created here. Our housing stock is largely driven by mom-and-dad investors as opposed to institutional investors, which is where in the countries where they don’t have negative gearing, they have to rely on a lot of government funding and institutional organizations to provide that rental stock, don’t they?
Philippe: Absolutely. It’s actually interesting to see that it’s about 2 million Australians who invest in property as investors, and out of that, there are about 1.4 or 1.5 million who own one property. When you’re talking about mom-and-dad investors trying to create a bit of saving on the side, you’re spot on.
Kevin: In fact, I saw some research only this morning saying that there are more emergency workers who negative gear and are investors in Australia than there are professionals, as in solicitors and barristers and the like.
Can I take you in another direction in your book? You just touched on it when you first came to Australia, and that is gearing, leverage. A lot of people don’t understand the concept of leverage, using that, and also then using negative gearing to get themselves into property.
Tell me about your experience with leverage and what lessons we can learn from that.
Philippe: Leverage is a great tool to actually speed up your wealth creation, in the sense that you’ll end up borrowing to invest. In a property – let’s take the typical investor ratio – they would borrow 90%. They would put in a 10% deposit, but they’re exposed to 100% of the capital growth. If you have positive capital growth, it’s a fantastic leverage.
Obviously, it works the other way. If you don’t get the capital growth, you can be really kicked, which is what happened to a lot of people during the GFC, when they invested in shares using CFDs – the contract for difference – where you could actually leverage yourself to 95% on a share, and if the following day it collapsed, you actually magnified your losses.
The thing I like about property is the fact that in terms of crashes, if you want, compared to the stock market, it’s very mild. During the GFC, for instance, property prices went down by 4% or 5% a year for about two to three years and then eventually, after they declared that the GFC was over, pretty much property prices recovered within a couple of years. It’s all part of that forgivingness of property, which I really like.
The worst-case scenario, if you invest in property, I keep saying to my clients, “Listen. If you have a property for ten years and it doesn’t appreciate, you’re pretty much wasting your time but you haven’t actually lost your savings,” which, to me, is a big safety net.
Kevin: A big safety net, yes. Another point you make in your book, too, in the very, very early stages of the book is who should you listen to, and you make the point that property investing is, in fact, a very cluttered marketplace now. There are dozens of so-called experts or property experts who are touting their services.
It raises a point about who do you listen to and what sort of questions should you ask of the person who’s giving you advice, and how important it is to actually tailor an approach that suits the individual, Philippe?
Philippe: Yes, the marketplace is very cluttered. Everybody’s an expert, and there are a lot of self-serving people saying, “I managed to buy ten properties. I’m an expert. I can share my knowledge. Blah, blah, blah.”
But the approach we are having is more about trying to understand what the client is about, first of all, because they don’t want to listen to your story; they want you to help them with their story, and that’s a completely different angle.
I don’t believe in all the hype; I believe in the facts and figures, and that’s what I impart in terms of knowledge with my clients, and then they’re adult enough to make decisions on where they want to go. The empowerment, if you want, comes with the education and making sure people understand how it works, what the mechanics are, and also what the potential downsides are and what the potential upsides are.
Kevin: I’ll round out the conversation with this one point, which is the beautiful question you ask when you first sit down to talk to someone, and that is “What is the situation now, and what would you like it to be?” which indicates to me that whatever I’m going to package up for you is tailored to your own individual circumstances. Someone who’s much older is not going to take as many risks.
Philippe, we are out of time, unfortunately. It’s been lovely talking to you. Thank you. Let me just give the book another plug: Creating Property Wealth in Any Market. It is published by Major Street. You can purchase it on Philippe’s website, which is multifocus.com.au, and also look for it in all good bookstores.
Philippe, thank you so much for your time.
Philippe: No problem. Thank you. My pleasure.