11 Aug How to best use bridging finance + Where Cherie Barber shops for bargains + What will impact the value of your property
Highlights from this week:
- This week we go shopping with Cherie Barber. Cherie gives us the names of the websites she visits to buy the materials she uses in her renovations. Hear how she save thousands of dollars.
- We try to calm your nerves about bridging finance with some sound words of advice on how to use it to your advantage. Hear the lowdown on the ‘rent-vesting’ revolution and the facts about what is ahead for the Melbourne market.
- As a feature, we catch up with Kent Lardner from VIEW. Kent is the genius behind many of the desktop valuation models in Australia and he talks about how they can pick what will impact the price of your property.
How to best use bridging finance – Andrew Mirams
Kevin: We quite often talk about bridging finance, but I wonder how many people realize what’s involved, what are the pitfalls, and really, is it all that expensive? Let’s get a bit of an insight into this. Joining me now is Andrew Mirams from Intuitive Finance.
Andrew, welcome to the show once again. Thanks for your time.
Andrew: My pleasure, Kevin. How are you?
Kevin: Well, thank you, my friend. Is bridging finance expensive? Walk me through some of the more practical uses of bridging finance.
Andrew: It’s a great question, because the first thing people often say is “Oh, I don’t want to do bridging finance because I’ve heard that’s too expensive.” It is and it isn’t. It’s a funny thing to say.
If you think about what bridging finance is, firstly, generally it’s when someone bought a property before they’ve sold a property. Often, people want to do it when they just want to make one shift. They go out, they commit, they buy something at the auction on the weekend, 30 days later, they own that property, but now they have to exit their old property.
Often, they’re upgrading. etc. That would be the most common use of bridging; very rarely on a downgrade because you should have enough money. But if there is a transition period, that’s the bridging component. So, it’s the bridging portion or the time in between a buy and a sale.
So, when you say, “Is it expensive?” primarily, it’s just because you’re basically carrying two mortgages. That’s the expensive portion, because you have the new mortgage that you’ve taken on for the new property plus you still have to fund or look after your existing mortgage until that sells. So, that’s probably where the main thing around the expense comes in – that you’re really carrying two mortgages, Kevin.
Kevin: To describe it, its name really says what it is, doesn’t it? It’s a bridge between the old loan and the new loan. Is that right?
Andrew: Absolutely. And when you say expensive, it’s a short-term loan so the banks don’t actively compete for it because they’re looking for the end debt; that’s what they’re most interested in. There’s a whole range of ways the banks assess it. Will they assess on the peak debt – the total exposure – or the end debt, and is there a contract now in place for the sale or not, and how much time?
There are a whole lot of variations that go in it, but the expense part, generally you’re talking about a variable interest rate in and around the fours. So, it’s not that expensive from natural interest rate. The expense is really just covering the two mortgages.
Kevin: Yes, it really depends how long that takes. I guess you should be factoring in anywhere from two to three – maybe even four – months of carrying the bridging loan.
Andrew: Yes. If you walked down the street to get the paper and you came back with a different bit of paper being a contract for sale because you bought something while you were out, you’re probably not ready to sell your house. But then at the same time, most people who probably are entering a bridging loan and doing that were doing a little bit of preliminary work in advance, because the reality is that they’re trying to get the house that they’re in now ready for sale and in a position that they can sell it quickly because they don’t want to carry those two mortgages in the long term.
Kevin: Yes. We’ve quite often given the advice – haven’t we – that it’s best to sell before you buy so you don’t find yourself in that situation. But practically speaking, that’s not always possible, and you sometimes end up sacrificing the true value of the property that you currently own just to move to the new one.
Andrew: Absolutely. We’ve talked about how to negotiate, modern negotiation tools, and having all those sorts of things in place. Well, all of a sudden if you hand the power over by being in a position where you’ve sold and now you have to buy something, you have to make that settlement, it takes you out of the position of power and it means that you might be a little bit more at the whim of a selling agent or a vendor in that instance.
Kevin: When it comes down to thinking about how expensive it may or may not be, it’s really just a matter of factoring in the cost of the bridging loan as part of that move. It’s part of the cost of doing it.
Andrew: Absolutely. Yes, that’s right. And like everything, Kevin, a little bit of planning and a bit of preparation, and just having your ducks in a row before you launch into these sorts of things, you can generally cover it off. And the smaller the bridge, the smaller the time gap, the less expensive it’ll be for you.
Kevin: Always good talking to you. Andrew Mirams making a lot of sense from Intuitive Finance. And don’t forget Andrew’s channel, of course, on RET full of lots of great information and new videos we’re putting up there as well all the time.
Andrew, thanks for your time.
Andrew: My pleasure, Kevin. Thank you
The original rent-vestor – Brad Beer
Kevin: We have spoken on the show about rentvesting in the past. I love talking to people who’ve done it, because I am quite often asked “Do you know of anyone who is rentvesting?” Well, I know of someone who did, and that’s Brad Beer, from BMT Tax Depreciation, who joins me.
Good day, Brad.
Brad: Hi, Kevin. How are you today?
Kevin: Yeah, good, mate. You’re a rentvestor. Tell me about it. How did it work for you, and what did you see were the advantages?
Brad: I was a rentvestor until about the age of 40, which was a long time. I’m only 41 now.
Kevin: That was, what, last year? Yeah, I was going to say.
Brad: Rentvesting to me, why did I do it, I think it depends on a few things. If you look at the current situation, where in areas properties become… Obviously, increasing prices and I don’t know if the word “unaffordable” is the right word for it, but expensive to get into a property where you want to live. And that was the same in different places in the past.
I took an idea where I thought “I’ll rent a property in a place where I’d like to be.” The returns on higher-priced property are quite low, and what I did was went “I can rent something here, and I can buy three or four different investment properties. My risk is reduced, and I’ve still got money in the property market, so I’m still able to take advantage of the growth.”
I actually then just kept doing that over and over again for a long period of time and renting better properties, the rental return being pretty light on higher-priced property often as a percentage. I bought a lot of less-expensive properties, took advantage of the growth, and it was a good strategy with me, absolutely.
There are some pros and cons with rentvesting. To me, I think some of the cons are things like you can get kicked out because of the lease when it finishes. But I think on that, you have to realize that maybe you’re going to need to move on day and make an allowance for removal in the costs of these things, I suppose.
The ability to change the property is a bit of a con, I suppose. You need to find a property you’re happy with. And you just don’t have some of the stability that you do when you own your own house.
The fact that you also lose out on some of the potential… The family home is the one tax haven in the world that doesn’t have a capital gains tax associated with it, and not being able to take advantage of that is obviously something that makes it a negative thing.
To me, I spent a good 15 or 18 years of time where I rentvested. I was able to live where I wanted to be, rent out property that was fantastic, and still invest in multiple properties in multiple places and take advantage of growth.
Also, obviously, I got to take advantage of the tax deductions that come along with investing in a property through the interest and things, the deduction, the income. But also, obviously, that depreciation – me being the depreciation guy – is not the reason to rentvest.
It’s one of those things where the cash flow, when you compare whether I rent a property and buy another property, the cash flow difference between the two – with that depreciation included – sometimes comes out very, very similar. So if you’re still able to take advantage of the growth and live where you want to live but you may not be able to afford to buy, it’s definitely a great approach towards achieving that.
Kevin: The two things you mentioned there about the cons of rentvesting – one was a lack of security, the other one was that you don’t have the ability to do any work on the property yourself – they’re pretty much balanced out by the fact that you are rentvesting.
You have your own property, you can pour a bit of capital or a bit of your own personality into that, but also, you’re building up your strength, aren’t you? You’re building up equity in the properties that you own, so it’s really not dead money at all.
Brad: I don’t see rent as dead money at all. Really, I have changed from rentvesting. My mentality 15 years ago was always “Well, I make some capital gains out of those properties and therefore some money out of those properties, and to buy the one that I do want to buy one day, I’ll have made the money to do it. So, I’m not having to try and save it, because I’m making it out of the growth of those properties.”
Yes, you still have opportunity to do those renovations, and I’ve done a lot of renovations and small developing, as well, at the same time. Being able to have not a whole bunch of borrowing capacity tied up in a principle place of residence at a young age meant that I had the flexibility to invest in those properties, chop change, and make some money from them.
Kevin: Well, it was good talking to you. Brad Beer, from BMT Tax Depreciation. Thanks for your time, Brad.
Brad: Thanks, Kevin. Always glad to be here.
We go shopping for bargains with Cherie Barber
Kevin: Some great news for you today. The Powerhouses of Property Tour is on around Australia right now, and heading it up is Cherie Barber, who joins me as our guest, the Queen of Renovation.
Good day, Cherie. How are you doing?
Cherie: Really well. Thank you, Kevin.
Kevin: Good. Now, tell me about the tour: who can we see, and what can we expect to see there?
Cherie: Okay. Two speakers, myself teaching people how to do low-budget, quick cosmetic renovations, how to get in and spruce up a property and not spend too much money but massively uplift the value of the property.
I also tour with a lovely lady called Dominique Grubisa. Dominique is one of Australia’s top asset protection and debt specialists, and what she’s going to teach people is how to protect their property assets that they have in their personal name.
Let’s face it; we live in an age where people can sue people. She’s going to show people how to protect their assets moving forward without having to take those properties out and put them into other complex trust structures.
Kevin: Yes, it’s an unfortunate part of what we’re going through right now, but you have to really protect yourself, so that’s some great advice.
How can we get some detail about when and where it’s all on, Cherie?
Cherie: For people who are interested in coming, it’s a free master class, a one-day master class. I’m on stage for about 2½ hours, as is Dominique. All they have to do is jump on my website, RenovatingForProfit.com.au, and they can register for their free ticket.
Kevin: Okay, so go ahead and do that.
Hey, Cherie, just on another point, I saw you recently on Sky TV, their real estate show, talking about places to go to get cheaper or more affordable renovation material. Tell me about that.
Cherie: Okay, yes. It seems these days that everybody is renovating on a budget. Let’s face it; most Australians don’t have $50,000 sitting in their bank account, so more and more people are having to do budget renovations these days. It’s just a fact of life.
There’s a heap of ways that you can get your renovation fixtures and fittings on the cheap. One of the strongest ways is traditionally not going into a retail store. When you go into a retail store, those companies have big overheads called rent, so a lot of people these days are jumping online. They’re jumping online to sites like eBay.com.au, Gumtree. I buy an incredible amount of good-quality, secondhand materials on those sites for a fraction of the price.
There are other sites where they have dedicated websites just for one type of product. For example, a great website at the moment is called SecondhandKitchens.com.au. Kevin, if you jump on that website, you can go get yourself a great secondhand kitchen that in some cases still looks brand new for $1000 to $2000.
Kevin: Wow. Yeah, I’ve heard of a number of people doing that. It is amazing what some people will actually not have any use for anymore and are quite prepared to sell it at a very low price, Cherie.
Cherie: What happens is people buy a house and they move in, and they go, “Oh, I don’t like that kitchen. I don’t like the kitchen cabinet color. I don’t like the benchtop.” So, what they often do is actually rip it out, and more often than not, it ends up in a skip bin.
But the smart people actually put those secondhand kitchens and other secondhand items… Things like doors, old shade pergola systems, lots of that sort of stuff can go online. Why pay retail price if you don’t have to?
Kevin: Okay. Just quickly, run me through some of those websites again. I know Gumtree. There was another one you said. Was it SecondhandKitchens.com.au?
Cherie: eBay, you have Gumtree, you have a great website called Renovator Auctions. I buy floorboards on that website for $1 a lineal meter, for example. There are other websites, such as eGarageSales.com.au. It’s like an online garage sale site, and again, people stick everything on there: renovation materials, secondhand furniture that you can easily trick up and repurpose.
There’s a stack of websites; renovationd.com.au is another great one. One of the ones I really love, believe it or not – I’m sounding like a real cheapskate here, Kevin – Salvos.org.au. Particularly for TV renovations, I’m always on a budget, and the first place I head to is the Salvos. You find incredible secondhand furniture that through a lick of specialty paint, you can trick up and make it look brand new for a sliver of the cost of retail.
Kevin: Yeah, and you’re supporting a great organization too, the Salvo. There was another one mentioned. Was it SecondhandKitchens.com.au? Was that what it was called?
Cherie: SecondhandKitchens.com.au. There are a lot of auction sites, places like Sal’s Auctions. What are some others?
Kevin: You could do a lot worse than actually going and Googling that too, couldn’t you? You’d probably have them all pop up then.
Cherie: Yeah. What you do is you just Google “cheap reno fixtures and fittings,” and a lot of those websites come up. You just have to know where to look. Unfortunately, most people just think “I have to go to the shop.” When you go and you walk into a retail store, you’re going to be paying full retail price.
Kevin: Yes, absolutely. Some great advice there from Cherie Barber. Don’t forget about The Powerhouses of Property Tour. Go to Cherie’s website, which we’ll have a link to in this transcript as well of this interview. Make sure you go and check that out for yourself.
Cherie, great talking to you. Talk again soon.
Cherie: Thank you, Kevin.
Getting the most when you sell – what impacts price – Kent Lardner
Kevin: Just what influences price? What’s going to impact the price of your property or even what should you be looking for when you’re looking to buy a property? Kent Lardner is from View.com.au. It’s a company you’re going to hear a lot more about.
Kent, thank you very much for your time. I’m just keen to know from you – because I know you’ve done a lot of modeling on this and you’ve looked a lot at what creates value in a property – what are the key drivers that you see?
Kent: The most common valuation technique that’s used out there is really matching three comparable sales. We’re looking at properties that have sold recently in the local market of a similar size.
Some of the things that go into driving that price are those things we can measure – such as a bedroom count, a bathroom count, a car space, or whether they’re on a main road or not – but then there’s the stuff that we can’t measure, which really comes down to quality. That’s where the human comes into it and can match up comparable sales that are truly comparable, based on build quality and finish or things such as views.
Kevin: Some of those things that you mentioned there that add value can also detract value, a classic example being too close to a main road, being close to heavy transport, factories, and so on. Have you got a feeling for how much they impact negatively the price of a property?
Kent: A lot of these things can certainly be a double digit when you compare it properties that are further away. Typically, what we do is when we find something that’s a little bit adverse nearby, you always look for comparables that are very close by or on the same street so that they’re all sharing the same dimension.
A railway is a good example. Being right next to the railway line, overseeing the railway line, you look for other properties in that same location looking at the railway line. But then you go back one or two streets, you don’t see the railway line but you have walking distance to the station, so it becomes the opposite of that and becomes an attribute, a positive feature, towards price.
Kevin: What are some of the other things that would drive price? We hear a lot of talk about pools, whether or not they add any value. What’s your view?
Kent: I’ve seen research that says one thing one week and another thing another week. Typically, what we find when we try and model and use pools, probably the first thing to call out is we don’t have a robust data set that applies to every single property with a pool, but you can often find that it would influence anything up to $20,000 or $30,000 we’ve found in some of the models. But more often than not, where we’ve tried to test pool as a variable in our models, it’s so hard for it to stand out and be what we call statistically significant.
It’s an unreliable measure from a statistical perspective, so what we often fall back to is the anecdotal piece, which is a lot of pools are attached to a renovated house or are part of a style of property or finish of property that its cohorts are also renovated and therefore, the prices are higher.
Kevin: What you’re saying, I guess, is why would you put a pool in an unrenovated property, where it’s not going to add much value? But you renovate the house and you probably double the value of the pool.
Kent: That’s right. Then it becomes a different market or submarket. There are people out there who say, “I want a renovated house and I want a pool, and I can afford both,” so it creates an entirely different market. People are only looking or searching for that style of property.
Kevin: Talking about values, is there a standard value you can put on, say, a bedroom, the difference between a three- and four-bedroom home?
Kent: The interesting thing… We call this multiple-regression modeling. How we use this is we take all the sales that happen in a given location, we’ll pick on a suburb, and then what we do is we bundle them all up and we look for how much the sale price varies on average for a one-unit change in something: a one-unit change in land size or a one-unit change in bedroom or a one-unit change in bathroom.
The one that often stands out – and most people don’t realize this – the bathroom, more often than not, is the big value item. When we do this, we do it entirely objectively. We let the numbers talk to us, obviously. We’ll let the data speak, as the saying goes. The bathroom often would have, say, as an example, $100,000 coefficient value and the bedroom might only be $30,000, which is really interesting.
The standout for me and the lesson learned here is if you’re really comparing property A to property B, that tells me that you should always have the same bathroom count, because if the bathroom represents the biggest value, you want to make sure you’re looking at apples with apples. You really want the same bathroom count.
The other interesting thing – and this is just my hypothesis – is that a property with a one-bathroom count is often a very different style of property to a two bathroom. If I’m renovating a house, I buy the old original house that’s 60 or 100 years old, they’re all one bathroom. So, suddenly, when I renovate it, I’m not going to leave it as a one bathroom; I’m going to add a second bathroom. The two- or three-bathroom house isn’t just purely the bathroom count. It’s also reflective of the fact that it’s a renovated property, so that accounts for a lot of that variance in value.
Kevin: It’s pretty similar to what you’re saying about the pool, isn’t it? It’s what you expect in a property. I guess buyers generally expect a certain level of accommodation in a certain price range, Kent?
Kent: What people are doing when they’re searching for properties is they’re filtering. A lot of people say, “I only want a two-bathroom house,” so when they’re looking for their properties online, they’re actually ignoring anything – not even viewing a property – that’s a one bathroom if they are looking for that larger property.
You will get some people saying, “I want this location. Therefore, I’m willing to renovate. I’m willing to extend. I’m willing to put up with a one bathroom.” But then you have a whole market out there, a whole bunch of buyers, who specifically say, “I don’t want to do any work. I’m over the renovation thing. I just want to spend my money and move in.”
Kevin: Fascinating conversation. Kent Lardner, from View.com.au. Check out their channel on RET, as well, because there’s a lot of really great information in there, and Kent, of course, supplying some good data for us, as well.
Kent, thank you very much. Look forward to catching up with you again real soon.
Kent: Thank you, Kevin.
When Melbourne takes the torch from Sydney – Michael Yardney
When Melbourne takes the torch from Sydney – Michael Yardney
Kevin: I was interested to see that Sydney has just topped the 5 million people mark, which makes it a global city. I’m just wondering, the conversations we’ve had in the past about Melbourne and how it’s growing so rapidly. Michael Yardney from Metropole Property Strategists joins me.
Michael, is it still in the cards that Melbourne is going to be Australia’s largest city given what’s just happened in Sydney?
Michael: Yes, it sort of went unnoticed that Sydney is now classed as a global city with a population of 5 million people, and it grew the last million people in about 16 years – really, really quickly. But according to forecasts by the Australian Bureau of Statistics, Melbourne is growing faster and will reach 5 million people itself in 2021, and quite likely by the early 2030s – and that’s not that far away, Kevin – it’s going to be bigger than Sydney.
Kevin: Why is that, Michael?
Michael: There are a couple of reasons. Currently, clearly, Melbourne is more affordable than Sydney, but it’s really related to jobs growth in the last couple of years: more full-time and permanent jobs as opposed to part-time jobs have been created in Melbourne than anywhere else in Australia.
And people aren’t coming for the weather. I’m just looking out the window at the moment, and I can imagine it’s nicer where you are in Queensland. They’re coming because of the jobs and the amenity.
Another big factor is education. A lot of foreigners are sending their children to Melbourne because of education, Kevin.
Kevin: Michael, let’s look back a little bit. Tell us about the history of Melbourne’s growth.
Michael: Interestingly, Melbourne was the last of the mainland capital cities to be settled, only in 1836. But because of the gold rush in the 1850s, Melbourne quickly became Australia’s biggest city. So, we were once Australia’s biggest city.
And at Federation, both Melbourne and Sydney had about the same population, about 500,000 people. But 100 years later, at the end of the 20th century, Sydney grew faster, quicker. It was the iconic city that the rest of the world knew with the Sydney Opera House, and tourists came there.
But now, the trend is changing. In the last year, Melbourne’s population grew by 108,000 residents. Kevin, just to put that in perspective, it’s the highest growth Melbourne has ever experienced. They couldn’t all fit into MCG, where we have our big football and cricket finals. Over the same period that Melbourne added 108,000 people, Sydney added 83,000.
But if you put it in perspective, we’re growing at 2.4% per annum. Kevin, what that means is in five years, Melbourne’s population is going to increase by 10% at least. Where are we going to put them all?
Kevin: If Melbourne’s population is going to grow that significantly, does it follow that property prices will grow equally?
Michael: No. And in fact, that’s one of the mistakes investors make, because they chase population growth. Sydney is much more landlocked than Melbourne. Sydney has the water on one side and the Blue Mountains in the other direction and farmland and forest in the other directions. So, Sydney is more landlocked.
When you look at Queensland, you can build from Coolangatta at the south up to the Sunshine Coast in the north, so, it’s not going to be as landlocked. And much the same as Melbourne, we have got the ability to spread out.
Therefore, one of the ways that houses will remain a bit more affordable than Melbourne than they were in Sydney is growth, and particularly growth into the western suburbs, which up until more recently have been the less favored suburbs. There’s still lots of room to grow, keeping housing affordable in Melbourne. So, not all properties are going to increase in value – and definitely not increase in value equally, Kevin.
Kevin: It’s good news – isn’t it – for those inner and middle ring suburbs in Melbourne, as an example.
Michael: No question about it, because that’s where the infrastructure is, and we know that as cities get to 5 million, they become unlivable, and public transport and infrastructure are important. Therefore in Melbourne, the tram system is very important, and that only goes to the middle ring suburbs. The buses and the trains are not as good public transport.
And proximity to any sort of public transport is going to become more important. People don’t want to commute. The freeways and the highways are not going to be able to cope with that extra 10% population. Just imagine 10% more cars on the roads in Melbourne in five years’ time. It’s hard enough at the moment.
Kevin: It is indeed. Michael, thank you. Always makes a lot of sense.
Thanks for your time, Michael.
Michael: My pleasure, Kevin.