12 Apr Picking the right investment strategy – Michael Sloan
There are many different property investment strategies but there will be just one that is right for you. We tell you about a book that helps determine the right strategy for you in your current situation. We talk to the books author Michael Sloan.
Kevin: I received an interesting book in the mail the other day. I don’t talk about every book that I receive because we actually receive quite a lot, but this one I do want to talk about because I think it has a lot of really great information, and I’m going to recommend that you pick up a copy of it. It’s called The Formula to Successful Property Investing written by Michael Sloan.
By way of introduction, Michael is the co-founder and managing director of the Successful Investor. He is a qualified financial planner, mortgage broker, investment property advisor, and external property advisor to NAB. He joins us to talk about the book and other related issues.
Michael, welcome to the show. Thanks for your time.
Michael: Thanks for having me, Kevin.
Kevin: It’s a good read. I’m going to pick up a few points in there. Firstly, the name of the book, The Formula to Successful Property Investing, leads me to believe that there is a formula. Is there a formula, and do you tell us what it is?
Michael: Maybe that’s a little bit of a trick title because my main point is that there is no one way to invest in property and when you see someone who calls themselves out as an expert and they say there is, that really is going to be a flawed argument.
Kevin: Is that because people have different risk profiles? Is that what it’s about?
Michael: People are so different, aren’t they? Their borrowing capacity, their capacity to handle cash flow on a property, what’s right for them, what time they are in their life, what their plans and goals are. You get people saying you should only invest for cash flow, only invest for capital growth, and none of that is right across the board.
Kevin: It’s really up to the individual where they are in their life, I guess.
Michael: Exactly, yes.
Kevin: I want to ask you a couple of specific questions about out of the book, and there is so much information that we’re only going to be able to deal with a couple.
Michael: Yes, sure.
Kevin: Can we talk about leverage? I think this is an area a lot of investors don’t understand or they miss a lot of opportunity. Can you explain what leverage is, and how can we take advantage of it?
Michael: Yes. In a simple way, it’s a way of getting more out of what you have. If you have $100,000 in the bank and you happen to get 6% growth in that $100,000 for the next 12 years, then the $100,000 will double in value to $200,000. Now, if you leverage – so using that $100,000 to borrow funds – you can buy a $400,000 property. At 6%, that $400,000 property in 12 years will be worth $800,000. You’ve taken your $100,000 and turned it into $400,000 of equity in a property in that time, so that’s the power of leverage.
Everyone has to decide what the right amount of leverage is for them. Some of the people who I’ve seen use leverage the most, the highest rate of leverage, are those in their 50s who’ve had issues in their life that mean they need to do some catching up if they want to have a decent retirement. They will leverage higher – at maybe 90% – to get more property. But someone in the earlier life should be conservative with their leverage, because the higher you leverage, the more risk you take, as well.
Kevin: Yes. As you become a good investor or a successful investor, the funds that you build up in the property – and you gave us that example there of investing $100,000 to make $400,000 – that $400,000 then can be leveraged again, can’t it, without affecting that first asset that gained it for you?
Michael: Exactly, and not even at the end of the 12-year time – somewhere along the way. People don’t even need cash to leverage. They’re using equity in their home, so they’re just using the difference between the value of their home and the loan. If there’s enough difference there, that’s equity and they can use some of that equity to leverage into a property.
At the moment, we have clients buying properties that are positive cash flow, so they’re not putting any money towards their property. They’re facilitating the purchase but they’re not putting any of their own funds towards it. They’re using their equity and they’re using their income to go to the bank and say, “Give me a loan.” So not even using cash to leverage; they’re using equity in their home.
That’s where people really make the money, and a lot of people don’t understand that it’s available to them.
Kevin: That’s right. That’s why I’m suggesting that you pick up a copy of this book, because Michael does actually deal with leverage quite well.
Can I take you to another part of the book? Page 130, actually. I don’t expect you to open that page because you’ll know what’s on it – the part where you talk about avoiding these properties. I think there’s some valuable lessons in there. Maybe you could skip through some of these for us and tell us some of the areas we should be avoiding and why.
Michael: That comes from my first years as a mortgage broker, when I met and interviewed literally over a thousand people – people who made money, people who lost money, and people who didn’t get started. From those people who lost money, I learned so much from them because I saw all the mistakes that they made, and I always thought “Gee, I wish I had five minutes with you before you bought that property.”
There’s a great story out there about lots of niche market properties in particular. There’s a great story about student accommodation. There’s a great story about this beautiful hotel resort on the beach. And a great story doesn’t mean it’s a great investment property.
Student accommodation is certainly one to stay away from. So many people have lost capital growth on that, it’s not funny. Holiday accommodation is another, and some serviced apartments. They might give you good cash flow, but if you’re losing capital when you invest, what’s the point?
Kevin: Yes. Things like backpackers, I noticed you mentioned that in there too, and retirement accommodation.
What about buying overseas? Are you believer in that? We’ve heard a lot about USA properties.
Michael: I’m a big believer in not doing it, Kevin. Look, if there’s a bandwagon, people will jump on it, and there was a bandwagon after the GFC when so many cheap properties were available in America and people saw a way to make money out of that. There’s a lot of really sad stories about what happened to people who have bought over here – literally lost their life savings.
You’ll read in magazines about a couple who sold their home and went to America and bought five houses with that money, but you never see what the outcome is. Often, it’s a complete disaster – people losing everything that they have.
What I talk about investing is investing should be you buy an investment property and get on with your life – and minimize the risk while you’re doing it. It’s like people who renovate: as soon as you start renovating or you plan to renovate for profit, you go into business, so you have to say “Is it suitable for me to go in this business?” Do you really have the expertise to be buying the property halfway around the world?
Kevin: Exactly. We’re almost out of time, but I just wanted to quickly touch on a couple of others, not ask for an explanation. In the book, you talk about things like storage units, apartments without carparks, commercial properties, holiday accommodation, hotel and motel rooms. There are so many areas, and you give a great definition as to why you should avoid those areas.
Look, I strongly suggest you get the book, life lessons from a 20-year veteran of the property industry, Michael Sloan. You might want to give away your age there, Michael. Thank you for joining us. The book is called The Formula to Successful Property Investing. Look for it in all good bookstores. The author is Michael Sloan.
Michael, thank you very much for your time.
Michael: Thank you, Kevin. Cheers.