13 Jan The experts predictions for 2016 – how accurate were they?
We are going to kick the year off with some very sound advice from Michael Yardney as he talks about the 12 important lessons for property investors in 2017. Smart investors are always learning and undertaking personal development. The property markets are dynamic, so dynamic in fact that you never quite “solve the puzzle” because the puzzle is always getting reshuffled in front of you right when you think you’ve got it solved. As Michael says “The more I learn, the less I seem to know”.
This time last year, I asked some of our experts what they thought we would be saying about 2016 at the start of 2017. I check back in with them and play back their comments. This time last year Cate Bakos was concerned about APRA, unit vs house price differences and she thought the unit market might improve. So is she still concerned?
Andrew Mirams was another one of our experts we asked about what he saw ahead at this time last year and he predicted unit defaults. Find out what is he saying about 2017.
Meighan Hetherington shares a great story about how she discovered the fascination of becoming a property investor and how she now shares that passion with other investors.
Brad Beer answers a complex question from Grant Campbell about property depreciation and capital gain.
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Is this a way to reduce capital gains tax? – Brad Beer
Kevin: I have a question now from Grant Campbell. Thank you very much for your question, Grant. It’s directed at Brad Beer from BMT Tax Depreciation. He joins me on the line.
Good day, Brad.
Brad: Hi, Kevin. Great to be here.
Kevin: Now, this question from Grant, I know you’re going to have to give me a fairly general answer to this, but he does go into a bit of detail here. It’s about depreciation and capital gains tax.
If depreciation is added back to the cost base, this should reduce the capital gain and therefore the capital gains tax on sale. For example, if I claim $5000 depreciation for five years, that’s $25,000, and the property shows a $50,000 capital gain, then the gross capital gain is $25,000. As it’s been owned for five years there is a 50% reduction, that is $12,500 would be added to my income for the year when the property was sold. Is this correct?
Now, I understand, Brad, you might have to give a generalized answer to this, but can you cover that for us?
Brad: Yes, Kevin, definitely. It’s a regular question that we do get about the capital gain being added, creating additional capital gains tax at the end. The simple fact is that yes, it does, and it means that the capital gains tax liability based on some of the claims will be higher.
Now, the building allowance component and the plant and equipment component are actually traded slightly differently, firstly. Without going into the complete detail on that, even aside from that, looking at the fact that what we get to do with deductions on the way through while we own this property is claim these deductions at our full marginal tax rate. When we sell a property and we pay a capital gains tax after 12 months, then we actually pay capital gains tax at half of our marginal tax rate.
And when you actually calculate this out in individual scenarios, most of the time – and there are a few dependencies, your tax rate and things here – what happens is that you actually get a deduction of more money than what you have to pay out in additional capital gains tax at the end because you make deduction on the full marginal tax rate, you pay capital gains tax at half the marginal tax rate.
And you also have then the benefit of the cash while you do it. You can put that into an offset account and pay less interest on your property, for example, or use it for something else. And you have the benefit of the time value of money.
Money today is worth more than money in five years’ time because of inflation. So if you can get the money in your hand today, even if it means you’re going to have a tax liability that may be higher in the future, the fact is under this type of scenario, it’s less than what you put in your pocket at that time usually and you actually get to use the money.
We’ve actually run and done some case studies on different scenarios – and they’ll be available on the website or in Maverick or we’ll find them if you want them – so that you can actually see exactly what happened in different scenarios. We’ve done those and they’re a good way to learn, and you can read in some much more detail about exactly why, how, and what it actually means to that investor.
A good gauge, Kevin, is sometimes someone comes to us after those they’ve sold a property and what we’ll do then is say, “Well, you have the capital gains tax thing to think about, we think your deductions will be roughly this. If you get the accountant to crunch the numbers of what it means for you in cash, then is it still worth doing the depreciation schedule?” And usually we’ve pretty much always still do it because they get more money than what they lose in capital gains tax anyway.
Kevin: You mentioned Maverick there. Now, that’s your newsletter. How can someone get onto that mailing list so that we can make sure we get that, Brad?
Brad: The Maverick newsletter, we write it a couple of times a year. We write case studies on lots of things. At our website, bmtqs.com.au, join Maverick – very easy – or send us an email and we’ll join you to that. The back issues are available or send me an email and we can actually send you the capital gains tax one specifically if you’d like to read that.
Kevin: If you want to go to the website, there’s always the link on Real Estate Talk. Just go and click on that there, or the website is bmtqs.com.au.
Brad, thank you very much. I know that’s a complex situation, but you handled that very well there for Grant. And Grant, thank you very much for sending that in.
Brad, thanks again for your time.
Brad: Excellent. Thanks very much, Kevin.
More concern over unit growth and prices – Cate Bakos
Kevin: This time last year, I asked a number of our experts around Australia what they thought we’d be saying at this time about 2016. I’m going to play a number of those for you today in the show, and I’m going to start it off with Cate Bakos, who is a buyer’s agent out of Melbourne.
Cate, hello and happy New Year.
Cate: Happy New Year to you, too, Kevin.
Kevin: Do you remember what you said this time last year? Just in case you don’t, let me refresh your memory. This is what you said.
What do you think we’re going to be saying about the property market this time next year, Cate?
Cate: I have two answers here, Kevin, and…
Kevin: You’re going to hedge your bets, aren’t you?
Cate: I am. Keep my crystal ball in good shape. I will hedge my bets. I think that the APRA changes have a lot to do with how our market has finished up in 2015, and unless we have some loosening of bank scrutiny and criteria for investment lending, I think that we’ll see a bit more of a divide between our auction clearance rates in our capital cities for houses versus units and also unit price growth.
I’d like to optimistically say that we’ll see a rebound in clearance rates and value growth for our unit markets, but the skeptical side of me or the concerned side of me thinks that divide will become greater.
Kevin: Cate, I thought you were pretty spot on. You must be proud of that.
Cate: Yes, I am proud of being able to pick that one. There were certainly some signs there, but it is always a challenge when someone says what could identify a year or what will be a theme – and in this case, it certainly was lender scrutiny and that disparity.
Kevin: I think the mention you made there about those APRA changes have really been quite dynamic, and I really don’t think we’re through the tunnel yet, Cate. I’d be interested to get your opinion on that. I do think we’re going to see a number of defaults during 2017 and even 2018.
Cate: I agree, unfortunately. I wish I had a better outlook on that front, but I think aside from just the APRA changes, we also have some lender changes. We’re seeing that with the appetite that lenders have for various types of properties and extending on not just from units but also more challenging types of properties, whether they’re quirky or not fitting that perfect profile as a lending security.
I think buyers need to be really careful this year – and next year – about what they sign up for, and they need to make absolutely sure that regardless of the pre-approval they feel they have in place, the lender is actually going to have an appetite for the type of property they’re picking.
Kevin: A lot of talk, too, about an oversupply of units, particularly in the Brisbane market and especially in the Melbourne market. You’d probably be seeing a bit of that. Your feeling about the unit market – you said that you had hoped it would improve. What are your thoughts now?
Cate: I don’t think that it will improve in the inner ring areas where we already have an over-supply. There are some hallmarks that buyers and investors can look for to shed light on whether there is a bit of a higher risk.
The first port of call should be checking out the vacancy rates. All they need to do is look at what’s advertised for rent. If there’s an overwhelming number of properties that are available that are all quite similar and in abundance, then that should be ringing some warning bells.
I don’t see the overall unit market improving for Melbourne in the short term, and I think if buyers are keen to secure a unit, particularly if it’s an owner-occupied unit, they really need to focus on the areas where they’re not in such abundant numbers.
Kevin: You’ve also talked about the house versus unit price separation. What’s your view on that now we’re 12 months down the track?
Cate: It certainly has been extremely noticeable. We’re finding that houses in those really highly contested, competitive environments – particularly the inner ring and some middle ring areas where train and a community feel and a village atmosphere is present – they’re really drawing a crowd.
We’re finding that cashed-up singles, couples, and families, are all fighting hard for those types of properties, and unfortunately, our limited numbers of properties for sale – so our supply – is not as great as our demand. So we’ve really had an upwards pressure placed on prices, and I don’t see that easing in those particular areas.
Kevin: Okay, fast-forward this time next year. Here we go again. Get that crystal ball out, Cate. What do you think you’re going to be saying about 2017 at the start of 2018?
Cate: I think we will still have continued house price growth, particularly in Melbourne, but I don’t think it will be quite as extreme as 2016. I think there’ll be a little bit of caution out there in relation to lender scrutiny. Also we’ve had prices shooting through the roof for houses but salaries haven’t been keeping up at that same pace, so eventually affordability really does become the question.
I think that we will still see some price growth but not as dramatic. I also feel that units will be problematic still, and I think that news of defaults and of people not being able to settle unit purchases – particularly off the plan, longer sunset-type purchases – will give people a little bit of a scare. So there will be a fair bit of information in the media, I think, and I believe that investors who are targeting units will probably think twice.
Kevin: Let’s have a look at a national perspective. What do you think will be the hot markets around Australia during 2017?
Cate: That’s a good question. We’ve seen house price growth in cities that haven’t been well documented for house price growth over the last five years, but we’ve seen them come into the equation just over the last 12 months. I’ve talked about Adelaide and Hobart, but it doesn’t necessarily mean that they’ll continue to soar and it doesn’t necessarily mean that they’re perfect investment areas.
I think that our Eastern seaboard major cities will continue to perform in the housing market, and I think that Perth and Darwin will still be doing it a little bit harder into 2017. Being a Melbourne specialist and being a little bit biased, I’ve certainly got a focus on Melbourne and I think that our housing market will continue to perform.
Kevin: Any regional areas stand out for you, Cate?
Cate: If I’d chat about Victoria – which is my patch and that’s where I’m licensed and where I know – I think that our regions will continue to perform. Geelong has been an interesting one. I have an eye on Geelong and I have had for a while.
It’s undergone a lot of change since the auto industry has disappeared. There was a lot of upset in Geelong at the time. But what we have seen is that Geelong is becoming a bit of an extension of Melbourne for a lot of people who can commute or can base themselves in Geelong or can work locally.
We’ve seen some really dramatic and beautiful changes around the city in the waterfront precinct and areas like Newtown and Geelong West, East Geelong, and South Geelong. They’re doing really well. They have been doing well for a little while, so I think Geelong deserves to be in the spotlight for all the right reasons.
Kevin: Cate Bakos, all the best for 2017. We will definitely talk to you more during the year, but we’re going to check in with you again at the start of next year for sure.
Cate: Kevin, I look forward to it.
Kevin: We will talk to you as the year goes on.
Cate Bakos, thank you so much for your time.
Cate: Thank you.
12 valuable lessons for 2017 – Michael Yardney
Kevin: As we welcome you back to the shows for 2017, my good friend Michael Yardney will be joining us again this year.
Michael: Hello Kevin.
Kevin: Great to be back with you again in a brand new year. Michael, I read a really interesting article that you wrote that I wanted to deal with first up in the show because I think there are so many great points in it: the important lessons that all property investors should remember this year.
Would you mind taking us through those?
Michael: Sure, Kevin. Every year is a time for learning and personal development. I think one of the great things about being involved in the property market is putting all the bits of the puzzle together. Yes, even though I’ve been involved in property for over 40 years, I did learn some new things, and I guess I relearned some lessons that I learned the hard way many years ago, as well, Kevin.
Kevin: What’s the first lesson, Michael, you’d like to tell us about?
Michael: Maybe the first one should be don’t let emotions drive your investment decisions. We know that market sentiment is a key driver of our property cycles and it’s one of the reasons the markets over-react. They overshoot during booms and they get a bit too depressed during slumps. So it’s important never to get too carried away when the market is reacting one way or another because letting emotions drive your investments is a surefire way to disaster.
We know each boom sets itself up for the next downturn, just as each downturn paves the way for the next boom. So take advantage of the good times that are going to be ahead in 2017, but be prepared for the next phase of the property cycle, Kevin.
Kevin: Yes, and just on that point, too, Michael, that leads us into the second one, which was take a long-term perspective. I guess if you take the lessons from the first point you made there, that would naturally follow on, wouldn’t it?
Michael: Very much so. Residential real estate is really not a get-rich-quick scheme, so don’t try and do it that way. Take a long-term perspective, and don’t let short-term influences affect your long-term decision-making, Kevin.
Kevin: I remember the last show for last year, Michael, you said to us that one of the big stumbling blocks for this year would be finance, and you make that as the third point, that property investment is a game of finance rather than a game of real estate.
Michael: Very much so. A lot of investors who had equity in their properties last year had difficulty getting refinance because APRA tightened the credit extension. You weren’t able to get more credit because of changing serviceability criteria.
One of the lessons is have a smart, investment-savvy finance broker as part of your team to help you through the maze, but the other is to make sure you only own investment-grade properties, good properties, because this will ensure that you can maximize your borrowing capacity, Kevin.
Kevin: Point number four in your article, Michael, was a lesson that we saw come home time and time again last year, and that is that there is no one property market.
Michael: That’s an important lesson, Kevin, that I learned many years ago but very much was to the forefront the last couple of years where it really was a two-horse race with Melbourne and Sydney leading the property market as a lot of people talk about. But there isn’t even one Sydney property market or one Melbourne property market. The top end performs differently to first-home buyers, so our property markets are segmented by location but also by the type of property and by price points.
I believe in this current year now, our new year, it’s likely that both Melbourne and Sydney will again outperform – but not all segments of those markets. I’d be avoiding the new and off-the-plan segments of the market. You’re right, Kevin, there’s not one property market.
Kevin: In fact, reading the article, too, Michael, you make the point that there are something like a quarter of a million properties for sale in Australia, but how many of those are investment grade, which is actually the fifth lesson you talk about. Could you take us through what makes an investment grade property?
Michael: Sure. Any property can be an investment property, Kevin. You kick out the owner, you put a tenant in, and it’s an investment. But not all properties make good investments, again, as we said a minute ago, because there are multiple markets.
In my mind, an investment-grade property is one that appeals to a wide range of more affluent owner-occupiers, which means it’ll always be able to sell later if you choose to, and one that’s got a level of scarcity. It’s a property that’s in the right location and one that has got good prospects of long-term capital growth. It’s a property that has street appeal and offers security, again, because owner-occupiers like that.
I like properties that have a high land-to-asset ratio because it’s the land component – not how big the land is or how much land there is, but the value of the land under your apartment even – that goes up in value. I also like investment properties to which you can add value.
If one puts all those characteristics into all those quarter of a million or so properties for sale, in my mind, currently less than 2% of properties would be what I’d be comfortable to call investment grade. In other words, don’t just buy any property and hope that the value of the property is going to increase, Kevin.
Kevin: I’m talking to Michael Yardney from Metropole Property Strategists, and these are the 12 important lessons that all property investors should remember in 2017. We’re about halfway through, Michael.
You and I have talked many times over the years about your five-stranded approach, which is your system. How important is it that we have a system?
Michael: Kevin, to be honest, almost anyone can make money during a property boom because the market covers up most mistakes. But when the market turns – as it did at the end of the mining boom, as it did during the Global Financial Crisis, as it does regularly on us and surprises us – what happens is many investors without a system find themselves in trouble.
Warren Buffett said a rising tide lifts all ships, but he also said that you only find out who’s swimming naked when the tide goes out. In other words, if you don’t follow a system that works in all market conditions, you’re likely to get caught naked when the market changes. I think it’s a critical factor of success in property investment, Kevin.
Kevin: Point number seven you make – and once again this is another lesson that came back time and time again last year – is the get-rich-quick schemes or the investors who want to make fast money. Has that been a mistake that you see many investors make, Michael?
Michael: Yes it is, and let me make the first prediction on your show for this year, for 2017. There’s going to be a new swag of people coming out and filling our inboxes with ways of getting rich quickly in property.
I think the lesson from previous cycles is that residential real estate is a fantastic way of transferring wealth from the impatient to the patient. So don’t think you’re going to give up your day job quickly. It takes a couple of property cycles – 10 or 15 years – to build a substantial asset base in real estate, Kevin.
Kevin: What was that great saying from Warren Buffett?
Michael: Wealth is the transfer of money from the impatient to the patient, one of Warren Buffett’s great sayings.
Kevin: And one of the ones I’ve heard you mention many times.
Michael, number eight: beware of doomsayer predictions. Do you think we’re going to get more of those this year? That’s a dumb question because I know we are going to.
Michael: I remember your great interviews a couple of years ago with Harry Dent, who was so sure how the property market was going to crash by the middle of the year, and last year, you had people on from overseas, as well.
Every year, there are these overseas gurus who tell us why our property values are going to plummet. Unfortunately some people have missed out on the opportunity of developing their own financial independence because they listened to the messages of these doomsayers.
On the other hand, a small group of Australians have ended up becoming financially independent because the value of the properties that they bought when everyone else said they were silly kept doubling in value, Kevin.
Kevin: Over Christmas and the New Year period, I had a couple of weeks off, Michael, and I picked up your latest book, which I think is fabulous – your Guide to Investing Successfully. The thing that occurred to me in reading that book takes me to point number nine, and that is that you have to treat property investment like a business. In reading your book, that’s very much the message that comes through time and time again, Michael.
Michael: Yes, Kevin. Thank you. I guess the reason is that successful businesspeople have a different head space, a different mindset. They are accountable, they don’t blame others, and they take responsibility. Sure, they have a good team around them, they have some good advisors around them, they don’t try and do it all on their own, but they take financial responsibility for their investments – and that’s what you should do as a successful real estate investor.
Kevin: I did some segments recently, Michael, for a company who wanted to get some tips on real estate, and I made the comment then that 25 years ago would have been a great time to invest. The second best time to invest would be right now, which takes us to the next lesson, and that is that there’s always a reason not to invest.
Michael: Yes, Kevin. When I first started investing I tried to do it counter cyclically because that’s what I read, so I thought, “Aha, this is a good year not to invest or maybe this is a better year to invest.” And I realized that every year brings its own set of crises and there are always reasons not to invest.
You can go back as far as you like in history, Kevin, there are always issues occurring that would give you a reason to sit on the sidelines. One of the worst mistakes investors make is that they see this news as a reason not to get involved.
I’d take advantage of the opportunities any bad news brings and just buy the next investment property when you are ready financially and when you can afford it. As long as you buy what we spoke about a moment ago – an investment-grade property – and allow the cycle to work its magic, you’ll be ahead.
Kevin: I’m always constantly amazed and impressed, too, when I go to one of your seminars and I can see people – very successful investors who are in your team – they come back year after year after year because they are always continually learning, which takes us to the next point, and that is about learning, Michael.
Michael: I think the point I’m talking about is that you know less than you think you know. When I first started off, Kevin, I thought I was smart. One of the worst things a beginning investor can do is get it right the first time, which is what I did, because you think you’re smarter than you are. But the market will soon teach you some lessons, won’t it, Kevin?
The big lesson is that I know much less than I think I know. And if you don’t remember that, the market will soon humble you. So always continue learning.
Kevin: The final point – and I’m going to quote you now, Michael, because I’ve often heard you say this – is that any problem that money can solve isn’t really a problem. This comes about the confusion between money and wealth.
Michael: I think when I first started off, I was chasing money because I came from a poor background. I’m sure a lot of other people are thinking that money equates to wealth. I heard somebody very clever say many years ago, true wealth is what you’re left with when they take away all your money or all your property or all your shares.
I became a lot happier when I came to realize that money and wealth are very, very different things. Money is really important in those areas where it’s important in your life, and it’s not at all important in those areas where it’s not important.
True wealth is your family, your friends, and your health – there’s no use having all this if you don’t have the health to enjoy it with – your spirituality, having the right head space and the mindset, and to me also being able to contribute back to society.
Kevin, that’s 12 lessons I want to share with you this year. But hopefully when we discuss this again at the beginning of 2018, I’m going to be even smarter, and maybe I can come up with 13 lessons next year.
Kevin: Oh goodness. Okay, that’ll be fantastic. Great talking to you again, and thank you and thanks for your continued support. We look forward to working with you during 2017. Thanks, Michael.
Michael: My pleasure, Kevin.
Sharing a passion for property – Meighan Hetherington
Kevin: I’m going to feature an interview now with someone I haven’t spoken to for quite some time, Meighan Hetherington, who is a buyer’s agent from Property Pursuit – PropertyPursuit.com.au.
Meighan, happy New Year. Welcome to the show.
Meighan: Happy new year, Kevin. It’s so good to talk to you again.
Kevin: Yes, it’s been a while.
Meighan: It has been. It’s been busy.
Kevin: Well, that’s good. I want to talk to you about the market and about a number of things actually, but I’m really interested to hear from you about your own philosophy. I know you’re a believer in property. Why did you get involved in property investment? What started all that off?
Meighan: It was actually back when I was at uni, and my father had a really strong interest in it. He just was a little bit risk-averse and actually didn’t take any action, but it instilled in me that interest in how to make money from property and how to research property and how to make it work for me.
It was back when I’d just finished university, I’d got my first full-time job, and I said to my brother and my father, “Let’s do this. Let’s get a property going.” And we did our first one together.
Kevin: Those conversations around the kitchen table, did that frame that in your mind – hearing there about your dad talking but not necessarily taking any action?
Meighan: Yes, and I think it’s one of the reasons that I really like the work that we do. It helps people take what might be an idea or a research phase that they’re in and actually take it through to completion and build a portfolio or buy a new home.
So that actual next step of having the confidence to take the action, I think that was the thing that I really wanted to make sure that I got started on quite young. And I gave up a lot to do that. I didn’t do any overseas travel and I really cemented myself in Brisbane by making that first purchase, but something that was really important to me was to get that financial stability quite young.
Kevin: Tell me about that first deal with your dad and your brother. How did it come about? Where was it?
Meighan: It was in Gordon Park, about five and a half kilometers north of the CBD in Brisbane. At that time, really that was considered a bit of the outskirts of Brisbane. This was in 1998. I was renting a property across the road with a couple of housemates and I kept saying to my dad, “That’s the kind of property I want to buy.”
It was across the road. It was the high side of the street. It was an old workers’ cottage that clearly hadn’t had any work done to it for about 80 years. Eventually it actually came up for sale, so it was a deceased estate. The sign went up, and the next day, I put an offer in.
It moved quite quickly from then. There were a lot of things that we did wrong on that first purchase and a lot of things that I learned. I think that collection of experiences has been quite valuable to me.
Kevin: Did you get into that with a view to turning it over, or do you still own it?
Meighan: No, I actually turned it over. I was working in corporate at the time, and when I got transferred to Melbourne, I sold that in its entirety to my brother. We were at 50/50 ownership in it, and my dad had put his house up as the equity so that we could borrow all of the funds to purchase it. We released his equity quite quickly. We did some renovations and were able to release his portion of it.
I sold it to my brother, and my brother sold it on the open market actually when I was a real estate agent I think in 2002. The view was to hold it, but I just wasn’t financially in a position where I could do that and live in another state.
Kevin: Did he give you the listing?
Kevin: Well done. That’s good. He’d have to, wouldn’t he? He’d never be forgiven.
Meighan: He had no choice.
Kevin: Interesting to hear you say right at the start of our conversation there about the sacrifice you made. You didn’t travel overseas. What were some of the things that you did do then to get into the property market?
Meighan: I’ve never been a very good saver. I have always spent the money that comes into my account when I’ve made it. So I had to change my mindset a little bit to make sure that I had the funds to pay the mortgage and also the renovations that we wanted to do.
I did a lot of the work myself, a lot of the painting and scraping and sanding and all of that non-technical trade work. I did the physical nature of that myself, and we saved a lot of money that way. And I rented rooms to other people so that we could get the extra income to do the renovation.
There weren’t breakfasts on Saturday and Sunday mornings. I certainly had a good social life but it was important to me that I made the best out of this first opportunity that I possibly could.
Kevin: When you sold to your brother, what did you do after that? Did you go on to buy another property?
Meighan: Yes. The next property I bought was in Kedron. I still own that one. Then from there, we’ve gone on to do a variety of different things. Some were buy and hold; some were buy and renovate. Our strategy for our personal home has been to leapfrog ourselves. We would buy something, renovate it, and then use the equity or sell to move up to the next level of home. We did that until we got into our current home, which as my husband says, he’s going out of this one in a box.
Kevin: I’ve heard that before. You probably have, too.
Based on what your experience is now, if someone wanted to get started in property investing today and they were listening in to this, what advice would you give them? What’s the best advice you could give them?
Meighan: I think the thing to be really aware of is that owning property isn’t a right in Australia. Owning property is something that you have to work hard for, and you do have to sacrifice for it. You can’t have everything, and you can’t always have everything that you want in the first property that you purchase.
I think the people who are prepared to look at it as a journey rather than a destination are the people who I see actually taking action and building their wealth through property, and having those milestone moments where they are working towards whatever it is – whether it’s the dream home or an income-producing portfolio or something that they can leverage. It’s probably having the kindness to yourself to say, “I can’t do that and have the property that I want, so which way am I going to go?” and then getting the balance right.
We had a client once who saved $210,000 in cash to buy a property, and we bought for them down in Edens Landing about 10 years ago, but their sacrifice was enormous. They lived in a squalid one-bedroom unit in West End for four years I think it was, three of them, to save that money. That’s extreme sacrifice.
It’s finding the right balance that you still have a life but have the ability to build for your future.
Kevin: What’s the best property deal you’ve ever done either for yourself or for someone else?
Meighan: There are two actually. One of ours was opportunistic. I say to people, have a plan in mind but always be open to something that pops up that you could not possibly have expected. For us, that unexpected one came in the form of a splitter block in Wavell Heights.
We’d actually looked at it, researched it, and recommended it to a client. That client happened to be traveling overseas at the time and he said, “I just can’t commit to this right now. I’m probably a week away.” And I said, “They’re presenting offers tonight. It’s multiple offer. Do you mind if we buy it?” He said, “No. Go for it. Great. Good on you.”
Again, we stand behind our recommendations, and we purchased that one with a view to knocking down a post-war and putting two new builds on it to hold. And as things turned out, the neighbors wanted to buy it, so we were actually able to negotiate a sale for the neighbors that was in excess of the profit that we would have made from doing the job. It was one of those really unusual opportunistic type things, but change your plans to make it fit.
The other one would be that we purchased a property in Toowong for a client about six years ago. It was a big block of land – 809 square meters. The land value on that was only $10,000 less than what we paid and it had a four-bedroom Queenslander. It needed a bit of work but the land content was really high. That’s been, without doubt, the highest performing property that we’ve purchased for a client from a growth point of view.
Kevin: Was that on two lots?
Meighan: Yes. It is a character residential area, so they can’t knock the house down, but it is possible to put a couple of townhouses in the back yard. So there are various options there.
Kevin: Speaking of that, what do you believe is best – investment in apartments or houses?
Meighan: We’re very cautious about apartments in Brisbane, and I know certainly in some of the other states, as well. It’s supply and demand in equity. Apartments are often purchased by investors and/or first-home buyers as a lower entry point for getting into the market.
With the amount of supply that’s coming on the market, we are already starting to see that rents are being affected. There is a lot for tenants to choose from at the moment, and they are very strong in their position to negotiate. Rents are actually dropping quite quickly in the unit market, and because of supply, prices are not increasing.
We’re very cautious about units. I’m always a big believer in land content. It is the land that appreciates, and if you’re a capital growth investor, the most value in the land that you can get – not necessarily the biggest size land but the most value you can get – and the best position for a capital growth investor is where I would be focusing my energies.
Kevin: Well said. What’s the most common question you get asked about property, and how do you answer that?
Meighan: Actually, I get asked a lot for positively geared property. And unless you have quite a large deposit, it’s just not feasible in Brisbane and certainly not in the other states, either. The average yield in Brisbane at the moment is about 3.6% on a house. I think positively geared as a strategy is something that people get a little bit focused on without really understanding what it is that they’re trying to achieve.
Kevin: It’s more an outcome actually, not a strategy.
Meighan: It is, isn’t it? It happens over time. Once we actually bring that back and talk to them about “What it is that you’re trying to achieve? How long are you looking to hold this for? What’s your risk profile?” all of those factors, then we can help people to get a better understanding of how property might – or might not – help them achieve those goals.
Property isn’t necessarily going to achieve the goals that you think it’s going to achieve. It’s not a be all and end all.
Kevin: I just want to round out our chat to Meighan with some of your thoughts about advice. What advice are you going to give your children about property? What will you tell them?
Meighan: I’ll be talking to them about the fundamentals quite early. They know that Mommy goes to look at houses on Saturdays and bids at auctions and helps people buy property. So the fundamentals of what that means and that property is something to work towards and that you can make work for you will probably be the basis of the advice that I have for them.
I think with them, it’ll be that they’ll be along for the ride because we’re continuing to purchase both residential and commercial. For us personally, they see that in action, and I hope that that will help them to have a really good understanding of what might work for them.
Kevin: And the best and worst piece of advice you’ve ever been given about property?
Meighan: Back when I bought that first property, a boyfriend at the time said that his uncle had said to him, “Buy the cheapest car that you can and the most expensive property that you can afford, because the car depreciates and the property appreciates.” That has stuck with me for a long time. I think that that helped me to get the action going. It was just one of those things that clicked with me. It resonated quite strongly.
The worst advice? Certainly people who think that they’re going to buy a property and quickly flip it over and make a profit out of it where they’re paying someone else. I would say a bit of a scary piece of advice that I got early was to buy, renovate, and sell.
Kevin: Great talking to you. Meighan Hetherington has been my guest. Meighan is from Property Pursuit buyer’s agents in Brisbane. The website is PropertyPursuit.com.au.
Meighan, thank you so much for your time.
Meighan: I am looking forward to a wonderful 2017.
Kevin: I know what you mean. Thank you. Talk to you again soon.
Meighan: Thanks, Kevin. Bye.
Where is the smart money going in 2017? – Andrew Mirams
Kevin: Earlier in the show I was talking to Cate Bakos, and we asked her to reflect on the comments she made about this time last year about what it would be like at the end of 2016 / start of 2017, which is where we are right now. Well, here’s another one, because this time last year, I spoke to Andrew Mirams from Intuitive Finance, and Andrew joins us once again.
Andrew, Happy New Year. Good to have you on the show. Nice to talk to you, mate.
Andrew: Good day, Kevin. Happy New Year to you, too, and all the listeners.
Kevin: Okay. Let’s remind you what you said this time last year about the 2016 market.
Andrew: Melbourne and Sydney have enjoyed a couple of years of pretty good markets. Obviously, Sydney’s had a couple of great years. Melbourne still appears to be really strong, and that’s underpinned by our population growth and employment, which still seems to be quite strong in our state. It seems to be similar in Sydney, and the market seems to be still okay there.
And I think that probably Brisbane might be something where some money starts to go because people look at fundamentals and think, based on a yield, it appears to be undervalued, and there might be some opportunities in Brisbane in 2016.
Kevin: Gee, mate, I thought you were pretty spot on there. You highlighted Brisbane as the place for opportunity. Did it reach the sort of heights you thought it would, Andrew?
Andrew: It probably didn’t. But, again, if you compare that again across to Melbourne and Sydney, who have had two or three years of extraordinary growth, it probably did nothing in Melbourne and probably Sydney and Brisbane. The markets are going to start to disjoint themselves and there are going to be markets within markets with the development boom that’s happening across those three states.
Sydney is probably still a little under supplied, but I think Melbourne and Brisbane potentially in those development markets might have some grief coming into 2017 and 2018 even.
Kevin: What do you think that will do to some of the more established markets in, say, Melbourne and Brisbane? Will they continue to improve, do you think?
Andrew: I think there’s always a flight to quality. I think the apartment market has been quite strong over the last few years. Now, just the supply and demand issue, I think, is going to see that dampen quite a bit, and there’ll be a flight back to land and where people can actually develop or hold the land. As we know buildings, depreciate whereas land over the long term tends to appreciate as it becomes scarcer and harder to get ahold of.
Kevin: Yes. We mentioned earlier in the show, too, about the APRA restrictions during the year. You’re much closer to that than anyone, being in the finance world. What’s your impressions of that? What impact did it have on the market, and did you see it coming?
Andrew: Look, it’s been happening for 18 months or so now – probably two years behind the scenes – and there’s still some work to go. I don’t think we’re going to see it get any easier anytime soon.
Kevin, we’re at record low interest rates, and there has to be some caution that goes with that, I guess, because we don’t want people over-committing and things like that. So I think APRA’s still got a bit to play out. They’re now talking about commercial land and development finance and just making sure developers aren’t over-extended as well as our consumers and people not getting their fingers burnt.
I think we’ll continue to see the banks incrementally raising interest rates, even if we were to get maybe an RBA decrease. I’m not sure that we will, but there’s still some pundits saying we might get another one or two quarter-percent decreases through 2017. I’m not sure, I’m not convinced, but I think they’re at such a low rate now that we won’t see much change.
But I think you’ll see the banks, as they’ve done through 2016, continue to move and differentiate between owner-occupier lending, which started to wane at the end of 2016… It started to drop off and the investors really started to come back into the market. And I think that what that is is opportunity: those who have money and opportunity to buy are still interested in buying into the markets and taking advantage of good opportunities.
Kevin: Andrew, are you seeing any defaults, particularly in that off-the-plan marketplace? Anyone can’t settle?
Andrew: Yes, it is happening. I think 2017 and 2018 is really when a lot of these developments in the larger scale, a lot of them are going to come to market, as well.
There are a couple of things though, Kevin. Your Australian investors are still going to be able to get money subject to the APRA restrictions, but through 2016, we also saw the banks withdraw pretty much finance to non-residents, and they’ve even restricted quite significantly finance availability to our Australian ex-pats overseas, depending on where they’re earning their income and how they’re assessed.
A lot of those people are the ones who have bought these off-the-plans. Non-residents get their Foreign Investment Review Board approval, they have to buy new properties. And I suspect now with the issue of getting money into the country, particularly out of China, and then also being able to access finance over here, we might see more and more defaults happen through the course of this year and next. It’s just going to put a damper on everyone in that market because if there are fire sales of apartments in blocks, then that’s actually what the value becomes.
Kevin: You’re helping investors all around Australia. Where’s the smart money going? What are they talking to you about? Which markets?
Andrew: I still think in Melbourne and Brisbane, it’s certainly now wanting to get hold of land, so it’s getting the opportunity for that inner ring, good opportunities to develop in the future or put a second property on or not that high-density living, but now that medium-density living. Houses will be always be popular with land.
Sydney is still attractive for the apartment market because they’re still not building enough to meet the market. There’s that inner ring and then the outer west and places like that that have a real over-supply of the units out there.
Where people want to live in Sydney, Melbourne, and Brisbane is still what’s going to be popular, where possible, I think through 2017, wherever you can, if you can buy something on a tiny bit of land – whether it be a house, a townhouse, a unit, or something like that – I think is going to be the most popular selection.
Kevin: Okay. Sum it up for me, mate. What do you think you’re going to be saying this time next year about 2017?
Andrew: I think we still will have had a pretty reasonable market, while we still have people in employment and low interest rates and there’s a supply and demand. There are probably less properties for sale that are highly desirable, which is creating that supply and demand issue.
So I still think our markets will be in a pretty good state by the end of 2017. Let’s hope so, anyway.
Kevin: Good on you, mate. Nice talking to you. Andrew Mirams from Intuitive Finance. We’ll talk again soon, mate.
Andrew: Thanks, Kevin. All the best.