27 Oct Triggers that will cause the market to crash + There is a time hold and a time to fold
What needs to happen in the economy to cause dwelling prices to fall significantly? According to Michael Yardney there are 8 things that would need to happen and you will hear us talk about all 8 today.
Ed Chan returns to answer a question from Carol about what entity she should use to buy a property.
I can tell you about an innovative new financial product that provides renters with an option to pay rental bonds off in instalments. It is called Bondsure. This is a win-win-win for landlords, property managers and tenants.
There is a time to buy and hold property for long-term results and there’s a time when it’s smart to fast track your investment plans. Knowing what to do at the right time is well covered in a book by Peter Mastroianni called “The Property Investor’s Buyers Guide”. We talk to Peter and focus on the accumulation phase of an investment strategy.
Our feature guest this week is successful investor and talented property industry entrepreneur Shannon Davis. Shannon tells us about his philosophy, how he started, why he wasn’t content to be an outsider but wanted to actively influence the industry. He has done that and a lot more as you will hear.
Bondsure – a win-win-win – Michael Wood
Kevin: Paying a bond can be an untimely nuisance for tenants, tying up money at the start of a rental period when many people would prefer to spend money on other things. Recouping bonds can also be a real nightmare for some tenants, when accidents or disputes over cleaning put bond in jeopardy. Well, today I can tell you about a new product called BondSure, which is the brainchild of Australian lawyer and insurance entrepreneur Michael Wood, who we tracked down. He’s currently in London.
Michael: Hi, Kevin.
Kevin: Thank you for joining us. Michael, tell me about BondSure, and how does it work?
Michael: Well, we’ve only just launched, so it’s new and certainly it’s novel. What we’ve done is we’ve linked the option of funding a rental bond – rather than paying it upfront – with the option of insuring that bond while that bond is sitting with the Residential Tenancy Authority. That insurance cover is for accidental property damage and increased cost of cleaning, two of the things that often arise during or at the end of a tenancy that can erode that bond. The third component of the product is tenant’s contents insurance.
Kevin: We’ll talk about that separately in a moment, but I believe there are about 31% of renters Australia-wide, so this is obviously going to help a lot of them out – as I said in the intro there – particularly with coming up with some fairly hefty bonds. Is there a limit on the amount of the bond that is going to be offered?
Michael: Yes, we offer it up to $5000. We do that because we’re wanting to cater for the areas like Sidney and Melbourne where the rent is slightly higher but also understanding that the average bond around Australia – the average rental because the bond is normally four weeks – is around $1500 to $1600.
Kevin: Yes, average rent about $400 a week. Is this going to apply to all tenants? Will there be some form of credits they’ll need go through, Michael?
Michael: Oh gosh, yes, most importantly. We thought about this because it’s important for the landlord to know that his position is much as it was, if not – we hope – somewhat better, because his concern is to ensure that that bond is lodged with the RTA so as to protect him with respect of any breach of the lease or any property damage to his fixtures and fittings. So it’s vital that the right tenants are taking out the BondSure product, and also it has to be emphasized that it is a fully ASIC-regulated product, and in that regard, there are responsible lending obligations.
There’s probably three key credit checks. The first one is an identity check – this is all quite simple – and then also a Veda Tenancy Blacklist check. Veda is one of the main Australian credit agencies. Then, thirdly we have some financial questions about income and expense. Then the real challenge was incorporating in our online system a bank account verification check that is required to verify the information we’re given.
One of the positives that we had from the estate agents is “It’s great Michael that you’ve thought of the credit checks, because we do a certain amount of credit checking ourselves but we can only go so far. It’s great that you’re able to do these checks and also do it online so that it’s quite simple for the tenant.” Also, it doesn’t require much input from the estate agent at all.
Kevin: It seems to me there are great benefits here obviously for the tenants, also benefits for the owners and for real estate agents. Let’s talk a little bit about the periods to pay off because obviously you’re effectively offering them finance, helping them finance their bond amounts. Are those payoff periods then geared to the lease term? Is that how that works?
Michael: They are to an extent. What we’ve done is we understand that the most common lease term is 12 months but there are also shorter lease periods of six months. In our discussions with the estate agents, we thought it best not to just offer a 12-month period but also a 6-month period.
The idea being that it almost is akin to a savings plan, which is one of the rationalizations for it, which is that what we’re wanting to promote is repayment of principal and interest over a 12-month period and with hopefully the benefit of the insurance maximizing the likelihood of the tenant then getting that full sum back at the end of that 12-month period rather than having to use that bond from the RTA to, say, pay off the principal on the credit card. In a way we’d like to think that we’re promoting savings by having the tenant pay principal and interest over the period.
Kevin: What are the fees? What fees are applicable? Because it is like a loan.
Michael: The interest on the loan is at an annual percentage rate of 16%. Again, we’ve tried to provide a product at a cost that is well below what we consider to be the rather exorbitant costs of payday lenders.
Now, the way it works is that fees are paid upfront, so if we were looking, for example, at a $1500 bond, then what happens is… Let’s say Joe and Jane are out looking for a unit. All they do is go onto the website, they put in their details, go through the chase, get preapproval, and then once they’ve identified their property, all that’s required is that they go along to the estate agent.
Now the cost, if they take the bond loan and the property insurance, works out to be the total cost is the equivalent cost of $40 a week and then if the bond is returned by the RTA at the end of the period, that amounts to $29, meaning that the net cost of the product is $11 a week. That’s with the bond loan and the property insurance.
Kevin: Very affordable. We’ve got a minute or so left, but I did want to particularly ask you about the optional content insurance because I believe a lot of tenants around Australia don’t actually think about insuring their contents, Michael?
Michael: No, it’s very strange. We’ve have about two million tenants with private landlords as opposed to government tenancies, and it is extraordinary to think that in this day and age where we’re always insuring cars and houses structurally that renters, in particular, aren’t insuring their own contents.
What our policy does is that it has a standard, sort of market-common sum insured of $25,000 as a standard. It can be increased up to $50,000. It has a minimal excess of $200. And it responds when there is loss or damage to content during the 12-month period – up to $25,000, as I said – through fire, storm, theft, malicious act, flood. We cover flood as a standard up to the 25th parallel, which is to about Rockhampton in Queensland.
It’s a standard product, but yes, we’re wanting to promote that because it is odd that renters aren’t insuring their own content. I think $25,000 is generous – not all renters will have $25,000 of contents – but we were trying to offer a product in line with the other tenant’s policies offered by the bigger insurers.
Kevin: Michael, we’re out of time, but thank you very much for joining us. Congratulations on the product.
If you want to get a bit more information about it, if you’re a tenant, property owner, and you’d like to find a little bit more about it, the website is BondSure.com.au.
My guest has been Michael Wood. Michael, thank you for your time.
Michael: You’re most welcome. Thanks, Kevin.
When to hold and when to fold – Peter Mastroianni
Kevin: I want to tell you about a book that I picked up the other day called The Property Investor’s Buyer’s Guide written by my next guest, Peter Mastroianni.
Good day, Peter. Thank you very much for your time.
Peter: Thank you very much. Thanks for having me on the show, Kevin.
Kevin: Great book, too, and I know that you’re a fellow podcaster, as well. You do podcasts, too. Just skimming through your book, Peter, it’s well put together, but why did you do it? What was the reason behind writing the book?
Peter: This is my second book. The first book that I actually wrote was The First-Home Buyer’s Guide. I guess it’s a bit of a play on a bit of a series.
I was fortunate enough to purchase property at a fairly young age. I guess that youthful inexperience at the time required me to become a lot smarter in my actual approach to take advantage of, perhaps, some hard lessons that were learnt at that point in time.
I guess through my own business and meeting with a number of clients who come through the door, I do see a number of common problems or obstacles that people face through their property journey and trying to accumulate wealth, as well.
Kevin: Do you think we look at property investing as the be all and end all – in other words, if I’m going to be an investor, I have to invest in property? There are other forms of investment, aren’t there?
Peter: Absolutely. I’m a strong believer that you actually should be a balanced investor. I think that you do need to have property as an asset class, but depending on your risk profile, you should certainly also incorporate other investment streams or multiple investment income streams into your portfolio, as well.
Kevin: What type of investor do you have to be to be a property investor?
Peter: I don’t know if it’s the type of property investor; I think everyone has the capacity to invest in property. I think it probably more so relates to their mindset and what they’re hoping to actually achieve in terms of the end result of the outcome that they’re actually looking for.
I couldn’t say hand on heart that that property is going to be the right strategy for everyone, depending on your risk appetite and depending on your actual capacity and willingness to leverage into higher debt positions.
Kevin: Thinking of young people for a start, looking at property, I guess the typical first property purchaser is going to be someone who needs to fulfill their own need. In other words, there are not a lot of young people who say, “I am going to build myself a property portfolio.” Their first purchase is likely to be one that they want to live in themselves. Would that be correct?
Peter: I don’t necessarily agree with that, purely on the basis that new social tribes are emerging within the marketplace. I personally believe that property needs a re-think or the traditional home ownership model needs to, perhaps, be redefined in order to allow a younger generation to actually get a foothold on the property ladder, which is seeing the rise of rentvesting, for example. It’s been around for a number of years, but now it has a bit of a buzzword attached to it.
But I think that the traditional form of, perhaps, getting married, having kids, and settling into a home behind a white picket fence is probably behind us now. People want more flexibility in their living arrangements. The way in which property is designed by how it’s bought and sold and actually built is changing quite significantly, as well. I think those new forms are steering a new direction for a rising generation into the property market.
Kevin: Interesting to hear you use that term “rentvesting” there. I know that that’s something that you’ve written about, you’ve spoken a lot about it. It’s portraying the fact that young people nowadays are becoming a lot more astute about their investments. You alluded to that when you said that our reasons for buying property are probably changing. Is that what’s behind that, Peter?
Peter: Yes, I think so. There’s a lot more information around than what there was 10 or 15 years ago on how to approach getting into the property industry or getting a foothold onto the ladder. People are becoming more educated and more wise about what that process could look like, and I think people want more flexibility in their living arrangements.
Having a big debt at an early age could be devastating or it could be very motivational, as well, in order to get out there, do some more, and continue to build upon an asset base. I think it’s a combination of, perhaps, our culture being very lifestyle-driven and us wanting to have our cake and, perhaps, eat it, too.
Kevin: Peter, great talking to you. There’s great insight in Peter’s book, The Property Investor’s Buyer’s Guide. It is out. Where can we get the book? Is it available at most bookshops?
Peter: It’s available at all good bookstores, Kevin.
Kevin: Well said.
Peter: If they don’t have a copy, be sure to ask for one. It should be released at the end of this month or early November.
Kevin: Do you have a website available, as well?
Peter: I certainly do. It’s www.TheBuyersGuide.com.au.
Kevin: You’ll find all of the information there.
Kevin: My guest has been Peter Mastroianni. Peter, thank you so much for your time. Congratulations on a great read, too, and I look forward to talking to you. There are so many other things I want to talk to you about, but we’ll get you back on a later show. Thank you, Peter.
Peter: Thanks, Kevin.
Triggers to a crash – Michael Yardney
Kevin: Well, there is so much uncertainty in the market right now, isn’t there? People are concerned about a crash, and we’re hearing it about it. I have to say all the talk about a crash is always coming from people overseas who don’t really fully understand the Australian market. Also, what’s happening with Asians and they’re being discouraged from buying property here and how difficult it is for first-home buyers.
Let’s get a bit of a handle on what really is happening. Let’s get our feet on the ground here. What could possibly cause the market to crash? I’ve asked Michael Yardney from Metropole Property Strategists to address this for us.
Hi, Michael. Welcome to the show.
Michael: Hi, Kevin. Thank you for having me.
Kevin: Michael, what are the things that could cause the market to crash?
Michael: Well, Kevin, it’s not as simple as some of the pessimists are thinking because for house prices to collapse… Now I’m not talking about the cyclical correction where things slow down, as they always will and they are to an extent now, but for property markets to crash, to collapse, people are going to have to be forced to sell their homes and there is going to be no one willing to buy them so that property values will drop substantially.
Now, there’s no doubt that some segments where property markets are losing ground – in particular, the new and the off-the-plan markets where you are right; as you said a moment again, foreign investors are having difficulty getting financed but so are local investors.
But in the general world, where most people who own properties are owner-occupiers, homeowners, many without a mortgage or with a little mortgage, they don’t just sell; they simply remain in their home waiting for things to pan out, Kevin.
So I don’t think people are going to outright sell their home and take a loss – unless you have some major shocks. Can we go through what those shocks could be?
Kevin: Please, let’s do that.
Michael: What could cause people to be so desperate that they’re forced to sell their home? Firstly, high unemployment. That could trigger a wave of forced sales. We know have our economy is doing reasonably well. Unemployment hasn’t gone up. In fact, there’s been considerable jobs growth.
A lot of the jobs being created currently are part-time jobs, but there are still significant jobs growth in Sidney and Melbourne, in particular – and in fact, in all our capital cities – and employment data is coming out positive, so I don’t think that’s going to happen.
Kevin, another thing that could force people to significantly get into mortgage stress and have to desperately sell their homes to cause property values to crash would be high interest rates where a raft of homeowners default. Kevin, it’s not on the radar of any of the economists or any of the banks.
Interest rates interestingly probably wouldn’t have to rise a lot, not to the 7% or 8% – or the 16% we had years ago. Just a 0.5% or 1% interest rate rise will stop this market dead, but it won’t cause people to sell out.
Kevin, a credit squeeze. In the old days we used to have that where people just couldn’t get financed but our banking system is underpinned by residential property lending – and the banks, the system, the government has a vested interest in keeping dwelling prices at least stable. The government, Kevin, doesn’t want the constituents to lose value.
The only people who want to seem to want it, Kevin, are the overseas people – or have you noticed a lot of those who have missed out on the market; they’re hoping that values will fall so that they can buy in cheaper.
Kevin: Absolutely. Definitely.
Michael: The next thing is a severe recession. That could cripple our economy. It could create unemployment. It could mean that people lose confidence, they default on their mortgages. But while we may well have a little recession one day – because we haven’t had one for years – it’s really, really unlikely in the foreseeable future. It’s not on the radar of the Reserve Bank or any economists of us having a severe recession that would cripple our economy.
Of course, an oversupply of property could create a fall in property values, and that could occur in a few isolated markets – the Melbourne high-rise market, particularly in the CBD; the Brisbane inner-city high-rise apartment market also is suffering from an oversupply – and suddenly a lack of purchasers being able to settle. But that’s a sub-segment of the market, Kevin; it’s not the whole market.
Our rising population has been one of the things that has driven our property markets, and population growth is slowing, but it’s not slowing so much that it’s going to cause a crash in the market. So I can’t see that being an issue.
Of course, the slowdown in foreign investment could well significantly affect certain sub-segments of the market, as we’ve already said. I guess another one could be changes in government legislation. It came up earlier this year with the concept that maybe negative gearing wouldn’t be allowed or superannuation funds couldn’t invest in property.
I don’t think that any of these things are on the medium-term radar. I can’t see a crash in the property markets in the foreseeable future.
Kevin: Okay, Michael, what are the positives?
Michael: Kevin, I see quite a few of them. Our population growth is robust, and that’s bringing new people in, plus we’re making more babies, so that combination of more people and basically a wealthy nation – our economy is healthy – is going to mean that these people are going to be able to, and want to, afford to buy properties.
We have a sound banking system, so it’s unlikely we’re going to have the problems of a lot of overseas countries had.
We have rising business confidence and rising consumer confidence. When businesses feel confident, they employ people, they buy inventory, and the economy moves on. When consumers feel confident, they make decisions like buying houses, buying cars, buying investments.
While we’re taking on more debt, we’ve actually got a healthy comfortable level of household debt because interest rates are low, so in general, we’re managing those well.
I guess the last thing is just our culture of homeownership. Kevin, 70% of us own or are paying off our home.
I see a lot of positives for the property market in general in the future, but of course, I can see a few little issues ahead that will give us some speedbumps to stop this strong rise we’ve been having.
Kevin: So the bottom line, Michael?
Michael: Well, for a number of years, property bubblers, doomsayers, property pessimists have been predicting that our housing market is going to crash. They have told us, “We’re denying the impending gloom, blinded by the consistent performance of our property markets.”
I think what I’ve just explained is that it’s unlikely for our property markets to collapse, but I do agree that in certain segments, they are going to correct. So it’s important to be vigilant, be aware what’s happening in the world economies that are affecting Australia, and take a strategic approach to investment and get good advice along the way.
Michael: My pleasure, Kevin.
“Why I didn’t want to be an outsider” – Shannon Davis
Kevin: Our featured guest this week is a man who we’ve spoken to on a number of occasions, but we’re going to take a little bit of a different tack with him today in trying to find out a little bit more about what makes Shannon Davis tick.
Shannon Davis is, of course, from Metropole Property Strategists and also the genius behind Image Property Management, one of the most successful management companies in Queensland for property.
Shannon, welcome to the show and thanks for your time.
Shannon: Thanks for having me, Kevin.
Kevin: What got you involved in property investment to start with? Tell me about where it all started, Shannon.
Shannon: I think I was a frustrated property investor. I had the profession of a schoolteacher – and enjoyed that in my 10- or 11-year career – but I was just wanting to be more hands-on with property and found my way in the real estate industry and, specifically, the property management side of things.
Kevin: Looking at it from the outside, you said you were a bit disenchanted as a property investor or property owner from the management of your property. How different was it when you actually got into the industry? Was it different from what you thought it would be?
Shannon: Yes, it was. There is a lot to it, to be honest. A property manager has to be a lot of different things as far as collecting rent and looking after the financial interests of an owner, but there’s a human side of things, as well. It’s not just bricks and mortar.
There are people who fall on tough times. There are tenants and owners who do that. It’s the environment. There can be extreme weather scenarios that cause a lot of displacement of people, such as the 2011 floods.
There’s always that working with people in their homes and their privacy being respected and communicating to both parties in a fair and equal measure between the both.
Kevin: You’re a very successful buyer’s agent as well as running a very successful property management company. Obviously, there are some things that you’ve done differently from others, because we’ve seen a number of companies start up that appear to be very successful but then they just don’t have that continual growth that you’ve been able to have in your company.
What is it that you do differently, do you think, that the others don’t do? I’m talking about property management now.
Shannon: I think we really have a service culture. I think we part ourselves last. When we give our owners and tenants and everyone what they want, we get what we want. It’s a bit counterintuitive. I think if you don’t operate on service, you’re going to be prone to digital disruption, the way taxi drivers were prone to something like Uber. But in real estate, again, it’s people, not bricks and mortar. If we compete on service and the culture of adding value, then no website will ever be able to replace us.
Kevin: Tell me about your own property investment journey. What was your first property deal?
Shannon: With my parents, I bought a quarter of a house in Red Hill, which we proceeded to do up.
Kevin: Red Hill in Brisbane?
Shannon: Brisbane, yes. We did up to sell like a lot of people who want to flip, but we were disappointed on auction day and ended up keeping the property. That ended up being the best thing that ever happened to me because there was the boom of 2003 where properties nearly tripled in value in a short time. What was bought for $165,000 was eventually sold for $865,000.
Kevin: I was going to ask you whether you still owned it. Are you a flipper, or are you a property investor and holder?
Shannon: I am a buy-and-hold person, but that doesn’t mean you never sell. I had to sell in order to secure a business opportunity and have no regrets on that.
Kevin: What was your second property? Did you do that on your own or, once again, with your family?
Shannon: Again, with the help of mom and dad, we bought a block of flats near Enoggera, and again, that appreciated really well within a short time – about nine years. We sold that one, too, but I would have preferred to have kept that property, but when you invest with people at different life stages, they have different goals and priorities. My parents were looking to withdraw, being close to retirement, and I was looking to still accumulate. I think that was a lesson I learned on that one.
Kevin: A great lesson to learn, too – isn’t it? – that when you go in with other people, you have to understand they have their own agenda.
Do you invest with other people now, or is it very much building your own portfolio?
Shannon: It’s just my own portfolio now. I have made one strategic relationship with a builder that I can add things that he can’t and vice versa. But we’re at similar life stages. I think if you can have that scenario where you both bring something different to the table and you have your exit strategy clear, it makes sense.
Kevin: That’s the point, isn’t it? You have to have your exit strategy there. I guess you have learned a lot from being in partnership with other people, albeit family or friends, to make sure that you have a clear exit strategy.
Shannon: Yes, definitely. It can definitely work better to your advantage working with people rather than on your own, but it can be a hindrance, too, if for some reason, there’s life dramas – death or divorce or unemployment – as well.
Kevin: Apart from the buy-and-hold or flipping strategy, what other strategies do you use to build your portfolio?
Shannon: I think adding value. That’s the biggest thing with property. You can’t go down to Woolworth’s, paint the walls, and hope your shares go up, but with property, you can add value.
I know a lot of people are attracted to new property for depreciation reasons and things like that, but I would always prefer to buy existing and add value – be it through renovations, development, subdivisions, or strata titling. That would be a better way to go, because you can actually manufacture the equity and be in control of your own path rather than just waiting on the economics of the day for appreciating prices.
Kevin: My guest is Shannon Davis from Metropole Property Strategists – a buyer’s agent – and also Image Property Management in Brisbane, one of the most successful property management companies in Brisbane.
Shannon, what was the best property deal you’ve ever done?
Shannon: The best one is probably when I was at an auction and I saw that there was a block of flats. It wasn’t an on-site auction; it was actually in a pub. There were about five or six flats being marketed that day.
For some strange reason, I was there for market research but there was a real immediate sale and it was way under in my opinion. I had it priced at early $2 million and I managed to buy that for $1.475 million, so a good immediate equity and there’s value-add that could be done there as well. It was in an excellent position such as New Farm, which is one of Brisbane’s premier suburbs.
Kevin: You have to be pretty sure of yourself to be going along to an auction like that – or any auction at all, I guess – and be able to seize on that opportunity. Did you have yourself set up for that in terms of your finances?
Shannon: I knew there was capacity, but I wasn’t there to buy that day. Sometimes you just have to take the opportunity when it comes. I wrote a 5% check and spoke to the bank on Monday, but again, I was in pretty good knowledge that it would all go through.
Kevin: And went home and said to your wife, “I know I went out to buy a loaf of bread, but I just bought an apartment block.”
Shannon: Yes, that’s right.
Kevin: How do you pick the suburbs that you’re going to invest in? What’s the strategy you use?
Shannon: I look for a high owner-occupier percentage because these people love their houses more. They’re emotionally attached, and they’re always improving them because that’s just what us humans do.
If you buy in the so-called investor hot spots, you tend to get less renovation, extensions, and improvements – hardly even maintenance kept up. The tenants don’t treat the properties as well, and you’re more prone to a correction in prices.
It all sounds well and good to get ahead financially and buy properties for investments, but when there’s a downturn in the economy – thankfully, Australia hasn’t had too many downturns in 25 years – even when there is just a bit of a hiccup or a GFC, you see a run on prices. That’s when your values collapse, especially in those investor-prone suburbs.
Kevin: In the early days, Shannon, when you first started out, new to the industry, who did you network with? How did you get going in those early days?
Shannon: I think having to find truthful people… People who walk their walk and are good to their word are hard to find, but when you do find them, it’s great. A mentor is probably the biggest shortcut to wealth, I think.
I’ve been fortunate to have mentors such as yourself, Kevin, and Michael Yardney, and Andrew Reece as far as a business mentor, as well. That really does help you. If you learn from your own mistakes, you’re on a good path, but when you learn from someone as being ahead of you in the game, you’re standing on the shoulders of giants, really.
Kevin: Thank you for that.
You spoke there about your investment properties. The ones you’ve mentioned are around the Brisbane area. Would you invest outside of Brisbane? Would you also then invest outside of Australia?
Shannon: Yes, I have invested into London. I love London as a real estate place that draws a lot of people in from other countries – pre-Brexit. But there’s an M25 that hems in the development and they don’t deal to me skyscrapers, so you always have that scarcity. You have that pent-up demand, which is good for capital growth.
I am interested in investing into Sydney and Melbourne capital cities, as well. They’re true international destinations. That adds a little bit more market depth. I haven’t done it yet just because I’ve seen better value closer to home and those markets have been really hot in the last three years. For me, when I’m buying, I prefer to buy when there’s more value and not when everyone is cramped in making it a hot market.
Kevin: You’re at the front line. You’re talking to investors all of the time. You’re a successful investor yourself. What is the most common question you’re asked by investors, and what is your answer?
Shannon: I think a lot of people are in a rush. They’re in a rush to leave their day job, buy properties that are in the short-term going to add to their lives – be it positive cash flow, or be it that it’s off the plan and heaps of tax benefits, or they enjoyed a really good holiday and they think that’s a great place to buy some property.
I would just caution against those things and not be in a rush. I think the best way to get rich is to not get rich quick. You have to be there for the long term, and there have to be lots of reasons for people to live there and market depth.
If you pick that long term and you have those reasons underpinning your property, you can’t get burned like the people did with the mining boom in the past where it was a fickle crowd, and now they’re looking at 60% off their property prices.
Kevin: Are there any books that you would recommend people should look at or read if they want to learn?
Shannon: The bloke with the beard, Michael Yardney, first bought out How to Grow a Multi-Dollar Property Portfolio in Your Spare Time, and that was one of the ones that really shaped my property investing philosophy.
Kevin: That was even before you knew him, I guess.
Shannon: Yes, definitely. Back in the late 1990s or early 2000s, I attended a seminar. I’m fortunate enough to work with Michael now in that company, but it’s funny how things happen.
I think there are a lot of people in that wealth-generation business who are trying to sell you vehicles that are bound to be around that wealth generation but in reality, they don’t actually get you there and could be taking you further away from your dreams and goals.
I think always see where the benefits lay, and I think fee for service is more ethical and genuine than someone who is getting undisclosed commissions from a builder or a developer.
Kevin: Yes. Tell me about personal development. What do you do to develop yourself and keep your knowledge space growing?
Shannon: I’m always interested in leadership and business and entrepreneurship, so I’m always listening to audio books, Facebook feeds, and things like that or people who inspire me and have walked a different direction. You find that they’re mostly generous risk takers looking to add value to the world and solve the world’s problems.
I think trying to keep your head positive, motivated, and inspired is half of the battle. It’s all between your ears. If you think negative thoughts and negative outcomes, that’s probably what you’ll attract into your life. But conversely, if you think the other way, you’ll probably get some good benefits and opportunities coming into your life.
Kevin: You mentioned earlier in our chat that you have a very supportive family and you’ve invested with them. Obviously, the conversations you had with your folks were very supportive. I know you have a young family. What is the kind of language or education you’ll be taking them through to instill in them this mindset of investing?
Shannon: I think the concept of making money work for you. I think that time is more important than money. Every currency known to man at one time has been worth practically nothing. I think time is really more important than money and how you leverage that time is really important. You do that through investing, making money work for you, and delayed gratification.
I suppose schooling institutions don’t really make our children financially literate; it’s up to us, as parents and primary educators, to take that role.
Kevin: What’s the most important piece of property investment advice anyone has ever given you, and who was it? Who gave you that advice?
Shannon: I think when I learned that the money is in the dirt and they’re not making any more land. I can’t really remember where I first read that, but it made me think much differently about property.
I think people can get carried up with the shininess of property and things like that, but it’s really about dirt – and not all dirt is equal. There are some properties that even though it’s a much smaller patch, it’s worth a lot more than, say, an Anchorage farm or something if it’s far enough away.
When you learn it’s about dirt and demographics, it’s a bit of an eye opener for you.
Kevin: Finally, the worst piece of property advice you’ve ever been given?
Shannon: Probably when I was a bit of a novice investor, taking advice from a sales agent. I think that’s probably the exact worse person to take advice from because they’re not working for you; they have a vested interest.
I remember this particularly ugly two-bedroom apartment with a triangular bedroom. Triangular bedrooms just don’t make sense when you have a rectangular bed. But how this would be a great investment and I should take it on and allow the tenants to live there in very much under-market rent. That’s all the wrong type of advice to be taking. It should be just glanced over really.
Kevin: Shannon, thank you for sharing your thoughts with us today. It’s been great talking to you, mate, and I always enjoy our time together. Shannon Davis, from Metropole Property Strategists and also Image Property Management.
Thank you for your time, Shannon.
Shannon: No worries, Kevin. Thanks again.
Buying in the correct entity – Listener question – Ed Chan
Kevin: Joining us, once again, to answer another one of your questions, Ed Chan from Chan & Naylor.
Hi, Ed. Nice to have you on the show again.
Ed: Good day, Kevin. It’s nice to be here.
Kevin: We have to answer a question this time from Victoria, from Carol. I’ll read it in just a moment, but just a reminder: we love to get your questions. Any questions about anything – whether it’s tax, finance, buying a property, what you should be buying, what you should be considering – our experts are always ready to answer your calls.
I want to mention, too, that we can’t always answer every question in our shows, so if we can’t answer it in a show, we’ll certainly get your question directly anyway. Quite often, if one person has a question in, I find many other people have similar questions, so we try and cover as much territory as we can.
Okay, let’s get to Carol’s question. What things should I consider when I decide which entity to use to buy my next investment property? That’s a great question, Carol, and Ed, I’m sure you’d agree.
Ed: Yes. Where do I start?
Ed: Carol, the biggest challenge for an accountant, I guess, is that one of your clients comes to see you on a Monday and says, “Guess what, Ed? I bought a property on the weekend.” My initial response, after the shock is “Whose name did you buy it in?” Then, of course, there’s a whole lot of things that happen after that, whether it’s trying to fix things.
But the biggest problem is that once you’ve put your name or a name on the contract, it’s very difficult to change. The vendor may not agree to change it, and it creates a whole lot of problems.
The best thing for anyone when they’re considering buying a property is to see your advisor, your accountant, before you buy the property not after you’ve bought it. I was just going to make that fact up front.
Then there are so many things to consider. The first thing is do you have an asset protection problem? If you’re a person in a high-risk occupation, like a doctor, you generally shouldn’t have any assets in your name. Or if you run a business and you’re a director in that company, then directors generally get sued, so you shouldn’t have the property in your name. And other situations when it’s held in your name could open you up to some sort of litigation. If you had four or five properties in your name, then if a tenant sued you, then they have exposure to all of your other properties, as well.
That’s the first consideration – asset protection – and you really need to sit down with someone to consider that. The second big item is tax. When you buy a property, there are all sorts of different taxes involved. I’ll just quickly go through some of them.
There’s income tax. There’s capital gains tax. There’s land tax. There’s stamp duty on purchasing a property or transferring a property. And, of course, if you’re buying a new property, there’s GST to consider, as well.
Let’s just start off at the top, and I’ll go through each of them very quickly so that you can see how complicated it is. It’s not simply just buying a property. If you’re buying a home, you can just buy the home in your name, but when it’s an investment property, you have to consider these things.
Let’s take income tax right at the top. If you go down to your local accountant, he’d look at your income and your income tax, and if it’s a husband and wife, if one person is earning more income than the other, then generally, if the property is negatively geared, your accountant would advise you to buy in the name of the person who is paying the highest tax.
The reason for that is that you’ll get a larger refund when you do your tax return than if you put it in the person’s name who is on the lower tax, because you only get back the tax that you pay. That makes sense.
The problem with that strategy is that a lot of properties start off as being negatively geared. Negative gearing is when your outgoings are more than our income, and you can then claim the shortfall as a tax deduction against your income and it get you a refund. But a lot of the properties after about seven or eight years become positively geared.
When it becomes positively geared, the net rental is then taxed in the person’s name who is paying the highest tax. Of course, then that becomes a problem, because you have a spouse who is paying a lot less tax and you have this property in your name that you end up paying a lot of tax on.
You might say, “Okay, I’ll move it to my spouse who is on the lower tax bracket,” but then when you do that, you incur capital gains tax and a stamp duty to move it across. It’s very important that we structure it correctly upfront so that you don’t fall into these particular problems.
If you then went back to the accountant and he said, “Just buy another property,” you might have several your name and then you end up with a land tax problem, because land tax is calculated based on the aggregation of all of your land together. It’s not property by property, but they pool the whole lot together, so then you end up with a land tax problem.
You can see that you really need to structure it correctly for your particular circumstances, and unless someone sits down who is experienced in this space and looks through your circumstances to best determine how you should structure it, then it’s best not to just put your name on the contract because that’s the first thing that came up in your mind.
Kevin: That’s right, because right at the start, too, you said how difficult it is to change after the event. Another cautionary note is that quite often, it can be deemed as a double transaction if you do try to change the name of the purchaser after the contract has been done.
Lots of reasons why you’d want to consult an expert. Our advice is that you should consult Chan & Naylor. They’re our supporters. We have a featured channel on our website, a lot more information about them under the direct link there to get you through to Ed and the team.
Ed Chan is my guest from Chan & Naylor. Ed, thanks again for your time and your very valuable insight. Thank you, mate.
Ed: Thanks for having me, Kevin, and thanks, Carol, for your great question.