• Buying A House vs. Apartment: The Battle Continues!

    · 00:14:38 · The Rentvesting Podcast | Smart Investor | Real Estate Investing Couch | Australian Property Talk

    This week we're talking about buying a house verse an apartment.   In this episode we cover: What to buy How to avoid capital losses. Some of the fundamentals that you need to look out for both internal and external Your personal circumstances and your personal cash flow Looking at the product that you're buying   Let's do this.    Say there's been a lot of news that's come out recently just about a buying, which is often fake news. Anyway as news around buying apartments at the moment where a lot of apartments especially around Darwin, Perth and Brisbane have been selling for losses at the moment. So there's been a few stories about people who bought apartments. One in Canberra in 2010 they've just recently sold at a loss. If you think about how much you put in there a huge loss is about $30,000 but then yeah if you look at stamp you and everything, the net loss and how much you put in as a deposit. If you put $50-60k as a deposit and walk away with a $30k loss on your original capital you’ve lost 50%.   Sometimes stories that aren’t shared are the types of properties they're buying and the types of things they're losing money on because then equally in that time there haves been people that have double triple their money. Think about who you are selling to next.   RP data has found in Sydney on 1.8% units are selling at a loss Melbourne is 11% Canberra is 22% Perth is 36% Brisbane is 25% Darwin is 52%   However this data didn’t give us timeframes or how big the data set is, which is be important.   Right now in the Brisbane market its expected there will be an additional supply of 20% above what we’ve already got. But some of that data is waiting on development approvals not commenced yet. Overdevelopment is probably the biggest issue for the whole - are you going to make money on apartments.     What are some of the identifiers of that? Number one it's actually getting there and going on the ground. As easy as it might be to buy something off the plan, buying something unseen is a risk. You actually have to go there and pound the pavement get a feel for the suburb and just make sure there's not too many cranes in the sky and all look at the council in Brisbane.         Things to look out for Your circumstances changing You don't want to be in a position where you buy a property and then you have to sell it very shortly after. Property is a long term game, 7 to 10 years minimum.   Look out for the cash flow The long term cash flow is going to be a major deterrant as to whether you have to sell or not. If you don't have much spare cash flow to start with, you're going to have to just sell the property. So making sure you have those numbers in place. The biggest thing to try and work out in the short term is don't bank on any capital growth or don't expect any capital growth because it is a long term thing and markets are cyclical. Anything can happen in the short term so if you're buying an apartment in Sydney now might go up might not in the next 12 months.   Don’t try and speculate If you live by the crystal ball you end up eating a lot of glass.   Look out for the boutique and the really well located apartments Michael Matusik went through with us on what to look for in a suburb, where to buy you know, what's the transport like, is it near traffic corridors and is it one of 500 in a building that has nothing really to set itself apart from the other 10000 that suburb or is it quite unique?   In summary Take the time understand your own situation and understand what you're getting in to. Know your own situation your own circumstances. If you're a contractor on your six month rolling contracts should you be putting yourself heavily into debt if they don't renew that contract? So there might be short bursts of large growth but it's kind of like Michael Matusik actually has a good saying, explaining about how you know property growth isn’t a smooth line it's all jagged, to go up in different spaces and go down and up and down. It's just not consistent. Don’t account for capital growth. Look for boutique properties, don't go for the cookie cutter mass market stock. Try not to throw your capital in a property because if something goes wrong there's a short term emergency of cash flow.

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  • Should I Buy Bitcoin? Matthew Dibb from Astronaut Capital Tells Us About Risks

    · 00:13:32 · The Rentvesting Podcast | Smart Investor | Real Estate Investing Couch | Australian Property Talk

    In this week's episode of the Rentvesting Podcast, we've got Matthew Dibb founder of Astronaut Capital in to talk to us about cryptocurrencies and investing in some of the landscapes. In this episode: We're looking into investing What are some of the risks An overview of the industry   So tell us about your background and how you got into Bitcoin and all that sort of trading? I started from a finance background actually in Australia. So previously working for Macquarie Bank and then in a trading background for stockbroking. Naturally, looking at the market this cryptocurrency market over the last few years, we've just seen this enormous growth out of it. Previously had a lot of clients who were looking into getting exposure into it. You think about Bitcoin and you know it's gone from in the early days in 2008 when it launched. That was after the GFC. It went from prices from as low as you know a few dollars and now it's trading at $7,000+ AUD and that's all in the space of six or seven years basically. So I got into it I sort of fell into it as a natural progression from derivatives trading. And now what Astronaut Capital is doing is basically managing funds on behalf of other retail investors and institutions and investing that into the currency market.   Take us back, even on a simple level I'm sure most people would have heard of Bitcoin and cryptocurrencies. But what is it at a high level? How does it work? Sure. So probably the easiest way to explain it. You've got what they call blockchain and I think everybody has heard that word before. Bitcoin is effectively built off this concept called blockchain and blockchain is effectively a trust list system. It's like a ledger in the cloud where every transaction or block they call that is processed in there is there and can be verified by anybody. So having this trustless this system was it was a huge thing and as I mentioned before in 2008 after the GFC people were thinking well, you know what about a currency where we don't need to have banks involved like how cool would that be? And so effectively Satoshi Nakamoto created Bitcoin which is a currency based off blockchain. And what it allows you to do is send any nominal amount that you want straight to another person in real time. There is basically no transaction costs to it. Very small fees and it's done peer to peer. There is no middleman. There is no centralised service or anything that is intercepting and charging you in between. That's why we've seen the growth in that currency.   A lot of people have talked about how they've made some people made really rich from it and you've heard stories of I remember reading one where a guy had used a couple of coins early on to buy pizza from Papa Johns and now it's about 10 million dollars. What are you seeing with people trying to invest in, what are the good things that can happen, what are the bad things the downsides? From when the guy was selling pizza and it was three dollars and now it's now it's over $7,000. But you know, think about it just a year ago when it was trading at less than $3000, even before that people have made a lot of money off this. It is a currency that's being used every day in the transaction volume, for example, it's bigger than some of the largest listings in the New York Stock Exchange. So it is huge, it's being used and it's going to continue to be used. So when we talk about investment for people and you know everyday people I think having exposure to that market albeit, not huge exposure, but having some is a great way to diversify your portfolio particularly because it is liquid. You don't have that problem of trying to get out of it. Billions of dollars of it are processed a day. So within a second, you can get in and out and you know a liquidity part of your portfolio in Bitcoin in other cryptocurrencies I think is a great idea.   So it's obviously highly volatile as well as a couple of weeks ago when China said they were going to ban Bitcoin and it dropped off like a flash drop. What do you see the future of it? Is it going to continue to be volatile? Is it like gold where it's kind of consistent, but obviously it doesn't make dividends? That's an interesting question because you just made reference to gold which is a good one because this Bitcoin is hundreds of other these cryptocurrencies in the market. Bitcoin is the gold standard of cryptocurrency. We see a lot of volatility, sure we see 30% swings inside of a week or a month, which is huge and that's why you know taking too much exposure where you can't sleep at night that would be a big problem. Taking a nominal allocation in your portfolio is a good idea. But volatility will always be there. It always has. But we look at the returns it's volatility on the downside but also volatility on the upside that's producing these huge 30-40% gains inside of months, so it all comes back to having that, unique but small exposure to your portfolio.   There are other cryptocurrencies too because I think this is where it gets hugely confusing because there's Bitcoin which is kind of the original one. So how does that actually work? What does that look like? Bitcoin is as we said is a currency but a lot of these other types are tokens that are coming out, we call them tokens if they're not a currency. They are blockchain. Blockchain can do legal contracts for land transferring a smart contract that no one can dispute that gets rid of the need for legal and conveyances. What companies do to build that intellectual property in that contract is they raise money via a token. That's the same thing effectively that like you mentioned Bitcoin and the hundreds of others have done. They come up with a concept that is blockchain backed that is going to improve the world or a particular process and they raise money on that very similar to an IPO. So we talk about an ICO which is initial queen offering for the tokens is extremely similar to an IPO in raising money.   With the ICO's, is it like an IPO to get shares in the company or do you have ownership, do you get dividends, do you get profits from it, how does it work? Yeah, good question. So it really depends on how they're structured. So if we look at what we're doing with Astronaut, a token that you buy off us which is called an Astro gives you exposure, basically ownership to a pool of other tokens in cryptocurrencies, but other ones are structured in a different way. For us, with Astronaut we actually distribute dividends based on our tokens performance and remembering that a lot of these tokens similar to Bitcoin, where the place prices fluctuate, these tokens actually list on exchanges as well. You may have ownership to a token that you get into it at a low price and you know within months of listing it can go up 10-20, even 30 times and we've seen that a lot this year.   With huge upside, there are huge risks. So this stuff is largely unregulated at the moment, along with what impact it can that have. What have you seen? I think you've mentioned before your time in America there's still not really sure how to treat it.   So what are the risks around that and the legal landscape? I think the regulation is going to continue to be talked about almost on a daily basis and in every country as well as in the last couple of months. You've seen China, you've seen Singapore, the US and Australia has just issued their point of view on the fact, the matter is none of them has been able to implement legislation because blockchain and Bitcoin etc. they are somewhat of a threat to the natural ecosystem of the government in the gold and the dollar standard. The whole financial system, the banking system and you know the Reserve Bank of Australia would be would be scared about that. And we're seeing the same in the US so regulation is going to continue to be talked about. But the question is can it actually be enforced? And no country has been able to do that because the whole point of Bitcoin and blockchain etc. is basically the freedom to be able to do what you want with it, without having to go through certain channels and middlemen. Governments and regulatory bodies are wanting to implement that and the market is simply saying no.   That's interesting. And I think it still largely seems to me we're in the early days so it's hard to say what the risks are exactly. It really is and you know I think we've seen huge growth in everything. Even with some of the scare tactics that China came out with or the US Bitcoin has gone up 20% since then. If anything it may actually be helping the cause of using Bitcoin. You know it was funny because I saw something the other day, a post on Twitter by Julian Assange WikiLeaks founder. I think it was 2010 WikiLeaks was barred from using basically any financial institution to hold any money any currency paper, so they were forced they had no other alternative but to use Bitcoin. I guess they put all their money into Bitcoin and said Julian Assange put out a post the other day saying I'd like to thank the US government for basically making WikiLeaks millionaires of the past five years. I think I think it's really interesting that ecosystem.   In summary: Go look at Bitcoin yourself because it's all fairly unregulated at the moment but it could be something to look out for so much. When it comes to cryptocurrency, whilst some people are getting rich quickly is still a largely new area that should be watched but should be approached with a lot of caution. It's hard to say what's going to happen next. The government, the regulation and even the volatility is there, but I think definitely something great to look out for.  

  • Cashed Up: Everything You Need to Know About the Reserve Bank of Australia; what it does and how it affects you?

    · 00:18:44 · The Rentvesting Podcast | Smart Investor | Real Estate Investing Couch | Australian Property Talk

    In this week’s episode, we talk about cash and the Reserve Bank of Australia (the RBA), the official cash rate, what it does and how it affects you. We’re going to look at how the economy is going on an individual level and how the flow on effects us.   The Reserve Bank of Australia So what is it? It's an independent central bank to the government. They deal with the cash rate and stability of financial system. Through open market operations, all the RBA does every first Tuesday of the month is set the cash rate. They look at how well the exchange rate is going, unemployment rates etc.   What is the official cash rate for? It’s simply the interbank lending rate - the rate the banks actually borrow money from each other. To increase the rate, they won't print as much money, or buy money off the RBA. Then to decrease the rate they’ll increase more. It’s all supply and demand, the more money in the economy the lower the interest rate will be. To stimulate the economy they’ll lower the cash rate and to cool it down they’ll raise it to help control consumer spending and lower inflation. Over the past five years, we’ve seen a steady decline in the rate because the economy isn’t doing so well, so the RBA is stimulating the economy to get people spending.   How does it affect home loan interest rates? So for example, the banks borrow at 1%, they then add their own clip so an extra 2% and then will lend the money to an individual at 3%. The interest rate will go down in cycle with the RBA’s cash rate. The banks still set their own interest rates and that’s called an out of cycle interest rate. It’s an excuse to make extra money and margin; they don’t need to follow the cash rate. The flow on effects are nil if they don’t do so, so when the rates are down they’re advised to, otherwise the bank is making an extra margin. So all of its services are making banks more profit rather than helping the economy, it works on cash rates for term deposit. It doesn’t affect the lending side and also the deposit side.   The RBA stress test The RBA did their own which APRA has been doing a lot too, and also is why banks are increasing investment rates. There’s more stress on speculative when people in Sydney were buying on 1% yield - on speculation that it would increase in 12 months. They want more owner-occupied borrowers because if times get tough they’re less likely to just dump their property on the market because they live there. This is why they’re trying to slow down investment lending. They did a stress test and found interesting things. The most interesting thing about it is that usually, the RBA doesn't go into this level of detail. Prices are starting to stagnate or go down a bit. That's Brisbane and inner-city Melbourne which are cooling a bit. Sydney is stagnating and they’re also looking at other conditions in the market. Like macroeconomic scenarios, what the flow on effects of rising interest rates will be. Most people now as a household are spending less on their mortgage than 10 years ago because interest rates are lower. However, they've found it's still more expensive to own a property than rent one. So there’s a divide. They’ve also found that over time the number of investments people own has increased. 2 in 9 households have more than one property and most are using it as an ability to invest. 1 in 14 own more than three. There’s been a steady rise in the baby boomer era of individuals owning more than one property. That’s what they’re trying to stop, a bubble of people buying too much property. If you’re investing in a property, do the numbers on worst case scenario and assume it will be vacant 2 – 3 weeks, that the rental growth might not change and make sure you can ride it out.   Through lower interest rates your reduce the time of your loan too. Keep a buffer and don’t keep it too thin, if you have an extra expense you’ll get caught out.   Selecting property ratios – doing the modelling, any quick tips? A rule of thumb is – in some areas, for every $100k worth of property you should expect about $100 worth of rent. With deposit ratios, it’s not going to be a cash flow burden if it's an area going up in value you can go for higher leverage. It depends on what level you’re at. You might have less of a deposit to get going. But you want to build a buffer. Once you get to that level you need to be at 50 – 60% gearing for banks to lend you more money.   Some interesting things to remember are the fact that the RBA is doing it as opposed to APRA and over time if rates do go up we’re in an interest yield trap.   The key takeaway points from this episode are: The RBA affects you, your money in your bank account and the deposit rate. Before you buy, you need to do your own stress test to make sure you’re not putting yourself in a worse off position through buying an investment property.

  • More Value Than You Think: How to Avoid the Value Trap When Buying

    · 00:20:01 · The Rentvesting Podcast | Smart Investor | Real Estate Investing Couch | Australian Property Talk

    In this week’s episode, we’re looking at how to value, specifically property but we touch on shares and bonds too. We go through overall how to best not destroy your investments, we’ll be talking about valuations overall, the biggest mistakes most people make and paying too much. In this episode: We’ll go through some examples What is the actual value? How to actually value properties Information on valuing Let’s talk about how to value, whether its property, shares or bonds.   When it comes to buying any investment it's going to cost you something, what’s generally considered the value? So how do you actually avoid the value trap and not pay too much for an investment? You make your money on the buy-in, Kevin Turner says it. The cost of paying too much, what does it look like? If you’re buying a $500k property and overpay by 5% (so about $25,000), as a first home buyer this happens a lot. New developments usually have referral costs built into the price. In this scenario, if you had of invested that elsewhere for 10 years earning 8% that $25,000 would now be $54,000. The risk is not only are you foregoing investing those funds elsewhere, it will be harder for the investment to grow in value. Getting the right price increases your capital growth overall.   What is Value? There are two different types, market value or underlying/fundamental value. Market value is what you pay for it – it’s not necessarily what it’s worth. Shares are a buyers recommendation. Whats that drive from? It's driven by the fundamentals. If someone is giving recommendations on an asset it's from looking at the business model and how well the company will do in the future. If a share is $1.10 and they say don’t buy it, but the market value is 50c and they value it at a $1 then they will give you a buyer recommendation and say definitely get some. Property is a bit different it's more subjective.   What is Fundamental Value? It’s simply going through due diligence, doing some comparisons, you'll never be purchasing fundamental value its always market value. Being aware of this before you buy helps you not overpay. For example with shares, Dominos shares went up massively in share price over a short period, it went about 80 times price earning, which means that the price was 80 times the earning. The banks at the moment actually have 13 price earnings, it was overvalued quite a bit and that’s an instant where people overpay. In property, you could look at a yield basis, where if you’re buying an investment property at 0.5% yield and just speculating on capital gains it a similar thing where you can get caught out. Property is harder to put an actual valuation on it.   What is market value and how is it derived? For example, say Jim's house is valued at $500,000 how do I work out the value? Look at what it last sold for, working back to how much you bought it for, how much the market has gone up – looking at Domain for the median price statistics. Median value overall takes an aggregated view of the market and it depends on the sample size. It can be very bias and very skewed. You can work out relatively easy if you have an existing property if the median house price rise has been 9% you can figure out the value that way, otherwise, banks use another methodology through looking at recent house sales and similar profiles within the last 6 months. That’s broadly how the valuers look at it. Online as well, it’s a similar methodology. Bedrooms, land size, what the property is comparable to, etc. Online you can do it for free – sites like Domain, On the House, Core Logic, RealEstate.com.au, SQM are all great tools. The other way is you can get a real estate agent to do it for you, they have access to RP data which is the paid version of those free sites. They will always happily come out and give you a market appraisal. If you’re looking at buying you should be doing this, looking at property history and sales history. Just because your agent says its worth a certain amount doesn’t mean it is, make sure you don’t overpay by only looking at their price.   Future value, how do we work that out? Again it’s very hard. With future value, the best way to predict is a through strong trend of demand verse supply. DSR Data actually gives a rough estimate of the supply verse demand of suburbs. Low supply – high demand prices will grow, why Sydney is growing so well. Over time if there’s strong demand for a suburb the price should go up. To get an idea of what the value might be in the future it’s a good idea to look around and look at potential factors that might increase the demand. Gentrification might happen in some suburbs so always look around. Use a variety of sources to make your decision and don’t just rely on one. Every time you do research still be the one making the decision don’t let it bias you too much, look at a few different sources.   What is the best way to get a valuation? Domain has good property profiles, and you can look up the individual property. SQM Research is good for rental rates and further information about the property, DSR Data also has a variety of sources. We’ve found On the House isn’t as accurate so beware of that. They’re all not super accurate so it might be worth paying for RP data if you want really accurate info.   In summary: Don’t pay too much - opportunity cost for future potential growth will be missed out on. If you pay too much upfront, your property won't grow as much. Fundamental value – this is the best guess of what something should be worth. Market value – the price people are willing to pay for it. If you took a look at different areas of Sydney and worked out the fundamental around that, the additional demand for that is a massive price disparity compared to the actual fundamental value. It's worth remembering that generally the bank and those valuations do it on the basis that you can sell a property fairly quickly. Which is why the value may be different because the on market value is more aggressive especially if it’s trending up so there can be a gap. Know what else is selling in the neighbourhood and do your research. Work out what it costs at the beginning. If you enjoyed this episode, please leave us a review on iTunes here and don't forget to send us your questions for Wednesday with a Why!

  • Wednesday with a Why: How Much of A Deposit Do I Need As a First Home Buyer?

    · 00:05:11 · The Rentvesting Podcast | Smart Investor | Real Estate Investing Couch | Australian Property Talk

    Thanks Cam for the name recommendation, we’ve officially changed it! This week we’ve got a question from Chris. How much of a deposit do you recommend for first home buyers? What do you do with these savings – leave it in cash, savings? What if it's going to take 3+ years for a deposit?   How much of a deposit do you recommend for first home buyers? It starts with the price, if you’re a first home buyer you’re not going to be buying a $2Mil property. As a percentage. Louis says 20%, but Jayden says it's more about time in the market if you’ve got 5% saved but the trade-off is paying lenders mortgage insurance at least it gets you in as soon as you can. Louis is more cautious as it varies for each individual like doctors who get 95% loans because they can pay them down quickly. If you’ve recently gotten into a high-income occupation, you can get a bigger loan.   Where should I invest the deposit short term? Typically the short term is from today to 2 – 3 years out. With any investment, if it's needed in the short term, while it sucks, cash is still the best and safest place. You don’t want to put it into the market if you’re potentially going to lose it. That’s why cash does make sense. You need to look at the expected return, cash has interest and there’s no chance you will put your money in and it will half in value, whether shares aren’t like this, in the short term you don’t know what will happen.   What about for a timeframe over three years? In three-plus years, you could look at more growth orientated investments, but I wouldn’t put 50 – 50 outside of cash, maybe a bond for 3 -5 years would be good which would pay a higher income and retain a fair amount of cash. If it's something where you know you’ve got three years before you use it, it's best not to put it into the market.   Don't forget to send us your questions!

  • What Determines Good Debt and Bad Debt? Examples and ways to Minimise with Debt!

    · 00:23:24 · The Rentvesting Podcast | Smart Investor | Real Estate Investing Couch | Australian Property Talk

    In this week’s episode of the Rentvesting Podcast, we’re talking about good debt verse bad debt. We’re going to look at the ABS’s recent study of wealth in households and the results are surprising.   In this episode we look at: Good debt and bad debt What to look out for Where debt will take you in the future   There was a recent household study on household income and wealth done by the ABS. It was surprising to see but when you think about it, it makes a lot of sense. The results of the study showed that the households with more disposable income have more debt. They broke the population into 5 brackets (20% each) in terms of income brackets. The top 20% with the highest disposable income were more likely to be in debt compared to the lowest income 20% bracket. This does make sense because the more money you’ve got the more the banks are willing to lend you. They’ve found that around 73% of households are over-indebted and the top 40% of people with the most disposable income make up around 50% of the over-indebtedness. Retired people have the least debt because the banks won't lend them money!     So let's go through the good and bad debt. If you’ve got two incomes, the bank will lend you more money – that is when there are two people in the household. You’re in the category of people most likely to be over-indebted. The banks are probably advertising to you for more credit cards and more loans too.   Good debt is something that increases your net wealth and helps you generate income and value – so you manage your finances a bit better and buy things to grow that wealth. The interest is deductible for most of the good debt category.   Bad debt makes you poor. It’s debt that doesn’t help you increase your wealth and allows you to purchase goods and services that have no lasting value.   Good debt includes: Property  It works off what’s called leverage. If you put $100k down and you take up $400k debt, you can claim a deduction. As that asset accumulates over time in value, for every percent you get, you get 5% additional growth. Here good debt can help you build wealth. Property can also be bad debt if you’re over-indebted, having too much debt can be crippling. Just because the banks will lend you the money doesn’t mean you should take on all of the debt. As an idea, 30 – 40% of your income should go to servicing alone but if it’s more, you'll be in trouble.   Shares or managed investments Borrowing money against a home or even a margin loan helps build up an asset base. While interest repayments will be made, they’re deductible and the value of the loan you took out will stay the same and the value of the asset will go up over time. Margin calls – this is when it goes bad. The bad side of good debt is  margin calls -  one of the worst situations, if you take a loan out against shares where the value of the portfolio drops (which happens because they’re liquid as), so if it drops above a loan to value ratio above 80% and the bank tells you-you're outside of the range, you’ll need to sell, or buy more shares to top it up or pay some debt off. None of those options are good if the shares are going down. That’s where good debt turns bad because you’re overleveraged.   Remember that over long-term things historically have gone up and short-term there’s volatility against all asset classes and it just means you’ve got to have a bit of a buffer. With the bank's changes around investment only loans, good debt has become 'less good' because interest rates are higher but historically they’re still super low.   Education This is good debt because it's adding value to you as a person and helping you build your wealth and increase your top line/revenue. So Jayden thinks HELP is good debt because the interest is very low. But it's important not to overeducate yourself, like doing three bachelor degrees and a Masters might be a bit much. Louis sees debt as bad fundamentally, based on the education system where you study something and your earning capacity won't be increased. In some industries, you don’t need a bachelor degree but you can do a diploma instead for less. There are plenty of degrees out there where universities don’t have the monopoly of information too. As the supply of individual degrees goes up, the income for individuals has gone down. Studies have shown in America for those who have gone into trades and don’t have debt are better off. This is a double edge sword.   Owning or starting a business Again there are two points to this, borrowing money to get a business going and starting from zero is pretty hard. A lot of people might have a good idea but no capital which is why there are sites like Kickstarter and IndieGoGo. It is a bit riskier and can cost a lot more money though. The major reason most businesses fail is not enough demand for the product and also that they are too indebted to make money. It's always worth if you’ve got money to save up and are not starting from zero.   Bad debt Borrowing to go to the shops to get a new pair of shoes or a handbag is clearly a form of bad debt, but let's go into detail with this.   Credit cards They’re super expensive you still pay 20 – 25% interest on a credit card. Some banks don’t even ask for your payslips and just let you set one up. They’re bad because its access to money that you don’t have. Some people get into a lot of trouble with this. Think about trying to find an investment that can earn you 25% per year, that would be amazing. But instead, most people are willing to pay this to have a credit card. Australia’s credit card balance sits at $52billion and almost 2/3 are growing interest.   Holidays The best thing if you’re going on a holiday is to save for it. You’ll feel a sense of accomplishment and it won't put you far behind. If you lend money, because of the interest, you end up paying so much more back for the holiday. So often if you take out a loan and it takes you a while to pay it back you’ve almost paid for two holidays.   Cars and consumer goods Interest-free loans are a common trap; just buying a nice new car is bad! They depreciate so quickly, so if you’re buying consumer goods they’re typically depreciative in value. If you’re serious about growing your wealth put off buying a car until you can pay for it in cash.   Borrowing to repay debt For example, going on a holiday and putting it on your credit card and then refinancing it into a personal loan and paying it off over 7 years means you could end up paying it off twice due to interest. Not a good idea.   Gambling debt This is clearly bad debt, we just had to add it in. It’s different to investing because it’s looking to get returns over time with minimal speculative risk. When you gamble you’ve got a lot of speculative risks where you’ll either lose everything or gain. You’ve got a 50/50 chance. It’s better to actually not gamble and put money into investments and let it grow.   In summary: Good debt As long as it’s growing your wealth its effective tax wise and an effective form of debt its good.   Bad debt Bad debt reduces in value if it's just creating a memory or won't help you move forward and isn’t deductible then it's considered bad debt. If you’ve got a lot of bad debt why not put together a plan where you put every spare dollar to pay it off over a short period to cut the interest?   If you enjoyed this episode, please leave us a review here on iTunes or send us a question for Q&A Wednesday.

  • Q&A Wednesday: Do I Need A Will When I Buy A Property?

    · 00:04:10 · The Rentvesting Podcast | Smart Investor | Real Estate Investing Couch | Australian Property Talk

    In this week's Q&A Wednesday we've got a question from Candice who has just bought a property and wants to know if she needs a will?   Question: I've just bought a property, do I need a will?   If the solicitor says so then maybe, but typically a will just covers you in the event that you pass away and you want your funds to go into a certain direction. A state asset is something you own outright but there are so many assets out there people don't think about, that aren't state assets. If you've bought a property in a joint name, it will automatically revert to the other co-owner of the property and your will won't count. There are lots of different scenarios. For examples, superannuation is not a state asset, as with life insurance policies. Consider, do you have dependents and are there people looking after you? But what about if I am 25 and just bought a property and get hit by a car, who gets it? A public trustee has discretion of it, if you have living relatives, it's called dying intestate - where if you do die without a will it goes through the process. If you don't have any living relatives the state just takes it.

  • Under the Hammer: Cate Bakos' Tips to Taking the Win at an Auction & A Reality Check for First Home Buyers

    · 00:26:01 · The Rentvesting Podcast | Smart Investor | Real Estate Investing Couch | Australian Property Talk

    In this week’s episode, we’ve got a special guest, Cate Bakos who’s a buyers agent based out of Melbourne. She started investing at 21 and has been building a portfolio ever since. In this episode: Cate takes us through her journey starting as a real estate agent and then helping people buy. Tips on how to buy at an auction. Talks us through financing process and the importance of doing your numbers. A brilliant tip when buying your first home.   About Cate Bakos I’ve got a background like a patchwork. I did a science degree and when I first graduated and always loved property. I went into property sales/real estate and learnt about how buyers and vendors think. This felt a bit one-dimensional as I could only sell what I listed. I then got more into investing because I had a keen interest in picking the numbers. After I had my daughter, I decided to do something that would keep me close to the industry but also be a mum, so I went into mortgage broking so that I could work flexibly. Little did I know that it would be so beneficial for my knowledge bank. Looking at properties the banks did or didn’t like, cash flow etc.   Do you have an investing strategy you use personally or what’s the process you use when selecting investment properties? My strategy is to buy and hold. A strategy is determined by how you want to go into retirement and what that strategy is. My plan is to enable all properties to pay themselves down slowly. I have a blend of cash flow and high capital growth. For those who start later or those who go aggressively into capital growth strategy, they may have a different strategy. The most important thing for me is to profile someone when they start their investment journey and to understand the cash flow at hand. There are lots of different models out there but I’m always open about what I do.   With the changes between banks and how they’re looking at investment debt – has your view changed on how people should look at managing their debt?  It hasn’t really changed how I feel about debt, but it has changed how I feel about how people approach things. Three years ago you could pay the same interest rate on an interest-only investment loan and borrow 95% and in some cases more, so the category and segment of the market who has experienced significant changes are first-time property investors. Rentvesting has got a lot of airplay and there are a lot of successful stories out there but it’s not as easy of an option these days because of policy changes. My appreciation is towards those whose journeys have had to mould around these changes, and this is a prominent part of my conversations with people now. These days I still have a conversation about how much people can borrow but in almost every case people can borrow more than what the lenders give them but they have to think about how they can get their hands on money because it is harder.   A lot of recent first home buyers probably wouldn’t appreciate interest rates going up, how do you model that looking long term? I am very open with them that when I first started 7.25% was the average so being prepared for 9% was something I had to factor into my strategy. Having said that it is at a record low and I don’t see us getting us back to 9% in a hurry. Lending is all calculated now with a buffer in place and it’s around 7.5% that people are serviced on, so with a servicing number like that it means the banks are buffering for interest rates to hit that level and they’re factoring in P&I. If someone has held a 5-year interest only on a 25-year loan term they’re calculating those repayments. I’m not an economist and I don’t have a crystal ball though!   What are some tips you have on the buy-in and ways to approach it? A lot of people get emotional and attached so how do you help people remove that? Depending on whether I’m looking for a home or investment property I have a different hat for each one. I have to help people identify their criteria if it’s a home, the most difficult thing is being realistic and not getting hung up on the nice to haves and sticking to the must-haves. They need to make sure the budgets they’re working with are achievable and if they get that wrong they can be searching for over a year. For an investor, it’s important to not let your emotional home buyer hat come down when you’re out there looking for something that just needs to perform. Identify what sort of performance you’re after and understanding the outgoings with each property. Too often I see people looking at properties they’d be prepared to live in but it doesn’t matter what you want. You don’t have to love it you just have to be proud of it.     What are some rules for bidding at auction? Make sure your finance is sorted – that doesn’t mean having an indicative preapproval over the phone or being confident you saved enough covers it. You need to make sure you fit into the lender's policy. There’s no cooling off when that hammer falls. It doesn’t just go for financing the property its also paying that deposit. If you’ve got any doubt around that it needs to be sorted prior. Knowing your market – if you’re out there bidding on a particular type of property in a given area, you’re trying to buy into a market where you’re just following the lead with the agent's quote ranges. You may find you’re disappointed because you need to do more than rely on the quote range. It's up to buyers to understand the type of dwelling in the given area is selling at. If you’re miles off the mark you’ll waste all of the due diligence. Understand what sort of expenses could come up. Making sure you get a legal professional review - there are often things a solicitor or conveyancer will identify on the contract for you. We won’t bid without one of those completed, I say, no review, no bid. Building inspections – a lot of people are unsure about these. It’s a difficult question because personally when it looks like a rock solid property, I want to know a bit about it so I’m prepared for any future issues and any deal breaker issues. In the metro areas its less common to use building inspections for negotiation, like in Melbourne its hard to push back with a building inspection under your arm. But it is a reality check and can enable you to have some leverage in the regional markets. Finding out more about the campaign – this is relevant with auctions because you need to prepare for the competition you could face. It’s not about preparing just the figure, you need to be successful about finding out what appeals to the vendor. You can shift the focus from money to terms if you understand a bit about it. Know what sort of other properties are on the market at the moment that are similar. There’s a lot of gold in asking an agent about the campaign. They’re generally friendly who will talk to you if you ask them. Having this information could be critical in getting a better deal. Setting your limit – it's a good idea to keep you honest to yourself and stop you paying too much, but it's about having a firm stretch limit and being a tactical bidder. So once a figure is in your head, you can read body language and bid really firmly as opposed to scrambling around thinking about price. It does make you a more effective bidder if you’ve already done that background work.   To finish off what’s your number one tip for buying your first property? I think that people get carried away with their first property and they worry it won't serve them well when they have children - do their three kids get a bedroom each? Thinking beyond it being your forever home and treating it as your first property and a stepping stone is really vital. I remember years ago getting excited about living in Hobart, and I projected that I'd be there, but I learnt its hard to predict where your life will be further than 3 years down the track so if you’re buying for 10 years time it can be hard. Buy for now, don’t buy something you need to flip in 12 month’s time but buy something you’ll enjoy now.   How can our listeners find you? On my website - Catebakos.com.au   In summary: Building inspection – this is something that people skimp on, but it’s really worth it because it can cost you thousands in the long run. Finding out about the campaign – those insights can give you a leg up. Know your enemy. Setting that firm stretch limit at the auction, set that hard upper limit otherwise you’ll end up overspending, this removes the emotion. When buying your first home, just look for the next three years. You don’t need to be looking beyond that.

  • Q&A Wednesday: Where is the Perth property market headed?

    · 00:04:24 · The Rentvesting Podcast | Smart Investor | Real Estate Investing Couch | Australian Property Talk

    Ben has asked us a question about the Perth market. 'What do you think of the Perth property market at the moment? Do you think buying an inner city apartment in any state is a bad idea at the moment? Lots of people are saying there is an oversupply but it seems like demand is still really high, they also offer a good rental return of $450 a week for an investment of about $400k – $500k.'   What do we think of the Perth property market? We don’t really know the market that well, but we did have Dr Shane Oliver from AMP and he gave us some good insights, in summary, it wasn’t all doom and gloom, you can read it here.   On the apartment side, not every single inner city apartment is currently oversupplied compared to demand. There are pockets of areas that do have demand meeting that supply like inner-city Sydney. It comes down to supply and demand. Make sure those rentals are actually there and do your own Make sure those rentals are actually there and do your own research if there are heaps of properties up for rent you might not always get that return. Some developers also give out incentives for two years, which makes it look like it will be better than it is. You can't really generalise you need to look into the fundamentals of the suburb, public transport and amenities. Check the hidden costs like rates, body corporate, sinking funds, because sometimes you’ll buy a property like that and realise that the body corporate funds are empty. Another thing is sometimes you have to pay for the strata reports but it's so worth it because you can find out if there are extra costs involved. Another thing is sometimes you have to pay for the strata reports but it's so worth it because you can find out if there are extra costs involved. It's worth spending that extra money and getting those reports so you don’t get stung. A sinking fund – You buy into an apartment complex and that’s the kitty for fixing up the complex. If there’s a big problem they throw a hat around the apartment owners and get them to put money in and help pay for it. If you have any questions, please send them through to us via email or Facebook.

  • Bring in the Reins with Capital Gains: Kym Nitschke (Pt 2)

    · 00:17:19 · The Rentvesting Podcast | Smart Investor | Real Estate Investing Couch | Australian Property Talk

    In this week’s episode, we’re covering part two of our chat with Kym Nitschke. In this episode: Kym talks about his strategy around going for capital gains How to spot a unique property Some of the things you can look out for Renovating and how to add value and capital gains to it quickly How to spot good suburbs   What is depreciation, what are the changes flagged and the impact on investors? Depreciation is a crazy rule that enables you to identify all of the equipment in the property like air conditioning, hot water, kitchen covers, light fittings. You can get a report by an engineer (I use Depro its about $600 for a report and tax deductible) they will come up with a list of items you can claim an expense on because they depreciate. You can put it on your tax return and claim each year. If you bought a property in the right period of time (more applicable to newer properties) you can claim 2.5% deduction on the building component on the property. So if you paid $400k, the land is worth $200k and building $200k you can claim 2.5% on the $200k building component. This all needs to be clarified from the depreciation report from the expert but provided that it’s approved, it can add up to a big amount.   My mindset is that land goes up buildings go down, so the more valuable the building the more you’ve got to lose. I’m always trying to get the most run-down house so my building depreciation claims aren’t anything spectacular but I’m happy to do that because I know the true value is the land.   If my land is going up the value of my property over time is increasing rapidly.   You’ve got to look beyond the short-term and look at the bigger picture of where the property might go. I’d never chase a property for a big depreciation claim, chase properties where you can get a big capital gain on instead.     What are some of the principals you look for in a property with capital appreciation? What I look for are unique properties, I went on a holiday to Indonesia, and when I came home it was clear to me there are three things we can do here you can’t in anywhere else in the world. The first is, buy close to the CBD. It’s still quite affordable, I aim for 5 – 10km to the CBD and preferably the eastern suburbs. The next is buy near the coast, the Eastern suburbs. This is because as soon as people retire they want to move to the coast. The third is buying a property with a lot of land. I bought a 22acre farm with a stone cottage on it. I try to chase one of those three types of properties.   I read a book called ‘7 Steps to Wealth’ and it changed my view. So the next property I bought following these principles was for $225k and sold it 10 years later for $630k. So when you get the parameters right you can make a lot of money and be successful through it.   What are some rules from the book you read? Get as big block as you can get with the most run-down house that you can get. It’s got to have running water and electricity but the rest can be replaced and upgraded. Every weekend I’m at Bunnings all the time renovating, I buy run down and I try to artificially value-add through renovations. I look for properties which I think are underpriced through doing research, I check RealEstate.com.au on the app and watch the price. I’ve also moved over to Domain now because you can sort them and have them show up for you every day. I’m always on the look out for an undervalued property.     How do you know suburbs intimately? What are some of the critical factors for the suburbs? I look for a suburb that is being gentrified, it’s going from an old daggy suburb that people from a lower socio-economic area can afford but because of the location, it’s becoming an up and coming suburb. Look for groovy coffee shops that are there, young yuppies that are moving into it and whether it’s becoming the place to be seen. I’m always doing research on the sale price of the properties in that area too, I can tell what a basic home and block of land would generally sell at the auction for. I’m looking for those outline properties that sell below that price. It could be a big tree out the front that everyone is too scared to cut down because of power lines; I’m looking for cosmetic things that scare people away. All of those factors are aesthetic things that won't cost a lot to change but will bring a wow factor.   The other things are that I love deceased estates; they’re good to start with. Poor old grandparents have enough work to look after their own health so the property never looks that great. No one wants to buy these sorts of houses because they’re not attractive and appealing, but it’s so easy to go in there and give it a cosmetic upgrade. I don’t like the structural upgrades; they’re too much work.   Renovations in the existing footprint are where you get bang for buck.   So Kym how can we find your podcast? Go to iTunes or here through Accounting Insider, please feel free to reach out for a chat too!   In summary: Depreciation – 2.5% on the value of your building. If you have a property that is an investment, go and get a depreciation report. If you’re looking at buying remember to take this into consideration too. Spotting a unique property – worst house, best street. Some of his mantras are buying close to the city; if you can - look at Eastern suburbs, buy land within your budget. Using Domain or RealEstate.com.au and pick a suburb intimately and watch it every day.   Tell us what you thought about this episode by leaving us a review on iTunes and send us your questions through here for Q&A Wednesday.

  • Q&A Wednesday: How do I know when to move from an interest only to a principle and interest loan?

    · 00:04:06 · The Rentvesting Podcast | Smart Investor | Real Estate Investing Couch | Australian Property Talk

    This week we’ve got a question from Jason. "When or how do you know to move from an interest only to a principal and interest (P&I) loan on your investment property? We have a great tenant but we’d like to start paying down the loan. There are 17 months left on a fixed rate, which is the issue." So we're going to split up this question into two for you Jason!   What happens if you have a fixed rate, can you make extra repayments. If you have a fixed rate you’re limited in how much extra you can make in repayments. For Jason’s bank, they’re limited up to $10k in extra repayments per year. He can start making repayments today but your bank could be different. If Jason goes over that $10k the bank will charge him fairly big break fees. So, yes you can make extra repayments and in your situation, it’s up to $10k.   What are the advantages of this? How do I know if it’s beneficial? There’s now a difference between the interest rate you pay. On an interest-only loan, you’ll be paying a higher interest rate. It works out to be 0.45-0.6% so it’s a big sting. On principal and interest, you’ll be paying more as a total repayment however you’ll be paying far less in interest. It’s a bit of a balancing act where if you’re cash flow poor, interest only is better because you’re paying less but P&I is better if you’ve got additional cash flow. It’s a bit of a balancing act where if you’re cash flow poor, interest only is better because you’re paying less but P&I is better if you’ve got additional cash flow. Yes, paying the principal isn’t deductible but its forced saving and you can utilise those funds. Yes, paying the principal isn’t deductible but its forced saving and you can utilise those funds.   Some interesting research done by Macquarie Bank, they said by using a 0.5% difference, bank customers in the top tax bracket with a $500k investment loan would be $6k better off after 5 years and $12k after 10 years switching to P&I and that’s after taking into account negative gearing. Simply because by paying that extra half a percent has obviously cost you a lot more cash flow wise. If you’re in this situation jump online and do a calculation. If it’s only going to cost you a small amount extra per month its worth considered, even though it’s an investment property and even though that half a percent might be tax deductible, it's still a cost to you. Ask us your questions via email or on Facebook!

  • Tax on, Tax Off: Accountant Kym Nitchske's Tips For Tax Structures & Negative Gearing (Pt 1)

    · 00:14:32 · The Rentvesting Podcast | Smart Investor | Real Estate Investing Couch | Australian Property Talk

    In this week’s episode of The Rentvesting Podcast, we’ve got Kym Nitchske who's an accountant by trade and runs his own business based in South Australia. He also runs a podcast called the Accounting Insiders Podcast. We’re covering TAX! But we’ve split it across two episodes because there's so much information and it's such a big topic. In this episode we cover: Tax in property Things you can do around structuring How tax plays into that How it will affect you in the future Gearing – negative gearing in particular and how that fits into your overall tax strategy.   Can we get a bit of a background on you Kym? I’m an accountant, I’ve got a practice with six staff and we’re a boutique agency, I’ve been doing it for 20 years. Before that, I worked for Price Waterhouse Coopers. I started doing family and friends tax returns and then built up my knowledge in property. By default I built up my property portfolio, now I’m a bit of a property expert in the accounting field.   As part of growing a property portfolio, tax is critical and it’s something people don’t get right. When do you think people should get involved with their accountant? What are the advantages of speaking to your accountant early on? We can add tremendous value, it’s important to get it right from the start and when you’ve identified a property, that’s when you should be calling your accountant. Ask them what structure, what entity, how should you finance it, along with whether variable or fixed rates are best for you. Even when you’re at the concept stage, old or new properties, we can add value there.   Looking at structures, should you put it in your personal name? By default, most people begin buying their first property in their own name, that one is the first and easiest step. But when you start adding property into the mix there are factors like land tax. In South Australia if you own a property in your own name and another in your wife's name and another joint, you get the land tax for three different entities even though it’s the same people. Land tax has about a $500k tax-free threshold. If you add more properties into the mix, you’ve only got the threshold for the first, but if you spread it over different entities, you can get millions of dollars worth that you can use, by being clever. Another reason is that if you choose a family trust, they enable you to split income. Trusts are a tremendous way to split income with other members of the family. Capital gains can be split, really, there’s a whole world of creativity you can bring to the table when you invite your accountant into the conversation. Whenever I have a customer call me, I sit down and do the numbers. Looking at the long-term approach. There are all these different calculations to figure out which entity is best. Drilling down on the detail from the get-go will allow you to forecast what’s going to happen.   Is it true if you’ve got a family trust there are certain capital gains tax benefits that are different to a unit trust? Yes, so a unit trust is typically when you’ve got two people who are unrelated going into a property transaction together and everything is split 50/50 down the line. For the family trust, you use family members to split income. For both trusts, if you’ve held a property for more than 12 months you’ll be able to halve the capital gains tax you pay on the sale. The unit trust has legal implications that protect you if you invest with the unrelated person, they’ve got legal mechanisms where you can't put all of your assets on the line if the other partner goes belly up. There are tax implications and legal implications for choosing the ultimate entity.   Negative gearing – it might not always be appropriate if you’re on lower income, but at a high level, what is it and in what situations does it suit? Negative gearing – I’m always chasing the capital gain. I want something that I'm paying $500k for today to be worth $600k to $750k in four to five years time. They are the numbers I’m chasing. Behind the scenes, negative gearing, in a nutshell, is claiming the losses that you’re making and typically that’s when your interest is more than the rent you’re receiving. So you’re making a loss on paper every year. That is absolutely gold when you’re a high-income earner and your marginal tax rate is 0.48c to the dollar. It’s less beneficial and it doesn’t actually work if your income is low, like around $20k/year and you’re paying no tax at all. Also if you’re a pensioner or retired, it loses all of the benefits. It’s a quirky piece of legislation where if you make a loss on a property you can use it to reduce your tax. As an investor, you can make great use of it and the tax you pay to the government very minimum.   In summary: If you’ve got an accountant, lean on them and get them to help you unlock benefits and savings quicker. Negative gearing, whilst it’s great, it doesn’t fit everyone. Next week we have part two where we’ll go through capital gains! Make sure you check out our Q&A Wednesday and if you’ve got a question, send it in! If you have time, please leave us a review on iTunes here.

  • Q&A Wednesday: Where Should I Start with Finance: Bank or Broker?

    · 00:02:52 · The Rentvesting Podcast | Smart Investor | Real Estate Investing Couch | Australian Property Talk

    This week's question is from Calen: I've been listening to the podcast for around a month and have finally decided to purchase an investment property I'm unsure where to start with finance and whether I should go through a bank or a broker? In short: Most brokers have access to 10 - 20 different lenders, rather than a bank which has access to one. Brokers have more choice around policies, whether banks just have theirs. The rates and fees at banks can cost a lot more between them. In terms of specialisation, if you're self-employed some brokers might be more specialised with specific circumstances. Instead, banks have certain specifications and if you don't fit into 'that box' unfortunately you won't be able to get your loan. For the price range, it depends, if you've got a $50k deposit you won't be looking in the million dollar range to buy a property. The most important thing is not overpaying. So the price range depends on your situation and cash flow returns. It's a bit of a how long is a piece of string question but make sure you have a plan in place and you've done the numbers, like if it's affordable. In summary: Deposit - you need to have this to buy. Servicing/borrowing capacity, know how much you're earning and what you can afford to borrow. If you have a question send it through to us.

  • David Hyne Reveals Where You Can Buy Houses for Under $500k in Brisbane

    · 00:16:21 · The Rentvesting Podcast | Smart Investor | Real Estate Investing Couch | Australian Property Talk

    In this week’s episode of the Rentvesting Podcast, we’ve got David Hyne, director at Herron Todd White National Valuers. David's company Herron Todd White has valued over $85 Billion in property every year across Australia, so we’ve got access to heaps of great data. In this episode: David Hyne is a Director of Herron Todd White National Valuers He is based in Brisbane so we speak about the local Brisbane market, things to look for, indicators on when to spot growth, and how to look at markets and find the next hotspot. Where you can buy houses and properties under $500k. We then talk about buying property off the plan, and the difference between investor stock, compared to owner-occupied stock. It’s something you might not have heard of and could be buying a property that is affected by its resale. Lastly, we close off on the next 3-5 years.   About David: I’m a property valuer and started out in rural valuation, but I’ve been here in Brisbane for the last 17 years, in the residential space and development. Herron Todd White is a national firm and has been operating for about 50 years.   Tell us about the Brisbane market? What are some of the green shoots you’re seeing around Brisbane? The cycle of Brisbane and where we’ve been, in contrast to the southern cities, we had a bottoming out in 2011. But if we look at the last five years from 2012 to now, we’ve had median growth in about 20% compared to Sydney’s 80% and Melbourne's 60%. We’re the poor cousin in this last cycle. But we’ve seen activity slowly increase over the past years and it’s at or slightly above long term average. The key market driver is affordability which is above average, interstate migration, we’ve seen it bottom and kick in all the graphs. The other one we look at is confidence, most of those graphs are showing something at or slightly below long term average. Again, we’re playing poor cousin to Sydney or Melbourne and we haven’t had the growth cycle southern cities have had, but fundamentally the market is in a sound position.   Looking forward, the next 12 months to five years how does it compare to Sydney and Melbourne? Short to medium term, so 3 - 5 years, I’d like to think it’s Brisbane’s turn in the growth cycle in that period. As interstate migration takes a hold a bit more, if we look historically at things, it’s a key driver. The price of real estate in those southern cities has been a catalyst in the past. With that, prices will pick up. One preface to that is that it comes down to - if different properties perform differently, it probably would be more on the house and land.   Where are you seeing activity in Brisbane? Every other cycle started this way and this one is no different. It's always the inner city areas, you’d attribute the near city areas to have about 35% of growth and outer at 5%, certainly house and land in these areas has started to move. It hasn’t impacted yet on properties 25 – 30kms out, they’ve seen limited growth but eventually it does make its way there. Brisbane inner city areas aren’t overheated but they've performed at about 5 – 6% per annum.   Having lived in Brisbane, the apartment oversupply is area focused. Do you think its fair for people to take a broad brush approach? Or what do you see? That is a good point, take it one step further, a lot of commentary on the property market is way too general. If we talk about Brisbane we talk about suburbs and types of properties. Even in the one city, we talk about property classes. Either get good advice or school yourself. Yes, there are pockets of oversupply, but one step on from that is when people talk about investing in units – often people underestimate the type of unit invested in. As an investor in units, location goes hand in hand, a close second is the design of the unit and whether that appeals to the local market. So picking out something that appeals to that audience is important.   It’s true you see developers that are making investor stock, what are some telltale signs you’d see? How can you protect yourself from investor stock to owner occupied? First the location, non-local investors get sold on the location to the city. In Brisbane, we’ve got areas like Bowen Hills and Fortitude Valley that are close to the city, but from my perspective, they're not as good to buy in. They don’t have the local infrastructures like coffee shops that are popular for unit dwellers. So knowing where the local market is in terms of that is important. Secondly, when we talk about the design aspect, this is what separates those two markets. We’ve got examples where the properties are in good locations but simple things like bedrooms where the size is so small you can't even fit a queen bed. That’s impacting the fact that we’ve got a softer rental market, so when they go to sell, those people are walking in and straight back out.   If you’re an interstate investor in Sydney with a budget of $500k, what could you buy for that? You’re certainly in the house and land market in Brisbane, but realistically in the 15-20km from the city as a starting point. In terms of capital growth, get as big of parcel of land as you can as close to the city. There’s nothing wrong with starting in Sydney for your research, look at what’s going – sold and being purchased.   Any particular areas or suburbs? Here on the north side of Brisbane is my preference, Everton Park, the older timber style post war housing. Realistically you’re probably going to Keperra, Albany Creek, Chermside too, which all have reasonable infrastructure. There are no big developments there so there’s reasonable rental.   I know you help people with pre-buying reports, so how can people get in touch with you? We love to help, so check out our website www.htw.com.au or Google us.   In summary: There are areas in Brisbane you can buy for under $500,000, like Keperra or Albany Creek, it’s about finding the next suburb along. Look on maps and do research to get to know the area. Xkms from the city doesn’t mean it’s a good location, just because you’re within 5kms doesn’t mean the property you’re buying has the same amenities or public transport so get familiar with the local area.

  • Q&A Wednesday: How Should I Invest My Super & What Are the Different Options?

    · 00:04:38 · The Rentvesting Podcast | Smart Investor | Real Estate Investing Couch | Australian Property Talk

    Question: I would love to hear something about how to invest your super and the different options (retail, industry, self-managed funds and managed funds through a company) and its pros and cons.   So it’s a massive question and we’ll try and break it down as simply as possible. You do have a massive range of choice between types of funds, such as (retail, industry, self-managed funds, corporate, public sector. The most common ones are retail, industry and self-managed.   Retail fund A retail fund is a superannuation platform that’s trying to make a profit through giving you an additional service. Mostly owned by banks and there are third party's that are independent. Their whole mandate is to make a small profit through giving good service of a platform. The cons of this are that it's more expensive than an industry fund   Industry fund Industry funds are backed by a union so they can be very specific, QSuper is for Queensland government employees and they offer a limited range of investment options. The only issue is they’re not too transparent, you don’t know what shares they are part of. So the good thing is, it's industry funds and they’ll give you automatic insurance, depending on what your situation is like. However, it will have exclusions if you’ve got anything pre-existing. A con is if you don’t need cover, you’ll get it anyway and still be paying premiums.   Self-managed funds ASIC has some rules if you’ve got less than $200,000, it's not economically viable to set an SMSF up, as there are auditing and accounting fees from additional trustees. There’s additional burden where you need to meet with an accountant, go through the audit and make sure your funds are still compliant.   In summary If you’re starting out looking to grow super, industry funds are good, otherwise, if you have already got a decent amount in your super and you’re ready to take control and want to share funds outside of it, retail could be good. Otherwise, if you’re balling and want to buy investment properties in super then self-managed is best. If you’ve got questions hit us up on Facebook or our website, and we'll answer them. Don't forget to leave a review on iTunes here too. 

  • It's A Balancing Act: Tips to Get Your Portfolio Diversified

    · 00:16:56 · The Rentvesting Podcast | Smart Investor | Real Estate Investing Couch | Australian Property Talk

    So this week we’re doing a balancing act, Louis has got his best clown costume on, he’s got a bunch of plates balancing on his chin. We’re going to talk about building a balanced portfolio. We’ve spoken about diversification in the past but I think one thing we haven’t really gone into detail with and put a lot of colour on is the fact that when building a balanced portfolio, with property it’s more than spreading the geography and with shares it’s more than just investing in different businesses. There’s a lot of interrelated and correlated facts and background that can affect you and you’ll want to look at cashflow, the different types of property that you can look at and really balance it up at a portfolio level. We’re just going to go through overall diversification and how not to muck it up, how to get it right and then some tips at the end just to make sure that you’re doing it properly and to measure your success which is measured by a little thing called ROI which we’ll talk about. Before we get started I’d just like to thank you guys for leaving me reviews on iTunes, thankyou, thank you so much. We’ve got a couple in the last week, we’re going to do some shoutouts next week, but... if you guys don’t mind and you haven’t already left a review we would love you times infinity if you could just jump onto iTunes and search the Rentvesting podcast... Our one, not another one that kind of ripped on our name but definitely our one with a green logo and leave a review because we’d love you forever for it, so.. Thanks guys and let’s get into the episode. So, a balancing act? Not a contortionist, building a balanced portfolio... We’ve slightly covered it in the past but let’s dive in. A balanced portfolio means something different to everyone, some people think that, you know, having a balanced portfolio is 10 properties in Murrambah or something like that. We’ll be going through diversification again; we’ve talked about this a bit in the past but today we’ll be breaking this down further into how to properly diversify your portfolio and give some tips. Success on how well you invest will really depend on how well you are able to diversify your properties and overall portfolio well, so it’s all about managing your risk. What matters is the money you’re making overall consistently - there’s a thing called ‘Return On Equity’ or ROE for short because we get lazy and like to abbreviate everything. So the ROE is simply what return you’re getting on what equity you have invested. This is really the only measure of success when you’re investing in a property because it’s the return you make on the money you put in. The Return on Equity is, say you’ve got $100,000 in a property, and it returns $10,000 in a year then your return on equity is 10%. So it works out what your overall return on your initial equity of the investment is but it doesn’t really take into account the debt or other things structured into the property, so to work that out it’s around what the cashflow is. If it’s negatively geared for instance you’d have to minus whatever you’re putting into there off the growth that the property has then divide that by the equity that you have in the property. You can always think that you bought it for $300K, I sold it for $400K, I made $100K – I’m a genius! But if you’ve been losing $5K a year for 5 years it’s then minus $25K and then your net return is a lot lower, so that’s where Return On Equity or the ROE figure comes into play, it’s important to use that as your way to guide your investments. Exactly, so if you’ve just got one sort of asset that has low ROE every year it’s probably going to make your overall return suffer quite a bit and diversification really manages all the risk involved, we’ve talked about this in the past – say if a property’s price goes down by 50% it’s going to take a long time to go back up because you have to make a 100% return on the upside. Even for some shares I’ve bought, one went down by 94% or so.. and to get back to my original value I need to make a 200% return of that so if it goes down by 95% then it needs to go up by 200%.   So tell me, diversification manages risk, helps you manage and maximise profits, but it can be a bit of a trap so how could it dilute those returns? How can you reduce that ROE by diversifying? So over-diversification dilutes returns – the way that occurs is through a few different ways. Being over-diversified is if you have too many investments that can actually hurt your overall return so, a good example of that is the ASX itself (talking outside of property). On the Australian Securities Exchange the bottom 100 companies of the ASX300, so the smallest 100 companies out of the top 300, their average return is about 0% per annum because in that market space you’ll have some companies that go up and some companies that go down and they’ll net their overall return. So that’s where over-diversification can really hurt, as there’s no point in having every share in every country in every economy or every property in every economy as well, because on average half of them might go up, half of them might go down and it would just cancel out any net return that you get. The next one is also diversifying into incorrect assets or highly correlated assets, so again, rather than spreading all your eggs across every basket you could just stick them all in one basket. If you diversify in all medical shares it’s principally the one industry - they’re all related to the medical industry and if it starts getting regulated or in property if you’re relying on a mining town and if mining as an industry starts to go slow then… Even mining itself, so if people bought all Fortescue, BHP and in the mining services companies – we don’t want to call it the ‘mining crash’ but after the downtown around 2013, after that little downturn, if you only had resource companies your losses were very much amplified compared to if you had banks or other types of investments, so diversifying into incorrect correlated assets means that you’re just buying many of the same thing, so it’s no different than just having 1 property. Or 3 different lemons or 3 different oranges all of the same colour. It’s hard to make a fruit salad then. So, these are the risks of diversifying – getting over-diversified or diversifying into incorrect or correlated assets but the most important thing is just getting the right asset and the right asset means getting your timing correct, getting the best location and getting the best price. So on timing this could be around the property clock for instance, some sectors in Brisbane, NSW etc. they might be on their peak, some might be on their trough – so making sure that you’re not overbuying for an asset is important. We’ll attach the property clock – it’s just the Herring Todd White one that you can get online but it’s good to just keep that in mind, and then bearing in mind that within these markets there are sub-markets and there might be some that overheat and some that decline based on too much stock. Obviously location is critical in property and even where you’re looking in the suburb potentially and getting to understand that at a really minor level. Markets are cyclical, so some markets will go up, some markets will go down and it’s all about making sure that you’re not buying an asset when the market is way up. Which is a good point, when the next topic is PRICE. Price - I think Kevin Turner said it really well, in the episode recently where “you make the money on the buy” and we’ve said it before, if you overspend up front it’s pretty hard to recover from that so you’ve just got to do your numbers up front and make sure that you’re buying for the right price. Realise that there’s always another deal, there’s always another property, there’s always another share, there’s always another investment – you’re better off walking away if it doesn’t make sense on paper. Exactly, and then location as well. Location is important for diversification because certain sectors obviously will have different market returns. If you’re looking at Brisbane suburbs compared to inner-city apartments; their locations, while still being in Brisbane, are quite different and the types of properties you get in certain locations differ as well. So, acreage versus a 200m2 block. Yes, or different property sizes, which brings us to tips on how to get diversification right for you. One way of diversifying is through asset types. You might own some units and look at townhouses potentially, or buy some land with redevelopment upside, then you might just look at potential rezoning plays so it’s about diversifying the asset class. Even though they’re all different types of property and they’ve all got different benefits and pros and cons. But it’s worth looking at that, just because you might be buying in the same suburb you might be diversifying the kind of asset, i.e. if you’ve got development upside on a property. Infrastructure is actually a good one on that as well. So while infrastructure is not really direct property, you can view it as almost semi-property.   Is this with a fund that you’re talking about? In a syndicated, infrastructure investment fund? Yeah, so you’re not just going out and buying a freeway. Unless you’re a baller, there’s infrastructure funds out there where you have access to a lot of infrastructure projects which themselves will be diversified. The way that these funds work is the manager’s behind them, they don’t really invest in an up and coming infrastructure project, they invest in established ones which have proven cashflows and are actually making a profit. So, unlike a couple of toll roads, they then manage those risks very well. The volatility inside an infrastructure fund is very low because in a way infrastructure is correction-proof to an extent – with toll-roads, airports, trainlines, regardless of economic cycles, all those things still get used quite regularly so they’re not as correlated. If property crashes then infrastructure generally doesn’t do that bad compared to it.   The next topic in terms of diversification is CASHFLOW. We’ve previously spoken at length about positively and negatively geared properties but potentially having both in your portfolio could balance out. So if you’re an average income earner, like we’ve alluded to in the past, you might be buying a first property which is a bit smaller, a cashflow-positive property could work as your first property off the rank. But perhaps with your second or third property a negatively geared property might work if you’re going to make a capital gains play or if you’re buying a property with development upside. It’s more looking at that as a method of diversification in your portfolio so all your properties aren’t negatively geared for example and you’re not shelling out money every month to keep it afloat. A bit of strategy for that would be if you’re building a property portfolio is to start with positively-geared assets. What you want to do is over time, build up a positively geared scenario and then you can look at diversifying into something negatively geared so the two can balance each other out. You’re not actually still forking out money for your investment portfolio overall. Even on that, another good way that I’ve done with units that I’ve had in the past and houses, is thinking about renovating older houses and apartments to potentially improve that short-term yield and your capital gain so you’re actually getting a bite of both cherries. Potentially it plays into that cashflow piece where you’re investing in it up front to make sure you’ve not got your eggs all in the one negative or positively geared cashflow basket. The last one is if you’re not sure how to diversify into different areas, so if you know property really well but you want to start diversifying into shares – seek specialised knowledge because you can’t be an expert in everything. There’ll be some things that you do want to diversify in, or it’s a good idea to diversify into it, but again going back to those reasons why diversification fails is if you don’t know what you’re diversifying in then it’s going to be hard to actually achieve that. Talk to an expert if you’re actually investing a large amount of money, it’s not insignificant. That’s easy to forget and sometimes people squirm at thinking about getting a $500 report to get a valuation, $2,000 to use a buyer’s agent, it seems like a big amount but you’ve got to remember you’re spending half a million dollars on an asset so it’s actually disproportionately small. If you get help on buying a property, even interstate in an area you don’t really know that well, you can pay way more than $2000 in long-term costs and mistakes. If you overpay for something by $10,000 then you’ve basically still lost $8,000 on that overall position. Diversification helps you manage risks, your profits, but it can be a trap. Try to avoid the diversification trap by over-diversifying or just purchasing more of the same thing. One of each thing is not necessarily good, so a property in every single town in Australia isn’t a great thing if you do that. Just not diversifying for the sake of it, the asset needs to be worth buying so make sure you get the timing, the location, the pricing and the fact that it is a quality asset right first and then it’s OK to diversify into that asset. Final three tips? 1. Your cashflow – making sure that your overall position for cashflow is still positive to neutral at a portfolio level. 2.Diversifying into different property types – different asset classes, so looking at infrastructure, commercial properties, residential, then other asset classes as well – shares, fixed interest, alternatives, private equity. 3. Specialised knowledge, so if you’re not sure what you should diversify in or if you do know what you want to diversify in but don’t know too much about it – then definitely just seek some help because the major thing will be protecting yourself in the right way and not screwing up that diversification strategy. Well that’s it for the episode – if you have any questions hit us up at the website or Facebook, and if you have a question you should leave it because we’ll answer them. You can also go onto the website and record your question via audio and we’ll upload it into an episode on Wednesday so you’ll get your voice beamed out to lots of people across Australia, potentially across the world.

  • Q&A Wednesday: I Want to Buy an Investment Property, But I'm Worried the Property Market will Downturn, What Should I Do?

    · 00:04:09 · The Rentvesting Podcast | Smart Investor | Real Estate Investing Couch | Australian Property Talk

    This week on Q&A Wednesday, we’ve got a question from Alex. Side note: we’re still waiting for a better name to come through, whoever comes up with a better name gets a shout out.   Hi guys, Really loving the podcast- Easy listening, down to earth advice. And nailing every episode! I am a Rentvestor looking to make my next purchase. With the strategy of initially an investing in a house that in 3 years time I will be able to live in. I have plenty of equity and am in a good position to buy, but I'm having trouble committing to a buy, as I am worried the heat may come out of the market, and downturn slightly? Which direction should I go in?     Well Alex, with the media it can be very confusing due to with every story in the media, 1 in 10 is good and the rest are negative. It’s a lot of doom and gloom, about assets going down, end of the world stuff. In reality, it all depends on what you’re after. In this situation, if you’re looking to live in that house, in about 3 years time, it will be hard to make the decision purely from an investment point of view. You’ve got to ask yourself first, am I happy to live there? It’s a long term purchase so anything can happen in the short term, the market can swing down, stay flat or go up a lot. It comes back to your long term plan. If that’s to buy it as an investment, keep it as one, and then move in - in another three years. It shouldn’t be an issue because long term property will grow. Even inflationary pressures will increase property by about 3% per year. It’s more looking beyond three years as well. With most investments, you’ve got to look 10, 20, 30 years down the track. Look at the figures historically, the growth set. Avoid what’s already oversupplied, specifically like units in niche areas. But it’s very area specific and you can't broad brush a city, certain town or East Coast. Ask your questions here now! We’ll answer.

  • Property Structures: The Four Key Elements - Pros, Cons and Which Structure's Best For You

    · 00:17:42 · The Rentvesting Podcast | Smart Investor | Real Estate Investing Couch | Australian Property Talk

    In this week's episode of the Rentvesting Podcast, we’re looking at property structures. We’re going to structure this episode to go through four key elements of issues to try to avoid through smart planning and structuring. This is pretty much how to choose the right ownership structure when buying investment properties. There are a lot of factors, it's easy when you find a property you just want to sign the contract and settle it, you’re excited, but there are lots of different issues you can have, be it asset protection, taxation, if you’re buying with multiple parties - unit trust etc. You want to keep your costs down and make sure things aren’t too complicated, we’re breaking down those four different areas looking at personal, company and trust and looking at self-managed super structures and why they’re good. You want to keep your costs down and make sure things aren’t too complicated, we’re breaking down those four different areas looking at personal, company and trust and self-managed super structures and why they’re good.   How to choose the right ownership structure for property investment? The four key structures are asset protection, taxation issues, multiple parties, and cost and complexity. Like it or not, there are a lot of issues when it comes to asset protection. If you’re building wealth, you want to build it so you can keep it. The major two things are - along the lines of bankruptcy or being sued. If you’re being sued by a third party and you are technically personally liable – a sole trader. There’s no company to hide behind, so if you have assets in your personal name as a sole trader and the person suing you wins, they can go after these. Ways around this are company, trust and superannuation structures. From a litigation point of view, if you have a family trust that provides an additional layer of protection. Even with bankruptcy they can go inside and do a look through test, but superannuation is off limits. It’s not a good idea, a terrible idea actually, but I’ve heard of people taking say for instance a $400k bank loan, putting it into superannuation and declaring bankruptcy and they get to keep $400k. Not a good idea! Yet there are situations where a company, trust or superannuation will be better. The only one where they all break down is in family court, like separation or divorce, there’s no real structure there and no protection there. 'We want a prenup!' That doesn’t do anything either… in Australia, it’s a little different. It gets voided if your situation changes, so if you have a kid, that’s a significant change and they can throw it out.   Taxation I don’t think taxation should be the sole motivator for structuring, it can cost people a lot. Land tax can leave people with huge bills, so what are some of the things to be aware of around taxation? On taxation, the biggest thing would be looking at a longer term plan first. If you’re looking to buy an investment property personally and it’s 50/50 split between you and your partner, one is working and the other isn't, from a tax deduction point of view, the person who isn’t working won't be able to claim any deductions. It comes down to the cons, if you’ve got it in an individual’s name with high marginal tax rates then they’ll pay more on tax. If the property is sold the capital gains tax on that will be higher than an individual who is not earning an income. Then you’ve got the companies structure – the pros there for tax are if it’s a small company (if they turn over less than $10Mil), the flat tax is that you don’t get the capital gains discount inside a company structure. As an individual - if they sold a property and earn $200k/pa they will get a 50% reduction on the capital gains that is assessable while the company won't. A company pays a rate of 27.5% if it’s turning over less than $10Mil, while an individual on $180-$200k does the same thing they’ll be paying 22.5% so it still works out in an individual's name even on the highest marginal tax rate, it’s better.   Family trust is good from a flexible point of view with tax. You’d have the trust own the property then each year the discretion of proceeds where the tax is paid would be figured out. It would be distributed to the individual with the lowest tax bracket. The problem is that as an individual you can’t claim the tax deduction personally, the trust has to do it. So if it has no other assets inside the trust and just the one property is negatively geared, you’re losing deductibility.     SMSF - Self Managed Super Funds  From a low tax point of view, 15% is the income tax or after a year, the capital gains will go down to 10%, the only issue is that if that’s the most you can claim, that’s the most you can claim as a deduction. So if you’re deducting 15% of the property expenses, it's not much of a deduction but that means you’re not paying much in tax.   When buying with multiple parties – structural differences, what does it look like and what are the advantages? Multiple parties – family trusts are fairly good, even unit trusts can be used if you don’t trust your brothers or sisters in your family. With setting up trust structures, it comes down to family or unit trusts. Family trust – has to be with family members. Unit trust – a lot of developments and multiple parties who aren’t relatives will purchase a property as a unit trust and take a specific split of the number of units in there. Rather than the trust owning all of the assets it comes down to individuals or other entities owning the units in a unit trust, so you’re entitled to a number of units and you're entitled to the income off those and the trust is entitled to the deductions. Unit trust is good for third parties, even companies, but the only issue with companies is the taxation issue of no CGT discount. So companies are generally not used as much as unit trusts because unit trust the distributions from each unit gets flown on directly to the individual. Borrowing wise, the banks still consider you liable for that debt no matter which way you do it. If I apply for a loan application I need to declare 100% of that debt as mine no matter the structure. Potentially the bank might let you claim 100% of the rental but if it was only in our names and you owned 50% then they might only let you claim 50% of it. So the banks look at it as you owning 100% of the debt and only 50% of the rental which can be a bit of a sting. If you're looking at building a portfolio you need to do this planning up front and that can stop you in your track   Cost and complexity I’ve seen some Frankenstein-ish crazy A3 page structures and it’s just unnecessarily complicated, have the right structure, be smart and keep it simple. The more structures you have, the more costs you’ll incur. To set a company up you need to pay the ASIC fee of $472 just to set up a company and then add on the accounting and legal costs, ongoing compliance etc. it can be a costly process. If you’ve got a family trust for the property to be held in, you’re paying an addition $1,000 for auditing fees, depending on the situation, if you can benefit from the different structures, then it’s worth it. The good thing with a family trust is that it's discretionary, so if you have kids you can distribute income around your family depending on their tax rate.   Structures, in summary: In summary, you’ve got four major types – personal, company, unit trust, discretionary trust. Out of them, the most simple is personal and most complicated is SMSF, if depends on your long-term outlook.   Personal – Owning property in individual or individual names Pros – Easy to do. Cons – Limited tax planning, risk of ownership. When to do it – On a high marginal tax rate if negative gearing, low marginal tax rate if not. Company Pros – Flat tax (27.5% for most), safety from litigation. Cons – Paying money out will be taxable, no 50% CGT discount, Costly to setup and run. When to do it – Almost never. Trusts Unit Trust – Trust with units for non-family member. Family Trust – Discretionary trust for family. Pros – Great tax planning, segregated environment. Cons - Negative gearing can be lost, costly for setup and running. When to do it – Complicated structure, FT for family wanting tax planning and has other assets to help deductions, UT for non-family dealings like developments. SMSF Pros – Limited to no tax payable, able to use retirement assets to buy property. Cons – Costly, funds stuck inside super, deductions at 15% max. When to do it – long term property, has to be good cash flow, business premises.   If you enjoyed this episode, drop us a line with our Q&A Wednesday or leave us a review on iTunes here.

  • Q&A Wednesday: Am I Too Young to Invest & Should I Use A Bank or Online Trading Platform?

    · 00:03:30 · The Rentvesting Podcast | Smart Investor | Real Estate Investing Couch | Australian Property Talk

    This week we’re doing Q&Wednesday… If you’ve got a better name, well tell us. We get a bunch of questions each week so we thought we’d give you guys a chance to listen to the answers. Jake: Hey, how can a 17-year-old get started in investing, I have about $1000 in savings and I really want to get started in investing in the stock market. I have seen that most banks have their own trading platforms is it better to go through a bank or is there an online trading platform that has the option for under 18s to invest and if so what would be your recommendations? This is good, you can't ever be too young to invest, whether you have kids or are a man-child like me... Where do you invest and how do you do it? Louis, tell us! Most banks have their own trading platforms and there are third party platforms too, accessing those - if you’re with Commbank you can get it up online through Commsec. The issue is that you’re 17, in Australia, there are rules around minors purchasing investments and shares. You can't legally buy it in your own name but you can set up a trust account with your parents or your guardian then you’d be put as the account designation. So you’d have the right to the shares but it’s got to be owned by someone who is over 18.   Where to invest? Should it be through a bank or online trading platform? It comes down to brokerage, all trading platforms have the same access to what’s on the ASX, it just comes down to what they charge. Bank platforms are similar on brokerage fees while third party's fees can be a little more. Then with accounts overseas, you can access them too, but for the US you’d have to prove you’re a citizen, so it gets a little more complicated. So take a look at the brokerage fees and compare them, this will help you make up your mind. If you have any questions send them through to us!

  • Become a King of Cash flow: What is Cash Flow, How to Manipulate it and What the Banks look for

    · 00:17:48 · The Rentvesting Podcast | Smart Investor | Real Estate Investing Couch | Australian Property Talk

        Today we’re going to cover: What is cash flow A few tricks you can use to manipulate your ongoing cash flow by reducing tax and expenditures If you are borrowing, what the bank will look for Rates and how to forecast what your future expenditures will be   We’ve also got a webinar coming up, check it out here.   Jayden’s story: I bought a property in Sydney and was forced to sell it before I wanted to, because I didn’t understand the importance of cash flow. Interest rates were going up and the bank gave me the money and it seemed like the right thing to do at the time but it led to me selling early and having to live off a credit card.   So let’s prevent you from getting into this situation too.   The story in detail:   This second property I bought was an investment property and I was living in my first property. I wanted to renovate it, at a high level went to the mortgage calculators online, at the time it was based on interest only repayments and I was fine. But then about two weeks after I bought it, interest rates went up – this was in 2009-2010 and the property needed more work too. The thing I didn’t account for, and most people don’t, is assuming that you can afford it based on the current repayments. Repayments went up and I didn’t take into account body corporate fees, costs involved in tidying it up and the lost rent for not renting it immediately.   After that I had to sell it within 2 – 3 months of owning it. I would have liked to hold it longer, because now that 1 bedroom in Alexandria is worth a lot more that what I paid for it.   Cash flow is a generic term Think about the income you’re earning and your after tax income. Then look at your outgoings, like in that example, if you jump on a bank repayment calculator, and think the repayments are $2,000 per month but you don’t account for body corporate, water and rates, or only are looking at interest only repayments, well you’ve got to consider all of these.   For a recent client, we were trying to figure out whether to go interest only or principal and interest. While the cash flow was better to go interest only, we worked out that for a $420,000 loan they were going to be paying $350 more in interest every month under interest only. That’s because the banks at the moment are pricing them differently, so if you’ve got an existing loan, check that you are up to date with these changes.   The other point you can look at is PAYG withholding variation application. This would have helped Jayden, when he eventually sold that property, because he turned his first property into an investment property, which was negatively geared.   Every year after depreciation Jayden might have gotten $5,000 or $6,000 back at tax time but with this variation you can do it monthly. The ATO will allow you in most situations to do this. Every fortnight when you get paid you get PAYG withholding tax, so when it gets to tax time you don’t receive a big bill because you’ve been paying it along the way. You can lodge a variation where they will reduce how much tax is being withheld every pay cycle in anticipation that you’ll receive it at the end of the year. So it’s paying less tax now instead of receiving a rebate at the end of the year. The benefit is that on an ongoing basis you’d have more surplus cash month to month.   Another major thing that’s changed recently are the bank’s lending requirements   A couple of years ago if you went to apply for a loan the bank wouldn’t ask you about your living expenses. They didn’t take into consideration everyone’s different expenses per month. They had just categories like single or no kids, or couples, with or without kids. Fast forward to today, they’re getting to the weeds of your living expenses. Banks want to see a minimum of the last 30 days of statements and they have computer programs to break it down into fixed or discretionary expensesi. Fixed expenses are electricity and phone bills, rent etc. Discretionary involve your handbag buying habits, going out for drinks and food, jewellery, etc.   If for the last month you’ve been on holidays, they will look at that and annualise it. So a tip for this is if you’re going for another loan soon, be a bit frugal for a while and make sure your cash flow is in check if there are too many discretionary in there, get rid of them. As this will have a significant impact on how much they’ll lend you, too.   Looking at longer term interest rates If you’re forecasting with your current cash flow that a property is really affordable right now, and is slightly neutrally geared, look at what it would be like if it went back to long term interest rates - around 7.5%. Effectively, because the earnings to debt ratios are higher than they used to be, lower interest rates are the new normal for interest rates. But the reality is the rates won’t stay low forever and eventually they will go up. Don’t get caught out, when the rates go up they go up quickly. Google search ASX rate indicator and there are graphs you can click on which show you what a lot of financial markets expect interest rates will do over the next 18 months.   It’s expected that in less than two years rates will start going back up. One thing to look out for is that fixed rates will generally move 12 – 14 months out from when the variable rate will. Those fixed rates are already starting to move, so consider this option getting some certainty around your cash flow.   In summary Components of cash flow are – income and expenses, fixed and discretionary expenses. The easiest things to change are your expenses. The major thing is if you’re looking to build wealth you need to get your cash flow in order. Unless you can generate a surplus income, and put that towards an asset. Otherwise you’ll be similar to Jayden’s position and buy an asset for long-term growth potential, but if you have to sell that before you’re ready to, you won’t be able to generate much in the way of wealth. Just because the bank will give you money doesn’t mean you should take it.   Check out our Facebook here or leave a review on iTunes.