G’day, my name’s Ben Everingham, and today we’re going to talk about the four most important things to remember when buying positively geared property.
G’day, my name’s Ben Everingham and I’m the director here at Pumped On Property. We’re a buyers’ agency who help clients from all over Australia buy tens of millions of dollars worth of property every year. In today’s video I’m going to talk about the four most important things to remember when buying a positively geared property. I’m just going to give you a quick chance to know that I might be doing a bit of ranting on today’s video because there’s a few things that really, really frustrate me with the Australian property market and the average investor’s psychology, so I apologise for that in advance, but let’s get into it.
The first thing that I wanted to talk about in today’s video, before we get started on the four most important things, is the fact that I absolutely love positively geared property. I cannot personally get enough of it. Every single property I own personally is actually positively geared now. I’ve got granny flats on three of those properties, I’ve built dual-income properties myself, I really, really like the concept of positively geared. I think there’s still a time and a place for positively geared property in every portfolio, but there’s some other things to consider, and that’s what I wanted to make you aware of in today’s video.
I suppose the first part, or the first of the four things that I wanted to talk about, is the fact that positively geared property is great, but capital growth still matters. I see investors and talk to investors every single day of the week that are like, “I want a positively geared property.” I completely get where you’re coming from, but I think there’s an issue with Australian psychology, or maybe the average investor’s, that they just don’t understand how people actually achieve financial independence from investing and property.
Having 10 properties that give you $100 per week passive income is one way to get $50,000 worth of passive cash flow per year. Obviously 100 properties at 100 bucks a week, 1,000 dollars a week, times 50 weeks of the year, is a 50,000 dollar income stream, but what happens … that’s cool when interest rates are at 5 percent and you’re getting 100 dollars per week income, but what happens when interest rates to go 7 percent, and now on each of those property you’re actually paying 100 dollars per week? You’ve got a property portfolio that were possibly geared, and now they’re actually costing you a 50,000 dollars a year hold. This is what most people don’t think about.
The way that 90 percent of sophisticated investors, that I know, achieve financial independence, they buy really high-quality property, and those high-quality properties might be metro, they might be regional, they might be negative or neutrally geared or they might be positive, it really doesn’t matter as long as it’s a great property. They allow that property to double in value over time through natural capital growth, or maybe through getting a little bit more of your hands dirty and adding some value to the property, and then what they do is, they sell half of the property off to keep the other half outright.
If you own a property outright, let’s say you own one million-dollar property which rents for 1,000 dollars a week, regardless of what happens with interest rates, you’re still going to get that 1,000 dollars a week, even in the worst financial crisis or recession. The property rental figure might drop by 30 percent, but you’re still going to get your 700 dollars a week reoccurring regardless of what’s happening in the bigger cycle. That’s a more sustainable way. I think a lot of people that forget about capital growth and just go buy positively geared property, again, are going to end up putting themselves in a hole and miss out on huge long-term financial independence as a result of it, because they think that the interest rates of today are going to last forever, and they’re just not.
The second thing I wanted to talk about, which i sort of just alluded to, is the fact that interest rates rise. A property might be positively geared now; it’s not hard to find a property that, when the interest rates are 3.5 to 4 percent on an interest only loan, is positive, but what happens when interest rates correct back to their 50-year average of 7 percent, and all of a sudden that positive cash flow that you’re creating, that’s enabling you to leave work and retire independently is gone, and then you’ve got this dud property that’s costing you money? Always think about, will this property be possibly geared at a 7 percent plus interest rate? If so, maybe consider and weigh out the pros and cons of that, versus another property.
The third thing I wanted to talk about out of the four things, or the four most important things to remember about a positively geared property, is the fact that regional property is more susceptible to correction. I see a huge amount, and talk to a huge amount of investors, that are kind of like, “I want to go buy a regional property because I can buy it for 200 grand, and it rents for 250 bucks a week.” Seriously man, what the heck is two and a half thousand dollars a year going to do for you in the short term, medium term, or longer term? That extra 50 bucks you’re getting a week, what is it really going to do for you in the scheme of things? When interest rates rise it’s gone anyway.
You’ve got to remember that there are more options in regional marketplaces, but those regional markets never get the capital growth that the capital cities do, which means it’s going to be very difficult for your property to double in value and then sell half to keep the other property that you own. Remember that regional fluctuates. When the market changes, and the market will change multiple times in all of our lifetimes, there will be corrections, there will be great periods, there’ll be slow periods, but it will correct, and you’ve got to be prepared for that correction, and know that every time there is a correction, regional markets get absolutely smashed first. If you are think regional for positively geared property, make sure you’re thinking about major regional markets with a decent population, good infrastructure, and good job growth for the future, so you’re still looking at your fundamentals.
The fourth thing and last thing that I wanted to talk about before sharing some different ideas with you is the fact that, just because the rent covers the expenses of the property doesn’t mean it’s a good investment. An example of this is a lady that I spoke to this morning. She inquired into our business about 12 months ago. It never really went further than the first strategy session, where I gave her some ideas. She said she was going to go get it on her own, and so I introduced her to my personal mortgage broker. He was so worried about her yesterday that he sent me an email saying, “Can you please ring this lady? She’s about to make a massive mistake.” I didn’t care about working with her as a client, I wasn’t after her business, but I really did give a shit about stopping someone from making a massive mistake.
She was getting stitched up by some bullshit property marketer from Sydney that was selling her a piece of land in the middle of nowhere in Queensland, and the land value was 89,000 dollars. She was building a dual-income property for 450 grand. You don’t have to be a rocket scientist to know that the value of property in the future is based on the land, not on the building. She said to me, “Ben, the income projections from this company …” Which I thought were inflated by 250 dollars per week at least, and their depreciation figures were completely overly jacked up as well, after I sent them in to my accountant, were just so off.
This lady was expecting to receive 100 to 200 dollars a week passive cash flow. I thought she was overpaying for the property at least 150,000 dollars, which I thought the builder must have been making a fortune, and the piece of shit salesperson that was trying to sell it to her must have been making a fortune as well. It honestly made me sick, so I rung her, I explained this, and this is why this video is triggered, and basically said to her, “You’re making a massive mistake.” She was so far sold down the line of this journey with these people that I don’t think the conversation meant anything. It probably just upset her more than anything.
She’s going to go buy this property, in 15 years’ time the properties still going to be worth less than what she paid today. It’s in a market where no one actually lives, there’s no population growth. I had a look at the rental vacancy rates in the area, they were like 5 percent. A vacancy rate figure that you should be looking for is below 2 percent. It was just a shocking deal, but this person had built trust through lying, through over exaggerating figures, and now all of a sudden this poor lady’s going to get stitched up.
Which comes back to my point: just because it pays for itself doesn’t mean it’s a good deal. Anyone can go find a property that pays for itself in the current market, but 99.9 percent of those property are absolute dogshit rubbish. Sorry to be swearing, but I’m super fired up about this concept, because I’m sick of hearing about people making mistakes, and those mistakes costing them 5, 10, 15 more years of working a job that they hate, just because they’ve been stitched up by the wrong person, now they can’t get out of it.
I didn’t mean to be cynical. As I said, I love positively geared property, but the right type of property. My concept, or the way that I wanted to finish this video, I’m going to share two examples of great positively geared options in major metro markets that you can buy right now for under 500 K. These are not products that I’m trying to sell. We’re a buyers agency. We understand what people want and then we go find it. It’s more examples of property I’ve helped a couple of clients buy in the last couple of months, which I just wanted to share so that you at least know that there are great positively geared options out there.
My concept is, why not get both? The old days of just buying a negatively geared property for capital growth, or just buying a positively geared property for cash flow are dead. You can 100 percent get both now. You can buy close to Sydney, add a granny flat to that property, and get great cash flow, as well as whatever the capital growth rates in the city are going to be long-term. You can do the same thing in Brisbane, you can do the same thing in a huge amount of markets in Australia. Go for both, and if you don’t currently understand how you can get both, then have a look at some more of my videos, have a look at some of the great videos over at On Property with Ryan McLean, or have a listen to his On Property podcast, because every day of the week he’s sharing amazing ideas around how you can get both, as do I in my videos.
On the two examples that I wanted to finish up with in regards to capital growth plus cash flow, I recently helped a client buy a property for 380,000 dollars within one kilometres walking distance of the beaches in Brisbane, to the north side of the city I think. The suburb was about 24 kilometres from the CBD, so not far away, well-served with infrastructure. Generally I wouldn’t look that far outside of the city except for the fact that it’s right on the beach, and as we know from Sydney and Melbourne, beaches are desirable longer-term as the city grows.
Basically this client bought a 400,000, or 380,000 dollar property, they added a 110,000 dollar granny flat, which equals about a 490,000 dollar investment, which I completely understand isn’t everyone’s price range. That’s okay, because if you want quality sometimes you’ve got to spend a little bit more money. If you don’t necessarily have that money to spend then there’s plenty of great other examples. This is just the example that I’m sharing today.
For a 490,000 dollar investment, with the house plus a brand new granny flat, this client is getting 380 plus 300 dollars a week, so a combined return of 680 dollars per week, giving this person well in excess of a six and a half percent return. 490,000 dollars, 680 dollars a week in rent. It’s in Brisbane, which, at the time of shooting this video, is by far one of the more profitable markets in Australia. It’s already performing well, and it’s got great potential in terms of the expectations from the commentators in Australia. The vacancy rate in the suburb is very low, it’s close to the city, a train line’s just opened down the road, it’s close to the beach, it’s got all of these great opportunities for long-term capital growth because it’s a metro market, it’s Brisbane, but then you’ve got this great cash flow occurring at the same time.
That sort of opportunities available to anybody who’s prepared to get outside of the box and have a bit of a look right now. You may buy the house, get your 5 percent rent return, and then in a couple years time, or five years time, go back and add the granny flat to get the cash flow. At least it gives you options to get growth and get cash flow so that you can get moving forward towards financial independence, and continue to buy high-quality property.
The second example, and the way that I’ll finish up this video, is a brand new dual-income property. Again, my preference is probably towards existing houses. I’d say 19 out of every 20 clients we help, we help buy existing property, but every now and then I know there’s a tendency for people to look at positively geared, brand new dual-income property. Again, this is another example on the north side of Brisbane. Close to the water, new trains station, new university opening up. This is an example of how knowing the right people can get you a significant buying advantage.
I’ve been helping some clients acquire a 400 square metre piece of land and build a 3-bedroom 2-bathroom 1-car garage, 1-bedroom, 1-bathroom, 1-car garage, dual income property. The turnkey price of the house and the land, done, handed over, ready to move in, has been 470,000 dollars. I know other property marketers and the builders and the developers have been selling them to people, that are not me, for between 510 and 540,000 dollars, which means our clients will be making a little bit of money on the way in.
The suburb is predicted, according to RESIDx, to do 8 percent capital growth per year for the next eight years. I think that’s completely wrong, and I really do think this is one of the examples of the 20 percent of the time that RESIDx is wrong. I think the suburb’s more going to do 4 percent per year for the next 10 years, but I might be wrong and my clients might do even better. But the cash flow opportunity for this property, we’ve been renting them out, I run a property management company in the area as well, we’ve been renting out the completed product for 580 dollars a week, so a 470,000 dollar brand new property, making money on the way in, potential for capital growth, 580 dollars a week rent return giving you a 6 and a half percent rental yield again, and all of the depreciation benefits that come from a brand new property as well.
I hope this video has put some things in perspective. I didn’t mean to come across as cynical or negative, but I don’t want you to make a mistake by rushing into some property just because it pays for itself in some regional area. Now you know there are great options available. I’d like to offer anybody that’s seriously, seriously considering positively geared property as an option to book a one-on-one strategy session with me personally, or my brother Simon.
As I said, we help buy at least 40 to 60 million dollars of high-quality property per year for our clients, and really have a good understanding of the market, so you can go to www.PumpedOnProperty.com and click strategy session in the heading. You’ll find access to our calendars directly there. You can book a time to have a session, it’s completely complimentary, where we can talk about where you are, where you’re looking to go, and I can share a huge amount of other examples of what’s available. You can take that information and go and do it yourself, or maybe we or someone like us can help you do it.
I really appreciate your time today on today’s video, and until next time, stay hungry.