Simon Loo is a successful property buyer’s agent and director of property buyer’s agency, House Finder. He has been working in the property industry for a vast amount of years and has gained a wealth of knowledge along his journey. He is generous enough to share some of his expert advice on how to buy an affordable home and improve your skills when it comes to investing in property. 

Come with us as we delve into today’s topic of housing affordability and the biggest issues surrounding this problem, we learn about one of his clients and the situation they were in and how Loo was able to help them, we discuss the current climate of the property market in relation to the ongoing global pandemic, we find out about some of the strategies we can implement to be able to purchase property and make a profit, and much much more!

In this episode, we are diving into the topic of property affordability and we learn about one of Loo’s clients on how they adapted a strategy to the current property climate. 

It's no secret that Sydney is unaffordable for, you know, both investors and owner-occupiers. A lot of people come to me who, let's say, for example, they live in Sydney and they're fixated on investing or putting their money in their own backyard, which comes down to a bit of a comfort zone type thing. So, you know, as an example, I met with a relatively young investor who was around about 26, 27 years old. You know he's been working for maybe about five, six years, finally saved up a deposit to buy, to invest in property. He had his heart set on investing rather than buying a place to live in and, you know, with around about a $700,000 borrowing capacity or a buying capacity.

You know, he was only looking around Sydney, he was looking at some options in Western Sydney and in places further out or maybe even smaller units in the city. Two things were apparent. He could have bought the same properties that he was looking at not very long ago for in many cases, half the price of what they are now. And the other thing was wherever he looked, the cash flow was extremely poor. So, you know, he would, even with low super low-interest rates, he would still be looking at a negatively geared property unless he was prepared to buy something where he had to put some money into it to renovate it, you know, whether to make it more appealing from a rental perspective or maybe add extra rooms or add value to it. So, you know, when we sort of met up, I kind of sat down with him.

I go, look, you know, I had exactly the same problem when I started investing. I invested in my own backyard as well, purely for comfort because, you know, you're familiar, you can go see it, you can go touch it. But in Australia, there's markets, thousands and thousands of different property markets, not just Sydney, not just Melbourne. We kind of expanded on the viability of, okay, what's your ultimate goal with your property investment journey? Like are you planning to create a passive income or are you planning to create equity to ultimately buy like a principal place of residence in Sydney? And this particular client was definitely going down the passive income route because he actually ran a side business as well you know, apart from his day job and he wanted to focus on this business, which was in a very niche sector.

We find out about the motivation of his client and why he decided he wanted to start investing in property.

It wasn't a type of business where you could just jump in and start making, you know, a living out of it, so to speak. But it was his true passion and he really wanted to pursue it regardless. So, you know, he wanted that passive income to sort of go down that route and quit his job and focused on the business full time. I kind of said to him, look, instead of buying one unit or one property in Sydney, you'd be leveraged, you know, to the hills just to own this one property. You're putting all your risk into this one property where if a tenant becomes a little bit too difficult to not pay rent or anything like that or any maintenance issue, then the little bit of cash flow that you do have is going to be affected.

To create a true passive income, you need multiple properties. You can't just rely on one property to bring in the passive income. Especially once you quit your job. It's extremely risky. So I kind of suggested to him, look, why don't you have a look at other states? Why don't you have a look at other places in Australia that, you know, you could buy a decent property that doesn't compromise on location, doesn't compromise on lifestyle amenities? You're not necessarily buying in, you know, bad or lower socio kind of areas, but the affordability is much better because the house prices that you're buying into are much lower and in turn, the cash flow component makes a lot more sense because the yields, let's say on a $400,000 house, you might be renting that house for $450 a week or $500 a week and it's just much better returns on a day to day basis.

And if your goal is to buy multiple of these in the future, then it's important to have that flow in as we kind of discussed in previous episodes. So, you know, we talked about that a little bit more and we talked about, you know, different locations and different types of properties to buy and he was ultimately convinced that this was a better route. Instead of buying one, let's say two-bedroom unit in Sydney with his borrowing power at the moment, he was set on buying 2-3 properties interstate with the price point being a lot lower. The quality of the property was much higher as well in terms of the physical quality of it or all the investment viability of it, which basically means that there were proper houses. 

We discover why the housing prices vary from state to state. For instance, why the property prices in Sydney are so much higher than Brisbane.

It simply comes down to market cycles. You know, like Sydney, if you look historically, Brisbane is always a few years behind Sydney in terms of boom cycles. So once Sydney reaches the very top, which I don't have a crystal ball, I'm not sure if it has or not, but you know, I think it's fair to say that it's very close to it if not there already. That's when Brisbane, you know, maybe a few years later would then start to pick up, which at this current point in time, I'm actually seeing a lot of that happening. I mean, it's really no secret the media's been sort of going at it you know, in early 2020 as well, just in regards to a lot more sort of buy activity in Brisbane. In fact, last week I saw a property that was in the Redlands Bay area in Brisbane that had around about 55 different parties rock up to the first open house.

I'm starting to see, again, this is not unique, you know, a particular indication that it's really starting to pick up but I guess anecdotally, you know, I could definitely see a lot of changes that I haven't seen pretty much for the past three to five years in the Brisbane market. So, you know, it really comes down to the fact that there are different markets within markets, different markets in Australia as well. Sydney had a really good run in the past, sort of five to six years. I think there's a lot of fear of missing out the sentiment in Sydney as well, where people are thinking, if I don’t get in now I'll never get in. And again, from an investment perspective, it just doesn't make much sense because the cash flow is so low that the property prices are so high and a lot of people are turning to areas like Brisbane where the signs are that it's going to be next in line in terms of, you know, seeing consistent and accelerated growth.

Now, once Brisbane has had its run, which, you know, again, I don't know when that is, but once it does, it won't be time to look in Brisbane anymore. It might be time to look in other areas, maybe Perth. That's if the Perth market has kind of recovered at that particular point in time, or at least at a point where it's not still going backwards. And so as an investor, I think it's really important to look outside the square, you know, look outside your comfort zones and just sort of make decisions based on logic and based on numbers, based on investment reasons rather than based on more sort of emotional reasons.

Now that we understand Loo’s strategy in helping his client, we find out more details on the property that he helped his client to buy.

In Brisbane for example, which is where we ended up buying, we bought one property so far together. It ended up being a property 25 kilometres from the Brisbane CBD. We ended up paying $347,000 for a house. And in turn, it rented for $410 a week. Didn't require any renovations. It was just a buy. We had to put, I think about $2,000 into it to fix up a few little minor things. I think it was like new curtains and you know, a really solid clean because nobody had lived in this property for a little while. So a bit of yard work, a bit of cleaning, new curtains. And that was it basically, some new locks as well. And it was in a good area, you know, 25 kilometres out. It wasn't like a low socio area. It was kind of like a, you know, family-friendly, quiet, suburban, it was close to a major Westfield.

It was close to trains, parks and schools and things like all those typical emotional things that you look for. And it was much better for this particular client's goals because this is the type of property that I guess enables you to keep going. You don't just kind of own one property and then you're kind of just stuck there wondering how else are you going to buy your next one to reach your goal, to reach his goal, which was to build a passive income. So you know, those kinds of properties I think to stack up a lot more wherever you are, whether you're in Sydney, Melbourne, Brisbane, Adelaide, it doesn't really matter. But those kinds of properties just make a lot more investment sense. And they're the kind of properties as well that if you do reach a certain level of properties.

They're the kind of properties that you want to keep for a very, very long time because you know, the cash flow is consistent. They're low maintenance, you know, you've bought them, you know, the quality of the property as well. You're not making a compromise based on how much you could afford. So, you know, this particular house was brick. It was, you know, a single storey, on over 600 square metres of land. It's been there for about 20 years. So the house was about 20 years old. You know, when we did the inspections and the checks, there was nothing wrong with it. So it's the kind of house that'll last for at least another 20 years without much structural damage, touch wood. And it's just one of those properties that are solid and you're buying it. You know, in this particular area that we looked at, you know, the median house price between eight to ten years ago hasn't changed.

It hasn't changed too much, you know. So when I say that, a lot of people consider that as a bad thing, it hasn't really experienced that much growth for the past eight to ten years. Why would I buy there? But from my perspective, I feel like that's precisely the reason why you should be buying there because the trends or the likelihood of that property going up in the short term is higher because you've basically had a stagnant period for between four to around eight years already. So I mean, it's kind of contrary to what a lot of people expect growth to happen. You know, they kind of look at a very short term history and think, Oh, you know, Sydney's gone up. You know, this particular suburb of Sydney may have gone up 50% or 100% I need to get in now because there's that history of growth. But what they actually don't realise is they've actually missed out on a lot of the growth already.

With the current situation of the world and the global pandemic, we learn about the impact that it’s had on the property market.

I mean on the ground, again, anecdotally I haven't actually seen a slowdown. I've seen a taper off on the very top end of the market. And by the way, whilst this has been recorded, we're probably about a month into Australia starting to become serious and the top end has kind of tapered off. And when I say the top end, I mean like the really top end because as a buyer's agent as well, I actually do buy property in Sydney, but the clients that I have in Sydney are looking for places to live in rather than to invest. And what I've noticed is that the very top end of the market people are not showing up to auctions anymore, which is traditionally how they sell very premium property in Sydney.

As you've heard, you know, losses in the stock market, losses globally, you know, pretty much every other asset out there. A lot of the demographic that's buying into expensive properties have a large share portfolio or run their own businesses or have investments outside of the property itself. So I've noticed some people have, some of the demographics of buyers that are buying these very expensive properties are perhaps losing a lot of money elsewhere and they're not necessarily looking to buy multi-million dollar houses or anything like that. But on the more affordable side of things, which I'd say covers 80-90% of what I do, I've actually noticed an increase in appetite, especially in the price range that I was talking about.

So around the 300,000 to $400,000 or maybe up to the $500,000 mark, because I think the appetite for investing in property has a slow down. You know, people still see it as a bit of a safe haven. We're getting all these interest rate cuts as well, which is boosting, not boosting, but at least maintaining confidence. And I think given what's actually happening in Australia, one of the requirements is that people would need housing because people need to stay indoors. They're working from home and they need a place to be. So I think that the simple, neat necessity of having a property or having a house, so living whether you're renting or buying is not if anything has increased. So from that perspective, I mean we're a month in and I haven't really noticed too much of a drop-off, but who knows, you know, it's early days.

I have had a couple of clients come to me and say, you know, it's time to hold off a little bit for their own affordability reasons. Again, they may have a share portfolio that's lost a little bit of money, but I think that if you can borrow money and if you are eligible to buy property, I don't think it's a bad time to start looking around, you know because there are definitely people that are, you know, look, I use the term hurting, but you know, people who are in situations where they might have to sell even more urgently than they previously had to. So if you're at the right place at the right time, you might be picking yourself up some bargains.

When moments like this arise it is important to be ready to pounce and make the most of an opportunity if it presents itself.

It's obviously a black swan event. It's unprecedented. You know, I've always been a huge advocate of people taking action whatever the situation is in the world. You just kind of have to push forward. Not without, not obviously just do anything, but obviously you have to look at the risks and all that type of stuff involved as well. But typically when these types of things happen around the world, that's when the best opportunities present themselves. Hopefully, this thing is going to be temporary that we're going through. And once you know that there is some good news out there, a lot of these markets are going to start bouncing back and the typical losses that people have experienced are going to be, you know, it's just going to come back at some point in time. So if you're ready and you have the means to, it's not a bad time to be looking around as well.

We delve into how Loo was able to figure out what was affordable for his client and the different factors that he took into consideration. 

I think when people look at affordability, they look at how much they can afford to spend to buy the property. But I think a lot of people don't realise affordability can come in the form of owning the property as well. So if you were to buy a one $800,000 house or units and $800,000 is all you could afford to buy an investment property, you know, you're essentially exposing all that $800,000 capital or debt to one tenant, to one house, one bathroom, one kitchen, one air-con, like all these kinds of factors. Because if something happens to that one kitchen or one bathroom or one tenant or one household, one property, then it takes money, it takes time to fix it. It takes time to replace tenants if they're not paying rent, you know, you're just exposing yourself to a lot of risks and ultimately it's going to hurt your back pocket because the reality is these things are going to happen.

Part of investing and owning properties is managing these issues and it's almost certain that something will go wrong with your house at some point in time. So you know, to curb that issue is instead of buying, you know, having an $800,000 capital, if you split that up into two or three properties, you know, you've got suddenly three separate tenants, you've got three separate kitchens, three separate bathrooms. Now I know what a lot of listeners may be thinking, they're thinking, okay, there are three things to go wrong there, that is true. But if one of those things go wrong or one of those houses experiences, you know, a little bit of difficulty, at least you still got, unless you're extremely unlucky, two properties that's doing its own thing, you know, bringing in cash flow, they're still renting out.

There's no maintenance issues there. So you know, you’re just kind of spreading your risk a little bit more. And if let's say you were unlucky enough so that all three properties were experiencing some sort of issues together, then it wouldn't really be any difference in having that one property that you spent $800,000 on that's experiencing problems as well. So, you know, spreading risk like that has worked extremely well for my own portfolio. My portfolio at the moment consists of a bunch of houses that are just being rented out normally. And I'm always going through a vacancy or I'm always going through some kind of maintenance issue, but it doesn't really affect me too much because I've got a bunch of other properties that's doing what it's supposed to be doing.

So, you know, affordability from that perspective is also important because you're owning these properties for several years. Often even more. And at the end of the day, if you don't have the cash flow or the capacity to own these properties long term, you know, even more people now because of what's happening in the world. Then you might be in a position where you're forced to sell a house prematurely,  which is where people lose money. So I think the fact that buying properties that you can afford by looking in different markets and having the bonus of having that cash flow so that you can manage them or own them long term without too much of an impact to you is also two important things to think about when it comes to vulnerability.

By having more than one property and not putting all your eggs in one basket is advantageous and can mitigate a lot of your risk.

There are other tax benefits as well, such as land tax thresholds are kind of just moving, you know, having different properties in different markets. But what you'll find is like even if you start off with two or three properties in one particular market, you know, in the long term if the goal is to own, you know, let's say a dozen properties in the next sort of 20-30 years, you might not just have one in every state. You might be having a few in every state. So there's no real right or wrong in the sense of, okay, I need to buy one in every state in the next year. Again, you need to look back at, you know, where the markets are at. You know, just diversifying for the sake of diversifying is never a great idea because if you buy, let's say, you know, you've got a property in Brisbane at the moment already, if you wanted to buy just purely to diversify, you might be looking in the Sydney market, which as we kind of discussed, probably not the best place to be buying an investment property at the moment.

So even if you end up with two properties in Brisbane, at some point in time you might still be buying property in Sydney again when the market's a little bit more conducive to investing as well.

We find out about where the client is situated at this time and what the next move is that they’re planning. 

He's definitely looking for property number two. This is actually quite a recent client. So, you know, we've just settled on the property. We've just got the property rented out. He's going back to his broker to get the okay for property number two. And then once that happens, then we'll definitely be looking for the second one. The second one we're thinking will be something, again, quite similar. As a buyer’s agent, I specialise in finding distressed properties where you know that there is that potential to take out equity from these houses within the three to six month period. So we're going to kind of be doing that in tandem because this particular client that we've been talking about has enough cash deposit for the second property already.

So we don't really need to take out equity from the first house to buy number two. But we will, we'll also be doing that so that we can use a mixture of his deposit. I make sure if he's on cash and equity from the first property to buy number three. So it's a little bit different for this particular client. He's obviously worked very hard to save a larger chunk of deposit to invest with. So, you know, it's just a matter of finding the right types of properties at the end of the day.