Guide for Real Estate Buyers in Building Wealth

Daniel Walsh is a real estate buyer’s agent and founder of Your Property Your Wealth. He helps his clients purchase investment properties in growth areas. The company’s aim is to help build their clients’ property portfolios and provide useful strategies that can adapt depending on each individual’s circumstance. 

Join us as Walsh answers some of your burning questions and he gives us his expert advice on varying aspects of property investing. We delve into how to start building your property portfolio and where you should be looking when you are beginning your property investing journey, how to invest in property if you only have a small amount of money saved up, why refinancing your mortgage can help you in the long run, and much much more!

Let’s delve right in...

Currently, I have a preapproval for $450,000 and I want to buy a property, but I just don't know where to start. I have paralysis analysis. I'm in my mid-thirties, married with three kids and I've been having the debate in my head if I should buy a unit or house. Can you clarify what way I should go? Thanks, John. So what do you think Daniel?

It sounds like obviously John's been debating this for quite a while and I have seen this scenario play out with quite a few clients and people that do come to me, what they do is they actually, they have so much data or so much come to them in terms of data that they just don't know what way to go about it. What data should they take on board and what data shouldn’t they take on board? And then eventually everything just gets a bit blurred and they don't know what they should buy in the end. I guess the biggest debate that he's having is obviously should he buy a house or should he buy a unit? And I think when it comes to the type of dwelling that you're going to buy, you have to look at what's in demand in the area.

That's first and foremost. You shouldn't be dictating whether you buy a unit or a house, it should be the market that's dictating that. And you just have to really recognise what does the market want and then you cater for that market. So whenever I go into a new market, what I do is I actually would call different agents or I call property managers. And I start to sort of uncover the area in terms of what are people looking to buy and what are people looking to rent. Cause I want to be able to solve both of those problems, right? So if I can solve the renting problem and make sure that I'm buying something that's going to be in demand, buy or rent that property, but also have the problem solved from a buying perspective to say that I'm buying the right type of dwelling so that it's going to be in demand when I'm going to sell that property as well.

So I think when it comes down to buying a house or a unit, he really needs to do the research and just really cater for that market that he's buying it. Now in terms of, he doesn't know where he's even going to buy at this stage. Again, that's going to come down to he's got a preapproval of $450,000. The first thing that I would start with is what yield do you want to really return? What's your overall return on investment? Do you have the capability in terms of your wages and cash flow to be able to have a property that's costing you a little bit to hold? Or do you want to make sure that that property is costing absolutely nothing and/or making you a bit of money each week? So it really comes down to the personal scenario on what can you personally afford the cash flow for this property because that's going to dictate the area. So really he needs to work out what he's going to be able to carry over in terms of cash flow each month and then he's going to have to work out exactly what type of dwelling is in demand for the area before he buys.        

buyers real estate

We learn about the other possible experts that you should be looking to utilise in this type of situation.

In terms of experts, I mean obviously there's buyer's agencies out there, there are different people that do analytics and analysis on different areas as well. So, you know, maybe being able to seek out some people that can help you out in making sure that when you choose a location, you know why you're choosing that location. I think often what people do is they buy off emotion rather than buy off the data. So they might not necessarily even have the data available. So that's sort of why they are looking a bit more emotionally rather than data-centric. Whereas for me, I always want to make sure that I'm not emotionally attached to the investment property, but I'm buying off what I can see in the market at that time. So it really comes down to, you know, making sure that he's buying in the right market in terms of the cycle.

So making sure he is buying in the right state first. Does that state, he's got $450,000, that pretty much counts him out of places like Sydney at the moment. Whereas he might be able to look further abroad and look at different sorts of states that are going to offer a good return for him. Also, be in that price bracket of around that $450,000 and then choosing the right house or unit depending on what he thinks is going to be best off in the future. With the analysis paralysis, I think a lot of people, the way that I help people get over this, ‘what should I buy’, is you've really got to look at an investment property and say, how long am I going to be in this investment for? What is this investment going to do for me over the next 10-15 years and what am I trying to achieve out of it?

Am I trying to achieve out of this capital growth? Am I trying to achieve cash flow out of it or am I trying to have a balance of both of those? That all comes down to how big is the portfolio that he already has and what is he looking for to add to that portfolio? Because at the end of the day, you don't want to be chasing a regional property that might not grow with really high cash flow. If you know you're on a really high wage at that point and you're not really chasing the cash flow and you're chasing the capital growth and you're wanting to build the portfolio using the equity, it really comes down to your specific situation and identifying what you're trying to chase first. The timeframes that you're going to be doing that in. And then starting to look at the state by state, how they're performing, where they're up to in their cycles, and then honing down into suburbs from there.

Let's move on to the next one, which is from Nick. He says, I purchased my first investment property at the age of 23, about five years ago, so he's probably about 28 now. And I want to know if I can buy a second investment property and how I go about doing it the right way. My property is currently worth around $650,000 and I owe about $450,000 and that's from Nick. 

First I just want to say congratulations, he's done very well at such a young age getting his first investment property and it's also performed very well as well. So he's not only got an investment property, he's now got some equity in there that he can start to leverage now. Just comes down to how much equity can he leverage? How does he do this in a safe way? And then where does he go next? So I guess they're the questions of a new investor where they may have, you know, bought their first investment property, especially at a young age where there they may have bought something that's around their own sort of neighbourhood. It's grown in value, but they can't necessarily go buy another property in that same neighbourhood because it's already grown in value. So they're going to have to look at different markets and possibly even different states to be able to get into a new market, maybe around 300,000 to $400,000 mark so they can rebuy into another market and get the second investment property.

In terms of where he's at. He's obviously got some equity there. It's just about looking at how much usable equity does he have. And generally, it really comes down to how much do you want to be leveraged on a portfolio. So typically I like to say that you don't want to take an existing property that you have in your portfolio beyond about 80% of its values. So if you go up to 80% of its value and then you can have the equity between the debt and 80% of the valuation from the bank, that's roughly what you've got in equity that's available. Now, if you go beyond that and you go up to 90%, what happens at that point is you're going to be paying lender's mortgage insurance and you're going to be overall a higher LVR on the total portfolio, which puts you at a greater risk overall in terms of if there was any negative equity in that property in the future.

So it comes down to how aggressive you're going to be with that portfolio. Do you want to pay the lenders more insurance? Do you want to be doing it in a safer way? Maybe looking around that 80%. So in terms of Nick's situation, he has, you know, if you were to look at it, if the bank valuation was $650,000, he owes $450,000, if you take that up to 80% he roughly has $70,000 worth of equity. So he wouldn't be able to go buy again for $650,000 in that same area. But he could possibly go, you know, put a 10-12% deposit down, search out a new market around that 300,000-$400,000 mark and put that equity, that $70,000 to use and buying in a different market and possibly in a different state to be able to diversify the total portfolio that he has.

That way he has two properties that are working for him in two different locations. So I think with his portfolio as well, it's just vital to understand exactly how much equity you have before you're going to go out there. And purchase property. A lot of people want, you know, they start to look at houses before they've even set it up, right? You need to be setting up your equity, you need to be going to a mortgage broker, you need to be discussing with them and getting the valuation done, extracting that equity correctly. And generally, the way that you do that is you would generally get a split loan from that. So what happens is you would go there, you'd get it valued, you would get your $70,000 out as a separate loan with a mortgage broker, and then you would use that $70,000 to go out there and purchase. I see a lot of people, what they do is they actually look for the property first and think about the structure second. And you've got to be doing it the other way around and making sure you're prepared. So when you do find a property and you do know where you're going to buy that you're ready to pounce on the opportunities that present itself.

The next person we have on is Luke, he says, I currently have $100,000 in savings and I live at home with my parents. I'm in my early twenties and I'm single and I want to start investing, but I'm not sure on where I should invest. Where would you say I should put $100,000 in today's market? 

I just want to say obviously Luke's done extremely well for himself. Early twenties, he’s saved $100,000. It reminds me of me when I was younger. Obviously I did pretty much the exact same thing where when I was staying at home, I saved as much money as I possibly could because I knew at that time was when I could save the money to be able to get into it and invest in property. I knew that when I moved out of home it was going to be a lot harder to be able to do that. So sort of capitalising on that position and I think that a lot of young people need to do that these days. So Luke's done very well from that perspective. He's got his $100,000 saved. He can jump into the market and leverage himself in terms of being able to access that compounding interest from the property market early so that over time he can continue to build upon that and build quite a nice little portfolio in his twenties and thirties.

So in terms of where would I be investing $100,000 right now? To be honest, $100,000 would be about a 400,000-$500,000 purchase roughly. And that's because you're going to need a little bit leftover for a cash buffer at the moment where we're seeing pretty much but most prospects in terms of capital growth and overall balancing of capital growth and cash flow is probably Brisbane. Now Brisbane hasn't had a real cycle in about 10 years. And what we're seeing at the moment is interest rates dropping and we're seeing that we can still buy houses at the same rate as they were in say, 2009. And for me, I'm looking at that and saying, okay, Brisbane is the most affordable at the moment in the last decade. Whereas if you're looking at places like Melbourne and you're looking at places like Sydney, it's the most unaffordable.  

It's only been in the last 10 years. So when you look at it from that perspective, I can see that Brisbane is a market where I can go and get a balance of yield so I can buy a property that's either making me money and cash flow or costing me nothing and have very useful cash flow at that point. But I'm also going to be buying a property at the right time of its cycle, which is really in a recovering cycle at the moment. We're starting to see price growth there and we've seen price growth anywhere from between 5-7% in capital growth per year on average annual growth rate for about the last five years. But if you have a look at it, even today, you can still buy properties at the same price as they were in 2009, which was the last peak of Brisbane.

So I really think that Brisbane is the market to be in over the next 10 years, and that's just purely from an affordability point. So the net interstate migration at the moment is the highest into Brisbane. And that's moving from obviously Victoria, which was taking the lead a few years ago. So we can see that people are wanting to move to Brisbane because of its affordability. We're seeing infrastructure projects going there. We're seeing the jobs starting to increase. And I think that you can't go wrong in a market that's already bottomed out. I'm much more fearful of a market that's at the top than a market that's at its bottom. As long as you can identify the characteristics on why that area or why that state is going to increase in value. So I think Brisbane is a very safe bet. And I think for Luke with $100,000 that would be able to get him into a nice sort of house anywhere from sort of maybe 15-25 kilometres out of the CBD and he can have the land component through that as well. So I think that's a state to be watching at the moment.        

He talks us through what the expectations should be when you’re at your starting point and what returns you should be looking at.

It really depends on where he's buying. Obviously the closer to the CBD that you go, you're going to be getting a lower return. And that depends as well on what type of dwelling. So typically, you know, if you stick to say a house and you're buying around that sort of 20-25 kilometres from the CBD, depending on north or south at the moment, what we're seeing is in the south side the yields are a little bit higher than say the north side of Brisbane. But you can generally find around that sort of 5-5.5%t return on a property around that 400,000-$450,000 mark quite easily. So you know, you could have a property, especially when you're putting cash money into it. So if you put a 10-12% deposit down you're going to be able to have a property with a 5% yield where it's probably making you between 1000-$2000 a year just to keep that property.

And that's factoring in your maintenance and your water bills and your rates and maintenance, everything like that, Insurances. So when you factor all of that in, you can own or control an asset with 400,000-$450,000 costing you nothing per year to hold. Now when that investment obviously goes up in value, he can then leverage upon that and buy another investment that's not going to cost him anything to hold because at that time when you're building a property portfolio, you want to be really mindful of the cash flow because if something's costing you too much to hold each week, then you're going to be looking at it from a perspective and say, how many of these properties can I actually hold until I can no longer continue to invest? So Brisbane is a great market for that. You know, comparing that to say Sydney where it's already had 80-90% gains in that market.

It's really interesting that we talk about it from that point of view because yes, the returns are a bit better because of the lower cost of entry into buying these houses. But also too, there is potentially more capital growth in the future because when you look at it, say you're going to buy a property that's $800,000 to $1 million in Sydney for the estimated growth of 50%, there's going to be a substantial jump between that. And that also comes to affordability. Whereas if you go and buy a property, say in Brisbane for 400,000-$500,000 to go at 50% and essentially not quite a big ask because people in Sydney already used to that price point. So it has a very interesting and different appeal. 

I think also as well, like just on that, not only that, if house prices are still at the same rate roughly as 2009 but the interest rates have gone down, that's basically saying that and the serviceability calculators have also dropped as well. And as interest rates are dropping, serviceability calculators are dropping. So what we're seeing really is affordability becoming even greater in places like Brisbane where you're still getting the same yield as you were maybe two or three years ago, but your overall holding costs are actually decreasing. So you're holding the same asset but decreasing your overall holding costs. And like you said, if you go buy something in Sydney and you pay $1 million, what you've got to look at is can my wage actually support that property going to $2 million, in my opinion, I don't believe there's many areas that can sustain that level of growth again. Whereas if you look at Brisbane, you look at our house to say 400,000-$500,000, can that go from 400,000-$800,000? Well, yes. People could still afford that level and when you work out the median wages, you can understand that exactly. Those house prices can go there. Now let's figure out why they will go there.

The next question we have is from Corey. He says, my wife and I had been fighting about what to do with our home. We bought it about eight years ago for $330,000 and it's now worth about $550,000. We are both in our mid-forties with no kids and have a combined income of $120,000 a year. We still owe about $240,000 which for us is a lot and I've been thinking that instead of putting the extra into the home loan to pay it off, should we invest it into some property investments? What do you think? 

I think from looking at the situation, obviously, they've done fairly well in terms of they've got a small debt. The house is increased in value, which is good. They are in a really good income. They're in their forties, they don't have kids, so their overhead should be quite low and they've still got what, another 20, 25 years to actually invest before they retire. So as I always say to anyone, when you're investing, it's about timing the market. So how long are you going to be in that market for? The longer you're in the market, the less risk you have and the more upside for growth and being able to obviously achieve your goal of financial freedom will come. So they're sort of looking at it and saying, should I just be focusing on paying off that mortgage or should I be investing my money?

I don't think there's really, you don't have to do one or the other. And I've been explaining this to a few people where you can actually do both. Why not keep paying off your mortgage? You can see you've got $240,000 loan. Why not still pay off your mortgage, but every dollar that you're paying off your mortgage, you're just looking at the end of it looking to refinance that money back out as equity to go out there and invest in property. And I think what happens is people miss the opportunity over the years where they're so honed in on paying off their mortgage. At the end of the day, what you've got to look at is when you pay your mortgage off, where are you going to be? Zero. And that means that you're not going to be paying any interest per month.

So that's not going to allow you to retire though. You know, just because you have no bill on your house in terms of the interest, you still have to create income to be able to live. So why not do both at the same time? Why not continue to pay off your mortgage and the available equity that you have, which is at the moment lazy equity. It's not doing anything for you. Why don't you refinance that equity out, go out and buy a few investment properties, have those investment properties roughly pay for themselves? So that's not changing your scenario and paying off your own home. You're still paying your own home off fairly much at the same rate. You're just refinancing the equity out and using it for a different purpose. And that's for investment. That just means that by the time you've paid your house off, let's say that you pay your house off and you're 60 by the time you've paid that off, you may have two, three, four investment properties at that point and you may have bought them maybe 15 years earlier and those investment properties have doubled in value now.

Daniel Walsh buyers real estate

So at that point, you've not only paid off your own home at retirement, but you've also got three or four investment properties that would be creating new income and you have more opportunities to look at options with your retirement rather than just having your own home. And I think that people don't really look at it from that perspective. They think I'll pay my house off first and then I'm going to invest. Well to invest you're going to have to get your mortgage and read mortgage in terms of using the equity anyway. So why not use the equity early enough or now to be able to invest and be in the market a lot longer so that you can be exposed to the upside potential growth of the market.        

Continuing on this topic, we find out more about how you should be using your funds in order to pay both at the same time in the most efficient way.

It all comes down to the way that you structure obviously your loans and having a good broker on your side to be able to help you do that. So the way that I like to do it is you can still have a $240,000 loan and you're going to go out there and use the available equity. Let's say that for the first investment property, you're going to use $100,000 worth of equity. You go to your broker, you say, can I please have $100,000 worth of equity? Can I have that as a separate loan? That's a split loan. So now you have your own home loan of $240,000 and you have a split loan, $100,000. Now the way I like to think about it is you haven't increased your mortgage by $100,000 because the $100,000 is going to belong to the new investment property that you purchase.

So when you're factoring in your calculations for the new investment property, what you're factoring in is how much is this new investment property going to cost me on 100-105% borrowing? Because what you're doing is you're borrowing for the entire amount because you've used the equity and you're also borrowing to the statutes, so it's 105% leveraged at that point. Now if you can go out there and buy a property and let's say it costs you $10 a week, $20 a week at 105% LVR, meaning that you've borrowed the whole amount, then you've now essentially got yourself an investment property costing you maybe next to nothing or maybe 10-$20 a week, but you've also still got your mortgage at $240,000 now, yes, it's hitting you by $20 a week, but what you're looking at it saying, if I bought an investment property, say $400,000 over the next 15 years, if that goes to $800,000 you've made $400,000 now the rents are going to increase over that period of time and what that's going to do is make it even more positively geared at that point.

So it might be able to even pay itself off in the next 5 to 10 years and then you can just have that property just sort of burning in the background. But your mortgage hasn't changed. Your position hasn't changed because the investment property is still paying for itself. So now what you can do is still be paying off your mortgage at the same rate as you were before you've leveraged out of that property. So I think it just comes down to making sure that you've got the correct structure and also the right mindset and how you're thinking about your debt. You know, where is the debt really allocated to? The $100,000 isn't on your personal home loan. You actually extracted that out and used it for investment. So now it belongs to the investment property.        

Walsh provides an example on how beneficial it can be if you decide to refinance your mortgage and buy 1 or 2 more investment properties. 

I was reading an article the other day that was in the old newspapers and it was houses in Turramurra. They were $88,000 in 1976, right? 88,000. Now, could you imagine that scene where that person bought the house for $88,000 and they were paying it down, but they actually refinanced and bought one or two investments? If they had done that, they would have, you know, fast forward to now this is 40 years on, but fast forward to now, what you're looking at is you'd have your own home paid off and you would have had another two investment properties. Those current homes are now worth about $1.8 million apiece. So you know a number 21 times. So you look at that scenario and you say, could you imagine the two different scenarios? You bought the house for $88,000 and today, now we have to say 1.8-$2 million.

You own it. You've done very well for yourself. But imagine if you did that and you had the $88,000 and you bought two more investment properties and now you’re worth $6 million. You know, you've tripled your net worth over that time and it didn't have to cost you the earth to be able to do that. You still could have been executing on the same strategy, which is paying off your mortgage, but you were just using the equity to buy more houses, to continue to be able to increase your net worth. Because at the end of the day, your asset base, whatever your asset base is, look at that in the next 15 to 20 years, double that, and that's roughly where you'll be. So it's all about how large is my asset base. If you control more assets, you're going to be worth more in the future.        

We receive some valuable advice and something that we should remember when we are looking to buy investment properties.

That's the thing, like when you're buying property, what you're doing is you're locking in today's prices, right? It's like buying stocks, but going, I'm going to lock in today's price and it's only costing you a fraction of what the actual house is worth. If you have a house worth $500,000 and you put $100,000, your real entry cost is $100,000 not $500,000, so your entry is $100,000 but you've leveraged yourself to $500,000 and then over that period of time, if that goes to $1 million, you've made $500,000 off of $100,000.

You've got to look at it and say, if we buy a house right now, let's say it is $1 million and you buy a house right now, if that goes up 200,000-$300,000 and you've delayed buying a house because you just think, you know what, I'm going to wait for the market, and all of a sudden the market jumps 200,000-$300,000 at that point, it's going to take you a lot longer to pay that extra 200,000-$300,000 off the exact same house because you didn't lock your price in early enough. And that's what it comes down to overtime. We know that prices always generally increase over long periods of time. So you buy houses when you can unlock the pricing when you can.

This episode was produced by Andrew Faleafaga with narrations and interviews conducted by Tyrone Shum.

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