Daniel Walsh is a property buyer’s agent and founder of Your Property Your Wealth. He has years of experience in helping his clients explore and find the best properties for their portfolio and is kind enough to share some of that knowledge with us. He is here to answer the questions that you want answers to the most.
Join us as Daniel Walsh answers your burning questions and gives us his expert advice on various aspects of property investing. We delve into how to add value to commercial properties, how to overcome fear from previous mistakes and losses, why you should be looking to invest at an early age and how it can set you up 40-50 years from, and much much more!
Let’s get started..
The first question is, I’m a 63-year-old former self-employed married man. We have a home worth $590,000 with a $200,000 mortgage and an investment property, which is a factory, worth $1.25 million with an interest-only loan of $530,000. It’s rented out at $78,000 per annum for 10 years with a 4% yield increase. I’m finding it difficult to get employment. We’re thinking of selling our home to buy a $400,000 place and I’m wondering whether to sell our factory and invest the money or keep it and live off the rent, which could be potentially $49,000 per annum after interest. What should I do? Phil.
We were just talking about this before about locking in the price and he’s done well obviously from this factory. He’s actually got an asset that’s already creating passive income. So he’s got $49,000 after the interest. So it sounds like he’s already got passive income. He’s 63 years old and he’s thinking about selling it. So he’s already done the hard yards and now he’s going to sell it. I always say, you know, if you’ve got an asset, something like that’s actually creating new income, it’s something you should probably never sell. And that’s just because it’s going to be very hard to be able to get that income back. So, and he’s got the 4% yearly increase, he’s actually increasing his wage by 4% per year from that factory that he owns. So I think, you know, if it was me, I wouldn’t be looking at selling the factory.
He is obviously struggling to get employment, so he’s going to need income. So the $49,000 is the income. At least he’s got some good income coming in. If he’s not working in terms of downsizing his house, I mean, if he’s happy to downsize his house, that’s the way that I’d be going. He can free up some capital and pay off his own home and buy a house that’s smaller. You know, and be able to own the house outright and then have the $49,000 coming in to live off. That just means that if he doesn’t get a job or he, you know, he’s not earning as much money as he probably once was. He’s going to be in a scenario where he’s debt-free on his own home. Yes, he’s still got a debt on the factory, but it’s producing him income after everything.
So if it was me, I would be looking to downsize my own house, get rid of that debt and continue to keep that factory, increase the rents over time, see what I can do to get that rent up. I mean, I wouldn’t probably be still investing in buying more and more because of, you know, his age is going to be very hard to borrow at that point. So I think I’d be looking more so how can I maximize the position that I’m currently in? And I think selling down that factory would probably be a wrong idea if you did that way.
This is the thing that I’m going to mention here as well, is that there is potential with your existing assets to do something with it. And what I mean by that is that he could look at potentially, depending on how big the factories or what it’s currently got in there, what kind of tenant, if he can actually somehow split the factory into something else, such as maybe having an extra office in the back or maybe there’s extra garage space and rent that out, he could add additional value, therefore adding additional rent to it and generate more revenue. Because I mean at $78,000 a year, that’s substantial. It’s quite good. But you know, potentially if there’s an opportunity to develop the property. You can easily bring it up to maybe a 10% return, which would be about $125,000 now, I don’t know how the factory looks but I’m guessing, I’m making assumptions here, is that there is an opportunity here because it’s a factory, you know, there’s probably plenty of space.
So I would go in and renegotiate with the tenant when that comes up to see that they can actually get some free space that he can do some kind of development, add additional revenue to it in addition as well. Depending on your home, there may also be some upside there too to add some renovation and to get some equity out of it as well. So, you know, rather than looking at downsizing, maybe you might have that extra space and you can rent it out. So opportunities there that I think could be well worthwhile to look at unless, you know, cause we don’t know the exact situation behind it. But I think definitely to explore these options to save, they can be value-added to these properties that you have.
You don’t want to be jumping the gun and selling something until you know you have a sound strategy at the end of it. And especially something like a factory unit where it’s already giving him income. You know, like you said there’s plenty of opportunity may be there to look at how we can increase the income from the assets we’ve already got. Rather than selling them down because once you sell them, you then need to look at where are you going to invest the money next, then what return will you get there? He’s doing quite well and I think that you know, if you can look and explore those different options, you know, opportunities that he may be able to have in front of them, I think that that’s definitely a good option for him going forward.
I actually want to add one last thing because I talk from personal experience. I have a commercial property, which intentionally when I first purchased it, I just wanted to get the revenue from it, like the rent coming through. After exploring, speaking to various town planners and also builders and so forth, they said that I could actually develop the property and add a few more units in the back because it was a free block of land plus I could build up as well and built it aside. Now, if I didn’t do that research and ask, I wouldn’t have known about that and therefore would have potentially missed out on some extra revenue there. So there’s no harm in just going out there and having a look and exploring it. And now that I’ve discovered that, I can also add more, I think I’m going to be able to increase my revenue for about an extra $500 on front and then another $1000 on the back, about $1500 extra per week because I just did a little bit of research.
Obviously there’s going to be cost involved to develop it, but you know, that extra revenue and that income. You know that that’s going to definitely add an increased value of the property and therefore you could potentially draw the equity to invest into more properties down the track. So just an example like that is possible and I’d say just explore it first. So the next question I have is from Mary. She says, help! We are in our late thirties with two kids under four. My husband is on $100,000 and I’m on $70,000 per year. The mortgage is $130,000 on a house valued at $500,000. We have no savings and we have a couple of credit cards, they are paid off each month. So here’s our problem. We don’t fit in our house or our cars, so we need to upgrade. We could subdivide and build a two-bedroom house for $250,000 but we’ve lost a lot of investment properties in the past, over $100,000 and are scared we would make the same mistakes again. What should we do?
You’ve got to take into account that they want to, I mean they’ve got another block at the back of this house. So they are looking to expand and build a second dwelling so that they can live in both of these dwellings or are they looking to sell one of those to be able to go in the back? I guess that’s unknown. But it really depends. They obviously want to upgrade. They need a bigger house overall. So I’m not sure what the front house or the house that they’ve currently got is in size. But it depends on what they’re looking at doing. If they are going to go the way of selling. Firstly what I would be doing is saying, well they’ve already really acknowledged that they can subdivide, so to add value to that property, at least go get the DA approval. So that if you do go to sell that you can sell that with a debt approval and maximize your position on the out. So meaning that you’re going to get the most value out of that property before you sell it because a lot of money is left on the table. If you don’t go through those hard yards of DA approving it, especially if you’re going to sell it. So I would be looking to do that if I’m going to sell that property and upgrade. What do you think?
Totally agree. That’s the thing people will really underestimate even though it may sound like a lot of work and all of it is unknown. You know, if you haven’t spent a bit of time understanding how developments and subdivisions work, it can be a complete black hole there and you can spend a lot of money for getting a very little return. So again, the first thing is probably first to educate yourself on how this all works. Understand what the process is for sub development. So our subdivision, before you go into any of this, cause it is considered a little bit of a property development strategy. I wouldn’t say it’s advanced, it’s not too hard. It’s probably sort of a medium strategy that you could get into. But you do need to spend a bit of time educating yourself.
If you’re stuck on that. I’d say just probably speak to a lot of town planners and get a few quotes around and get guidance from them because they’re going to be the experts knowing what’s possible and so forth. Obviously you know that it can be subdivided. So I would start finding out roughly how long it’s going to take, speak to council, what’s the requirements, speak to a few architects, a few town planners, and get some quotes. And then from there, you know, make an informed decision based on what’s going to be involved in this whole process. And by the end of it, if it works out that we can subdivide it and build a two-bedroom house and still get a good return by renting them out, then it’s definitely worthwhile to actually keep it. I know there’s possibly some fear and you’re worried about making mistakes.
Yes, mistakes will come and are going to occur. But I think at the same time you’ll build up that muscle and that strength, you know, to help you do this in the future because ultimately investing in their property is going to be a skill that everyone will need to learn. It’s not something that you are brought up that you know how to do. But you can minimise that risk by seeking out really, really good professionals and surrounding yourself with a team and that’s what I think is going to be key for you to do. Coming back to the strategy of what you want to do, you know, if you want to fit into the house or you need to move out because if you’ve got more cars and so forth, then maybe consider renting for that period of time and renting out the front house that you’ve got there and doing the subdivision so that that’s possibly another option as well. What do you think?
It all comes down to the state that they’re going to be doing this in. You know, I know that in Victoria we’ve done subdivisions there and DA approvals cost between 15,000-$20,000 where we’ve been able to build townhouses to the rear of properties. So it’s a misconception sometimes on how it’s going to cost to be able to DA property. So you’ve really got to look at it and explore those options. But it’s vital to make sure you have your architects, your town planners, and you have the right team on your side before you jump into it. Because what happens is often people say I can subdivide, but they don’t actually do the numbers on is it going to be viable to subdivide? And that’s the key thing here, not just because you’re subdividing, just because you’re developing.
And I know a lot of people think that that’s, you know, kind of sexy at the moment where they’re developing and they’re doing all these different things and that’s what they want to go down that track. You’ve got to look at it and say, is this going to be viable to do this? I’ve seen a lot of times where people that are going to say, let’s say they’re going to do development and sell the development, it’s actually more viable to do the DA and sell it at a premium than it is to do the development. Especially if you don’t have the contacts, you’re not doing it every day where you know you’re going to have to pay someone to manage that project. As a project manager, it’s going to cost you more than say a professional developer at that point. So it depends on how much or how far they want to go down that track.
If they’re going to keep them and rent them out and then leverage the equity to buy their own home, they could definitely look at doing that, living in one DA approving, building the next one, and then maybe even moving out of it and keeping them as rentals. They could look at doing something like that. But you’ve got to really make sure that the numbers stack up before you do it. You’ve got to make sure you have your contingencies in there. So you’re across everything before you even literally put down the first dollar and start doing the process. You’ve got to make sure that you’re over every number.
My suggestion to add onto that is to have three possible exit scenarios rather than just focused on the one because at the moment we’re looking at one scenario for you and possibly two. But I’d say sit down and brainstorm what are the potential three different scenarios and we’ve kind of already helped you with two and maybe see what the other options are for the third one. Write down, compare them and do the numbers on each one and then see which one works out for your scenario. Because ultimately if one scenario doesn’t work or one extra strategy doesn’t work, then focus on trying to figure out the elements that will work. So you’ve got fallback plans and that’s the way we can always mitigate risks because I understand that from what you’re saying, you’re worried about making the same mistake to mitigate any mistakes. You’ve got to make sure that you have as many exit strategies as possible because if one doesn’t work, at least you’ve got fallback plans to, you know, work out and I think at the end of the day with any type of investment into property or anything, the way to mitigate risk is to make sure that you have all the facts in front of you, you’ve done your due diligence, making sure the numbers stack up and so forth and seeking the right team around you as well.
I was going to say I think with that as well, making sure before you even do anything, go to your broker if you’re going to go down that track of, I do want to develop it, I do want to add something to the back of that. The very first thing I would do is go straight to my mortgage broker or straight to the bank, whoever you deal with at that point, making sure that they’re all over this sort of stuff and saying, what is my serviceability? How much can I borrow? Can I actually get a construction loan and can I do this development? Because it might be viable, but you’ve got to make sure that you can serve it and you’ve got to make sure that you can get through it to the other end.
A lot of especially small-time developers, they’ve done it once or twice and they end up going broke because at the end of the day, you know, they can’t get the loans or they can’t get it across the line or something goes wrong and they haven’t had the contingencies that they should’ve had. And then next minute they can’t actually complete the development. So making sure you can complete it if you’re going to do it and making sure that the third thing you do is you go see what’s your serviceability like and can you complete it from a finance perspective?
We’ve given a little bit of insight into that and hopefully, Mary can reduce the number of risks that she possibly could go through. So let’s take a look at the next question. This is an interesting one. A few years ago I bought a house and was taken to court. I won the case but was left with the house repairs, bad debt, and also $157,000 in lawyer bills. This has been putting me in $500,000 in debt with $120,000 in a loan at 10%. I’m 51, married with one 23 year old who’s moving out in a few months time. Should I sell the house and walk away with $50,000 considering I earn $2,000 per week after tax, am I better off cutting my losses and starting again or should I look for another investment to somehow offset this? Thanks, John.
One of the big things is how we don’t know what his equity position is. So looking at, you know, can he leverage out or can he salvage I guess the investments that he has now. He’s obviously paying $120,000 loan at 10%. So that’s quite hefty there, that’s going to hit the cash flows. So it’s one of those scenarios where we don’t have, I guess the full story on it. But by looking at the cash flows, what I would say is, firstly, I’d look at the overall cash flows on what does it cost you per year in terms of the loan and the debts. Is it going to be better off to just reset and sell everything and reset and start again instead of having a 10% loan, you can then be going back down to threes and fours.
So I think it depends on what the overall cash flow scenario is at that point and then looking at how long is it going to take him to get to where he needs to be. So looking into the future, the next 5, 10, 15 years, if he keeps going down the scenario of paying the debt, where’s he going to be at the end of this if he holds. Or if he does sell everything and he resets, can he then, you know, save up some money, get back into that position where he can go out there and start buying investments and start getting back into the market and reset everything with 3 to 4% interest rates instead of say 10%.
Factor in also the costs as well to sell because that’s the other thing that may also hit the total income that comes back down. And also to take into consideration that it’s opportunity costs. So as Daniel said, if you do sell, the opportunity costs that you could potentially put that money back into might actually be a better option. Now as we don’t know the exact numbers, I’d say run the numbers on both scenarios where you don’t sell, how much is it going to cost and say after 10 years what’s it going to be potentially worth. And then the second scenario is if you do sell, how much would you actually get back that you could potentially reinvest in the future?
The scenario that he’s in now, if he doesn’t sell, can he continue to build his asset column while, you know, over the next 10 years while paying these debts? Or is he in a position where resetting and starting again and actually getting himself back on board in terms of you still have $50,000 obviously at the end of it he reckons. So if he can get back on board and start investing all over again, will it be in a much better position to accumulate assets over the next 10 years? Whereas he might be just treading water the way he’s going for the next 10, so you’ve got to look at the position and say, am I going to be prospering in the next 10 years in this position if I continue to pay down this debt and stay the course and can I keep investing? Which it sounds like it would be quite hard, you know, with 10% loans at $120,000 or do I reset and then get into a position where I go, you know what, I’m going to knuckle down, save, I’m going to put more money away and I could actually then build my asset column up over the next 10 years to get myself back into position.
I’m going to also sort of be a little bit brave as well too and put my point of view out there. Now whether or not you agree with me, John, this is my point of view here. If I was in this situation and I had this property also with repairs and all sorts of things as well, I would probably have this lingering over me for a while and just thinking, okay, it’s too hard. So I would probably go ahead and try to clear this out by selling it. And I’m obviously trying to get some tradespeople just to repair it before you put it on the market and sell and then just start fresh because having this on my mind and just having this experience on my mind of having such a big bill from the lawyers and so forth, it would probably tarnish me from wanting to invest any more in the future so that that would be sort of my path.
I’d go down and start fresh and then get more assistance and guidance from a team around me to find good investment properties that will help me without, you know, having to go down a path like this. Again, this is a learning lesson and I think a lot of people would appreciate it and being honest that you’ve actually shared this with us. I really, really want to just say thank you that you’ve been able to be open about this and it’s a good thing that I think we can all discuss and try to see how we can help you as well too. Let’s take a look at another question. The next one is from Sheridan. She says, I’m 23 years old and in my second year of working as a full time registered nurse, I received $65,000 gross a year and I salary sacrifice up to the cap per year, which is approximately $9,000 for rent and also living expenses. My question is, should I salary sacrifice more into super above the compulsory contributions or should I invest into a property? This would be my first one as well.
Sheridan, I guess this is actually a common question that I come across actually where people do salary sacrifice, especially at young ages. And they’re putting, you know, the maximum amount they can into super. I’m an advocate of I want my money now and I want it to be working for me now and locking it away into something that’s unknown, that I can’t control, and I don’t even know where the rules are going to be in the next 30, 40 years isn’t what I like. I don’t know what’s going to happen with my super. I feel like I don’t have any control over it and I’m going to have to wait too long and I might not ever even see that money. So for me, I would always like to control where my life is heading. So when you look at it, let’s say that you’re to be, you know, you can get into a position where you can buy your first investment property.
You could start to leverage and build more investment properties. You could potentially retire in say a 15 to 20 year period, but if you go down the salary sacrificing, you’re going to have to wait another 40-45 years until you can actually access the super that you have. So you might not even make it to that. You know, you might be salary sacrificing all those years and might not even make it there. Or we don’t even know if you’re allowed to access it at 65 or 67 at that time. It might be in the 70s before we actually get to that age. So for me, I think controlling my own future is what I like and being able to control my own assets so that when I get to that point, you’re going to have super anyway, you’re going to have the super that when you retire you’re going to have a nest egg there, but maybe build something outside of that so that you have property and you have the super so that both of them are working for you, but you can actually retire as offering the property much, much earlier because you have access to it now.
So that’s probably what I’d be thinking is, you know, let’s control the assets now, let’s control my money now. How can I get myself out of the rat race? How quickly can I do that rather than, you know, more so being scared about how am I going to retire in my seventies I think, you know, let’s retire in your thirties and forties rather than seventies.
It is important to be looking forward and ensuring that your future is set up in the best way possible but you can take control of that now by making smart investments rather than waiting for that money to come to you.
Your age is going to determine what you should be doing. And I think being so young and not having access to this in the next 10-15 years is vital to sort of make up your mind to say, you know what, I have so long to wait before I can even access this. It’s a different story if you’re already 55 and you know that you can be putting money away, salary sacrificing, you’re going to get it in the next 10 years. You’d know your exit strategy. When you’re so young you don’t even have an exit strategy. It’s not an exit strategy. To me it’s more so just put it in there and it’ll go up in value, but there’s just no strategy behind what you’re trying to achieve at the end of it.
Obviously you want a higher super balance. You want to be able to retire well, but how about the quality of life in between that next 45 years? What happens if you get yourself into a position where you’re very comfortable with three, four or five investments in the future where, you know, once you get to your mid-forties you go, you know what, I’ve actually got enough financial security that I only have to work part-time. Is that not a better quality of life over the next 45 years rather than having to wait it out to get to your, maybe mid-sixties and early seventies to be able to actually access that. And then who knows? By then your health might not even be able to get you there. So I think it’s really, you know, depending on your age is what you should do at that point.
But I think being really super young, I think that you could actually be buying assets now that you can control that are going to compound over the next 30-40 years and your wealth will be able to compound. Remember you can leverage up to five times in the property. Your dollar goes five times further by being able to leverage your money and you could buy it. You know, even a $100,000 deposit could buy you a $500,000 house. Using the compounding interest over time and leveraging yourself five times so that you know that you’re going to create more wealth over the long term. So I think that it really comes down to your age at the end of the day as well.
I guess when you look at it from that perspective, if you’re investing in your early twenties which we’re starting to see a lot more people even come through here where they are in their early twenties investing, people look at it from a risk perspective. You have next to no risk because you have the next 40 years, 50 years ahead of you. So you can minimise that risk because you’re thinking long term and you say, you know what, I can buy an investment property. What’s the likelihood of it going down over the next 30 years? It would have to be next to zero in my opinion. So you almost got no risk associated with it. I see more risk when somebody is in their mid-fifties trying to do this right because they have a time limit. To be able to achieve it in your 20’s you’re out there just grabbing assets, accumulating assets that are going to make you more wealthy in the future.
This episode was produced by Andrew Faleafaga with narrations and interviews conducted by Tyrone Shum.