Adaptive Strategy and Managing a Portfolio

Daniel Walsh is a buyer’s agent and founder of Your Property Your Wealth which helps clients purchase investment properties in growth areas. His company’s aim is to help people in managing their property portfolio and provide adaptable strategies that can be utilised depending on each client’s circumstance. 

Join us as Walsh answers the questions that you want to know about and he gives us his expert advice on varying aspects of property investing. We delve into how to invest inside and outside of your super fund, what to think about before investing in a block of units, the risks behind buying rural acreage as an investment, how to invest if you are out of the workforce and much much more!

The first question comes from Morgan. I'm 42 years old and divorced with no dependence, have around $190,000 in cash saved up and have a home loan at the moment around $200,000 left to pay back. I've been thinking about pouring my money into superannuation, but am considering property investment now I have $1 million in superannuation. How does buying an investment with your superannuation work? Do you need to be a certain age? Does it have to be a self-managed Super Fund?

I think the first thing to note is that he's 42 years old and has got a lot of time on his hands. He's in that next 15-20 years to be able to build a property portfolio. He's already got a lot of money in super. Obviously $1 million in super is quite a chunk. So I think the way that he is at the moment, he's got $190,000 in cash and he's got a $200,000 loan. I would be looking to build a property portfolio inside and outside of the Super Fund. And the reason being is he's obviously got the capability to do that. He can pay off his own home. So with the $190,000, probably what I would do is look to pay down the home loan and then see what equity is available right up until the 80% of what it's worth. Then what we'd do is go out there and extract all that equity to go out there and build a property portfolio outside of super.

Now that's the outside of super scenario. He's got the money to do that. In terms of going inside of super, there's no particular age where you can or can't invest in super. It just really comes down to the funds that you have in super that's available now. He's got $1 million so he can obviously set up a self-managed the super fund in terms of buying property in super, you do need to set up a self-managed super fund. So you'd need to go to probably a financial advisor to be able to set that self-managed super fund up ready to purchase property for the million dollars. What I would say is he'd probably be able to go buy a few properties with maybe some decent deposits of say 20 or 30% and be able to really establish a property portfolio inside of super to the point where all of those properties can start paying themselves down, ready for retirement of say maybe 55 to 60, so that he can really, I guess once he gets to 60 years old, he'll own a lot of his portfolio inside of super, which would be generating the healthy return plus also outside of super as well.

So he might actually retire a little bit earlier than let's say when he can actually access his super. And that's because of his portfolio that he's built over the last sort of 20 years. Being able to do that outside of super as well. So I'd be focusing on building the portfolio now outside of super for the next 20 years because that's going to give him income and he can retire earlier because he can access that. And then also building the property portfolio inside the Super Fund and that would be for retirement.

We learn a little bit more about using super and whether or not you can access your super at an earlier age before retirement. 

To be honest, I'm not sure how early he can access that. You'd have to really talk to his accountant to see in his situation, given his age at 42, but he would really need to speak with an accountant to see when he's going to be able to access that super for himself. He can obviously access it now to build the portfolio. He just can't live off that money just yet. So he'd probably have to do that between sort of anywhere from say around that 65 mark. I think they're looking to up it to 67.

Basically you can access the super to do the investments, but you're not allowed to actually take the return or the actual passive income from it to be able to live off up to your retirement age.

All you can do is continue building that asset base up in super until he's allowed to access that. So you know, let's say that he's getting capital growth and he's putting more money into the super fund in terms of cash flow. Let's say he's earning an income, he's putting more into super each year. He's building his property portfolio up, ready for when he can access it at retirement. So that's sort of the retirement portfolio, but he's now got to build a portfolio outside of super so that he can retire early on. So let's say he doesn't have to wait till 65 and he wants to be able to retire at 50 or 55, he should be able to build a portfolio now because you look at it and he's got a $190,000 in cash and he's got a $200,000 home loan.

So he could basically go pay the home loan out. So what I would be doing is saying, how much equity do I have in my property right now? I've already paid down all the nondeductible debt. Let's go recycle all this nondeductible debt into investments right now. Build a portfolio from 42 to say what 52 to 55 years old. You'll have enough property over that time that will go up in value. The rents will go up in value. You'll be able to pay down some debt. It'll create a passive income between say 50 and 55 enough for him to be able to retire. And then he's got the sweetener of when he retires, he's got also that property sitting in his super fund ready to go as well.

I'm just wondering with the investments that he can purchase outside of super for him right now at his age. What kind of purchases do you think he should start to look at purchasing because it doesn't sound like he's got a portfolio set up or established as such. He's got his super, as you can see, but with the portfolio, he's going to start to build up between now to his retirement. Should he actually start looking at building more growth assets or should he just continues to accumulate the positive type of assets? What type of properties should he start looking at?

With the portfolio, whenever you're building a portfolio, you need both. You need capital growth and you need cash flow over time. Now at the start, you need capital growth, but you need to be able to balance the capital growth and cash flows. So if it's too negatively geared, you can't build a property portfolio. If he's got very neutral cash flows, as he builds his property portfolio, he can build a larger portfolio, which is going to give him a better result, in the end, the outcome over the next sort of 10 years. So when you look at it that way, what he needs is capital growth. So you’re probably going to have some assets there, anywhere between say 400,000 and $500,000 that are going to give really good capital growth over time. And they may necessarily not be, you know, positive cashflow at the moment, but they're giving you good capital growth. But he's also going to need cash flow properties as well because when he's transitioning into retirement, it's no longer the capital growth he's looking for.

He's looking for the cash flow. So he's going to need both of those properties to be able to work together which is important to build a balanced property portfolio. You know you don't want to own a property outright that nets you 2%. Because it's not giving you enough income return on the money that you have sitting in that property. But in the early days, you may want some of that capital growth. And then when you retire, if he can get a 5% net return or a 6% net return, that's a lot higher and a lot more money in terms of getting a better return on what money you have outlawed into the property on a cash flow perspective. So you're no longer wanting the capital growth, you're wanting the cash flow at that point. So I think it's a bit of a misconception where people are like everything's got to be growth or everything's got to be cash flow. It really has to be a mix.

He has the opportunity to both build up the asset base on his super and also outside of his super as well. So obviously between now to when he turns 65 and h retires, if he's built up a substantial portfolio outside of super, he can access those funds and use that towards his living. And then by the time he reaches 65, he'll have a nice portfolio built up based on what he's got at the moment for his properties and be able to live off that. So he’d have double income that would potentially be coming through.

He would definitely have as I said, it's a two-part sort of retirement for him. He'll dramatically increase his income when he goes into retirement at the age of 65. That's because of all of the super and the amount of time he's had to be able to build the property portfolio inside of super and let that compound over time. So he's really got a two-part retirement. He's retiring outside of super first and he might even retire outside of super, not on his ideal income. Just so he can retire maybe five years earlier because he knows that when he does get to 60-65 and he gets into the real retirement age, he will then be able to increase his income anyway. So he might actually retire a little bit earlier on a smaller income or even back off work, maybe work a couple of days a week and do something that he really wants to do instead.

We've got another question from Darren. I've recently become more interested in property investing as a vehicle of financial growth after listening to quite a number of your episodes and other similar content. My partner and I are in our early forties and we've been running our business, which we have invested a lot of money into. That leaves us with a little bit of savings of $15,000. We also have our own principal place of residence, which we recently got valued at $788,000 and there is no debt on it. We're thinking of buying an older style six-pack unit around the $300,000 price point in the 5000 to $10,000 inner circle of Brisbane, near transport and cafes. It would be around about $1.8 million and returns about a 5% yield. Hopefully, by retirement, we'll have around $150,000 passive income. The question to you is, I would like to know if it's possible to purchase this six-pack unit and do you think it's a good investment?

The first thing to really note, so $300,000 apiece obviously for these units, so $1.8 million. It really depends on what he's trying to do, what they're trying to do with the unit block, whether they're strata titling it to increase the value of that. And maybe they could increase its value to then leverage out of it later on. It is a fair chunk of money to be putting in one place. That is the issue that I have with that sort of style of property is you can buy a unit block and they're great. Generally, you want good cash flow and you’re going to own the land. So you own the total unit block, which is always better than just owning one unit in the unit block, but you're tying up $1.8 million in that one asset.

And let's say that you're in a state that hasn't performed over a five year period, you really got $1.8 million doing not much for you at that point. So I personally would rather see somebody with $1.8 million builds an entire portfolio and a couple of properties in different states to be able to diversify and maximise the growth over a period of time and also reduce the risk that you like I said, you buy a dud in the wrong state at the wrong time. You're not going to get any growth or very little growth. So it's not going to achieve much for you at that $1.8 million level. The other thing to note was it's 5% rental return. It's not a very high rental return on a unit block. So I'd probably be more looking at say 6 or 7%.

More in the 7% range. And the reason being is you're buying 6 units, you're going to have maintenance. You go into that and you own the whole block and something goes wrong with the block of units. Like there are major defects with that block of units that could cost in the hundreds of thousands of dollars to repair. Many people think about buying a whole unit block. They don't realise just how much it could cost in repairs over a 15-20 year period. Even stuff like repairing roofs or replacing roofs on a complete unit block can run into the $50,000 or $100,000 range just for something like that. So you really need to have a good buffer to be able to do that with. But you really need to look at what is the outcome of this property? Is it going to be that I strata title and then sell it and make some money out of it doing it that way?

Or if it's a buy and hold, I would say that I would like to see that couple be able to really go there and build a property portfolio of just bread and butter properties at the 300,000 to $500,000 range. They could go buy roughly anywhere between say three to four properties and diversify that property portfolio as well. What we've got to look at, let's say you put a 20% deposit down, you're really putting $360,000 into them plus stamp duty, legal, everything. So maybe $450,000 to put into one asset in one location. It's a lot of money to be able to do that. So it's sort of like going to a roulette table and putting all your money on black instead of diversifying it.

We delve into strata titling and if you are unsure what that is Walsh explains what it is and some of the benefits. 

I think the first thing to note is that it's not an easy process to strata title. So people think that they could just go out there and strata title and go through council, get everything sorted and get them strata titled. It does take a bit of time to do that and you need to have, you know, your fireproofing and everything like that and certified to be able to strata title so it can cost a lot of money to do that. People really need to realise that before jumping into it, they need to actually go and see exactly what it's going to cost to do it, to see if it's actually got any benefit in them buying that asset and strata titling and then selling them. Now, what strata title means is let's say that you bought that on one title at the start. It means that you can only sell that unit block as a unit block. You can't sell them individually. Whereas if you wanted to make more profit on it, what you could do is if he can go strata title them, you still have to go through the process of that. 

But if you can go through the process and you can strata title, you can then sell each individual unit of those six units and you're not just selling them as a unit each. So one unit, two units, three units, so on. And so generally what happens is you get a better price per unit rather than a whole unit block because not many people want a whole unit block unless it's an investor. So as an investor, they want return and they're looking for a higher return. So you're going to get a reduced price by buying a unit block, but when you do strata title, then you can then start to sell them off to their first home buyers or homeowners or investors alike as well.

We find out about the potential costs of strata titling and what goes into that process. 

It really depends on the building that you have and the fireproofing and everything like that. So you need a certifier to go out there. I'd get a private certifier to go out there before you even buy the block of units to see really what you're up for. Each block of units that you buy are different and each state has different rules and regulations around that, even down to council. So you really need to look individually at that unit block, you need to find the unit block. Then you need to go get a private certifier to go out there and view the property with you and then go through everything steps by step. You really want to work out your calculations before you even buy the property. You're putting $1.8 million into one property. You want to know extensively what that looks like on the outcome and what percentage uplift you're going to make by strata titling and also putting in a buffer contingency as well. It's very much like developing, you want to put a contingency in there because it can cost more than what you thought initially.

You've got to look at the overall strategy that you're trying to achieve. If you can't strata title them and you're just trying to pay it down and you're only getting a 5% return, so it's not passive income, so you're not getting passive income, you're going to have to get passive income from the rents increase over time and you paying down some debt as well. So you've got to look at the overall strategy. If you could put that $1.8 million into say four properties and in a 10 year period to have those properties doubled out of the four, you could turn around and sell two of them, payout the other two. Now you own two properties outright creating your passive income. This is more of a strategy behind diversifying in a price range between say 300,000 and $500,000 rather than going out there and buying the $1.8 million property that's not really that high in terms of cash flow. 

The next question is from Harley. Harley says I'm a 32-year-old IT worker, recently retrenched about three months ago and I have an investment property worth $350,000 generating $1,300 a month, $78,000 in shares, generating $5,000 a year in dividends. And I've also got $120,000 in super and $40,000 in savings. My home is a one-bedroom unit, $260,000 fully paid off. I've no credit card or car loans and I'm interested in buying rural acreage for approximately $700,000. What are the pros and cons of buying rural acreage?

The first thing is his scenario. So looking at his scenario is going to be probably very hard for him to right now go out there and buy acreage as he wants. Unless he's got that property that he owns, maybe paid it off or something like that. Then maybe from there, he could sell that property to use that as a deposit. But it does sound like he doesn't really have enough funds to be able to complete, to be able to buy a rural acreage of what $700,000. It's quite a bit of money. So $700,000, now let's look at the pros and cons of obviously rural property. So it depends on what you're looking for. If you're looking for an investment there are a couple of cons, I'd say more cons than pros to acreage.

But if you're looking at it from a perspective, you know, most people would look at it that it's an investment. They want to be able to sell that to a developer later down the track. So it might be changing the way that it's structured in terms of, you know, might be going into a different zoning, so changing zoning so that they can go to small allotments and it's no longer rural zoning would be helpful. The only thing is that a lot of people that buy that type of acreage hoping that one day the zoning changes and 20 years later it still hasn't changed. So it's sort of like trying to win the Lotto doing that unless you really know what it is going to change. So the pros and cons about it, I guess with the cons, if you have somebody in there with acreage, it's a lot more maintenance generally.

So you've got a lot more maintenance in terms of acreage and all of that type of stuff. The other thing is as well as getting lending, so if you're going to go out there and try and get lending, typically you're going to have to come up with a bigger deposit maybe a 20, 30, 40% deposit depending on where it's located. And the other thing is that it’s very hard to get a genuine valuation because there's not many properties that probably sell in a given year. It's very hard to value that type of property. So if you want to leverage from that property to buy more investment properties down the track, it might be a little bit harder to get a valuation that stacks up to be able to leverage from that property. I've seen that quite a bit where a property's worth $1.2 million and the banks come in here and value it at $800,000 because they're not willing to take the risk because the valuation is very hard to do on a property where there might be only one or two sales a year in the area.

Walsh talks to us about his thoughts on acreage properties and why he believes people still buy them. 

Sometimes rural acreage can be used for agriculture. It can be used for farming land and that can produce a good income for you. So I think if you're going to buy rural acreage and it's going to produce you a very good income from doing that, or you're running a business on the acreage then it could be a good outcome because you're looking at what you're putting down in terms of how much is it going to cost you. And then also looking at what sort of business or activity you're going to run on the land. So you see a lot of people that go into farming and they produce a very good income from that. So in that sense, it's not really a passive income. It's more of an active income. If you're going to set up a business doing that, I think if you're just going to have a property and rent it out and it's rural acreage, some people will do it because they might later down the track want to retire in that and they want to retire on acreage and land.

But the thing is, I guess it's just a cost opportunity as well. Could you have built a portfolio and then later down the track bought your dream acreage to be able to retire in any way.

The next question we have is from Jo. She says that my husband died a few months ago and I'm trying to work out how to look after myself and my two kids ages 15 and 17. I'm not currently working and I don't want to return to the workforce as I want to write. I'm turning 49 this year and we own our own home outright currently worth about $1.2 million. What I would like to do is invest the life insurance, which I think is about $800,000 after repaying debt, family holiday and so forth, so we can live modestly. So around about $50,000 per annum while also maintaining our lifestyle and to invest in more property for my kids. How can I achieve this?

It really comes down to the fact that she doesn't want to go back to work. So that's one of the things she wants to start writing. She owns her own home, which is really good, but it's also tying up $1.2 million in terms of capital as well. So not earning her an income, but it's $1.2 million that she's living in. So with the life insurance, you're going to need to invest that without an income or without you working, you're not going to be able to leverage. So you're not going to be able to go out there and get a mortgage and start building a property portfolio or anything like that while you don't have an income because they won't let you do that. So what you're going to have to do is buy property outright.

Now, if you bought two properties, say $300,000 a piece, it would probably return you around $30,000 worth of passive income if you were to do this into commercial property and have said a 7% return of $650,000. And then you've got obviously all your legal and that ready to settle the property. It would give you about $45,000, maybe up to $50,000 passive income. So you could achieve the 45,000 to $50,000 passive income in the commercial. The downside of the commercial is you have no income. So if this goes vacant, the property goes vacant. In the commercial, you could be sitting between long periods of time of vacancies. I've seen vacancies anywhere from, you know, six months to two or three years because they can't rent these properties yet in commercials. You've got to be very careful. If you do go into commercial, you know what you're doing, and you may have a long lease, you may have everything sewn up, but it still doesn't mean that you can forecast what's going to happen.

The economy might turn and people may no longer want that commercial space. So you've got to be careful in what type of property you buy. If you wanted to be more risk-averse, you're going to be investing in residential property. And like I said, you could probably get around a 30,000 to $35,000 income from that $800,000. So you're not all the way there in terms of the $50,000, but you’re fairly close and you're doing it in a conservative way, fairly risk-free. Now, in terms of the property that you own, you'd have to look at that and say, do I continue? Can I continue living here? Like do I want to, when you've tied up $1.2 million in a house, would it be more beneficial if you can sell that house and then downsize into something maybe for 500,000 or $800,000 and be able to free up some capital, go out there and buy another property outright to give you an increased income at that point, which would then tip you over the $50,000 worth of income and you wouldn't have to go back to work.

So I would say the best outcome would be to buy residential property, split that up into two properties with the life insurance, buy two properties outright. I would probably look at selling the property that she lives in and downsizing from there. And then being able to use the extra capital to be able to invest in more property that she owns outright. Because we can't forget that she's not working so she can't borrow. So unless she wants to go back to work and start working for another 5-10 years or however long and start to build a property portfolio, she needs to be conscious that it's the best scenario in given the situation.

Jo wanted to start investing so she would have something for her children. We delve into how that is possible.

It depends on the structure and how she invests. So let's say she goes out there and buys those properties in a trust where she'd be able to probably give them to her kids a lot easier. If she does invest in a personal name, then unfortunately what they'll do is they'll make her or they'll make the kids pay stamp duty on the money. So it's basically like a sale again maybe down the track when that happens, there's not really a way around that. Before buying a property, if you're looking to pass them on to your kids at that point, go speak to your accountant and say, what is the best avenue for me given my circumstances? Should I be buying in a trust? Is it going to outweigh the extra costs or should I be buying in my personal name? They are going to have to pay stamp duty down the track, but they're going to also get unencumbered properties. So it really depends on what's going to be the best scenario for her because she's going to also look at how she's going to distribute the income and how she's going to get paid as well.

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

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