Daniel Walsh is a property buyer’s agent and founder of Your Property Your Wealth. He has years and years of experience in helping his clients on how to successfully buy a house and properties and build and estimate value of property portfolios in the smartest way possible. We are lucky enough to have him share some of his expert advice and knowledge with us on how we can improve our property investing.
Join us as we dive into discussing where to buy investment property based on the interstate market cycles. Daniel will be sharing with us the four fundamental principles he lives by when building a successful ‘recession-proof’ property portfolio, as well as sharing his strategies on how to balance your portfolio to gain wealth!
Walsh and I dive straight in, and he describes the strategy he’s come up with after years of investing.
Daniel Walsh: I've been investing now over a decade, so it's been quite a while. And I've been able to formulate my strategy over that decade and work out really how to build a strategy that is recession-proof. Because, with our strategy and what we're looking to do, we're looking to build a long-term portfolio.
So, because we're looking to build a long-term portfolio, we know that there's always going to be points in the economy where we are going to see booms, and we're going to see maybe, you know, some vacancies and more of a robust sort of scenario. And we know that we're going to have to go through these periods throughout that 15–20 years. So, what we really want to do is build a strategy around the portfolio that we're looking to build. We want to make sure that it’s recession-proof.
And I guess the four principles that I've come up with and that I live by and stick by with building, you know, not only my own property portfolio, but my client's property portfolios as well, is No. 1: We like to buy in multiple affordable properties. And No. 2: We like to buy in fundamentally strong areas. No. 3: We like to buy a balanced portfolio or build a balanced portfolio. And No. 4: We like to have cash buffers.
So, if we stick to these four principles and we can break those principles down, then we know that we can build a really fundamentally strong property portfolio, which is recession-proof.
Walsh dives into the first principle, breaking down what it means and why it works.
Daniel Walsh: Why I started that strategy of buying more multiple affordable properties was a few reasons.
No. 1 was I could buy more affordable properties rather than just buying one or two expensive properties. So, what happens is generally someone will go there and they just purchase one or two properties. And let's say they were buying them in Sydney, and they paid a million dollars for those properties. What happens is: Because they are at a higher end, they're going to have probably a property which is negatively geared. It's going to really drain their cash flows. So, you know, you can only buy so many of those properties before you're going to get stopped by the banks, but you're also going to be at risk if there are higher vacancies.
Let's say that you had one of those vacant and that property is meant to be renting for $1,000 a week or $800 a week, then we're going to be losing $800–$1,000 a week, essentially going into your buffers. So, we know that when buying a high-end property, there's much more risk associated with holding those properties long term. Plus, there's not much of a strategy around that other than just hoping for that property to grow. And if, let's say that you bought one property for a million dollars, you pretty much just put all your eggs in one basket.
So, with buying more affordable properties and multiple affordable properties, we can actually then diversify these properties into different locations. However, what I've realized over the years is, with affordable properties you can have more growth as long as you pick the right location, which comes back to the data or in doing the research. But if you, let's say, bought a property for $300,000–$400,000, it’s more of a likelihood that that $400,000 property will go to $800,000. And why it will go to $800,000 is because even at $800,000, it's probably considered more affordable than a property going from $1 million to $2 million.
So, we need to look at it from a wage perspective. If you have a house, a property worth a million dollars, it's got to go to $2 million. Wages need to increase significantly in that area for that to be possible. However, if you stick to the affordable property range—now, let's say, it's $400,000—we can get those properties from, you know, $300,000 to $600,000, or $400,000 to $800,000. And the majority of the population can still afford those properties.
Tyrone Shum: Yeah, I really, really resonate with that. And I guess what I wanted to maybe have this discussion around is the different types of States. So we know there's different States that have different pricings.
In this current market, as we're talking about on this podcast, with Sydney and Melbourne, the average property price is around about that million mark. For a house in Brisbane and all the other states or Queensland should I say, and the other States, it's a lot lower. What are you seeing to be the sort of affordable range in, say for example, Queensland, and why has that been a really attractive place for investors to go up there?
Daniel Walsh: Yeah, so I mean, let's say we look at Brisbane, for example. You're probably looking at something for around $400,000, maybe to the $450,000 or $500,000 mark. That's going to get you a really good property with a good rental return as well.
We see a lot of investors going North because it's more affordable. We also see that, you know, not only that it's more affordable—you're going to get a better rental return than say something in Sydney, where you're paying $800,000 to a million dollars. However, you're probably getting a 3% rental return, whereas you can get a 5% rental return in places like Brisbane.
Tyrone Shum: What I was going to ask as well, and I think a lot of questions will revolve around this, but why is it that, say for example, in Queensland, those properties are almost half the price of say in Sydney?
And I guess historically it's, when I look back at the figures, even going back to when Jan Sommers—I had her on the podcast a while ago—she says basically Queensland has always been 50%, almost half of what, say Sydney and Melbourne prices have been. You know, even if you look back to when it was worth about a hundred thousand, it's property price was worth $200,000 in Sydney going back even 20 years ago. And it hasn't changed much in that sense. And that means that historically, we can follow that principle.
But why do you think that is the case, even in today's environment? Because you know, we're not that much different. We're working remotely—you know, I guess, demand and supply. I'm just trying to understand. Why do you think that's the case?
Daniel Walsh: Yeah, I mean, when it comes to Sydney, and it comes to Brisbane and then Melbourne, each property market there, each State, has its own cycle. So, everything goes through cycles. So, we've seen that Sydney has gone through a cycle and that's come down to obviously job growth. It's come down to migration, immigration. It's come down to your population growth—so, supply and demand. Obviously, there was a lot more demand than there was supply, and therefore, we saw that the prices would increase. We saw the same with Melbourne. But each State will go through a cycle at a different time.
Typically, let's say what happens is, Sydney and Melbourne generally go through a cycle first. And then, all of a sudden, it gets too expensive for people to buy in Sydney or Melbourne, and/or, ...what we see is, you know, people in Sydney, people in Melbourne: They actually have a lot of equity in their properties where they can then start to invest in Brisbane. And we start to see interstate migrating from Sydney and Melbourne to Brisbane because it's more affordable. It is a case where it's probably going to be more affordable always. And that just comes down to I guess the supply and demand side of things, the population and also, economically, what's actually happening with jobs as well.
So, because we're seeing bigger markets in Melbourne, we're seeing more population, more jobs growth in Melbourne and Sydney. They are the driving force for property growth as well.
Tyrone Shum: Yeah, it's really fascinating. And I guess if you track on the time that we've been talking about this —‘cause I do remember going back even three, four years ago, the property prices haven't really moved that much in Queensland. I mean what's been your opinion on those?
Because, that's why I think a lot of people are still going up to Queensland to buy. And you ask these questions. When will it actually even get to the prices of, say, Sydney? I know there are some locations by the water, you know, million dollar properties and stuff. But even then, when you go back into sort of the other areas like down South and so forth, it was still around that $300,000 [or] $400,000 mark.
Daniel Walsh: Yeah. Typically, we normally see Brisbane or Queensland start to grow off the back of unaffordability from Melbourne and Sydney. So, every time they go through a cycle and become unaffordable, that's when other locations like Brisbane become the spotlight because they are more affordable from an investment perspective. They are more affordable [for] people downsizing. They're more affordable [for] even first-home buyers. So, we're seeing that now. It's in the right time of the cycle.
If we have a look at say, Sydney market—Sydney market from 2004 to 2012 was relatively flat. Now in that same period of time, Brisbane actually doubled in value over that period of time. Now just before that, Sydney from 2000 to 2004 actually had quite a big boom and it went sort of flat for, you know, all the way till 2012. And that's just because we needed wages to grow in Sydney before we could see the next cycle happen.
Now we've sort of seen that play out, where we've seen Sydney doubling in value between 2012 and 2018. And again it was, you know, hitting a wall almost compared to wages where prices couldn't continue to grow because people couldn't afford to pay more for that property. So, now what we're seeing is Brisbane's more affordable. It hasn't actually grown from 2009 to 2019 if you look at it from that whole decade.
Pretty much what's happened is, we've seen from 2000 to 2009 a really good price increase, and it doubled in value. Then we saw it sort of correct for a few years, and now we're starting to see that go back up. So, if you look at the data in Brisbane over the last sort of four years, it's gone up probably about 30% to 35% in some of the areas that we've looked at and where we're currently buying.
But what makes it a really good opportunity now is: You can buy into those properties much more affordably. What we've seen is over that period, over this last decade, wages have increased. Now we've also seen that interest rates have dropped, you know, from 6%, 7% all the way down to now, you know, you can get a 2%, 2.5% interest rate. So, now what it means is: It's much more affordable now in Brisbane than it ever has been in the last decade.
So, what we're going to see now is the next 10 years are going to be a lot better than the last 10 years due to the affordability. Obviously, we went through some changes with, obviously, mining and jobs in Brisbane. But we’re now seeing a lot more infrastructure projects come into that market, construction starting to build out; health and education starting to build up. And you know, the backbone of growth comes down to what's actually happening economically first, and then that will turn into price growth.
So, firstly you've got to really look at the actual state and say, ‘Okay, where does that state sit in a cycle?’ How long has that got to, you know, until it's going to grow. So, we've got to look at economically what it looks like, vacancy rates. We've got to look at where it is on its cycle. Once we can figure out why that market will grow, that's when it's a buying opportunity. Typically, it's a buying opportunity after we've seen a sustained period where we've seen no price growth—because we're now seeing more affordability in that market.
Tyrone Shum: Yeah. That's why I also totally resonate and agree with you on that side of things—because that's what happened with Tasmania. There was a wall where nothing happened. And then suddenly it just had this growth spurt. So, eventually, I think what we'll see, you know, Brisbane will eventually catch up. It's just a matter of when. And especially during this kind of time, it's very hard for us to sort of know what's going to happen—‘cause there's still a lack of confidence in the market and uncertainty.
After covering ‘affordability’, the first principle in Walsh’s strategy, we move on to his second point.
Daniel Walsh: Buying in fundamentally strong areas. So what I'm talking about here is we always want to be making sure that because we're building portfolios for the long term. We don't want to see ups and downs of prices where they're fluctuating. You know, one minute we've got an industry in an area and we see price booms, and the next minute that industry is leaving the area and we're seeing, you know, 30% corrections. We don't want to see that in our portfolios. Instead, we want to see stability in the portfolios. And that comes down to being in a strong fundamental area.
So typically, what I want to do is base myself around a capital city and then from there we start to sort of, you know, look out and say, ‘Okay, let's have a look at each council around that’. And then we start to work out where is going to be a really good area to buy in? But if I can buy within a commutable distance back to the large CBD like Brisbane, Sydney, Melbourne, Perth, those types of things...what I know is that, over the long term, I'm going to have real stability in that market. Because as the population grows, it grows out.
But we'll also get to know that there's going to be a stronger market economically because we're not seeing, you know, a mining town. What we're looking for is a town or a state where there are multiple industries.
So, when you look at Sydney, for example—why Sydney has been so strong is because it's not really dictated by one industry. So, if you look at Sydney, for example, it's not like there's only construction that's holding or underpinning the city’s, you know, price growth. What we see is, there's health; there’s education; there's construction. There's so many different industries in Sydney where people are working in all different industries. So that if one of these industries, like manufacturing, starts to go downhill and we start to lose jobs, it's not going to hit Sydney’s market, because we've got other industries that are propping up that market.
Walsh gives us an example of when he used these strategies around fundamentally strong areas in his own portfolio.
Daniel Walsh: Even with my first two properties, I purchased in Sydney in 2011 and 2012. And I'm again always wanting to balance out good capital growth but also with rental return. So back then, obviously interest rates were a lot higher. But we were, you know, I picked up two properties with around a 7.5% rental return, which is, when you look at today's standards, quite good—especially in Sydney.
Tyrone Shum: Well it's not possible to get that at this point in time. ‘Cause even when I've been looking around locally, at most, 2% or 3% is what we kind of expect. But anything around 7%, you definitely have to have some extra, you know, rental income from the granny flat or, you know, hopefully have a dual lock somewhere on the property.
But yeah, that 7% is awesome!
Daniel Walsh: Yeah, definitely. And when I was buying these properties, again, what I wanted to do is: I went out to family demographic areas—just your normal blue collar areas—and I really studied those areas and worked out what was underpinning them. So, I looked at it and said, ‘Okay, what type of infrastructure is coming to this area? What's the population growth like? What's the building approvals like? Is their supply and demand good?’ And I really wanted to know whether that was going to be a strong area long term.
If there's a lot more happening to that area, let's say that, you know, there might be airports or there might be, you know, even schools and hospitals. And you know, there were those shopping centers that were going in...we know that that's going to bring more jobs to the area. The more jobs that come to the area, the stronger that area is going to be economically, and that's going to return the price growth.
It's not just about how close you are to the CBD, but looking at that area specifically and saying, ‘How strong is this area? If one of these industries goes down, does that mean that my property is going to also go down and suffer from it? Or are there many industries in this area?’
So for example, in Melbourne, you could go out towards places like Geelong and Ballarat. They aren't really underpinned by just one industry. They've got multiple industries. And I know for a fact, with Geelong we had that Ford manufacturer closed down. Now when they closed down—I think it was around 1,500 or 1,800 jobs that were lost at that period of time. However, the following three or four years, Geelong had a really good growth rate, price growth. And we saw properties pretty much go up around 50%, 60% the following three, four years. And the reason being was, yes, manufacturing was going downhill and there were jobs lost, but there were so many more government jobs coming into that area.
So again, looking at that area, looking at it and seeing if it's fundamentally strong, and if you're a commutable distance back to a large CBD, even if people do lose jobs, they can jump on a train or they can get on the highway, they can go get a job. They can get into the cities, and there's mass jobs in there. So, they can be, you know, they don't have to basically move areas.
So, if we, let's say look at regional areas, for example—If you go regional, what you've gotta be looking at then is, is that regional area strong, fundamentally? Because if, let's say, it's a mining town and, all of a sudden, we see that mine closed down, people are just going to leave. And that's just what happens. They're gonna up and leave. And then they’re gonna go somewhere where the jobs are.
So, No. 1 thing to look at is jobs. Are there jobs in abundance in that area? Are there more jobs getting created in that area? And if that's the case then we know that fundamentally that's going to be a strong area long term.
Tyrone Shum: How do people actually find that kind of detailed information? Because it's hard to predict what's going to happen. I mean do you look at like the government and you find out from, you know, online to see if there's going to be potentially new companies coming in?
Like, how do we find out all about that information to be able to determine, ‘Okay, this is going to be a good location to buy in?’
Daniel Walsh: Yeah. I mean the first thing that I would be doing is, you know, calling up the council. You'd want to be researching that council and saying, ‘How progressive are they? What type of infrastructure is already there?’ So, you can look around and say what's already in the area, but what else is coming to the area as well.
So, you've got to look at that and say—I might call the council and say, ‘Okay, what sort of infrastructure projects are coming to the area over the next 10 years? What's already been approved?’ And you can start to look at those projects. It might be that there's a new train line or there might be, you know, a hospital or something like that. And you can start to sort of collect all those pieces to see if that's going to be a good area in the future. You know, places like ABS and stuff like that as well. So, that sort of data.
You can then have a look at, you know, what's going on with the jobs in terms of how many jobs are being lost and how many jobs they're gaining there so that you can start to look at that type of data as well. So, they're probably the one of the two that you'd be looking at from economic purposes.
Walsh and I dive into the third fundamental principle that he uses when building his portfolio.
Daniel Walsh: When I'm talking about building a balanced portfolio, what it means is not putting all your eggs in one basket.
So, I do see a lot of investors: What they do is they like to invest maybe within their own state or maybe within their own backyard, you know, their own suburb that they know really well. And all of a sudden they might buy two or three investments in that area. The problem with doing that is, let's say that the area they're buying in z doesn't grow for the next five or 10 years, so they just didn't hit a winner on that one—but now they've times that by their total portfolio. And they haven't balanced their portfolio out by diversifying it. So, when you're balancing a portfolio out, it's key to diversify that portfolio and balance it with different types of properties.
So, let's say that, you know, I have a property already in New South Wales. Maybe, you know, I look at Australia wide and say, ‘Where's another opportunity for me to invest?’ And let's say that I can then maybe go put one in Brisbane or one in Melbourne and find a really good growth location there. And what that means is, over time, all of these properties are going to be growing at different times. So, because there's multiple cycles through, you know, each State—and even within that State, there's multiple cycles again, through each suburban town.
What we can see is, if I have let's say a property in Melbourne and the property in Melbourne jumps up 20%, yet the Sydney property did nothing, all of a sudden, my portfolio is doing quite well. However, if it's all sitting in Sydney at that point, nothing's doing well.
So, it's about diversifying that portfolio over time and then balancing out with cash flow and capital growth. So, what I mean by balancing equity, capital growth and cashflow is: Too many people look for all cash flow properties or all capital growth properties, and I feel like you can balance them both, where you know you've got to be putting each asset into your portfolio and knowing why that asset is going into the portfolio. Maybe that asset is for cash flow. Maybe it's a higher rent return for you. You understand that maybe the growth is going to be a little bit slower in that market. However you are chasing the cash flow for that asset.
However, you might then look at another asset to balance that out. That might be a little bit less in terms of rental return might be a little bit lower. However, you're looking at that for more of a short- to medium-term capital growth play. So, now you're going to get the capital growth. You're going to get the cash flow from the other property, because what's important is to look at the end goal. And the end goal is the capital growth properties or the property that you're going to buy for capital growth. That's great to leverage you into more properties.
But when it comes time for retirement, you're not looking at the capital growth, you're now looking at the cash flow. And if you have both of those types of properties in your portfolio, then you could be maybe offloading one or two of those good capital growth properties to pay out the cash flow properties to be able to retire on that cash flow as well. So, I feel like it's very important to be able to make sure that you're diversifying all throughout Australia.
Tyrone Shum: Yeah, and I guess the markets go up and down at different cycles of time—and this is the hardest thing. It's very hard for us to sort of just say specifically where to go and invest by and so forth. But, I guess, the thing is the fundamental principle is looking at having those balanced assets, having the two types, looking at one for cash flow and one for capital growth.
Daniel Walsh: Well, a perfect example even with my portfolio: So, I have saved my two properties in Sydney; now, the two properties in Sydney from 2012 to 2018—they doubled in value. I could have gone back to that same market in 2016 when I was going to buy another property and then just bought another one and went, ‘You know what? They're doing really well. Let's buy another one here’. However, I diversified that next property that I wanted to purchase in 2016, and I put that property into Melbourne.
Now, that Melbourne property in the following two years from 2016 to 2018: It went up to 60%, so I had 60% growth in that property. Now, if I had actually put that property in Sydney where my other two properties had just doubled in value, I would have made no growth at all, because even though they've doubled in value, they actually had stagnated for about an 18-month to [a] 2-year period.
So, if I had just kept putting them into that same market, I would have then had some properties that doubled in value and then other properties that would have done nothing for me over that same period of time. But what I was focusing on was, ‘Where's the next growth market and where can I diversify to?’ ‘Cause no matter how good of an investor you are, you can't pick when the growth is going to occur.
You can look at the best markets to say this is going to be a really good, strong fundamental area long term. But you don't know whether that growth is going to occur in the next six months or two years. So, it's important to diversify those properties, because I would have missed out on that 60% growth if I didn't, you know, buy that property.
And that makes absolute sense because the thing is you don't want to be putting all your eggs in one basket even though there are a lot of cases. And I've had interviews of people who just only purchased properties in Sydney. But, I guess, you got to ask yourself, ‘How long are you prepared to hold on to these? Are you looking to hold them for 20, 30 years?’ Yes? Then you might be successful in having a massive portfolio.
But if you're looking to look at how the portfolio is growing and you're able to fund it over say, the next three to five years or so, then you definitely need to consider balancing it. Because the cash flow that comes from a property, those negative cash flows obviously hurt—you know, how much you got to put back into it every month. So, you just need to consider those factors because you gotta be able to fund it.
Tyrone Shum: So, having a positive cashflow will help you balance out the capital growth portfolio properties as well.
Daniel Walsh: And not only that. Like, look at 2004 to 2012: If you built a whole portfolio in Sydney off the boom, let's say, that 2000 to 2004 was when the boom in Sydney happened. Let's say that you bought in 2005 or 2006, your property portfolio wouldn't have done very much all the way until about 2013. So, you would have had pretty much some dud investments sitting in Sydney, which sounds crazy at the moment because people have seen what's happened in the last five or six years.
However, you could have built an entire portfolio in Sydney in 2011 and done very, very well. But no one would have known that. So, it would have been better off at that time, say in 2006 [or] 2007, to be able to buy in Brisbane, buy in Melbourne, buy in Sydney, and therefore, nobody had done very well over that period of time. We know that Brisbane doubled in value over that period of time and Sydney did nothing. So, you would have had two assets that probably doubled in value, and then you would have had Sydney that didn't do very much.
However, from 2012–2018, Sydney would have done its thing, and it would have doubled in value as well. So, then you could have been extracting those that equity out as you go from each of those properties. You could have been placing them in different markets as you go, rather than having, you know, five or six years where you can't do anything and can't extract any equity out because that market hasn't grown.
Walsh and I move on to discuss the fourth and final fundamental principle that he uses when building his portfolio.
Daniel Walsh: Cash buffers. So No. 4, cash buffers, is probably the most important component out of all four, because at the end of the day, if you don't have a good cash buffer and something goes wrong with your portfolio, it doesn't matter how much that portfolio is worth…If you need to sell the portfolio, you're not going to be able to execute on your strategy.
And what we want to be able to do is obviously build a portfolio, but then also maintain that portfolio over the next 10, 15, 20 years—and even, you know, past that timeframe. So, because of that, we want to make sure that we have really good cash buffers as we're building his portfolio.
But if something was to go wrong—let's say that you were sick, let's say that you lost your job, let's say that the economy changed and things went south for a period of time—you want to know that you can ride out these periods without a sweat. And if you can do that, it's also from, I guess ,a mindset perspective as well, to say that you're not going to get scared in any circumstance throughout holding that period. Because if you hold a portfolio for 15 years, if you are too leveraged at that point and you don't have cash offers that are going to be able to support that portfolio, you're going to have periods within that 15 years where you're going to be very stressed. And you don't want that.
You want to be able to build a portfolio that's actually going to help and you know, make your life better, so that, you know, your future is secured—rather than just be sitting there going, ‘Can I hang onto this portfolio over the next few years because things didn't go the way I wanted?’ So, I think it's important to always have cash buffers.
The way that I like to do it is I like to put them in an offset account. So, you might just have your principal place of residence, and you might have five investment properties. Let's say you have an offset account. So, your principal place of residence, and for every property, you work out roughly how much you need in a cash buffer to be able to support that property.
Everyone's a bit different now. It can be that you have a government job and you know that your job is extremely stable, and you don't need to hold as large of a cash offer and you're more of a risk taker. Therefore, you probably have a smaller cash buffer than someone who owns a business and knows that cash flow can go from having a lot of cash in your pocket to, you know, feast-to-famine sort of thing. And if that is the case, well then you're going to need to have a larger cash buffer to be able to ride out those leaner times.
So, a cash buffer is the most important out of everything, because you've gotta hold these properties. What I see is a lot of people buy property and they get into an investment property. And within three or four years, they're forced to sell that asset because they haven't factored in their cash buffers to be able to hold the property. And then, all of a sudden, they've made no money or they've made a loss, because they're forced to sell at the wrong time.
Walsh gives us an example of how he works out his cash buffers.
Daniel Walsh: In the early days, my buffers were quite low. And that's because I was building, and I was a risk taker. And I was young, so I wouldn't advise to do that. But I mean, for me in that circumstance, I had nothing to lose. It was [when I was 20 or 21 years old], and I knew that I had to buy a property because property was going up. But now what I like to do is make sure that I have roughly between six or 12 months worth of cash profit for each property. Now, that might be between, sort of, $15,000 to $20,000 per property that I hold, in buffer, in an offset account. And then, it depends on how many properties I have.
If I have 10 properties, you know, I might have $15,000 to $20,000. I might hold even a little bit more if my portfolio gets larger than that. But it really depends on the time that I'm going in to. If I see that there's really good opportunities with that buffer, I may deploy that buffer for a little while. But I do want to make sure that I'm always maintaining a good buffer. So, if you look at a minimum of six months per property of expenses, then you know that you're going to be fairly safe.
If you want to be more risk averse, you might want to up that to 12 months. But I think that also comes down to as well, when we go back to, you know, point 1: buying multiple affordable properties. The vacancies. If you have one property and it goes vacant, and it's $1,500 a week rental to you, you know that you've now got to cover $1,500 a week. And you're going to be very stressed in that period of time that you've got to cover that. And let's say that that's vacant for three months—you're going to be extremely stressed.
Whereas, let's say that you bought four properties for that one property, and one of those properties goes vacant and it would only be costing $200 a week or $250 a week. You know that you can cover that property; your other three properties are rented. So, you have more properties to be able to prop up that other property that you have that is vacant at that period of time. That's another reason why we do buy multiple affordable properties over buying really expensive properties. That, you know, if they do go vacant, you're going to be a lot more stressed.
Tyrone Shum: I think that's really, really important that you mentioned that, because I don't think people realise you need to actually just keep these things aside.
It's important to continue to grow and invest your money. But at the end of the day, if you can't hold onto these properties, then you spend all that effort buying it, and then you have to sell it out due to stressful times or whatever it is. And times like this, I guess due to COVID and all those kinds of things that are happening, there are unfortunately a lot of sellers who have not planned for things like this and, unfortunately, have to sell at a price that's current—meaning the market—and then having to make a loss on whatever their investment was [or] initially what they had put in place.
Daniel Walsh: With cash buffers as well, you can actually—for a cash buffer, you can release equity from a property and stick that in an offset account. And that could be your buffer. That could be your survival rate. It all comes down to how long can you survive for, really?
You know, when you're having a portfolio and you're building that property portfolio, you've got to think like a business. And a business always has cash-on-hand, and cash is their survival rate. If something goes wrong, how long can your company survive for? We're thinking the exact same way with our property portfolio.
And you might have, let's say you have a portfolio that's worth $2 million and you have, you know, a million dollars worth of equity sitting in that. Well, you might then extract $200,000 out of equity. You might put that in an offset account, and then you just forget about that. You don't touch that. It's not for going out there and blowing it on a boat or a car. However, that's for emergencies. If you need to continue to pay the bills, you can continue to dwindle that $200,000 down. And let's say that $200,000 buys two years worth of time or three years worth of time. So, you can now use that $200,000 for two to three years before you even get into any strife with that portfolio.
Now, why I say it's not that bad to use your equity is because people say, ‘Well, I'm getting in more debt. Why would I want to do that?’ If you have $2 million worth of property and that $2 million over the next 10–15 years goes from $2 million to $4 million, it's not going to matter that you spend a hundred thousand dollars to get it there or $200,000 to get it there. It's much better doing that than it is to sell the entire portfolio and have to use everything.
Tyrone Shum: Yeah, and I was going to comment on that too. Exactly what you said. It's only a short-term thing anyway. You're not looking to hold on to using equity for the next 10 years. Things move up and things improve, and, hopefully you increase your income within 12 months or so. But at least a minimum [of] 12 months would be a good starting point just to have those cash buffers in place.
And I personally am the same. I can tell you from my own personal experience with one of my father's properties that he purchased back in Sydney: He purchased a really good property down in King Street Wharf for something close to like a very high-end property price, which is close to about $800,000. And at that time, that was actually a prestigious property, very expensive. I mean, when you look at it now it's, you know, it's a tiny amount of money in comparison. But back then it was a lot of money.
That property is probably worth like over $2 or $3 million now ‘cause it was by the waterfront. Unfortunately, over a period of five years, because the market didn't move—it actually went backwards—, he had to sell that. And he actually made a $200,000 loss on that because he just couldn't hold onto it. He had not enough cash buffers.
He bought it, unfortunately, at the wrong time of the cycle. But also, at the same time, it was costing him so much each month not only just from the rental side of things and mortgage. It was also the strata fees and all those kinds of things. And if you don't do calculations behind that, it can be a very, very big loss. But if he actually held on for another two more years, which is when the boom happened, well, he would've made an extra cool, $1.2 million of equity. But, you know, there’s a lesson there to be learnt. And I guess that's coming from experience from that.
Daniel Walsh: That's a really good point that you made as well, because, at the end of the day, like you said, that property was $800,000 and is now worth $2 or $3 million. If he had been able to hold that, he would have made that money. If he had a good buffer, he could have held through those periods of time. And when you look at it, that's another thing with building a balanced portfolio.
So, when you build a balanced portfolio, you're looking at that from a cash flow perspective and saying, ‘Can I actually hold this property through bad times? Has it got enough cash flow for me?’ Because people will go out there and say, ‘I'm going to, you know, get a 2% rental return. I'm going for capital growth’—but what happens if that capital growth doesn't come? How much is that property going to cost you each year to hold and how long are you going to hold that property until you become sick of it and then offload it because it [didn’t] make you anything?
I’ve seen a lot of people who have done this. They bought two properties in Bondi, and those properties in 2018 peaked. They bought them. And now, all of a sudden, they went back 10% at one point and then they're going, ‘Geez, these properties are costing me $15,000 each, per year to hold’. So, there’s $30,000 each year that it’s costing to hold those two properties.
Now, [in] that same period of time, I remember actually saying to those people, ‘Why wouldn't you go buy some more affordable properties in Melbourne? You pick them up for around $350,000 to $400,000; they've got better cash flow, you know. You can hold those properties’. But they had more upside for growth, because they hadn't been through their growth cycle just yet. And I remember them telling me going, ‘Oh, you know what, I don't want to do that because Bondi’s you know, blue chip. It's a blue chip.’ Well, those properties still haven't gone up in value. They're only probably just back to where they paid. But they're costing them $30,000 a year to hold.
Whereas, [in] the same market that I told them to buy in, in 2016 [or] 2017, I remember all those properties—I bought my own property there. It went up 60%. However, I was getting a 5 ½ per cent rental return. So, it was paying for itself. I made 60% capital growth. I was able to leverage that equity and go buy more properties. So, they're sort of sitting there going ‘I’m probably lucky to break even, and it's costing me to hold’. They're probably going to end up selling out ‘cause they're sick—you know, the holding costs. Whereas, I've been able to leverage and buy more properties, and they're not costing me anything to hold.
And I did that by buying affordable properties where they weren't costing me, you know, an arm and leg to hold those properties. ‘Cause I knew that if they cost me too much to hold, I'd be in the exact same scenario.
Tyrone Shum: Yeah, exactly right. And it's a mindset thing as well. I mean you've just given perfect examples of what could potentially happen in one scenario. If you hold it in a place that doesn't have any growth at this point and no one knows, you know, what it’s going to do. But if you get a property that can cover the cost itself and potentially have its capital growth, then that actually sounds a better option.
But I think it's just understanding the fundamentals, understanding the calculations behind it, and then, furthermore, speaking to experts, you know, who actually know what's happening in the markets. So, I think these four very, very fundamental things...Daniel, would you mind just sort of summarising those four again?
Daniel Walsh: Yeah. So the four points are, No. 1 is buying multiple affordable properties. No. 2 is buying in a fundamentally strong area. No. 3 is building a balanced property portfolio, and No. 4, the most important, is having cash buffers in reserves.
Simon Loo is a very successful property buyer’s agent and director of the buyer’s agency, House Finder. He has gained a wealth of knowledge through the many, many years of experience he has built up and he is generous enough to share some of that knowledge with us and provide some expert advice and strategies in the midst of the COVID-19 global pandemic.
Join us in this episode of Invest Like A Pro as we dive into the topic of overcoming your fears during the COVID-19 pandemic. We discuss the impact that the pandemic has had on the property market from Loo’s perspective, the best way to mitigate risk during this time, reminding us that property is a long term play and that you always need to have that end goal in mind, and much much more!
We jump right in and Loo shares with us some of the conversations he has had with his clients about the COVID-19 pandemic.
I think it's more pertinent than ever before. I think previous to COVID-19 there was just a lot of—most property investors would just have an expectation that their properties would be rented, would find great long term tenants, or all they'd have to focus on is vacancy rates and things like that. But I think deeper into that, that this whole pandemic that we've gotten into, the more we are seeing articles of the rental market really taking a massive hit, people reducing rent significantly—especially certain types of properties.
So, the conversations I'm having a lot of at the moment with my current clients and past clients are, you know, what they should be doing and what they should be looking for in property or in their own portfolio to ensure that it will be relatively securely tenanted in the long term. Even if there are vacancies, even if they're in between tenants, I guess, it just comes down to mitigating a lot of risks which is more important than ever.
We find out the best ways for us to mitigate risks in light of the pandemic and some of the biggest fears of a property investor.
The biggest risk is not being able to find a tenant. Having a very long vacancy period in any property investors portfolio is extremely frustrating. And it gets to a point where it's a downright scary experience. You know, if you're just paying mortgage repayments, if you're just paying council rates and all these expenses, and you're not getting any income from that property, you know, it really does put a lot of stress on your finances. You know, even if you are fully employed and all that type of stuff as well. So, that's probably the first fear.
The second fear is getting bad tenants, you know. They sign on, and they don't pay rents, which I have noticed in specific areas. That has been a little bit more frequent, you know. Since this whole COVID-19 thing happened, there's been a lot of measures put in place from the government. To stop landlords from exercising their rights that they could have previously, if tenants were, you know, to just stop paying rent.
Well, I mean, eventually as a landlord, you can take action depending on what state you are in. There's certain timeframes that you can. But it's so long that it's, again, just a very frustrating and stressful experience. If a tenant decides not to pay rent, you know, up to six months, you basically can do nothing. So, a few of the ways that I try to, you know, mitigate a lot of this type of risk, you know.
I guess it's no secret that I've always had a focus on buying investment properties that are in more affordable housing areas in major capital cities. So, we're not talking like, you know, it's very blue-chip houses in a city type of area. But the focus has always been in areas where it's just your typical sort of an average income, you know, middle ring kind of suburb.
And I think that the main point that we have to focus on is the way that investors see property is different from what the majority of Australians see property as, which is at the end of the day, a place to live in for themselves, for their family. And whether you know, obviously notwithstanding massive catastrophic events, housing will always be first and foremost considered as an essential item for people to live in.
So, the type of properties that will always be in demand are what I would consider affordable housing, you know. You've got your three-, four-bedroom house that's in a major city and that's in proximity to shops, schools, parks, and transport. It may not be right near the city, but it's within a distance of traveling, you know, to various aspects of that particular city.
In times like these it can be as simple as having affordable housing to mitigate the risk of long vacancies.
Even in my own portfolio, you know, I've had a few vacancies in recent weeks and legitimate vacancies where tenants had to leave. And I had to find new tenants. That kind of stuff is still significantly in demand from a rental perspective. You know, you're getting a lot of people now that are unfortunately exposed to some pretty bad financial situations personally. And previously they might be renting or they might be living in a ‘nicer property in a city’. But because of unseen circumstances, they're having to move back into more sort of affordable options. So, that's one side of the demographic. The other side is, you know, for the people that are maybe moving out of home—or for, maybe, like a young family that's new to the state or starting out, they're also looking at these kinds of more affordable options.
I guess at the end of the day, there will be consistent demand for houses that are affordable, you know—houses that are clean, safe, they're tidy; they can house a family. I think that's also a very important factor: to find properties where young families with kids or for any family with kids can safely live in. So, you know, I feel like if there is more of a focus for investors to focus on this type of product it will mitigate a lot of the risks of having tenancy issues down the track.
Loo provides us with a tip on the type of property that he believes is always in high demand.
That's always the bottom line. And whatever your goals are with property, it's 99% going to be a very long term exercise. You know, usually when you buy a property, you're holding onto it for at least five years, usually around 10 years—and a lot can happen in 10 years. You'll have ups and downs with the economy. You'll have, you know, unforeseen circumstances—like this pandemic happening, high interest rates, low interest rates, personal circumstances, you know.
Investors or people sometimes run into situations themselves where they might have a bit of a rough patch. Maybe they have a bit of unemployment or maybe a health issue, health scare potentially. So, I think risk mitigation is so important, like now more than ever. And it's been a big focus for me.
And my clients nowadays really focus on characteristics. I mean, we talked a little bit about the type of properties, which are affordable housing. But the characteristics of these properties as well [are] coming into play. And in general terms, you do need a property that appeals to as many people as possible. You know, like a property that might appeal to the wider range of demographic would be like a three- or four-bedroom house with a decent-sized yard. It might be very low maintenance. It might be very safe, a very typical layout, nothing too flashy, nothing too odd.
In Queensland in particular, there's obviously the difference between high-set and low-set houses. High-sets basically is a single-storey house but on stilts. Those are less in demand from a rental perspective than your typical sort of low-set three-, four-bedroom brick house. Because if you have a house that needs stairs to get in then get out, you're cutting out a significant amount of potential tenants that may have some disabilities—or, you know, maybe they just don't like stairs.
Building a portfolio with properties that appeal to a wider demographic is important in getting through a difficult period.
With my portfolio as well, the ability of having these affordable houses, this is obviously when the buying price is generally a bit cheaper compared to your more empty city areas. So, over the long term, it allows an investor to spread their portfolio over a larger quantity of assets rather than, you know, having a lot of debt tied to just one or two inner city houses. Because if one of those houses [has] become vacant or both become vacant, then you're really in a sticky situation. So, I think that's also, I guess, in many ways, proving to be a bit of a lifeline. Just having, you know, these properties that are appealing to the majority of tenants, you're in decent areas in capital cities that they're priced to a certain point, not super expensive.
And if you've got a few of them, then it becomes like a bit of a self-fulfilling portfolio where, you know, even if you have like one or two properties that are going through a bit of a rough patch, you've got a bunch of other properties that might be doing well enough to absorb some of those costs, if that makes sense.
I feel like if you get these things right, it really helps investors not be exposed to too much potential pain, I guess, in the coming months, in the coming years, even depending on how this pandemic plays out. Another controversial point that I've actually noticed down on the ground when it comes to tenancies, the stereotypical bad tenants can prove to be your best, especially in times of crises.
We hear an interesting story about one of Loo’s tenants and why you shouldn’t judge a book by its cover.
I've got a single mum tenant in one of my properties who was struggling to find a home for herself and a couple of kids that she has. So, I decided to take her on because, you know, at the time she was employed, she wasn't on TICA, which is a database for bad tenants. She came back with some really good references. And she was extremely grateful that I took her on because clearly she had been rejected by a few other properties based on her single-mom status or stereotype that a lot of landlords associate with as being not a reliable tenant. But the other thing is, she was actually receiving Centrelink benefits, rent assistance. And that rent assistance paid my rent or paid her rent completely.
So, as a landlord, her rent was basically coming directly from Centerlink into my bank account. Now I know for a fact that, you know, this particular tenant did lose her job. And I think she's kind of on the new job at the moment. But, you know, regardless of whether she's in between jobs or not, my rent as a landlord is still secure because it's coming directly from Centrelink. And, you know, it's unnecessary for her to try and negotiate a lower rent—or, you know, even if she chooses not to pay rent like it doesn't really affect her, if that makes sense.
So, I guess what I'm trying to say is, you know, a lot of the negative stigma that a lot of people have with tenants and with certain types of properties can actually prove to be the best kinds of investment—especially when there's trouble, you know, when there's a lot of uncertainty in the market.
When you are looking for tenants you need to ensure that you approve the right people in the end.
I think a lot of character and analysis comes into play. And an offshoot of that is having an extremely good property manager as part of your team. So, you know, typically when you have a house for rent, obviously you do an open home. And the type of people that come through, you know, you never want to judge a book by its cover.
But at least when you're having a chat to them physically and looking into their eyes and having a conversation about the situation and what they're after and all that kind of stuff, you get a gauge to some degree on the situation or the genuineness of a particular person that's looking to rent a property.
Now, I think if it was, let's say, two able-bodied mates, you know, the mid-20s that are on Centrelink. I think maybe that's a little bit different to have, you know, like a single struggling mum with three kids that's looking for something safe to live in. Everyone's got different situations. Obviously, if there's two able-bodied friends or brothers that have been unsettling for a very long time, then they may not be the most genuine of characters—because, I mean, we're in a pretty bad economic situation at the moment.
People can't find jobs, but you kind of have to question, ‘Okay, are you guys actively looking? When was the last time you had a job?’ All those kinds of factors are super important. Now, I'm not suggesting every single mum with three kids out there is genuine and struggling, and they're not all angels doing the right thing. But look, I guess what I'm trying to say, there's always going to be a risk, you know, with any tenant in any property.
I think it's our job as investors to minimise that risk as much as possible.
And what I found [out] recently part of that is actually taking advantage, I wouldn't say taking advantage, but I guess we're using ‘leverage’—leveraging the generous benefits that the Australian Government has for people that are genuinely struggling. So, you know, I think that has helped me ensure that the cash flow from my properties haven't really been impacted too much. Because these properties that I have, they appeal to the type of people that will forever, you know, need affordable and safe housing at the end of the day.
Nobody saw the global pandemic coming and the impact that it would have. If you are a little fearful at this time, just remind yourself that everything will eventually get back to normal.
This pandemic is actually playing to the fact that housing is more of a necessity than ever before. People need their own spaces, you know, to overcome and minimise the risk of catching COVID-19. Authorities are advising people to stay indoors as much as possible and to keep apart. So, you know, at the end of the day, I feel like this particular pandemic globally, you know, will actually benefit certain property markets.
You know, it might not benefit the super expensive blue-chip type properties because the amount of people that are buying and can't afford those kinds of properties at times, during times of risk, is definitely lower. But I do feel a multitude of the median and the most sort of affordable options there's definitely been a bit of an uptake—especially in the areas that are operating from a business perspective, from a buying perspective. A lot of homeowner-buyer activity at the moment, a lot of owner-occupiers now, you know, looking at these suburbs that, I mean, just because they're affordable, it doesn't mean they're the lowest socio.
It doesn't mean that they're bad areas. You know, they’re just a bit further out—maybe not what a lot of people would prefer in terms of proximity to cities and things like that. We're talking about the 20-kilometre distance. So, it's not like a huge, you know, 5-hour commute or anything like that.
And the other thing is, I feel like a lot of these from what I'm seeing as well, a lot of these owner-occupiers or first-home buyers that are buying a house to live in are also being a little bit more conservative. Previously they might be borrowing to the hills to try and get that property that they really want in a very desirable location. But now, you know, because of the economic risk and potential employment risk as well, you know, even if they can't afford, let's say a million bucks to buy a fancy place to live in, they're opting for more sort of conservative options. And they're maintaining a bit of a buffer from a cash perspective as well. So, they might be, you know, budgeting $700,000 instead as an example. So, I think that's starting to become a little bit more normal as well.
We delve into why Loo thinks that work in the property industry has been busier than ever even during this period of time.
There's a few factors at play currently. I think the government has done a great job in maintaining confidence with the general public, you know—with job care, with JobSeeker, you know, banks deferring mortgage repayments, extremely low interest rates. Even though that's not really a government policy, all of these factors combined has helped maintain a lot of confidence with people who need to enter the property market because they need a house to live in.
Now, pre-COVID, I would say there was probably a 50/50 balance between an investor wanting to buy a property versus an owner-occupier wanting to buy that property. Now, since we're, you know, several months into COVID, I would say that shift is probably more like 20% or 25% investor versus 75% or 80% owner-occupier.
So, there's a lot more owner activity and a lot more first home-buyer activity. On the other hand of the equation is a very limited number of listings that are coming on the market. Definitely a lot less than there would be normally. So, the people that are selling houses at the moment, there's a lot more situations where people have genuine reasons to sell rather than previously where people are thinking, ‘Oh, you know what if I can cash out or make a decent profit, or maybe I'll just test the market and see if there's any potential buyers’ and things like that.
So, we've got a situation where we do have a lot of buyers on the grounds. The shift has been owner-occupiers being propped up by a lot of confidence and also being propped up by a lot of media bashing on the property market because it’s all the doom and gloom, and property prices are going to tank—and all this kind of stuff.
So, you know, there's a lot of owner-occupiers that are out there thinking that they're going to be getting a better deal or a cheap house that they can, you know, buy a house for their family to live in or to grow up in. And then, on the other hand, you've got a limited number of listings as well. So, I think when you marry the two together, you get a situation where there's just a lot of market activity. And it's more apparent in locations where it's not super expensive. You have locations that are, again, more affordable in locations that are more conducive to, you know, meet any income standards and things like that.
You need to be in property for the long haul and understand that there will be bumps along the way, but always have that end goal in mind.
Property is a long-term game, and I think investors will have to remember this. And this is how I advise all my clients that come to me and say, ‘Simon, I want to build a portfolio. I want to have $100,000 dollars of passive income in 10 years’. I go, ‘Okay, cool. That's great. Let's strategise. We can work that out. That's fine’. But 10 years is a long time, you know. Within the 10 years, there's going to be high interest rates. There's going to be different economic policies. There could be, you know, pandemics like what we're experiencing.
So, it's really important not only to focus on growth and advancing towards a goal, but it's also important to ensure that you don't get in too deep. Have measures in place to ensure that if things were to go wrong, you can exit.
Exit strategies are super important. We've discussed this in previous episodes. And also to ensure that your property appeals to lots and lots of tenants and it's rentable, and you're not going to come under any undue stress or risk if that tenant decides to not pay rent, or if they decide to leave, or if you have maintenance issues and things like that.
