In this property chat with Daniel Walsh who is a buyers agent and founder of ‘Your Property Your Wealth’ an award winning investment buyers agency. Daniel began his own investing journey at the age of 19 and has since built a portfolio worth over 4M dollars by the age of 28. Daniel’s aim is to build a community of the top 1% of investors in Australia, through his own experience and professional expertise.
The goal of his company is to help clients improve their property portfolios and provide strategies that are adaptable depending on each clients situation.
Join us as we hear the answers that Daniel Walsh has for the questions that you have sent in this property chat. We learn more about how to use your current income to invest in property, the role that your super fund can play when buying property, the best strategies to use when you’re looking to build a portfolio and find a home for yourself and much more on this edition of Q&A with Daniel Walsh on Property Investory!
Recently there have been a number of questions sent to me, so a special monthly Q&A episode will be shared. I invited property expert Daniel Walsh to answer these as he brings a wealth of property knowledge and experience. Let’s jump straight in…
This question is from Desiree. My husband and I are in our mid fifties and both employed full time, our total gross is $150,000 a year. We own our own home, have no debt, and have about $400,000 total in super funds and $200,000 in savings. My question is, what do you do with the $200,000 cash? And our aim is to have enough in retirement, but everyone says to me, you need x to retire completely, and I panic. So I guess if we were to replace that income for $150,000 per year in passive, how can we achieve that?
I guess firstly they’re saying they want to retire on $150,000, I guess what they really need to look at firstly is, how much do they need in retirement? They say they need $150,000 but what happens is, a lot of people don’t realise their expenses go down quite dramatically. When they do go into retirement, they may own their own house, they don’t have to buy new cars every two years or anything like that. So you’ve got to look at really what are the basic expenses we need to cover. Because you need to get that right first. Once you go through the bare necessities and how much that’s going to cost to live each year, then the extra is going on holidays and living life I guess at that point. So it really comes down to what do we need overall and then what we need to do is work backwards on that.
Now it’s good that they basically said they’ve already owned their own house outright. So if you own your own house outright, you’ve got no mortgage, you’ve already cut down a lot of the expenses. The thing is they’ve got a lot of equity sitting in that house that they haven’t used. All those years that they’ve had that house they could have been recycling that debt back into investments 10 years ago, maybe even 15 years ago, and being able to build a portfolio that now would have been self-sustaining. So in terms of where they’re at now, they’ve got 10 years left. If they were to leave the investing route for another two, three, four years, what happens is, you’re adding more risk to what you’re trying to achieve because your time frames are becoming shorter. So what you want to do with investments, and anyone that’s investing, is you need to be looking at what is your timeline and the longer the timeline, the least amount of risk you’re going to take on with building the portfolio.
Now in terms of the cash, they’ve got $200,000 cash and they own their own home. They’ve got $400,000 in super. So the super’s going well, they’ve obviously got the $200,000 cash, but it’s not really doing much for them if it’s just sitting there in a bank. So they really need to be building the portfolio and that’s starting off with the cash money. They could probably go out there and buy two properties straight away. Again, it’s going to come down to what do they need. If they want $150,000 worth of passive income, it’s going to be by the end of the 10 years, they really need about $3 million unencumbered in investments to be able to do that. And that’s based off a 5% net return on the net worth that they created. So they’ve got a fair way to go in terms of building the asset base, they’re going to need to build the asset base as quickly as possible to let that asset base grow.
We learn from Walsh on some strategies you can use in your later years when you’re able to access your super fund and what may be the smartest option.
They’ll have a 10 year period, 15 year period obviously to let that grow. The other thing is what they probably haven’t thought about is they’ve got super, so if they get to retirement and they can access their super, what they may do is they may actually keep the portfolio growing for another five or so years before retiring some of the debt or selling down some of the properties. And what they could do is live off of that super money in the earlier days so that then they can let the investments grow for that little bit longer. And then maybe in 15 years time they turn around and say, you know what, we need to retire one or two properties in terms of retiring the debt so they can create the passive income. Once they have created the passive income in retirement, it’s going to be a lot more stable.
I guess around super is, if everyone’s worried about what’s going to happen if the recession happens and can I get wiped out? We saw a lot of the baby boomers got wiped out in 2008 so when you do this strategy and you create the portfolio from a property perspective, as long as you’re getting your rent and you eventually own those properties, then it doesn’t really matter about the capital growth anymore. It’s just about the cash flow at that point and it should be fairly stable if you’ve built a really good asset base in good areas as well.
Just to ask a question may be on the side here is that, they’ve got $400,000 in super, do you think that it would be actually an option, and this is something that they would need to get financial advice, to put it into self-managed Super Fund so that they can purchase property in that because at the moment if it’s sitting with the institution, they don’t really have too much control over that amount of money.
I’ve had clients that have done the exact same thing. They’ve got a large chunk in super. They worried about their super getting wiped out and the economy and the way it’s going. So they think, you know what, maybe I’ll put that into an asset like property where $400,000, they could go own a property in super. So that’s then creating that passive income straight away. So they’ve already then sorted that out. And then it’s just about building the proper people for you outside of super as well. So if they want to put everything into property, then they can do that. If they want to keep diversified, they may stay in super and then they may have their property portfolio outside of super as well. But it really comes down to their risk appetite as well and what they’re willing to risk to be able to get to the other end. But it’s definitely a good question to raise because a lot of people don’t think about putting their super money into property and being able to do that. You can pretty much create a passive like they could create a passive income straight away and they can continue to pay into it to build up another deposit. So maybe two properties in super by retirement,
You can’t leverage off the property. So, let’s say the property doubles in value, go from $300,000 to $600,000. Typically outside of super, what you would do is you would go out there and you would refinance the equity portion that you have and you’d go buy another property. You can’t do that within super, but you can leverage upon the money that’s in super. So if you have $400,000, you may want to go out and buy $600,000 or $700,000 property. You can do that and leverage upon I guess exactly the same way as outside of super. You can leverage inside of super. You just can’t, you just kind of use the available equity to be able to leverage upon that and build a portfolio within super.
Basically to summarise that, you can actually build a property portfolio within super using that money as deposits and then borrowing from the bank, or wherever you want, to buy the money to purchase property. But you can’t take out the equity, say the property has got capital gains. You can’t take that equity again to recycle, to use into purchasing more properties.
The other thing to know is, let’s say $400,000. I want to buy two or three properties and just put down deposits of say 20%. They can do that, but they’re going to have to have a portion of this self-managed super fund. When you set that up and you go for a loan, they will actually make you hold a portion in super. You can’t spend the whole amount. And the reason being is you can’t actually go pay for repairs out of your personal money. Everything’s gotta be within the super. So the super has to pay for all the maintenance and has to pay for everything. So generally when we look at, so some self-managed super funds and buying properties or building portfolio in the actual super fund, typically most people would be looking for higher-yielding assets that are going to sustain themselves or pay themselves down because you’re going to be paying principal and interest.
The interest rate might be a little bit higher than your standard interest rate outside of super. So there’s a couple of different things that you’ve got to really contend with. The other thing is as well, it’s going to cost you with the self-managed Super Fund, setting it up and then the ongoing cost of managing that as well. So a lot more people go for a higher-yielding asset in super so that it can take care of itself and then they can keep building this super up via obviously their PAYG job, getting paid into super each year or if they’re self employed, then putting their own super money in each year as well to build up for more deposits.
Walsh provides his expert opinion on what type of property people should be looking to invest in and where.
It really depends on how much money they’re putting into their super and what wages they’re running. So what they can sustain. If they need a higher growth asset within super and they earn fairly good wages and they can sustain that, then they may be able to do that. They may even go a lower priced property with a higher return to be able to minimise the risk or if they’re on lower wages, meaning that they’re not putting as much into super each year. So it really depends on the circumstances of the client, what they’re trying to achieve, but most importantly, what they’re putting into their super each year and what they can.
I have a question from Nina. She says, my husband and I are in our mid forties and our kids have moved out. We have decided that it’s time to sell our investment unit. Based on realistic assumptions we should make about $175,000 profit after selling costs and capital gains tax. My question is, what should I do with that money? We are completely debt free, so we own our own home, but I’m unsure where to invest. And I’d like to continue to build up a portfolio so that way I can have passive income for my near future retirement.
The first thing I would say is why are you selling the investment? Is it not performing anymore? Maybe that’s why they’re selling it. A lot of people think that they’ve got to sell an asset to realise the capital gain and continue building it that way you can leverage from asset to asset. So really it depends on why they’re selling that. Now let’s say that they have sold it, they’ve got $170,000 to invest. It really depends on the appetite and what they can afford to borrow. So the very first thing you’re going to need to do is actually work out what’s their borrowing capacity, what’s their strategy and what they’re trying to achieve. And also what can they afford in terms of, if it’s out of pocket, how much for them and or do they need a positive cash flow property as well.
So for me, in terms of where, at the moment I think Brisbane’s quite a good opportunity to buy in at the moment where you’d get a balance between good capital growth and rental return. So that’s probably a good starting point to be looking at. But again, it’s really gonna come down to what their risk appetite is depending on how much they leverage that deposit that they had, which is $170,000. They typically would probably only buy, say maybe one property, they might be able to squeeze out two cheaper properties.
So let’s just have a look at this scenario again and say, for example, if Nina said, okay, I’ve decided not to sell this unit because we’re just exploring that option and we held onto it. Now if we’re to pull out, say that equity, which is potentially $175,000, these are your after costs and all the capital gains tax, you probably might have a little bit more equity in that. What would you say we could potentially do with that? Would it be the same strategy, based on maybe a very risk-averse type of appetite, someone who doesn’t want to actually be too aggressive with building a portfolio, how would they approach this scenario?
Let’s say that they didn’t sell, that’s where I would want to look at that property to see what it’s doing because it’s doing either one or two things. It’s either growing in capital growth or if it’s not growing, has it got cash flow. If it’s really negatively geared and it’s not growing well, then obviously that’s maybe an asset that they don’t want to hold onto. But if it has really high cash flow and they’re able to leverage out of that, like you said, they’d be able to leverage out more than $170,000. So say they have a good $200,000, they probably could go buy two properties between say 300,000-$400,000. They might even diversify and put one in Victoria, one in Queensland, have two properties in diverse locations. So they’re there, they’ve got different growth drivers, and if Victoria grows and you’ve got the best of that world and if Brisbane grows, you’ve got the best of that world as well. So I guess that’s minimizing the risk from that perspective as well. To me, I like to, instead of going in on one house for say $1 million, I’d rather go out there and buy two for $500,000 or maybe three for that $400,000 range. So that’s minimizing the risk if they want to be more risk-averse at that point.
Sometimes with investment properties it is about the long game and Walsh delves into a couple of properties he bought that have turned out to be very successful.
Another thing to note while looking at this property as well is, let’s say that that property has had good capital growth, which it looks like it has, but maybe it’s a high yielding property where they may be able to turn that to principal and interest and then let that property pay itself down so they’re guaranteed to own that over a period of time. And then that will create the passive income long term just from the one asset. I actually have done the same thing with a property in Sydney. So I’ve got a couple of properties in Sydney where they’ve grown quite rapidly. They’ve pretty much, they’re both doubled in value, but I’ve recognised that probably over the next three to five years, they’re probably not going to grow too much more. But the thing is with those properties of their higher-yielding properties, so they yield me about seven and a half percent.
So what I’ve done with that, both of those properties was transferred both of them to principal and interest to pay themselves down. So I’m creating equity myself at that point, but I’m not actually paying anything out of pocket. So they’re basically paying themselves off at this point. Now, the reason why I didn’t want to sell them was that they’re such high yielding properties in really good locations. Even though I recognise they’re not going to grow in the next three to five years, I don’t want to sell them because I know over the next 10 to 15 years I’ll do quite well. So I want to pay them down and I’m going to leverage the equity out of them to go buy in growth areas. They could do something similar. If they’ve got a property with a higher yield where they’ve got equity in, they may not necessarily think it’s going to grow, but they can turn that to principal and interest and let it pay itself off.
It’s basically guaranteed equity. You’re paying it down, but you’re not having to physically go to work to pay it down. You’ve got somebody doing it for you. I’ve done that with quite a bit of my portfolio and it’s good to know. I wake up everyday and think, I’ve got a few properties paying themselves off right now. Even if I wasn’t to go to work, they’re paying themselves down. They could do a scenario like that rather than just selling the asset to get the capital gains to then try and make more money in the next property they could leverage from it instead.
The next one is from Mitch. He says I’m a 23-year-old university graduate. In my first year of full time work, I earn about $57,000 and have about $12,000 in shares, $16,000 in super and $10,000 in my savings account. My girlfriend and I had been dating for three years and are looking to move out in the near future. We’re both currently living with our parents. However, even with historically low-interest rates, Sydney property prices make me physically sick. My question is, is the Australian dream of owning a house all that it’s cracked up to be, given that the interest payments on a large mortgage, even with a 20% deposit, wouldn’t we be better off just renting wherever we want to live and build a property portfolio, at least we would see some income from property. What do you think?
I think this is a really good scenario for a lot of young people. Because I, myself, had to go through that journey and I’m a rentvestor and I’m still a rentvestor. So I had been through it and I’ve asked myself the same question and I still continue to ask the same question. I live in Sydney and the property prices are quite high here, it was very much like, do I go out there and buy the million dollar home? I know that I’m going to have that for 30 year period. And I know that over that period of time I’m going to have stress points because you’re going to have to think about what’s happening with the economy. Interest rates going up again, what’s going to happen? And there’s going to be periods of the economy not doing well, the interest rates going up, debt going down, they’re going to do all different things over the next 30 years.
So I basically looked at it and thought, I know that I’m going to have points of stress if I go out there and buy a property in Sydney with a really high LVR and have a $1 million mortgage. So I wanted to go the other route. And for many young people, I say to them, it can be a lot more stress free by going the other route, which is going to rent where you’d rather live. So I rent where I live and then I go out there and I have built an investment property portfolio in more affordable locations that I can afford at that point. And I think that’s a really good way of doing it because you can create passive income that can then pay for the rent or, in later stages of your life, will pay for the mortgage if you wanted to buy a house. It is a long route to do it that way.
If you’re going to go that route, you’re going to have to stay on the path for a good 10 years. And that’s because you’re putting all your money into investments. And then that’s what I’ve done. But what I’ve been able to achieve is now all of my portfolio pays my rent. So I live here rent-free. Even if it’s over $1 million dollars, I get to live here for nothing. Whereas if I wanted to actually pay that off, I would still probably have an $800,000 mortgage if I was just doing the traditional paying it down each month. So I think it’s a really good question because in Sydney itself, there’s a lot of locations where it’s cheaper to rent than it is to buy the property. And not only that, not only is it cheaper, but you also less risk because if something was to go wrong and you lost a job and you could no longer afford the rent, then you can move out.
You give your notice and off you go. You can’t do that with a mortgage. Especially if you’re a negative equity where some of these people have bought at the top of the market in Sydney. So, in this case, I would say that, if he’s really comfortable renting then probably stay the renting route and it’s a decent strategy to be able to rent and then build your investment portfolio as well as most people can’t even afford to ever get into that market in Sydney. So it’s better off getting into a market than no market at all. So I would say looking at these numbers, first he is going to have to just knuckle down and save a bit more money to be able to get into his first investment. But it is a good route. And it’s a valid question because I think, I get asked on the daily about that type of question for people that are under 30 years old.
I’d like to run some numbers just to give people an overview because I’m pretty sure people are going, okay, this sounds like a great path to go down and do rentvesting just to get started because if you try to get into a market, say for example like Sydney and let’s just say the average property price in Sydney is $1 million, this is just a house, not an apartment or anything like that. You need to have at least a minimum of 20% deposit, so you need to have at least say $200,000 saved up as a minimum. That’s minimum. Then you’ve got to add all your additional costs. That’s another 5% on top, so make it rounded out to $250,000. You need to have that saved up in order for you to be able to get into the Sydney market. Then on top of that, you’ve got a, say $800,000 mortgage. I don’t know how much roughly he’d have to do. If we did a quick calculation, that would be on 5%, 5% on $800,000 would be $40,000 a year. That’s like a minimum wage, which roughly about says less than just under $500 a week. It would be around $800 a week. That’s just interest repayments, to actually rent a place in Sydney for under $800 is quite achievable, would you say so?
I live in over a million-dollar house and I pay $800 a week, but it would cost me more if I was to own that property. So I think that, what happens is people will say that I’m going to go buy a house because it makes them feel warm and fuzzy that they bought their own house, but they’re only paying the interest back, a lot of them. So we’re seeing a lot of people just paying interest only because they can’t afford the principal. And I look at that and I say, well, that’s no different to renting the house really. I could probably rent that even cheaper and you’ve got to factor in all the extra bills, the maintenance on the property.
I know in my property I’ve got a pool and the pool pump blew up about four weeks when I moved in. So the guy had to shell out the money for the pool pump. So you’ve really got to look at it and say, I don’t have to pay the rates. I don’t have to pay the maintenance. I didn’t have to pay the insurance. And that all adds up. And in a $1 million home, that could be $10,000 a year that you’ve got to add on extra that it would cost you if you were to own the property.
That kind of puts everything into perspective and it’s really good that we brought these numbers down. So I guess for maybe Mitch, he can definitely consider looking at the reinvesting route and start building his portfolio. And even just to get started in any other markets, like in Brisbane, you’d probably be looking at and say maybe on average, $350,000 to get a 20% deposit, 50,000-$60,000 would probably be sufficient to get him to the property market at least.
And he might not even go down the route of the 20% deposit. He might go down the route of putting a 10-12% deposit. Yes, you’ll pay lenders’ mortgage insurance, but on $350,000 it’s like $5,000. But that’s also claimable. So what you’ve got to look at as well is once you build the property portfolio and you’re renting, what you’re doing is, all the debt that you’re taking on is deductible and you’re getting deductions on this. So lenders’ mortgage insurance is actually a deduction. So if you were to pay $5,000, you would be able to claim that back over a five year period at your marginal rate of tax, you get some of that back as well. So you may not even want to put a 20% deposit down because you’re getting income from the property. So your risk is a lot lower than if you were to go out there and buy the property owners.
I’ve got another question from Bec. This one’s an interesting one. I’m about to receive a large inheritance from a friend of the family. It’s around $350,000. My friends are all envious in a good way, but to be honest, it’s actually stressing me out. I have a $400,000 mortgage, which I only bought three ago and I have an old car that I want to replace. I have no children or dependencies. What would you advise I do to build an investment portfolio with that amount of money?
The first thing I’d be looking at is where you live right now or how long do you want to live there? Is that the home that you want to live in? Because you want to get that right first before you’re building a portfolio. I mean, you can still build a portfolio, but you want to look at where’s this $350,000 going? Let’s say that the scenario was that she’s happy where she lives. She wants to stay there long term. I’ll be paying down that debt first. That’s non-deductible that $350,000 straight into the mortgage. You owe $50,000 now. Then from there what I’ll do is refinance that mortgage and then I would be getting split loans, which might be two or three split loans. And then you could go there and buy a two to three properties, almost straight away.
What you’re doing then is you’re paying down your non-deductible there and you’re transferring that debt back into deductible debt so that you can claim the whole amount of that debt. So you basically borrowed 105% because you’re borrowing for the stamp duty, you’re borrowing for the total loan amount because it’s coming out of the equity that you just refinanced from your own home. So now you get to claim 105% deductions but you’ve also paid your own mortgage off to under $50,000. You can continue to pay down your mortgage at that point and keep your investments at interest only and pay down your mortgage all the way down to zero. You’ll be able to get rid of that probably within a year or couple of years. And then you own your own home. Technically you’ve got no non-deductible debt, no bad debt. And you’ve transferred it all into investments. So I guess from a portfolio perspective, you’ve actually got yourself the right way up.
In terms of that car, you want to get a new car. I mean, the way that I like to do it is, I would put the money still into the house. I would actually just, whatever you needed, let’s say it’s $50,000 for a car, I’d be getting that out of the mortgage instead of going to get a car loan or anything like that. And I’d be probably just paying interest only on that. You’d be getting maybe a rate of say 4%, you’re paying 4% for the car instead of basically going out there and getting a car loan for 5-6%. And you’ve got to pay it over a three to five year period. Instead you’re just paying the interest portion of $50,000. It’s probably like $1500 a year or something. I haven’t calculated it, but it’s probably $1500 a year to hold the car. The cars are depreciating items, so you don’t want to really throw all your cash into it anyway and you can keep the money working for you longer in the investments.
I think that there’s some really, really valid points there to be able to raise because the good thing about doing it that way in terms of say buying a car is because then you don’t have to worry about after three years you’ve got to say roll it over, go through all that other paperwork. Basically you have access to your money and you can actually own the car outright. And therefore, as you said, it’s a depreciating asset. You just don’t want to hold too much cash in it or buy with cash as well too. So in terms of building a portfolio, what kind of strategy do you think you could perhaps recommend for her if she wants to start replacing her income as well? Say she has been wanting to earn the average income towards retirement. So maybe it’s $75,000 to a $100,000 a year. What would you recommend to do to start building out this portfolio?
Straight away, she should be going close to owning her own home. So she’s in a very good position. So for her to leverage and go out there and build a portfolio quite quickly is quite easy. So let’s say she goes out and buys three properties. Even if they’re between say 300,000-$500,000. If we rounded out to say $500,000, that’s a $1.5 million portfolio there. So what I’d be doing is making sure that you’ve got a balance, you know, depending on the income you’ve got. Also look to factor in the incumbent. I’d be balancing out the yield with capital growth and I’d be diversifying the portfolio, three properties in three different locations, predominantly probably sticking to houses at that point. And finding growth locations. Obviously I go through all that research to do that. But finding three growth locations and then being able to diversify the portfolio straightaway.
So you then have three properties worth $1.5 million growing at maybe 5 or 6 or 7% rate at that point. And then from there we can continue to leverage and she continues to save money and pay down her own mortgage at the same time because we don’t want to have a huge strain on her investments in terms of negatively geared while she still has non-deductible debt. We want to have these properties working in the background for her. And you know, $1.5 million portfolio can be working quite well for her while she’s still paying down her non-deductible debt. You could do that over the next three to five years, build a quite comfortable portfolio of maybe 1.5-$2 million and within a 15 year period that should go between sort of around that, if it’s one and a half years ago between say $3 million and $4 million.GroupParagraph
Yet you would still only owe maybe $1.5 million dollars if you didn’t even pay out the debt. So that’s interest only. So you’ve been able to get yourself into quite a good position where you can, within that 15 year period, create passive income. And along the way, once she’s paid down her own debt of her own mortgage, she can then start to pay down some of the other debt as well, and then recycle that into more and more investment properties to make sure that she creates a passive income even earlier.
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This episode was produced by Andrew Faleafaga with narrations and interviews conducted by Tyrone Shum.