Inspire & Inform Show – Episode 11

In episode 11 of the Inspire & Inform Show Andrew will be discussing the important topic of diversification as it relates to property investment and how it can impact both planning for your better future as well as the results that you achieve

Please see below for the full transcript of this video

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Transcript:

Andrew 0:08
Good evening, everyone, and welcome to Inspire & Inform episode number 11. So fantastic to be able to spend some time with you all each week at Wednesday 6pm. To share some of the insights some of the things we’re seeing going on in the property market, trying to add value in any way that we possibly can to serve you and to help you along your journey towards building a better future for yourself. So we’ve been taking a little bit of feedback this this week and trialing out a new format for you. So I’m going to be doing tonight’s presentation alone, just so we can focus in on the content that I have to speak about tonight, which is all about diversification. And we’re going to try and make these episodes a little bit shorter and sweeter and a little bit more, a little bit easier for you to digest and really take on board some of the lessons and the insights that we’re providing during these sessions, towards becoming a better investor and a better future for yourself.

Andrew 1:23
So tonight, as we said, we’re going to be talking about diversification. And it’s an interesting topic to really delve into. Tonight, we’re not going to have any spreadsheets, we’re going to be talking on a fairly high level. And of course, just as you’re all aware, we don’t really have a good understanding or have any understanding to be honest with you about your personal situation. So the information I want to share with you all tonight, is general in nature. And it’s not it’s not classified or it’s not indicated towards your personal circumstances. So therefore it cannot constitute advice. It’s impossible to give advice across these, these forums.

Andrew 2:08
So onto diversification. What is diversification? It’s, for those of you who have spent any time thinking about, I guess, investments, it’s probably a term that you’ve heard fairly commonly used. And the reason why many advisors whether it be in property shares or any other type of asset class, are generally advocates of diversification is that regardless of which asset class that you’re talking about, typically, there’s many different options within that asset class for you to invest in. And typically, these markets tend to move at different directions at different times through different cycles. So one of the reasons as an investor of any asset class and this applies to property shares, or every asset class that we’d like to speak about diversification is that we want some exposure to those different types of markets. When some are going through a growth phase, some of them potentially going through a declining phase. So overall, as an investor, we tend to get a little bit more security and tend to be able to mitigate our risk a little bit better when we adopt a diversification strategy.

Andrew 3:34
But on the flip side to that, and this is important thing for us to consider is that it’s really, really difficult for us or any individual to be across all different types of markets at all different times. And there’s a couple of reasons for this. One reason is that our asset base or how much you have to invest may not be able to allow us to gain exposure across all different types of asset classes in different markets at the same time, for example, when we’re talking about property, we’re talking about quiet a significant investment that we’re making with each each asset purchase a couple hundred thousand dollars up to a million dollars and more, it’s very difficult for most of us to have enough money to diversify across into shares into other different asset classes at the same time. And the other side of the coin is that it’s really difficult for us to be on top of everything that is going on and across all these different types of asset classes across all these different markets all at the same time. So the question remains, should we specialize in one particular asset class and make make ourselves an expert in that particular asset class? Well, the interesting thing and just sharing from my personal story is that I’ve chosen property as the asset class that I want to specialize in. And I was conflicted when I was beginning out in my journey because I believed in this diversification because I wanted to use it as a tool to help mitigate some of my risk and make me feel a little bit more confident in the actions that I was taking. So what I learned during this stage was that it is possible to diversify within each asset class and obviously here at Inspire Realty, we focus on property as our asset class. So I wanted to share with you tonight some of the ways and some of the reasons why you might as you’re building out a portfolio, you might consider diversification within property as an asset class and there’s a couple of different ways in which you can do that and we’re going to dive into that.

Andrew 5:59
So what about diversification when it comes to asset type? So there’s a number of different types of properties that you can add within your portfolio. So right from residential to commercial to industrial and different types short term accommodation, there’s a number of different types, but even within residential property, and what that’s what we focus here on at Inspire and that’s what I’m going to focus on tonight, there is several different types of assets that you can buy within residential property. You can buy houses, you can buy apartments, you can buy townhouses, as just an example of those. And what I wanted to do was to actually bring in a little bit of data to be able to sort of justify or justify the case of how or some of the differences between these different types of assets being apartments and Houses in this case, and some of the reasons why you would want to diversify and have both in your, in your portfolio.

Andrew 7:09
So it’s a common question that we get asked, should I buy a house? Or should I buy an apartment? And typically what I’m about to share with you is part of the answer that I would give to that question. So as investors, one of the key ways in which we build our wealth is through capital growth or the appreciating value of the property over time. And when I used Melbourne as an example, and I looked over the last 20 years history of Melbourne, I noticed something interesting when I compare the capital growth of houses in Melbourne, versus the capital growth of apartments. And as you can see, they’re both grown over the last 20 years at 8% and 7%. In terms of capital growth, so Typically what you see, and there’s obviously exceptions to every rule is that houses tend to grow faster in value over the long term compared to apartments. Now, why is that? Well, when it comes to property, there’s two sides to the coin. One is the land, which tends to be the appreciating value. And obviously, you own less land when when it comes to apartments, potentially higher value land, because you’re in a in a got a small portion of some very valuable real estate, but houses on average have a higher value of land, whereas the depreciating side of your property purchase is the actual apartment or the actual house. So the ratio of land to the asset value is higher when it comes to houses and that’s typically and again, there’s always exceptions to the rule. Why we see houses have a higher appreciation rate or capital growth rate when you compare to apartments.

Andrew 9:08
So if you were just if you were to just take that side of the coin, you would say, Well, I’m going to go only going to go out and buy houses and I’m never going to buy an apartment. But you really need to consider, I guess the other side of the coin when it comes to property investment, and that is the cash flow side of it. And what you can see on the right hand side of the screen is you can see typically and just taking Melbourne as an example here to provide you with some data houses have a lower yield or rental return when it comes compared to apartments. And so what that means for you as an investor is that it typically costs you more to hold on to a house when it compares to an apartment. So at different stages across your portfolio. You can be targeting capital growth. But you also need to be very mindful of the cash flow that’s required in order to be able to hold on to that investment for long enough to allow the capital growth to happen. So that’s why in my own portfolio, I have a mixture of both houses and apartments, which serve a different focus. Now they both go up in value, but some faster than others, but have a serve a different purpose within my portfolio. And that’s why I diversify in the different types of assets that I have in my property portfolio.

Andrew 10:38
So that’s just one example of how we diversify within property in terms of our asset type. Now if you have any questions about this, if you want to delve a little bit deeper into whether or not potentially a house an apartment is right for you, very happy to have a chat with you, feel free to reach out out to us at inspirerealty.com, or drop us a comment on the post that you’re watching this presentation and be more than happy to help.

Andrew 11:11
Going on to the second type of diversification is diversification in location. Now, one of the things that I learned very early on in my property investment journey is that you hear a lot of commentators talking about what’s going on in the property market. And still today, I get so many questions from friends, family colleagues, and they say, Andrew, what’s happening in the property market? My answer to that question is always going to be which property market you’re talking about. And just to give an example, I want I pulled up some data around the median house values across the different states in Australia. And just to give a bit just to sort of highlight the point that each market just when you’re looking at a state level, and then we can drill down at some stage in the future to a suburb level even. And we can see that they perform differently at different times. So to give you an example of what we’re talking about here, I probably like to draw and what I might do is I might actually bring up this screen a little bit bigger so you can see the chart a little bit better. So we can see I want to focus on two states here, I want to focus on Sydney and I want to focus on Brisbane. So what you can see is Sydney here through this period was relatively flat. Yes, it moved up and down but relatively flat during this period, here just adjusting the screen that’s sorry that that period is 2003 , that’s about 2003. That’s through about 2011. And then you can see from about 2011 Through to about 2017 / 18. Sydney has had quite a big boom Melbourne tends to follow our two biggest states tend to move very closely together being Sydney and Melbourne. But if you can focus in on the yellow section here, which is Brisbane, we can see through 2011 through 2019. He went Sydney and Melbourne are going through quite a big boom. Brisbane was actually quite flat during that period. And if you go backwards a little bit from about 2003 through to 2007. When Sydney was flat, you can say Brisbane had quite a big uptake there. So the point I’m trying to really drill down to here is for different reasons. different markets move in different cycles. And you can probably pick the only other capital city here that actually surpassed Sydney when it comes to median prices is this black line here, which is Perth. And that’s obviously on the back of the mining boom. So different states move at different times. And what this is why as you’re constructing a portfolio, you will look to acquire different assets in different states. And that’s really a mindset shift and an evolution or a growth that you need to go through as a property investor. A lot of people when they’re starting out their property investment journey. They’re very much looking and focused on the areas that they know that they feel comfortable with that you know, where that close to where they live or where they work. Because to them, it feels a little bit safer. They can look touch and feel, if I’m honest with you. I haven’t seen several of the properties that I own it within my own portfolio, but it took a while for me to feel comforable with this, it’s very intangible. Just this week, I was commenting with my dad, and we’re talking about the restrictions that are in place at the moment through COVID-19. And throughout COVID-19 I actually settled a property in Queensland and he said, you know, look, these people, they’re just sort of saying, Hey, give us your money, but that you’re not allowed into the state to come and have a look at it doesn’t matter if you’re investing a million dollars up here not allowed to see it. So it was the point I’m trying to add is a little bit of a shift in mindset that I have to do in order to be able to feel comfortable to make decisions and diversify my assets across different markets, so that when Brisbane goes through its next cycle, I can actually be on the back of that. But I also do own property in Sydney and Melbourne. And it’s, each of those will move at a different time. So that’s what I wanted to share there.

Andrew 16:02
The other the other variable as a property investor, is I think that diversifying out and this is what I’ve done in my own portfolio another consideration is land tax as property investors, unfortunately, despite popular opinion around the negative gearing side, we have to pay a lot of taxes to be able to hold on to our properties. And one of those taxes is land tax. But interestingly, land tax is a state based tax. So it’s based on the amount of land that you own within that particular state. So one of the strategies that I’ve used as I’ve built out my own portfolio is to diversify in the different states that I own property, and thus minimizing the amount of land tax that I need to pay.

Andrew 16:50
And just going on, again, this is designed this is the new style of Inspire & Inform is designed to be a little bit more faster and a little bit more digestible for you. So if you have any questions around diversification, how it might look for you just want to learn a little bit more very happy to spend some time with you have a chat get to know each other. Please visit us at inspirerealty.com or feel free to comment on the post that you’re watching on. We’d love to hear from you all.

Andrew 17:24
So the key takeaways I really want wanted everyone to take away from tonight. Firstly, as kids screaming in the background, I hope you did not hear that. Firstly, you can diversify within an asset class diversification doesn’t need to mean that you own a business, some shares, a property, etc. It can or you can also diversify in both the type of asset that you’re purchasing in the case of property, a house a townhouse apartment, they all have pros and cons and you can also diversify within the location that you’re purchasing your properties, it can be used as a way to mitigate risk. And again, that comes from different types of assets. So, you know, houses, apartments, townhouses, and locations, all operating for different reasons at different times in a different cycle. And by having exposure to these different types of assets, you can help to mitigate your risk overall. Market cycles are always going to happen and we really need to plan for them. So as an investor, you know, for example, if you had bought property in Sydney in 2012 / 13, and still hold it today, you’ve probably done pretty well for yourself if you recall back to the Sydney boom. But moving forward, how confident would you feel that diversification having exposure to assets across the country is really going to help you to ride out the different cycles. And as well as maintaining your position. For example, if you were to believe that Brisbane might play some catch up to Sydney, even if you’re Sydney asset that you’re holding, will give you some confidence to hold on so that for the next time that Sydney experiences an increase.

Andrew 19:23
And the diversification decisions are going to be based that you make you can’t diversify from day one, you know, when you were starting out your property investment journey, you start out with one asset. So it needs to be based on your individual circumstances and the right decision is not going to be the same decision for the next person. It really needs to be based on your own circumstances. What you’re targeting, what you really need to gain out of this purchase that you’re making is it cash flow is it growth is a you know, have you got three properties in Sydney and you need some exposure to different markets. It’s gonna be very much based on your own individual circumstances. And this is where I really get my kicks out of spending time with you all on Inspire & Inform, and more. So spending time sitting down getting to know you to help guide and mentor you through these decisions based on my own personal experience, as well as my professional experience, to really help you create and feel comfortable to take action because when it comes to property investment, as we know, it’s very, it’s a very big decision, and it’s going to have an impact on your future. And that’s not something that I like to take lightly. And that’s personally not a journey that I would like to make on my own. So if it’s something that you are considering, we’d love to have a chat around diversification or anything else that’s that’s really concerning you holding you back, keeping you up at night, we’d love to add value have a chat. Visit us at inspirerealty.com or comment on the post there. So really happy again. I hope you I’d love some feedback on the on the shorter version of Inspire Realty. Sometimes I know I get a little bit carried away, I’ve got a lot that I want to share. And I just really want to add value in any way that I can. So we’re trialing the shorter version. I’d love to hear your feedback. Please put a comment on the post. And really looking forward to seeing you all next week who I think will where I think we’re having another one of our strategists come on board to share their story got some really good feedback from Mel a couple of weeks ago sharing her story, and we’d like to make it relevant rather than just sticking with the theoretical side. I love to share some more personal stories and show you some different faces from Inspire Realty to really Continue and and share their lessons that they’ve learned. So really looking forward to listening to that next week. And that’s all for me tonight. Nice and short and sweet. So thank you very much everyone for listening. And see you guys all next week. Bye for now.