Inspire & Inform Show – Episode 13

In episode 13 of the Inspire & Inform show Andrew discusses the most common question we get here at Inspire – Is now a good time to buy? He will share a practical example which demonstrates that it is not when you buy or even the bargain price you may be able to negotiate that makes all the difference in the long run!

Please see below for the full transcript of this video

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Transcript:

Andrew 0:09
Good evening ladies and gentlemen boys and girls. My name is Andrew Koleda from Inspire Realty and welcome to tonight’s episode of Inspire Inform episode number 13. A very interesting topic to speak to you about again tonight, and tonight I’m excited to announce that there will be a spreadsheet in tonight’s session one of my favorite tools for really wrapping my head around the different topics and concepts and really, it’s always my go to method in order to be able to, I guess, offer certainty and assurity around the decisions that I’m making my own property investment journey, as well as it’s a tool that I go back to time and time again, to assist clients to do exactly the same thing, and that’s essentially building a better future together. And that’s what we hope to share on tonight’s Inspire & Inform.

Andrew 1:09
And the topic we’re going to be talking about tonight is a concept or a phrase that I’ve heard time and time again, throughout all of the education, all the different books that I’ve read and the podcasts that I’ve listened to, and that’s the concept of timing the market versus time in the market. And it really, before I get into it, I really wanted to share that. Obviously the information I’m going to be sharing with you tonight is for educational purposes only. It doesn’t constitute advice. We really have no idea about any of your particular circumstances and and every bit of advice that we do give here at Inspire Realty is really catered towards your individual circumstances it’s not something that no matter who walks in the door, they get the same solution because ultimately, everybody’s needs and goals and aspirations and situation is completely different. And that’s really the value that we provide here at Inspire Realty.

Andrew 2:19
So the most common question that we get on a daily basis here at Inspire is, is now a good time to invest in property. And this morning, I was inspired, I was listening to a podcast and one of the commentators on the podcast had a really unique take on this and shared some analysis and some logic to back up their view that and their view was that it doesn’t matter quite as much about the two biggest things that people concern themselves. People concern themselves when it comes to building an investment property portfolio with the wrong things.

Andrew 2:57
Their concern is now the right time to buy? And let’s go out and hunt the best deal that I possibly can I need to grab me a bargain, I’m going to go look for a deceased deceased estate and I’m going to offer them 20% less than what what they’re asking for I’m going to crunch out a deal. And well, if you obviously make your money when it comes to property investment when you go into the market when you buy, it’s an interesting concept I wanted to share with you as to probably is now the right time what’s going on in the economy. What’s going over with America, China is the property market going to collapse is COVID going to be the end of property investment as we know it what’s going on in the market.

Andrew 3:44
Whilst it’s a very important concern, as well as trying to buy a property that is below market value is also an interesting concept. And we’ll delve a little bit deeper into that and it’s very important. It’s probably not The most important thing, and I’m going to share with you, I guess what what I feel personally is the most important thing when it comes to property. And it’s, it’s selecting the right asset to purchase combined with spending enough time in the market having that long term view that long term mindset that is really going to pay dividends above and beyond anything you can gain with perfectly timing the property market buying exactly at the bottom and riding the wave all the way up to the top, as well as that 5, 10 percent that you might be able to save by buying a property that is below market value. And I’m going to give you some justification of why I believe that to be such an important variable, and of course always here at Inspire & Inform, our objective is to educate you and provide you with the toolsto make better property investment decisions along your journey.

Unknown Speaker 5:05
But of course, everyone’s situation is different. And if you’d like to have a chat about your own personal circumstances, or just want to have an opinion, or want to sit down and have a full on strategy session with us to plan out and map out what your next 5, 10 15, 20 years is going to look like, and how you’re going to get from where you are today, towards that longer term objective. We’re very happy to help. You can reach out to us by either commenting on the post always appreciate the likes that we can reach out to some more people and continue to grow our audience here to provide value or you can visit us at www.inspirerealty.com and one of our strategists will be more than happy to reach out to you and arrange a convenient time to have a free 45 minutes consultation.

Unknown Speaker 6:00
So moving forward when you’re considering when the right time is to buy an investment property, there’s obviously a lot of factors at play, you know, do you have access to the right finance? Are you in a relationship and you have two incomes and you can easily access finance. So you want income or whatever your situation is your ability to hold over the long term slash cash flow considerations. Because here at Inspire we’re very much about have the mindset of a buy and hold and hold over the long term strategy. And what we’re going to discover tonight is that it’s really capital growth is what you take out of the market. That’s where you build the wealth for your future to give you the choices and allow you to live the lifestyle that you desire, once you decide it’s time to finish working, but it’s really cash flow, which we’ve covered in other sessions and I’m sure we’ll cover again in the future that gives you that opportunity to hold on to your investments, whether it be one investment, or 50 investments over the long term to allow the capital growth to happen. And we’re going to work out tonight why it’s so important for you to be able to be able to hold on to it over the long term.

Unknown Speaker 7:20
Obviously, tax considerations. one topic that we’d likely dig into deeper in the future is around the tax deductions, negative gearing, depreciation, and how that has an impact over the after tax holding costs of your property because there’s two different concepts there. There’s pre tax and post tax.

Unknown Speaker 7:42
Planning considerations, what stage of your portfolio journey that you’re in, whether you’re in an acquisition or growth phase, where you’re building up the baseline of assets, they’re going to deliver that lifestyle for you in the long term, or whether you’re in a more of a consolidation or paying down debt phase of your portfolio growth, moving closer towards retirement and starting to break some of the benefits of your hard work over the years.

Unknown Speaker 8:10
How close are you to retirement? Again, that concept of property being a long term investment comes into play. And to give you a, I guess, an example, if someone’s left it a little bit late, but more than a little bit, and they come and speak to me and say, hey, look, I’m age 60. I want to go out and buy a property I’m planning to retire in five years, the likely conversation barring a variety of number of other factors is going to be potentially property’s not the right investment vehicle for you at this stage of your life. And there are a lot of variables around that,

Unknown Speaker 8:46
Of course, what’s going on in the economy. What are the demographics, you know, the pie formula population, infrastructure employment, how does it relate to the Austrailn economy, how does it relate to the particular state? How does it relate to the particular suburb? what are the macro and micro factors? All those things are important, as well as this concept of getting a great deal buying below intrinsic value. So what is intrinsic value mean? It means fair market value are you buying at a below fair market value the investment property and it’s interesting. The point I’m really trying to drive home tonight is that asset selection or buying a high quality investment grade asset with owner occupier appeal and scarcity and all these lovely things that we look at when we’re making a recommendation of a property here at Inspire for one of our investors is fantastic. But the interesting thing is, people want the best of both worlds they want to get buy an asset that’s in high demand and lots of people are going to compete for it if they were to ever sell to buy that property from you. But they’re also expecting at the front end for that property. to you know, for example, you know, typical example you say is looking for a deceased estate or a mortgage or mortgagee in possession, I want to get a great deal and a great bargain with no other bidders. And then all of a sudden, as soon as I buy that property, I want there to be 20 people queuing up to buy from it. It’s almost a contradiction of mindset.

Unknown Speaker 10:21
Now, I’m not saying here that we go out and we pay in excess of what the property is actually worth those deals. And those, I guess, Diamond properties or perfect properties, or unicorn properties is probably a better term, are very few and far between. and the likelihood is you’re not going to realize it, when you do see it. It’s only in hindsight that you realize that a particular property may have been a unicorn. And a lot of people that I speak that have been investing for a reasonable period of time, love to share those war stories about that particular property. I wish I bought that, it doubled in five years. Okay, all those sorts of things. I’m sure you’ve all heard those stories before yourself.

Unknown Speaker 11:08
So the point I’m going to emphasize in tonight’s presentation is, okay, let’s look at how it all plays out over the long term. We’re going to look at an example of and we’re going to take an example of if we pay 10% below market value for property, versus if we paid 10% over market value for aproperty. And we’re going to play out those scenarios over the long term. And we’re going to demonstrate to you tonight, why asset selection should be your number one concern rather than market timing, rather than getting a great deal or a bargain, because ultimately, remember, the underlying concept we’re trying to stress here is capital growth is what you take out of the market. That’s where the wealth is, that’s where the magic is and compounding over time. It’s not the deal when you go in, yes, it’s important, but it’s not the most important thing.

Unknown Speaker 12:14
So what are the most important things, having a long term mindset combined with the ability to hold that property over the long term. Property is a different asset class than shares, which tend to have a lot of volatility. You know, even reviewing my own share portfolio over the last few days, I’ve had 4,5,6 percent swings in my share portfolio in a single day. You know, I guess the data and the specific depending on which market that you’re talking about, potentially the property market over this whole COVID I guess pandemic has had maybe a 5% five to 10% swing, again, depending on which market you are looking at and which property type over the whole pandemic.

Unknown Speaker 13:04
So, what real, where property really stands out? It’s doesn’t have a lot of volatility. And we’ve covered that in the past and happy to cover that again in the future. So it’s almost like a slow and steady growth over the long term. Yes, there’s periods of ups and downs. But if you look at the past 30,40 50,60 years of data when it comes to property in Australia, particularly, it’s been a very solid asset class, providing that you can hold on to it over the long term.

Unknown Speaker 13:37
And again, capital growth is where we make our money in the property market. Yes, there’s plenty of other ways to make property in the market. You can buy you can renovate, you can sell, you can, you know, build duplexes and split boxes up. There’s lots of different ways to make money in the property market. But the question over here really encourage you, I strongly encourage you to do is or to ask yourself is, are you qualified to take up all these different types of opportunities? If you were looking at knocking down at buying a house, knocking it down splitting it up and building a duplex? Do you have the skill sets, and also the time to invest in it because that in my mindset is very much active income.

Unknown Speaker 14:31
So that’s why for the average person, the average Australian which is the people that we love to help hard working everyday Australian people, our mindset and the strategy that we help them to implement is a buy and hold over the long term. And that’s why we’re so strong and then try and foster this long term mindset when it comes to property investment. because historically that’s the most powerful proven path and and least risk path towards achieving most people’s goals over a lifetime and allowing them to finish work and to be able to live the lifestyle that they deserve.

Unknown Speaker 15:14
So without further ado, let’s dig in and look at a couple of examples. And I’ll share with you my lovely spreadsheet that I built for you all tonight.

Unknown Speaker 15:24
So let me just switch over to this view so you can see it maybe a little bit clearer. So as you know, I like our numbers. And I’ve come up with a couple of scenarios. And I built this out over a 20 year period that you can see here. So at the moment, and all these are built as variables so we can look at a couple of what ifs analysis or how does it actually impact. But the one I’ve got up here for you at the moment is assuming we’re going to buy a property worth $500,000. We’re going to buy it at 90% of its property value.

Unknown Speaker 16:00
So it’s worth $500,000. But where you’re going to pay $450,000 over the 20 years, we’re going to assume a capital growth rate of 5%. Now, we know that it does this doesn’t happen every year on year if we look back over any 20 year period in Australia property market history, but over the long term, Australian property market has actually grown at between around about seven or just I think it’s 7.14% on average. Now, we’re going to factor in some costs here, we’re going to assume we’re getting a rental yield of 3%. We’re going to be paying interest only at 4% over the whole period. just for simplicity sake, I haven’t converted these numbers into principal and interest. And there’s a lot of expenses when it comes to holding a property whether we’re talking apartments or houses might be strata costs property management costs, vacancy rates all those sorts of things, property maintenance, depending on the age of the property that you’re purchasing. But generally, a good rule of thumb is factoring in around about 2% of the property’s purchase price for associated costs each year. So it’s a good way to sort of back of a napkin, do a calculation to demonstrate a point. And we’re also going to compensate for inflation. So meaning our rent goes up each year, and also our expenses. So how does that look like so property we buy for $500,000, we get a loan amount of 450. We’re also going to borrow the full amount just for this example. So we’re not going to worry about the deposits and LMI’s and all those sorts of things demonstrate this out for you.

Unknown Speaker 17:48
Our gross rent at a 3% yield is $15,000 per annum, a gross interest we’re paying at a 4% interest rate is $18,000 per annum could about 10 $10,000 of expenses, which is Three, sorry, 2% of 500,000, meaning we’ve got a negative cash flow cost us $13,000 out of our pocket to hold on to this property for our first year. And then we go along, and we extrapolate out the numbers growing at 5%. And what you can see is because of the rent growing with inflation, whereas our interest is staying static, our cost to hold starts to diminish as we go along.

Unknown Speaker 18:30
So that’s our scenario here. But the other important factor to consider when looking at these numbers, is I’ve assumed a capital growth rate of 5%. Now, why have I assumed that? Well, in this scenario, again, going back to well, in order to get a property that’s below intrinsic value, or below fair market value, I’m not saying it’s impossible, but the likelihood is you’re going to have to or potentially have to go to a location that is a little bit less desirable, not as much in demand, you’re gonna have to pick your market timing perfect, you’re gonna have to do, everything’s going to have to converge in order for you to achieve this goal. So at a 5% return with let’s have a look at what the gross numbers look at over a 20 year period. So our property value in 20 years time growing at 5%, that we bought for 500,000 is worth 1.2. Less our purchase price of 450,000. Because remember, we bought this at 10% below market value. So net capital, it’s worth 813,000 because that’s how much money we’ve grown made in capital growth over this 20 year period. Our cash flow so over 20 years, it’s cost us $225,000 in order to hold on to this property to get this 813,000 so a net position after 20 years is $587,000 and I’m just going to write this in here. 587, 827.

Unknown Speaker 20:09
Okay. So, let’s look at another scenario here. So let’s pretend we actually got the timing of the market wrong. Let’s pretend we fell in love with the investment property that we found and we ended up paying 10% over market value for that property. We paid 110% of the purchase process its only worht 500,000 but we borrow 550,000 in this scenario to buy it so pay a 10% over but because we’ve selected our asset carefully, we’ve got the right combination of population infrastructure employment, it’s in the desirable street within the neighborhood. It’s very much has owner occupier appeal and we can be because we’re willing to overpay In this scenario, we can be a little bit more selective as to which asset that we choose and we choose the best asset that we possibly can. And remember, the discount or the deal is very short lived, it’s in the first, you get the benefit or that capital, all that equity in the first year, whereas, remember, at as long term investors were looking at 5, 10 15, 20 year timeframe.

Unknown Speaker 21:30
So if we picked a better asset, so let’s say we pick that something that grew around about the average rate that we’ve seen over the last 20 years in the Australian property market is very general. It grew at 7% per annum. Now remember, with paid 10% over market price we bought at the wrong time, we fell in love, we’ve gone crazy, we pay more than what it’s worth, for a good asset. If that’s grown at 7% over the last 20 years, same calculation property is now worth 1.8. Less our purchase price of 550. Because we pay $50,000 too much, and net capital 1.2. It’s cost us 305,000 in negative cash flow to hold on to this property, remember, that’s pre tax, but that’s for later discussion. NET position is $952,000, against our $587,000. So the point that I’m really trying to drive home with you all tonight, and the key takeaway is that asset selection is the number one priority, assuming we’ve got the cash flow side and the ability to hold on to that property over the long term covered. Once that’s determined. Asset selection is the number one priority. And yes, it would be an even better situation. If we paid 90% we’d end up with one point One three to two, yes, we’ll be better off. But it’s not the most important consideration that asset selection with the combination of population infrastructure employment, you know, a gentrifying suburb, something that appeals to owner occupiers and all the other different variables to make sure we buy a premium investment grade asset is a key determining factor over the long term, 5, 10 15, 20 years, that’s going to determine our success, not the 10% that we discount from the listing price on real estate or domain that we go out and hunt for if we have to sacrifice on the quality of asset that we purchase.

Unknown Speaker 23:45
So yes, we’d love to get the best deal that we can. But the first thing to sacrifice I’d rather pay more for a good asset than less under market value for a crappy asset. So that’s what I wanted to really drive home with you.

Unknown Speaker 24:00
The other key takeaway that I really see when I look at this spreadsheet again now with you is that basically property is a very much a forgiving asset, providing your abuy and hold long term mindset. So even if you get it wrong, providing you can afford to hold on to it for long enough to allow for the capital growth to happen, you’ll be okay. So the message out of that is don’t get too caught up in trying to find that unicorn. That is the best possible asset at 10% below market value and until you find that you’re not going to invest, because if you wait that two or three years, and I have not built the spreadsheet this way, the equation will be drastically different. So the point is to take action to find the best asset that you possibly can. And if you’re not confident, to do that for yourself or, you know, these numbers they’re really spinning around in your head. I know I love my numbers.

Unknown Speaker 25:04
Feel free to reach out to us at Inspire I’m happy to go through this scenario, maybe you’ve got a different variation or permutation or something that you’re a little bit confused or didn’t understand with what I shared tonight, very happy to go through that with you spend some time with you completely obligation free. Or even if you want us to sit down and delve a little bit deeper and put in place a strategic portfolio plan that’s going to see take you from where you’re at to where you want to be over the long term. happy to help. Just comment on the post. Again, we’d love a like so we can reach more people and continue to add value or visit us at www.inspirerealty.com we have a lot of other great resources that we put up on our website to try and add value make you better property investors but ultimately what it’s really about is seing you to reach your longer term goals, so very happy to help. And I think that’s about all for me tonight. So I’m going to say good night. And thank you very much for listening and we’ll see you all next week. Bye for now.