New government should change the conversation about investing: PIPA
The Property Investment Professionals of Australia (PIPA) has issued a firm call to the new government: prioritise the r...
This is such a difficult article to write. Not because I don't have the experience or credentials, and not because I haven't walked the talk. I bought my first property when I was 21 and I'm an experienced buyers advocate and qualified property investment advisor. So why is it such a difficult subject to nail?
Blogger: Cate Bakos, director, Cate Bakos Property
You can't force things. I can't ever force a client to buy, I can't force a friend to invest, and I certainly can't force a young person to spend their money on property.
My very own beloved stepson was going to be my success story - which in itself demonstrates my sheer naivety and misplaced confidence on this subject.
Beloved Stepson (BSS) has been around our 'property-chat' for many years. He has grown up on renovation projects, rental stories, maintenance projects and spreadsheet projections. He only started asking the clever burning questions at about the age of 15, so harnessing his enthusiasm I decided to lay down a challenging opportunity. If he decided to save for a sizeable item (ie. car, property, overseas trip etc), we'd match his savings dollar for dollar. If it was property which he set in his sights, I'd take the offering one step further and pay his stamp duty and LMI on a $250K investment purchase if he could clock up $20,000. I reflected on the encouragement (or lackthereof) I received when embarking on this same journey some 18 years ago and thought that BSS would pounce on the offering and save with gusto. He even received a wrapped copy of Robert Kiyosaki's Rich Dad Poor Dad from under the Christmas tree (which, incidentally I still maintain is the best read for a young budding investor).
Things started well - he banked his birthday money, he picked up extra shifts at his part time butcher shop job, he read the book and asked good questions, and he showed interest in exploring my thoughts on what the best areas for his $250,000 investment could be.
But the plan started to slide downhill when he started his apprenticeship. He was bringing home over $500 per week, had limited expenses to endure because his Mum financially covered his food and living, and he had a girlfriend and mates to impress. His once-suitable VT wagon was no longer fit for purpose - he needed a hot silver ute. And so began his elaborately thought out justifications for the ute... and despite the 'depreciating asset versus appreciating asset' talks, our rationalisation for keeping the wagon and staying on track for property investing was fruitless. What did we get wrong?
My biggest mistakes were:
- assuming BSS and I felt the same about property
- not having some better examples of the tangible and intangible cost of unsecured credit (and the trouble it can cause for young people)
- expecting that reading a book would not only stimulate his interest but cement his plan
- perhaps not being more hands-on with a more disciplined savings plan
- not clearly demonstrating the power of compounding growth over time, and
- not putting together a cashflow-neutral property purchase scenario which he could easily understand and feel comfortable about
But at the end of the day, all of the best of intentions may not have made a difference at this early stage, and I'm hopeful that BSS will enjoy his car while it still smells new, recognise in the short to medium term that his depreciating asset isn't building his longer term wealth, and take me up on my economic offer in his second round of money-saving.
What would I do differently now, knowing the pressures and temptations 19, 20 and 21 year olds’ face?
I'd be more prepared to open the books and share the property Balance Sheets and P&L's with him. I'd like him to see the positive impact of the decisions we made over the years, but also to appreciate the buffers that we need to maintain and the contingencies we've accounted for.
If he's willing, I'll take him to some of the properties and let him meet some of our tenants and property managers. I'll show him the impact at auction of a good renovation on a house in an area which is ripe for improvements. Being a young builder on an exciting path, I need to allow him to tap into his own strengths and style of value-adding in the property world.
Better still, I will show him with cashflow calculations and a simple spreadsheet what the specific cashflows will look like, factoring in contingencies such as vacancies, letting fees, maintenance and improvements so that he has a complete picture of what his likely ‘out of pocket’ expenses could look like for the proposed purchase. This part is vital so that he can have a leading hand in engineering the strategy around his lifestyle (and have confidence that he can still enjoy his friends, going out and lifestyle).
Finally, I'll endeavour to take on the hardest teaching format - projecting what the future could hold. Many nineteen year old boys don't think about next week let alone twenty years’ time, so this is the biggest challenge I have with BSS's property investing adventure. He wakes at 5am and starts work onsite shortly after 6.30am. Only one year into his apprenticeship, he knows what hard work feels like. I wonder if he'd be receptive to thinking about a life of optional work, versus work-because-there-is-no-other-option?
Property investing offers no short term golden ticket, (or silver bullet... however you'd care to phrase it), but with careful planning and clear, decisive steps early in life, a long term financial outcome can be so greatly and positively impacted. The power of compounding growth cannot be underestimated, and if I can’t even begin to count every investor who has sat at my desk and said "if only I'd started when I was young". As the saying goes, Youth is wasted on the young, - but we can make a difference if we personalise it, maintain full transparency and help them.
If I can manage that, then the remaining risk I need to be mindful of is taking too much of the fun and the learning away from him. After all, my own property experiences have shaped me as the investor and advisor that I am today. My mistakes have taught me, and my successes have grown my own confidence. I can’t ever take that away from BSS. I need to let him create his own adventure and select his risks too… albeit with a little bit of a friendly steer in the right direction!