Secrets to building a $12-million portfolio: Lloyd Edge
Investor Lloyd Edge has successfully built an 18-strong property portfolio with assets spread across three states, now v...
To kick off the new year, Phil Tarrant brings accountant Michael Johnson and Right Property Group’s Steve Waters on the show once again to discuss what has been happening with Phil’s portfolio since their last update.
Tune in as they discuss recent news headlines and what is happening in the property investment world, unveil just how much it costs to hold their properties which includes interest rates, weekly costs and taxes, as well as the metrics they utilse to improve cash flow and continuous growth.
They also share how to reduce costs in your portfolio and reveal their thoughts on using mortgage brokers.
You’ll hear all of this and much, much more in this episode of The Smart Property Investment Show!
Did you like this episode? Show your support by rating us on iTunes (The Smart Property Investment Show) and by liking and following Smart Property Investment on social media: Facebook, Twitter and LinkedIn. If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insight!
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Announcer: Welcome to the Smart Property Investment Show with your host, Phil Tarrant.
Phil Tarrant: Okay everyone, it's Phil Tarrant here. Welcome to the Smart Property Investment Show. Property update is the theme of today's conversation. If you're new to the Smart Property Investment show, welcome. We typically do this every month. We get together and review our portfolio. I know for our long term listeners is always a very popular segment that we put together and very much in line with one of the reasons why we started Smart Property Investments really to show. How you actually go about creating wealth through property, warts and all.
I'm the first to say I make plenty of mistakes, but I also do all right as well. I'm quite fortunate that I have a whole bunch of people around me that help me get on this path of wealth creation through property investment. One of them is a friend and colleague that works with me here at Smart Property Investment. We're going to meet him. Michael Johnson, how are going?.
Michael Johnson: Good Phil, thanks for having me.
Phil Tarrant: This is about your third time on this show now. For our listeners who know what you do and don't know what you do, you essentially are the numbers man behind the portfolio. You keep it moving ahead.
Michael Johnson: The numbers guy.
Phil Tarrant: The numbers guy. You do a lot of heavy lifting when it comes to these things, dealing with brokers, dealing with lenders, dealing with property managers.
Michael Johnson: Just keeping the train moving.
Phil Tarrant: Yeah, which takes a lot of heat off me, so I can concentrate on I guess more strategic stuff, which I do in conjunction with our buyer's agents Steve Waters who is joining me again today. He's from the Right Property Group. Steve, how are you going?
Steve Waters: Going well mate, how are you?
Phil Tarrant: Good, welcome to our January 2018 edition of our portfolio update.
Steve Waters: This is the fun part. This is where we get to dissect the numbers and see how the portfolio has travelled, whether it's up, down, or sideways, and some of the hurdles we face.
Phil Tarrant: It is and we've just spent the last half an hour, 45 minutes just looking at numbers and performance metrics and factors and just a general chat around the market and pick up the fin review here. This is Thursday, the 18th of January. Front page is just some panda sitting there and the head line is Interest Only Loan Crunch. Interestingly, this was not too far away from what our chat was about in terms of interest rates and where we are heading and where the market is going.
This is story is pretty much saying people coming off interest rate terms and is getting priced at much higher rate than what it was originally and how that's really going to shape the way in which people can either hold their properties or afford to hold their properties or the macro effect on property markets. It's a bit of an issue, isn't it?
Steve Waters: I think it is an issue that will unfold. Who knows when though? It might be tomorrow, it might be in five years time, but it certainly something that I think will affect the markets considerably as well.
Phil Tarrant: I also look on the front page of the fin review on the same date and I see bitcoin bubble burst as regulators regulation buy it. When you look at mortgages and the property market over the last couple of years, the regulators in particular Ahpra who is the prudential regulator, has got involved quite a lot. Just in terms of dealing with some of the factors shaping the growth of property in Australia. One of them is the perceived idea of rampant price growth, easy access to lending, people potentially borrowing more than they can probably afford.
A result of that is that the lenders have really tightened the screws on lending and that is either they are issuing less interest only loans or they look at the serviceability of people much higher than one of this is 7% principle interest rather than 4% interest only. That's sort of slowed the market down hasn’t it Steve?
Steve Waters: Well, it has through certain parts of the country it has and it's probably even further more hampered different parts of the market from getting a bit of momentum going in terms of backward buyers' growth or consumer confidence. But it was something that needed to happen whether they were a little too early or a little too late is the argument. But if they hadn't have pulled some of these, certainly I think it would have been in a pretty dire situation.
Phil Tarrant: Obviously, the idea is that we are looking at that portfolio. When we look at the performance in that portfolio, there is stuff we can control and stuff we can't control. What the regulators do, the macro markets, macro factors shaping the property market in Australia and again also on the front page it was talking about Chinese property buyers disappearing. Which mean that they are not buying all off the plan apartments, and obviously there is going to be some impact. We can't control any of this sort of stuff. Right?
Steve Waters: It's out of your hands.
Phil Tarrant: It's out of our hands, but what we can control is how we use this information, how we observe the market, how we frame that or put that in the context of our scenario and then it allows us to make decisions we feel is most appropriate for our portfolio. When you look at the goals of our portfolio, what are we doing? We are creating wealth, so we want to try and identify the assets that are going to go up as fast as possible and try to hold them for as cheaply as possible over time. That's what we are trying to do.
Steve Waters: That's what you are trying to do, and I think taking all these bits of news within the media and perhaps even forecasting a little bit is important because that will help you make some decisions. The important thing is to make a decision whether it'll control your cashflow, improve your cashflow, reduce your debt. Whatever it is, but burying your head in the sand or just being entirely oblivious to your own financial situation is dangerous.
Phil Tarrant: Similarly, yourself Michael who works with us on building this portfolio. Do you get pretty connected in property markets or how do you go about getting information and using it?
Michael Johnson: There is a lot of information out there across the web. It's important for me I feel to look at just to keep things in context. Take everything with a grain of salt. Obviously there is some big headlines there. How much does that really affect the day to day of the property market? I'm not too sure. Obviously at a trend level sure, but always take things with a grain of salt I think.
Phil Tarrant: In terms of your point, there lots of information out there. There is all in the same front page the headline was interest only loan crunch, first point of information as in reprocessing of our debt. Number two, Chinese property buyers disappear in the market. Number three, there is a small story here that says property office vacancy tightens. There is another story here that says Sydney wealth migrates to Brisbane. Then you've got another point here saying how about tops rental that…. There is no shortage of information out there.
Steve Waters: I think depending on your own personality you'll find the good or bad in that and you'll focus on it.
Phil Tarrant: Anyway to our portfolio, so this information helps us shape how we look at our portfolio and I'll just share some numbers as we always do, which is essential to our portfolio update on the Smart Property Investment Show for those of you who've been watching this over the years. It's grown from zero in terms of the asset values to a total asset value of 7.2 million dollars. That's the value of all the properties that sit within this portfolio and they sit across different trusts.
Total debt position is 4.9 million and that relates to some recent purchases last year. If you've been keeping connected with it, we secured six properties over the course of 2017. That's increased our debt position, but also our asset value position. Our total equity now at a 100% is 2.28 million. That's the value of when you say how much is this portfolio worth less the debt, we are left with 2.28 million dollars. That's not cash. That’s equity, so for us to get that out we needed to do a lot of stuff.
Then we've looked at another metric, which is total equity 80% i.e if we wanted to refinance this portfolio to use that money to tip into more acquisitions. We have 845,000 bucks sitting there. That's how we sit, so if you look at total asset value 7.2 million, our total purchase price. This is what we purchase this properties over the course of those number of years we've been doing this is 4.314 million dollars. Doesn't mean a lot. All those numbers say there are just numbers, aren't they?
Steve Waters: They're never just numbers. Right Michael? Other than the total value there, the interesting number there for me is the purchase price versus the current debt. There is 4.3 versus 4.9 on debt, so obviously we've leveraged along the way to be able to leap frog into other properties along the way. But the important thing is the debt has increased and it had to.
Phil Tarrant: This is all about the sort of accumulation phase of property investment. Right?
Steve Waters: Absolutely.
Phil Tarrant: At a point in time we'll say, "Okay, let's stop and start paying down our debt." We obviously talk about those scenarios a lot on the Smart Property Investment Show and also on smartpropertyinvestment.com.au. We are talking about there about the size of the portfolio and some of the dynamics, but the cashflow is absolutely critical when it comes to property investment. If you look at some of the operating costs, so total revenue that is generated from these assets. This is what rent we get per year is 314,000 dollars. That's what we get paid from people who rent in these properties.
You've got a whole bunch of operating costs holding property. You got accounting fees. You've got land tax. You've got property management fees. You got repairs and maintenance. You've got insurance. You've got the list goes on. What this portfolio costs us a year to hold is 64,000 dollars cashout. That means for what we receive 314,000 dollars versus it's a negative of 64,000 dollars. That sounds like a big number, but when you put that in the context of the size of the portfolio, which there is 18 income producing assets in there. What we are talking about there is individual doors, which generate a rent. It costs us per property per week $72 to hold it.
Steve Waters: We've got a mixture of properties in there obviously. Some of them are perhaps larger blue chip properties for lack of a better word and some of them are quite cheap. They are spread on the operating losses quite different as well.
Phil Tarrant: Yeah, it is. 72 bucks a week per property that's a bit blunt because some are big, some are small, but collectively per month they cost us 5,300 bucks to hold this asset or 64,000 all the year. As long as we are going up more than 64,000 dollars a year, we are in a positive position.
Steve Waters: We've got the ability to pay the debt.
Phil Tarrant: You pay the debt and that goes back our original comments about interest rates and all sorts of stuff. A whole bunch of numbers thrown at you. LVR across the portfolio, so that's the loan value ratio for our new investors, which means the value of the debt you hold against the value of the asset or the property portfolio, 68% our gross rent to yield is 7.2%. A gross rent to yield being the rent over the purchase price. 7.2%, 8% is pretty good. Be planting in as well, doesn't really tell a story.
That's how we are looking right now. In total as we said added income reducing assets, nine in New South Wales, eight in Queensland, one in Victoria. There is seven houses, seven units and four sort of townhouse villas. Highest interest rate we have right now across the portfolio 5.74%, lowest interest rate 4.79%, average interest rate is about 5%. Michael, what's another metric we would look at there instead of weighted average cost of capital, right?
Michael Johnson: A metric that we can use to look at sort of the value over the cost of the debt instead of just using the average interest rate, we can use a weighted average cost of capital, which is basically just taking the total interest expense that you pay every year dividing by how much debt you have. Basically what it gives is it puts weight behind, so you've got a bigger loan and it's at a higher rate. When you have a small loan, it's a lower rate. Obviously, that has different amounts in the absolute value that you actually pay up. By using this weighted average cost of capital we can sort of see what the true interest rate across the entire portfolio is.
Phil Tarrant: I think that's a really important metric and the people need to understand, so maybe on your website you can put up an explanation-
Michael Johnson: Sure.
Phil Tarrant: ... so that other people can start utilising that metric, but what's really interesting is we are talking before we came in was just how high some of these rates are. I think over the last four to six months, the cost of debt has gone up by about 15,000 dollars in terms of interest rates. We'll be looking in line with Ross to perhaps reduce some of these rates and call that 15,000 dollar back.
Steve Waters: Is that Ross my mortgage broker? Ross I need you mate. Come and fix me interests rates. Would you? Come back from holidays. But there is some significant sort of underlying averages there. Cost of debt average is at 5.7. I think you said that's above the odds now. The banks obvious it's a risk weighted. Right? Being self employed and various structures and the complication or the sophistication of these structures. Sometimes the banks want to charge a little bit more to cover risk, but at the end of day if could drop rates by half a percent as an average across the total debt, that's a lot of money.
Phil Tarrant: That's going to be a focus for us this next few months. I think in terms of prioritisation actions in this portfolio, do we want to keep going? Yes. What are we going to buy? Don't know yet. We'll sort it out. Key part at least for us is to number one, look at the interest rates as something we can control, at least attempt to control on the rates that we receive from the relevant lenders that we use. A consequence of that is less cash going out, which will therefore improve our cost the whole position.
Steve Waters: This is importantly your serviceability.
Phil Tarrant: Serviceability. We may look for more debt, it looks better if we got more money to be able to show serviceability to lender. We should be able to drop that hopefully 64,000 dollar deficit by looking at interest rates is one of the levers you can use to improve your cashflow. Remember we are talking about pretax policy. Post tax we do pretty well. I suppose too much of this portfolio there is about five grand. Was it last time we worked out?
Michael Johnson: Yeah.
Phil Tarrant: Of tax, somewhere around there. Go and check it out it was a conversation we had with our accountant Mozroe towards back end of last year sort of October, November.
Michael Johnson: I think Steve raised a really good point. Steve always goes on about this. It's important to talk about your pre-tax dollar just simply 'cause that's cash. That's what's in your bank at the moment and we think that's the best metric to use.
Phil Tarrant: It is, but let's look at the reality of this, so 72 dollars per week per property. Now, if I only had one property and it was costing me $72 a week, I can probably cover that. Most people will tighten the belt a lit bit, few less coffees, few less dinners out, etc. you'd probably cover, right? Amplify that 18 times, it starts getting to a big number, 64,000 dollars, but then you look at the reality of investing. 64,000 dollars it costs us every year to hold this portfolio, 30,000 dollars of that is land tax.
Steve Waters: Maybe just say that again.
Phil Tarrant: Costs us 64,000 dollars a year to hold this portfolio of 18 income reducing assets of which 30,000 dollars of that is land tax. Now, land tax you pay to the government for the privilege of holding property, which is a cost of doing business now.
Steve Waters: That's something you can't control.
Phil Tarrant: That's something you can't control. What you can control though, is that how you choose to hold your assets. The point I'm making here is that a lot of the properties that we have, the houses what you pay land tax on, NSW. Now, because we invest in a trust structure, we get no threshold. We pay land tax on absolutely everything. Whereas if you were investing in your own name or under different structures, you get a land tax threshold in New South Wales.
Look at Queensland, in Queensland you actually get a land tax exemption if you invest in a trust, but if the value of that land within that trust goes over a particular point, you start paying land tax. Because we choose to invest in trust structure, it costs us-
Steve Waters: Is an added cost.
Phil Tarrant: ... is an added cost for us so, take that 30,000 dollar away it would be costing us 34,000 dollars a year to hold eight income reducing assets, which means that it would be costing us 30 something bucks a week to hold this property. But that's not the reality.
Steve Waters: You can sugarcoat that to make yourself feel good between your ears, but at the end of day money out is money out. It's done and dusted and I think people need to really be weary that they do the figures correctly. Throw in all the costs that are associated with properties so on your case as you've done it there is land tax 'cause that's a fact of life.
Phil Tarrant: We'll not sugarcoat our numbers, we know where we sit.
Steve Waters: This is what's really, really cool about this because these numbers include everything from as you say land tax down to the cost of debt, property management, accounting fees, rates, everything. Everything involved with owning property is in there, so that's a true number. The trap that people can fall into and then when people talk about their numbers is that they are only doing it on the debt versus the income.
Phil Tarrant: I'd go to a barbecue as just Joe Punter and say, "Yeah, invest on property and I get a gross rent to yield." At some point you have to say, "Wait, that's not right." You know what I mean? It's like social media you only ever see the best of people. You never see the crap behind the scenes, right? Investing in property, there is a lot of crap behind the scenes or your land tax. Land tax is the cost of doing business, I can't avoid it. I don't want to pay it, but I do pay it 'cause I have to. That's the crap bit, but I look at all the numbers associated with it to give me a realistic position about why we are doing this and how we are doing it. What's the cost of creating wealth? It cost money to create wealth.
Steve Waters: At the end of the day it's a 100% true because in this case 65,000 dollar we really want our portfolio to be going up well and truly in excess of the cost of holding. That cost will fluctuate as interest rates go up and down and land tax goes up, but it's important to also know that, that 64,000 dollars isn't divided equally into 12 months. There is going to be better months where the cashflow drain is not as large as when all your rates are due. It's about cashflow management as well, not just the ability to be able to afford the 65,000 but managing.
Phil Tarrant: To that point then Michael, running a property portfolio is like running a business. You have seasonal variations. You have quarterly variations. You have land tax might be due this month and you got pony up 20k and then other months you don't need to have to do the same, so it is a business.
Michael Johnson: It's really important as with any business that we do here SPI. Especially we do a lot of cashflow forecasting for our commercial business, but in property it's the exact same thing. You've got money coming in, you've got money going out. Is there enough dollars in the bank to pay for it? It's really important.
Steve Waters: That's why people come and stack here. You don't want to be the bloke on the front of the Financial Review saying I'll have to sell my property because this has happened, I wasn't prepared for it. It's going to P&I instead of interest only. Like if you were caught in that trap and you haven't forecasted, that's going to happen to you via just your loan term as an example and you haven't got involved and started doing what's necessarily years beforehand in some cases. Well, then woe for you.
Phil Tarrant: What we are doing then is that we are going to do a Ross. We are going to do interest rate review across our portfolio.
Steve Waters: The pressure is on that because now we've talked about it.
Phil Tarrant: I know. I'm sure we'll get us a, "I will be back next month through report. What's going on Ross?" That's cool. That's a level we've got. What else can we do to reduce costs on our portfolio or improve our cash position?
Phil Tarrant: The obvious one is rent. Push rents up and at this time of the year I'd be suggesting not to touch rents at all. It's always a bad time of the year part of the season coming before or just off the back of Christmas. You don't want to create any instability within the portfolio, so I'd be looking to perhaps do a rental around about the March then implementing it then here. Good point and all the investors out there listening to this, go and do that. Speak to your property managers or if you manage yourself, test the market and if you do manage your properties yourself, in test mark about speaking to some property managers and just seeing what the appetite for rents is. What's the local dynamics in a particular market, particular streets etc.? That's stuff you have in your control.
Steve Waters: It's not about what's on realestate.com or domain for rent. It's quite misleading because different streets and complexes-
Phil Tarrant: Will attract different rents. You go and do that. Cutting cost Michael, what else can you do?
Michael Johnson: I think at the moment we are pretty lean, but one thing is preventative maintenance. I think that's something that we are working to do on a number of the properties. One in Kingston for example. We are looking to just make sure that things aren't going to break massively. It might be some minor fixes that cost us a couple of hundred bucks rather than a couple of thousand.
Phil Tarrant: At the moment that Kingston property and go back. This is an asset we purchased last year June, July. Michael find me those numbers. There is a computer Kingston of you. Go and listen to the podcast, great story. Good bye. Poorly presented property, need a bit of love.
Steve Waters: A lot of love.
Phil Tarrant: When we secured it, we wouldn't touch it except for some essential stuff for sort of health and safety. I think it was extending balance straight that we weren't very comfortable with, but we said when the tenants move out, we'll have a look at it. At the moment we are getting some work done out there. Aren't we Steve?
Steve Waters: Yes. The plan was when the tenants left that we do not only some essential work, but also some work to value add in terms of its value, but also its cashflow position. It was just unfortunate that it happens at the worst time of the year being Christmas when they decided to up and leave. A tradesman on the ground at Christmas in any state is always hard to find especially in Queensland or Brisbane at the moment where the markets are very, very blunt. We are working through that now in terms of the renovation to do preventative maintenance as Michael talks about.
Phil Tarrant: Is it a rental or it just-
Steve Waters: It will be a rental.
Phil Tarrant: ... fixing some stuff?
Steve Waters: I call it a rental because we are going to do a bit of a kitchenette downstairs and what a view. There is a bit of expenditure there. But on the subject of preventative maintenance really comes down to cashflow management as well because as Michael said, if we spend a couple of hundred now might save you a couple of thousand in 12 months’ time. But try and time that when you have the capital available to do it. You don't want to be living in a two-minute noodle scenario just to do a bit of maintenance.
There is a difference between essential being preventative and then in safety. Always do the safety first such as lights, which is balanced straight heights in this particular case because you don't want to be in a position where you jeopardise someone's safety.
Phil Tarrant: You've got a GEK as a landlord.
Steve Waters: 100% don't be door.
Phil Tarrant: Or a number of things legally, but also morally. I think this is where people forget that essential part. There is that legal version, which you should never, never forget about, but from a moral point of view as well don't be that slum loaded. It will come back and get you.
Steve Waters: It's not cool.
Phil Tarrant: No, not at all. All right. You can change what you pay for the debt as an interest rate to affect your cash position in your portfolio, which we are looking at. You can push your rents up, but you need to weigh up or balance potentially getting 10 bucks more a week versus missing out on someone for two months when you've got a property vacated-
Steve Waters: Does make sense.
Phil Tarrant: ... in hand and all that. It's a lever that is a challenge to the pool. How else can you influence cashflow? Preventative maintenance, so spend a dollar today so you don't have to spend two dollars tomorrow, is another good point. How else can you affect cash flows? You can enhance the asset. It might be sticking up a wall or changing configuration from a two to a three bedroom property.
Michael Johnson: Yeah, and be a little careful to run the numbers because you don't want to spend $5,000 to get an extra $10 dollars a week rent. The return on your investment in that scenario might not be very attractive, but if you are going to spend the money and it's going to create you 10% or 15% return on that initial expenditure, well it's well worth entertaining then as long as you can withstand the capital that's gone from your kitty, so to speak. But otherwise to add some value in this particular portfolio, we'll look to start running numbers on perhaps secondary incomes on some of the properties. Whether that be a granny flat or knock-down rebuild duplex, and majorly all the things to come in the future.
Phil Tarrant: We haven't really focused too much on that. The assets that we have acquired over the years, most of them have a bit of an x factor. Some of them are just going to be good sort of assets that we never need touch and you can't really check a granny flat now, but some of the other stuff we have ... One of our first properties our at North St Mary’s has the capacity for granny flat and or knock-down duplex.
Steve Waters: It does.
Phil Tarrant: We haven't really tapped into these opportunities yet because we are out there acquiring assets and there hasn't been the real owners on needing to "improve our cash position" because you only really need to improve your cash position if it's really hurting you. We are still able to acquire assets while covering the cashflow shortfall just 'cause the nature of us and how we do stuff. But at a point in time, that trigger will happen where we go, we don't want to cover the 64,000 dollars loss or 30,000 dollars, whatever it is because of a rationalisation of our strategy. We going to go, "Let's start fishing the cash position more often now." But I know Mark Mozroe whenever we can chat with him, Michael he always says, "Let sort this cash shortfall out."
Michael Johnson: I think that's a big thing for him and I agree. When you think about it right you got this equities in this portfolio and every year we have a loss or cash outflow. That's obviously weighing down that equity. It's draining out that equity. Obviously having a neutral cash pos is great. It's obviously easier said than done sort of thing.
Phil Tarrant: I wish we had this on video. I'm also doing this year if anyone is interested if we can record this podcast video as well, so you see what we are doing and what we are looking at and stuff. If that is of interest, let us know [email protected] Give us your views and observations, but before we come on air I was having a chat with Steve about I call them the inflexion points. This is a point in time when ... and I drew it out on a x and y axis and they all make sense, but I can't show it to you, but I will try and explain it. Pretty much your property goes up in value over time on a upwards trajectory and the cash you generate essentially with that should also go up over time or the shortfall.
At point in time, you will go from negative cashflow to positive cashflow and I said that's an inflexion point. I said to Steve and I've got a big question mark there, how do you workout when that is? Can you actually choose a point in time when you know that your portfolio is going to go from positive to negative? You said, it's the buy and hope strategy rather than buy and hold strategy. Can you just talk about that dynamic? I hope I've explained that well enough. Did that make sense? The inflexion point when your portfolio goes from costing you money i.e us 64,000 dollars to putting money in your back pocket.
Putting money in your back pocket means that you get a tax consequence 'cause you need to pay tax on that. But it also improves your serviceability as well, so you can show it to a lender that it's income. The inflexion point Steve.
Steve Waters: Might be another way to look at it is if you buy property and it's got a negative cashflow to it. A lot of people strategies out there is to hold that property to a point in time where the rent continues to go up, so it goes from being negative to positive cashflow. A lot of people will talk about, "Well, that should only take a couple of years." For me, that's a really dangerous strategy because nobody knows. If everybody knew when their portfolio would turn negative to positive, talking all the parameters out of it, well, then it'd be an awesome investment that you could passively sit back and just wait or control cashflow at that point in time.
Reality is a different kettle of fish. No one knows when your property will turn positive to negative because you can't project rental growth just like you can't project or be certain about asset value growth as well. The other major factor in this is people leverage. They are increasing their debt level while tapping into the equity, therefore the cost goes up so that they can buy the next property. As a result of that, that means theoretically it's pushing out time for your rent to go up before it gets to that neutral or positive territory.
When it does become positive, it might be positive by $5, $10, $20 a week. That's not enough to live on. Sure you might have had some wealth attached to that because it's going up in value, but you can't leave your day job. The buy and hope as I call it is because you're just sitting idly buying. You're being very, very passive. We are advocates of not being passive in your portfolio. You've got to hustle. You've got to make things happen. Now, that might be via adding value via renovation. Obviously, buying well all the time. Buying the right areas but also a control in the cashflow along the way.
Phil Tarrant: It's something that all investors should be thinking about I think. This goal towards positive cashflow and what's the end game, isn't it? It's a benchmark, right? The idea is that why are doing this? You're buying these assets and it is an asset. Look, it's a property, but it's just an asset. It's a tool for you. It's about to create wealth, so there needs to be an end game with this and you need to understand what that end game is.
Steve Waters: You need to understand it, but you also need to be able to survive it. I think people have this real disconnect between wealth and cashflow. If we look at this portfolio at the moment, where there is a couple of mil of equity, so wealth so to speak. You can't live off the wealth because there is a debt attached and you got a negative cashflow even if it was positive by $20,000 a week. You're not going to quite work, so you need to actually have the combination of both. The cashflow is just enabling you to hold it while the wealth goes up to the point for us where you actually pay down.
Phil Tarrant: Where you realise that and that's an interesting point. If you consider to a point in portfolio Michael that this is a business running a portfolio, what is the business worth? A business isn't worth anything unless you sell it.
Steve Waters: Correct.
Phil Tarrant: Or you can use that asset to create wealth elsewhere. Now, what we are talking about there is cashflow. Cashflow is critical. Cashflow should be from a mind of all investors because if we never choose to sell your properties or property portfolio, the thing is not worth anything.
Steve Waters: To you its worth nothing. The wealth you're not touching and the cashflow you haven't got. This is why we are so big on this. It's the second most important thing behind oxygen. You need the cashflow.
Phil Tarrant: This one of the tractions of investing in property for PAYG employees, right? Because if you get a paycheck every day and you don't own a business, self employed people is slightly different, but if you don't own a business, the cash flow you generate from your salary can allow you to be a business person through investing in property. Gives the panel to control to go about being a master of your own domain and using your cashflow to create wealth. That's a really key thing. This is an advantage that a lot of PAYG employees have over self employed people, because it's ready supply cashflow. Banks prefer PAYG than-
Steve Waters: Than us.
Phil Tarrant: ... than guys like us who are self employed. Maybe start thinking about just the concept of that. How can you see your salary as an enabler for you to run your own business? Rather than one in two businesses filling for sheer wrap because some of us aren't going credit clothing line and go and knock out clothes at local market. Do their ass right, but this is an enabler and I often have that conversation with people and you see a light bulb flicking. They go, "Cashflow is the total any business." As you say this is business, you don't go into business to lose money. It won't last either. Or you don't go into business or investing in property for the benefits of negative geering either.
Steve Waters: It's a moment in time. That's all it is.
Phil Tarrant: That's what they say, but anyway, some cool concepts there. Everyone can invest in property if they have the cashflow to be able to do it, make sacrifices and ... What next for us Steve? What are we doing this year?
Steve Waters: Let's adjust the cashflow position firstly 'cause it will help with serviceability. Then it's time to diversify a bit. We are pretty well loaded in Queensland and Brisbane, Sydney we are okay as well. New South Wales, it's time to go inter state.
Phil Tarrant: Back in Sydney I got a kitchen sitting in storage waiting for I don't know mate. What I'm I going to with that thing?
Steve Waters: I've got a house that needs a kitchen.
Phil Tarrant: Do you want it? My treat.
Steve Waters: Yeah, in Sydney.
Phil Tarrant: I've got some tiles as well just down the road from one of your places actually. You can visit your place and do my place.
Steve Waters: Let's talk. Let's just do it.
Phil Tarrant: Are we going to buy anything this year?
Steve Waters: Yes, is the answer.
Phil Tarrant: Why.
Steve Waters: Because we need to adjust not just the net worth position 'cause you always want that going up, but we need to put some plans to arrest the cashflow position as well. Even if we don't, ... I will go back a step, even if we don't buy for whatever the reason might be but finance 'cause that's always the key, we can certainly start doing work on what's existing in terms of adding another income to address the cashflow position and the value position.
Phil Tarrant: This goes back to your business partner Victor Kumar one of the favourite term is pigeon pairing.
Steve Waters: Pigeon pairing?
Phil Tarrant: A shame Victor isn't here to explain this, but I will let you explain it for our listeners. What is pigeon pairing?
Steve Waters: Pigeon pairing is taking an asset that perhaps is great in growth, but has a negative cashflow scenario wrapped around it. Then buying another asset or producing another asset that is still going to give you growth, but perhaps has better income so that we are leveraging out the loss or arresting the loss.
Phil Tarrant: You are arresting the loss. One is a growth property, everything should be growth property, but one is more geared towards growth, whereas the other one is more geared towards yield. Then collectively those two side by side you want try and push them towards being a neutral position. If look at your portfolio, you've got a really good mix of both. All right, good Michael, your observations. What are we going to do this year, so it's first portfolio update for 2018?
Michael Johnson: Ross, step up your game mate, you will be good.
Phil Tarrant: Ross did you hear that from the slopes of Canada? I don't know I'm going to edit that or leave it in there.
Michael Johnson: No, leave it in there.
Phil Tarrant: Leave it there. Ross is a good man.
Michael Johnson: He will be all right.
Steve Waters: He is a good broker. Ross is one of the best actually, but put some heat on your brokers is what I will be saying. Get these guys working for you, good brokers with their weight and pound and Ross has been in screw to the development of that portfolio.
Phil Tarrant: I think in fairness with your brokers as well, they are dealing with not just you. They are dealing with potentially thousands of other clients and you need to take the responsibility. I'm not saying you in particular, I'm just generally speaking about you looking at you. Need to take responsibility for your own business and I wouldn't suggest approaching this for the listener every six months and adjusting your interest rates or reviewing them. Do it on a monthly basis like have a vested interest within your own business.
Steve Waters: I think the point I make on using a broker and securing mortgage finance is try and be the best customer you can be. What I mean by that and that's very self reflective. I often think about the relationship we have with our mortgage broker Ross at Aussie our at Paramatta and we're quite hard work. I will say, "Ross I want to review all our mortgages can you help me out?" He'll say, "Sure." Then he is going to go, "Can you give me all this information." I go, "That's just too hard." It's too hard. The admin component as in you need to be fluid in terms of being able to move quickly to give the information you need to give to your brokers, so they can go about doing their job.
That's a slight more on me because often the intent is right from my end, our end Michael to say we need to look at our interest rates and then Ross will be engaged and reactive, which he will be I know on saying, "Okay, let's do it." Then I will be the handbrake that stops us moving forward. You need to be a good customer. You need to be a good support for your broker for you to get the best out of them.
Phil Tarrant: It also might be a case we don't need to utilise a broker's time. It might be going ringing up your lender direct, which has no negative effect to the broker and just looking at perhaps putting some hardy odds in there and if you don't ask you don't get. It's true. The thing with lenders and we spoke a bit about this, but we will do it on our other brand is that thing called channel conflict, which our brokers don't really like. Where lenders go direct to people and try and persuade.
Steve Waters: We see this a lot.
Phil Tarrant: You'll get the phone calls every now and then when your lender will give a call and probably potentially offer you a better rate to go direct with them. If you hear about that, let me know because we wrote a report on that sort of stuff, but don't discount the value of a mortgage broker. Whether a pro-broker and when you look at the numbers, and I was on the telly the other night, Steve you were there as well. Michael our master of the show looking at the growth of brokers over the last decade and back in 10 years ago, so 2008. Mortgage brokers were accounted for about 38% of all mortgages written in Australia.
Today, that number is 54%, so it has grown rapidly. Obviously, the pan out the broker and the value they offer a consumer is key. If you know you are using a broker, I highly recommend going and even have a chat with one and see if they can help you out and be an enabler for you to do your job better. Because back in 2008, interest rates were this time ... Well, IBA doesn't meet in January, but in February it was 7%. Went up 7.25% in March of 2008, so war was very different back them.
Steve Waters: Massively different. What is it? 10 years now.
Phil Tarrant: 10 years since the JFC. Go speak to your broker, I'll be speaking to mine and I'll actually get Ross on the show and we'll have a chat about how we go about reviewing high interest rates. You know what? Banks might not move on us, they might just get stuffed or I mentioned that there will be some play there.
Steve Waters: You will get something. Even though it's a 1,000 dollars a year, that's still your money.
Phil Tarrant: A 1,000 bucks, right? Maybe some of the other scenarios is that we can consider maybe going doing P&I position. When you do the numbers, you can get a P&I rate at 4%. P&I being principal and interest, you pay off some of debt amount just not interest of it. I can get that at 4% versus 5.7% as interest only. Often it might be 20 bucks a month difference in terms of your repayments, so you're paying to have some debt as well, but you can renegotiate the period of time that you can have that right for. It might be another five year period. Like this bloke on the front page of the paper, he starts resetting and that's going to be the problem.
Steve Waters: He is worried, but I think this is where taking ownership of your own position is so important and people should be looking at the household budget. Not just now but they should be forecasting over the next one, two, three, and five years where they are going to be. Whether it's kids and moving school and whatever it might be and start setting yourself right now in terms of expenditure. Your biggest expenditure is your mortgages.
Phil Tarrant: Absolutely. It's a pretty good one for the first one for the year.
Steve Waters: Awesome. First one of the year, done.
Phil Tarrant: Let's try and get some structure at least I guess moving forward.
Steve Waters: Sounds good.
Phil Tarrant: Michael.
Michael Johnson: Sounds great. I love the structure.
Phil Tarrant: Are going to put banks to it?
Steve Waters: Well, maybe I think.
Phil Tarrant: What are we going to talk about?
Michael Johnson: I think we need to pick a theme every time.
Phil Tarrant: A theme every time. For our listeners if there is anything that you want from us as well, I'd rather be driven by you guys. I know you really like this part of the Smart Property Investment Show, the Portfolio Update. I'm in your hands and Steve, we are happy to deal anything or any particular question about this portfolio, what we are doing, how we are doing and why we doing it. If you like the idea that we start every single one of this with a big recap the portfolio position, and we can do that each time. We get an asset sheet here. Maybe we'll get this up on the website as well. We are going to do a lot more work on this over the course of 2018. Let us know guys and we are happy to talk about whatever you want to talk about.
Steve Waters: Cool, good stuff.
Phil Tarrant: Thanks for your time. It's good. Michael always good.
Michael Johnson: Yeah, thanks for having us.
Phil Tarrant: Steve thanks for coming in mate.
Steve Waters: Thanks you.
Phil Tarrant: If you are not listening to it, I do a regular podcast with Steve Waters and Victor Kumar from Right Property Group. Very different to this one, it's called Investing Insights for the Right Property Group. We do it once a month where we get down and dirty of some pretty heavy topics within property investments. Today, we've brushed over certain things using terms, which we are very familiar with, but we actually get really down into and unpack them and explore them and through propagated podcast. We'll be back doing that this year as well.
Steve Waters: We will 12 times.
Phil Tarrant: 12 times, so you will see it in the feed where you listen to this right now just for investing insights and tune into that because its hugely popular and really meaty stuff and we do enjoy it. Thanks for joining us today at Smart Property Investment Show. If you're not subscribing to our daily morning market intelligence news that being the first to know what's happening in property investment, smartpropertyinvestment.com.au/subscribe. If you want to get the info on social media just search Smart Property HQ, you will track us down.
Again, we are here to listen, do engage with us, do reach out and say good day. Get it to @smartpropertyinvestment.com.au. The team will get back to you and I think that pretty much covers everything off. We do love those reviews on iTunes, so keep them coming five stars we always enjoy, but if you've got any feedback for us, we are very open to constructive criticism. We are always looking to improve the show, so get in touch. We'll be back again next time until then bye, bye.
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