What does ‘balance’ mean to you, and why is it so important to your investment success?
In the latest episode of Investing Insights, host Phil Tarrant and partners Right Property Group discuss the importance of diversification in your portfolio, why you shouldn’t be ‘skewed’ by one investment strategy alone and why accommodating for life events and market changes is essential to an investor's success.
Tune in now to hear about the team’s investing experience and how you can better balance your portfolio.
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Phil: G’day everyone it’s Phil Tarrant here from Smart Property Investment. Thanks for tuning in. I’d like to welcome you back to our key education series, Investing Insights, which we do with one of our partners here Right Property Group. Got the boys in the studio again today – Victor Kumar and Steve Waters. How you going guys?
Steve: Good mate, how are you?
Phil: Really good. This is now the sixth, fifth?
Phil: Fifth one we have done of these.
Victor: Flying through.
Phil: I think in like five months, wow. Quite popular as well, which is good.
Victor: Been awesome.
Phil: Yeah, really good.
If this is the first time you have tuned in, thanks for joining us. What we try and achieve with this is very different from The Smart Property Investment Show, which we chat to investors and get the stories. Our Investing Insights podcast is very much geared towards looking at some really deep issues surrounding property investments, so The Smart Property Investment Show doesn't really allow us to deal with some pretty full on issues that we need to give a lot of time and attention to. So we hope to cover off over the next half an hour a very key topic, which come to investing in property.
The previous ones we’ve done have been pretty good and really interesting. You will probably see them If you listening to this on iTunes you will see a list of them underneath it, or on our website. All the other topics, but I will run through them really quickly. Topic one, the first one we did was eleven things successful property investors don’t do. Which was really, really interesting. Topic two was debunking the most popular property myths. Topic three was mindset goal setting that sort of stuff. Topic four our most recent one was investing in units versus houses – so should you choose one over the other?
Today we are going to tackle a big issue – one which any property investor who's been in this game for quite some time will be talking about. And if you’re new to property investing this is something you should be thinking about now, rather than in the future. It’s all about building a balance portfolio. A balance portfolio is going to mean a few different things to different people. Depending on property investment journey. How far through you are in it, the assets that you might have in your portfolio now, what your goals are. But let’s just tackle off a really easy question straight off the bat, Victor, to you. What does it mean? What's a balance portfolio?
Victor: Thanks Phil. Well if you look at an investor and their starting a portfolio often they get skewed down one area, or one method of investing without adjusting for market. Without adjusting for their increasing or decreasing negative cash flow as they are building the portfolio and accommodating for life events. So there are quite a few things we need to look at when we are building a property portfolio, such as where the properties are located. So spreading them out nationally, or even internationally. Looking at spreading the lending out. Spreading the risk, in terms of the types of properties you buy and so forth. So there's a lot of things that need to be taken into account as you continually build on the portfolio.
Phil: So when most people who have any experience or education in investing, when they hear the term ‘balances portfolio’, what will spring to mind is a balance in asset class. So people will be going, well if I`m looking to create wealth for retirements. Say for example a balance portfolio would be to have some property, have some shares, some fixed income, some savings. Maybe some fancy bottle of wine they, which I`m sure Steve’s got in his balance portfolio.
Steve: Hard earned.
Victor: You got in before I did.
Phil: So that's how most people would conceptualize a balance portfolio that asset classes. But what we`re talking about, I guess it’s similar in some ways in that you have a balance in the type of assets you have in a property portfolio
Victor: Pretty much so, so if you brought it back to say, shares as an example, you would be investing in different companies – shares off different companies. And it’s the same with properties as well. You’re investing in different areas. So you’re looking at those different businesses. As an example those that have invested recently in New South Wales, particularly in Sydney, they are investing more for the equity because the yields are no longer there. So they need to then further diversify. In other words, balance the portfolio by getting some yield to help support their equity gains. And that may be in other states where the yields are significantly higher and the entry prices may not be as high.
Phil: For someone who is new to property investing, Steve, when should you start thinking about building a balance portfolio?
Steve: Before you do anything really. It should be the first step. And quite often we see people that they want to attack the whole balancing act somewhere toward the end of the portfolio or halfway through.
Victor: As an afterthought.
Steve: When they are in trouble, we probably should have done this a little differently. To me balancing a portfolio, it’s really covering my risk. That's how I think about it. As you know I`m quite conservative and I don't go into anything looking for the negatives. But I just want to know that I can sleep at night and that if I have everything right. And that's in terms of equity, as has been mentioned, and also cashflow. And then my worst possible scenario is covered. Or it should be. Too many people don't do that unfortunately. And Victor’s just mentioned about cashflow. Like, people are coming into New South Wales and they’re still investing in New South Wales and Sydney in particular. More about growth and equity and not cashflow.
I was having a conversation the other night with someone who was saying, ‘Well we want to invest in Melbourne for cashflow.’ I said to them. Well Melbourne’s perhaps not the place to go for cash flow. We had a very in depth conversation all around about cashflow, which is part of the balancing act. And my point is, everybody who talks about cashflow cannot really define what cash flow is. What is their version of cashflow.
Victor: That's right. It’s different for everyone
Steve: Well it is. And if you go south of the border and perhaps they might get say, a four and a half or a five percent yield then that's awesome. That's cashflow. But for us a five percent yield means, well that's not really cashflow it has to have something else attached to it. Weather is going to be instant growth, instant equity or something that's got a twist to it. So everyone's interpretation of cash flow is different.
Victor: I guess you have got to set the bench mark. So if your bench mark was four percent as a good yield then anything above that is fantastic. Whereas, if you look at investing in Sydney in the last five years. We started off with good cash flow now we are getting into good equity. Because as usual, growth actually follows yield. So we had fantastic yields in Sydney, and now we have had phenomenal growth with the infrastructure changes and so forth. Of course the low interest rates have helped. And now for those that have invested heavily in Sydney, perhaps a balancing act could be that backing on that equity that they have gained, they may now want to invest in another state to get on the upside of that state. Because they have had significant gains here and have a higher cashflow there to offset heavy equity in New South Wales.
Phil: So balancing is a whole bunch of different things.
Victor: Pretty much.
Phil: It does. So, new to investing. Or even if something I think about was. You have got to balance your books, right? So, from a cash flow perspective you’re going to have individual properties. You’re going to have a different cashflow outcome. Or implication of your portfolio. But then when you start getting multiple properties – two, three, four, five, ten, fifty. A balance portfolio might mean that you have different assets within a portfolio, but you could be looking at least towards a neutrally balanced or geared portfolio, or positively geared.
Steve: In a perfect world. But as we see prices increasing that yield is diminishing no matter where you are. And it’s not because the rents are coming back, unless you’re in W.A. But it’s more about the prices going forward. But it’s not just about the cash flow. I believe the whole balancing act, so to speak. It’s about where your properties are located. Anything from entity to land tax thresholds.
Steve: Lenders especially. It’s a whole myriad of things that you should be looking to balance your portfolio.
Phil: Let’s look at those. So from a risk perspective let’s look at balance. You have got lenders, so you can balance out your lenders. So you’re not overly geared towards any particular lender. Therefore your minimising your risk profile should one make changes in terms of interest rates and the other ones don't. You’re not over exposed with all your eggs in one basket. So balance out lenders.
Victor: Yes true.
Steve: Balancing out the type of properties that you have. So houses, units. We spoke about that last time around. Victor you could probably chat on this. Houses form differently to units and the other way around. From a cash flow and also a couple of...
Victor: Absolutely. So usually it’s the units that have the higher yield. They do come with their own expenses, such as your strata fees and so forth. But they usually located very close to infrastructure. Whereas houses may have a higher negative cash flow. But you've got so many others things that you could do to it, such as sub-dividing the block and so forth. It brings in its own pros and cons, and if you have a portfolio that's just units – nothing wrong with it. So long as you diversify the area. Or you have got just houses – again nothing wrong with it. But with my portfolio and yours as well Steve and for a lot of our clients, it’s balanced in a sense that by the time your portfolio is mature you have a blend of houses, town houses, units and small development sites.
By small development sites I mean, your simple sub divisions. Your granny flats and those sort of things. So that down the track you can then look at methods of retiring the debt, which is probably one of the things we will talk in the upcoming podcast. And then that helps you retire the debt really quickly. And also if you’re looking at it from diversification into different states.
So let’s say that you had a necessity to sell down your portfolio, part of your portfolio weather it is to fund an acquisition, a lifetime acquisition, or whether it is for lifestyle reasons. If you have all of your properties in the one state. So let’s say someone’s got all of their properties in Western Australia right now, it would be a lot harder to sell down and realise a significant gain in there. As opposed to having it spread out. So we would leave Western Australia portfolio alone, and we may sell down our Sydney portfolio. Just gives you the choices to change.
Steve: At the end of the day I think that's what balancing is about. It’s about choice, options.
Phil: Good point. So we spoke about lenders, we spoke about houses and units. You balance that out. Spoken very quickly about locations. What do you think about balancing out in terms of metro, regional or rural stuff? Steve, what's your thoughts mate? I know you’re a country boy
Steve: I have got properties in regional areas and think there's a time and a place for them. Usually when cash flow is nowhere else. I'm a bigger fan of metro areas because that's where the world lives.
Victor: And the liquidity
Steve: And the liquidity there. But having said that, there are some regional areas which do tick a lot of the boxes, but they have got to have their own infrastructure. They have got to have several parts to the economy. They cannot be reliant upon say the one thing. Such as mining or agriculture as an example. And they can produce well for you. So a really good example of that is central New South Wales.
About five to seven years ago, somewhere around that period we targeted the Dubbo region, because it’s probably the major inland city. The biggest there is. And what that was giving to us was that it the potential cash flow. At the time I think it was eight percent buy in yield, which was pretty good. We went to the right areas and the growth potential is there purely because of more infrastructure. I think it was the evo cities that was going on back then. And we bought a lot very, very quickly. In probably seven years they've doubled. Now I’m not saying that's the norm. I’d like to say it’s because we bought them well and the cash flow as a representative back then, is somewhere around about ten percent now. So there's a time and place.
Victor: That's right. So if you took that example it does have a very specific place in the portfolio. So something like that you would use to help underpin a more negative cash flow property. What I call pigeon pairing a property. Let’s say you had a property in Sydney, where it’s costing you one hundred and fifty dollars a week in negative cashflow, before tax. And you have got the other property in Dubbo that's bringing you in fifty dollars positive cash flow in the worst case scenario, before tax. All of a sudden your holding cost has dropped from one hundred and fifty to one hundred dollars. Which is a lot more plate able than one hundred and fifty dollars. Especially when there's a absolute sure chance that interest rates will rise in the future. So you are using two different types of assets to underpin each other, so ones giving the yield the other ones giving you the growth.
Steve: And that's probably the main thing that people think about when we talk about balancing portfolios. It’s all about the cash flow, which is second most important to oxygen. Its survivability isn't it? And it not just helps from the money in money out of your pocket, but also from a serviceability point of view too if you want to keep perpetuating the portfolio. But all of that aside and coming back to the regional areas question, it is really, and I know I just touched on it but it is really about timing. you know there are certain times no matter how big the regional centre is, I don't think people should go there. But as I've explained, everyone's situation is different. But it’s just so important to get the timing right.
Phil: Another area of balancing, and you touched on this very briefly Victor, was I guess the opportunities that you have within your portfolio. So you can have a property that you never touch, you just buy it. It’s good yield, good prosperous capital growth. Never seen it. It just sits there does what it does. Then you have stuff that you might be able to manufacture some equity in . Small renovations, cosmetic renovations. Maybe something a bit more significant. Or something that you could potentially do a small development on. So knock it down. Duplex, granny flat etc. so you can balance your portfolio by having different opportunities and different assets within it that can give you leverage to grow and evolve.
Phil: Can you comment on that very quickly?
Victor: My own portfolio. So I started out buying a unit as an investment. First investment. And that was two reasons. One, I didn't know any better. And I was pointed in that direction and I had limited capital. And it worked out really well for me. And if I start all over again I would do absolutely the same thing. So that's been the corner stone.
Then I have gone on to buy houses and small development sites where I could do a sub division or granny flat. So if I were to then look at that opportunity as experience grows, I would then go back and do the sub divisions. Put in the granny flats and in a high interest rates climate I would actually bring forward those secondary dwellings. To help me hold onto the property. It comes back to staging it. Whether it’s in the different states or whether it’s in the different assets classes. Also having a progression plan to say that, okay I`m going to hold this asset and I might come back and develop on this. Therefore further balance out whether it is my equity position or my cash flow position. Or whether it is something that I am going to renovate and sell down for lifestyle reasons. To fund my lifestyle. Or it is just to increase the equity base in my portfolio.
Phil: Obviously we are speaking very general around a balanced portfolio here. So by way disclaimer, everyone's circumstances are different and you should be speaking with the appropriate professional to give you guidance, support and advice. That aside, the reason why I say that is because I want to have a quick chat about entity structure, Steve.
Phil: We spoke about balancing lenders, balancing areas, balancing the type of assets, balancing opportunities. So do you have a balance also in which you hold these properties? So weather I`m investing in a trust or some sort of co ownership, or individual.
Steve: Look when I first started, my accountant at the time... Well he stopped me because I wanted to – all I had read about was, got to invest in a trust. Yeah I need the protection. Better tax advantages and what have you. And he gave me some pretty good advice that was suitable for my situation at the time. And it was quite simply, exploit yourself first. There's a couple of reasons for that. One, back then, and it still rings true today, is about serviceability, or getting finance. Getting finance for yourself is much easier in most cases than doing it a company format. Or getting it in a trust structure or whatever it may be. There's was also obvious benefits for me from a land tax point of view. And furthermore from that he said, do it individually, not with your wife on title.
As an example, sometimes even in today's environment you need to be both earners on the loan, but having one on title can be more beneficial. From a balancing point of view it gives you a couple of advantages. Once again. Everyone's scenarios are different. But entity helps you in terms of what you invest in. And which entity, weather that be once again personal trust or company. Gives you more diversification, gives you more risk mitigation. And it gives you options. Once again, the best people to speak to is not just your accountant. And it’s not just you financier. We always urge people, that if you are going to start investing in structures other than yourself that you actually get your accountant and your broker in the room together. Because often what they broker wants to get the loan across the line, perhaps the accountant doesn't and vice versa. So get them both around the table.
Phil: From what I have found in terms of, in building a balanced portfolio and the way I have approached it. I think we probably made a mindset choice early on that we were going to grow a large portfolio over time. Therefore we need to get this right. But often your structure is going to be influenced by the type of diversification or balance that you have. And I say that by –
Steve: And your profession.
Phil: Yeah and your profession. You know, if you work in a…if you’re self-employed and you work in quite a lentiginous type of position or role, like the media. You need to protect your assets differently. And that's got to change the way in which you might want to build a portfolio. That said also, you know the land tax perspective. You can invest, for example in trust structures up in Queensland and get a thresh hold on land tax, whereas if you’re buying in New South Wales in a trust structure, you get no thresholds. So that might influence the balance that you have in terms of...
Steve: That's a mistake we see. And I will call it a mistake, in inverted commas, that often people when they are first starting without the right ... proper advice they will create this trust. Because perhaps the accountants led them down that path, and they just don't realise, especially if they are investing in New South Wales that they are going to be up for land tax. Straight up.
Victor: And that's probably because the accountants coming from a tax perspective. And an asset protection perspective.
Steve: Or revenue.
Victor: That's true. And they may not take into account the entire picture. In terms of what's the impact in terms of land tax? What's the impact in terms of lending itself? Because not all lenders are comfortable lending to entities such as family trust and so forth, so therefore you've reduced the number of lenders that you can approach. And also its starts becoming a bit cumbersome, in terms of compliance, in terms of getting the lenders to understand how the income flows in your portfolio and so forth. So the idea is to keep it really simple. And once you have as Steve said, once you have maxed out your own personal thresh hold and your personal lending, then perhaps look at structures. Of course we are talking still very general. It’s specific in your needs and terms of having a trust structure put in place then you should.
Phil: We have spoken about what balance means in a portfolio. I think we have given a pretty good run just generally about the areas where you can get balance. There's also balance and potentially the people that you use to help you grow you portfolio.
Steve: Yes true.
Victor: Yes absolutely.
Phil: You might want to do some stuff yourself. You might want to use a buyer’s agent. You might have an accountant or financial planner. So you know there is another element to that. But I won’t to dig down too far into it. But I guess my question ... we are going to have to wrap up pretty quickly. Maybe for you Vic is how do you know if you have achieved balance? How do you know if you’re sort of on the right path?
Steve: It’s like a tantric sort of...like a – I have got balance. Balance in force. How do you know you have got it?
Victor: I was waiting for the music to come on.
Steve: I know Vic, you’re out there in your – on your yoga mat with your legs crossed in the lotus position. There's the cover for your new cd.
Victor: That's right.
Phil: Or maybe balance is that you sleep well at night?
Victor: That's right.
Steve: That's exactly what it is, sorry Vic I’m answering your question for you…
Victor: That's all right, let me do the yoga stuff. Taking off that Steve, one of the first things you look at is one act of balance is actually to stop buying. There's a lot of inverters out there that continually look at buying and buying and buying. You need to allow the property to mature itself for it to consolidate. And that maybe that one of the balancing acts is that you actually stop buying so that you’re not constantly draining the equity out of your portfolio. And you’re looking at the portfolio itself to be able to look after itself, because the more properties you have, you have got to remember it also has got a lot of admin work attached to it. So the balance doesn't just mean the number of properties and where it’s bought and all that. But also what impact it has on your lifestyle as well. That's my deep yoga message.
Steve: I completely agree with that. You know for me investing in property is about balance and my balance is that I don't want to be doing open houses every single Saturday. I don't want to be dealing with lenders. Balance my life out I want someone else to sort that stuff out for me. And I think it’s a component of investing a lot of people forget, because it can be stressful. It can be emotionally taxing. It can out pressure on relationships, financially or otherwise. So you got work life balance right. They should have investor life balance.
Phil: Property anonymous. Or something like that.
Steve: As a ...suppose one of the last points, the balance isn't this thing that you set up in the beginning and then just forget about it. It’s constant so always ...it’s reviewing your portfolio and your position constantly – monthly – because that will give you some clear direction if you’re looking at the numbers, on what sort of property, where it should be, when and how is your next step. Not just a throw it at the dart board scenario. Or just buy, buy, buy.
Phil: We've got sort of quite spiritual toward the back end of this.
Steve: That's about as deep as I get.
Phil: Get a couple of XXXX Golds into you and you will probably open up a little bit more.
Steve: The true story.
Phil: It’s good I've ...just having a chat about this organically has got me thinking about; balance is not about the numbers. Balance is about, in many ways, your own sort of health. When it comes to thinking about properties. It’s good.
Steve: Want to hug it out?
Phil: Yeah, maybe. It’s good. All right we have run out of time. Enjoyed the chat guys. Remember to drop us a line if you have got any questions that you would like us to cover on the Investing Insights podcast, or with Smart Property Investment. You can email questions at rightpropertygroup.com.au. And I think they come over to you Victor?
Victor: That's right.
Phil: So you will get in touch. And please do send them through because we have got plenty of topics here that we want to cover but if there is anything in particular you think we are missing out on, or you'd like any deeper knowledge around any of the particular points that we have spoken about today get in contact with the guys, because they will be happy to have a chat with you. You can go to rightpropertygroup.com.au and learn more about you guys, is that how it works?
Victor: Yes. Or come to our Facebook page.
Victor: Search for Right Property Group.
Phil: So you do a regular information session?
Victor: Yeah, we do an open forum. We have been doing that the last eight odd years.
Victor: In New South Wales every month. We had the last one was pretty good. In the sense that usually we get about over a hundred people there, and the idea is that it’s an open forum where we share knowledge and you get to rub shoulders with other inverters that are doing the hard yards, in terms of investing and not just talking about it. And then we do a similar thing in Melbourne as well. So drop us a line and we will send you the information.
Phil: Okay, good. Thanks Vic. Appreciate it.
Steve, nice one mate. Enjoyed the chat. That's it for us this time around on the investing insights podcast. If you’re listening to this on iTunes go over to smartpropertyinvestment.com.au. You can check out all the other topics that we've covered. Whish we went through earlier on in this podcast. We will be back again next month, where we are going to be chatting around some key principles on deciding what property you should be buying. We will see you then. Bye bye.