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Do you have a plan? Advisers’ tips on future-proofing your investment portfolio

By Tamikah Bretzke

Running an investment portfolio is much like running a business, and in light of changing investment conditions, taking care of business has never been more important.

Steve Waters and Victor Kumar say the numbers never lie. However, by having an active involvement in the running of one’s own portfolio, even the most seasoned property investor can ensure their businesses will run even in the worst possible scenario.

In this episode of Investing Insights, the team from Right Property Group joins host Phil Tarrant to discuss just what it takes to future-proof one’s portfolio, why people should avoid investing ‘on the red line’ and explain why having a plan in place is essential to running a successful wealth creation business.

Tune in now to hear all of this and much, much more in this episode of Investing Insights!

Did you like this episode? Show your support by rating us on iTunes (Investing Insights) and by liking and following Right Property Group and Smart Property Investment on social media: Facebook, Twitter and LinkedIn. If you have any questions about what you heard today or any topics of interest you have in mind, feel free to email [email protected] or [email protected] for more.

Full transcript

Phil: G’day, everyone, it's Phil Tarrant here. Welcome to Investing Insights with the Right Property Group. I'm joined by Victor Kumar and Steve Waters from Right Property. How you guys going?

Victor: Going well, mate. How are you?

Steve: Good Phil.

Phil: It's good to see that bullying is alive and well in Poke House land.

Steve: Sledgley.

Victor: Absolutely.

Phil: Picking on me, it's not very nice. Thanks for coming again. It's our monthly episode. I want to have a chat to you guys today around future-proofing your portfolio. The reason I want to chat about this is that I always lament on some of the challenges I have with my portfolio and where I can do better. I think future-proofing is one of those things, so I'm very conscious and focused on that, assuring that my portfolio today works for me as much as it's going to work for me in 10, 20 years’ time, two cycles time, three cycles time.

Future-proofing your portfolio. Do you think this is something, Steve, that a lot of people are thinking about when they start investing in property or is it just here and now, "I just want to buy property and get a couple of numbers or runs on the board and walk around with my chest pumped out saying 'I'm a property investor.'" How's it work?

Steve: I think you're 100 per cent right. I think people think about it too much. They don't think about the "end at the beginning" and the "what could go wrong, can go wrong" scenario even just living comfortably. It's more about getting rounds on the board to begin with and then we'll just deal with the issues later, I suppose, or putting the plan into play [inaudible 00:01:18] which is kind of reverse on the way you should do it.

Phil: So what does future-proofing your portfolio mean, do you believe?

Steve: I think future-proofing the portfolio is just taking care of business, essentially, looking after the details, making sure that you have all bases covered, as best as you can. Because a fear for a lot of, we'll say the "public investor" at this stage of the property cycle is that everybody's used to this massive rounds on gain, they're used to very short or very cheap cost of money and vacancies being pretty low. They've never really seen several cycles and how the cycles unfold, and how you've really got to take care of the ups and downs.

It's not what the property will do in today's market, it's what it will do in tomorrow. Or, even better, judge it on its worse performance and if it's still viable then, as long as you've got your bases covered, well then you're in a good position. But most people aren't doing that.

Phil: One of the things that I talk a lot about with smart property investment is concentrating on the things that you can control, not those things you can't control. Don't sweat it too much, just be aware of it now. Just to keep some context to our listeners, we're recording this the week after the budget.

Steve: Yep.

Phil: If you're a property investor, I'm sure you've seen some changes that the government has made in terms of depreciation of your assets. These things you can't control, what the government chooses to do around the rules of investing in property. Now, Victor, with these depreciation changes, obviously we won't go into details around it, there's plenty of information on it and if you want more info about it, speak to Steve and Victor about it.

These things have changed, in many cases, the cash flow component of the viability of a property investment. If we talk about the depreciation changes, you can't depreciated plant equipment and so out of your property anymore, so it's going to change for a lot of people the cash flow position their properties now compared to what it was previously. You can't control this but if you're investing and you're on the redline, you're not investing for the future. You're not thinking about future-proofing your portfolio because you are a victim of changes to legislation. So how do you feel about these changes? Are you worried about them or do you think your clients or property investors should be really concerned about them?

Victor: I'm not worried about it to start with and neither are our clients because we've always held a mantra that you don't need to take tax into account when investing, to clarify that. Tax is just a bonus, and it is a sovereign risk that that tax incentive could be taken away at any point in time with any changes in legislation or appetite by the government or by the economy itself. Therefore, you need to be looking at property purely as a money in, money out and the tax incentives then become a bonus on top of it.

If you're investing and you're holding onto your portfolio only because you are getting those tax incentives, yes, of course, the depreciations have been grandfathered but bear in mind for all those people that have bought properties off the plane right now that are going to settle in the future; and there's a very strong chance that they might not get the full depreciation that they have calculated to receive which will then make a big dent in their cash flow. Therefore, because they bought based on what they can do today with the cash flow, they're not actually future-proofing it in the sense that they're taking into account any incentive that is available right now.

A good example of that taking a different segway would be your standard D concessions and first time owner's grant. When it first came out, a lot of people started holding off for that and then that changed. So they're holding out for a grant or for a government incentive. You should always invest with the simple mantra "money in, money out." In other words, the rent coming in versus the expenses going out, that's what you work your figures on. Stick to the fundamentals, stick to what fits your financial fingerprint, and then don't speculate.

Phil: So is it okay if you're starting off investing in property, say your first sort of two, three properties that, it's here and now, you just want to get in the game; and a lot of people struggle with making that first step and never, ever become a property investor because of some reason why, they don't. But get in there, hurry up, and don't worry about future-proofing immediately, but you need to be buying the right assets with a future-proof mindset and that is cash flow, isn't it?

Victor: Absolutely. I guess the biggest mistake most property investors make is that they decide, okay, I need to invest. People reach a stage in life where, that is early on or later in life, where they've had this anecdotal evidence from their family and friends, they've seen other people succeed, they've listened to great podcasts like this one or the Smart Property Investment Show podcast and they get educated and say, "Okay, we need to start investing."

Where they go wrong is then they go out and start buying properties straight away. They're not taking into account, "Okay where am I heading with this? What do I need to do?" In other words, plan first, put the action plans in place, put all the mitigated risks, mitigations in place. In other words, talking to a financial planner, making sure all of your income is looked after, your income protection and so forth and then implementing the actual investment plan itself. Then going and buying properties that suit your goals in areas that are actually trending upwards, not jumping into an area that's already trended upwards and is very close to flat line, and you've jumped in way too late in the market and you're trying to catch up to the masses. Then finding out that you bought a property that doesn't go as planned purely because you've just jumped in too early without planning everything through.

Phil: So Steve, with future-proofing your portfolio, would that also entail how you structure your portfolio. So the vehicles you use in order to invest in property. Do you invest personally, do you invest in a trust, do you invest in a partnership? There's a number of different ways that you can actually hold these assets. Is it a big part of future-proofing your portfolio?

Steve: Look, I think it can be. You've got to have some forethought on where you're going to go with that. The type of vehicle that you use whether it be a trust, a company or an individual should be talked about quite deeply with your accountant and perhaps predicting what might happen later on in life. Having said that, you don't want to get to a stage where, before you even begin, you're over complicating it to begin with because you've read something, somewhere you've heard something somewhere about trusts and security and all that sort of good stuff. Keep it simple to begin with.

I just want to also go back to what Vic said earlier on about incentives. This is where I believe people go wrong. If we just take depreciation, because that's already been mentioned, it's just an incentive, or an incentive and a byproduct in combination, really, it's a moment in time. It just happens to be a longer moment in time and it's always something that's going to be -

Phil: Something with change.

Steve: On the cards that it's going to be adjusted. They abolished it before, all the gearing effect anyways and they've brought it back and that's not part of your fundamentals. We've always talked about cash flow is king and our fear has actually come to fruition being that people have forgot that. They've forgotten that cash flow is king and they chased, perhaps, just hardcore growth without having to worry about the cash flow because the growth will take of it.

Now we're down to the final moment in time where people are going to start saying, "You know what, we've got all the growth, we've had the equity gain, but we've now just lost a lot of cash flow incentives to be able to control or hold this equity," and it's a real possibility that some of the perhaps poor or uneducated people are going to become a victim and that's something that we have hoped that wouldn't happen but it's just starting to unfold that way. What that means is that perhaps I'll learn a lesson for next time around, next cycle round. What it will also do is create opportunity for others in the market. Which is something, not taking advantage of people that are perhaps doing it hard, but this moment in time where there's been an adjustment, not just only in the lending arena, not only in the taxation arena, but it's something that we've been predicting that'll happen for quite some time and we're actually quite happy that it has happened. Gives some normality back to the market.

Phil: It's going to shake the market up a little bit. It's a problem among people who are investing, maybe shouldn't be investing. The last time we all got together last month we spoke about those changes or recommendations of APRA – the prudential regulator – is making around mortgage lending. So it is getting harder for investors to secure finance. Our summation at the time was, "That's probably not a bad thing. You shouldn't be borrowing in that way anyway."

Steve: Yep. That part of future-proofing portfolio is actually taking into account that this stuff, these changes will always happen. Nothing is 100 per cent growth in five years all the time, it's just a part of the cycle. These changes do happen and you need to be aware of that and perhaps create your portfolio or even maintain your portfolio based on what can happen. Nothing is always gravy.

Victor: You've got to adjust your strategy in line with the market also.

Steve: Absolutely, absolutely.

Victor: Just coming back to your comments, Steve, with focusing on cash flow. We've had a lot of questions back from the audience in terms of, "Okay, where is cash flow?" I wanted to clarify that. Cash flow is not necessarily regional areas, it is still metropolitan. In this cycle we are still investing in the metropolitan areas. A cash flow property is different from one person to another person, because it needs to match your financials as to your ability to hold onto the negative cash flow a property might bring when you buy it. For someone only concentrating on cash flow, it could be that my entire portfolio can go above $200 negative cash flow per week, when I've taken everything into account. Someone else it could be $1000 a week. So for each person that cash flow figure is different.

When you're buying and then putting together this portfolio, you need to be slotting in properties in a way that will then, at a time when you're hitting that ceiling, when you're reaching your maximum negative cash flow tolerance before tax in a portfolio, you can actually bring forward that second reconstruction. In other words, I'm talking about your granny flats as an example.

So you need to always, as you're building your portfolio, every now and then tuck away a property that has got the potential to have this massive turnaround for a portfolio when it brings forth the construction. At times like this when interest rates are on the rise, when your interest-only loans are now no longer being reset as into stone they're being reset as principle and interest, that's the time to bring forth that construction to normalise your personal cash flow. Therefore, you are then living to fight another day and you're not having to sell down your portfolio or to refinance unnecessarily or, in the worst case, live on two minute noodles because that's the last think you want to do as a property investor.

Phil: So one thing that you can control as a property investor is the types of properties that you buy -

Victor: Absolutely.

Phil: - the assets you choose to hold. So what you're saying, because my take from that is, that when you're identifying assets, when you're identifying properties to add to your portfolio, you should be thinking about that upside in terms of an additional revenue stream from that, and that might be a granny flat or something or other. That's what you're alluding to, right.

Victor: Absolutely. And when you're buying a property, you need to know what impact it will have on your current cash flow once you've bought it and also thinking two purchases down the track in terms of, "Okay, will this now actually set me in a better position to buy again? Will it still have growth?" Because you don't want to be buying for the sake of buying because we are aiming for two very distinct things in a property portfolio. We're looking for cash flow which is the rental income, but we are also looking for growth and the two can go hand-in-hand so long as you can address the fundamentals. They might not fire at the same time, but so long as you adjust the fundamentals, there's increasing population, there's infrastructure going on in the area, it's in reasonable travel distance to your employment centres, you can get both of them. And that's something that you need to focus on.

Phil: So we've said that you can control what you buy, you can control when you buy, you can control who helps you identify these assets to buy with, but you can’t control -

Victor: The Right Property Group.

Phil: Yeah, the Right Property Group. You can't control what the government's going to do about it.

Victor: Absolutely.

Phil: Is there anything else that you do have armed in your arsenal of things that you can control to make sure you do future-proof. Is it how you get your property managed or is it the type of people you put into your properties to ensure that you're going to get this cash flow. What are other things?

Steve: I think the biggest ingredient that most people miss is their involvement.

Victor: Yeah, absolutely.

Steve: And this is the key.

Victor: It's not hands off.

Steve: Absolutely. It's not passive. The only one that says property is passive is, we talked to that before, it's just they don't have enough. It's hard work, it's a lot of work but it's rewarding work. So involvement means something as simple as admin, all the way down to managing your property managers, as an example. Property managers aren't there just because you pay them to do everything for you; you've still got to manage them. They're part of your team, so to speak. Making sure that you're abreast of, not just the federal economy, but a local economy – where infrastructure is going as Vic just mentioned, or where the employment hubs are, what's your property, is it time to build a granny flat. There's so much involvement to be a, want to call it a professional investor, where you'll get the best results. As opposed to being a passive investor where you just sit on the sidelines and things unfold. For a lot of people that's worked over a period of 20 or 30 years, but perhaps they've also had the cash flow to ride the ups and downs. But if you're going to be involved, then you need to be 100 per cent involved.

I know for ourselves and for our clients, we encourage them from a weekly basis is to redo their figures, is to check the market conditions, continue their education. Yeah from a professional point of view from our clients, we're continually doing reviews to help them help themselves, so to speak. That doesn't mean that we're the only people that do that, you can be responsible for your own destination.

Phil: One thing that I can attest to is having known you guys for quite some time and knowing some of your clients, they are all really involved people. I don't know anyone-

Steve: Absolutely.

Phil: I don't know anyone within your client base who are just a sit and forget type of investor. Actually, they live and breathe it.

Steve: Yeah. It's almost addictive.

Phil: It's funny, you know. And as I navigate the world of property investment doing what I'm doing, I come across all shapes and forms. There are some exceptional buyer's agents out there, but every single buyer's agent is slightly different. When I look at the DNA of the people who are part of the Right Property Group, they're just ... It's nearly biblical sometimes just how involved and engaged they are.

Steve: The focus, the focus, yeah. Biblical.

Phil: So when I look at how some other people invest, you look at some people who sell off the plan apartments that will talk about, "Hey, this is a high performing property and after all these different things, this is going to be your net cash position after it.

Steve: Yeah. So I typically sell the property based on the benefits associated with holding and depreciation.

Phil: On gearing, de-gearing, etc.

Steve: Yeah.

Phil: What do you do when you see that 'cause I know a lot of people get sucked in and I think, "Oh, I can just buy a property over here and I don't have to think about it ever again because it's going to be a great-performing asset." Do you have alarm bells when they say that sort of stuff?

Steve: We do and we get to say it, unfortunately, on a weekly basis times 10.

Victor: Yeah.

Steve: Having said that, it's not as though people, perhaps, that get caught up in that whirlwind are stupid, it's far from the truth. We've been to a lot of seminars or marketing seminars just to have a look see and sometimes we find ourselves going, "Oh yeah -

Victor: It makes sense.

Steve: But you wake up to yourself. There's an art form behind these guys, they're that good. There's NLP there's everything that goes with it and it's a numbers game for them. When you step back and we get to see some of the clients that have had some pretty poor results, there's a few fundamentals they haven't checked off and part of considering the subject is future-proofing. One of them is diligence. Obviously not just on the operator or the person who's giving you potentially the property advice, through to you broker, your accountant or the ad person selling the property. If it's a sale straight up it's never any good in my books. But also on the area, the property type, is there warranted demand for it. Then that's the beginning of their involvement all the way through to the cash flow sheets, monitoring your portfolio, your interest rates, product details and so on and so forth. Rental, market rental.

A really good example of being involved is with my portfolio you can ask, and actually everyone's guilty of this, you can actually get stuck in your own portfolio. You get blinded by your own numbers, shockline so to speak. Vic will look at my portfolio and he'll give me advice in terms of perhaps what I'm not seeing because I'm blinded by I'm so involved, and I'll do the same to him, as we do with every other client as well. You can't really see everything in your own scenario sometimes.

Phil: Just on that note then, often you need to sort of unpack or deconstruct your portfolio to understand what's performing real well, what might potentially be a lemon. When you saw you and your portfolio in that light and the topic is future-proofing your portfolio, when do you know you need to start making some drastic changes because where you're heading is not the right way and maybe need to start offloading some assets or changing your strategy?

Steve: There's a few key times that I think you'll start to get that gut feel. One is when you can't sleep at night. Perhaps you start to worry a little bit too much.

Victor: Absolutely.

Steve: And that's because the cash flow drain is starting to affect you. There's also a false positive rate as well and that's usually media sentiment. How strong it drives the consumer confidence which is what we're starting to see on the negative side of things at the moment by particular organisations. But when you actually sit down, things will really come to fruition for you. You'll get that hard jolt of reality is when you actually sit down and you do the numbers, and the numbers never lie.

Victor: Don't fudge the figures either.

Steve: You can only fudge them if you're doing a predictive look at your scenario, and the best way to really do it is looking back over the last year or the last quarter, it's done for you. Because people often don't take into account maintenance, vacancy, expenses that perhaps weren't accounted for, or the tax variations, something that didn't work out there. There's a number of things that will start to trigger you that things quite aren't right. But you should never get to that stage if you've got that involvement and that's constant reviews. Even if it's just yourself and your accountant or just yourself and your wife or your partner or whatever. Sit down, go through the numbers, but be real. Where people go wrong is that they start to average out the numbers. So if your interest rate, as an example, is 4.57 per cent that's what it is, it's not 4.5 because out of a portfolio, that's a massive difference. As an example, your expenses are your expenses to the cent. Be real.

Victor: Another big thing when you're sitting down and doing all the numbers is looking at where your loans are at. Some of them would be fixed and they be coming unfixed. The reality is that with most of the loans that are coming unfixed now, they would also be coming off interest only repayments as well. Just doing loose figures, if you had a $300,000 loan that was coming off interest only, it was 4.5 per cent interest rate, to go into principal and interest, you've got to find another $256 odd dollars per week per property, and we know now that interest rates are barely at 4.5 per cent now, so they're definitely going to go up.

Let's say you're fixed rates are going to come to fruition inside next year, we've got to start planning now so that we're not getting to a stage where we're scrambling for money, scrounging around for money when all of our loans go off fixed rates and turn also into principal and interest. So if something is going off fixed next year you start the measures now. Earlier I said your granny flats you would start, your construction of granny flats now so that by the time your fixed loans come off it's fixed, you've also got that granny flats cash flow coming in. Or it could be that you're also starting to explore other financial alternatives, other lenders.

And sometimes, even in my portfolio, what I've done is I've had a property that is coming off fixed in about three months’ time, I've actually taken the hit now and paid out the fixed rate now so I could refix it, so I've got another three years on it. Because I knew that by the time it came off fixed rates, there's a very strong chance that there might be a few more changes in the mortgage arena which may mean that I may not be able to qualify for the loan. So it is easier than and more financially prudent to actually pay that little bit in terms of break fees and refix the loan so that I've got interest only for another three years. So I've got three more years to plan for it.

Phil: See, my observation on that, Victor, and I know you've got a reason to be logical but you know the numbers inside out so the fact that you know that you have one of your loans coming off a fixed period and you make that decision now, ready for the future, that's very specific and you're a sophisticated investor but a lot of people aren't that intimately connected with their portfolio and might not know. So a granny flat, for example, how long if we said today, I'm gonna get a granny flat built in one of my properties, how long till the things built generating income? At least nine months.

Victor: At least nine months. In the best case scenario, two months to plan, three months to build.

Steve: And that's if you can get a construction loan, you bought it right and worked backwards from there. But I think coming back to this whole involvement thing, if no business would ever run themselves without budgeting, creating a budget, forecast budget, without knowing what they'd cost to operate is and some forward cash flow projections, every single property that you own as an investor is an individual business and the portfolio is just the bigger business. So treating it like a business is absolutely paramount and that is where people fundamentally go wrong, is they're not serious related to cash flow projections.

Victor: Absolutely. And the reality is if you're really focused on making a good progress in investing, what you need to know is actually know your numbers off the bat. So if someone wakes you up at 2 a.m. and says what's this particular property costing, you should be able to regurgitate that straight away and it becomes really simple. If you look at your portfolio on a weekly or fortnightly basis, I look at my portfolio on a fortnightly basis and I do my admin work on a weekly basis, but I look at the portfolio on a fortnightly basis 'cause that's when I get my rental statements and it gives me a trigger point to look at my properties, I'm looking at it and making sure that all the cash flow is good, but also for planning to say, "Okay, these properties are coming off fixed." And it's simple record keeping, just a simple Excel spreadsheet would get you that. That's one of the things that we give to our clients is a Google sheet so when they come on as a client and once they've bought a few properties, we actually make available the tracker, as we call it, which I use personally, and Steve uses, personally, for tracking our portfolio to where the numbers are and where the loans are sitting. Your earlier comment that I knew beforehand when my loans were coming off fixed was a simple Excel spreadsheet.

Steve: But it's no excuse not to be organised, it's something that you can control.

Phil: Especially with today's technology, right, too? Like setting alarms and bits and pieces. One of the big ones is insurance.

Victor: Oh, yeah, big one.

Steve: The amount of people that we see where their insurance has lapsed.

Phil: I've been guilty of that in the past.

Steve: Yeah, I was looking at you.

Victor: Here comes the bullying again.

Steve: But it's that sort of stuff. If you take a worse-case scenario. Imagine if your house burnt down and you hadn't renewed your premium by three days. It's just the most basic future-proof you -

Phil: This is it. It doesn't have to be that complicated. It is actually pretty basic. It's just some simple rules that you need to follow and set up. Perhaps some steps at the end of the day.

Steve: So you need some way to sort of identify red flags.

Victor: Absolutely.

Steve: That's what it's about. It's about spotting differences which probably need your attention.

Phil: Absolutely.

Steve: And it could be your rental statements, as an example. Or it could be your insurance as we just talked about, interest rates. There's a mountain of things, there's probably a hundred different things you should be monitoring all the time, 'cause that's how serious it is. People take it serious and that's a major fundamental of future-proofing your portfolio.

Phil: If you have a future-proofed portfolio what does that mean?

Steve: It's going to be a portfolio which is going up in value in terms of capital growth, and you're going to be able to underwrite the cost of holding that property with good cash flow.

Phil: So you want to be sort of strong towards?

Steve: You want to be able to take care of business in the worst possible scenario.

Victor: Be prepared for GFC and be able to weather that out. That's how simple it is.

Steve: It sounds as if it might sort of prepare you if one came along. I think, once again, coming back on an earlier statement that one of us said, is it's not how the property performs today, it's how it performs in its worse possible scenario. That's the testimony of a really good property. Or your portfolio. At the end of the day, even though we talk about cash flow is king, and that doesn't mean just the rent, it means your expenses as well, it also means ... It doesn't mean that just because you've got cash flow, as Vic said earlier on, that you got no growth, because we're not talking about regional one-trick pony towns here or mining towns, we're just talking about good fundamental cash flow in good fundamental areas, and you can have both. You just need to be able to ride out the ups and the downs and actually even be in a position when everybody's going in one direction, you can potentially be going the other way.

Phil: Often that's when you can get the best-

Steve: Absolutely.

Phil: Properties is when things are in a state of flux. I know you guys are very realist in terms of property investing and if you listen to some parts of the media, but not us – obviously but there's a lot of doom and gloom merchants out there that say that the whole world is about to fall in, that Australian property is so overpriced that a big bubble's going to burst and everyone's going to end up in a lot of strife. What's your sort of take on all that in terms of future-proofing your portfolio?

Steve: A strain in residential property as an asset class?

Phil: I know your answer is going to be, "It depends." Is it a sound asset class that you guys have a lot of confidence in investing in moving forward?

Steve: I think it's a very sound asset class, generally speaking. 'Cause everybody needs accommodation, everyone bandies that around, but it's the truth. I think there are certain portions of the market that will struggle over the next five to six years. There are certain portions of the market that will continue to perpetuate, because there are different cycles as we all know and we all keep talking about within Australia and even in different states. There are some areas that will be oversupplied and already are, and we haven't even started to see the statistics or the data on that yet. But in terms of this great big bubble crashing and so on, part of me says it will be what it will be. If there is this big bubble crash, let's liken it to the GFC, there are certain areas that lost a great deal of value and there are certain areas that didn't lose that much value at all, it just comes down to the area that you pick. Even if does, let's go worst case scenario and be pessimistic and doomsday, even if there is a crash, if you've got your cash flow in order, no one ever really foreclosed on you if you didn't have adequate equity, it was all about cash flow.

Phil: So the banks wouldn't come banging on your door saying that your negative equity if you're paying your mortgages and get enough sleep.

Steve: If you've structured yourself correctly-

Victor: In the loan-to-value ratios.

Steve: And the loan-to-value ratio is where it should be. If you're at 120 per cent then what do a random check well then you have a course, but you shouldn't be in that to begin with 'cause you shouldn't have over leveraged to begin with which is all about future-proofing. Having buffers and so on put aside. I've never come across ... You know, banks ... If you go back to the GFC they didn't take other people's properties because of lack of cash flow. It wasn't lack of equity, it was lack of cash flow 'cause you didn't pay your mortgage. And those people who hung onto their portfolios even if they were in the worst possible shape during the GFC, where are they now?

Victor: So if you look at the GFC in the hard times like that, if you bought properties in fundamental areas of supply and demand, easy travel distance to work and all this sort of stuff -

Steve: Pretty much the assets that -

Victor: Pretty much, yeah, you'll generally find after a six-month lag that the rents in that area absolutely skyrocket because less people are buying, people are compressing from the more expensive areas down to these areas

Steve: Population growth -

Victor: Population growth -

Steve: No development -

Victor: So it all adds up. It helps increase your cash flow at that point in time. Of course you read that high interest rates climbed at the time, but what happens once the rents increase, they rarely come down back to where they were before unless you're in a mining town or something like that, right? But in these fundamental areas they really come back to where they were before. You'll have massive increase in rent, then they've reset by about 5 per cent or 10 per cent. But following that because the yields are quite high, you'll then start having a run in terms of equity. In other words, the equity will start increasing rapidly. The values will start increasing rapidly because the people see that yield and they start jumping in. So if you look at your Blacktowns and Campbelltowns in New South Wales,

Steve: That was your first round properties

Phil: Exactly that scenario

Steve: I don't think it, everyone talks doom and gloom. I don't think it's as bad as it is. It’s always summer. If you’re a weather forecaster and you’re in the middle of a drought you keep saying everyday it's going to rain, well sooner or later you'll be right. It's not that.

Phil: People may say it's that serious, and it is but come on, let's be real. Let's not get carried away.

Victor: Bottom line, you're going to diversify your portfolio across several states that are in an upward trend, make sure you buy in fundamental areas and addressing, not necessarily your neighbor's cash flow and their portfolio but your own portfolio, making sure that the properties that you are buying, you can actually afford to hang onto in the hard times.

Steve: And also, 'cause I know we're running out of time, but it also may be time to change asset classes. So you might already have a very good looking portfolio and it's time to sit on your hands and do nothing and consolidate, but yet make your money work for you, I don't know, in shares or bonds or whatever. It's about having an overall understanding of your whole financial scenario and we don't for one minute think property is the only way to go it's just a part of your financial future.

Phil: Okay. So quick summation, Victor. Future-proofing portfolio, what's the key?

Victor: The key is diversification. The key is looking after your numbers. That's what it boils down to is if you know your numbers, you know how to make minute changes to your portfolio so small tags along the way so that you straight out your goals and then taking a step back from there, don't buy for the sake of buying. Buy only after you've set a plan and a goal and then you can buy in good fundamental areas that suit your financial circumstances.

Phil: Steve, I need to start at the beginning. Have a plan and then be involved every step of the way, every minute of the day.

Steve: Good. And I'd summarise this chat in terms of future-proofing your property. The best way you can do it is buying the right property and the right property has good cash flow, the right property has good capital growth so this is what you should be identifying, the secret of future-proofing your portfolio is, I agree with you Victor, is diversification.

Phil: I think the final point is something that resonated with me, what you said Steve, is all about being in control, about being involved. You can't sit there idly on the sideline and wait for this magic to happen. You actually need to be in there pulling levers, pressing buttons and breaking a sweat. So I enjoyed the chat, it's good. We're in a state of flux right now in terms of the market we spoke about. It's getting harder to get financiers, investors, and the government is looking to just manoeuvre the market in a particular way with some different mechanisms that they use in terms of changing depreciation and you can't travel anymore and get a break off it and all this sort of stuff, so just remember to concentrate on the things you can control and don't sweat the stuff you can't control too much as long as you know how you're going to sleep at night.

Thanks for joining us everyone. What do we do to have a chat with you guys? What's the website?

Victor: It's www.rightpropertygroup.com.au or tag us on our Facebook page or send us an email at [email protected]

Steve: Excellent. Good. We'll be back in next month.

Phil: Awesome.

Victor: Thank you.

Phil: See you then. Bye, bye.

Thank you.

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