Following the acquisition of its last property purchase, the Smart Property Investment team has moved on to even bigger and better things – and in this episode, buyer’s agent Steve Waters returns to share an update on the portfolio and tell us what’s next for the team.
Tune in as he and host Phil Tarrant open the books and reveal all – from acquisition costs, to “boring” assets, risk mitigation, cash flow management and yearly income, as well as the inside scoop on a new property that could take the team’s investment strategy to the next level.
You’ll hear all of this and much, much more in this episode of The Smart Property Investment Show!
If you liked this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by 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 insights!
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Keeping a finger on the pulse of your portfolio
Greens’ policy ‘out of touch’ with Queensland rental market
Low housing turnover signalling ‘warning bells’ for housing industry
Episode 5: From 12 to 100 properties – how this investor will achieve his goals
Episode 4: Property investor talks research, teamwork and balance in his portfolio
Episode 2: Buyer's agent forecasts what’s to come for Aussie property market
Episode 1: ‘How we achieved financial security through property’ – the Property Twins reveal all
View all episodes of The Smart Property Investment ShowEpisode 5: From 12 to 100 properties – how this investor will achieve his goals
Episode 4: Property investor talks research, teamwork and balance in his portfolio
Episode 3: Portfolio update: SPI opens its books to reveal all the nitty-gritty details
Episode 2: Buyer's agent forecasts what’s to come for Aussie property market
Episode 1: ‘How we achieved financial security through property’ – the Property Twins reveal all
Phil Tarrant: G’day everyone. It's Phil Tarrant here. Thanks for joining us on The Smart Property Investment Show – most recent episode, and today I made a commitment last time that I would start doing a regular portfolio update with greater frequency, and I've decided that now I'd do it on a weekly, no, a monthly basis. I'm getting some stern looks there from Adam, our AV guy who's going, "What's going on?" I know this is something that our listeners really enjoy, to go back to the original story with Smart Property Investment. Yes, it's a media brand, but when we looked at the marketplace and the stories you see within property investment it was always too good to be true, and we thought, "Hang on a second, a lot of these stories just aren't right."
We thought that as part of delivering market insights and intelligence news around property investment, we'd also warts and all show what our property portfolio is doing. We've built a portfolio within Smart Property Investment. It's a good portfolio, and you can have a look at it online, smartpropertyinvestment.com.au. There's plenty of stories about what we've bought and how we've bought it. I'm enjoying getting away from the written word and talking about it instead, and I think we can cover a lot more ground discussing our portfolio. The last time we spoke about it was on the 27th of July, and if you go and check it out, look through the feed wherever you're listening to this podcast right now, you will see it. 27th of July I had a chat with my buyer's agent who joins me again today, Steve Waters.
We went through our latest purchase, and what I wanted to do this month is to just give you a bit of an inside view on what we've been doing over the last month, how we've been tracking and progressing, and importantly what our next moves are going to be. Steve, how you going?
Steve Waters: I'm going well, mate. How are you?
Phil Tarrant: I'm very good. Thanks for coming in.
Steve Waters: Welcome.
Phil Tarrant: We just come off the back of about an hour of us just sitting around talking about property and looking through our portfolio, which I do enjoy. It's probably one of the favourite things I do. Whenever I look at my portfolio and chat about some of the dynamics of it, it's a fun thing to do, and it's fun because thing's making money, right?
Steve Waters: Absolutely. You'd hope so anyway.
Phil Tarrant: We're not fighting fires with it, really, are we?
Steve Waters: No. Not yet.
Phil Tarrant: In terms of fighting fires and I'm going to touch on it at a point in time probably over the next couple of weeks I'm going to ask our accountant to come in and have a chat through some of the financial dynamics of our portfolio from a cash flow and also taxation perspective. That's going to be with Munzurul Khan who has been our accountant since we started developing this portfolio, and he's got some interesting insights about it all. Top line numbers where we're sitting right now, we did a bit of a rehash. We've had some bank vals lately as we prepare ourselves to do some refinance to buy some more stuff, which I'm going to unveil in a moment.
Steve, our position at the moment in terms of total portfolio valuation is $6.15 million, so that's grown from scratch since August 2011, so we've had the pedal down. We've been moving pretty quickly, and I think we've been fortunate that we've been investing in the right types of property at the right time in the marketplace, so have we been lucky? Perhaps a little bit, but have we been clever? I'd like to think so.
Steve Waters: It's a bit of timing and time in the market. I think you have to have them both.
Phil Tarrant: You need to have both.
Steve Waters: You've had it.
Phil Tarrant: We have had it, and if you put that against an interest rate environment which has decreased since we started investing from high sixes and sevens, I think, all the way down to...
Steve Waters: All the way back to the beginning.
Phil Tarrant: Down to low fours, which is what people have been getting most recently. They're all back towards 5% now, but our total debt position including all the refinancing, so as it sits as of today: $3.915 million which gives us a total equity position of $2.234 million and we also have a bit of cash sitting in an offset account, which we are going to use to do some more buying. Our total equity position: $2.394 million, an LVR, Steve, of 64%.
Steve Waters: There's nothing wrong with that.
Phil Tarrant: It's okay, isn't it?
Steve Waters: It's pretty good. It's pretty good.
Phil Tarrant: Running through these numbers a little bit earlier, one of the challenges we have in our portfolio, and this is something I'll touch on when I get Munzurul into the studio is cash flow, and that's always a challenge, so we're fortunate that we've bought good properties which have delivered pretty reasonable yields, and we'll run through some of them in a moment. Our portfolio cost us a little bit of money before tax, and that's probably a nature of a growing portfolio. If we stopped doing what we're doing right now and in two, three years’ time it'd probably be nice, neutral, even positively geared, but because we have the pedal down, we keep refinancing to secure our next assets, we're running in a before tax situation portfolio's costing us a little bit, but after our accountant Munzurul does what he needs to do it sits at about a neutral position, so all in all it's not a bad little portfolio.
Steve Waters: It's a pretty good portfolio, and I think we can't lose sight of the fact that there's a couple of reasons why it's negative. There's one or two particular properties in there that are the bulk of the negative cash flow, but also because we've continually over the years tapped the equity, therefore increased the debt just to be able to perpetuate or leapfrog, whatever you want to call it, into the next run of properties. There has to, well, not that there has to be, but there's a very good chance that anyone doing the same thing you will run into a negative pre-tax cash flow position.
Phil Tarrant: There's nothing wrong with that.
Steve Waters: Well, as long as you haven't exceeded what that threshold is in terms of negative cash flow, which is one of the important things when you very first sit down and put a property plan together is working out what is your tolerance for negative cash flow pre-tax.
Phil Tarrant: We got this portfolio. There's now 12 properties in it, and if you haven't tuned in before and you don't really have an appreciation for this portfolio and where it's located, we have properties, and I'll run through them really quickly from ... Well, I'm looking at the big spreadsheet here, so I'm going to say from left to right, but this is in terms of time when we purchased these moving forward, so we started off in North Saint Mary's which is a suburb of the Blacktown Council, out western suburbs of Sydney. Then we're in Mount Druitt for two properties back to back, two two-bedroom apartments that we secured.
Then we went out to Ambarvale which is within the Campbelltown area, one of the satellite suburbs probably only about five minutes away from the Campbelltown CBD. Then we're in Cambridge Park, which is near Penrith. Then we went up to the Central Coast of New South Wales into Berkeley Vale. Then we secured a property in Mount Ku-ring-gai which is near Hornsby, and that's the most expensive property in our portfolio at the moment. Then we moved up into the Queensland market. We purchased in Logan, then Springfield. Then we secured an asset down in Glenroy, which is a suburb of Melbourne, and then we moved down into Wollongong. We secured a place in Port Kembla, and our most recent purchase was back up in Queensland, a place called Kingston which is part of the Logan Shire. It's pretty good spread in the portfolio.
Steve Waters: They're pretty diverse. Yeah.
Phil Tarrant: All those are at different levels of debt position. As I've said beforehand, our LVR across the whole portfolio is 64%, but when I look at that individually we have some properties with LVR positions of 45%, and then we have some properties with LVR positions at 75%-ish. That's pretty common for a portfolio like this, isn't it, to have that variance of LVRs on particular properties?
Steve Waters: It is, and it depends on how much that you've tapped the equity in it, and the figures are quite obviously showing the growth gravy train, so to speak, throughout certain areas of Sydney, and then of course Brisbane and the Central Coast. Some of these properties we haven't touched yet to utilise the equity position or the available capital, and some of course have, so their LVRs will be a little bit higher, which is quite natural when you're perpetuating your portfolio.
Phil Tarrant: A lot of people might think that a 75% LVR is on the high side and quite risky, whereas some investors will think, "Hang on a second, you've got all that equity in there. You could be buying more properties and having a bigger portfolio." What do you say to that, Steve?
Steve Waters: It's your own personal sleep at night factor. When you're beginning a portfolio, a lot of people, well, you need to perhaps leverage a little harder than your portfolio as it matures, because capital's that finite resource, and so you need to utilise it to keep going. Once you get to a baseline of properties, you don't have to really ride that LVR position too high, depending of course on how hard you want to go, but I'm not a fan of continually being leveraged high. There's no safety in that, and especially as you leverage higher with rates going up, your cash flow position starts to deteriorate as well.
Phil Tarrant: A lot of people would be concerned, I think, when you look at the current market and you listen to the doomsday merchants and some media commentators. There's a lot of good headlines around despair, and we've been talking about it for five years now how the market's going to fall to pieces and everyone's going to end up with no money. Hasn't happened yet, but I think the current environment we sit within, when you look at some of the drivers or dynamics of it you've got lenders which are under pressure from the regulatory body, APRA, to ensure that the minimise growth within their investment lending portfolios. That's had an impact now. It's more expensive to get money.
Most of the banks have increased interest rates for investors, irrespective of the fact the RBA hasn't done anything with rates, so they've been ratcheting up rates, and also the banks now are servicing or looking to do serviceability metrics on much higher levels than what they have done in the past, 7% principal interest. It's getting harder for investors to secure money. Then you also have dynamics around some parts of Australia, Perth, for example, are going through some trying times from macroeconomic areas and situations. You have markets like Sydney which has many ways topped out. There's not much growth left, but you come back to the reality that there's more people coming to Australia, there's more pressure on housing, et cetera, et cetera.
This ongoing debate around is the bottom going to fall out of the market and is everyone going to end up on their arse...
Steve Waters: On their backside. To be honest with you, I don't think you can just throw a blanket across the whole of Australia and every single one of its markets and think that there's some common factor there. As we always talk about, there's markets within markets, but even more so the states are at different parts of the cycle more so than perhaps ever at the moment. Then when you drill down, if you look at the CBDs throughout the country, probably excluding Sydney most of them are and an oversupplied situation, but as you go out further to the suburbs and perhaps even more so the detached dwellings, they're still percolating very, very nicely, obviously talking about Sydney as well.
Is there doom and gloom? I would think not. I think there'll be a softening of the market in certain areas for sure, and there probably needs to be, and we're going to look at maybe periods of no growth for some years, which is okay, but it's all around, at the moment it's all around finance. It's one of the most important factors of investing is the cost of money, and as you say at the moment it's harder to get money as an investor. They're decreasing LVRs and they're tightening up on serviceability calculators or calculations, and I think that's okay as well. There was probably a period there where money was a little loose, and they need to reel it in so that we don't go to this boom-bust scenario. Investors don't want that. We want longevity within the market.
Phil Tarrant: Yeah. We want things to be sustainable.
Steve Waters: Absolutely. Hundred per cent.
Phil Tarrant: Things are sustainable, you can make them scalable, and that's the idea because property investment's creating wealth through property. I've talked a little bit about debt positions and valuation positions, and if you're quite new to property investment you might be getting bewildered by all of these terms. Go and check out smartpropertyinvestment.com.au if you're unsure about some of these themes or principles we're talking about. Your total debt position is how much money do you owe? Your total valuation position is what is the collective value of your property portfolio.
Let's have a little chat about income which is important, so the idea in property investment, Steve, to make it as simple as possible is to buy properties that are going to go up in value as much as possible and is going to cost you as little as possible to hold it as they go up in value.
Steve Waters: That's as easy as it gets.
Phil Tarrant: It's as simple as it gets. What we're talking about there is that you want to make sure you're generating income, rent, so you can hold these properties, so it doesn't put pressure on you and you don't have to tip in money yourself. When you start talking about how well a property or a property portfolio is performing, you talk about yields, and before we come on air we had a good chat, played around with some numbers and to give our listeners some context for how we'd look at our portfolio, you can look at it in a million different ways. How well is this performing right now? Is it good or bad?
Well, going up in value. That's a good thing. How much is it costing us to do that? It's costing us a little bit, so how do we measure whether or not it's going well or what are the benchmarks we can use to do so? Now, look at our portfolio in terms of how much income it generates, and at the moment it's about just over $20,000 a month in income, so that's $240,000 a year. That's money coming into our bank account. How much is going out as part of that? Now, I'll look at our total repayment amount every single month is about $14,000 or $178,000 a year. When you look at how much money is coming in versus how much money there needs to go out, we're left with about 27% of everything that we earn. The rest of it goes out in the mortgages, then we're left with 27% of it, which we've got to use to pay for other stuff.
Steve Waters: Rates, insurances. All the good stuff.
Phil Tarrant: Other stuff, rates, insurance, repairs and maintenance.
Steve Waters: Vacancy.
Phil Tarrant: Portfolio costs, vacancy, accounting fees, et cetera, et cetera. These things start adding up quite a lot. This get you to your position where you talk about are you positively geared or are you negatively geared, and most investors who are new to the market and building a portfolio are positively geared or are you negatively geared. That's the -
Steve Waters: In today's market for sure.
Phil Tarrant: In today's marketplace. Now, we talk about rates going up, that's going to hurt a lot more. It's going to cost you more to hold that money, and we could easily do the calculations. I won't do it now, but if you do it on your own portfolio, if you're paying your debt at an extra per cent above what you're paying right now, if you look at this here, it's probably going to remove that nice little buffer we have there pretty quickly, right?
Steve Waters: Absolutely. My fear for a lot of people is that perhaps they've got used to very cheap money, so we're talking about low fours as an interest-only repayment, and as rates perhaps get up to their five and a half somewhere in the future, are they still going to be in a position to control their asset? If you go back to the GFC which was our worst time in our living history perhaps, not many people lost their portfolios or their assets for lack of equity. It was from a lack of cash flow. This is why we're always talking about why cash flow is so important, and we don't particularly mean it's got to be positive cash flow. That's awesome if it is, but not sacrificing growth at the same time. It's more about controllable cash flow, and in this scenario and the barometer or the benchmark that property investors talk about is yield.
Phil Tarrant: We have four different yields we talk about internally.
Steve Waters: That's only because we get a little bit OCD and we drill right down.
Phil Tarrant: I know, but let's have a quick look at that. I have the first one here is called the book rental yield. That's how I call it, so this is the yield against the purchase price, so this -
Steve Waters: Which is the standard...
Phil Tarrant: Which is the standard way to look at it. What you do, you work out what your rent is, you times it by 52, then you divide it by how much did you buy your property for or your portfolio for, and then you get a number. Our number is 7.3%. That's pretty good.
Steve Waters: That's awesome.
Phil Tarrant: The issue I have with that is that it doesn't account for a whole bunch of other stuff to establish these properties, so you're not talking about buyer's agency fees if you use them. You're not talking about stamp duty. You're not talking about conveyancing costs.
Steve Waters: Trust set up.
Phil Tarrant: Trust set up.
Steve Waters: Ongoing costs.
Phil Tarrant: All that sort of stuff, so another measurement we use is that I call it the net rental yield, so this is the same calculation: your rent times 52, but divided by the total establishment costs for these things, so the purchase price plus the other stuff.
Steve Waters: About 10%.
Phil Tarrant: About 10%.
Steve Waters: Five to 10%.
Phil Tarrant: Our number there is 6.6%. That's more of a realistic take on where our portfolio is, and 6.6%'s pretty good.
Steve Waters: I think it's important that you do do that, because they are a cost. It's not something that you're making up, and most people don't know what their true position is unless you throw everything into the pot which is clearly what you've done.
Phil Tarrant: Yeah. Have done. I have another little measurement here, I call it the market yield, so this is our current, against the current valuation. Our total rent over our current valuation, so this number's a lot lower. It's 4%. That's on the basis of what are these properties worth today.
Steve Waters: This is something that a commercial, perhaps, investor would look at and take into account, and before everybody rings up and starts slamming me over this, I think it's a, be it something that you want to know, I don't think it's really important in the scheme of things against market valuation, because at the end of the day, and we'll talk about it in a minute, it's really what the debt's costing me, which is my biggest expense, versus the current income for the property. Once again, we're creating these different metrics, and that's only because we like to do so, but there are a lot of people out there once again that are just doing it on the standard purchase price, and I think that's short changing themselves or cheating themselves, more to the point.
Phil Tarrant: If you got some time on a Sunday arvo and you want to have some fun, try and do this on your own portfolio, because the other indicator here, I call it a debt yield, which is against the size of the mortgage.
Steve Waters: For me that's the big one, because at the end of the day my debt's my biggest expense, and if it's costing me 5% but my gross yield is 7, what was it, 7.4, that's not a bad spread to take care of everything else. I know all the commercial guys and other investors and perhaps even accountants would be on going, "That's not the way to look at it," but for me it is because I might have controlled the property for 15 years and the debt's stayed the same.
Phil Tarrant: It has stayed the same, therefore that number's going to be really big, but then if you have a little cash cow that you keep milking and you keep going back and drawing equity out to 80%, it's probably going to be a lot higher there, right?
Steve Waters: Or, on the other side of the coin, if I've had a property for 20 years that I bought for $100,000, it's now worth half a million and the rent's $350 a week, my value to income percentage isn't going to be that attractive.
Phil Tarrant: It's good. These are just some of the ways, for our listeners, that we look at our portfolio. You know what, they're just numbers. What does it mean? Now, I go back, is it -
Steve Waters: What's in my pocket and what's not?
Phil Tarrant: What's in my pocket? Is it hurting and am I worried about it? Am I sleeping well at night, and I'm not too concerned at the moment even though we're in an environment where things are changing quite quickly, but I'm satisfied our serviceability, we can weather any increases in interest rates and...
Steve Waters: You got the buffers parked aside. You got the risk mitigation.
Phil Tarrant: We do. We do. Another number I have here which I like looking at is growth since purchase across our whole portfolio, and it's very small. That's 85%.
Steve Waters: Since when? 2011.
Phil Tarrant: Since 2011. Then I look at the spread of some of these properties from left to right again. Remember I went through those suburbs. 141%, 82%, 94%, 118%, 192%, 139%. See 192%, that's huge, right? That's that property out at Cambridge Park.
Steve Waters: That's Barry Street, and that's an anomaly. In fact, they probably all are because doubling these sorts of numbers in what, four, five years, it's above and beyond, and so as I said earlier on, I think there will be a period of zero to very little growth, and that's how we're going to get our averages...
Phil Tarrant: Back to where they should be.
Steve Waters: Yeah. Over history.
Phil Tarrant: Then you look at some of these others: 65%, 51%, 44%, 42%. This place we have in Port Kembla has gone really well. It's 100% over a couple of years.
Steve Waters: Over a couple of years. Did you ever think though that you'd be looking like, "42% growth over a couple of years, that's pretty bad"?
Phil Tarrant: Yeah.
Steve Waters: Compared to...
Phil Tarrant: Yeah. A lot of people would say, Steve, "No. It's impossible. You can't do this. It's just not realistic." What this is, this is a case study in buying at the right time and buying the right type of stuff at the right time.
Steve Waters: And having the goal to begin with the strategy and then implementing it.
Phil Tarrant: Yeah. It's good. That's where we're at. We can keep drilling down into this, but if anyone's got any questions they can contact the team at [email protected] Anything that's specific, we'll run you through it, but we're going to update everything online as well. Smartpropertyinvestment.com.au, go and check it out. Steve, I know everyone's probably sitting there going, "All right. That's all very good. We got 2-"
Steve Waters: Yesterday's hero.
Phil Tarrant: "$2.3." Yeah. "$2.4 million in equity. We're just one of the lucky guys who experienced a boom in Sydney, and we've made all this money out of property." We're keeping the pedal down. We keep buying. We keep focusing on growing this portfolio. The idea of this portfolio is to, number one as I mentioned beforehand, paint a picture for how you can go about doing this. As you can see we haven't bought any crazy, off-the-plan purchases within this portfolio. We're not buying a house on land packages out in -
Steve Waters: Or mining towns.
Phil Tarrant: Or mining towns. This is very boring.
Steve Waters: Extremely boring but it works.
Phil Tarrant: It's extremely boring. Boring but it works. When you look at actual acquisition costs for this portfolio, the most expensive property we bought about $600, $650 I think it was, $665,000. A property up in Mount Ku-ring-gai. The cheapest property that we've secured is $145,000.
Steve Waters: Big spread.
Phil Tarrant: It's a big spread. That was in Logan Shire. You know what, $665,000, that's the most expensive thing we've bought. We bought that in 2013, so that's now a good three and a half years ago. Is that right? Yeah.
Steve Waters: What's the yield on that one? 11% or something.
Phil Tarrant: No. The yield on that one, one of our lowest, 5.2% is our most expensive one. Some of the other stuff's at 11%. Sorry, the one which we secured cheap...
Steve Waters: Cheapest one's 11%.
Phil Tarrant: 11%, so gives you a bit of an idea. I want to keep going with this, and these boring assets, they are the foundation of a really, really good portfolio. I think a lot of people, Steve, get carried away and they think, "I want to be a property bazillionaire overnight," and...
Steve Waters: Developer.
Phil Tarrant: ...they want to develop and go crazy and do multiple properties, and all that sort of stuff. You can't even start thinking about that sort of stuff until you got a good bedrock portfolio that gives you sustainability in cash flow, sustainability in terms of lending capability, and also an asset that you can potentially look to refinance to help underpin the growth of more assets, and that's where we are right now.
Steve Waters: Absolutely, and it's been, what, 2011, so it's been a ... Look, on one side of the coin, it's been a quick journey, but everything has been put in place and we've ticked it off, crossed the T's, dotted the I's, so on that side it's been methodical and quite slow compared to perhaps other people that went all in in a suburb of, say, Mount Druitt and doubled their money in two years.
Phil Tarrant: If they've done that, great.
Steve Waters: Awesome.
Phil Tarrant: I'm sure a lot of people have done very well in that regard, and that's what we'd like to see happening, but we're at the point right now with the growth of our portfolio that we don't really need too many more of these, what do you want to call them?
Steve Waters: Foundation.
Phil Tarrant: Foundation type properties or cookie cutter type stuff, cookie cutter in that they've suited our strategy thus far, so buying under market value properties in affordable areas where we can manufacture equity through renovation or just by buying well, and it doesn't cost as much to hold them. That's what we've been doing. You know what, we'll be opportunistic and if these things pop up in the future we'll probably grab them, but we're looking for portfolio additions now, and we mentioned this last time we got together, last month, and you can check out the podcast, 27th of July is when it came out, where we're looking for things with a bit of an X factor on it now, and I think we've found one, haven't we?
Steve Waters: We've found it. Just going back to perhaps these foundation properties, it's those that have enabled you to go to this next level so to speak, something outside the square, something that I suppose every investor aims for at one point in time, but you've got to crawl before you walk and then run. This is outside the square. It's in Brisbane. Still, it's north of Brisbane, and we have managed to secure five two-bedroom units, so a block of units in entirety for let's call it a mill. 25 minutes, if that, to the CBD of Brisbane, north of, and returning seven point, what was it, 7.1% yield, which in anyone's terms is just fantastic.
Phil Tarrant: It's really good. To give some context to this purchase, so this is an entire block.
Steve Waters: Entire block. Yeah.
Phil Tarrant: Entire block, and all of these properties are strata’d, so it means that they all have their own title, but we control the lot because there's no one else on these properties. There's only five properties on this. There's five properties within this block of land all individually owned now by us. We've exchanged contracts and we're gearing up for settlement in about ... Next time we speak, we'll be settled, I imagine. Won't we? Yes.
Steve Waters: Yeah. We'd be very close to it.
Phil Tarrant: Very close to it. What really took my fancy with this particular addition to the portfolio, so we've been looking for something like this for a while now, and they're few and far between these type of things -
Steve Waters: We don't get them, and the problem with unit blocks at this time in the cycle is that every man and his dog wants them, whether it be the private investor or the listed and unlisted funds, especially looking for a 10 to 15 year play. Often people have deeper pockets than us, so we go through hundreds, and hundreds, and hundreds of these and very rarely do we get them. We were quite lucky with this one. It wasn't some funky, off-market deal. I'd love to lay claim to that, but it wasn't. This was a complex or five units, the entire complex that hit the market at say midday and by 12:10 we had all but done and dusted the negotiation.
It was more about knowing the area, knowing that perhaps the agent was a little negative on the price or more so the vendor giving the instructions and so we were able to quickly secure it, and that's what it's all about.
Phil Tarrant: We'll actually unveil the location once we've settled the property, so suffice to say it's been exchanged and when you look at the numbers coming in terms of cash flow, and we've been looking for assets to add to our cash flow position, each of the properties rent for about between...
Steve Waters: $275.
Phil Tarrant: ...$270…
Steve Waters: $270, $275.
Phil Tarrant: ...$275. The combined rent will be $1,365 so an annual rent $70,980, so as Steve said on a valuation of, well, it's $995,000 bucks, a million bucks, the yield is 7.13%. I'll have them every day of the week.
Steve Waters: It's not in a one-trick-pony town, so this is metropolitan Brisbane, and it's quite close to the new precinct which is happening within, so the belt, the train line heading up towards Redcliffe, so this is a foundation piece of infrastructure for Queensland, probably a long time coming. Well under way.
Phil Tarrant: Well under way.
Steve Waters: Parts of it complete, but there's a lot more infrastructure, and I suppose big ticket projects if you will that are due for completion in the next three to four years, and with that structure comes jobs, comes population, comes a demographic shift, so to speak, and this complex of units is well-positioned to take advantage of that in the future. In the meantime, we're going to enjoy 7% yield.
Phil Tarrant: Let's have a quick chat about some of the investment happening there. We have a new train line going in there. There's about nine foundation stations that they've got together. Foundation stations, that sounds pretty good. What I like about this particular area, and for our listeners, go and check it out and get a good feel for it. I probably shouldn't be telling everyone this, because I still want to buy in the area, but...
Steve Waters: I'm looking at you.
Phil Tarrant There's some big infrastructure projects happening up and around this part of Brisbane, which will see not only an increase in the demand for rentals but actually will put a lot of price increases also, because there's a lot of people going to move into town along this particular rail link. Go and check it out. Once we've finalised the deal and we have settled, paid over our money, and control the assets, I'll go into much more detail.
Fortunately the work we've been putting into this portfolio, and by we, myself and the team here at Smart Property Investment but also the guys we work with to help support us to drive the growth in this portfolio, our buyer's agent, obviously, Steve Waters, our broker and our accountant Munzurul who I mentioned earlier who we'll get on and have a chat about things. We've been able to create this good equity position where we have capacity to draw down on this portfolio. We're currently at 64% LVR so we're going to have to pull some cash out of it which will take our LVR position to about 66%. It's going to add about another 800 grand of debt into the portfolio.
Our equity position initially will remain pretty stable because what we're pulling out, we're putting back in. Then over time these assets should grow, so this is a bit of a longer term. We're going to get 7.1%-ish yield on these properties for the immediate future, and so I say they're located in a very good area. They're right near a train station, shops, and all this sort of stuff, but over time these properties should just grow in value, so this is more of a 10, 20 year type scenario for us, isn't it?
Steve Waters: They all are. Just some outperform others, I suppose, and I think that's the key to it is finding the properties that do outperform the market. This one will because we've bought it right being under market value, but we won't really talk about that yet. It's got the cash flow to support it, and it's got the infrastructure that's not just already there, but there's a mountain more going in which will perpetuate the value of the area. Then we've got this net migration numbers from the southern states being, or areas, Sydney and Melbourne having this big lifestyle change back up to the Brisbane area, in particular this area, better lifestyle, three times bang for your dollar in terms of the house, and perhaps more opportunities some would say. We're starting to see those numbers climb.
Phil Tarrant: What is it with these northern suburbs of Brisbane that the government, they're spending money like wildfire in terms of actually developing for a true future and 50 years ahead? Big roads, rail infrastructure, just facilitating the movement of people in and out of the city, but also creating little satellite towns as well. The area that we're talking about that we will unveil it'll be its own little satellite hub. There'll be a huge, local economy there, and even moving further up through this rail link, and you can go and check it out. It's all on the internet. There's a Redcliffe, what is it, a Redcliffe rail...
Steve Waters: Peninsula.
Phil Tarrant: Redcliffe Peninsula Rail.
Steve Waters: We've got to look at the affordability scenario here compared to Sydney and Melbourne perhaps where the average price in Brisbane it's just so much lower than what it is here in Sydney and down in Victoria or Melbourne to be precise. When you've got a difference in average prices of over 50%, some would say up to 70, seven zero, with an income difference of 14% being one four, there is so much more opportunity there, some would say. A lifestyle change, younger families, get in on the market, sunshine, warm weather, and sandy beaches. You have the perfect picture postcard. You can see why it's attractive as long as the infrastructure's there, the jobs, and just to support that lifestyle, I suppose, and it is.
Phil Tarrant: This new acquisition, Steve, pros and cons with it.
Steve Waters: If it was all on one title, it'd be a lot cheaper to hold these properties. Because there is five individual properties within this block, there's no strata per se and I say that in inverted commas, because we go in the block, but that's five sets of council rates, that's five water rates.
Phil Tarrant: Five different water rates.
Steve Waters: Five insurances.
Phil Tarrant: Five insurances. You pay a bit of a premium to hold these assets as individual titles, but there's upside benefit in that it gives you a lot of flexibility if you want to shift a couple of them. You can hold onto all of them. If you control the block, you can knock the whole thing down one day and build something new, so we can change.
Steve Waters: Pros and cons. I think you've hit the nail on the head. In terms of the negatives to having it not one title is your cost to operate is going to be a little bit higher. Let's say with the rates alone, that's somewhere around about 20% or thereabouts. The flip side or the positives however far outweigh the negatives being that this is not now a commercial loan, so if it was one title it'd be a commercial loan. Interest rates are higher, lower loan to value ratio, yearly audits, bigger cost to operate to keep the loan, so that's a major negative obviously.
Phil Tarrant: We could spread the lenders as well, right?
Steve Waters: We can spread the lenders now.
Phil Tarrant: We're going to have three different lenders on these five properties.
Steve Waters: At a higher LVR, so 80% as opposed to perhaps 70 or 60 in commercial. Then we have the flexibility of risk mitigation, so you can, as you say, you can sell one, two, three, four, whatever it may be and have that flexibility rather than selling a whole block, and probably the biggest one other than finance is that it's allowing you to buy them, because it is a residential loan, not a commercial. To me that's huge. It just gives you so many more options and the cost is higher rates. Higher council rates we're talking about, not interest rates.
Phil Tarrant: Good. That's that.
Steve Waters: That's that.
Phil Tarrant: Pretty good update, monthly update. Not weekly, Adam. Yeah. Monthly. Good. We'll keep at it. Look, I'm quite conscious that if I was listening to this I'd just hear oodles of numbers coming and thrown at me, and I'd be going ... I'm probably confused and bewildered, so hopefully we've done a pretty reasonable job in trying to explain these things. Some of the key terms we've spoken about, Steve, LVR.
Steve Waters: LVR.
Phil Tarrant: Loan to value ratio, so how big is the debt versus the total asset. Refinancing, so this is when you draw down on some of the value you have in equity in your property and you convert that into cash, so you can use it for other things.
Steve Waters: There's a difference between you'll hear the terminology refinancing and topping up, so typically ... Both mean that you want to access the equity within the asset, but typically refinancing is when you take it from lender A to lender B, so to a different lender. Topping up is keeping it within that same lending institution, and there's pros and cons to that. In fact, we talk about Barry Street, the one that's gone up by 200%-odd or whatever it was, and I remember there at the time we had to refinance it, so take it to another lender because the current lender at the time perhaps didn't see as much value in it on a finished product, so there are pros and cons as to why you should top up or refinance.
Phil Tarrant: Yeah. There is. The important thing is that you got to know your numbers.
Steve Waters: Numbers. That's all it means.
Phil Tarrant: It is.
Steve Waters: At the end of the day it's just about numbers and probably cash flow is the most important one.
Phil Tarrant: It's good. Remember to check out smartpropertyinvestment.com.au. We'll update the portfolio there. Go and check it out. We'll add some stories to this as well, and as we get closer to the settlement of this property, so we're currently in ... We're past the cooling off period, but we're just in the process of getting all our financing done, so that's refinancing some current loans and then creating five new loans. When you invest in trust structures like we do it's a bit of a headache. I apologise. I'm sure he's listening to it, our mortgage broker, Ross. Enjoy. I do appreciate the hard work you do, and they're not big loans, but this is the important of having a good broker. You can get this stuff sorted out.
Knowing your numbers. I know the numbers because I've got a big fat spreadsheet here in front of me, and I can refer to it whenever I want. I know some investors, Steve, they'll be able to rattle out these numbers off the top of their head. I'm probably 80%...
Steve Waters: You're pretty good.
Phil Tarrant: ...of the way there.
Steve Waters: Yeah. You're pretty good.
Phil Tarrant: Yeah. 80% of the way there, and what I don't know, I can always refer back to it, and it comes back to being organised, so having the information in front of you whenever you need it on-hand so you can actually know where you're sitting right now. Have some fun in your portfolio, run some different scenarios, run some numbers. I always enjoy recalculating our equity position depending on what's happening with the marketplace or if prices go down as well as up, and also working out your cash flow position should interest rates rise. You need to make sure you got a nice buffer there to ensure that if and when, and it's a matter of when banks start pushing their rates up what's the impact on your personal finances to manage your portfolio.
Steve Waters: When are you going to reveal the location? When you're unconditional or settled?
Phil Tarrant: When we're settled, I think.
Steve Waters: When you're settled.
Phil Tarrant: Might give me a chance to find a few more places up there before I tell the rest of Australia. I did that with a big wink. I'm looking to buy within this portfolio and also my personal portfolio as well, so I like this area, Steve. I think it's good. I don't think you need to be a rocket scientist to work out where it is, but it's just-
Steve Waters: No. I think people are saying, "Really? Come on guys? Like it's a secret."
Phil Tarrant: I know. I know. For those in the know, you got to be in the know.
Steve Waters: That's what it's about, right?
Phil Tarrant: It's about having a good buyer's agent, right? I wouldn't be doing this if I didn't have you sorting this out for me, so I'm very happy with that. Thanks for joining us. I hope that wasn't too rambling and full of information. These are always popular episodes, so if you do like this and you've got friends looking to invest in property, point them to this as well because I like to think that this is real world. Happy to talk about what we do well and what we don't do too well, and I've been very frank and honest and open about some of my shortcomings when it comes to being a property investor, but I'm not too bad. I'm not too bad.
Steve Waters: You go all right.
Phil Tarrant: Go all right.
Steve Waters: You go all right.
Phil Tarrant: We'll do another update in a month's time, so make sure you check it out, but remember we are doing stuff every single day on smartpropertyinvestment.com.au. Make sure you subscribe to our newsletter. Be the first to get all the latest market intelligence and news about property investment and those spots where you need to be investing. We like to think that we give people insights into where they should be investing before they become hotspots, or at least have the tools to understand how to find those things.
Steve Waters: I think that's important is finding the right tools. Are you going to do the live podcast?
Phil Tarrant: Yeah. Yeah. We'll do that, and if you're interested in that, please drop us a line. We've had some people going, "Can you actually make this live as well as do it as you're doing it right now?" Yeah. Sure. Happy to do it. You get to see my ugly mug on the screen, and Steve's isn't much better.
Steve Waters: Every time.
Phil Tarrant: Every time. Can't help myself. Happy to do it live, and you know what, we can even do some live Q&As. If people want to do that, let us know. I'd be happy to sort it out. Smartpropertyinvestment.com.au, go and check it out. Remember, one thing and I do really appreciate this, can you please keep those reviews coming on iTunes or wherever you're listening to this podcast. They're really important. It's just really good feedback to the team that we're doing some great stuff, and hopefully something of value. It also helps open up the community to a wider audience as well, so for me it's important that property investors across Australia actually have the tools to actually be better property investors.
It actually makes me sick sometimes when I see some of the mistakes or decisions people are making, because they're purely uninformed or they're just getting led down the wrong path by the wrong people, so property investment doesn't need to be hard. It just needs keep it simple, and that's pretty much my two bits on it. All the stuff, social media, go and check it out. Until next time, I'll see you then. Bye.
Announcer: The information featured in this podcast is general in nature, and does not take into consideration your financial situation or individual needs and should not be relied upon. Before making any investment, insurance, tax, property, or financial planning decision you should consult a licenced professional who can advise whether your decision is appropriate for you. Guests appearing on this podcast may have a commercial relationship with the companies mentioned.
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