(upbeat music) - Good day, everyone. Welcome back to another episode of Spark Your Fire. I'm your host, David Shee. And with me today, as always, the lovely John Camino, smiling on the other side of the camera. How are you, mate? - I'm very well, David, the lovely John Camino. Very nice. How's the lovely David Shee? - So say, look, Caminos is always smart. That's good. - That hasn't been a single day where you guys aren't happy, right? - Yeah, that's right. That's right. No, everything is good, doing well, probably markets, chugging along here in Sydney, but doing well. How are you doing? - Good, good. I'm looking forward to my Europe trip. That's for sure. So the next couple of weeks, you know, I think we'll be missing a few episodes. I hope, I don't think that this is gonna miss me. That's for sure. They're gonna miss you. That's the only issue, John. Make sure you do some recordings and put it on. - It will see, but it's totally worth it. You'll have a great time. - Thank you. Thank you, John. Oh, might have a bit of a tan too. See how we go. But apparently I think it's getting colder there. So maybe not, maybe not. - Right. (laughs) - Oh, that's okay. You'll have a great time. - Yeah. - Thanks, John. So yeah, so look, it hasn't been much of a property news at the moment. So look, you know, I thought today, we'll jump straight into our topics of interest, which we both love talking about, right? Like, you know, just basically giving in our opinions in terms of, you know, different type of property topics and discussions. And again, none of this is scripted. You know, John and I basically have nothing in front of us. We just thought, here's an idea. Let's just go in and have a chat around and see what came out of this discussion. So. - Very exciting. - So John, one of the questions that I get asked my clients, should I be aligning my borrowing capacity? As a property investor. And again, I'm asking John as the property investor here, not a buyer's agent. And he should have taken the buyer's agent head off here. (laughs) Should you, as a property investor, do you think that it's a wise idea to be aligning your borrowing capacity and push yourself to the absolute maximum? - Yes. So I think, I think most of the time it is worth it. A couple of reasons. So, but I think it depends and there's always, there was always going to be a, it depends component of the answer. And the answer to that is it depends on your age, I think, really. - Okay. - If you're young and you know that your income is in a cent, I think that it's a good idea. But let's just, let me make a couple of remarks. Again, I haven't scribbled anything down. So this is all going off. What's left of my pickled brain? So I think that you should, depending on your age. And I know that when I made my first property, I went right to my limit. And my view was that while you can lose money on real estate, like a buy and hold apartment in an entering suburb of Sydney, should be okay if I hold it for long enough. And I intend to pay down principal. So the buffer that you can create for yourself, so it takes the pressure off the property to be going up is paying off principal. The assumption here is the repayment side of things can be kept up, I guess from a P&I repayment perspective. Because let's say, for example, you bought one, two, three properties. And if you have all the non-principal and interest repayment in today's environment and in today's interest rate, that is a lot of cash flow drain, especially if you're buying, that's a set, like even scrap the idea of buying in Sydney. Like don't even think about anything in Sydney at the moment for that kind. Like, let's just say, hypothetically, you bought a couple of Brisbane properties, cash flow or yield white isn't too bad, looking at about four to 5% gross rental yield. Even on an interest-only repayment today, it's going to be negative. On the principal and interest repayment today, it's going to be even more negative. So John, how will people be able to support that? Like, given that if they are absolutely redlining it, my main concern will be cash flow. How do they maintain cash flow on a P&I repayment basis? So if you can't support the cash flow, you shouldn't redline. And this is part of the analysis that you know yourself as a lender and the banks do. So we're talking about what an acceptable level of risk is. So the big four, I'd take a more conservative approach or the big five if you include Macquarie Bank these days. And the kind of second tier lenders, maybe a pepper or a pepper or a Liberty, might take a different view. But of course, if you can't afford the repayments, you know, don't go into that much debt. But the lender would have a perspective on how much is too much debt for you. And I feel like in most instances, their perspective would be more conservative than your own perspective. So you might think, well, I can afford those repayments and they're assuming that I'm going to buy a plasma TV every month and I'm not going to. And so one of the things that I think in the banks assumptions are that you can adjust your spending to suit your new cost structure, which might include a higher mortgage repayment. So I think people have very flexible spending habits. So I think that if you push yourself on the property, I think that the rewards are there, you're going to get a better property. You're also going to get a higher rental if you're an investor. I mean, everyone needs to make their own risk assessment. But like a second tier lender is willing to give you a loan, which is at the upper end of your comfort level. If you can adjust your spending to accommodate it, it's worth it. It's worth it, I think. - Back in your days, John, to Sarah, did you when you were in your acquisition phase, were you doing your P&I repayments across all your investment properties as well? Or at some point in time, were you able to use interest-only repayment strategies to maximize and optimize your cash flow as well? - So we would buy, let's say, one property, at one stage, it was a property a year. Prior to that, it was a bit less frequent, but it was quite regular. We would always put them on P&I initially, and then we'd buy the next property. We would take those off P&I. So we would have the latest acquisition on P&I, mainly because you kind of what a, I always wanted to give myself some buffering case. The market went against me in the first year. I didn't want it to affect my equity. We would always put a recently purchased property on P&I, and then it would go into interest only a year or two later. - I see, okay. So when during the initial acquisition phase, you put it as a P&I, but you moved the previous properties into an interest-only. - Exactly right. And the idea is just to risk some of the loans that you initially had for maybe a year or two before you turned them into interest only, yes? - 100%. I always felt like the riskiest period of owning a property of the first couple of years. So if you own a property for 30 years, if the market goes down by 5%, you don't care at all. If the market goes down by 5% in the second year that you own a property, that's that you've got a problem. So we would always do some P&I at the beginning, and then shuffle it out of P&I. - That's interesting strategy. I think that's definitely something that's worth exploring a bit more. - Right, right. - Yeah, no, thanks for sharing that, John. - But that does, just to put a bow on it though, that's how, that kind of is the justification for my view that, yeah, you probably should go to the red line. If you're young and if you're income's rising, if you go to the red line and then manage your debt and manage your finance, 'cause the rewards are far greater from spending more money in real estate. What else are you gonna spend it on? Are you gonna spend it on the movies or whatever, like spending as much as you can on real estate? It usually pays off in a medium term horizon. - I do agree with you, John. I think that's sensible, but at the same time, I think a lot of people lack the actual discipline to be able to save, I mean, even just that's a, for example, be able to push to themselves. But putting that aside, putting that assumption aside, that's a, for example, that they assume that they do have enough resources to be able to purchase and be able to red line to whatever property they need to get into. I guess from my perspective, I'm more of a lifestyle-first, hypo person. So in other words, lifestyle-first, invest along the way as well to a degree. So yes, and again, I put that as a bit of a, maybe, depends, like, similar to you. Because it really depends on the type of clientele, you know, their age bracket, their spending pattern, their ethnic groups, there's a lot of complexity that's behind it in terms of whether this person should be redlining, plus their own risk appetite, their perceived risk appetite. You know, most of the time, they'll be heading to up that walk road to say, should I be getting a liberty or a pepper loan that's giving me about 8% interest rate in today's market? And should I be redlining that to that point in time? And, you know, I think the answer to that really comes down to, personally, to say, if you purchase this property, is it going to impact your lifestyle? That's probably one of the key questions that I will want the borrower to be able to answer themselves. If you do that calculation yourself to say, okay, well, if I'm gonna buy a property and I'm gonna be paying, let's say, 8% plus interest rate in that instance, and I can pretty much accurately estimate my cash flow, in other words, how much I need to put out in my pocket, is that gonna be putting myself into a difficult position and is that gonna impact my lifestyle? If it is, then I think you should think about it again. - Yeah, personally. - Okay. But that's not to say you shouldn't do it, right? If you have a backup and if you have a good mitigation strategy to be able to offset that, that, say, for example, buy a really good high cash flow type of property to be able to offset that potentially, yes. Or if you have, if you know, just like, for example, you know that you are on a growth trajectory in terms of your employment, your income is going to go up in the next few years and therefore we would have a way to be able to refinance you out of liberty or pepper, then yes, I would say absolutely good, right? But back in the four, the four foremost top of, I would say, yes, you probably wanna put your lifestyle first because ultimately everyone has to live toward degree, right? You don't wanna be on instant noodles and maggies and every day just to be able to get a property that's about 8% interest rate, that's not. - Yeah, no, that's true, that's true. Although I think to be reasonable, like I think it's a balancing act between your lifestyle. Like when I bought early properties, my lifestyle took a massive hit. And I mentioned the first property I bought, which I went all of in on. Yeah, I was, it affected my abilities to go out and I was living in London at the time and all the traveling stopped because I couldn't afford it. I had a mortgage then, so. - So I was making the middle of the gym at the time. - Well, I was an expat, I was eating maggies noodles anyway. It was gross, but I mean, I totally accept that. I don't mind sacrificing a little bit of the lifestyle upfront. As long as there's a reward in the end, it's so good. - That's why you're reaping the route now, right? Because you put in the hard yards around your twenties and the thirties, right? So you took the difficult path, which most people probably wouldn't have at that point in time. You made the decision to redline your borrowing capacity just to be able to get one or two more properties at that point. Yes, you sacrifice your lifestyle a little bit, but you find a balancing act to be okay, you can accept it. And you've got a mitigating strategy in place to be able to hold them, you pay down a bit of debt and then turn them into interest only afterwards. 10, 20 years down the track, that's where you reap the rewards, essentially. - Right, right, right, right. - So I'd like to make one more argument for going as close to your limit as you can. - Okay. - And that is that, let me set this up a little bit. So bias agents used to do things like property plans and that's gone out of fashion a little bit in particular. And the reason that property plans, to build a five property portfolio over six years or something like that. The reason that's gone out of fashion is because you can only really do property purchasing one property at a time. The minute you purchase a property, you have to reset your finances and then figure out what you can borrow the next time because you don't know what you're gonna be able to borrow for the second property. All you know is what you can borrow now for a property. So we don't do five property plans anymore, acquisition plans. So what does that mean? It means you don't know what you can borrow for your second property. So you have to go all in on the one that's right there. It's like looking at a staircase and looking at all the stairs or really should just be conscious of the next step. And because you can't plan all of the acquisitions you're going to make, even if you aspire to a portfolio, you only know what you can purchase right now and what you can borrow right now. And because there's so much uncertainty about borrowing how much you can borrow for the next property, I figure borrow as much as you can now because you don't know what you can borrow the next time. - Okay, ballot point. Although I'm not too sure how out fashioned the property plan is. I mean, I'm sure I still saw a couple from last week. - Yeah. - Yeah, yeah, yeah, yeah. - Okay, okay. - Yeah, when I do my modeling with my clients I do map it out. But we buy low value type or properties where I like talking about $600, $700, $100,000. So it's a lot easier to predict in that case whereas I guess if you're looking at purchasing in Sydney, it's a slightly different story. 'Cause yeah, the- - Maybe that's different. Although it is depressing that the six or 700,000 is considered low value and that's a lot of money. - Thanks to the inflation. - Yeah, that's right, that's right. But yeah, that's so, you know, my opinion at the time was we'll figure it out later. So if we're gonna buy a property after this one, let's get this one under our belts and then we'll go back to the well and we'll figure out how attractive we are to the bank when we come back in a year's time. But right now, if this is what I can get, 800,000 or whatever it is, that's what we're gonna spend. - That's where you would be. Okay, okay, good, all right. Let me post another question for you, John. Again, it's somewhat related to borrowing capacity as well. So similar type but different because I think I'm not sure about you or have you being recently being asked but I've been asked a lot by purchasing on the trust. So people tend to have this tendency or I don't know where they've read it or heard it. They kind of had the idea to go, if I run out of my borrowing capacity under my personal name, I should be looking at buying properties on the trust because apparently you can have unlimited borrowing on trust. And when I look back at the fundamentals as to why they want to do that, it's because they're being told or they're very close to getting basically the end of the borrowing capacity under their personal name. And in order for them to be able to continue their journey, they are looking for ways to work around that rather than having a broker or bank to tell them, sorry, John, can't lend you any more mates. So they're trying to be on the front foot. And that's why they're coming up with these creative strategies in terms of trying to get finances around it. But bottom line is, should you be afraid? Should you be afraid of running out of borrowing capacity during any kind of property acquisition journey? - Yeah, you should always be conscious of your attractiveness to the bank and you should be concerned about running out of serviceability for sure. - But I think, isn't it a natural course is, I guess, is what I'm trying to point out here. Back at the time when we were purchasing our, building our property portfolio, yes, of course, we will get up to the point where the bank is going to say, sorry, mate, can't lend you any more, this is the max that we can do. And yes, you can go to liberties, you can go to pepper, but there's also so much that you can do. Like, you know, after liberty, there's no more lending that you can do. At that point in time, what do you do? Like, I guess the point that I'm trying to make here is, isn't a natural course of progression? Like everything, everything just, you can't just continuously buy. - Right, okay. - One to 10 properties in one go. Definitely not in today's environment, right? So you should investors be afraid to be told that, sorry, mate, you have no more borrowing capacity. - Right, okay. So yes, things changed in 2017, or they're about. So 2017, we switched from having sort of an equity model of lending to an income model of lending, or the lenders would argue that like, there are two hurdles in command equity, but nonetheless, it became more serviceability oriented. - Correct. - So what do you do? So there are two things that you do, and should you, I mean, I personally think you should try to find a way, but it all depends on how, you know, if you're in any financial distress with your existing debts, but let's say you're not in any financial distress and you wanna keep going, but the bank is saying no, two options, I think. The first option I think is to, well, the first option is to wait, to wait, and just to accept it, maybe work on your non-real estate related income, get a promotion at work. - Yes, yes. - Get married, I suppose that can help as well. But the second thing, if you wanna take a more active approach, and it sort of comes back to, this is what worked for us, but I would say that you could pivot to paying off the debt, paying off the debt makes you more refinancable in a couple of years, and it would bring forward when you can next purchase. Now you can then shuffle that property onto interest only later, but if it's got the same amount of debt, it's gonna be harder to reshuffle that onto interest only, I think. Now, you're the lending guy, so I'm not great at this, but if you, I would suggest switching things onto P&I, then going back in a couple of years, two years, which is quite soon, with less debt, and then seeing what the bank would say, and I'm almost positive that they would have a, more positive view of your circumstances. Because one of the roadblocks would be your LVR, so you'd have a serviceability problem and an LVR problem. Now, serviceability is tough, but you can do something about the LVR. You can get the L down, you can get the debt down, right? So I would say work on what you can control, which is your debt, manage that, try to get that down, and then separately, you can be looking at your income and other aspects, but, yep, wait or pay some principal off. What do you think? - Yeah, look, and that's the whole point that I'm trying to make you. I think a lot of investors are so afraid of not being able to continue purchase and not being able to continue purchase immediately. - Yeah. - Immediately. I think the key word here is, you know, immediate. And that might be a consequence of a lot of media saying, you know, like these rags to riches story, you know, one to 20 properties or one to 10 properties will be in a couple of years. That kind of mindset has already, has created that expectation for property investors nowadays ago. John's done one to 10 properties in five years. Why can't I do that, right? Like, why am I being told? I can only get up to my number three property, you know? There must be something that's wrong. Okay, well, what are the ways that I can actually go around it in order to be able to get up to 10 properties? That's a, for example. But fundamentally, that's not true. But, you know, it took you 20 years, for example, to build your property portfolio today. - Right. - Right. - Right, isn't built overnight. There will be times and you, as an experienced investor who has gone through this journey, will be able to tell everyone that there are times where you had to stop as well. You had to consolidate, right? - Absolutely not. - You were being told by the bank to say, "You can't do any more at the moment." Fine, you work on your income. Like you said, you work on your income, you get a better job, you change career, that kind of stuff, right? To improve yourself in terms of getting more avenues. And number two, as you said, potentially pay down a little bit of debt to be able to reduce your overall deposition and to manage your risk in that sense. But the point here is it's not just number one to 10 properties straight in one go. It's going to be that, say, for example, three properties around during this cycle and then you wait for a couple of years, you work on improving your income, you work on improving your financial situation, you wait for lending to ease. Lending actually goes around cycles as well, just like property, right? There will be times that it's going to be easier to lend money. Most people are not aware of that. Right now, it's actually very challenging to actually borrow money from the banks because of the high interest rate, but that's going to change in the next few years. - Yes. - No? So, you know, there will be times where right now you go, you might be disappointed here, oh, am I only able to borrow free, or to get free properties this cycle? That's not the answer. Well, you buy free cycles, you accumulate right now, you work on your income, and then, you know, you wait for a right time and maybe potentially pay down a little bit of debt if you want to, or, I mean, my personal preference, keep an interest only, keep that money in your offset account because, you know, you can choose to pay down the lump sum or the loan if you need to. So, you can still control the L at the time when you want to refinance, except you get more control in terms of your cash flow as well. So, you know, you just park the money in the offset account, gives you that flexibility. But you do that, you, so you buy properties, you hold, you wait, you work on yourself, improving yourself, getting ready for the next round, and then when the lending eases, that's when you can start looking at, if you want to borrow some equity, you can borrow some equity and be able to do it, and then, you know, bring those properties back into, from, like, a pepper or liberty back into a major bank again, because lending has ease, so you're able to pull them back up to the Tom Tien lenders, who says, harsher lending criteria, and then be able to use the likes of first back pepper and liberty again to be able to continue and push for one or two more properties. Rinse and repeat, rinse and repeat. It doesn't happen overnight. I think that's one of the things that, I mean, when talking to a lot of my new property, there's the clients nowadays, they all seem to be under this impression ago. Oh, I'm stuck already at two or three. Like, why? Like, there must be something wrong, and he's gonna turn. - Right, right, right. I see what you're saying. Yeah, you gotta let it sit there and marinate for a little bit, and I assure you we all did as well, so there were periods of time we had just, let it sit there and mature a little bit. - It's like the red to catch up, let the dead go down. - Pardon me. - Just like fine wine, you're gonna let it there for man to mention. - Oh, exactly, that's right. That's right. So the secret is that it's a marathon, not a sprint, so if you're by holding it, by and hold investing, you have to have the period of time where you're just letting it mature, or marinate it in equity, and letting it marinate in inflation really. What we do as by and hold investors, we're just letting inflation do its thing, but inflation is a cumulative thing. - That's right. - But here's the dirty little secret, the dirty little secret, all the people that, the buy hold investors who have done very well, didn't necessarily make their money out of real estate. They made their money in their businesses, and they parked the money in real estate. And I think that the people coming into real estate, they're looking at people with 10 properties and 12, they didn't make the money in property necessarily, or they might have made the money in a property adjacent business, but they didn't make it out of rents. They made it in some other aspect of their life, and then they parked the money, that parked the money in real estate. So it's such a different way of thinking about it. So the grass is in greener. By holding investing, by holding investing is very much a marathon. And the people that you think did well out of it probably made their money doing something else just parked it in real estate. - I think you hit the nail on the Jeff Paul's there mate, basically, yeah, essentially it's where, it's how they make their money. Most people thought it's just because they make their money through a paycheck, but that's not always the case, right? I guess you might start it off with making a paycheck, but ultimately, to be able to support a sustainable portfolio, say 10 properties, your income also need to be enough to be able to borrow up to that amount. So that's what we mean by you get up to the point where you can, you push yourself to the limit, and then essentially you need to work on ways to improve your income, your personal income, whether that's through business, whether that's through another I job, there's multiple ways to be able to do it, so. - Hang on, spot on. Thanks, John, thanks for your wisdom as always, mate. Any other dirty secrets that, or you just, there's enough-- - Not the dirty ones. No, that's the main one. (laughing) No, that's heaps of divulging for today, I think. - Yeah, no, definitely leaves our listeners to ponder in a lot more about what the next dirty secret will be. - Well, let me actually, I'll give you an insight into something that's someone, it was a mortgage broker actually, that I was speaking, this has got to be like 10, 15 years ago. And we said to him, how did, how did those people, this is, so we were kind of, we had some properties, but we weren't, you know, property people, I suppose. - No more good status, yeah. - So how do you get to 20 properties? And he said, the way you do it is, that every second property that you buy is a flip. He said, he goes, because you need to be able to demonstrate serviceability to the bank. And the only way to demonstrate serviceability is to convert a capital gain into income. And the way you do that is to buy one, flip one, buy one, flip one. And it, I mean, I'm simplifying the message, but he said, you've got to figure out how to do flips. And that's the way you get to be property portfolios, because if you're in, you know, working in accounts that at Virgin Records, your POIG salary is not going to be enough to build a 20 property portfolio, you need to figure out how to get that income up. And the way you get that income up is through flips. And then it's his advice. - It's interesting though, I'm not sure what that's going to apply in today's market, you know? - And that's right, I mean, that's not. - Yeah, I mean, I guess it's primarily because that will be a once-off capital gains event, essentially. And when the banks look at your tax returns, you'll be able to work it out, you sold something. That's why the taxable income is so much higher this year. Main on the history work on the today's inventing environment. That's my main concern. - Yeah, yeah. There are a couple of tricks there as well, I think, but yeah, that's- - That was interesting. - You're exactly right. That's exactly right, yeah. You need to figure out a way to boost your income by real estate without just holding it and relying on the rent. - Sounds like that's another topic of discussion. - I'm glad that's right. - So John. (laughing) - Correct. - Well, I wait for you to be able to put out more dirty shirts. - Yeah. - Yeah, that's right, full of surprises. - All of a surprise as always, mate. Well, thank you. And I think, look, you know, that's keep it short and sharp. So that's pretty much all we're covered today. And like I said, you know, I think we'll, I'm going to be out of action next couple of weeks. So I think we may not necessarily have our regular updates, but we'll pick this back up again towards the end of October at that point in time, once I'm back. And, but until then, stay safe and have a great week and a great month. We'll see you guys again in another episode of Spark Your Fire. John and David. - If you have any questions or feedback about today's episode, you can reach out to us through sparkyourfirepodcast@gmail.com. That's sparkyourfirepodcast or one word at gmail.com. Also, the content discussed in this episode is general in nature. Please seek specific advice from qualified professionals in regards to your personal situation.
