(upbeat music) - Welcome back to another episode of Spark Your Choir. I'm your host David Shee. And with me today is John Comino as always my lovely co-host today. On a very different virtual background today, mate. Look in classy. What's going on? - Right. - Unrecognizable, I'm good David. I appear to be in a skyscraper near the ocean. - We're against skyscrapers ourselves, aren't we? John, why are you there? (laughing) That's right, that's right. Puerto Rico, I think. No, I'm very well, I'm very well. How are you doing? - I'm great, I'm great, I'm great. For our listeners, look, we have changed our platform a little bit, so we're coming off Zoom and we're jumping on to Microsoft Teams as such, I think the foreman, at least from the video side of things could be slightly different than what we normally would be. But nevertheless, you'll still get the same great content as we always do, that's our promise, mate. So, but yeah, I think it's been a while since we caught up, but I think I loved these end of month episodes because, I mean, we literally just got the inflation figures that just came out on Wednesday, so we're able to have a chat around that. So I think a bit of positive news so far, you gotta look at, I mean, I'm a last half full person. Let's put it that way. So, the July, the July monthly CPI figure has actually dropped from 3.8 in June to 3.5%, which is actually good, it's encouraging 'cause it's certainly trending down, but at the same time, it's not trending down as quickly as much as we liked it too. And look, the main categories that was contributing to that, pretty much housing, which is at 4%. Food and non-alcoholic beverages, 3.8%, alcohol and tobacco, 7.2%. I know why people are just smoking a lot more, and I think they're just drinking a lot more, potentially. And transport, 3.4%. And now an important thing to note here, I think John is that the energy bill relief has now kicked in, so starting first of July. So, this read of 3.5% leading up to July 2024 is actually inclusive of the energy bill relief. So, one of the reasons that the inflation has been consistently high was mainly housing based on my memory. Housing was always higher due to mainly the rent, the bills, the insurances, all that kind of stuff. So, this one, technically speaking, is actually the first one that included the energy bill relief, so it's logical to say, yes, it's meant to come down, and I think that's broadly in line with the market expectations at the moment with that. So, I guess the question is, are we gonna see in the next few months where it's gonna be continued trend down even further and even faster like this? So, I think that's gonna be an important one there, John. Any thoughts, anything you want to highlight on that figure, on that read? - Well, I mean, as you say, sort of CPI's moving in the right direction, it was above expectations by 0.1 of a percent, but you're never gonna get it exactly right. And as you say, the energy rebate, which, so like food and all these essential items were up, but housing was down because of this energy rebate. So, I mean, I actually think that inflation is gonna continue to trend lower, or I shouldn't say inflation, I should say CPI will continue to trend lower. And I actually think that in a sense, because we know that the Fed is gonna cut rates in September, I kind of feel like broadly speaking, we're at the end of the, at the end of the high rate cycle. Chairman Powell, and I know this is the US, not Australia, but Chairman Powell said, it's time for a change in policy, and this happened about a week ago. So, where the Fed goes, the RBAF follows. I, even if our inflation isn't quite as tamed as the US inflation number, which it isn't, which it isn't, the stronger Australian dollar is gonna put a lid on import prices. And I actually think that, I still think that CPI is going to be moving lower in the next couple of months, even if we're disappointed by the speed of that decline, I still think it's gonna be moving in the right direction. And whether we like it or not, the FX market will probably force us to be cutting next year anyway, early next year. - So, I guess, yeah, it's good that, I suppose that's an indicator to say, look, there won't be any more rate rises. So, for the rate warriors, that's certainly good news, but at the same time, we're not too sure whether there is actually gonna be any rate drops this year. I mean, I think CBA and Westpac are still saying that there could be one towards end of the year, but looking, reading what RBA's minutes has been saying for last month, basically they only think that the board has been discussing was whether there was an up or an increase or a hold. So, it's either an increase or a hold, it certainly did not touch on a reduction at this point in time. So, I think I will tend to agree with you that it's more likely to be 2025 or at least next year, before they would even consider on that option at this point, given that fact that, like you said, 3.5% isn't really yet in the band, and this is with the energy relief bill as well, that's already in place. So, technically speaking, has it really moved much? I don't think so. We've got the energy bill relief. I was saying we're probably still sitting at around a 3.7, 3.8 today. So, it's getting really, really sticky, which is what's concerning now, essentially, and who knows how much patience RBA boards still has. They keep on saying they're getting impatient, they're getting impatient. They want this to be done and dusted before within the band of 2025, right? So, anyway, yeah, look, I think it's interesting one to see. - Certainly, on the US counterpart, Fed is giving us positive news. So, that's good, that's quite cheerful, but when would RBA be forced to actually pull that trigger? I guess, yeah, that's for us. - I've always said February or March, I think will be the first rate cut, yeah. I think that, look, I do think that the economic news will be deteriorating. So, I think that if you had to be a betting man, you'd be saying, whatever the consensus is, numbers will be worse like employment and all those things, and I really believe that, I think one of the things that's interesting is like, why is our unemployment number so low? And my view is that it's hidden in the NDIS figure. So, all the people who might have claimed unemployment in the past are now being sort of shuffled into the NDIS system and it's hiding our unemployment numbers, which is kind of a unverified hypothesis on my part. But I don't think the economy's doing well, but I think that we've got all these statistics that sort of hide how brutal things are at the moment. And I think we all feel it's tough out there, right? It is tough. - It certainly is, so, I think. But it would be interesting to see, as you said, that's a hypothetically, in February or March next year, would RBA be forced to increase, or sorry, to drop the rates, even though inflation hasn't really hit that two to three percent band? What would happen then, John? Just, I mean, this is the hypothetical case, but that's a, the inflation proves to be very, very sticky. You still hold us around above the three percent. Unemployment rates kind of still relatively low, with low fours that kind of sitting around those low four figures, but with all the forex's and currencies and U.S. counterparts dropping their rates, like fears and ferocious, what would, 'cause that's gonna impact our import and export big time, right? So, do you think RBA's gonna be put into a position or into a corner where they kind of get to go, look, we haven't quite really hit the two to three percent inflation bracket that we really wanted to, but we will have to drop the rates no matter what. - I definitely think that that will eventually happen. So, I think that there are two reasons why they would start to cut. One is that the Aussie dollar starts to get too strong, and I think they're monitoring that, even though they don't really talk about that too much, but I think that if the Aussie dollar gets stronger than they're comfortable with, I think that that would be a reason to start cutting. Another reason is that even if inflation might be higher than they're comfortable with, unemployment starts to rise, like real, like they might have some measure of unemployment. - The real unemployment. - So, what they would then say in that instance is that, even though inflation might not be perfectly within our target or at the upper range of our target, we've done enough on inflation, and now we have a dual mandate and we need to address the unemployment number. So, once they get it below three percent, which is probably fairly imminent, it's at 3.5% or so. Once they get to 2.9%, they'll probably say, look, there's momentum and it'll keep falling, we can start to cut. - I also think, I do think that we'll be in a recession by the next quarter, if we're not in a recession already. - A technical recession already at the moment. - Yeah, these things are hard to read. They're also hard to, you know, recession to hard to measure in a timely fashion, because you're looking for two quarters of negative GDP growth, which means you don't know you're in a recession until six months after you're in a recession. - That's right. - You know. And sometimes you're out of the recession by the time they start to report it. So it's a very odd thing. But yeah, I think there's, globally there's going to be an easing bias. One thing to always bear in mind is, the federal reserve in the US is the Globes Central Bank. I mean, you could say the IMF is, but as long as the US dollar is the reserve currency, and the Fed is the Globes Central Bank to some degree. And if they're cutting all the satellite central banks, the Bank of Canada, the Bank of England, the Euro, the Australian RBA are going to have to cut as well. And directionally, they will set the tone. - Yeah, okay. No, good point. Look, yeah, certainly good to have your thoughts on that one. 'Cause that's something that's in the back of my mind, which I thought would be worth asking. So we'll see. I think, yeah, RBA might be forced into that kind of position. But having said that, you know, it is a narrow path that they've been walking at the moment. And so far, just based on numbers alone, it's not too bad. But, you know, it's on the everyday people in Australia, that's really fitting the pinch right now, unfortunately. So, yeah. All right. And okay, so that's, I think that's a good summary in terms of the inflation figures and what we're expecting in terms of the cash flow movements moving forward. - John, what's been happening around the property markets at the moment? I know you've had some exciting or interesting things to share. - Well, yeah, it's always exciting in the property market. So I bought a couple of properties in the last week, which is good. One was-- - For clients. - Not for yourself. (both laughing) So both clients were owner occupiers, which is maybe in itself interesting, but owner occupier clients, they both bought apartments. One bought a giant apartment in the St. George area. It was a three bedroom, two bathroom, two parking spot apartment with 160 square meters on title. - That's a massive-- - In big balconies, you can put a dining table on, like it was a big, big apartment, quite straight, close to the station. It was great. Like, it's the sort of thing I would buy myself. Like, I liked it a lot. And the other one was a penthouse in St. Ives, in the uppermost shore, other end of Sydney. Newer, beautiful skylights, and all those sorts of things. So a lovely apartment. And what I can tell you is that the, I mean, both were semi-competitive, but it wasn't a brutal bloodbath. And so it was reasonably competitive. There were other interested people. There were other offers that we had to contend with. But kind of the feeding frenzy has come out of the market. So it was, it wasn't, it was, we were a couple of offers in, rather than this sort of ratcheting Dutch auction. It wasn't, it wasn't like that. The broadly speaking at the inspections, the St. George area, was busier. So there were people lining up at the front of, the inspections waiting for the agent to turn up. You didn't see that in the uppermost shore. The uppermost shore was definitely quieter. And statistically, the north and the uppermost shore are actually probably coming off a little bit. - Yeah, yeah, I think that's to do with the affordability, isn't it? - Yeah. Definitely. - Yeah. And for our listeners, you know, the St. George market, which is Cogra, out to Herstville, even the beach is bright and sensitive. It just dances to the beat of a different drum. So Sydney could be doing this, and the St. George area is doing the exact opposite. So, and it's a strange old market, but Sydney is sort of softer. It's coming off in most parts, and the St. George area is doing quite well. And I think the St. George area, it's because the St. George area, and not to dwell on any one particular sub-market, within a sub-market, within a sub-market, but it's because it's the spillover area for the children who grew up in the inner west, and the children who grew up in the eastern suburbs, and they converge on the St. George area, because that's where they can afford now. So it's a very interesting market, which has a lot to offer. But it's also got a very nice vintage of apartments. So you get those old walk-ups that are well-made with no problems, and they've got a lot of appeal. So that market's still busy. - Yeah. - Yeah. - Beautiful. - Yeah, yeah, yeah. - Not good to know, mate. Good to know. Oh, no, occupiers as well, by the way. - Yeah, yeah. - Yeah. And even in, but I must say like a big peak, there's always a lot more prospects at this time of year. So I've probably signed up the most amount of my clients in October. It's because I think that people get to the end of the year and go crap. We, you know, they look to their better half and say, we told ourselves, we're gonna buy a property this year, and we've got two months of Christmas. So I always sign up a lot of people at this time of year. But even of the people I'm talking to, majority your own occupiers. - Yeah, right. - Like buy a mile, buy a mile. - As in, they wanna upgrade. Or-- - They wanna start renting. They want to stop at rent. And that they're older, older for time buyers, older for time buyers in the forties. - Older for a time buyers. - That's still a thing. - Yeah. - Getting see what all the rents that's been going up around Sydney, which I think is starting to soft a little bit as well at the moment, isn't it? - Yeah, I've, I'm hearing this. I mean, it's, it's, you know, have with the rents, you kind of have to rely on what-- - What's that you and if you want to tell you a little bit, but I'm definitely hearing that as well. But as we said on a think of previous episode, whether you experience falling rents kind of depends on when the rent last went up. And that applies to landlords and tenants. So it's hard to, it's hard to know. I mean, I still think that rents are hovering at fairly high levels, but I don't really think as a broadly speaking, they're going up. I think that, yeah, I'm not sure. It's hard to know because I mentioned a couple of moments ago that the people I'm seeing going into the market are owned or occupied. It's not, not in this-- - Yeah, that's true. - It's not for supplies coming from. But yeah, so I believe that rents are flattening out to coming down. Not sure why, but what are you seeing? What do you see in terms of the clients coming into the-- - Oh, look, I think certainly there's the, the inquiry level from popping businesses here strong in terms of my, yeah, my client side of things. So because I'm buying them at the affordability type of purchase price, so you know, around a 600K mark, that still considers relatively affordable. So I'm not looking at Sydney, that's for sure. Although, you know, it would be good to be able to get back into Sydney again. So we'll see. But yeah, there's still a lot of demand people, especially people looking to, as you said, try to actually wrap up the year because they set themselves a goal to say, this year I want to get an investment property. If we're looking at end of August now, moving towards September, where am I? Okay, I've got almost pretty much a last quarter to try to get this ticked off. So, and yeah, look, from a property side of things, you know, there's still mostly kind of, they're still mostly buying around Perth at the moment and prices still going up, like in an affordability ranges, 'cause just there's so much demand for it. And saying with the Pet Townsville market as well, very, very competitive as well, I'm hearing right now, a lot more people considering Melbourne now as well. They're starting to go a bit counter, counter cycle. Although having said that, you know, cash flow is still the biggest issue right now for entering the Melbourne market, which is always being the case. So, you know, I think, and probably not, it's that market is not going to move in the short period of time, at least not in the next 12 to potentially 24 months. There isn't really much incentives in those areas yet at the moment for that market to move, and land tax is still high. That's still one restriction, so we'll see. But we will see. I have a feeling that soon, Australia won't have any property that's kind of below the 500K mark or 550K mark, at least in the capital cities or the major regional cities. 'Cause there won't be anything that's below $600,000 just at this current pace. Yeah, and that's going to be the norm. Basically, the 600K might be moving more towards the 650, 700K becomes the affordability barrier, so anything above that, anything below that, is just going to continue to disappear. So, yeah, it's just an interesting market, that's for sure. Lending widespread, I think the banks are certainly aware that they are people need borrowing capacity. So, they are scraping, and they're trying to work out ways to be able to help people improve their borrowing capacity. So, I think just this week, or the last couple of weeks, there's a few banks that already, owner-occupier strata fees, which used to be counted as something in addition to the general living expenses, is now being factored in as part of the general living expenses now. So, you know how expensive city units and their strata are easily, or maybe 700 bucks a month, or even looking at $1,500 to $2,000 a quarter, that could have a big impact in terms of the borrowing capacity. We're talking about potentially 50K of borrowing capacity changes, just by including that owner-occupier strata into part of the general living expenses. So, and I think more banks is going to follow on that soon as well. So, you know, we'll see that's positive changes, 'cause that's going to allow people to push a little bit more for those owner-occupiers who's living in units, or looking to purchase units as well. - Right, right. - Yeah. - Yeah, so I think that might start pushing the unit prices up. As a matter of fact, fun fact, I think I skim through the CoreLogic report the other day. I think it's the first, probably won't be the first time, but in the recent months, the units has started to help pace the growth for houses when that's across a number of capital cities as well. So, I think this is going to start to accelerate in that, because like you said, affordability and having that extra bit of borrowing capacity allowed them to be able to purchase something slightly better from a unit perspective. So, consequently keep driving up that it's about time. I think it's about time that the units start to catch up, and the houses will probably stay flat, given the fact that it has grown so much in the last, in the last few years. - Yeah, yeah, I mean, if markets are like a weighing machine, as I think Warren said that but he was quoting Benjamin Graham, I think, but markets are a weighing machine, and like the difference between houses and units are just out of whack, that said, there's more sort of, when we talk about the shortage of properties in Australia but in Sydney, in my case, we're really talking about houses. So, I agree that houses need to kind of reassert themselves, they're a bit undervalued. We talked about the replacement cost of a unit being, like you're basically buying these old apartments at cost, which is beautiful, but there's still no shortage of them. That's the difference, and I think if we look at the rentals, the rentals are coming down more on the unit side, I thought I could be wrong on that. But yeah, I saw an interview with Damian Cooley and Mark Burris, so they're two people that are definitely worth listening to, they have their finger on the pulse. And Damian Cooley, actually, as an option here, probably one of Sydney's top auctioneers, Australia's top auctioneers, he has this data set which is quite unique, which is where the properties are selling above or below, they're selling above or below reserve. So, the rest of us schmucks have to look at the clearance rates, but he has that wonderful data. And he was saying that the things that are selling best at auction are houses. So, yeah, so it's, I mean, it's still, I think, I still think that it's a seller's market at the moment, and they're still reasonably good buying, even if it's flat to the end of the year. Definitely, I mean, if you can't afford a house, that is. But looking at, you know, in Sydney, how much like the average price can't even get a, get a, like a normal standalone house for at least 1.5 plus, right? And like even in a semi-decent type of suburb. So, it's a big, yeah, it's a big commitment for people to have, and I think affordability is just the main thing. The other thing to worth considering is also, I think I haven't checked this, but pipelines of new constructions of units, which I think is actually at a record low at the moment as well. So in other words, it's going to be years with no supply on units as much. Yes, there has been a lot of supply in the past, but that's being eaten up at the moment. If there's no new supply coming in, then surely that's going to have to be a pressure force to keep pushing up on that side of things as well, so. Absolutely. Yeah, we always, we're very aware of the impact that high interest rates have on the buyers. Yeah. So, it strikes kill buyers. But high interest rates kill off anything that requires leverage, which is, in most cases, sort of the construction of apartments. So high interest rates affect supply levels demand, so. Yeah, yeah. Yeah. Yeah. Absolutely. Cool. All right, no, thanks for sharing that. Okay, well, let's move on to have a chat about this, this week's, I guess, the discussion topic that we want to jump in. So I think you've shared with me one of the, one of this Michael Yarmy's article, I think, as a matter of fact. So, and what it talks about is four in five people ended up selling in the first five years. So, you know, most of the people actually fell in the game of real estate, so that was one of the key topics that we kind of want to explore. Now, to set the scene a little bit, just to, just so with our listeners. So, I'm just going to read our little blurb here. The problem is most people who get involved in property investment don't develop a financial freedom thereafter. Statistics show that 50% of new investors sell up in the first five years, so 50% of new investors sell up in the first five years. Most investors never get past the first or second property. And only around 21,000 Australians own six properties or more. I mean, this data could be slightly outdated, but I think it's still relevant as of today. In other words, less than 1% of property investors ever succeed in building a substantial property portfolio. Right, so that's one of the reasons that's kind of, we kind of want to use that as a bit of a discussion point to say, why is it so different? Why do people sell up so quickly? You know, we all know fundamentally conceptualize, concept-wise, you need to hold the property long-term in order to grow the wealth in order to enjoy the compounding impact effect and all that stuff, right? In order to really create wealth in the long run. But having said that, when you actually do it, it's so tough, it's so difficult. Like, what are the main factors that's causing people to sell up in the first five years? John, I think you had a few good ideas there. So I'm gonna handball it back to you and you can give our listeners a bit of thoughts on those. - Yeah, sure, sure. So I've got four reasons, these are my reasons, but I've probably kind of subconsciously adapted Michael Yardney's reasons. But, so I'll add out, and full credit, 'cause it's something that he quite rightly talks about regularly. So my view on why, I think that said 1% of investors, it's not 1% of Australians, 1% of investors. - 1% of investors. - In real estate, which is to say, they buy multiple properties. The first reason I've got four, the first reason we can go through them and buy one is expectations. I think people just get bored and fed up and they use their patience with what is essentially a game of patience. And their expectations going in is that, well, I've seen everyone else make a ton of money out of real estate, and if they don't make money in the first three, four, five years, they go, I saw it, and they decide that it's not for them. And I think that the expectations of a problem, because the people that these abstract people that they look at, making all this money in real estate, they had to play the patience game. And the difference is that those people hung around in the property market, stuck it out the good times, the bad times. And that's why it appears to them, what was very much a marathon appears to the newcomer to be a sprint. And so my view is firstly misaligned expectations. Most of your capital growth is going to occur in bursts. It's going to occur in a couple of, a short couple of years, but most of the time, real estate is going to be doing low single digit growth. This is the sort of big capitals on average. But I think that they want to be achieving stronger returns than that because some internet guru said that it was possible, so patience and expectations. David thoughts on that one. - Oh, look, I totally agree. I think it just comes down to, yeah, expectations is definitely the number one key criteria. And also, as you said, patience on seeing the growth, because I mean, everyone, when you're purchasing and when you're purchasing the investment, and I think this is one of the downsides of how information transmits so quickly nowadays. Everyone just expects things to go very, very instantaneous, right, like a bit like shares, bitcoins. People are just so used to volatility. Just go, they don't want a boring day. Hey, that's chicken to see what's going on. Why is my property hasn't risen that much yet? They told me that property is meant to go like it meant to double in every seven or 10 years. And I have seven and 10 years. I haven't seen anything or haven't seen much growth. That's the kind of expectations. And there's obviously too much information on the internet which could cause that expectation to be incorrectly aligned. And look, we have these conversations with our clients the whole time, right, to set that expectation. It's a long-term game. But like you said, it's that expectation that a lot of investors expecting growth in a short period of time, and they want to see results. And if they do not see results, then it's a dud. No, I'm not holding onto it. I'm not holding onto it, right? So, and the other thing is also the type of the, I guess the other side is in relation to the expectation of how much effort you need to put into actively manage the property as well. So, you know, that's one of the things that a lot of people thought, oh, it's a passive investment. So, you know, once I buy it a property, then rent comes in, mortgage goes out, that's it. That's all I need to worry about. No, there's a lot of repairs, maintenance, there's tenant issues, et cetera, et cetera. There's always gonna be things that's coming up which requires your attention. So, property is not a passive asset. Property is a very, very active asset. You need to be involved in that. And most people, by the time they got to, probably around the four to five years, they get really sick of it. Aircon's broken down again, you know? You know, I need to replace that. It's a couple thousand dollars. Roofing's having issue now. Oh, now do I need to actually get a quote for the roof to prepare a roof? What? So, all these little things, you know, keeps on, keeps on, you know, basically reset that original expectation that, hey, this is meant to be a easy way of building wealth but it's actually not the way. So, you're absolutely right, mate. You know, expectations, you know, I think everyone in the long run certainly need to come in and expect that this is a difficult game to actually make money out of. Yes, I agree, I agree. It kind of takes me to point number two because you mentioned that there's this expectation that it's passive, but it's actually active and, you know, hot water systems are gonna break down, air conditions are gonna break down. But actually the thing that you're most actively managing month to month is the debt. It's, you know, I think Michael Gardner, he says, game of finance, some bricks thrown in, always like that one. So, the other reason people fall out of the property game is they're not managing their finances. So, they're not managing the debt. We can debate whether you pay down the debt or you do interest only, but whatever the case may be, you've got to manage the debt because there's, I think, and I'm gonna butcher the saying, but there's a saying about, no one went bankrupt with that debt. So, the only reason you'd run into distress is probably not the asset itself, although that can be a problem. It's probably gonna be the debt levels against the asset. Yeah. Number two, manage your energy debt. That's true. No, that's true. And it comes down, yeah, like, and it's to do a lot with how budgets, spending and, you know, to a degree interest rates as well. But I think a lot of times, you know, you control what you can control. At the end of the day, and, you know, like from speaking from the personal experiences, when I was initially accumulating my portfolio, I've always added an extra buffer in terms of calculating if I take on this much debt and if interest rates sitting at, let's say, 8% or 9%, am I still be able to hold onto it to a level? Because we all know when you buy a property, you'll essentially be able to buy the debt. If you can't buy the debt, then you don't have the property. So it comes hand in hand. So, but what level of the debt should you be getting? That's something for you to consider and for you to be comfortable with. A lot of people just think, I'm just going to leverage and leverage and leverage and continue to leverage without the leveraging or without a plan to the leverage. That's obviously very, very dangerous. You know, even though we, you and I have very different views in terms of where there should be interest on the versus P&R repayment. But like I said, ultimately, no one's going to go bankrupt without debt, essentially. So, you know, there has to be a way to consider this and be able to manage the level of debt. I mean, initially accumulation, yes, you're going to have to work with debt. And it's important to actually be comfortable working with debt as well. And I think that's another thing that a lot of the new property investors are probably not as comfortable with. Because, you know, there might be to do with the fact that their parents told them you should be just buying a home and then you just pay it down before you start looking at investing and that kind of stuff. So, you know, your relationship with the debt has to a degree, has a very big influence in terms of how much, whether you're able to succeed in property investment. Because if you look at it as a foe, or if you look at it as a friend, it's a very different view of it, right? And, yeah, so it's a double-edged sword, basically. Debt can help you propel to the next level. But at the same time, if you don't manage it well, it can also ruin you. So, something to keep in mind. - I like the way you put that. Your relationship to the debt, it's so true. How much you've got, you know, what your interest rates are, all that stuff. I think that that's such a massive component. So, manage your finances. Have a good broker, like yourself. Because whether you succeed in real estate is going to come down to finance, mortgage is debt. - That's right, that's right. - Number three, I had cash flow. It's not managing cash flow, which is really the other side of the coin of, you know, how to manage your debt in finance. But I guess it has another level, which is also, so in addition to all the things we said a few moments ago about managing debt, managing finance, getting the right finance solution for you, is also how you manage your rents. So, cash flow coming in as well. And it can also include things like depreciation and so on. But look after your tenants. But also be, I think you should be as aggressive as you can be with your rents. But you should keep good tenants and not have high vacancy rates. So, all that sort of stuff. And it comes back to your initial point where property is an active asset. So, you have to juggle this. And it is like running a business. You've got to be savvy. You've got to, you've got to stay at the bank. You've got stakeholders as the tenant. So, you have to manage all of that. You've got to coordinate all of that to cash flow this asset. - Yeah. So, cash flow. - Yeah, yeah, no. Absolutely, mate. Look, cash flow is definitely one of the most important aspects in terms of managing and being able to hold on to a property portfolio as well. And when I think a lot of times when we talk about cash flow, it's the first thing that comes into my mind is a lot of people think that, you know, they want to be able to purchase a property that's positively cash flow from day one. Which is very, very different. Because, you know, I can tell you, a lot of times those property companies who want to sell you properties will give you a really lovely spreadsheet that has everything broken down to detail. And, you know, they might be putting in a loan amount, that's 80%. They might be putting in a very low interest rate, just to fudge around the numbers a little bit. So, it looks feasible. Plus, you know, adding a bit of depreciation, especially for brand new properties. And you go, here you go. Here's a positively geared property that you can just take it home for as much as the X amount of dollars. But, essentially, once you bought into it, then there's a different reality. Because, you know, depending on the type of repayment that you're going, depending on the type of bank, the interest rate that you're gonna be heading into, it's very, very different. So, you know, don't get, I think one of the things that my client comes to me a lot of times, David, I want to buy my first property, my first investment property, I want it to be positively geared. I said, mate, to be honest, in today's environment, it's not possible. Residential properties are not meant to be cashflow-positive, I don't know, if you're comparing it to like a 2%, 3% interest rate back in COVID days, yes, you can get those positive cashflow ones. But, on an average interest rate between 5% to 7% today, no, you're not gonna get something out of that. So, you need to reset that expectation that, hey, these properties are meant to feed me money from day one, rather than me feeding it money. I mean, the analogy that I use to use is like, it's like a child, right? Like, you kind of had to feed the child, you had to contribute the child up until the time where he's a teenager, be able to work and be able to earn his own income to be able to get to that level. Property is no different, it's like a child, right? You need to constantly feed into it, nurture it, look after it, and then ultimately, it's gonna give you that return. I'm not sure about the kids, but anyway, but that's a side story. (laughs) They may not necessarily do that. But I think that's one of the very important things about managing cashflow. The other one is about income. So, your P-A-Y-G self-employed stuff. So, managing cashflow also means that you should be very, very careful and mindful about your job, 'cause that's most of the time, that's the only source of income in a household. And if you lose your job, do you have enough buffer to be able to hold onto these properties? Especially, I think this is a very relevant conversation today when we're heading into a bit of economic uncertainty moving forward with a lot of people getting made redundant moving forward. So, this is definitely a pre-planning or a foreplanning that anyone who's looking to build a property portfolio should be looking into, because managing cashflow sometimes does mean if you lose your job and if you don't have enough cash buffer, mate, you're gonna have to sell. That's the last, that's the bottom resort, but some people may have to, you know, unfortunate circumstances, right? And don't forget, property is not a liquid asset. It takes time to sell as well. You may not necessarily be able to find a good buyer, you may not be able to settle within six weeks. There's a lot of ins and outs, so, you know, from the time you decide to sell until the time you get sold and you get your money in the bank account, it will take time as well. So, look after your job, make sure that you've got plenty of buffer that you keep in your bank account. How much, I guess it's subjective, to be honest. Personally, I kind of like to have at least six months of repayments in my bank account at least, but that's just me being conservative. I try to have more, if I can. Certainly, in the offset account, you can never go wrong, but yeah, always have a backup plan in terms of managing your cash flow and sit on a healthy cash flow. I think that's a one-on-one for anyone who's wanting to be able to build a property portfolio, really. - Yeah, I like, I like that more, I love that a lot too much. - John, no, no, no, it's very good. I had one thing to pick up on, and I've lost it, but no, spot on. And so, the last thing I had was buying the wrong property. So, the last thing for why only sort of 1% of property investors may hit real estate is buying the wrong property. So, buying the wrong property can mean a lot of things. It almost ties in expectations a little bit, like the property doesn't kind of deliver what its purpose was. You might have bought a property that was supposed to be income-oriented, or you might have decided to buy a property that's a growth property, like a big block of R4 land with a tiny house on it, you know, that would be a growth-oriented property. But buying the property that doesn't match your goals or your expectations is the issue there. I suppose the two examples that people most give about buying the wrong properties, which is unfair, but let's go there. The first type of property that people talk about is like mining towns. Now, you can make a lot of money out of mining towns, but they're not great buying whole investments over long period of time, because they're going to eventually sort of go through a mega boom and then correct. Because there are so few economic drivers, they've got generally the mine, the mineral. So, mining towns are potentially sort of error number one, or buying something that's too niche like that. And the other example, and I had to bring it up because a lot of listeners would be expecting this, but would be like, newer off the plan. And it's not that they're bad investments, but they're probably not going to grow. So, you probably would get a decent cash flow, but without the growth, you're kind of missing out on a lot of the reason why people buy properties. So, buying the wrong property is the other reason why people throw their toys out of the pram and decide this is not for me. And I can understand, if you buy an off the plan property in 10 years later, it hasn't grown. You've been, I mean, you've been left behind, right? Thoughts, David, the wrong property type? - I'm on the pointy end on the wrong property, right? So, I do have my, making my grand bill off the plan property, which is my first property. So, I'm absolutely putting my hands and feet up in terms of agreeing with you on that one. Seeing it has no growth after 10 plus years, and it's still costing me a lot of money at the moment, actually get things fixed is certainly not a great feeling. But yeah, look, I think, and this one is again, tied to, like you said, expectations, you know, what do you want this property to do? I mean, I don't think there's a thing as per say, wrong property at the end of the day. It's a dwelling, like fundamentally, you've got to think that it's a dwelling. It's for people to live in. But your expectation on that property determines whether it's the right for purpose or not. Like you said, if you purchase a house on a R4 big land block you expected to grow, yes, you know, I mean, in the long run, given the location, given proximity, given rezoning, yes, you probably would have that at capital growth perspective. If you're buying it off the plan, and if you want the same type of potential growth or the capital growth, no, it probably won't happen. But you may get better cashflow from that off the plan property. Who knows, I'm just saying subjective, right? Like, you know, so your expectation of the property that you bought is going to make a big key differences in terms of whether you are wanting to hold onto this property in the long run or not. So, but yeah, look, you know, having a portfolio of all the off plans is probably not something that I personally would want. I certainly want to have capital growth properties, you know, basically pigeon paired with cashflow type or property. So it becomes a bit of a balance moving forward. But, yeah, luckily, I think properties are very forgiving assets. So in the long run, generally speaking, you wouldn't go too bad, but having said that, I'm still on a point in, I'm still building very solid about my off the plan property at the moment. So don't get me started on that, John. I think that's for another episode. - No, I agree, I agree. And I didn't want to pick it a scab there, David. - No, that's okay. No, I'm probably from from from from. But I think you need, I mean, I think it's also important to have the battle scars. And I've got them as well, like there are properties that I've bought that it's just strong and performed. And I'm all the wiser for having, having done it. And I can bring that value to clients. So it's okay. It's all right. So they're the four I had, I'm sure there are others, but I actually think they all come under those categories to where, you know, and Australians have a love affair with real estate. I mean, if you've ever been to a barbecue, which is all of us, or a family gathering, that's what people want to talk about. And yet, despite that, so few, so few are actually successful in real estate, even despite this obsession that we as a culture and then we as a country have. So what are we doing wrong? And I think they're the four things. And just to recap, I think it's the wrong expectations and not having enough patience. Two is not managing your debt and your finance. Number three is not managing your cash flow. And then before I had was buying the wrong property. - A property, yep, yep. - No, great summary, John. I think that sums it up pretty much pretty well. Yeah, most of the, most of those, yeah, certainly certain can be categorized under those four broad categories that I can think of as well. So I mean, I don't think there's any more things that we can add at this point, so. - Awesome. - Beautiful. All right, well, thanks, John. Thanks for another great episode. So, and look, I think that's it for us today. Listen, let's hope you guys all like it. And, you know, I'm certainly feeling that the spring is in the air now. So, you know, keep an hour. I don't know whether it's going to be a strong spring market or not, but I'm sure, you know, in a fortnight, John will be able to give us further updates on that as well for listening markets. Until then, have a good week and we'll chat to you guys soon. 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.
