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Unlocking the professional formula for investment property success · The Money Puzzle

0:11
Speaker 1: Hello and welcome to the Australian's Money Puzzle podcast. I'm
0:14
Speaker 1: James Kirby, the wealth editor at The Australian. Welcome aboard, everybody.
0:19
Speaker 1: I think if you are a property investor, if you
0:22
Speaker 1: aspire to be a property investor, or even if you
0:25
Speaker 1: are a veteran property investor, I expect one of the
0:30
Speaker 1: most difficult things with property is because it's illiquid, right?
0:33
Speaker 1: Because you can't sell a bit of it. You can't
0:36
Speaker 1: sell $ 10, 000 worth of property. Most people, most of the time,
0:41
Speaker 1: really don't know how their property is faring until the
0:45
Speaker 1: day they sell it. So they buy it, they hold
0:47
Speaker 1: it for 10 years, they sell it, and then they
0:49
Speaker 1: look back and they go, okay, well, that worked out
0:51
Speaker 1: at so much per annum. But that really isn't quite
0:54
Speaker 1: good enough. In recent times, I've met so many people
0:58
Speaker 1: who have been disappointed with certain property investments, specifically inner
1:06
Speaker 1: city apartments in two major cities, which haven't really worked
1:10
Speaker 1: out or certainly haven't worked out as well as they
1:12
Speaker 1: were told they were going to work out. Because once
1:14
Speaker 1: upon a time, everyone was told, hey, buy property, it
1:16
Speaker 1: doubles every 10 years, we'll all be fine. That is
1:19
Speaker 1: not the case. That hasn't been the case for a while,
1:21
Speaker 1: my friends. Very good, but it's not that good. And
1:24
Speaker 1: all property is local. So I'm going to talk today
1:28
Speaker 1: about this issue and some other key issues that are emerging.
1:31
Speaker 1: We've seen a spike in interest-only lending. What's that about?
1:35
Speaker 1: Now assume that the interest rate cuts are on the
1:40
Speaker 1: long finger, shall we say, because they're, don't you know,
1:43
Speaker 1: there's now economists saying, I wouldn't be waiting until early
1:47
Speaker 1: next year for interest rate because they may never come
1:49
Speaker 1: with the election of Trump. By the way, on Trump,
1:52
Speaker 1: of course, we're going to deal with Trump and what's
1:53
Speaker 1: happening in markets. We will do that on this Thursday's show.
1:57
Speaker 1: Look out for that. Now, to help me, to guide
2:01
Speaker 1: me through the issues I just laid for you there
2:04
Speaker 1: on property investment is a regular on the show. and
2:07
Speaker 1: a regular contributor to The Australian. Stuart Weems of the
2:10
Speaker 1: ProSolution Private Clients Group. How are you, Stuart?
2:14
Speaker 2: I'm really well, James, and thanks for having me back
2:16
Speaker 2: on again.
2:16
Speaker 1: I'm sure the audience will fondly remember you standing for
2:21
Speaker 1: me when I was on holidays, which now seem like
2:23
Speaker 1: a long time ago, even though I came back in
2:28
Speaker 1: early October. But, you know, that's life, I suppose.
2:31
Speaker 2: I feel far more comfortable being the guest than the host,
2:34
Speaker 2: that's for sure.
2:35
Speaker 1: Do you? One of the things you often mention to me,
2:37
Speaker 1: and I want you to just sort of explain it
2:40
Speaker 1: and discuss it with our listeners today, is internal rate
2:43
Speaker 1: of return. So I mentioned at the start that professional investors,
2:48
Speaker 1: they've got this running tab, if you like, on their
2:51
Speaker 1: investments called internal rate of return. These VC funds and
2:54
Speaker 1: private equity funds, Yes, they invest for 10 years, but
2:58
Speaker 1: they don't sit there blindfolded, hoping it'll all work out.
3:02
Speaker 1: They keep a running tab on their investments. Internal rate
3:05
Speaker 1: of return. Tell us how an investor, a potential investor,
3:09
Speaker 1: can do that on property.
3:11
Speaker 2: And it's really important to understand how an internal rate
3:15
Speaker 2: of return behaves, James. And I'd say that particularly for
3:18
Speaker 2: property investors, because property investors are borrowing money and then
3:21
Speaker 2: they're servicing the loan and then they'll hopefully get some.
3:24
Speaker 1: First of all, what does it actually mean? What's the
3:26
Speaker 1: difference between my return and my internal rate of return?
3:29
Speaker 2: Internal rate of return is the return that you receive
3:33
Speaker 2: back from the... or taking into account the amount you've
3:36
Speaker 2: contributed to an investment over many years. And if I
3:40
Speaker 2: draw an analogy, say... between, say, a forestry investment. Let's
3:44
Speaker 2: say I want to grow some trees and then harvest
3:46
Speaker 2: those trees. And let's pretend that when I first buy
3:50
Speaker 2: the land and the trees to plant on that land,
3:53
Speaker 2: I borrow the full cost of that acquisition, that cost.
3:56
Speaker 2: But of course, those trees are going to take 20
3:59
Speaker 2: years to grow. And over that time, I'm going to
4:01
Speaker 2: have to service the interest on the loan that I
4:03
Speaker 2: use to buy the land and the trees. The trees
4:05
Speaker 2: are going to need water and care and so forth.
4:07
Speaker 2: And I'm going to have to contribute to that. And
4:09
Speaker 2: that'll be my contribution because I borrowed the initial cost.
4:14
Speaker 2: I haven't put any of my own money in, but
4:15
Speaker 2: I'm putting my own money in each year over the
4:18
Speaker 2: next 20 years. In 20 years time, I'm going to
4:21
Speaker 2: harvest those trees and hopefully then sell the timber or
4:24
Speaker 2: whatever I might want to do. And that will be
4:25
Speaker 2: my return. If I'm putting in $ 10, 000 a year for
4:28
Speaker 2: the next 20 years, $ 200, 000, what return am I going
4:29
Speaker 2: to earn on that $ 200, 000 that I've drip fed in
4:30
Speaker 2: over the last 20 years? and that'll be the capital
4:40
Speaker 2: at the end of the day. An internal rate of
4:42
Speaker 2: return expresses that as a percentage, an annualised compounding percentage.
4:47
Speaker 2: And the reason that's important, James, is because if I'm
4:51
Speaker 2: investing in forestry or if I'm investing in an investment
4:54
Speaker 2: property and it's costing me $ 10, 000, $ 20, 000, $ 30, 000 a year.
4:58
Speaker 2: The question I need to be asking myself is what
5:01
Speaker 2: return will I earn and is there something better that
5:03
Speaker 2: I can do with that money? So if I'm getting
5:06
Speaker 2: a 15% after-tax return from investing in property, fantastic. That's
5:10
Speaker 2: probably better than super. It's probably better than the share market.
5:13
Speaker 2: But if I'm earning something substantially less than that, then
5:17
Speaker 2: I might want to be thinking about have I chosen
5:19
Speaker 2: the right property? Am I managing that property well? Or
5:22
Speaker 2: should I, in fact, invest in a different asset class?
5:26
Speaker 1: Speaking, as I mentioned at the start, people who are
5:29
Speaker 1: disappointed with property investments when they finally sell them, maybe
5:32
Speaker 1: if they did this exercise earlier, they wouldn't get such
5:38
Speaker 1: a disappointing outcome. Because it's similarly for the investor. The
5:42
Speaker 1: investor says, oh, well, the yield, you know, everyone's talking
5:44
Speaker 1: about rents going through the roof. But as it turns out,
5:47
Speaker 1: my yield is only 3% or 4%. And my costs,
5:48
Speaker 1: my loan is 6% or 7%. And I have all
5:55
Speaker 1: the costs on top of that. So I'm absolutely dependent
6:00
Speaker 1: upon the price of this apartment being much higher when
6:06
Speaker 1: I sell it. So let's take that example then. Here's
6:09
Speaker 1: the investor. It got this apartment. I'm going to use
6:12
Speaker 1: an apartment because I think it's probably the ideal proxy here.
6:15
Speaker 1: Got an apartment. Had it for three or four years.
6:19
Speaker 1: The idea was to hold it for 10 years. How
6:22
Speaker 1: would they do the entire rate of return exercise on that?
6:28
Speaker 2: Look, you've got to spreadsheet it and use the calculator.
6:31
Speaker 2: I don't think people, investors necessarily need to do that
6:34
Speaker 2: calculation themselves. Their advisors probably should, but they don't necessarily
6:38
Speaker 2: need to. They just need to understand the relationship. And
6:41
Speaker 2: maybe I can give you some examples between, say, a high-income,
6:45
Speaker 2: low-growth property and a low-income, high-growth property, so the complete reverse.
6:51
Speaker 2: And let's assume that we get a 9% total return.
6:54
Speaker 2: It's really just the makeup of income and growth that
6:57
Speaker 2: equals that 9%. And so the low-income property is yielding 1.5%
7:03
Speaker 2: gross rental income, terrible yield, that's not very much, and 7.5% growth.
7:09
Speaker 2: And the high income property, 6% income, 3% growth. And
7:12
Speaker 2: let's compare those two because it's important to not only
7:15
Speaker 2: look at the internal rate of return, but actually the
7:18
Speaker 2: dollars at the end of the day as well. So
7:21
Speaker 2: in both those scenarios, the internal rate of return for
7:24
Speaker 2: the low income property is 10.5%. If I hold it
7:27
Speaker 2: for 30 years, sell it and walk away, that's after tax.
7:30
Speaker 2: The high income property, so 6% income, 3% growth, internal
7:34
Speaker 2: rate of return is 11%. So pretty similar, but just
7:38
Speaker 2: a little bit more. And the reason for that is
7:41
Speaker 2: that high income property, it's producing a very high income.
7:44
Speaker 2: So my contribution is a lot less. The property starts to,
7:47
Speaker 2: in fact, earn a positive income after 12 or 13 years.
7:51
Speaker 2: And if I'm holding that property for 30 years, then
7:53
Speaker 2: most of the time it's giving me income. And that's
7:56
Speaker 2: why the internal rate of return is so great. But
7:59
Speaker 2: when we look at the actual dollar value return in
8:02
Speaker 2: 30 years' time when we go and sell that property,
8:05
Speaker 2: the high-income property is going to put about half a million,
8:08
Speaker 2: $ 520, 000 in my bank in today's dollars. Okay, so that's
8:12
Speaker 2: not a bad injection.
8:13
Speaker 1: What are you basing these estimates on?
8:16
Speaker 2: The income and growth, so the total.
8:18
Speaker 1: On historical averages?
8:20
Speaker 2: Yeah, exactly right.
8:21
Speaker 1: Okay.
8:22
Speaker 2: Whereas the low-income, high-growth property... is going to put $ 2. 8
8:27
Speaker 2: million in my bank account in 30 years in today's dollars. Now,
8:30
Speaker 2: $ 2. 8 million, James, would be enough for anyone to run
8:34
Speaker 2: a perpetual portfolio. So that is that they could have
8:38
Speaker 2: a very enjoyable and comfortable retirement. So sometimes as property investors,
8:44
Speaker 2: when we go and buy a property, what we want
8:46
Speaker 2: to do is trying to balance between income and growth.
8:50
Speaker 2: But the reality is that's the wrong approach. you're actually
8:54
Speaker 2: forgoing too much in terms of return by doing that.
8:58
Speaker 2: What you should do, as what property investors should do,
9:01
Speaker 2: is do property investing in two steps. At the acquisition stage,
9:05
Speaker 2: obsess about capital growth because that's the time when that's
9:08
Speaker 2: going to be locked in. It's going to be what
9:10
Speaker 2: type of property, what sort of land value component, where
9:13
Speaker 2: is that land, how much land do you have? All
9:16
Speaker 2: those things are factual. They'll be locked in when you
9:18
Speaker 2: buy it. There's not much you can do to change
9:21
Speaker 2: the outcomes after you've purchased it. But after you've purchased
9:25
Speaker 2: your property, forget about growth because you've already locked that in,
9:29
Speaker 2: start obsessing about holding costs. Can we make cosmetic improvements
9:33
Speaker 2: to the property to increase its rental yield? How do
9:35
Speaker 2: I minimize my interest costs? Am I maximizing my tax benefits,
9:40
Speaker 2: my negative gearing? Because the outcome is, I bought this property,
9:45
Speaker 2: I hope that I'm going to achieve a 6% or 7%
9:48
Speaker 2: average compounding capital growth rate over a very long period
9:51
Speaker 2: of time. You're not going to get that every year,
9:53
Speaker 2: but over multi-decade periods. And so now my goal is
9:57
Speaker 2: to limit the amount I have to actually invest in
10:00
Speaker 2: this asset, which is your holding costs. And that's where
10:03
Speaker 2: the focus should be. The mistake that a lot of
10:06
Speaker 2: people make is that they try to even out those
10:09
Speaker 2: two elements when they buy the property, both yield and growth.
10:13
Speaker 2: And the result of that is that they end up
10:16
Speaker 2: either really compromising in terms of performance and financial outcomes.
10:21
Speaker 1: Let's take a break. When we come back, we're going
10:24
Speaker 1: to tell the listeners the nature of these properties and
10:27
Speaker 1: where they might be. Back in a moment. Hello, welcome
10:42
Speaker 1: back to The Australian's Money Puzzle. podcast i'm james caribbean
10:45
Speaker 1: i'm talking to stewart weems of the pro solution private
10:50
Speaker 1: giants group now if you recall first part of the
10:52
Speaker 1: show we talked about this very important issue for the
10:57
Speaker 1: investor and the the attraction if you like of strong
11:02
Speaker 1: income yield on your property which translates very simply as
11:08
Speaker 1: high rents okay that the rent that the rents are
11:11
Speaker 1: high as a proportion, that is, of the price of
11:14
Speaker 1: the property. And you have a strong rental yield. Traditionally,
11:19
Speaker 1: the place where you found high rental yields was in
11:23
Speaker 1: the regions. And basically, the deal was in the center
11:26
Speaker 1: of the city, you had low rents, that is, low
11:29
Speaker 1: rental yields. And in the bush and in the regional
11:34
Speaker 1: towns and at the very fringes, perhaps, of the cities,
11:36
Speaker 1: you had higher yields and you couldn't expect such price growth.
11:40
Speaker 1: That was the deal. Is that the deal still, Stuart?
11:45
Speaker 1: Where do we get these high yield properties?
11:47
Speaker 2: Yeah, but COVID skewed the data a little bit, James.
11:52
Speaker 2: It skewed the data around property a little bit. And
11:54
Speaker 2: I think what it's doing is inviting investors to make mistakes.
11:59
Speaker 2: And the mistake is that if I'm going to go
12:01
Speaker 2: and buy a property, I need to think about, on average,
12:04
Speaker 2: Over a very long period of time, I'm talking hopefully multi-decades,
12:08
Speaker 2: what will my average returns be? You can't always use
12:12
Speaker 2: most recent returns as an indicator for that. I've seen
12:16
Speaker 2: a lot of buyer's agents online saying, look, we're buying
12:18
Speaker 2: this property. Not only is it giving us a good yield, 4%, 5%,
12:23
Speaker 2: whatever it might be, but look at the growth over
12:26
Speaker 2: the last five years. And that's fantastic. When you add
12:29
Speaker 2: the yield and the growth, you might end up with
12:31
Speaker 2: a total return of 12%. But do you really think
12:33
Speaker 2: you're going to get 12% from that asset over a
12:35
Speaker 2: 30-year period? Because that's a pretty ambitious assumption. I think
12:40
Speaker 2: the answer is it's unlikely. And typically, you're going to
12:45
Speaker 2: need to make a compromise. Are you going to compromise
12:48
Speaker 2: on income or are you compromising on growth? It's one
12:51
Speaker 2: or the other. And ironically, if you look at the
12:53
Speaker 2: internal rate of return calculations, even if you can find
12:56
Speaker 2: a balance... between both, that's an inferior outcome on the
13:00
Speaker 2: internal rate of return perspective because you're actually not getting
13:03
Speaker 2: one or the other really. So are.
13:07
Speaker 1: You saying you should go boots and all into one
13:09
Speaker 1: or the other, that you should seek knowingly to the
13:13
Speaker 1: extent that you can ever know, but to the extent
13:15
Speaker 1: that you can know and you do your homework, that
13:18
Speaker 1: you should know what you're buying, that this is a
13:20
Speaker 1: capital growth property and I know the yield is low,
13:23
Speaker 1: or this is a yield property And I know the
13:25
Speaker 1: capital growth will be modest, but look at this yield.
13:28
Speaker 1: In my dollars today, this is really working out for me.
13:31
Speaker 2: If you can achieve an average return of 7.2%, over
13:34
Speaker 2: 30 years, your property will be worth six times than
13:38
Speaker 2: what it is today. There's no easier way to make
13:41
Speaker 2: money than compounding capital growth. It's always going to beat
13:46
Speaker 2: the income yield, almost irrespective of what that asset costs
13:50
Speaker 2: you within reality. the outcome is going to be great.
13:53
Speaker 2: The outcome is going to be a comfortable retirement.
13:56
Speaker 1: Where are these properties geographically?
13:58
Speaker 2: If you want to take an approach where you've got
14:01
Speaker 2: the highest probability of earning 7.2% or more, then you
14:05
Speaker 2: really need to think about scarcity and scarcity and demand.
14:09
Speaker 2: And you want to be in an area where demand,
14:12
Speaker 2: the potential buyers, their capacity isn't directly linked to their
14:16
Speaker 2: household income. They've got other sources of wealth. And then
14:20
Speaker 2: supply in terms of scarcity in terms of supply as well.
14:24
Speaker 2: So this is really blue-chip suburbs are going to have
14:28
Speaker 2: the fundamentals that are going to drive higher and higher growth.
14:31
Speaker 2: And we can talk about density and all those sorts
14:34
Speaker 2: of things. All these things add to the scarcity of
14:37
Speaker 2: these sorts of assets.
14:38
Speaker 1: So it's not necessarily regional, non-metropolitan property residential.
14:45
Speaker 2: If you're investing in a regional location, you've got to
14:47
Speaker 2: ask yourself, what haircut am I going to take on
14:50
Speaker 2: capital growth and what's the opportunity cost of that? Now,
14:53
Speaker 2: it's quite possible to buy in a regional location that
14:57
Speaker 2: is well established, but buy in a really good area
15:00
Speaker 2: in that regional location, in that regional town. Buy in
15:04
Speaker 2: the best street possibly or something that is very sought after.
15:07
Speaker 2: So you can still apply this methodology to regional areas
15:12
Speaker 2: as well, but essentially what you're trying to do is
15:15
Speaker 2: not by the diamond, but by the pink diamond, by
15:17
Speaker 2: the asset in the street that's always going to be
15:21
Speaker 2: in demand. And that way, the people that can afford
15:24
Speaker 2: to buy into that area will continue to push those
15:26
Speaker 2: prices forward.
15:28
Speaker 1: Terrific. Okay. Now, one other thing I wanted to talk
15:32
Speaker 1: to you about since I've got you this week is
15:35
Speaker 1: you and I both noticed, we didn't get a chance
15:37
Speaker 1: to talk about this, but in covering the bank results,
15:40
Speaker 1: I noticed that the interest-only loans as a percentage of
15:44
Speaker 1: the book, if you like, in National Australia Bank, which
15:48
Speaker 1: just happened to be the bank result I was looking at,
15:51
Speaker 1: had popped higher. And it struck me that, of course,
15:55
Speaker 1: when investors are very confident in property markets, they will
16:01
Speaker 1: invest and they will invest interest only. And more importantly,
16:05
Speaker 1: banks will hand over interest only loans. They've been slow
16:08
Speaker 1: to do it for some years. They're clearly starting to
16:11
Speaker 1: do it again. What do you make of that?
16:15
Speaker 2: I think it's probably more borrower-led than a reflection of
16:20
Speaker 2: credit policy, James. A couple of years ago, obviously, interest
16:23
Speaker 2: rates were really low. And at that time, a lot
16:26
Speaker 2: of investors, certainly in our experience in our business, a
16:30
Speaker 2: lot of investors said, given interest rates I can fix
16:33
Speaker 2: at 2%, sorry, interest rates are so low, I may
16:36
Speaker 2: as well start repaying some principal. And so a lot
16:39
Speaker 2: of investors went over to principal interest repayments on those
16:42
Speaker 2: low fixed rates. Obviously, the fixed rates of most of
16:46
Speaker 2: them have matured, expired. And now they're realizing that because
16:50
Speaker 2: interest rates have significantly increased, of course, the dollar value
16:54
Speaker 2: repayment is much higher. And so a lot more clients
16:57
Speaker 2: are speaking to us about going back to interest-only repayments
17:01
Speaker 2: now that interest rates are at a much higher setting.
17:05
Speaker 2: I think Credit policy has loosened slightly, but I don't
17:09
Speaker 2: think that's the reason for the increase in interest-only lending.
17:14
Speaker 1: And on interest-only, do you have a set position on it,
17:19
Speaker 1: or is it case-by-case basis?
17:22
Speaker 2: I think if you're in acquisition stage, so you're young,
17:25
Speaker 2: many years away from retirement, then your goal probably is
17:29
Speaker 2: to acquire as many growth assets as possible and have
17:33
Speaker 2: an interest-only setting. will probably help you do that. If
17:36
Speaker 2: you've already established a good asset base and it's really
17:40
Speaker 2: about consolidating, then in that situation, sometimes principal interest makes sense. Personally,
17:45
Speaker 2: I've always been interested in more recently. I've had a
17:48
Speaker 2: few loans flick over to principal interest. I'm pretty comfortable
17:51
Speaker 2: with that. It helps me build a bit of equity
17:54
Speaker 2: in the property as well. So it just really depends
17:57
Speaker 2: as your stage of life, I think is the key one.
17:59
Speaker 1: Okay, very interesting. And do remember folks, the interest only,
18:02
Speaker 1: assuming a bank will give you one, The issue is
18:04
Speaker 1: that your loan doesn't go down. So you're paying that
18:07
Speaker 1: interest every year. The years pass and your loan on
18:10
Speaker 1: the fourth year is as big as the loan on
18:13
Speaker 1: the first year. Mind you, inflation, of course, a little
18:16
Speaker 1: bit of inflation would help that situation, Stuart. It's not
18:20
Speaker 1: a problem when you are in that situation, particularly if
18:23
Speaker 1: you're fixed. And you can fix on interest-only loans as well.
18:27
Speaker 1: This probably isn't the climate to do it, but just
18:30
Speaker 1: making that point that you can. Okay, let's have a
18:32
Speaker 1: break and we'll do some questions. Hello, welcome back to
18:41
Speaker 1: the Australian's Money Puzzle podcast. I'm James Kirby talking to
18:45
Speaker 1: Stuart Weems. Our first question this week is from Paul.
18:49
Speaker 1: He says, I believe most people are happy for our
18:53
Speaker 1: taxes to be spent on helping the true backers into
18:56
Speaker 1: social housing. We've all heard, however, about the occasional social
19:01
Speaker 1: housing occupants who trash their property. What guarantees will governments
19:06
Speaker 1: give to the voting public that such problems would be
19:09
Speaker 1: quickly and effectively handled. Okay, that's interesting, Paul. One of
19:14
Speaker 1: the things I think many people would be on broadly
19:19
Speaker 1: in principle agreeing with you there that social housing is needed.
19:24
Speaker 1: It has a place and it's important. And not only that,
19:27
Speaker 1: but not much housing was built for many years in
19:31
Speaker 1: many of the key cities under both Labour and Liberal administrations.
19:36
Speaker 1: So they're catching up now. It's also true, the statistics
19:39
Speaker 1: show that, that their maintenance levels are higher and they
19:43
Speaker 1: have that issue. I don't think you can change that
19:46
Speaker 1: issue in any substantial way. You probably just have to
19:49
Speaker 1: take it into your numbers and allow that. I think
19:52
Speaker 1: that's all they can do. They can know that numbers
19:55
Speaker 1: are higher and issues such as damage to property is
19:59
Speaker 1: higher at that level of the market. You take it
20:01
Speaker 1: as a truth that you like of that market and
20:03
Speaker 1: you work as best you can around it. And obviously
20:06
Speaker 1: from an investment point of view, if it's the case
20:09
Speaker 1: that such housing is being put before private investors, they
20:12
Speaker 1: would allow for that. Anything to add to that, Stuart?
20:15
Speaker 2: My only observation is that state governments are very keen
20:19
Speaker 2: to ensure that private landlords have maintained very high standards
20:23
Speaker 2: with their rental properties, but it doesn't seem like states
20:26
Speaker 2: do the same with public housing. And I think perhaps
20:30
Speaker 2: the rules should apply to the government just as much
20:32
Speaker 2: as they do private investors. Not really related to the question,
20:35
Speaker 2: but I thought I'd like to mention it anyway.
20:37
Speaker 1: You thought you'd chuck that in. Yeah, okay. All right.
20:40
Speaker 1: And can you see this? Would you like to read
20:43
Speaker 1: the first one from Dan?
20:44
Speaker 2: From Dan? Yeah, definitely. Dan writes, one of my relatives
20:48
Speaker 2: is 65 years old, no debt, lives the full life
20:50
Speaker 2: of travel, but does not own their own home. And
20:54
Speaker 2: they have a super balance of $ 1. 65 million. What should
20:57
Speaker 2: they consider? For example, should they buy a small property?
21:01
Speaker 2: What do you think, James?
21:03
Speaker 1: Well, I would say if it's the case that they
21:06
Speaker 1: have no property whatsoever, this is never advice, Dan. This
21:09
Speaker 1: is information only. But if it's the case that there
21:12
Speaker 1: is a 65-year-old couple in Australia and they have super of,
21:18
Speaker 1: what was the number? 1.65 million between them and they
21:20
Speaker 1: don't own their own home, they are asking, they are
21:25
Speaker 1: walking into the most difficult situation because the entire tax
21:28
Speaker 1: system is loaded in favor of the homeowner and pension
21:32
Speaker 1: access too. loaded in favor of the homeowner and if
21:35
Speaker 1: you had one i'll be very crude about this but
21:37
Speaker 1: if you have 1.6 million and you spent a million
21:39
Speaker 1: on a home then your access to the pension would
21:43
Speaker 1: open up because the home isn't included but all those
21:46
Speaker 1: assets the 1.65 that you have outlined that you're a
21:49
Speaker 1: couple own their non-property they are every dollar is going
21:53
Speaker 1: to be included in pension access and i could say
21:55
Speaker 1: that you're probably wiped out in terms of all the
21:58
Speaker 1: the benefits in there so That's what stands out there.
22:02
Speaker 1: Should they buy a home? If they don't have a home,
22:05
Speaker 1: they should buy one. I would think so. I mean,
22:08
Speaker 1: I don't want to give individual advice, but I would
22:10
Speaker 1: say in the scenario outlined for any Australian couple, then
22:16
Speaker 1: you are walking into higher tax or at least less
22:21
Speaker 1: beneficial arrangements as you're older if you don't own your home.
22:24
Speaker 1: What do you think of that, Stuart?
22:28
Speaker 2: I was thinking along the same lines, James. Like if
22:30
Speaker 2: they put a lot of that wealth into the family home,
22:35
Speaker 2: they would certainly open themselves up to a part pension.
22:38
Speaker 2: They'd have to spend maybe 1.3 to get a full pension.
22:40
Speaker 2: I'm not sure I would do that. And then you
22:44
Speaker 2: would say, hang on, you're pulling money out of an
22:46
Speaker 2: environment that's tax-free. Home is tax-free. So the only thing
22:49
Speaker 2: I would add to it is if I was in
22:51
Speaker 2: their situation, my concern would be longevity risk and security.
22:56
Speaker 2: having your own home gives you a lot of security.
22:59
Speaker 2: So I would buy a property, maybe somewhere around that
23:02
Speaker 2: million to 1.2, and I would buy it with an
23:06
Speaker 2: investment lens. I would buy an asset that is going
23:09
Speaker 2: to give me good capital growth that I also would
23:12
Speaker 2: like to occupy for the next 10 to 20 years.
23:15
Speaker 2: But if you apply it with an investment lens, at
23:17
Speaker 2: least your money's going to be working hard for you
23:20
Speaker 2: and any capital growth's not going to be taxed, of course,
23:23
Speaker 2: it'll be tax-free. So that's a pretty good outcome, probably
23:26
Speaker 2: just as good as super almost if you buy well.
23:30
Speaker 1: And if it looks like the numbers on your income,
23:33
Speaker 1: which will fall, of course, having spent to buy a
23:38
Speaker 1: residential property, a home that is, as Stuart pointed out,
23:42
Speaker 1: you must, the holistic view, allow for the fact that
23:45
Speaker 1: your access to the pension suddenly opens up because the
23:49
Speaker 1: home is not included. That is one of the great
23:51
Speaker 1: big tax shelters in our society. And someone should be
23:57
Speaker 1: aware of them and I would be very slow to
24:00
Speaker 1: turn my back on them, put it that way. Okay,
24:03
Speaker 1: now Billy seeks clarification on the land tax scenario. If
24:08
Speaker 1: you choose to vacate your primary place of residence over
24:12
Speaker 1: summer and later for another week over Easter, and you
24:16
Speaker 1: choose to earn an income off Airbnb during those periods,
24:20
Speaker 1: does this make you eligible to pay land tax? I
24:24
Speaker 1: don't know the answer, but instinct tells me yes. What's
24:29
Speaker 1: the story, Stuart?
24:32
Speaker 2: I don't want to add to the negative Victorian economy sentiment,
24:36
Speaker 2: but I'm afraid my answer will. I only checked out
24:39
Speaker 2: New South Wales and Queensland. Of course, we don't know
24:41
Speaker 2: where Billy's property is located. And there was no issues there.
24:45
Speaker 2: You could earn a little bit of income as long
24:47
Speaker 2: as you didn't rent the property out for more than
24:48
Speaker 2: six months. But you'd have to look at your individual
24:51
Speaker 2: state legislation to really check this. Unfortunately, in 21, Victoria
24:57
Speaker 2: changed the law. You can't earn $ 1 from your property now.
25:01
Speaker 2: It used to be similar to other states. If you
25:04
Speaker 2: rented out for more than six months, it's no longer
25:06
Speaker 2: your primary place of residence. From a land tax perspective
25:09
Speaker 2: in Victoria, they changed that in 21. So even if
25:12
Speaker 2: you rented out for two weeks, bang, you've lost your
25:16
Speaker 2: primary place of residence exemption and you'll get a land
25:18
Speaker 2: tax bill. And it relates to the previous tax year, right?
25:22
Speaker 2: So the land tax years are calendar years, which means
25:27
Speaker 2: if I rent out my property, my home this year,
25:30
Speaker 2: next year I'll get a land tax bill. Pretty harsh,
25:34
Speaker 2: I reckon. Yes, yes.
25:37
Speaker 1: So, yes, pretty harsh. And, of course, there's this arbitrage
25:41
Speaker 1: between the states now where one state is clearly the
25:44
Speaker 1: least attractive to invest in property, which is Victoria. Yeah.
25:47
Speaker 1: And part of the price of that, of course, is
25:50
Speaker 1: that in a federation where people can easily choose between states,
25:54
Speaker 1: they do. I might actually take a second on that, Stuart,
25:57
Speaker 1: with you. One of the things, we have mentioned this
26:01
Speaker 1: before about Victoria and the difficulty being an investor there.
26:05
Speaker 1: And I saw where Moody's, the rating agency, had run
26:09
Speaker 1: some numbers on mortgage delinquencies. And it turns out that
26:13
Speaker 1: Victoria is the highest. Now, so we have The weakest
26:16
Speaker 1: property growth in Victoria. We also have the highest rate
26:20
Speaker 1: of mortgage delinquency. They tend to go hand in hand,
26:23
Speaker 1: that if prices start to fall, mortgage delinquency goes up.
26:26
Speaker 1: And as an investor who could invest anywhere in Australia,
26:32
Speaker 1: Do you see that as becoming a bargain basement, basically,
26:36
Speaker 1: or are you too worried about the regulation risk in Victoria?
26:39
Speaker 2: I mean, delinquencies and arrears rates in Australia have been...
26:43
Speaker 2: They sometimes report there's an uptick, and there certainly has
26:45
Speaker 2: been over the last couple of years.
26:46
Speaker 1: Yeah, and they are very low. I know what you're
26:48
Speaker 1: going to say. They're reasonable, right? But they're going the
26:50
Speaker 1: wrong way.
26:51
Speaker 2: Yeah, they're very low. Victoria's population growth has been pretty
26:54
Speaker 2: ordinary with interstate immigration, or migration, I should say. It's
26:58
Speaker 2: actually turned positive now, which is... Maybe the green shoot
27:01
Speaker 2: sign that the economy, particularly in Victoria, is recovering. The
27:05
Speaker 2: shrinking population is not really great for the economy either.
27:08
Speaker 2: And then you've had higher interest rates. I don't think
27:12
Speaker 2: Victoria is shooting the lights out from that perspective. But
27:14
Speaker 2: I think if we take a long-term view, which we
27:16
Speaker 2: must when we're investing in property, I'm very optimistic about Victoria,
27:21
Speaker 2: particularly for a few different reasons, but it's going to
27:24
Speaker 2: be a federal issue. The federal government needs to solve...
27:28
Speaker 2: the Victorian issue in terms of getting the economy back
27:30
Speaker 2: on track and getting the debt in line. Otherwise, it
27:33
Speaker 2: impacts Australia because the Victorian economy is a significant contributor
27:37
Speaker 2: to the overall GDP in Australia. So it's not only
27:41
Speaker 2: a state problem. If not already, it will become a
27:44
Speaker 2: federal problem as well.
27:46
Speaker 1: Okay, very good. And of course, there's the whole issue
27:48
Speaker 1: of state debt. But we will put that to one
27:50
Speaker 1: side for the moment. Very good. Thank you very much, Stuart.
27:53
Speaker 1: Every now and again, we should actually stand back on
27:55
Speaker 1: the show and look at some of these elementary issues
27:58
Speaker 1: as an investor that are applicable to you wherever you are,
28:01
Speaker 1: whatever you're doing. Internal rate of return is one of
28:04
Speaker 1: those things. Thanks a lot, Stuart Weems of Pro Solution
28:07
Speaker 1: Private Clients.
28:09
Speaker 2: Thanks, James. Fun as always. Appreciate it.
28:11
Speaker 1: Great to have you on the show. Folks, let's have
28:13
Speaker 1: some emails. The money puzzle at theaustralian.com.au. Happy to receive
28:20
Speaker 1: your observations, questions, complaints. Also, we would really appreciate it
28:27
Speaker 1: if you would mention the show to someone you know.
28:29
Speaker 1: That's our bit of internal marketing here. And thanks again
28:34
Speaker 1: to our producer, Leah Samuel-Glue. Talk soon. Thank you.