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Is 5 Properties in 5 Years the New Wealth Hack? · The Follio Property Podcast

• 0:05
  Welcome to I Call Bullshit Property Podcast, where we separate real estate fact from fiction. I'm Rhys Bettle, and in every episode, we uncover the truth behind the property market's biggest claims and trends. Joining me is our resident expert, Lachlan Delhunte. He's seen it all and isn't afraid to call out the bullshit when he sees it. Lachlan, welcome. Always a pleasure, Rhys. Let's jump into today's topic.
• 0:27
  Can you buy five properties in five years and live off the passive income? It's a big fad at the moment, isn't it? On TikTok, YouTube, buy five properties in five years, live off the passive income, and you can retire, live in Bali. Yeah. Look, we gotta sort of wind it back.
• 0:42
  And big numbers too. You always see like, you know, 150K passive income, 200K passive income. Yeah, massive. Massive, overly stated. And in reality, none of that shit's achievable. What are you getting pitched to on social media every single day? For anyone's at home, you look up a realestate.com ad and all of a sudden you're going to get flooded with a lot of buyers, agents, property influencers, so to speak, with these... Almost how outlantic it is, is more, you know, the bigger the hook. And that's what they're trying to create, right?
• 1:11
  One of the guys, I think it's Henderson, $150 million portfolio at 25. It's ridiculous and it's not factual information and it can be annoying. But when you dial back, let's have a look at it. You can buy five properties in five years. Like I said, off there we can go and buy five one-bedroom units in Geraldton.
• 1:30
  for 200k a pop but is that a good strategy no so we need to look back as as as to why you know any portfolio come back to the why what what are you trying to achieve what you're trying to achieve yeah and those those are the questions you should be asking yourself before you begin a
• 1:46
  Absolutely. You want to set out with a clear goal in mind and every client's very different and probably at a very different point in their investment journey. So again, coming back to the why. And that why changes and it's okay for that why to change. And the reason I ask that is the amount of people I know or speak to through our roles that are accidental investors or accidental landlords, I should say. So we're...
• 2:12
  They want to upgrade their house, they've earned a decent amount of equity and they actually just turn their owner occupied into an investment property and that's how they start their journey because they upgrade their house but they keep theirs as an investment. I think a lot of those people don't sit down and have that conversation about, why am I doing this? Well, what are some of the fundamentals I should be considering before I jump into this? And in some instances, keeping that principal place might be a bad decision because that asset type is maybe not the best growing area
• 2:40
  Yeah, exactly. And the timing of that market might not be the right time, but a lot of people are accidental investors. And it's not until that accidental investment goes well that all of a sudden they're a property expert and they want to kick off this journey and repeat that. But the problem is they typically do it in the same market and they've ridden a cycle and they try to double down in that market at the wrong point of the cycle.
• 3:02
  So when we tier it right back, it's what you're trying to achieve. And typically, I've probably assessed, I'd say, somewhere between 5,000 and 7,000 portfolios over the last 10 years. And typically, all investors are in two phases.
• 3:17
  without even without realizing they're in two phases they're in two phases and they're either well they should be in a sort of a debt reduction strategy if you've got a primary place of residence you want to be paying off that debt as quickly as you can because it's bad debt there's no negative gearing benefits we want to get that down as quickly as we can and hurt your service ability as well
• 3:36
  And once you're over that ledge, for a lot of people, that takes years and that's why you're on a loan for a 25 or 30 year term, because if you do nothing else, that's how long it takes you to pay that off. So that's typically the first goal, whether people realize it or not, that should be your goal and our conversations around that. How can we get that from 25 years down to six or seven?
• 3:59
  Once you pass that, then you're at wealth creation and you're trying to build your nest egg and you're typically looking at one or two things. Are you trying to leave a legacy portfolio behind or are you trying to create an income closer to retirement to supplement what you make from day to day? And that's what it really dials back to. Yeah, what about when you're first starting out? Over, so you mentioned there reducing your principal pay step because it's not tax deductible.
• 4:26
  The strategies you hear a lot through online advisors or TikTok mortgage brokers, etc. There's a strategy clear about overpaying and reducing that debt as quick as possible and also utilising something like an offset as well. Yep. If someone's just kind of starting out and looking to reduce, where should they sit on the fence there? Or is it dependent on their circumstances? Yeah.
• 4:50
  So you're talking about reducing debt. So reducing their mortgage, either doing overpayments into their mortgage so they'd have to access a redraw facility, I guess, or is it better putting it in the offset? Because a lot of banks out there, we'd be pitching the seven, eight offsets we can have on this account. Yeah, yeah.
• 5:09
  It's crazy.
• 5:31
  it's just mature, right? Straight away you are paying off debt, you're building a buff between what you owe and what the property's worth, and then with inflation you're getting that gap, which acts as your equity to recycle back into the next property and the next property. And that's really fundamentally what property portfolios are and how they're built, is it's a game of equity and leverage, and it's getting that right. That's why the first investment is arguably the most important, because as we've spoken previously,
• 5:59
  Both our experiences, we got this wrong. And for me, it cost me seven years because I was in negative equity for seven years. And when you don't have an income to get yourself out of that, because at university, you've really got to wait it out. And it's just a time game. And it took me seven years to then get the equity from that asset. So it generated 20 to 25% uplift after seven years to use that to then fund the second purchase.
• 6:23
  So learning from that, if you do time the markets well, that's the nature of the game, using that equity. And now we're seeing that happen in as little as six months. More recently, I've had a client that the week it settled, they refinanced the 15% gain out of the property and then reinvested that straight back into the next asset. But that's the game to build a portfolio.
• 6:45
  It is equity and leverage. And without either of those two things, it's very difficult to build a portfolio. So looking at first-time buyer, first-time investor, I should say. So you've mentioned there, first thing, understanding...
• 6:59
  why you want to build a portfolio, what are your reasons behind it? And I think we've discussed as well about the accidental landlords. Sometimes that doesn't come into play. In terms of reducing your principal place debt because it's not tax deductible, what's the first thing after, okay, we've cleared down some of our principal place. What's the first thing if we're looking to build our portfolio, we should be doing from an investment side of things?
• 7:23
  Understanding the markets, again, and going back to your strategy. So what are you trying to achieve? And that's where people, even when they're young, you might be in your early 30s or some people fortunate enough to be investing in their late 20s are going out there and they're just like, I want to build a nest egg. I want 30 properties in my portfolio. It's like, okay.
• 7:42
  It's hard to have those conversations to say as to why. If we reverse engineer it, and that's where I like to start the conversation, is where are you trying to get to? So say if you have paid off your prime place of residence, we've ticked that goal. It's a huge milestone. And at the very least, for a lot of people, if you've got to that position where you own your house debt-free, anything else is a bonus. And that's a huge accomplishment to live where you want to live, in the area where you want to live,
• 8:09
  in the home that you want to live in, and you own that debt free, that's a huge milestone. So once we get to there, and ideally we get there with six to eight years with clients, and once we've done that, you know, pat yourself on the back. If you don't do anything else, you've done an amazing job. You can sit there. For those that want to go to that next phase, is looking at, okay, what does retirement look like? And for some people it's 30, 40 years away, but it's good to start thinking about that. What's a serviceable income
• 8:34
  that I can get to. It doesn't mean people will retire. Some people want to retire when they're 35. Some people want to retire when they're 40. What income do I need where I don't have to work? I may continue to work, but it's my choice then. It gives you so much more control over your life when you can choose if you want to work versus you need to work.
• 8:51
  And say for a lot of people that's $150,000, $200,000. Let's use $200,000. What would that look like in real estate to generate that income? And what it is in reality for a commercial asset, because when we go into that cash flow, there is high yielding residential assets, but it's typically not the platform we certainly advise to play in when you're looking for cash flow, because the high volatility and the risk of negative growth, because you're looking at higher density, typically higher density new builds in,
• 9:20
  over saturated areas typically where you get that you do have tenancy risk so it's looking at blue chip commercial assets and you're chasing the yields of six and a half percent so what does that mean when we dial that back that means on a three million dollar asset you know hypothetically you had a debt free it would generate you at a six and a half percent yield circa two hundred thousand dollars in income
• 9:40
  And that's okay. What does that actually mean for an investor? It means, okay, I need to build up an equity position over the next 5, 10, 15, 20 years, whatever that retirement horizon looks like. I need to generate an equity position of $3 million, which sounds significant. But the reality is over time, enough time, 10, 20 years, you'd be surprised what someone on a relatively modest income can achieve.
• 10:07
  So that's big picture, obviously, going from all the way to commercial, I'd say, and decking out that portfolio. We mentioned the goal is from once they start their journey to reduce their principal place, get rid of the mortgage altogether in six to eight years. At what point?
• 10:27
  Should someone look to start an investment in terms of how much equity should they have in their current asset before is a reasonable time to start their investment journey? So most people, if they don't take lenders' mortgage insurance, you're looking at a 20% deposit. If you have a bit of growth on that, is there a nice sweet spot or could it be to depend on the actual home value and what you can actually take out of it? Or would you look at it more from a percentage standpoint?
• 10:52
  As soon as you financially can, based on your equity position. So you need arguably 20% deposit for that first investment. The moment you have that in your home, you want to be activating that because you need, again, and people hate it. Not everyone loves the thought of having debt, but particularly early in your investment journey, it's getting good debt. And good debt is buying in the right markets, time in the markets, understanding what you're buying. Yeah.
• 11:17
  But the moment you can, because you're just fast tracking the second end or third purchase by getting in sooner. And that's reality if you look at markets since data was produced since the 1900s. Time in the market, we've had a discussion around what that looks like, is the way to build a portfolio and build equity. You're not going to generate equity being out of the market.
• 11:37
  So as soon as you financially can, understanding you need to have, you know, understanding of your constraints. And what I mean by that is protecting your downside risk. So looking at your cash buffers, your debt to income, you know, that's the banks and your serviceability thresholds are there to protect the consumer. So they're not overexposed. So there is...
• 11:57
  naturally default policies in place to protect people from not over exposing themselves but making sure you've got cash buffers there as well as is really important you don't want to go out there and put all your eggs in into the market and not have a reserve for a vacancy period or something goes wrong where there's a maintenance contingency so you know you need to fork out ten thousand dollars worth of works
• 12:20
  and then you can't eat, can't live, and then you have to sell a property prematurely, when you think of all the fees that go into buying a property, that's the worst thing you can do. So it's when you financially have the ability to, and that's not just based on the deposit. So the buffers are gonna be key, yeah. Yeah, your buffers are important. And if you look, okay, so obviously the question's of five properties in five years and,
• 12:39
  live off those properties. Let's look at some markets in Australia over the last few years. So Perth, local to us, has gone on an absolute run in the last three or four years. Depending on when you time to the market, you've earned a significant amount of equity. Sydney's been on a run for the last 10, 15 years. Adelaide's went on a run before Perth and Brisbane as well. So you're looking at a lot of these
• 13:00
  capital cities in Australia where a first-time buyer has come in and a decent amount of equity and maybe now they're looking at investment, but actually the amount of growth they've had in that period, they've potentially got the capacity to buy multiple properties with a 20% deposit. Is that something you would recommend as far as if there is the capacity there? So looking at all those cash buffer thresholds you mentioned there and being comfortable with debt, they've got the...
• 13:29
  they've got enough for the 20% deposit for those investment purchases. What about someone who's looking to, has the capacity there? Would you recommend them buying multiple properties in, in, in,
• 13:38
  I guess, A, same area or same market, or B, diversifying in different asset types and different locations? Yeah, well, the default is always diversification. Diversification is key, right? So with that in mind, we don't want to be tripling or quadripling down on the same market. So we need to look at that, looking at multiple properties. Look, I'm okay with it if it's financially feasible to do so.
• 14:04
  but I would step it out over a two-part process because albeit in theory on paper, it looks like you can afford it. It's not until you're living through those monthly repayments and understanding the rental income and the outgoings. I think the biggest failure when holding property is the additional costs that people don't factor. I think people just look at...
• 14:24
  okay, I buy a property, it's purchase price plus stamp duty minus the rent and the interest that I have to pay. So they're really just looking at rental income versus interest repayments, land tax, council rates, property management fees, all the additional things. I got burned out myself. I felt like the first couple of years I owned my property almost...
• 14:44
  Everything's going out the door. Everything's going out the door, so I can understand that. So that's why, like, with caution, go out there and buy, you know, everyone wants to wake up tomorrow and buy three properties. It's like, okay, let's walk through it. Buy your first investment property. Understand what it feels like and how financially you can service that debt with all the other additional outgoings, maintenance, et cetera.
• 15:04
  then okay if you're comfortable with that you've got surplus buffer you've been able to build up cash buffers let's do some numbers run some numbers on what a second purchase would look like we do a lot of that sort of forecasting modeling on what additional purchase would look like and on paper it looks fine but experiencing that is really important and then you know subject to that going well we build out equity and then a third that's sort of how i'd layer it not to go out there and try to buy five properties tomorrow because and again it puts additional stress and
• 15:31
  property investments stressful enough by buying one property at a time, let alone trying to buy multiple properties. And anyone who owns multiple properties will understand that and it's dealing with tenant issues and all those, you've got people in place to manage these things. It is a lot of decisions to make. So let's just step that out over, you know, layering that is a more conservative and probably a more appropriate strategy. Interesting. And then let's just use someone who's maybe a slightly more experienced. So...
• 15:57
  They've got three or four properties at the moment. Back to the original question about the five properties in five years. Once you hit that four property mark, where should you be shifting your portfolio? So you've obviously gone through strategy with the debt accumulation, strategy getting down your principal place of debt as much as possible.
• 16:21
  At four properties, should you still be looking for capital growth or is cash flow now starting to become something that should fit within your strategy or does this depend on people's circumstances? Depends on the goal. What are we trying to achieve? Where you're at in your phase and what are you trying to achieve? Because it will change depending on the client situation.
• 16:45
  But in reality, to answer your question, you're at four properties. And it's not about, this is what sort of annoys me, it's not about quantity. It's not going out there and buying 15, 20 properties. So when you're at a barbecue, you can tell your mate, you own 20 properties. Always quality over quantity for so many reasons. And that's why these brookers clearly don't own that many properties. Because anyone who does knows how many headaches come with owning multiple properties. So having quality in the portfolio over quantity is always...
• 17:13
  firsthand. And then when you're going out there chasing cash flow, any seasoned, sophisticated investor, those cash flow is at a certain price point at a particular cycle in your investment journey is commercial. And having 50 properties that are all positive gears in a residential space is a strategy, but it's certainly, I don't believe, the most effective or has been the most effective, but that's what a lot of the noise is in the current...
• 17:39
  So my reading between the lines here, you'd prefer quality over quantity. So, I mean, obviously you prefer quality. What I'm getting at is a lot of people, when they first start their investment journey, they don't have the capacity to be buying $1 million plus assets.
• 17:54
  No, no, no, quality doesn't necessarily need to spend that sort of money. It's still quality assets by looking at owner-occupier type areas. And you can still achieve that at the lower price points, sub-medium in most circumstances. It's understanding what that looks like and what the makeup of any suburb looks like. But again, getting that timing right is critical.
• 18:15
  Yeah, what about if you have bought multiple properties and you're earning, you've had a significant growth in all the properties, do you then look at strategies of selling off those properties? Let's say you bought a property at 500K and it's gone up to 750 and you've had your, the growth that you wanted on that property, for example, maybe a little bit higher if we wanna go to minimum 60% growth. Do you look to then get higher quality assets,
• 18:43
  from there or would you be then looking to just do similar strategy and buy properties that say 500k 600k yep in reality it's the opportunity cost we spoke about this in a previous podcast we don't like trading properties unless we've completely you know chewed up our service ability particularly in rising markets but yes if we've got an overexposure which you know been locally in
• 19:07
  And there's a lot of listeners that may be overexposed to the one market. Then you have a look at your current portfolio. I look at your opportunity cost. OK, I'm heavily exposed to one particular market and my service ability is chewed up. Then it makes sense of a divestment strategy where you're taking some of the chips off the table in one market and reallocating them to another market.
• 19:27
  Absolutely, I'm for all that strategy. Currently doing that in my personal world because, yes, I'm overexposed to certain markets. I've ridden the waves of those cycles. Does that fit part of my long-term strategy? Absolutely not. There will always be a place for a property or multiple properties in the same market longer term, but certainly I don't want all my investment tied up in the one market anymore.
• 19:49
  And that's where we really understanding the markets and how markets work can become really effective for those building out portfolios because you can really fast track those retirement goals or that debt reduction strategy. Because, you know, when you do time the markets, you see the uplift far more aggressively and that creates the equity and recycle it.
• 20:07
  Once we are maximised in terms of our capacity, we then have to look, okay, where is the next best opportunity and where do I need to sell off? What do I need to sell off or what do I need to divest to allow other markets to open up for the portfolio?
• 20:21
  Yep. And what about scaling to say five properties or even more in this instance? What's the biggest risk in experienced investors come across once they start scaling, scaling their portfolio as well? If you're scaling it in a short amount of time is what I'm getting at. So if you are scaling a property within a five-year period, what do you see the biggest risks in going?
• 20:44
  Yeah, cash buffers, people not understanding the running costs of property, cash flow. So cash flow is key and that's where serviceability comes into it. So that's why we look at portfolios of typically if it's about expansion, it's trying to get a bit of a balance between that sort of capital growth and yield. And obviously, like we said previously, we're always looking for capital growth. We wouldn't be investing in real estate if we weren't looking for capital growth.
• 21:08
  You're not sitting there, so you can typically just draw an income. We still want that uplift. So I think it's understanding cash flow and understanding how you can tweak that with property to increase yields, to increase your serviceability, and managing that. Because that's essentially the hand we're playing is the debt that the bank will give us.
• 21:32
  So we need to be very, very strategic with how we use that debt. Because once that debt's out on the table, it's like your casino, you've got X amount of chips. Once you've got those chips out on the table, there's no more. So where those chips are allocated is so important. And make sure that every one of those chips is maximised in the right markets at the right time. The moment they're not, we need to start reframing the strategy to make sure that they are. Cool.
• 21:56
  And I think from what you've said previously, I can kind of probably see where the answer's gonna go on this one. But let's jump back into the initial question. What's the verdict? Can you buy five properties in five years and live off the passive income? Do you call bullshit? I call bullshit. I call bullshit because in theory, you can buy five properties.
• 22:16
  but to live off the passive income of that, no, you can't. And the people that are spruiking this information are ill-informed and certainly not walking the path that they're talking. Make sure to join us next episode. Stay informed, stay curious, and keep going up the bullshit.