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Most Investors With Multiple Properties Are Making This One Debt Mistake · The Follio Property Podcast

• 0:00
  National debt will reach $1 trillion for the first time.
• 0:03
  The eye-catching figure will be left in the hands of younger generations.
• 0:07
  4.4 times is lazy investing.
• 0:08
  They need to be pushing that harder.
• 0:09
  Cash to debt's at 3%.
• 0:11
  Debt to income's at 5.8 times.
• 0:13
  Are they over leveraging themselves?
• 0:15
  They're pretty much going to put all their cash out on the table into volatile markets.
• 0:18
  It's just warranting a disaster because all it takes is one vacancy and now they would be in negative equity.
• 0:24
  Portfolio value, $5.49 million.
• 0:26
  The negative cash flow, about $32,000.
• 0:28
  They weren't able to save any money, so they were going backward.
• 0:31
  Looking at that portfolio, what was your advice to this particular client?
• 0:34
  My advice in this scenario was very clear.
• 0:37
  Let's divest the three regionals while the market is still buoyant.
• 0:40
  So of the $920,000 that we were able to withdraw from those regional plays, the diversion from these regional assets to a core capital city in Melbourne, purchased at $2.6 million.
• 0:49
  Each individual unit, if sold off individually, would be valued at about $3.2 million.
• 0:53
  So there's $600,000 of equity in the asset day one.
• 0:58
  You're listening to the Folio Property Podcast.
• 1:00
  I'm Rhys Bettle.
• 1:01
  I'm here each week with my co-host, Lachlan Delahunty.
• 1:04
  Lachlan, big episode today, a strategy episode.
• 1:07
  We haven't done one in 10 episodes, so we're getting a lot of feedback from the loyal listeners that they want to hear a strategy.
• 1:12
  This one is really targeted at sophisticated or experienced investors.
• 1:17
  If you're not a sophisticated, experienced investor, you're still going to get value out of this, but it's really targeted what your advice and strategy will be for those clients sort of moving forward.
• 1:24
  Yeah.
• 1:25
  Yeah, look, and if there's anyone that wants independent advice on their situation, and what we discussed today is a specific scenario.
• 1:31
  There's two of them, Rhys, that we go through in terms of a current client that we've dealt with previously and the advice that I gave and a potential scenario of another client's situation and the advice that I would give –
• 1:44
  There's a link in the description notes below.
• 1:46
  If you want advice on your specific situation, drop us a line and I'll reach out to one of our advisors and we can go through high level what you should or shouldn't be doing because there's a lot of moving parts in the property landscape at the moment and every bit of advice is, unfortunately, it wasn't as easy as it was pre-budget, right?
• 2:02
  So you've got to know the facts behind the person and what they're trying to achieve to give advice.
• 2:07
  So let's crack into it.
• 2:08
  This is for...
• 2:10
  A warning for those that are listening that haven't entered the property market, this is probably more catered towards sophisticated investors or people that are looking to kind of scale a portfolio.
• 2:20
  Absolutely, stay on, listen, see what it can be like once you do build that portfolio, but there will be some high-level data.
• 2:26
  So just a bit of a warning for those that might not know what we're talking about.
• 2:30
  Let's talk it through this client.
• 2:32
  So we've changed some details here to remain private for this particular client.
• 2:37
  But I want to talk through a portfolio review and acquisition that you recently did using our portal prop stack, which is a little cheeky plug prop stack.
• 2:46
  Join the wait list.
• 2:47
  There's a link in the description.
• 2:49
  Now, this particular client was a married client with a couple of kids.
• 2:55
  had a big portfolio.
• 2:56
  So we classify this as a sophisticated investor, had six investment properties plus the PPOR.
• 3:01
  I want to talk through the portfolio and get your commentary on what you said to the particular client.
• 3:06
  Now, they had an asset in Mackay that purchased back in 24, an asset in Gladstone, which you've spoken quite a lot about on this podcast.
• 3:14
  So it'd be good to get your feedback on that.
• 3:16
  an asset in Townsville.
• 3:17
  So they're all three regional Queensland assets.
• 3:20
  They then had two Brisbane assets and one Adelaide asset as well within the portfolio.
• 3:25
  So we're looking at a wide mix of assets there.
• 3:29
  Firstly, just give us your feedback on the current portfolio before there was any advice on what to do next.
• 3:34
  Look, they've done pretty well and that was the honest assessment.
• 3:37
  This conversation, initially I had a meeting with them pre-budget and going through and trying to work out what was next and they had been using another buyer's agent and brought a lot in the regional business.
• 3:50
  areas and they've actually done pretty well.
• 3:52
  And that's what I said.
• 3:53
  But it's very clear that they were starting to lose confidence in that strategy moving forward because they were getting now the next avenue of advice that they were getting was to go and buy more regional assets in the similar markets.
• 4:05
  So again, double down in Townsville,
• 4:07
  go Darwin.
• 4:08
  So the makeup of the portfolio, they had purchased Adelaide and the two Brisbane ones themselves.
• 4:12
  The three regionals were bought through a buyer's agent and they were getting pressured to buy another two to three assets in the regional space and then another two in their super.
• 4:22
  Advice at the time was, hey, just cut back on that.
• 4:24
  Let me digest your portfolio before I give you any advice.
• 4:27
  But certainly, I didn't feel their debt to income levels warranted going out and buying more properties.
• 4:33
  They didn't have enough cash buffer and,
• 4:35
  They were going to be using bank valuations, fake equity to buy these properties.
• 4:40
  So I had concerns about trying to extend themselves already what they were positioned in quite a volatile market.
• 4:45
  So my advice was we do not want to take on more debt based on their income.
• 4:50
  You've mentioned a couple of key stats there.
• 4:52
  For those that are listening, this is very much a visual episode.
• 4:54
  I'll do my best to explain what we've got on here from a portfolio view.
• 4:57
  But you mentioned their cash to debt, you mentioned their debt to income.
• 5:00
  So for those that can see this, we can see here the cash to debt's at 3%.
• 5:04
  Debt to income's at 5.8 times as well.
• 5:08
  So those particular figures, are they in danger category for you or over leveraging themselves?
• 5:13
  Yeah, particularly when they're proposing to buy another two assets.
• 5:16
  So that would have pushed their debt to income well above seven times.
• 5:20
  Look, at five and a half, I'm okay with.
• 5:23
  If we're going to push that a little bit more to six, it's for a sophisticated investor with a strong cash buffer of say 10 to 20%, that's okay.
• 5:33
  But we've got a problem here.
• 5:33
  They're going to push their cash to debt
• 5:36
  below 3% and that's a huge issue.
• 5:39
  We want to see at least 10%.
• 5:40
  So they're pretty much going to put all their cash out on the table into volatile markets and then push their debt to income above six times, well and truly almost seven times.
• 5:49
  So that is just warranting a disaster because all it takes is one vacancy change in market conditions, which has happened.
• 5:58
  And now they would be in negative equity on the purchases that they were going to make.
• 6:02
  So I'm glad that we put a line in the sand to, hey, say, don't buy anything in this scenario.
• 6:07
  Let's recalibrate.
• 6:08
  And I don't think there's an opportunity here to just buy more properties for the sake of buying more properties.
• 6:13
  I would prefer to trade the assets, some of the questionable assets in this portfolio out and get some more higher cash flow assets in there just to...
• 6:23
  I suppose, reduce their exposure because the cash flow burden on this was pretty significant as well.
• 6:29
  So negative cash flow, they were getting a gearing benefit, but there's a lot of moving parts.
• 6:34
  Before we dig into what your particular advice was and what the strategy was moving forward, just talking some overall figures here for those that are listening and don't have the privilege of watching this.
• 6:45
  Overall portfolio value was pretty healthy, 5.49 million, total debt 2.94.
• 6:50
  So equity position, very, very healthy, 2.55 million.
• 6:53
  You mentioned there about the cash flow, the negative cash flow, about 32,000.
• 6:57
  And that's important to note.
• 6:59
  They were getting really concerned about their cash flow.
• 7:02
  They weren't able to save any money.
• 7:04
  They were constantly putting money into maintaining these properties.
• 7:07
  So they were going backwards and that was starting to creep in or be it, they were just about getting pressured into buying another two properties.
• 7:13
  Okay, so let's talk through the portfolio.
• 7:14
  You've got the three regional there, Mackay, Gladstone, Townsville.
• 7:18
  You've got the two Brisbane blue chip areas and same with Adelaide in the blue chip area.
• 7:23
  What was your advice to this particular client looking at that portfolio?
• 7:26
  You mentioned that you wouldn't advise them to go again due to their debt to income levels and their cash flow and their cash to debt as well.
• 7:33
  But what was your advice in terms of that overall portfolio?
• 7:35
  What did you like?
• 7:36
  What didn't you like?
• 7:37
  And what was the next steps for them with their current portfolio?
• 7:40
  Yeah.
• 7:40
  So looking at medium to long term, I like the two assets in Brisbane and I do like the blue chip asset in Adelaide.
• 7:47
  So if we're going to keep anything in the portfolio longer term, I'm not saying that they'll be there forever, but certainly looking at their portfolio, they are the better quality assets by far in this portfolio.
• 7:57
  Problem is with those three assets is going to be cash flow because they are negatively geared.
• 8:01
  So my advice in this scenario was very clear is let's divest the three regionals and let's do it while the market is still buoyant.
• 8:11
  So when we did sell them and we sell them in pretty short concession, we sell them back to investor groups, Rhys.
• 8:17
  So back to the same people that were essentially pitching them to buy more, we sold them back to that group for a premium for a profit, enabled them to release about a million dollars of equity or about $920,000 of equity out of those three regional plays.
• 8:31
  So that freed up a lot of equity and a lot of cash to pay off some of their primary place of residence.
• 8:37
  But then the conversation was, how can we retain the three quality assets they've got in the portfolio, still get exposure to a better quality asset, but relieve some of their cash flow concerns?
• 8:49
  And the way we're able to do that was through a blend of a residential and commercial strategy through a unit complex where we can still get exposure to capital growth, but the cash flow was geared at a yield of 6.5%.
• 9:03
  So that was the, I guess, the diversion from these regional assets to a core capital city in Melbourne in a really blue chip location.
• 9:11
  So we're very, so a triple A location where we can get a strong yield to offset the negative gearing that was happening in those blue chip assets.
• 9:21
  Look, a lot of buyers, agents, advisors out there could quite easily advise clients on what to buy, but it takes a certain person to tell people to sell, especially in a rising market when you did advise to offload some of these assets.
• 9:35
  It wasn't in the conditions we are as of right now where it's been a bit stagnant.
• 9:39
  What would you say to those that are saying you probably took the money off of the table too early and actually the exit costs versus the entry costs isn't worth it in this current market?
• 9:47
  Yeah, absolutely.
• 9:48
  And I'm not going to sit here and say I time every market to absolute perfection.
• 9:51
  Sometimes I get out of markets too prematurely and sometimes I might hang on for too long.
• 9:56
  But everything I do is at the view of a medium to long term focus.
• 10:00
  And I know over the long term, they do not want those regional assets in their portfolio.
• 10:05
  They are buy, hold and sell assets, not buy and hold assets.
• 10:08
  There is an argument for the other three assets in the portfolio, very blue chip, high quality,
• 10:12
  in family-bound areas, they are buy and hold assets unless there's an opportunity cost that the funds or the debt associated is better allocated to.
• 10:21
  So how can we keep those assets in the portfolio?
• 10:24
  Because they pretty much said, we can't retain this cash burden.
• 10:27
  Okay, if you can't do that, well, how can we keep the quality in the portfolio while still enabling you to expand your portfolio over the medium to long term?
• 10:37
  And we can do that through targeting a more
• 10:42
  high cash flow residential, we still get a combination of both targeting high capital growth, but also having something that's going to be self-sufficient.
• 10:49
  So of the 920,000 that we were able to withdraw from those regional plays, like I said, allocate $100,000 to the prime place of residence, pay off a bit of debt there.
• 10:59
  And we use 720,000 to gear that unit complex at 70%, which means it was fully self-funded
• 11:07
  the cash flow would 100% pay for all costs, including your interest, your maintenance, your property management fees.
• 11:15
  So they were not going to have to put in another dollar for holding that property.
• 11:18
  And if rents increase, which they're forecasting a 30% increase over the next four years, then you're going to see that sort of start to come into a positive geared scenario, which will help offset the other three blue chip assets.
• 11:30
  And we do believe fundamentally with that particular unit complex, we can subdivide it into eight independent units.
• 11:37
  So that scenario there, purchased at 2.6, each individual unit, if sold off individually, would be valued at about 3.2 million.
• 11:44
  So there's circa $600,000 of equity in the asset day one.
• 11:48
  And there's ability to add value, subdivide, and if Melbourne goes on the run that we think it will, likely get tremendous capital growth.
• 11:58
  So it's a strategy that I think really suited this particular client, but it wasn't to just add on another asset to build out their portfolio and take on more debt.
• 12:07
  It was looking at the opportunity cost of where their debt was allocated.
• 12:10
  And their exposure, when you look at their debt to income now, it's in a better position.
• 12:15
  Their debt to income is now lower because of the cash flow that they're having to pay for those regional assets compared to this unit complex.
• 12:22
  And their cash to debt is much higher because of the sale they were able to get some cash, which they've put in the offset against their home loan.
• 12:28
  So it's freed them up from a financial point of view where now it's 12% cash buffer.
• 12:34
  Debt to income is in a similar position.
• 12:36
  and they've got a far better quality asset, which is producing a better income.
• 12:40
  So for this particular scenario, you could say that it's in hindsight, the timing was quite fruitful.
• 12:46
  But regardless, even if these markets would continue to run in these regional areas, the caveat was with the clients, these markets will likely increase in value at a quicker rate in the short term compared to Melbourne.
• 12:57
  But over the long term, you're going to be far better off.
• 12:59
  They understood that.
• 13:00
  They're sophisticated.
• 13:01
  They've been around enough cycles to know that quick wins are exactly that.
• 13:06
  They don't last very long.
• 13:07
  And hindsight would suggest that we probably timed that decision to perfection.
• 13:12
  Okay, Lachlan, so we've actually made you pull up your laptop for this one as well, so you can talk us through the data on this one.
• 13:18
  So this is the complex you mentioned there that was the advice for this particular client.
• 13:23
  Now, you can see here, for those that can't see, we're just showing a visual representation of the investment report we did on this one.
• 13:29
  Now, the value you mentioned there, it would go for about 3.1, 3.2 mil.
• 13:35
  Each individual unit would sell for 3.2, would secure it for 2.6 off-market.
• 13:41
  So looking at these figures, this isn't equating to a nearly 600K equity uplift from day one.
• 13:47
  Yeah, absolutely.
• 13:47
  And that's what we like, these particular assets.
• 13:49
  They're unique.
• 13:50
  They're not easy to come by.
• 13:51
  But A, there's dollars in it from day one.
• 13:56
  But more importantly, for this particular client, the cash flow yielding at 6.5% in what is a blue chip location.
• 14:01
  This is in Brunswick, Australia.
• 14:03
  you know, Melbourne CBD essentially.
• 14:06
  So we're in a triple A rated suburb with the compounding growth rate well north of 6%.
• 14:12
  So these are all the sort of metrics in a school belt area, quiet location with strong underlying land value.
• 14:17
  And that's the key.
• 14:19
  What has changed post-budget?
• 14:20
  It's very difficult to get high land value assets.
• 14:24
  Typically, you get an old house on a big block.
• 14:27
  Well, that's very difficult because of the negative gearing.
• 14:29
  There is no benefit now.
• 14:30
  So this is a way where we can still get underlying land value.
• 14:33
  So the land value on this is close to $1.5 million, right?
• 14:36
  So just in the land alone.
• 14:38
  So then you're looking at an asset where almost 70% of the value is still in the land, but we're getting a really good return for the units that sit on top of it.
• 14:45
  What we consistently talk about on the podcast is looking at that blue chip asset, you want to look at a high long-term compounding growth rate.
• 14:52
  What appeals to you about this?
• 14:53
  So for those that can't see, it's done 7% in the last 12 months, negative 1% in the last five years, which kind of paints the story with what's happened in the Melbourne market over the last five or six years.
• 15:03
  And then from a 10-year perspective, it's at 1.9%.
• 15:05
  So the long-term average well above what it's seen in the last five and 10 years, but actually the last 12 months has already shown recovery and above the overall long-term average.
• 15:14
  Yeah, I'd really like to compare the 10-year and the long term.
• 15:16
  So as you can see, there's an argument to suggest that it's underperformed by 4% compounding for the last decade.
• 15:24
  That is exactly what we saw in Perth in 2019, exactly what we saw in Brisbane 2017, exactly what we saw in Adelaide in the lead up to 2020.
• 15:34
  It's when you're seeing a significant underperformance in comparison to its long-term compounding growth rate.
• 15:40
  So
• 15:41
  Again, this doesn't come without its complications.
• 15:43
  Have a look at the photos.
• 15:44
  It's not the prettiest unit block on the street.
• 15:46
  And that's what we like.
• 15:47
  There's the ability to add value.
• 15:48
  There's the ability to update the kitchens and bathrooms.
• 15:51
  There's the ability to not just rely on the market to generate, I believe, with the right amount of work associated with this, you can get a million dollars of equity within three months without relying on the market.
• 16:04
  And that's where post-budget, we're going to be more creative.
• 16:06
  And that's the type of strategy that I want to encourage more of our clients to participate in.
• 16:11
  All right, Lachlan, this fruit prop stack we track and it's particularly relevant in this market, definitely with this asset type as well.
• 16:19
  But when is this asset going to be cash flow positive?
• 16:23
  And what is it going to look like from a forecasting perspective?
• 16:25
  So for the client you referenced there, that alone amount about 1.6 mil on this one.
• 16:29
  And you can see here from day one, we're in cash flow positive.
• 16:33
  And that's the intention.
• 16:34
  That's why we get it at 70%.
• 16:35
  So the gains that were taken from those regional plays, yes, some of that was to take care of the cash buffer and the prime place of residence debt.
• 16:42
  But the remainder is to make sure that this is not negatively geared.
• 16:46
  And there's a reason for that.
• 16:46
  There's no benefit in doing that anymore.
• 16:49
  So by gearing this at 70%, it gives you positive cash flow from day one.
• 16:53
  But as you can see with forecasting out in year five, six and seven, we're starting to get to the point where the income on these assets become extremely relevant.
• 17:06
  So as you can see here, in year six, this is cash flow positive $60,000 a year.
• 17:11
  So that becomes significant.
• 17:12
  That cash flow means you can lend against that income, but equally, you know, it's
• 17:17
  a strategy for a lot of our clients is to have two, three of these assets in the portfolio and then you start to look at trying to use that income to supplement your potential retirement income.
• 17:28
  The lower the debt, the more equity in the asset you can reduce the debt, the higher the income.
• 17:33
  If we can have two really good quality unit complexes in your client book at retirement next to debt free, we're talking about $200,000 to $300,000 in income and that's the objective.
• 17:45
  Next scenario here I want to talk about, I really want to get your opinion and see what direction we take this from an advice and strategy standpoint.
• 17:51
  This particular client that we've got here, they have a principal price of residence in Sydney, valued at about $1.8 million with a total acquisition of $900,000.
• 18:02
  They've got a Perth asset investment property at $1.2 million with an equity position of $5.50.
• 18:08
  They've got a blue chip Brisbane asset as well at $1.3 million with an $810 equity position.
• 18:13
  Now, for those that can't see this visually, I've got PropStack up here, which shows the overall portfolio value of this portfolio is at $4.3 million, and the total equity position is at $2.26 million.
• 18:25
  What's their debt to income and cash buffer?
• 18:27
  Their debt to income is 4.4 times, and their cash to debt is at 3.4%.
• 18:32
  Now, Lachlan, this particular client, they're a young couple with a kid.
• 18:36
  They've got a child on their way.
• 18:38
  They live in Sydney.
• 18:39
  They live in Sydney.
• 18:41
  What do they do next?
• 18:42
  So they're in Sydney and they plan to upgrade in the next three to five.
• 18:46
  Then we're bringing that forward as soon as practically possible.
• 18:51
  And ideally, we upgrade in the next six months because it is the best buying conditions or will be the best buying conditions in Sydney in the next six months.
• 19:02
  you know, informational caveats around that.
• 19:05
  I'm selling Brisbane, I'm selling Perth and I'm selling Sydney, offloading the $4.5 million of asset value, freeing up that $2.2 million of equity to upgrade and probably quite a significant upgrade.
• 19:17
  They're going for a property that they'll probably sell for circa 1.8, you said, and now we might be upgrading up to sort of $4, $4.5 million.
• 19:26
  which in today's dollars in Sydney, you're buying an asset that was probably worth $6 million as little as six months ago, right?
• 19:32
  So you're getting something at a pretty dramatic discount and it should hopefully, if they're not too picky, tick a lot of their boxes for their family needs for their forever home.
• 19:41
  So that's the scenario there.
• 19:44
  With the debt that they're going to offload and their current equity, that $2.2 million, means the LVR on that primary place of residence at $4.4.5 is going to be less than 50%.
• 19:54
  So we're not putting – it's not dead up to their eyeballs on their home, which will allow for future investment if they want to continue to build out their portfolio post that purchase –
• 20:03
  not going to put so much pressure on their mortgage repayments because it is a lower LVR.
• 20:08
  So that would be the priority there.
• 20:10
  And we're putting their equity, their money into a tax-free environment.
• 20:16
  And that will probably surprise a lot of people.
• 20:18
  They'll be like, well, why would you sell three really good assets?
• 20:22
  Because you're going to put that money into a tax-free environment.
• 20:24
  And we know Sydney prices can move very quickly.
• 20:26
  Not too long ago, things that, six, seven years ago, you could buy something for two and a half, three million that...
• 20:32
  As little as last year, they were selling for close to $10 million.
• 20:36
  It can triple in a very short concession in Sydney.
• 20:40
  And I don't want them, that client, to have a meeting with them in three or five years to say, you talked me out of buying my dream home in Sydney and talked me into a Darwin asset, a regional asset, or even a Melbourne investment.
• 20:52
  And they've missed out on being able to get into the market at this point in time.
• 20:56
  Now, I want to go through a couple of different caveats to this as well and see if your advice stays the same.
• 21:01
  But firstly, the advice on this, they've said, you know, growing family, the current principal place isn't going to be their forever home.
• 21:08
  Why is the timing right now?
• 21:11
  Is there a situation where they wait a couple of years or you feel because of the way the market conditions are in the Sydney market, the timing now is now moving them in that direction a little bit earlier than maybe they would have thought?
• 21:21
  You're never going to pick the bottom.
• 21:22
  And I do think there's more hurt in Sydney, but think about the timeframe to activate this strategy.
• 21:27
  You're going to sell three properties around the country.
• 21:29
  You're going to try to work that in with potentially some lease terms.
• 21:32
  Ideally, we're selling those places because we want to maximize the exit.
• 21:35
  We want to sell the Perth asset for the most that we can.
• 21:38
  The best way to do that, have it vacant, have it staged, have it painted to get the best outcome.
• 21:42
  Same with Brisbane.
• 21:43
  So to coordinate that, that is a 12 month process at best.
• 21:48
  depending on the lease terms, you might be able to do it in nine.
• 21:51
  So we need to start that process today to get those assets sold.
• 21:56
  And albeit they're in choppy markets, you might be leaving money off the table.
• 22:00
  Any dollar I leave off the table in Brisbane, Sydney or Perth, I will make that three to four times in buying Sydney at such a discount.
• 22:07
  So that one, now that asset in Perth for 1.3, if I sell it for 1.2, well, I've covered those costs by purchasing something at 4.5 that should be 6%.
• 22:17
  So that's where, you know, probably a lot of listeners won't agree with this as a strategy.
• 22:22
  But again, this wouldn't suit our business model.
• 22:25
  But that would be the best advice I would give that client if that's their circumstance.
• 22:31
  Yep.
• 22:31
  Same set of circumstances, you know, growing family will be looking to upgrade the next three to five years.
• 22:36
  Would you be recommending that same strategy you have for the Sydney asset?
• 22:39
  No.
• 22:40
  And this is where it's market dependent.
• 22:42
  I think, you know, the Brisbane market,
• 22:46
  has a stagnation of potentially a fall in house prices over the next sort of 12 months to three to five years.
• 22:53
  So I think the medium term fundamentals in Brisbane are worse than that of Sydney.
• 22:57
  So I think there'll be better buying in two to three years in the Brisbane market than there is now.
• 23:03
  So if that window is three to five years to upgrade, I'd be holding back looking to
• 23:09
  use some of the equity to put into a high, because the cash flow is likely an issue with some of these assets they're holding, put into a high cash flow asset, so it continues to support them, but continue to grow their equity base.
• 23:22
  So currently the equity is at 2.2.
• 23:24
  The goal would be try to get that to $3 million in the next three years, which is going to give them more options when they upgrade than less.
• 23:31
  So completely different strategy depending on the market they're in.
• 23:34
  The cash to debt on this particular client's at 3.4%, which is well below the kind of buffer that you would... What is the buffer that you would actually... We want to see 10%.
• 23:43
  It's an easy fix here.
• 23:43
  They've got $2.2 million equity.
• 23:45
  They can refinance one of their investment properties, pull out some cash and put that in an offset, which is going to give them plenty of comfort.
• 23:51
  So I'm not too concerned about the cash buffer in this scenario.
• 23:55
  And their debt to income's healthy.
• 23:56
  Like it's at 4.4 times.
• 23:58
  If they aren't going to upgrade their home, they need to be more aggressive.
• 24:02
  4.4 times is lazy investing.
• 24:05
  They need to be pushing that harder.
• 24:06
  Everyone's like, well, that sounds like a bit of a spook.
• 24:08
  No, only one way to get ahead is you take on more debt in this game.
• 24:13
  And at 4.4 times, if you're serious about growing your portfolio, I don't want five times on the prime place of residence, but I'm happy to put another one, one and a half, two times into a really good investment property that's going to get them to that $3 million equity position in three to five years' time.
• 24:29
  And just finally, with this particular scenario, you mentioned that if they weren't wanting to upgrade, you'd be wanting to restructure their finance so they've at least got some cash to debt there and going again from a property perspective.
• 24:41
  What is the particular assets that you'd be selecting?
• 24:43
  Bearing in mind this portfolio would be primary place in Sydney, blue chip asset in Perth and blue chip asset in Brisbane.
• 24:51
  What would you be looking to consolidate that portfolio?
• 24:54
  Melbourne is the obvious pick in terms of a macro city here because it gives them that diversification play.
• 24:59
  Key's going to get something that's higher cash flow.
• 25:01
  They're going to have some negative gearing benefits because those properties were bought or purchased prior to the budget.
• 25:08
  So we want to get something that's going to help support the cash flow.
• 25:11
  So I'd be looking potentially in that scenario either a particular...
• 25:15
  potential strategy of what we discussed before, like a unit block complex or a high-yielding unit or a villa.
• 25:21
  So you might get something of $700,000, $800,000 that's on a 5%, 5.5% yield.
• 25:26
  That would be the two sort of options I would consider there.
• 25:31
  Depending on their risk appetite, we may look at a small development maybe, but probably with that type of portfolio, they look like a passive type of investor.
• 25:40
  So we get something that is passive in nature.
• 25:42
  Okay.
• 25:42
  This is a good portfolio, just to wrap it up.
• 25:44
  So it's a really good portfolio, blue chip assets across the board.
• 25:48
  What would be your advice to them if they've got someone in the area talking speculative assets or something like that?
• 25:53
  They don't need to.
• 25:54
  This particular profile here, they've done a lot of the heavy lifting.
• 25:57
  If they do nothing, they're already in front.
• 25:59
  So with these scenarios, what's more important is to make sure that they don't go backwards because they've done a lot of the good work.
• 26:05
  So my job is to discourage doing anything too risky, anything volatile.
• 26:10
  They don't need to take that risk.
• 26:12
  So, let's get in a position to get their dream home.
• 26:15
  That's my objective now.
• 26:16
  They want to upgrade in the next three to five years.
• 26:19
  Let's go and see, you know, what does that look like?
• 26:21
  Something that's worth $5 million today.
• 26:23
  You know, we might be able to pick up for four, four and a half in three years time in Brisbane with more equity.
• 26:29
  They might be able to buy it at 30% LVR, not 60 or 70.
• 26:32
  Without knowing the full details of this particular couple and family, if they added one more property within their portfolio, is this a health – and it's a blue chip asset.
• 26:40
  Let's just say it's one of these – Melbourne houses.
• 26:42
  Melbourne houses, capital city, blue chip asset.
• 26:45
  Is this a healthy enough portfolio, do you think, to potentially retire in 20 years' time?
• 26:49
  Without a doubt.
• 26:49
  If they did nothing at all, they're going to be in a really healthy position.
• 26:52
  But no doubt, I know the psychology of human behavior.
• 26:56
  And if they're a young family that you described in that situation, they're going to want more than upgrades on the card.
• 27:03
  And why not?
• 27:03
  They deserve that.
• 27:05
  They deserve to have the ability to upgrade because they've done the heavy lifting in their sort of 30s and early 40s.
• 27:11
  And that's what people in Australia deserve, to own their private place of residence debt-free.
• 27:18
  Brilliant breakdown, Lachlan.
• 27:19
  I think for those that are listening, we want to hear your stories or your scenarios, potential scenarios.
• 27:24
  Put them in the comments and I'll do everything I can to address your situation with as much information as you give me.
• 27:30
  And I understand you can argue there's so many different layers to this depending on your personal situation, so that is the disclaimer.
• 27:38
  This needs to be independent advice based on your personal situation, but I'll do the best to be as honest as I can with the information you give me.
• 27:45
  Also, put in any questions that you want us to answer.
• 27:48
  We've just heard from our producer about 10, 20 minutes ago, Lachlan, that our 100th episode is coming up in the next couple of weeks.
• 27:54
  So Q&A.
• 27:56
  Q&A episode.
• 27:57
  Break down some of your predictions that you got right, some of the predictions you got wrong, and just really address any Q&A out there from our loyal listeners over the last 18 months.
• 28:06
  You've been listening to Folio Property Podcast.