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How To Pay Off Your Mortgage Faster in Australia, in 2025 · The Follio Property Podcast

• 0:08
  Welcome to the Folio Property Podcast with my co-host Lachlan Delahunty. My name's Rhys Beddle. We're excited to today have a chat about the debt reduction strategy.
• 0:22
  Yeah, it's a focal point of portfolio builders and probably one that's underestimated. I think everyone's got their eyes on the prize of building out this mammoth portfolio. Everyone forgets about prime place of residence and how the boring debt reduction strategy, where it fits in the portfolio. Yeah, and it's a bold calls, I think, that,
• 0:42
  when we're speaking with clients and clients you've successfully helped over the years, it's that kind of that buzzword of like, how do you pay your principal place off in six years? Is that possible? Is one question we'll probably unpack today as well. But you do see a lot of that through social media, whether that's finance brokers or advisors or property experts out there or so-called experts. But that's a key thing I'd be keen to talk about. Is that possible? Can you pay off your principal place in six years using a debt reduction strategy?
• 1:12
  Yeah, we'll unpack that today. But I think what's overstated is more these Atlantic statements about building out five, eight, $10 million portfolios without addressing the fundamentals to start with. And that's where I think people get carried away. They're all about wanting more. Today it's about actually doing the opposite. It's having less in terms of having less debt, having less exposure.
• 1:35
  But paying off your prime place of residence, for me and the thousands of clients we've helped over the years, is one of the first steps in a portfolio development strategy that we recommend. Yeah. And that's something you've kind of said for me day one. The first strategy is to pay that off. Yeah. Everything else put aside, whether you want to be this property mogul and you're…
• 1:57
  you wanna think about passive income at retirement, your first strategy has gotta be pay off that principal price. Yep, anyone that comes into my office and we go through this, and I see debt when they fill out the fact, fine I see debt on their primary place of residence. That's where our focus is. How do we get that down to zero? Because the reality is, you talk about good debt and bad debt, we want the right type of debt and the structuring of the right debt. Unfortunately, we've got a podcast with Nathan Hood
• 2:22
  around tax and being advantageous with your tax in a coming show, which will be really, really exciting for those listening because it's important that everything's structured correctly. Referring to that bad debt versus good debt and how to maximise your tax position is really, really important.
• 2:39
  So when we look at good debt versus bad debt, bad debt's the obvious ones and that's getting rid of all your credit cards, any HECS loans that are hanging around because people don't understand the implication that a loan has on your serviceability. And for those that are new in the property game that are carrying card debts, credit card debts or HECS debts, although HECS with the new scheme isn't factored into your capacity which is helpful.
• 3:05
  Those bad debts really do restrict your ability to borrow, which obviously disadvantages you trying to build out a portfolio. So that's the first part of it. But the good debt versus bad debt is common questions we get asked. What actually is defined?
• 3:20
  Your household debt on your prime place of residence, albeit it's good debt in the sense that you need it to have a home, to have a prime place of residence, it's bad debt from a tax position because there's nothing that we can claim. There's no negative gearing tied to that. We can't claim depreciation. We can't claim any costs that are spent on the property. We can't claim any of that interest. So there's, you know, we don't want our, if we have a portfolio and sometimes it's quite
• 3:47
  a client come in and they'll have three or four properties and they will have an LVR of 80%. So still only 80% of the home on their home. And yet they'll have some of their, an investment property completely paid off. They'll have 30% LVR on another one and 80% on the other.
• 4:03
  And the advice has either come from their accountant or mortgage broker. And straight away, it's like, why is this structured this way? There is, straight away, we can save in excess in some of those scenarios, $20,000 to $50,000 a year, depending on how much debt they've got, just by restructuring it so that they've got more debt on their investment properties that they can claim, negative gearing, depreciation, those sorts of things, and less debt on their home.
• 4:28
  Yeah. And when you're dealing, I guess when you're speaking with your clients over the years, everyone's going to have a different goal in mind in terms of...
• 4:37
  when they want to get to that retirement point or when they want to, you know, short-term goal, pay off that principal place. You know, you come up with strategies to help them get there. On the, you know, what's a typical timeframe that when you're speaking with a client that you can recommend a strategy that can get them to the paying off that debt, say under 10 years or the six-year figure that we've been floating around?
• 5:01
  Obviously, it depends how large that debt is in scale to their income. So if you've got a combined income of 300K, ideally we want that debt structure on the primary place of residence to be no more than 900,000. There is creep for that. Three and a half is sort of the threshold. Once you get beyond that, you're chewing up your investment debt and it makes it very difficult for those looking to build out a portfolio and pay off that debt.
• 5:29
  quickly it makes it really difficult because you've got no levers to pull once you've chewed up all your serviceability well you're paying that sucker off for commonly 30 years now it's getting there's loan terms of 35 years in america there's loan terms of 50 years and you can just see banks will go that way because they want to extract more money from you so so yes to answer that question in part three to three and a half is the is the figure you should be working towards
• 5:53
  So that's the debt you want in your primary place of residence, your debt to income. And income does include income from your rental properties, additional income if you've got a side hustle or you've got dividends from shares, et cetera. That's the three to three and a half is where we want to stick to. So if I've got that debt sitting at a million dollars.
• 6:11
  My loan terms at 25 years, my loan terms at 30 years, it's common practice that that is the norm. You buy a home and you spend the next 25 to 30 years paying that off. It's crazy. And we're going to sit here and maybe when I get to 55 or 60, I'll finally be debt free. And for most people, I think owning your home outright is the definition of financial freedom.
• 6:34
  I really do. And the ease of seeing clients go through that journey and they get to that milestone, it's like once you've done that, what else really matters? Yes, you can go and conquer the world and buy another five, six properties and try to take on more debt, go and get commercial properties. Everything after that can take place. But that moment and sometimes with clients, it's...
• 6:55
  We've gone through various strategies where it has pushed them a little bit in terms of their comfort levels, pushed them a little bit in terms of their stress levels to fast track that debt reduction strategy. But when you get there, it's just this moment of clarity and often it's just enjoy it. Have a year of not having any debt because it's a lovely place to be. I haven't been there for many years and with my thresholds at the moment, I won't be there for a while. But that moment of clarity is really important for people.
• 7:21
  So we want to get as many clients as we can to that position first off. And it's not going, my goal with clients isn't going out there to buy 100 properties tomorrow. It's not going out there to build a $20 million portfolio. My goal is to get them to zero debt on the primary place of residence as soon as we can. And what sort of, you mentioned, you kind of loosely alluded to, you know, potential scenario where,
• 7:42
  Someone could be aggressively paying it off and it might have a bit of pressure on their finances. There might be tight budgeting there. What sort of mindset is someone going to have to have if they do want to pay off that principal place? Is it like when I say pay off the principal place, I mean, you know, within that six year period or seven or under 10. So quite aggressive in terms of the.
• 8:01
  25, 30 year long term. Under 10 is the target. We've been able to exceed that and often do, that five to seven year mark. We've had one recently, we did it in three, but that was a really aggressive strategy. How'd you do that?
• 8:16
  Again, they took on a lot of debt to get there. And that's the kind of productive nature of this, right? You have to take on more debt to relieve debt. So a particular client of ours had a home in Geelong. They had close to a million bucks worth of debt on their prime and place of residence. We then purchased three assets for them. Their debt to income on that was at about two and a half. So the beauty of that, the debt to income was so low on their prime and place of residence, it gave them so much surplus capacity to buy investment properties.
• 8:44
  And so people listening like, okay, you're telling me that it's a debt reduction strategy. You're going to have to take on all this debt to get there. Yeah, that's the nature of it because they're on track to pay that mortgage off in 25 years. Kids are at an age, you know, over the last five years where you've got three children, two, five, and say seven, but there's no private school fees yet. All the large expenses that are coming are coming in three to five years time. So they don't want to be paying off all that debt when they're putting three boys through
• 9:12
  through private school right so the strategy was we want to be as aggressive as we can we're making really good money we're both back at work um and we both don't want to work forever so how quickly can we do it so the strategy was a five-year strategy to get that down to zero as quickly as we could we certainly didn't anticipate you know we're going to get the full million in five years but that was a that was the play and
• 9:33
  Purchased one in regional Western Australia, so Rockingham. That one there for 350, recently sold it for 700. So after fees, there's 300,000 off the table that you've taken off the primary place of residence. Bought another one in Perth, in Maylands. Purchased that for 650. That is now on the market and looking to get close to 1,1.
• 9:56
  So that will do a fair bit of the heavy lifting. And the other asset they bought and sold and traded within their own market of Geelong. So it was a, we assisted on the purchase side, but it was a renovation and flip. So they were able to do that in 18 months and extract another $350,000 from that. So once mainland settles and sold, they'll actually be more than debt free. But understand in reality, it's not as simple as, you know, I made a million dollars, therefore I pocketed that. You've got to take away your capital gains. You've got to take away your sales costs.
• 10:25
  So they'll still probably owe $100,000 on that mortgage, but a large portion has been knocked off in a three-year period. So pretty significant, obviously fortunate with some market conditions there. Their Rockingham property pretty well doubled in three years. Mainlands has done the same with some work, some value add, as we spoke about on a previous episode. All three strategies endorse the value add. So we weren't just relying solely on the market and they did one in their own neighbourhood and Australia.
• 10:52
  Josh the client is quite skilled so he's able to do a lot of those works in Geelong himself so there's a perfect example and and the beautiful thing is having a meeting with them recently was you know at 12 18 months ago they nearly tapped out of the strategy because the debt their debt to income got up to about six and a half times which you know is significant when we didn't potentially foresee the interest rate rises so it was all well and good three years ago to take on these properties when interest rates were at four percent
• 11:22
  they get to six and a half, that cash burn on a daily basis become real. So our yearly meetings went to six monthly meetings, which went to quarterly meetings, which pretty much catching up monthly just for them to hold on and not sell. So there is ways, and this is what it's looking at various scenarios. So we sat down with their account and their mortgage broker.
• 11:42
  They all had prime sites in good markets and it was prematurely too early to sell. So we restructured some loan to be able to pull out some equity to put that in an offset account which essentially cash flowed these assets. So does that make sense? Yeah, definitely. And I think listening to this scenario, when you're looking, you gave good examples there of some properties that you bought.
• 12:06
  selling them off while they're on the market, flip some as well. In terms of investment debt, should the strategy be to get it to a point where you sell, or should at any point in a rising market you refinance that? I appreciate obviously you're not a mortgage broker, but should there be part of a strategy in a rising market where you refinance, take some of that equity out and put it onto the principal place? Or with this type of strategy are we looking at
• 12:33
  letting the market do the heavy lifting, hold on, and then look to just sell, then release the capital from that onto the principal base. Yep, everything's circumstantial. So the play there was, you've really got to give the asset time to grow. And if we had to sold it mid-strategy a year and a half ago, their debt on their primary place of residence now in Geelong would be five to 600,000. By waiting another 12 months, it's now gonna be 100,000. So that is life-changing for them.
• 13:00
  And that's, you know, that takes some risk appetite. It takes, you know, them listening and sticking with the advice that we gave. So everything's circumstantial. So when we look at the fundamentals of the markets they were in, and this is where we always revert back to the data.
• 13:17
  I'm not talking on personal bias, is what my belief is on the Geelong market or the Adelaide market or the Perth market, Rockingham, for instance. It's on the data. And there was clearly a runway in all those markets. And we believe that they were still very early in the cycle. So the heavy lifting in terms of that capital growth, more was still to come than had already happened. So the advice was clear. We've just got to find a way to hold on to these assets.
• 13:41
  for at least another six months. And we're not going out there saying, we're gonna hold these for another three years. It's like, let's reassess in six months, but we're not selling them now, because in six months, and that next six months, the portfolio increased collectively, you know, another 40 or 50%. Okay, that's fantastic. How are we positioned? How's your cash flow?
• 13:59
  Are you sleeping? That's your stress levels. Are you managing this? And once we refinanced, we put $100,000 out, put that in a spending account in their offset, but they could still access it. Just took all the pressure away. Because it was literally, they're going paycheck to paycheck, and they're going, well...
• 14:14
  Our boys are growing up. They eat more than they've ever eaten. We want to take them to holidays and we want to do things and we can't because we're so burdened by these mortgages. But they didn't realize it. They felt like they were probably letting themselves down by having to remortgage and take equity out of a property. They felt that was a failure. I said, no, that's not the failure. The failure will be when you're forced to sell.
• 14:36
  when you don't have to. And they just probably didn't realize that that leverage was there to pull. When I say leverage, I don't mean the sense of debt, but you've got to look at levers. What can I pull? What can I sell at times? What equity can I draw upon? What value add can I make? So what's our options? And in this scenario, it was a simple refi. Pull $100,000 out of the portfolio, which that $100,000 ended up making them another $400,000 or $500,000. So return on cash, and they didn't spend that $100,000. They spent like $30,000 or $40,000 of it.
• 15:02
  But having that safety net that there was money and they could live a normal life was game-changing for them. And when you're looking at this type of strategy where you, let's just say, under that 10-year rule trying to pay off the principal place, I'm assuming the example you provided there, what you were saying earlier in the conversation, these are going to be trading assets predominantly that we're after. Trading assets, are they only capital growth or can you get a, will an asset that has good cash flow potentially be a trading asset? Yeah.
• 15:32
  obviously has a bit of a potential to have capital growth. Is there a clear distinction between capital growth asset and a cash flow asset? Yep, to answer the first part of that question, it doesn't have to be a trading asset because you can simply go out there and, again, that example, if they had a million dollars of debt. So get the equity to work for you, I guess. Exactly, you pull out the equity,
• 15:51
  And that equity then pays off the primary place of residence. So you're debt free. You still own the three investment properties. And that was my advice when they sold, right? So they're now under offer or close to on the third asset of the portfolio. But to be fair, and like I said at the start of the podcast, just to see how happy they are and relieved and they're in such a great position that –
• 16:13
  There's an element in it that says I should be just comfortable with that. But seeing where their portfolio would go over the next 12 months, my advice is my portfolio, I wouldn't have sold because I would have restructured, taken the debt out and paid off my prime and place of residence, geared up my investments so I'm getting better tax advantages from that. So the negative giving kicks in, the appreciation kicks back in.
• 16:35
  So I've got my debt working for me. I've got my house paid off and let the portfolio continue to grow. But again, it's case by case and everyone's appetite and it's almost seasonal, right? Investing's almost seasonal. We've got to go through seasonals. We've got to roll up the sleeves. It's going to be tough work. We've got to buckle down. We've got to save and we're going to go hard at this for two or three years. We know it's not forever. And that's how I try to break it down in years of a property portfolio.
• 16:59
  There's going to be times where it's tough and there's going to be times where it's easy. That was a period for them and they sort of roll up the sleeves for three years. And now they get to enjoy the fruits of it for the next decades, really. And they may not do anything else. And they're going to be comfortable with that because they're going to live a very happy life and a very low stress life knowing that they don't have any debt and they own the house where they're going to live for the next 20 years. Debt free.
• 17:21
  And that example, you've bought in multiple locations, Geelong, regional, WA, Perth. How critical is it for someone wanting to implement that strategy to understand how the property cycles work? So all of these markets are going to be moving at different paces, different growth as well. How important is that going to be for selecting the right asset?
• 17:41
  It is, it's so important to have diversification. And, you know, if they had have, for instance, they're in Geelong, right, in Victoria, the safe bet for them would have been to invest in Victoria. You know, if it wasn't for the value-add plays that they did in Geelong, they would have lost money on that deal. The market conditions alone went backwards, fortunately. The value-add play got them out and got them out quite well. But if they had invested all their chips, they'd have lost money on that deal.
• 18:09
  put them on the table, invest in the Victorian market, one in Melbourne, another one in Geelong, two in Melbourne, at that period in time, they would have lost money, and not just a little bit of money, 20 to 30% of their portfolio, which would have put them back decades.
• 18:24
  So again, there's two things to learn there. Cycles for this strategy are so important. You can do everything right, but if you mistime the cycle in the market, it comes back to the research, you put yourself decades behind. But also diversification, because we can have all the research in the world and fortunately we've been right for the last decade, but through diversification, you de-risk it naturally. So if we, in that example, one in regional Western Australia, one in Perth, one in Victoria,
• 18:53
  We have hedged our bets. One didn't perform. One didn't perform. And that was the Geelong, the market didn't perform. The value added, the market didn't perform. Because we diversified into two separate markets outside of that, those other two assets did the heavy lifting. And my advice is it wasn't sell Geelong because now Geelong's revenue is in really good value. So if they had to hold onto it for another period of time, you'd start to see that potentially shift. Yeah. What about rising markets?
• 19:21
  People, a lot of people get fear of missing out, maybe jump in too late in the game, but can you still buy in a rising market and do well to then exit? So let's just, look, elephant in the room, let's call out Perth, for example. What is that, like 80% growth in the last five years?
• 19:38
  Yeah, like the established market of houses with land has done about 85%. 85%, where we're looking at the data daily, weekly, and seeing the amount of stock on market and from the ground level on, we can hear it's heating up again. It feels like it's going on another run.
• 19:57
  Let's use that as an example. Should people be deterred from investing in an area that has already gone on a run and think there's still value left in the market? Or should you always be trying to pick at the bottom of a cycle? Say, for instance, Melbourne that we're hearing quite a lot has just entered into more of a buying phase there.
• 20:15
  Yeah, it really depends on your strategy, where you're at with your portfolio. Recency bias stops people from taking action. You know, if you always look at hindsight, you'll never buy. And the equivalent of that was when we were buying in Perth in 2022, for example, right? We just had a COVID uplift of about 20, 25%. Everyone's like, oh, the Perth market's, you know, it's done its dashed.
• 20:37
  They hadn't seen growth in a decade. It's done 20%. It's like, wow. Yeah. You know, they can't do any more. Anyone that's bought in 2022 hasn't made at least 60% to 75%, right? Again, this time last year, the market was doing 2% growth a month. So we'll call it September, October, just before it sort of slowed down a little bit. When I say slowed down, it's going from 2% growth a month. It went down to 0.3% growth a month.
• 21:00
  at that point in time people saying Perth's done you know it's up 70% for established houses we can't see growth I've left the market too late we took a very strong plane in Perth units middle middle middle of late last year buying units for five to 550 that are now you know less than 12 months later are worth eight 850 so there's
• 21:25
  There is a theory to buy at the bottom of the market, and absolutely that's been our model for years. But when you buy at the bottom, you won't always know it's the bottom. And for us, it was buying in Perth in 2018. From 2018 to 2020, there was maybe 3% to 5% growth. So you arguably say we're potentially too early. So buying mid-cycle is arguably a safer option because you're getting instant gratification, you're getting instant equity. Yeah, monthly too. Monthly. You're probably looking at your...
• 21:55
  Absolutely. So there's a huge- Yeah, a house on realestate.com, you've seen it going up every month and you're hearing all the positive talk amongst the media as well. So you can kind of see it instantly. Yeah, exactly. And in the game we play, we're trying to build out portfolios. We need equity to do that, right? It's hard to save your wage and then recycle just your wage alone into property. You'll be waiting years. So we need equity. So we need to get equity, we need instant uplift. So buying mid-cycle-
• 22:23
  It doesn't guarantee, but it gives you more certainty because you know you're well off the bottom. There's momentum in the market. And so those examples last year, when we'll be able to buy for 550, they're now worth 800,000. That $250,000 equity, we can then recycle into another market. So early in your portfolio,
• 22:42
  my advice would be buying in markets that are already carrying momentum. So not buying at the bottom of the cycle for your first investment because you may be too early and then you're waiting too. You're just sitting and playing the waiting game. I need the equity. I can't save enough cash to buy another property. And the yields will probably be pretty low as well. At the bottom of the cycle, the cash flow really hurts. Mid-cycle, they've improved. So certainly for those starting off their portfolios, you want to be buying into a hot market.
• 23:08
  And it's like, it sounds counterintuitive, but it's in fact the reality because within 12 months, most of these cases, by the time they settle, you've got equity that you can recycle. But certainly in 12 months, you can have more than enough deposit and a bit of a safety net to then look at the next market. And then the second or third asset, you can hedge your bets a little bit then and then try to time the bottom of the cycle.
• 23:31
  What about this statement? I'm kind of smiling. I laughed kind of when I was having the conversation, but I spoke to a potential customer and he's like, look, I'm after a unicorn. I'm like, okay, tell me what's the unicorn. I want 6% yield, minimum 10% growth per year. So this guy here, obviously, you know, there's probably spruikers out there telling him that's an achievable market with an off-the-plan apartment in Melbourne or something like that.
• 23:56
  NDIS, dual key, something. Correct. But I mean, it raises a good question. Like that person there, how would you, what would you say for, he's a first time investor. What should he be chasing then? Should he be chasing more something with a high yield because he's trying to get into the market? So maybe it's going to be more of a long term play or should he be looking at something that is going to get him a market that we think has legs to potentially get him to that 10% growth?
• 24:25
  So, and this is too much noise. Someone has probably promised him that, which, you know. Unicorn. Unicorn is cool. On our previous version of this podcast, I call bullshit. Yeah. I call bullshit on the unicorn assets. They don't exist.
• 24:38
  In masses. Look at the portfolios that we've created. There's deals in there that are unicorns, but we didn't know that when we purchased them. We knew they were good deals and they've turned out to be sensational deals. But the reality is your first investment is arguably your most important, right? Because that will dictate the length in time you can...
• 24:59
  make your second and third and the fourth. And like I said, in my personal world, my first asset that I purchased, regional Victoria off the planned townhouse, put me back five years because it was the wrong asset selection. And that five years is a long time, half a decade to then exit pretty much at the same price as what I paid. So a really good learning exercise. So when I look at that, your first asset has to be with the mindset of capital growth. Has to be.
• 25:26
  So if you're out there chasing the yield, chasing the yield, chasing the yield, there is a place for cash flow, don't get me wrong, and it's important. Typically later in the portfolio piece, we go heavily cash flow through commercial. We spoke about that with Cal Doggett and the ability to generate a passive income from commercial property.
• 25:41
  100%. A lot of our clients that are getting close to retirement, that's the strategy we endorse. But early in the portfolio, we need to get equity. We need to get capital growth into that asset as soon as we can, because that's going to set you up for your second purchase. Once we get to two to three, three to four, then we start to have to manage cash flow a little bit more.
• 26:02
  then we have to start to manage cash flow across the portfolio because you're going to be limited. You're going to hit a cap on your borrowing capacity, not because of your equity levels, because of your serviceability. But certainly for your first investment, you can service it. The banks wouldn't give you the debt unless you could service it. So we don't want to go high cash flow, low capital growth strategy. And everyone's like, I want high cash flow, I want high capital growth. Just get comfortable with the fact that that doesn't exist. There's a world where that doesn't exist. Yes, there's exceptions.
• 26:31
  Like I'm sure a lot of the assets, maybe Perth as well, where the yields were good, had that growth. But that was just the market. We have purchased assets that have 6% yields. These regional markets we've participated in and had 15% year-on-year capital growth. So it has happened. But I'm not going to go out there and say, there's a market in Australia where you're going to get this consistently longer term. Let's under-promise and over-deliver, right? So let's assume for the moment that it doesn't exist.
• 27:00
  It's either higher capital growth and then you're going to take a haircut on yield, or it's going to be lower capital growth, but you're going to get higher cash flow. So that, let's assume, the long-term compounding growth rate of most of the markets we participate in is between 6.5% and 7%. And that's the average, obviously, in a rising period of time when the cycle is on the rise, it exceeds that. When it's on the decline, it's sub that. But on average, over 30 years, it's 6.5% to 7%.
• 27:28
  If we want assets to outperform that long-term compounding growth rate, we're gonna look for higher land component assets. And to do that, you pay more for the land, less for the house. The tenants are gonna pay less for those improvements, therefore you're gonna take a hit on your rental returns and your yield. So that balance needs to play out. And my advice for first-time investors is be only focused on capital growth. Find a way to service it.
• 27:54
  Find a way to make sure the cash flow means you can survive. You're not eating too many noodles. You can get by. Like I said, the banks won't give you the debt if you couldn't anyway, so you're pretty well safe from that point of view. If you've been assessed and improved, they know you can cover the debt. So that's a really good safety net.
• 28:10
  But there's various ways which we've spoken about value-add renovations to increase the capital growth. But let's keep the eyes on the prize. In the first 12 months, how do we get equity? Because then we can look at the second asset. And then I'm okay to look at cash flow assets for the second and third. It's a completely different conversation. But without equity from the first, we're not going to get to property two or property three. Yeah. And just going back to the debt reduction strategy, so...
• 28:32
  pretty clear that I guess in terms of the strategy in terms of what you want to be buying, what type of assets to be buying, high capital growth, potentially trading at least ones where you can activate some of that equity and put it back onto the principal place. I'm just thinking in my head, if someone comes to you, early 30s, late 20s, maybe that's their first home that they're aiming to pay off, they're gonna upsize in a period of time. So maybe their strategy is always just to be paying off that principal place, they get it down to a
• 29:00
  you know, pay off that principal-based debt, but then they go, actually, no, I want that house in the better suburb next to us that's an extra six, 700K, so we go again. Is that kind of what you see from time to time? You see the debt reduction strategy play out multiple times throughout the life cycle. If I had to, you know, in every client situation, it's different depending on when they come to us, where they're at in their journey.
• 29:19
  But if you look at the masses, if I had to like give you the timeframe, it would be first purchase isn't an investment property, right? It becomes an accidental investment as you say. So they go into a home, wherever they can afford, and they get into that property. Then they will look to upgrade
• 29:36
  at some point in time, two to four years, maybe five years down the track, and then they upgrade into that investment property, just the property they were living in just becomes an investment property, your favorite saying, accidental investing. So yeah, accidental landlords. That's a scenario that plays out so commonly. But if you can actually control that a little bit better and have some pre-thought that, hey, that probably will happen to me. So let's put some strategy into place to make this work better for us. Because what happens in that scenario is, they paid off a lot off their home,
• 30:06
  Then they move, they upgrade, they don't change the debt. They've got high leverage on their prime place of residence now and they've got low leverage on their investment property. It's exactly what we don't want to do, but I see it all the time. And their broker may not be sophisticated to provide that advice.
• 30:21
  So let's plan it out. Where you live now at 30, is that where you're gonna probably wanna live at 35 or 40? What's your dream location? It's not, yeah, and they're gonna go, oh yeah, we're probably gonna have kids one day. Okay, so this two bedroom villa that you're in, will that be enough to have the three or four kids that you hope to have? No, okay, so let's plan for that. How can we get the debt down to this as quickly as we can? And this may inevitably become a trading strategy. So we buy one to two investment properties, that $600,000 debt on the villa,
• 30:48
  We get that down to zero within the five to seven year period. And then we sell down the villa to upgrade and have as little debt as we possibly can on that upgraded property. And then we start the debt reduction strategy again. We buy two, three properties and over the course of five to seven years, anticipate to pay that debt off. And then you'll find there may be a third and that's before the downsizer. Yeah, what about this? You were just saying that in terms of like, it was just my mind was wandering into
• 31:17
  A lot of conversations I have about this exact scenario where someone wants to buy a location, buy a property in a location, because that's where they want to end up. That's their home they want to settle in. Land banking. Land banking. But it might not be in a market. It might not be the right time to be buying it. But that is such a common thing that I've personally got asked where I want to buy in this location because that's the house I want to live in in 10 years' time.
• 31:43
  Like what sort of advice do you give to clients like that? Would you, because that is an emotional and, you know, in investing, we try to keep the emotion out of it, but that is obviously an emotional purchase. Would you guide them towards that? That's what they want to do. Okay, let's, that's what you want to do. Let's try to swift change the strategy to get the capital growth elsewhere. Or would you advise them against doing that and waiting to the money? Yeah, that's if it's not a rising mark, I should say.
• 32:04
  Yep. Well, that's the strategy I've done myself, right? Where do I want to be in five years' time? I land banked that three years ago. And it's a really good strategy when you don't know exactly what you want, but you may know an area that you want to be. Because the house, you know, when you've got one kid now, I'm sure you'll have three in the next five years,
• 32:23
  what life looks like in five to seven years in the house requirements at that point. Do you want a backyard? Do you want a pool? Do you want a second level? Things change and it's hard to foresee and it puts a lot of pressure, emotional pressure on people to try to make a decision now for a period of time in the future. And most people are never going to get it right. They're never going to be happy and they miss things and then they sell. And then because of the cost of transacting becomes expensive, it was a bit of a lost exercise.
• 32:49
  by lamb baking that location, there's a benefit on two part. You get massive negative gearing benefits because if you're lamb baking, you don't really care about the improvements, right? So one of the worst houses you can possibly imagine, the yield on it's like one and a half, maybe 1.4%, like horrible yield. So yes, I have that cash burden, but I get massive negative gearing benefits out of that, right? So essentially the government's propping that up for me. So thank you.
• 33:15
  And that location, really happy with it. I think it will be a forever location. What the house I put on it one day, I don't know what that looks like. And it changes every year, every 12 months, what I was going to put on there. And the older I get and closer I get to potentially go into that next transition of building, I'm getting a bit more of an idea of what I think I want that house to be.
• 33:34
  So, and the beauty in a rising market, you know, that property like the Perth market has gone up 75, 80%, arguably more because it's purely land value and land improves higher than improvements. So it's more than doubled. I've locked away the location. I haven't moved. It's been negatively geared the entire time. So it's costing me nothing to hold.
• 33:58
  That strategy works well. In a stagnant market, it's hard to foresee. Do I recommend do that in a stabilised market?
• 34:07
  I'd probably shy against it because again, it's the opportunity cost. That is in its current form, although it's my prime place of residence in the future, in its current form, it is a high land value investment. Bleach your barrier. Yeah. So the idea is when I bought it five years ago, I knew we were entering a rising market, I'd rather pay five years ago what the price was worth compared to what it is now. And it turns out it was essentially half the price back then. So I was forward planning that as an investment property.
• 34:36
  But if the fundamentals aren't strong in a market, I would hedge against it because it's the opportunity cost. My debt's been tied up in that, meaning I haven't been able to invest in other pockets or in other investment types. So no, in a stagnant market, to answer your question, I don't endorse that strategy.
• 34:54
  And just to kind of summarise then, what would you say to someone who's sitting on a 25-year, 30-year mortgage right now and wants to pay that off quicker? What would be your advice for them to implement straight away?
• 35:09
  You need to take on more debt, get comfortable with that because you need to invest in rising markets. But you may be comfortable with that. First is, are you okay with that? Just working and paying your mortgage off over 25 years? If you are, that's fine. So this is not for everyone. It's those that have got a clearer strategy and it's knowing what the next five years, do you have school fees coming up?
• 35:32
  Are you got, are both parties at work? At the moment we are, but we don't wanna do that forever. Okay, if we don't have kids, let's work out before one of us is at home taking care of the kids while the other one's working. So everything is circumstantial, but in that scenario, you've got 25 years and you do wanna pay it off quicker, you wanna get it under 10 years, then you're gonna have to get comfortable to take on more debt. And we're gonna potentially buy one to two investment properties,
• 35:58
  over the next 12 months and then again 18 months to have a four to six year strategy to get your home completely paid off in full. Beautiful. Just going on to back to the roots now for the I Call Bullshit segment. We've had a load of comments over our YouTube channel over the last couple of months. Moving forward, as we've said in one of the intros, please send in any statements or comments
• 36:25
  Bold statements, bold headlines. Bold headlines that you want Lachlan to unpack. Or if we've got a guest on that episode, we might pick the questions that maybe are related. So we've got Nathan Hood coming on to talk about some tax stuff. So if there's any tax questions, please send those in as well. But yeah, I think the one we saw recently, which I quite liked, was essentially you don't need a real estate agent in a rising market. So I was referring to Perth at the moment being on a bit of a heater.
• 36:55
  and the value that a real estate agent is providing. So Lachlan, the question is, you don't need a real estate agent in a rising market. Do you call bullshit? It's interesting, isn't it? Because in a rising market, the sheer volume of demand does the selling, right? This is the perception that an agent doesn't do anything. People don't realize that selling your own home
• 37:20
  is the largest form, individual form. So you've got the big agencies in the world, Ray White, Elders. Selling your own home is still the number one agency in Australia. So people don't realise it. A lot of people do sell their own home. It's crazy.
• 37:35
  Yeah, no one does. But there's a lot of websites that you can do it. You launch it on there, you take home, it opens yourself. But it is the number one way people, obviously it doesn't compare to the masses of agencies, but as an individual agency, selling your own home is number one. But I don't encourage it. Yes, there's good agents out there. Equally, there's terrible agents there that don't do a lot. But through every conversation that I have when this gets questioned,
• 38:03
  if you do have a quality agent that does all the buyer work, creates a really competitive framework and works the buyers extremely hard, they will get a higher price. There's no doubt about it. A really good, well-run campaign is,
• 38:20
  will outperform the market. There's no doubt about that. So I do call bullshit in summary. Quality is key. Yes, I do agree that there's some agents out there that have got very comfortable in rising markets, be that Queensland, Adelaide or Perth in recent years, where they do more work in trying to find listings and spend 95% of your time. If you listen to any real estate podcasts, no one's talking about how to get a better price for their seller.
• 38:47
  No one's talking about how to do a great job. All they're talking about is how to get listings. So that concerns me, that the push in that market is all about listing activity. I've just got to sign listing agreements. The more listings I get, properties sell themselves. So it worries me that that's becoming the image of a real estate agent, don't get me wrong. But fundamentally, a really good agent that does work for their client
• 39:12
  will outperform the market and get you the best result. And legally, we could sell our own properties. We're licensed, I'd argue I know real estate pretty well. I think I could sell my own property. Recently, I've sold two properties in my portfolio in the last six months, and on both occasions, the agents have outperformed my expectations.
• 39:32
  and certainly outperformed in their buyer work when i talk about buyer work their follow-ups so and some stuff you know shadow in there go through home opens and see you know how active these agents are because they they can talk the talk they're very good at selling so they're selling to you as a client as much as they're selling anyone else but no i was i was pleasantly pleasantly surprised that the good operators out there are getting better results
• 39:53
  Beautiful. Thanks for listening and joining us on the Folio Property Podcast. Any questions you want to send Lachlan moving forward, please hit the link below at info at folio.com.au. Thanks for listening.