Episode 98 | Host Special Q & A | Chris Bates & Veronica Morgan

Older V Newer apartments | Staging & Styling Tricks | Growing a property tax free | Rentvesting properly

In this episode special, Chris and Veronica answer hot-topic questions from listeners. Here are some of the highlights:

• Why older style apartments still hold up against off the plan apartments

• How staging and styling distorts home buyers perceptions

• How land titles affect lending and resale

• What questions should you ask your building/pest inspector

• Why being cash flow positive on an investment property can negatively impact you

• How to grow a property tax free for 6 years

We refer back to:

Reena Van Alast: Episode 18
Kerry Hunt: Episode 87
Equities Market: Episode 84 | Episode 83 | Episode 73 | Episode 69

Work with Veronica? info@gooddeeds.com.au
Work with Chris? hello@wealthful.com.au

EPISODE TRANSCRIPT: 

Please note that this has been transcribed by half-human-half-robot, so brace yourself for typos and the odd bit of weirdness…

Veronica Morgan: You're listening to the elephant in the room property podcast where the big things that never get talked about actually get talked about. I'm Veronica Morgan, real estate agent buyer's agent, cohost of Foxtel's location, location, location Australia and author of a new book auction ready how to buy property even though you're scared shitless,

Chris Bates: I'm Chris Bates, financial planner, mortgage broker, and together we're going to uncover who's really making the decisions when you buy a property.

Veronica Morgan: Don't forget that you can access the transcript for this episode on the website as well as download our free fool or forecaster report, which experts can you trust to get it right. The elephantintheroom.com.au.

Chris Bates: This episode we're answering some of your questions. We'll be covering a whole bunch of things that affects capital growth, such as where the new townhouses will outperform old townhouses in the same suburb. We'll also discuss different types of land title and their impact on resale and we're going to talk about reinvesting in Tasmania and all the things that have to be in place in order to be cashflow positive.

Veronica Morgan: We'll also talk about the questions you need to ask a building in person specter and the styling tricks that property and buyers need to be on the lookout for. And thank you so much for sending in your questions and feedback. We'll tackle more of your questions in future episodes and we'll also look for guests who can share specific knowledge when we have more complex problems thrown at us, keep them coming, then you can contact us via the website. So that's the elephantintheroom.com.au or on Facebook as two of these questions have done and remember to stick around for this week's Dumbo as we have a doozy for you.

Chris Bates: Before we get started, everything we talk about on this podcast is generally nature and should never be considered to be personal financial advice. If you're looking to get advice, please seek the help of a licensed financial advisor or buyers agent. They will tailor and document their advice to your personal circumstances. Now let's get cracking.

Veronica Morgan: So our first question is from Ante What's your view on capital appreciation for two of the same properties, townhouses in the same area, within 10 kilometers of Capitol city. However, one is new and the other one is say 15 years old. Will they grow at the same rate? All other things being equal? What do you reckon Chris?

Chris Bates: Wow. I mean, I guess it's a semi element to this question. I mean, the townhouses, the land content in income, Cooper obey completely different the floor plan, et cetera. So just because the two townhouses doesn't mean they're equal from the get go in terms of their land content, the street they're on could be completely different. One could be North facing, one could be South facing. Um, yeah, I mean, that's right. You could be, um, one could be a three bed with a study, you know, I guess it's kinda, you know, it's, it's very hard to kind of, you know, I guess say everything's going to grow equal because fundamentally they're two different properties.

Veronica Morgan: Well, I think two older has is actually often quite smaller, a lot smaller than newer townhouses. You know, I know often there's, you hear that apartments are shrinking, you know, a two bedroom apartment now is smaller than it might've been say 40, 50 years ago. Not always the case by the way. But anyway. Um, but that's sort of a belief that a lot of people have. Whereas there are a lot of townhouses I see in the older style ones are quite a lot smaller than in the newer ones. Um, so you know, once again you're going to have more size. But the other thing that is interesting that if you're buying brand new, then there's always that sort of the, you know, the new car showroom type factor, which means that there's a period of time where your property might actually decrease in value or, or stagnate for a bit while the market sort of catches up and absorbs that premium that you've paid for that property. So if they were to exactly the same, you know, in terms of size and aspect and all things being equal, it's just that they're 15 years difference, I would think you'd probably do better are the older one. But if the newer one is significantly better, then you know the actual caliber of the acid itself, then you could potentially do better with a new one.

Chris Bates: Yeah, I mean I guess it's the, the really thing that goes up is the land content over the longer term. So I guess it's probably figuring out how much land is you actually own. There is a, you know, in terms of the townhouse because yeah, if it is a smaller block and it's only 120 or something like that, then yes it's a nicer house. But is the land going to grow as far?

Veronica Morgan: Yeah. That's a, that's an interesting thing and I look, I know, you know, I know it's true. Land goes up in value more than the building cause the building depreciates and I know that that is true. However, if you've got, um, you know, you could have two houses, let's forget townhouses for a minute. You could have two houses on exactly the same size, land in, in the same suburb and one will go up more than the other. If it has, it's a nicer style of home. It's a period home versus a, you know, a bog standard, modern home for instance, in certain suburbs. Or if it's positioned in the block in a way that means that you feel like the land is bigger versus it's positioned in the middle of the block where there's a lot of wasted space, or if the actual floor plan is better in one than the other, or the aspect is better in one than the other. So you can actually have two assets. They might even cost the same amount of money on one day on the same block of land in the same suburb, but one will go up better go up more than the other one because of the actual building on it. So the improvement on that land. So whilst we sort of say, well that, you know, the land is what goes up, it's not as simple as that.

Chris Bates: No, no, no. And I guess I'm probably throwing all new townhouses in the camp that they're not that well built. You know, I would guess if you're buying a, um, yeah, but I mean, I guess if you're buying a really nice new townhouse that was built by, you know, a real rapport builder and it's built in a premium suburb and it's all sustainably built and it's, you know, very high end, then yes, maybe it's an tan house. But the problem with a lot of new townhouses is they're built in areas where they're building a lot more townhouses. And so I guess if you buy a new townhouse in that area, you got to be worried.

Veronica Morgan: You gotta remember the question was within 10 Ks of the CBD.

Chris Bates: Well there's probably still pockets that, you know, you think about down the South Sydney, you know, towards like kind of the airport they'd build in corner.

Veronica Morgan: Thats outside of ten KM, Yup. The caveat on this one is within, but I think what you're saying is absolutely right. I mean, if you're going into an area where there's that there's ongoing supply, that's obviously going to be an issue, you know that's going to be an issue for all townhouses though, not just new. And you know what I mean? Like that's just going to be generally an issue.

Chris Bates: Yeah. And I guess in Melbourne though, in the, in a, in a 10 K ring, there's without doubt there's areas where the building lots of new townhouses yeah. Into the North of kind of Melbourne lock. There's definitely pockets where there's streets and streets of just kind of new kind of cookie cutter townhouses. So I guess you just gotta you know, if you are buying a townhouse, you want to be buying them generally where they're not building a lot more of them or if they are, they're very hard quality. So you know, you just protect yourself from that supply risk. But I mean just generally, I guess we are more of a fan of probably buying the oldest stuff probably from the content, unless it's an amazing new build. That's probably how I would,

Veronica Morgan: yeah, I think that's probably the, the final word on that question. Okay. Next question over to you Chris.

Chris Bates: So Shannon has sent us three questions and um, it could be my best and one of my best. My best mate. I actually haven't. Thanks. if it is you, Shannon. Thanks. Bye. Um, but anyway, there's um, yeah, he's two, three questions. We're staging and styling including tricks that to be aware of that make the space look beautiful but might not actually be functional.

Veronica Morgan: I think that buyers tend to gloss over and forget that properties are all dressed or not all but often dress for sale. And quite often there's some really good opportunities in properties that aren't stressed for sale because people are just sort of bypassing them and going for ones that are a little bit more attractive. And there's a good reason why they're styling industry is, you know, it's been fairly prolific in the last say 20 years because we don't like to think too hard, you know, we like to go on a property, have it sort of presented to us on a silver bladder. So there are definitely tricks though. There are definitely tricks. Painting is one, you know, freshly painted house. He can cover off a multitude of sins. In fact, just recently I looked in inside of the house, actually owned by a friend of mine. Now this house has a lot of dam, has had a lot of Dan that she's actually dealt with that DEP and fixed all the problems and she rented it out some years ago and got it freshly painted to rent it out and at the same time sort of fix the roof and, and attended to all that damn stuff. Now interestingly enough, I was shocked actually and amazed actually the tenant never actually complained about this. But in the kitchen there's practically an war where the paint is just been lifted just off in sheets. And so, you know, when that tenant first moved Dean, it did not look like that. It looked like a beautifully freshly painted wall. And so you could buy a property there even even if the repairs had been done. But the damp hasn't been allowed to take, you know, to come out of the wall, the brick, whatever. And it's been freshly painted. So paint can hide a multitude of sins. That's, that's one absolute no brainer. And another one is, um, and this is one that stylish showed me. If a bedroom's a little bit small, they take the feet off the beds so the bed sits closer to the floor and optically it actually looks bigger. There's a trick.

Chris Bates: I like that. I mean they do, they don't sometimes put side tables with the bed too. Do they? Or they'll use a plant that's makes it feel like it's a bit bigger than

Veronica Morgan: got some tiny little thing there that you just sort of go, Oh yes, I had tabled. Tick. But you don't sort of think, Oh, it's tiny. I can't feed one with a drawer.

Chris Bates: Yeah, you can see the bed and you're like, Oh, okay. So is this a bedroom? And me kind of keep going. I mean, wardrobes is probably another one though. You know, if it hasn't got built-ins, sometimes people don't think, is there actually a wardrobe here?

Veronica Morgan: Do you know on that bid thing when we were filming once down in Melbourne talking about styling, um, I was having that conversation about the beds and about in the small rooms and I wonder if there's got feet on that bed and as, as as the contributors for the show actually went to have a look and see where there was feet on that bed. They've lifted up the corner of the bedspread and not only were there no feet and there was actually no bed. The bed was made out of cardboard boxes. somebody sat on it.

Chris Bates: Well that's it. You know what to sit in these things, isn't it? I know. I do find it funny when you look checking these houses out and you kind of walk around, no one even sits on the furniture or gets any experience or anything like that. Everything's like so perfectly crafted. He meant to be living in these homes. Do you want to kind of sometimes sit down and just experience it? Look, you know, I think what is important is that the start, a good stylists will make that spice seem functional and they won't be anywhere near as much furniture in it as it would be if you lived in it. And I think that that's the other thing that people gotta really think through. It's like, um, you know, because doing a pre-settlement inspection with somebody and you know, obviously this doesn't happen for my clients cause we take them through all of this. But back when I was a sales agent, you'd do a pre-settlement inspection where somebody bought a property six weeks earlier at auction. It had been beautifully starred and they fall in love with the finish. You know, the way it furnished and everything in empty houses, a pretty miserable, really miserable looking dismal. And so, you know, by walking through, Oh God, this is what I actually bought. And I think that that is something that all buyers need to be very, very firm, you know, remind that when you're walking through a home, those furnishings, okay, the window coverings stay, the light fittings will stay on. This is a note in the, in the contract floor coverings, as long as they fixed, we'll stay. But there's nearly everything else goes.

Chris Bates: And so how do you kind of help clients really visualize that? Because know it's easy to kind of say, Oh imagine there's no furniture here but you're still seeing the furniture. So how do you actually help clients? Really yeah. That really stuck in their mind that it's not going to look like this when you buy it.

Veronica Morgan: Yeah. Look, I mean if, if we think it's going to be an ex absolute issue because they glossing over things that we can definitely say. Sometimes we just keep taking them back to the property until actually it dawns on them because you know, buying properties and emotional process, you know, and we go through homes and we start picturing us living there and this sort of lifestyle thing and um, you know, the odd person is very practical, you know, and though, but that is a minority. I do think of back in the day and, and when I say back in the day before it was routinely done that every property was styled then, you know, buyers were used to looking at empty properties that were used to, to sort of being a bit more critical about properties potentially, um, or actually looking or using their imagination. Whereas nowadays sit there, they're the exception to the rule, the ones that aren't style.

Chris Bates: And what about the photography? Um, tips because you know, you look online, it looks like big rooms. Looks like it's so light. Mmm. You know, I think when you go to a real estate agent now and you're marketing a property, they can say, do you want us to electronically style it? So not actually you store furniture, we will, you know, pay $150 a room and we will put in fake furniture on the rentals because it's even sales.

Veronica Morgan: Well, yeah, but the thing is we rentals, it's not cost effective to actually furnish style a property to rent. Right? There's no real money in it. Whereas when you're selling a property, the potential upside of styling and investing a few thousand dollars to do that is definitely there. So there's a real purpose for doing your return on investment is, is potentially there. So if you're only gonna use electronic furniture in a or virtual furniture in a sales campaign, well that's a bit stupid really, because when people are going to go inspect the property and then you've lost all that, I mean, yeah, you've got them in the door, but there's still what's there is gonna speak out volumes. It's like, you know, when they use those, those fisheye lenses, I make the room look enormous. I mean, the minute you get, there you go. Yep. That's, it's, it is small. And so there are certain things that the photography, yes, it will get you in the door, but if it sets the expectations too high, you can actually lose buyers because of that. Um, but I'll tell you where the big danger is buying sight unseen.

Chris Bates: Mm. Well, people do it. It's not, it's not unheard of. I'm sure we've all got friends or family that have done that. And I, my mother did that. But anyway, yes. We won't bring her into the property done by section. Sorry. Um, how long ago, Shannon, second question here is around land titles and how this affects lending and resale.

Veronica Morgan: Yeah. So he's a, who is limb, he's noted limited, qualified, Toren Strada. There's also company and community titles. So let's just run through some of those things. So, okay. So if you buy a house, it's Torrens title, right? With a couple of little exceptions, right. So Torrens title means that you own yeah, it, you know, the, that land and everything on it basically. Right. You don't own too much beneath the land because if the government finds that you've got oil, it's, there's, there's a caveat and every contract says basically that. But anyway, so you own your own, the land, you own what's on it. So that's Torrens title, right? So, so in older areas, say in Sydney and in the inner West, Oh, the Eastern suburbs. And maybe it's the lower North shore where they've been, they've had properties that are built into the Victorian, you know, back in the 18 hundreds. Basically there are two types of titles. It's either limited or qualified. Now the one of them refers to, they need to look, I should probably go get a lawyer to give me the definitions of this. But basically what they mean is that they haven't sorta been brought up to date. One of them basically needs a new survey to just be 100% certain that you're actually getting the boundaries of exactly right. Yeah. Okay. And the other one relates to transfer of title. So basically, um, that one that relates to transfer a title generally falls off. That's a qualification. It generally falls off once the property is transacted again. So that's just about basically establishing a conscience, continuous line of, of ownership. Right. Whereas the other one is around about the boundary. So you can overcome that by getting a survey and actually registering that with the land titles office.

Chris Bates: Now that was, um, yeah, it just had that, have that certificate and our bank just needed that. And that was fine. It wasn't a big deal.

Veronica Morgan: So yeah, so we come across them often enough not to be, I wouldn't say that they actually impact the value of a property. I think that that over time they just all getting upgraded to Torrens and yeah, it's part and parcel of buying in an area that's quite old. So there's sort of not a major issue. Um, now on to the strata side of things or strata is like a subset, if you like off Torrens title, right? So strata and we've had many conversations with strata experts. It technically you are, you own the air space you own from the paint on your walls in. So therefore, you know, I look at strata as being, well, it's w what does someone call it, the fourth layer of government. So you're not buying land, you're buying a proportion or a share of the land that the building or the complex sits on. So, obviously there are issues in terms of ongoing value with that because of the land content. But there's also how big that strata Rees and you've got all these other inputs into how good that strategies and so therefore your of that property and the value of that property and the improvement or performance or maintenance or whatever of that property is diminished. And I think that's probably a big area in where, you know, the actual, um, vow ongoing value potentially could be impacted.

Chris Bates: Yeah. I mean like if you buying a strata building and the Strada is not, well my tine is a huge risky got a, you know, be factoring in when you're buying it. I mean, banks have no real problems. We've kind of lending on strata. I mean, well the saws. Yeah. I mean you can have a toddler. They're not really all about, it's more the size of the , the building and the property in terms of the actual floor space. And you know, it was 35 squares and then it went to 40, and now potentially it's under 50.

Veronica Morgan: Different banks have different, yeah.

Chris Bates: You know, you saw banks there will still be desperate and will still take on those kinds of smaller units, et cetera. But it's more risk for them because they know smaller apartments genuinely have a smaller market that one them and um, you know, might only be singles or it might be investors looking for something cheap and the investor market isn't buying all these single markets. You know, it'd be concerned about the economics then, you know, they can't sell them. So I guess, you know, strata is generally fine. I mean, but I mean the next probably titles, probably your company and things like that.

Veronica Morgan: Yeah. Or just still on strata for a second. So you've got community Tato, which is part of strata when you've got, um, and if you want to know more about these, go back to the episode we interviewed Reena van Aalst. So that's a raw back in the, maybe in the 30s. Check that out. Reena van. Now she's a strata manager. And we did go into quite a few different types of strata or the layers of strata title. But the community title is we know large complex where you tend to have other facilities that are shared between a number of different strata plans. So there's a different layer of title there. It relation to that. So you know the larger complexes, you know, not huge fans of but, but there's the exceptions to rule with that too. Really well run and really in demand. Large complexes can be very fabulous places to live and in fact people want to upgrade within those complexes. So, so you know it can be an issue, but I think it comes back down to that, that element of who's managing it and how well is it being managed and if it's a really great place to live, then when resale that's, that's a Cracker, it's great. And back now onto a company taught us, it'd be for strata title was invented. The way in which they divided up the ownership of a building was to effectively issue shares that gave exclusive use rights over certain space. And so there are still quite a number of those buildings that have company titles say in the Eastern suburbs. A lot of them are in Potts point, pointless with Bay around there. Um, and that's an interesting beast. The company title. So let's first start about lending. It's the banks don't love them, do they?

Chris Bates: No, but it's not to say they wouldn't do it. I mean they, you know, they are putting restrictions on LVRs and things like that, but you do need to start taking a bit more extra careful with it and you want to get the contract, you know, checked with a bank basically. So you do are going to consider buying a company title then you know, definitely start to get open the conversations with a broker because your preapproval could be through a bank and that bank might know go, I want to go anywhere near it, but I don't think they're not going to land on it. I don't think it's, cause you would say the company title properties would be worth a lot less. Yeah, but they're not. It's just that you do need to be a little bit extra careful with the lending.

Veronica Morgan: It's interesting you and typically you would need a higher deposit so they're not going to do it on your 10% deposit or even your 20. Um, so you often, you don't often see, I guess maybe first home buyers less so buying company title, um, often, you know, in the soreness. Um, and we have bought company tire for clients, but our owner occupier clients, uh, in the Eastern suburbs. And so the thing is that some of the most beautiful buildings, the lovely art deco buildings or Spanish mission buildings are actually company titles. So there's a certain value that goes with that. So certain buildings have their own scarcity and their own, um, level of value around, around that. So there are other buildings where you think, God, you know, if they all got together and actually upgrade and converted to strata, they all have an increasing value of those properties. So it, once again, it's a case by case situation, typically the TP call, um, understanding your own company titles that there'd be a discount that you pay to get it because there are less people that can, can or would want to buy. And therefore when you sell there's going to be a discount as well. So that's a typical understanding but it's not uniform. And there are also some buildings.

Veronica Morgan: Um, is it the Astor in the city for instance, is a classic, um, where they're very restrictive company title where they interview people before they can even buy into the building. You have to be qualified, you have to be vetted. Um, they will not allow tenants, um, at all. So there are very restrictive, um, company titles in terms of their rules. And so sometimes that preserves value cause there's a massively exclusive but there's not a huge market for people that you know, would go into a to want to do that. But some, some are very famous movie stars in Australia, movie stars basically. Um, I have bought into a building, I know that I've got friends that own into, and they had to be interviewed as well. You know, they had to qualify. Yeah. It's a, nobody is immune. Any sort of buildings. Yeah.

Chris Bates: It's a famous, I should definitely come in here and everyone has a famous,

Veronica Morgan: Maybe not always, I'm on a big parties, but we, um, we bought a property, uh, in Elizabeth Bay for a client that we bought two in that building. Um, sort of coincidentally, uh, both for owner occupiers and in that be that building, they had a restriction after the, I think it was within the first 12 months. You couldn't, um, you couldn't lease it. So because I did have a couple in there leased out because the owners had gone overseas and, and so it was good because it didn't stop people from life changes that would lead them to water their apartments out, but it actually preserved the predominantly owner occupier flavor of the building, which was really good. So you know, there's, there's a lot of those sorts of things to be taken into consideration. So it's not always a bad thing for capital growth, but, and you won't always get a discount if you're buying company title.

Chris Bates: Funny you say that because we are going to Melbourne soon and you'll start hearing episodes about that. And I think some of these, uh, thought processes around creating more owner-occupied driven Strada sort of buildings with restrictions on resale, um, a starting to pop up as new models that kind of attracts people and families to live in new apartments. So that'd be an interesting episode. Shannon's last question here is around building and pest inspectors. We did cover this in Carrie Hans episode, but yeah, the final questions on, you know, what questions to ask a building and pest inspector. So Veronica, what do you, what do you think,

Veronica Morgan: well first of all, before you engage them, you ought to ask them about their experience, you know, how long have you been doing this? Were you a builder in the first place? Um, I also like building and pest inspectors to do both. You know, otherwise you got to get a building inspector and then you've got to get a pest inspector and you know, that's a bit annoying. I think you've got to ask them where did they get access to, where couldn't they get access to? You know, not all properties have access into the roof and not all properties have access into the sub floor. And those are two areas that can hide a whole bunch of problems.

Chris Bates: They love that as a disclaimer though, don't they?

Veronica Morgan: Oh, well, yes, of course. Because the reports were full of these claimers. Yeah.

Chris Bates: I couldn't get access to so-and-so, so I couldn't, you know. Yeah. Comment basically.

Veronica Morgan: And it's furnished and I couldn't get around it or et cetera, et cetera. So there's, you know, be aware of that. So I think the one question I love to ask an inspector as well, would you let your daughter buy that property?

Chris Bates: What if they haven't got a daughter.

Veronica Morgan: Well, you know, imagine you have a daughter and if you did and she had the money to buy, probably would you let her buy? I've had some building inspectors that, that they really resist giving a judgment. And I'm like, yeah, but I'm asking you, I'm paying you because I want a judgment and I want advice as to how this property compares with others of a similar age or a similar style of renovation, et cetera, et cetera. And I want you to give me a judgment call. I don't want you to sit on the fence. So, you know, building inspectors that do that I think are a bit annoying, really. In fact, I think any professional who's, who's in the advice business and he sits on the fence is annoying. But yeah. Yes. If the building inspector sits on the fence, we say, why are you sitting on the fence?

Chris Bates: But I mean, I guess I, so I'm trying to buy at the moment. And, um, I think what we did is we probably were doing the building and pest and we're no longer going ahead with this property that we really liked. But I think we fell in love with the property before we got the building and pest. Now we, we stopped it. We pulled out. We're no longer going ahead with that property, but it was, I've just kind of tracking my own emotions and how, um, how hard it was. Um, because, you know, and I think this is the problem is that we, um, you know, we've already fallen in love with a property and then we do the building. And pest, and we're going there with Rose colored glasses and we don't want to see the big crosses and the big red marks and the big risks because we want to buy this property with one and believe that it's okay. And then, you.

Veronica Morgan: know, did you ever come, Oh, well what happened? What, what came up in the building inspections,

Chris Bates: Uh, is there was a, basically a problem with, it's on a incline and there's a bit of a problem with the retaining wall that's cracking. Um, and so some of the cliffs basically coming down, uh, and you know, and fair enough, like the buyer's agent picked up on it and he's like, well, no, there's definitely a problem.

Veronica Morgan: He's not using me. Notice this guys.

Chris Bates: It's not in the inner west. So I was a buyer in the inner West. Veronica definitely consider y'all as a long way from those areas. But anyway, um, yeah. And, but anyway, the building and pest is, uh, picked up on this end, uh,

Veronica Morgan: Are you looking at buying in the, in the Northern beaches and the Northern beaches that rent up there first. He's gonna, he's going to be the Dumbo in a fall, in a future episode. If he goes and buys, we'll say, we'll say, okay, so you didn't go here with it. So despite the fact you fall in love with it and despite the fact you had to self-talk your way through that, was that easy to let go?

Chris Bates: It wasn't at all. And um, you know, I though this journey, I think my wife's probably not fallen in love with properties as much as me. I'll probably fall on them, fall in love with them more than she does. Uh, and I think she fell in love with this one a bit more than me. And so I think it was really hard for her. But you know, the problem with this is an issue though, is that we don't know how big the issue is because, you know, it's one of those things that, you know, the wall could fall over and the problem is that was holding up the house and if that falls over, then you're up for a lot of problems. So that the unknown of the problem, whether it's a big or a small farm, we just don't know. And so it's really just the next property for us as a decision. But when there's very little stock on the market, it's also the pressure to overlook. Yeah. And to actually go and buy something. So it's just very interesting. So not only is there a building and pest report getting it done, but you've got to kind of steal, you know, use it. You know, there's no point, um, just just getting it and sighing and, but you've actually got to go on if it's actually sending some big warning signs there, like this one was go get a um, a geological kind of, you know, civil engineer to look at it. Do Al these tests, figure out what the problem is, you know, to do that. That was a few thousand dollars just to do that test.

Veronica Morgan: Owner should have done that. No. If the owner really wants to LA fees,

Chris Bates: Yes. I mean, they might want to, but you know, that's also potentially, you know, not something that you know, you want to leave up for by beware, I guess. You know.

Veronica Morgan: That's true. I'm just saying that, you know, if a, if an owner is to sell under those circumstances where the building inspection is going to raise these issues and show the walls cracking and then with these, these could be the consequences, worst case scenario, et cetera, et cetera, then you'd really want to get a better grip on actually what the problem was. But that's not what this question's about. So did you meet the building inspector at the end of the inspection and go through the property with?

Chris Bates: Uh, yeah, it is a him, um, didn't, but had a really long conversation with him on the phone. Um, and you know, and ask questions like, Mmm, you know, what were your thoughts? Basically, you know, would you buy this property? You know, in roundabout ways, you sit in the fence. Uh, no. Uh, and that was, you know, and cool, but it didn't, it didn't just get there at first. You know, I had to kind of warm him up and talk to him more and more and not allow him just to jump off the phone. And then at the end he kind of, you know, did give us what we really wanted to hear and it wasn't what we wanted to hear. Actually we want to hear everything was fine, but we actually got told things things aren't going to be, you know, Rosie, you potentially could be out for, you know, South through it and get the problem is a lot of the repairs are only going to get it back to what it is today. So it's kind of what even it's actually, you know, you're not going to see, you know, improving the property or adding a bedroom. We're not adding a new kitchen. We're not, we're spending a hundred grand, maybe 150 grand just to get it back to where it is.

Veronica Morgan: So you need to discount whatever you paid for it. That and more for risk.

Chris Bates: Yeah. But when you're trying to buy, you know, what is a pretty scarce caught property, um, other people won't be discounting it. And so you've kind of pretty much waste the time.

Veronica Morgan: Yeah, yeah. Yeah. And that's, that's a good point because obviously the magnitude or how these issues impact buyers changes according to what the market's doing. So, you know, you will see buyers gloss over things more in a hot market where they're fearful of missing out, then you will, you'll see them absolutely digging their heels in, in a slow market where they feel they've got options and choice. And, and I think that's really important for buyers to remember in a hot market. How would I respond to this if there was lots on the market? That's a really, that's a question to ask yourself, not your building inspector, but I think, you know, I think yes, if you can't get to the inspection, right. And I really encourage people to do that. Um, I know that it's difficult if you're working. Um, but it's very important to go through visually and eyeball these things with the inspector, particularly if you do move forward to, to purchase it. Um, but yes, spending that time on the phone, really going through it, reading the report first before you call them is, is really important.

Chris Bates: Yeah. And I mean, I guess another one we're looking at, um, you know, as an example is I went, looked at the property and um, started walking around the surrounds of the property and then saw that the neighbor had actually burned down the back of the property. Um, so, you know, on the front, the front of the property looks amazing, but it was only because I was being a bit nosy. I've kind climbed the cliff, walked around the back, um, and say the whole back of the house has been burned down. And so I'll let, if I didn't do that, um, I wouldn't have known that this property at some point it's probably going to get knocked down. It's probably going to have a rebuild a construction of a year. Um, that could be next year, could be in a few years time. It could add value them on, not that value. Um, but I think a lot of buyers have, wouldn't even know that that house has had a fire recently. Um, and he's going to have a big construction and they're not factoring that into their price. And so I guess it's just, um, you know, that was one of the learnings for me as well. You know, I was just go and check the neighbors out. I was not expecting the back of the property to be half.

Veronica Morgan: Wow. Yeah. Well definitely. I mean one of the things that we do, we always get on line and, and have a look at da activity in the surrounding properties and certainly if their properties obviously derelict or obviously needs work as or definitely if it's half burnt down, I'd be wanting to know, well what's happening? Is it going to change? You know, because he was going to see if nobody's doing anything, could sit there like that for another 10 years. You know, you don't really want to be living next to a rat infested hoarder's home or, or you know, or something that's absolutely vacant and derelict and or empty and burnt out shells. So these are, these are actually quite important things to check out.

Chris Bates: Yeah. And I think it's just because it was a hedge and because it was a, you know, you couldn't, you wouldn't see it. And that's the thing, you know? And it was just, cause I was paying a bit nosy. I'd say Anna and say you just gotta you know, you just gotta be careful sometimes, you know when you're buying buildings and things like that and what's happening surrounding the building because that's what all you're also buying.

Veronica Morgan: Yeah. So one question I like to ask you, you ask the inspector, would you build it? I like to say, would you buy it? I should say, I like to say, well would you let your daughter buy it? You know, because, or if they're a bit younger, would you let your parents buy it? Cause if you would let something that you care about, buy it, then you know, I think that's a good litmus test. Okay. A third question is from Nathan. Hello there. Veronica and Chris. Firstly wanted to say, I love the podcast. Thank you. Very informative. Yet simplistic IB mint. Simple, simple in the right way and not simply a Z. Okay. My partner and I have recently moved from the big Island to the human Valley, Tasmania. Beautiful. And our potential first home buyers. But we're leaning towards investing and renting. We are lucky enough to be renting in an area in which we love owned by my partner's parents. They are lucky. I know Tazzy doesn't get too much of a mention when it comes to property. Well it has of recent years and when it does on your podcast, you both seem a little wary of it. A K especially Hobart. I was just hoping to get some advice on starting an investment portfolio. Ideally something cashflow positive.

Chris Bates: Okay. Nathan? Um, I mainly go to parents, uh, partner's parents property. So I think the renting a little problem with rentvesting is, it is, you know, down to what you can, you know, your rental situation is the red part of it. Um, and can you rent, not now, but can you rent longterm and do you want to rent longterm? And if you have a family and things like that, are you still happy to rent, you know, problems with schooling and things like that. So in this scenario though, it sounds like he's got a very good rental solution, potentially forever, you know, and so if you could just rent that property from your partner's parents forever, then you might say, well, yeah, I've could actually go and just invest my money elsewhere. So that could be a person that might want to consider investing in saying that though, you're not going to be getting the capital gains tax exemption, which is one property growing for you tax free.

Chris Bates: So I'd be thinking personally, can I look to use the six year rule, um, and still, um, rent that place. But that's going to be difficult because the only way to use the capital gains tax exemption and the six-year-old is you have to move into a property that you buys an investment or a period. But if you're living in Tasmania, it's going to be hard for you to buy a property that's a great investment, potentially live in it, and then move back into the parents' parents' property. So, um, I think that's one of the biggest flaws with, you know, um, the strategy here is you might not get the capital gains tax exemption on one property.

Veronica Morgan: Oh, and just to explain it in case, um, anyone's not familiar with what that is. What that means is that when you own your own principal place of residence and you live in your own home, down the track, when you go to sell it, you don't have to pay any tax on the money you made. But say you bought an investment site, costs you $500,000 and say you sold it down the track for a million, then you made $500,000 capital gains and, and look, you know, there'll be lots of costs and stuff you can take out. But anyway, let's just simply, this is simplistic. Yeah. Um, so you got $500,000 worth the gains. Currently there's a concession. That means that you only pay tax on half of that. So you pay tax on 250,000 which means that your marginal rate, which of course means that a lot of it, if not all of it, is going to be at 47 cents on the dollar. Um, and so you're going to have to pay tax on that, that money amount of money. So paying tax on $250,000 whereas if you bought a home that you lived in for $500,000 and you sold that for $1 million down the track, he paid no tax whatsoever. So that is what Chris is talking about here.

Chris Bates: Yeah. And it can add up to a lot of money, especially if it's on bigger, more expensive properties that, um, and we, and it's kind of like Australia is, you know, to me it's the biggest tax write off. You know, in that scenario there, they've made 500 grand of gains that they haven't had a single dollar of tax on. And so if you buy a property for $1 million and you sell it for $2 million, that's $1 million of tax free money that you've just made. And so, you know, I think it's, you're missing a trick I think if inside your investment portfolio, not one properties at least growing tax free. Um, but I mean I always worry when I hear the word cashflow positive, um, because the rate what you really want your, your priorities around the wrong way. I want to get a property that's got cashflow, but it should be all, I want to get a property that grows over the longer term for me.

Chris Bates: And that should always be number one, not the cashflow, because the cashflow should be kind of secondary to that. And the reason why I think like that is because whether a property is cash flow positive or cashflow negative, it's tax taxable or tax deductible, a the Y. And then the after tax impact of that motto only be a few thousand dollars. Um, and so you're saying, well, I'd rather not be a few thousand dollars out of pocket, but if that means that the property is not growing for you, well it's great. I've got $2,000 extra my pocket, but I've got a property that's not growing. So you've got to get the pro priorities around the other way. Can I get a really good capital growth property first?

Veronica Morgan: Yeah. And look, I often think that whole positive cashflow thing, it seems so sensible. It's like, Oh, I shouldn't have to pay any money out of my, you know, my monthly cash flow in order to buy this investment. If I can make it pay for itself, then I've done a really good thing. But then what people are thinking is that all properties are equal effectively and they're not. And like you just said, unless you're focusing on growth, particularly if you're a first home buyer age, you are at that asset accumulation phase of your life. Now, I'm not a financial planner of bit, but that is the period of time where you've got this massive runway ahead of you before you actually retire. You've got decades. That's when compounding works. It's magic. That's when you know that that capital growth absolute works is magic. The fact that you can borrow money and then compound on that works its magic.

Veronica Morgan: All these are wonderful opportunities that are ahead of you or that you have right now that you won't have if you buy something that doesn't go up in value. And so it's, you've wasted that runway. And so I think you know also comes back to well something that's valuable should cost something, you know, if it's not valuable, you know, and it doesn't cost anything. Well it doesn't really matter, really don't get it. You know, but even if it doesn't cost you something in terms of cashflow, like cashflow neutral cash flow positive, it actually is costing you cause it's costing opportunity.

Chris Bates: Yeah, that's right. And I mean, you know, I don't think you should ever really buy a property unless it's, it's likely to go up in value. You know, there's other things you can buy that will give you income and give you yield.

Veronica Morgan: Well we've had lots of episodes on that exact topic.

Chris Bates: Yeah. And so you really, you know, it always comes back to capital growth. It always comes back to what's going to drive the value of this up. Because if it's not going to go up in value, it's very hard to put the rent up as well. So might be cashflow positive because you're getting a very high rent versus the value of the property. But you can't go knock on the door of the tenants say I'm going to put your rent up. Because at some point they would say, well I'm just going to buy the thing and I'm already paying a lot of rent and it's shaped so that cause that's why it's cashflow positive. I can't, you can't put the rent up. But if the value of the property goes up over time, your rent will go up. Most likely is well because the more that a property goes up in value, the less people can afford to buy it. And the more people are forced to rent and over time rents rise. So if a property is negatively good, it won't not be negative. Glee forever. Well hopefully isn't. Well hopefully. And that's because the capital value most likely will go up and then the rents will go up and then maybe in eight to 10 years time, the property becomes neutrally geared and then slaughtered at time to exactly. Maybe just flip the priorities, right. If you can get a property that's yielding well and it's got great capital growth, by all means go for it.

Veronica Morgan: But that doesn't happen. But sometimes it doesn't. It's very, doesn't it? Yeah. Because yeah. Okay. So we're heading towards interest rates of zero, potentially or negative even. Um, what is that gonna do to this rentvesting strategy? Because I think what it might do is take some renters out of the market because it's going to be money's cheap. So borrowing money is going to be a lot cheaper. If they can afford to buy, there'll be buying, I mean, prices could go up though. So that could mean that their hurdle of the deposits going to be beat higher. But rinse will probably come down. So, you know,

Chris Bates: intentionally I think in some areas maybe, but if you're getting more buyers and you know, there's only so many properties, um, yeah. And this, if more people are buying, then you know, there's only a hundred properties, then you know, you're going to find that it's going to potentially less rental stock because no one's looking to buy from an investment point of view, they're all looking to buy it from a Homer point of view. And so I think in some areas you might find that rent will probably go up. I think the interesting point is, is that with interest rates going down, we can get a five year fixed, right interest idling investment loan, um, for under, you know, Beth three and a half percent now. Wow. And so if you're thinking about that kind of positive negative gear or if you can get a yield on a, you know, a good investment property at around 3%, you're talking a very small negatively good on an impact T. so the problem with the investors though is I can't borrow anyway knee as much as they used to be able to borrow. And so if you are thinking about investing, you've got very little firing power. And so that's why it's so important that you go and get, you know, one or two absolute top quality properties don't go and waste that very limited power on lots of different poor properties.

Veronica Morgan: And I think what often happens is that people get just enough to get onto the letter somewhere and they buy a very, very low rung in a very shaky, probably termite, eaten, run on the property ladder. So, you know, all property is not good property. I think if you're going to buy in Tazzy I certainly would not be buying there as an investor. But you know, if you're going to be putting your roots down there and staying in, you're committed, you've got family, you've got all of that and you love it, then Bidell living by all means, um,

Chris Bates: but buy a good asset.

Veronica Morgan: Oh, absolutely. You want to buy a good asset. I'm not saying don't buy it. What I'm saying though is that I'm very wary about buying an investment in Tazzy. It's just doesn't have the population growth. It doesn't, it just doesn't have all those fundamentals that, that the mainland does offer. And it's not even everywhere in the mainland even. Um, but if you can't afford a really good asset, then you can't invest in other things other than property as we've had many episodes. You know, we'd go back to two, Oh, I can't even think of the numbers, but it's a few in the 80s and the 70s we've been, we've interviewed people in the equities markets. Um, so there are alternatives to investing. There are other things that you can do, you can put your money into that will help you grow wealth.

Chris Bates: Yeah, exactly. So if you, if you do want to rent something, if you do want to live in an area where potentially it's not a great investment, then by more means maybe, you know, just rent, invest your money elsewhere. Um, and then in 10, 15, 20 years time, you potentially can sell those investments and then buy one quality investment in an area that, you know, you do want to live potentially one day. So, you know, I don't think home ownership is what everyone should aspire to sometimes as best as you just rent and invest money elsewhere.

Veronica Morgan: Absolutely.

Chris Bates: every week we're hearing incredible stories of the dumb things, property buyers do, dumb things that end up costing a whole lot of money and, or a whole lot of stress mistakes that can be avoided. Now, Veronica, have you got a property Dumbo for us?

Veronica Morgan: I've got a doozy. So sometimes I get people contact me and say they just like to have a coffee. And this guy was a solicitor and I dunno, I should have asked him a few more questions before I agreed to have a coffee. But I did sat down with this guy and he just opens his mouth and starts telling me this story. Um, I'm not sure. He listens to podcast and if you do, I'm not gonna mention your name. Um, so he quite proudly started telling me that he, he's bought a cashflow positive investment and that, and he said he gets a rental yield of 6%. So this is the story. I've got this great investment. It's a duplex, it's in Brisbane, it's brand new, um, and I get 6% yield. And I said, okay, so tell me a bit more. How close to Brisbane is it?

Veronica Morgan: Oh, 25 K's out. How many other properties like that have been built are quite a lot. So he's bought these properties, bought a duplex, there's 25 Ks out of the Brisbane CBD. He tells me it's got 6% yield. Then it turns out that it's actually not finished. So where does the 6% yield come from?

Chris Bates: Rent guarantee?

Veronica Morgan: No, the agent, well the agent said he will get 6% yield. Like he's just being told these. Right?

Chris Bates: Um, well my summer's do, do places do have rent guarantees as well.

Veronica Morgan: That they go, but then for how long? Like, so now he didn't even have that. This is actually, this has actually been just told, uh, it's 25 Ks out from Brisbane and lots and lots of other subdivisions or similar types of property are being built out there. And then what gets me is you were talking about positive cashflow. Of course it's positive cashflow because he's paying cash for it. All right, well if you get paid cash for any property, you're going to get positive cash flow. Cause that's the thing that I guess we think neglect sometimes we talk about positive cash flow is if you put up 50% deposit, you're probably going to get positive cash flow. You know, if you're going to borrow 105% are a really good asset, you're not going to get positive cash flow. I mean it all comes down to how much equity you put into it.

Chris Bates: That's a really good point because, um, if you look at the lot of the positive cashflow spruikers and I do think that they are spruikers because I don't believe in this strategy at all. And I do think there's much better strategies for people and a lot of it is pushing people to newer properties like these duplexes. Um, and I've kind of, you know, investigated a little bit and asked for their kind of cashflow reports and, um, how is it positive cashflow and you know, very scary the forecasting they do because they use capital growth rates at 7% 6%. So don't ever look at those because apparently if you buy a $500,000 duplex, it's going to be $2.5 million in 12 years or something stupid. But you know, the capital growth rates are crazy when they should be more like three or 4% at best. Um, but yeah, so you know, they, they sell it on the capital growth, they sell it on the depreciation, but then they also sell it on the positive cashflow. And I'll put in a 20% deposit. But that doesn't, that doesn't make it positively cash flow because generally if it's an investment, you're not using an 80% loan, you need to use a loan at 105% so you know, the full purchase price plus costs, that's the loan repayment, not the 80% because investors generally, I've got a home and they should be paying off their home.

Veronica Morgan: The debt on your investment, not on your home,

Chris Bates: not on your home. And so if someone says she is positively cashflow or is it positive, the cash, if you have a loan at 105% and then most of the time it goes back negative. And so it's just, it's just a marketing spin to get you to think that you're not going to have to put any money in your pocket. But it's fine

Veronica Morgan: putting his money there. The reason though, I said, why are you doing that? Right? So he fairly recently immigrated out here with his kids. I want my kids to have a future. I want my kids to have financial security. I said, so why did you choose to do that? Oh, he got sold a whole garbage lie. But the thing was that he'd actually gone for an auction for a home in the North shore and he'd been obliterated at auction and you'd had, from what I could gather, one experience at auction and he from that with these tablets on his legs, he just decided that he will go and invest his money in Brisbane instead. And it's like, Oh my God. But it gets worse. So he's got no tax advice. None. He's hasn't structured it in a way that actually gives him any tax benefits whatsoever.

Veronica Morgan: Um, he thinks he's doing a thing to look after his kids when they get older, but he's actually done more than most riskiest things ever in the Indiegogo game. About 10 minutes to tell me this story. There was even more to this, but when honor on, on what got, I'd have said mate, I don't know why I agreed to have coffee with you. I don't know what your question is. He didn't have a question cause he had no more money left to spend on any property anyway. So it's not like what can you do? You know, he didn't seem to think he had a problem that he made a mistake. So it wasn't like he was asking for advice to get out of it. But I said to him, I can't listen to you anymore. You are, you have made some of the dumbest mistake takes you. And I'm telling these out of kindness, cruel to be kind because before you settle on this, cause he still hadn't settled on it cause it wasn't quite finished before you settle on it,

Veronica Morgan: please go and get advice from a tax accountant. Please do that. And then potentially you can structure things differently to actually give yourself other advantages in life and make these a better decision. But this just blew my mind and I'm fairly certain that he took none of mine so that he's the property dumb boat.

Chris Bates: Yeah. I mean the Dumbo is probably not even wanting to listen to good advice. I guess the other thing there, I mean it's actually a really interesting point how the pain of missing out at auction, the pain of um, potentially, you know, not getting the job done. And I've seen this, you know, as well where, um, you know, it's just all too hard and so instead of trying to do continue on the, it is tough. I think it is tough to actually go and buy good property and it is time consuming. It is stressful. It is, you know, emotionally draining. Um, it can, it is costly, but if you get it done right, you get the rewards. But you know, a lot of people do get a bit, um, this is all a bit too hard and they just take the easy route. Um, and they start, you know, going away from the thing they know they should be doing and just take the easy route and go and buy something like that. So I think it's, um, I've seen that time and time again.

Veronica Morgan: It's really sad. So look, we hope you've enjoyed this Q and a episode. As I said, we will do another one, so we absolutely welcome your feedback, your comments. Uh, we take it on board too. There's been some constructive, um, uh, feedback that's been given over the last year or so, which we have taken on board and we thank you very much for it. And, uh, we want to encourage you to continue to share the episodes because we want to help more people make better property decisions and that's what this podcast is all about. So please give us a review on iTunes and once again, share these episodes.

Chris Bates: Thank you very much. Don't forget we're on all the social channels. We're on Facebook. We're on LinkedIn, Brad's Twitter,

Veronica Morgan: or you can connect with us on the elephantintheroom.com.au, you, the links are all there for you.

Chris Bates: Please connect and send us a message we'd love to hear from you.

Veronica Morgan: The elephant in the room property podcast is recorded at the Sydney sound brewery. This week's podcast was recorded by John risk editorial by Gordie Fletcher.

Chris Bates: Until next week, don't be a Dumbo.

Veronica Morgan: Now remember, everything we talked about on this podcast is generally nature and never be considered to be personal financial advice. If you're looking to get advice, please seek the help of a licensed financial advisor or buyer's agent who will tailor and document their advice to your personal circumstances with a statement of advice.