Episode 126 | Lending rules & predicting the property market | Stuart Wemyss, Prosolution & Investopoly

Banks tightening up lending and unpacking Stuart Wemyss accurate prediction of the property market
Predicting the property market and getting it right doesn’t make you a Nostradamus but when you get it right and people want an answer, what do you say? In this episode Stuart Wemyss Director of Prosolution and host of the Investopoly podcast joins us back from Episode 39. Stuart shares insights into how the lending space has tightened up on borrowing, why people are upgrading over investing and how he came to his accurate prediction. 

Here’s what we covered:

• How did Stuart get his 2018 forecast?

• Why are predictions not that reliable?

• What do the studies show and does it help you invest?

• Why asset selection is far more important than "getting a good deal".

• What happens at the bottom of the market?

• Does your property have the fundamentals that could lead to high capital growth?

• When should you sell a quality asset?

• How to become borrower ready?

• How to maximise your borrowing capacity? 

• How to best manage your spending.

• How have low interest rates changed investing strategy?

• Why to always approach the family home as an investment property?

MENTIONED EPISODES:
Episode 39 | Stuart Wemyss
Episode 117 | Dr. Shane Oliver
Episode 123 | Martin North

GUEST LINKS:
Buy Stuart’s book Rules of the lending game. And use code ‘elephant’ for a discount plus free postage. Buy Stuart’s book Investopoly
Subscribe to Stuart’s blog
Article: How important is buying below market value?
The largest longitudinal study on forecasts Philip E. Tetlock

HOST LINKS:
Looking for a Sydney Buyers Agent? www.gooddeeds.com.au
Work with Veronica: info@gooddeeds.com.au 

Looking for a Mortgage Broker? www.wealthful.com.au
Work with Chris: hello@wealthful.com.au

Buy the book - AUCTION READY How to buy property at auction even though you’re scared s#!tless:
www.getauctionready.com.au
Use the coupon ELEPHANT for your 30% listener discount.

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…
This episode was recorded on 5 May, 2020.

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 called auction ready, how to buy property at auction. Even though you're scared shitless.

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

Veronica Morgan: Don't forget that you can access the transcript for this episode on the website as well as download our free food or forecast to report which experts can you trust to get it right. The elephant in the room.com.edu.

Chris Bates: Please stick around for this week's elephant rider bootcamp and we have a cracking Dumbo of the week coming up

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 adviser or buyer's agent. They will tailor and document their advice to your personal circumstances. Now let's get cracking.

Veronica Morgan: We have a lot to cover. In this episode we're going to talk about what's useful in property predictions, the rules of the lending game, which so happens to be the title of today's guests new book and what happens when you combine an understanding of these two elements with a bit of property now thrown in for good measure. It's your Williams joins us today and if you've read our 2020 forecaster report, you'll recall that he got a gold star as the only person we could find you correctly called the bottom of the market in December, 2018 Stuart is one of very few financial planners who has a really good understanding of property and he's written numerous books about both finance and property. He also hosts a podcast called investor plea. He's authored a book with the same name and has a particular gift for explaining financial concepts in a way that we can all understand and we've also interviewed Stewart before back in episode 39 so if you want to hear more from him, please go back and listen to that episode. Welcome Stewart. Thanks for coming along and great to be talking to you again.

Stuart Wemyss: Hey guys. And after that introduction, even, I'm looking forward to hearing what I'm about to say. So thanks for having me again.

Chris Bates: I know where you're out GoTo now. Sure. Whenever we want a forecast on the property market, it gave a recent track record. You're the man. So just like as a rewind back to 2018 cause it was a big call at that stage when you know, there was central election next year, there was all the Royal commission, et cetera. But you were coming out and saying, no, I think potentially prices are going to be, you know, if not positive in 2019. So can you take us a bit back to that and why do you think you were a contrarian when everyone else was saying the other thing?

Stuart Wemyss: Yeah, sure. Well, firstly I'd say that for any Seinfeld fans out there that George practice something called showmanship, which means that if he told a really good joke, he would just leave the, the, the room or the meeting or whatever and leave on a high. So I think probably what I should consider doing is something similar. If I'm one for one in terms of predictions, maybe for the rest of life, not make any more predictions and I'll have a perfect record. But and look, there's a, there's a, there's a really deep, and I can't remember the name of the person that did this study, but there's a really deep longitudinal study on predictions. And and they really, at the end of the day, they decided that it wasn't any better. You know, forecasters weren't any better than sort of being a toss of a coin, a 50, 50 chance.

Stuart Wemyss: And in fact, the, the highest the higher profile, the predictor the, the less probability that they were going to going to be. Right. and I think the, the study went a couple of decades. So studied predictions over a couple of decades and.

Veronica Morgan: To have a link for that cause that would be great to include in the show notes.

Stuart Wemyss: Yeah. I, I'll find it. It's in it's invest opoly I made reference to. It's all, I'll, I'll search the book and find it. So so that study shows that look, predictions aren't aren't that reliable and, and really they're just noise. And and I can evidence that by supporting my own prediction in 2018 because my prediction was premised on the assumption that labor would win the election and that there would be a period of time about 12 months for people to be able to buy property to lock in the negative gearing.

Stuart Wemyss: And obviously as we know, what happened is labor lost somehow lost that election. And and that didn't transpire. But you know, the upside was that negative gearing remained and CGT didn't change. And the property market recovered. So I would say that that prediction was more like than than skill to be, to be honest. But also, but also I think just like in share markets prices drop to some T to an extent at a time when you, where you have to form a view or I think it's reasonable form of view that most of the downside risks are already priced in. And and so there's, I think there's a natural floor in most asset classes, a price floor that is and property had already fallen quite considerably. And was, was showing good intrinsic value at that time. So it was kind of, in my view is kind of, it's, you can never say never. And you know, the property can't crash 30%, for example. Anything's possible obviously, but it was just very unlikely. And it was seeming to me like we were close to the floor that it was representing value. And at some point more and more people would would build their conclusion.

Chris Bates: So you think that at some point asset process, whether that's property, shares, whatever it is, at some point people start to believe that it's a good time to buy because it's cheaper. And that's what's makes the floor or is it because it's hard to find it cause liquidity dries up? Cause that's another thing that can create the full, I mean, what's some of the elements that create that full?

Stuart Wemyss: Yeah, well I just think it's intrinsic value at the end of the day. You know, the liquidity is, is is something that will impact markets or have an impact on growth and markets. Certainly in the shorter and medium term at a macro economic level but doesn't really to a wider IX and other people's liquidity. Don't, don't alter my investment plans. You know, either I've got liquidity, I can borrow and I've got surplus borrowing capacity or I don't, it's a question of fact, and that will then drive my decisions whether Chris or Veronica have surplus borrowing capacity don't really, don't have any impact on my decisions. Of course, it will have a impact on broader demand and therefore price growth in the short term a hundred percent. But in terms of my investment decision making, it doesn't have any impact.

Stuart Wemyss: So really then it's about me for me a view about what the longterm growth prospects of an asset are and the, the value that I enter that asset class will have. You know, one of the you know, I sometimes a lot of share studies because there's been a lot more and there's better data and a lot more studies are done on the Sharemarket. But it stands to reason that a lot of the studies demonstrate that your entry valuation, so your entry point in the investment is the, the biggest indicator of your longterm returns. And that's just common sense. If you buy what assets are cheap, then your upside is is considerable. If you're buying at the peak of the market, you know, where assets are very expensive, then there's less upside. And of course in the long run you're probably not going to do as well.

Stuart Wemyss: And so therefore it's about an individual investor forming a view on what the intrinsic value of a particular asset is in a particular location. So bit of landing Hawthorn Victoria or you know, a similar sort of blue chip suburb in any other capital city. You know, what is this land worth and what's really driving the value? And at some point it becomes cheap and that's different for everyone in, in everyone's mind. But again, if you take that longterm view and try and detach yourself from, will prices fall in the next six months, which isn't really a very helpful contemplation. You know, that's, that's something to sort of think about.

Veronica Morgan: That's interesting because often often am asked about timing the property market and I'm sort of gonna contradict you in a way because it's like what you're saying is exactly what I agree with, except the way you said it is different if you say that the studies have shown that the price that you pay effectively or the time at which you buy it is the biggest predictor or the biggest indicator of future upside. Is that correct? Is that a big power paraphrase? But the reality is if you buy at the right time in the market, I E the bottom of the market and you pay a cheap price but you buy a sheet asset and that's really the predictor is the actual caliber of the asset that you've decided to buy, not the price you paid all the time you bought it. And, and I know that you were saying that in there, but I'm just clarifying that because a lot of people go, Oh, that's it. That's it. Then I've got to, I've got to time it and I've got to get the price right. I've got to get a bargain. And they take the focus totally off the actual quality of what they're buying. And so that sort of, and it's just so important.

Stuart Wemyss: Yeah, a hundred percent and I'm going to contradict myself by totally agreeing with you to continue to myself to some extent by totally agreeing with you because I did an analysis I think about 18 months ago where I modeled a a property acquisition and then varied all the assumptions, the interest rate and growth rate and whether you bought below intrinsic value in those sorts of things. And then also I've done as another sort of empirical study looking at the peaks and troughs of the property market and just say if you had a crystal ball and bought at the peak versus bought at the trough, what, what you know would say 20 years ago, what is the impact on returns? And both those analysis demonstrate that there's zero impact on returns, right? Timing actually has zero impact, which is a complete contradiction to what I just said.

Veronica Morgan: Can I ask you to put the link, send us the link for that as well, because I remember reading that and I went, I loved it because it was just such a great demonstration of those principles at play. So that's quite funny that you say that.

Stuart Wemyss: Yes. Yeah. So so, so there's no, there's no value in trying to time the market obviously, and it's the quality of the asset from a property perspective that delivers the value. The difference in the share market is it's the quality of the investment methodology that utilized and asset selection is less important. And that's why timing or valuation in different sectors in terms of geographical sectors of the share market are important. And, and that's why it's not important in property because the methodology only just informs the asset selection, but ultimately is the asset selection that's going to deliver value. So I don't care if I go out and buy a property and pay 50 grand more than what it's worth today. I would be not at all concerned about that either emotionally or financially, if I'm a hundred percent sure that that asset is a perfect asset or as close to a perfect asset as you can get.

Stuart Wemyss: Cause I know that's what's going to deliver value. My commentary previously was really just about forming an impression of what what the market is doing and how close to intrinsic or under intrinsic value it is. And that tends to be a motivator for some people to invest. So what I'm sort of saying is if prices drop and most economists are predicting prices will drop, you know across the board this calendar year. So at some point for different people it's going to represent compelling value this year compared to other people. And that's the sort of driver of about where I think there therefore there's an underpinning level of demand within a market. And that's why it doesn't continue to fall.

Chris Bates: I think the hard part with pricing or coming out with a value of an asset is, you know, it's very hard to do, you know, in terms of what something actually is worth, especially if you're comparing property to property and, you know, look at recent sales. But you know, has there actually been any recent sales that are actually the quality of this asset? And maybe not, you know, how far is the market moved, you know, how much, you know, et cetera. And then also like, where are interest rates going to be longterm? You know, and that's, it might be cheap if rates stay at 2% for the next, you know, 10, 15 years. But if rates go up then, and so I think it's, it's you know, I don't think people are very good at being able to price something where something actually worth. And a lot of investors will probably think that, you know, it's not worth as much as they've got to pay, unfortunately. And so then they can't, you know, they always waiting for a bargain, but the bargain never comes for those quality assets. Yeah.

Veronica Morgan: But the bottom of the market is sort of a lack of supply, right? So it sort of gets to a point where everyone that's had to sell sells and there's very little stock around, and so they've, the sheer fact you've got not enough supply means that prices have only got one way to go.

Stuart Wemyss: Yeah, that's right. And I think there's also buying signals as well. I mean, if I think back in in my personal experience, my wife and I bought a beach house, which obviously isn't a great investment, not an impulse purchase, but at the time we were contemplating yet when the property was on the market, it was on the market for a while. It was just very poorly presented and poorly marketed anyway. We, we thought it was too expensive. But we ended up buying it. We ended up buying it for just under 1.9. The vendors that were selling it obviously had paid 2.4, seven years earlier. And in the area for the, the type of property in the location, the view to their had the, the comparable sales were, you know, in the 2 million range. So I think sometimes and then you go, well, you know, the market was only prepared to pay one nine, and it happened very quickly.

Stuart Wemyss: It's kind of a first mover advantage. So there's a bit more to the story. But the point is that sometimes you get these mismatching in the short term and and you've just gotta be looking for it. If you're not looking for it, you'll never say it. And and that's what I'm talking about. Intrinsic value. So the question then when, when we were contemplating that purchase is what's the propensity of that property to be worth, let's say 4 million in 10 to 15 years time? And if you look at the growth in the area over the long period of time, of course I, I'm not suggesting people go and invest in beach side locations. It was a pure lifestyle purchase. But if you do look at the growth I'm not saying there's a guarantee it's going to be worth 4 million in, in 10 or 15 years.

Stuart Wemyss: But there's a, there's a good chance that there's evidence that supports that's a reasonable conclusion. So, so therefore that's the key thing I think when looking at property, it's not necessarily only just about what is it worth today, but what are the fundamentals of the asset that could drive its value in 10 or 15 years time? And can that price double, does it have those fundamentals? And if you if you could, you know, if I could say to you, guarantee that assets can be with, for me in 15 years time where you wouldn't pay one nine, maybe you'd pay two or maybe you pay 2.1 because that's ultimately what you're really investing for is that it's future value.

Chris Bates: It's funny you say that in terms of could it be worth 4 million, but also, you know, a lot of investors haven't even thought about that. But that even thought about, you know, it could go sideways or it could go down. You know, what, what's, I think a lot of apartment investors, you know, don't really potentially understand that, you know, an apartment, it might be worth a million dollars, but if apartment prices, you know, if it's a newer apartment, go up to 1.2 million, that means developers again, I make more money and then they're going to build more. And so, you know, I think a lot of people would die understand that as prices rise, sometimes you can actually just build more of them. And but where's your beach house there? I think a lot of people would, you obviously mentioned there's one word you basically said I had a view. Right? And so it's either right on the water or it's made straight back. And so even in beach locations, there's scarcity and there's growth, but it's only where there is actually scarcity. It's not, if you were looking at the growth rate, maybe a kilometer away from the beach, there's probably no growth at all. Right. So it's only those scarce assets that drive the value.

Stuart Wemyss: Yeah. If you're gonna to do anything do it well. And it's the same with property investment. You know, if you're going to invest in property, don't muck around. Don't, don't try and minimize the amount that you're going to invest. Just because you think you're managing your risk, you almost gotta swing for the fences and do it properly and better off putting all your eggs in one basket. If that basket is the highest quality basket you can find as opposed to spreading your eggs amongst several different Everage quality baskets, that's just not a good strategy.

Veronica Morgan: It's interesting, isn't it? Because a lot about property investing or successful property investing is really about defying those commonly held beliefs. And one of those is that you've got to diversify. And another one is that you, the risk is in the borrowing rather than that asset. And so what you've alluded to there is that if you sort of, you try to think, Oh, I want to stay safe. I want to chase affordable locations, for instance, that I hear a lot of people talking about, cause I don't want to really borrow more than say half a million dollars for an investment. And he's a lot of money, but that means you're going to be buying a B grade asset and the big red location and you might go sideways as Chris has mentioned, or you might even go backwards. Your risk is enormous, but it doesn't feel as risky because you haven't borrowed as much money. And this is a real challenge for so many property investors to wrap their head around the idea that that diversification in property, if you can only afford one asset, one good asset is actually a really, really poor investment decision.

Stuart Wemyss: Yeah, the best way to manage risk is to level up on quality. And that would be true for any investment investment class, including property, but probably even more so with property because asset selection, as I've said, is, is the actual key to getting it right. The actual specific asset you buy will determine your outcomes. So leveling up on quality is really the best way to reduce your investment risk. Even perversely, that means going and borrowing more money. But ultimately you know, we need to service the debt fair enough and we need to borrow safely and all those sorts of things. So I'm not suggesting people go in gear to their eyeballs. But if I had, let's say I've got three meals a day today, that seems like a lot in most people's language and it is a lot of money, right?

Stuart Wemyss: But then if I say, well, the assets securing that 3 million worth 9 million, suddenly you feel a lot more comfortable with it. So therefore, the best way to make your debt look in material is to invest in assets with high amount of capital growth. Because over time, then your investment debt will become a, it's not an issue. It's not a big deal. You know, borrowing a hundred thousand dollars in the mid eighties was a lot of money, just like three minutes today. It's not coming true, but it was still a lot of money. So if you had to put that into a property in the mid eighties, you're probably be worth somewhere in one, three, one four. And you've got a hundred thousand dollar loan against that essay, you're not really worried about debt.

Chris Bates: I mean that's very similar on the interest only sort of conversation. I think we should, you know, one of the reasons to get you honest and talk about your new book and you know, this is one of the conversations to have with clients is that, you know, they'll ask around interest only loans and they say, well, I'm never going to pay the loan off. And I said, well, well firstly it's an investment. So that's, that's good for tax reasons not to be paying it off. But secondly you know, in 30 years time, you know, you're in your thirties now you know, a million dollars isn't going to be a million dollars. So you know, worst case you can sell the property, but it's not going to be that burden around your neck that like say, and really dollars is today.

Stuart Wemyss: Mm. That's it. Inflation eats away at the loan principle really is, is what you're saying, Chris, because obviously inflation is a component of interest rates. We need when inflation is high, interest rates are high, and the reverse is true as we see today. So really you're notionally paying your inflationary costs every year is you're paying the interest in respect to the loan. So and then over time, obviously that inflation ate away at it. Look, I still think people need to have some sort of idea or plan on how they're going to manage their interest rate exposure. But if I go back to my previous example about buying in the mid eighties if you've got a hundred thousand dollar loan today secure by one point $3 million property, you're not sensitive to interest rates. You know, so that that debt, even though it's been interest only for 30 or 40 years it's still, it's still not worrying you.

Veronica Morgan: It's quite relevant to, you know, the coronavirus impact as well on the property market. Because a lot of people were saying, Oh, that's it. This, you know, six months time there's going to be this avalanche of property desperate sellers. And I kept saying, yeah, but not everyone's situation is the same. And then there's a good example of someone bought their property back in 1980s, you know, and they've got bugger all dead on it then stock it. It's completely material where the prices go up or down or they've lost their job even. You know, and, and that's, that's a good example I guess, of, of why we've got to think in bigger ways or bigger terms.

Stuart Wemyss: Yeah. And I wrote a piece for the Australian on the weekend about that, you know, you can, there's practical consequences. We're selling property. I mean, the practical consequences obviously in terms of the cost and hassle and time of doing it. As opposed to shares where I can wake up tomorrow morning and decide I don't want to own CBA shares, for example, and dump them, you know, within half an hour of sold them. For example 

Veronica Morgan: Consideration of selling your home too. If that property happens to be what you're living in.

Stuart Wemyss: That's exactly where I was going. We all need somewhere to live. And and you know, w we can't just wake up tomorrow and go, Oh well let's see. I want to be a property owner. I'll sell my property that you've got a practical consequences, you know, where you're going to leave. So I think people then tend to and there's also emotional attachment to people's homes. So I think people tend to try to do everything possible to avoid needing to sell their asset where that's not always true in other asset classes.

Chris Bates: And the CJT comes into it a lot, right? So you know, we all hate paying tax. And so, you know, a lot of people, even if they're bought, you know, average to assets and they're performed and they've grown over, you know, 10, 20 years and they haven't grown as strongly as other assets. There's still a growing CGT bill that they know and they, they don't even know how much it is. I think there's a lot more than it probably is a lot of the time. And they'll just do everything they can, not to, to sell it cause they know they've got to pay some type of tax. And so I find a lot with, with property people hold onto assets just because, you know, even in downturns cause they just don't want to pay any CGT. Yup.

Stuart Wemyss: Yep. Yep. Which is pretty silly really when you think about we've, we've got to fall in love with the after tax return. So CGT is a component of that. Now hopefully we go and buy a property with, with an intent to hold it for longterm and probably never sell it. And that's a good time horizon to, to make that investment decision. But from a practical perspective, we can't take it with us. So we're going to have to do something with that money at some point or allow someone to benefit from that world with be it our souls in retirement or our children or family or charities or whatever that might be. And capital gains tax comes in as a, as a consideration there, which was in that analysis I did months ago. Asset selection was number one. CJT was number two in terms of the impact on after tax returns, which isn't probably a surprise. But it just means that people need to think about ownership structures when I'm building a property portfolio, knowing that, or at least giving them the flexibility to be able to sell an asset tax effectively at some point, maybe not the whole portfolio, but at least one or two assets.

Chris Bates: Yeah. So what you're saying is understanding the ones that you most likely are going to sell and making sure they're in the right type of structures to allow that to be efficient. Yes. You know, putting it in, say the higher income earner or trust or whatever a company, et cetera. Just being aware of that tax that you're going to have to pay at some point.

Stuart Wemyss: Yeah. Giving yourself the flexibility. So, you know, if you need to liquidate some assets, at least you can do it and minimize the tax associated with it as opposed to, you know, taking a very staunch, longterm view that nothing's ever going to change and you're never ever going to sell a, that's not necessarily a bad view to adopt. But from a practical sense, you know, we just can't predict the future. So we've got to almost prepare for the worst and hope for the best.

Chris Bates: And sometimes it needs actually the best advice to sell quality assets. You know, by restructuring a portfolio and you know, let's say someone's got a lot of home debt or equity in a really good investment property and you know, and so good time to sell that property because the market in that asset and that selection's doing really well. And yes, you've got to pay a CJT, but the benefits of that is much lower home debts, a much freer cashflow, able to reborrow and buy another property. And so some people would just, you know, shoot, you should never sell, but actually sometimes it actually makes sense to, you know, sell, buy again to recycled it spot on. So you've set up it. What are you taught as your book is what's more important to understand with property investor? What's the key to the property investment game? Is it, you know, understanding what's a good property or is it understanding lending and what you can and can't do?

Stuart Wemyss: So I think it's the management of scarce resources and most people think that's property. Because by definition, you know, an investment grade properties are scarce. And that's true, right? From a property perspective, maybe of all the investible properties in Australia, probably, maybe 5% are only investible and the rest are in sort of investment grade assets. So that's true from a scarcity point of view. But if I had unlimited borrowing capacity over the next 10 years, I'm pretty sure I could acquire quite a number of investment grade properties. I don't think the supply, I mean it would slow me down in some markets in terms of maybe I'd only make two acquisitions a year and into other markets they might be 20 or 30 acquisitions I could make any year. But the supply of investment grade property isn't really the thing that's going to impact my ability to build Wells.

Stuart Wemyss: It's really the supply of funding to do that and really borrowing capacity is the scarce resource that as an investor I should be managing more proactively like an asset rather than looking at a lot as a liability. And that's kind of why I wrote the book because I think if someone can proactively manage their borrowing capacity, so that is in terms of reducing its cost, maximizing your actual borrowing capacity in a safe and prudent way, then that will deliver more funds that I could then contribute towards investments. And ultimately then if I do that correctly, cause obviously that's a pretty that's a, that's a critical step is investing obviously in the right assets as was spoken about. But if I can do that prudently, then I'm going to be more successful than someone that doesn't do that. And and so I sort of a keen to play monopoly or any other sort of board game, you need to sort of learn the rules of the game firstly to, to, and then you have to learn how to play those rules to your advantage and you build a strategy within the confounds of those rules.

Stuart Wemyss: And that's why I wrote the book rules lending game. So that firstly we can learn the rules and then secondly, learn how we apply them. You know, you gotta know when to negotiate with the lender, when to walk away, when no is really a no and there's nothing you can do about it. But when a no is just not that lender and I need to go on find another solution, but ultimately you're playing the game for yourself. And that's and the goal is to maximize your borrowing capacity in the safest way possible.

Chris Bates: I know just now longer term, I think I, when I started working with now you've been doing it a lot longer, maybe 2000 or 2000 or something joke. But you know, I think you could borrow potentially after 10 times salary you know, pretty easily if you were looking to invest in terms of the way the calculator works. But, you know, during the Royal commission and a lot of appro changes, you know, that's pretty much dropped to six times salary now. So, you know, I guess it's, you know, your ability to kind of leverage your income as, you know, dropped say 40% if not more. And so I guess pick the people don't really, that it's now actually limiting them. You know, rather than just being able to borrow as much as much as they want. Yeah. And, and dedicated

Stuart Wemyss: A large portion of a chapter just to get, becoming borrower ready and what you need to do. You know what, I started no to a mortgage broking. And at that time it was literally here's my client. How much will you lend them? Oh my God, that's ridiculous. We're never going to borrow that amount. This is how much we want. Alright, there's the money or by the way, after settlement, can you give us a line application form? And we better ask for a payslip, you know, is that lax? It was just ridiculous. Literally we would be setting up loans and then provide the application form after the fact. It was so easy for me to sell houses. That's right. That's right. And so of course things had to change. That was ridiculous. And it was just open to people misusing it, which is exactly what happened.

Stuart Wemyss: But these days it's not the case. So in the past, so I've been doing this 18 years, probably for the first 15 years. You would not even consider what the banks would lend a client. It would always be, what do you think is the safe amount for the client to borrow? These days? You now need to consider both questions. What is the safe amount to borrow and what will the banks lend them? And sometimes, I mean always in the past that the amounts of the banks will lend them, will was always greater than what they should borrow. These days, that's not the case. Sometimes we've got clients today that we, that I feel very comfortable they could borrow X, but the banks won't lend them X because they're not fitting inside the box. And so then you need to use those rules to your advantage to work out how do I feel inside the box? Because ultimately that's gonna put a, that's gonna make or break your investment strategy. If you want to invest in property, unless you've got a big wad of cash at home, you're going to need to borrow. And if you can't do that successfully, then you're going to invest in property and, and no one wins.

Chris Bates: So what are the main ways you can, you know, maximize that borrowing capacity and manage that borrowing capacity longer time. So what are the things that you always need to be thinking about in terms of, you know, I guess getting that to be the highest possible?

Stuart Wemyss: Oh, I think there's probably two key elements. I mean, there's a lot, there's a, there's quite a number that I talk about in the book, but I think the two key elements that jump out in my mind is the first one is being proactive. So I don't really, I mean I've got no loyalty to lenders on it. I think a lot of people really do have any loyalty to their bank or to their lender. But that's easy to say and not necessarily easy to execute on. So as far as I'm concerned, I've got these sort of pieces on a, on a board and they're their lenders and I'll move them around depending on what's going to suit me and, and deliver the best outcomes for me in my personal wealth perspective. So if that means swapping lenders every months, that'd be a nightmare.

Stuart Wemyss: But I'm happy to do it if there's, if there's benefit in it. If that means staying with one lender for 10 years, so be it, that's fine too. But I'm not, I'm not adverse to to refinancing, restructuring, revaluing and being really proactive in in dealing with that because different lenders will have different policies in different appetites at different times as well as markets are different geographically in certain areas. Value is a different, you know, all these things are kind of moving a bit of a moving feast. And so I'm not suggesting people need to go and refinance every six months that that would be, that that's probably a sign that you've made the wrong decision in the first place. But also, you know, staying with the same lender for 10 years may or may not be serving you very well.

Stuart Wemyss: And then the second thing is just cashflow management, which doesn't mean cause when you talk about cashflow management and monitoring spending brings up connotations in most people's mind have stopped spending. It doesn't actually mean stop spending, but it's just a really deliberate about your spending. So knowing where your money goes and probably the best evidence that that's not been done very well in the broader market is that when I meet a new prospective client, I'll be very interested in to hear what you think Chris and also Veronica about these. But my experience is when I ask a client, how much do you spend on just general living expenses, you know, they know how much their mortgages and that's easy to ascertain, but just all, everything else 90, 95% of people can't tell me with any level of confidence. And then when they guess they, they're materially wrong way off. Like either. And sometimes it's not even not consistently under overestimating. It can be a broad category of under an not overestimating, but they just don't have a clue about where is, where their money's going. And you can't manage what you don't measure. So do you find the same thing Chris, when you speak to people about spending?

Chris Bates: Oh yeah. I mean very, very few people track or have any idea. I mean, I think that's one of the things I love about the barefoot movement is it actually kind of empowered people to look at their money in their bank account and have a structure and how they do that. And you know, get rid of credit cards and things like that because there's, you know, the financial systems perfectly built to make you not understand how your money's going, you know, and especially this kind of cast lessons society that we're in now. So I think you've got to kind of wind the power back in and take control and you know, actually have a system in place to actually track that. And you know, and then stay disciplined and actually, and actually, you know, and do it and look at your credit card statements and whatever it is and actually see what you're spending.

Chris Bates: And I know there's apps to do that, but I think you're a hundred percent right. I think people have got no idea what they're actually spending. And if sometimes, you know, they overestimate and you look at it and go, we actually spend a lot less than that. And and vice versa. I think that was a real big issue. Product Corona, we would get a lot of applications and it would have to potentially have, you know, lots of detail conversations or Ana clients. I look, I know you're telling me you spending five grand a month, but you know, when we look at your credit card statements, you're spending nine, that's what a bank's going to look at. This is going to be a problem. But you know, in the current climate, I think a lot of that discretionary spending is and isn't the case.

Stuart Wemyss: Yeah. And what I say in the book is that you have so it's a bit of a tilt on barefoot investor's account structure. That's okay. I'm not against it, but it's not always going to suit people. And so what I find is it's the unconscious expenditure that really eats away at cashflow. And that's the sort of stuff that you just go and buy and they don't have to be big ticket items. You know, it could be, you know, I'll go and buy four coffees a day and I just think all, it's only a few dollars, it's not a big deal until you really add it up and you work out, you're spending $4,000 a year on takeaway coffee. You start to think, Oh, hang on, that $4,000 will help me borrow an extra hundred or whatever it might be, $50,000 that I could put towards my investments.

Stuart Wemyss: And you realize there's an opportunity cost. So what I try and tell people is have two accounts, a nondiscretionary and discretionary or the nondiscretionary expenditure can come out of your sort of main account that receives your salary, you know, there those sorts of things or mortgage repayments any, so utility bills, that sort of stuff that you can't really overspend on. And then everything else that's discretionary, you know coffee clothes going out to dinner comes from a separate account. And if you just transfer, you know, a certain amount of set amount every fortnight or month, four grand a month goes into this discretionary expenditure at a high level, you then know I'm spending four grand a month. And you know, then at the end of the month, if you've got money left in your account, you've done well. And if you've got to top it up during the month, you've done poorly.

Stuart Wemyss: And you don't need to then have an app or monitor every single bit of expense. But just the mere fact of doing that tends to realign the expenditure. And it's not a painful process in that, you know, you don't have to end up denying yourself. What you realize is, I'm not going to buy that cause that's not smart. And yet it's actually kind of empowering. You feel very good about it rather than saying, okay, I'm on this budget now and I cleaned, I can only spend $20 a week on takeaway coffee. And it feels very strict and stringent and, and compliant doesn't always, it's not, it's like, it's like a diet, you know? And, and eating a certain way. It's, it's okay for a short period of time, but it's not always sustainable.

Chris Bates: I mean, I use it pretty much. It's very similar. I don't really believe in the whole tracking and you know, going dollar a dollar, et cetera. I don't think, you know, add all that into your life. I actually think you're right. You split up your spending, you put all your non-discretionary sort of things that you can't really control your fixed costs things you have to live to spend, to live. B`Asically you pay them, you know, you've got no choice really. Yes, you can negotiate better deals potentially, but you don't to be looking at them every month. You just look at them every, you know, year or so. But the one that you have to kind of control is your known discretion. You discretionary things that you just spending day to day. And so you just pay them out of a new bank account.

Chris Bates: Just say you have to brighten your habits. You can't just do this at your current bank. You've got to, I believe you've got to go and set up a new bank account somewhere else and then just transfer an amount per week into that account. So if it's a thousand bucks a week, if you want to live off a thousand bucks a week or 500 or 200 and then you can very easily track and go wow on burning through this fast. And where am I burning it? Well you know, I'm going out for dinners or whatever it might be. And you know, that just that, that dude brings awareness I think very fast.

Veronica Morgan: Um just how much of a difference to offset account though, if you're pulling money out of that account, putting it elsewhere, cause you're keeping that balance really low.

Chris Bates: And this is the thing, people kind of, you know, to get the interest savings on an offset or the benefits of a 55 days on a credit card. People create these kind of complex structures. If that offset, if that savings, that spending account has under $5,000 in it the interest on $5,000 over a year is about $150 a year. So saving. So yes, I might be saving $150 at the absolute tops for having that money in an offset account. But the benefit is if I don't go out for dinner once, there's some $150 back. And so I think you know, we, we kinda, the banks love it in the offset because you see 30, 40, a hundred thousand in your offset and you build, you feel you're richer than you are, but really should only be saying $500 or a thousand dollars in your account and you, you're basing your spending based on that, not what you've got in your offset. And I think it's just that behavioral mindset thing that you've got to trick your mind to go, actually no, no, I've only got, let's say this week offset.

Stuart Wemyss: And that clarity provides a really good data for making investment decisions. So, you know, if I know a client has a really good handle on their cash flow, that their discipline, that they spend $4,000 a month and have done that for 10 years and haven't deviated, then I can kind of push the envelope or feel safer pushing the envelope in terms of borrowing capacity than someone that has virtually no idea. When someone has no idea about their spending, that typically almost always means they're spending too much. And so therefore you don't really have good data to be able to provide definitive advice. And, and as a consequence, you're likely to be more conservative and say, look, I'm not really sure about that borrowing level because we just don't have enough data to be able to make that decision. So that's why it helps you maximize your borrowing capacity because it then gives you a, a really firm idea of what your future cashflow looks like and therefore how far can you push it and how many but how much buffers do you need and those sorts of things to kind of that.

Veronica Morgan: So I just want to be devil's advocate just for a minute because whilst what you're saying is absolutely sensible and smart it also, there's been, you know, a whole industry has spruikers that have come about say, over the last decade and maybe they're not, it's not so lucrative for them in the current lending environment or as it has been since sort of since 2016 but where this idea about, you know, leveraging your capacity, you know, and, and buying something often a brand new house and land package, getting it revalued as soon as it's complete, borrowing against it again and building his house of cards. So, yeah, I guess one of the things that I'm getting at here is that in order to buy an a grade asset, you need to have a really good income in the first place. And so therein lies a bit of a problem with this, isn't it? Because a lot of people do look to property to solve their problems in terms of whether they don't have a capacity to earn a great income. Is there an opportunity that you see for people with lower incomes to actually master this or is it really that they're shut out of eighth grade assets?

Stuart Wemyss: No, I think people can master it. At the end of the day, it doesn't really, I'm, I've got clients and again Chris would know this very well. You've got clients that would have incomes of several million dollars and have not very much to show for it and clients on lower much, much, much, much lower incomes that do incredibly well. And it's not how much you earn, it's how much is left over after you stopped spending or how much you invest before you even start spending. And that's the, that's the key thing. So if you're very good at, even if you've got a low income, but if you're still very, very good at managing your cashflow and you're minimizing it and you've got there for a greater investible some then you'll, you'll be able to do, well of course there's going to be a limit.

Stuart Wemyss: You know, of course, you know, if you've only got an income of $10,000 a year, you're not going to be able to borrow very much properties, probably not going to be the strategy for you as a result. But if we're being reasonable about it and just looking at it kind of average incomes it might take a while to get there and it might be a bit of a hard slog, but compared to people on much higher incomes. But I still think it's, I still think it's possible. Again, it comes down to to cashflow management and you know, I've seen some people build some really amazing levels of income of very conservative amounts of income.

Chris Bates: Yeah, I mean, I agree. I've seen some clients come in and you're like, wow, like, yeah, I have to actually build this on that type of income. And you're right, it has happened overnight, but it's happened and they bought really well. That property has done well. And then five years later they bought another one. And you know, and it just bought really well. And it actually just, you know, saved and then paid off their loans and then when they had enough capacity, they went and bought another one. And yeah, I agree that sometimes it's the income is the worst indicator of someone's investment success. In fact, it actually creates a lot of bad behaviors because I think the money's always going to come so that you don't even prioritize investments in their life. I just think income's going to always be enough.

Chris Bates: And unfortunately it's never enough because it doesn't always last forever. In terms of interest rates, bank all time lows and likely to, you know, you'd have to consider this is only gonna make interest rates stay lower. This kind of Corona situation. How do you think that's changing your investment strategy with clients? And that's what, you know, with advice, we're always changing what's best practice and what we would prefer because things are always changing. So what's some of the things that you're thinking about now that potentially you weren't thinking about? You know, when rates were, say a little bit higher?

Stuart Wemyss: Probably the biggest change creases is investing in a family home. You know, going out just notionally if I had a client that wanted to go and upgrade their family home and they'd need to borrow a million bucks to do that in, you know, maybe if we had these conversation five or 10 years ago, I'd go, wow, that's a, that's a crippling move. You know, that's a move that that's going to eat up all their surplus cash flow. It's probably going to put them in a position where I wouldn't be recommending any additional borrowing cause they've already got large exposure. They're not going to have enough cashflow to diversify, to invest in other assets or make additional super contributions or it's a single point sensitive strategy that's going to be very, very expensive from an after tax cost of debt perspective.

Stuart Wemyss: And that didn't, that in itself doesn't mean that it wouldn't be a good strategy. It would depend on the client's position and so forth, but, but swings it against the strategy more than for it. Whereas if we assume that interest rates are going to be, well, let's say steady for three years and then gradually rise thereafter, so, you know, the next 10 years they're going to be well, well below they're sort of longer, much longer term median or average. Then the investing in the family home strategy it starts to actually look quite attractive. So that is that you know, instead of, you know, if you've got a, an every time in an average area you could either do two things. You could go and invest in property, so go and buy a pure investment grade property or you could sell your home and upgrade to a, to a really a blue, cheap, good quality area that's going to provide a much better capital growth.

Stuart Wemyss: And looking at a sort of from an after tax and a net asset base. And that's a pretty compelling strategy if we assume that rates will be lower for the next 10 years, which I think is a pretty reasonable assumption. And so that's probably the biggest thing is the impact of nondeductible on an overall investment strategy is much less than it ever has been. And investing in the family home can kind of tick two boxes. Sometimes from a lifestyle perspective. It puts him in a maybe a better location, better schools zone, those sorts of things, and also helps them build build wealth. And you've got to think about, you can't pay, you can't fund retirement from equity in your home. There's a non-cash asset. Of course you need to, that's only sort of one component in a wider strategy. And whether that means you've got to downsize one day or leverage against that, ultimately leverage that equity.

Stuart Wemyss: That's, that's obviously the missing piece of the puzzle, but from that one specific element, yeah, certainly that the home. And then the second thing is that that the opportunity is that rates are really low and will be lower for longer probably. So the costs associated with investing in properties, you know, is it's, it's kind of, if you look at compare it to history, it's nothing like a, you know, investing in a property is really not going to cost you very much cashflow wise. And so I guess the frustrating thing though is that is when you've got clients that it's a, it's an absolute no brainer for them to be able to borrow, to invest, but then you've got to be able to demonstrate to the bank. So, so really building a strategy around and it's sounds like a good plug for the book and it's only accidental in the question. It's the question, but really building a strategy around proactively managing borrowable equity is, is key as well.

Veronica Morgan: Interesting. You know, around the cashflow and investing and it's obviously critical because you could overlook cash flow. It's going to undo all your good asset selection if you can't hold it. But obviously one of the things that's going to be impacted well it has already been impacted by Corona virus on the market. It is yield and you know you know, and everyone who listens to this podcast says I don't buy for yield. However, it is an important component of cashflow. And now we're looking at sort of eight grade assets in Sydney and probably Melbourne as well. I would hazard you know, you're looking sub 2% yield, which is pretty horrible. You know, I thought it was pretty horrible at 3%. You know, you really do need your capital growth. Obviously if you're going to be, I mean, you wouldn't, you wouldn't buy those sort of assets with that sort of, you, unless you were focused on capital growth. But it's going to impact on people's ability to hold them. And I know the interest rate to lower and the cost of borrowing is lower, but because we don't know how long it's going to be the case for. I think there's been, you know, it's been mast. The, the volume I guess, of available property for rent has been masked because of these Airbnb as a strategy and now and for the foreseeable future, there's a lot more stock available for rent.

Stuart Wemyss: Well I guess low interest rates compensate us a little bit of for and really it, we're looking at the after tax cost of that debt from a cashflow perspective. So certainly yield impacts if interest rates to right were to rise, that would be an issue as well. But I guess that therein lies the opportunity and the opportunity is that I can invest today, I can benefit probably for the next decade of below average interest rates. Those low interest rates are probably going to stimulate asset prices. So we'll be able to build and if I do it, get the asset section right, I'll be able to build a pretty reasonable amount of equity over that period of time. And then if I'm managing my borrowable equity, I can build in some buffers to prepare myself for the ultimate situation of inevitable interest rate rises.

Stuart Wemyss: And then if there's further compression on rental yields then you know, in 10 years time I've got, you know on a my LVRs 50% because of the, the uplifting value and I've built in some Boral Blake rescind buffers into my loans, then I'm less concerned about having to weather that storm, you know, that that is higher interest rates and lower yields. Because I've, I've seen the benefits of investing in property have already been kind of rewarded. But it will be even challenging then in 10 years time. For example you know, someone contemplating entry entering the market at that stage, we need to straight to higher in yields potentially even low hour or the same today. That, that makes it I guess more difficult. But it's not a, if you look at historically what yields have done really since the eighties it's not something that's really worried the market too much. And as long as we continue to see that uplift in value that's really driven by the laws of demand and supply and I can't see them changing anytime soon. I think it, I don't think it's really going to have a big impact on the appetite of for people to invest in quality assets.

Veronica Morgan: I think that's always the caveat, isn't it? If these sort of discussions is it's the quality assets, there's plenty of crap out there to be bought and there'll probably be a lot of that crap that, that hits the market because you know, people have bought it thinking with this short term rental strategy and then, and the asset itself isn't worth holding or they can't afford a holder on a lower yield. You know, that's the sort of stock that's probably more likely to hit the market in longterm. I guess that'll, that'll come out of the you know, the rental market as well. And that will actually help yields rise again, probably.

Chris Bates: I mean, a lot of the supply issues now with apartments yes, there's Airbnb, a lot of those Airbnbs coming on the market. Our apartments, there's going to be a massive underbuilding of apartments right over the next five to 10 years because we've got less migrants coming. Yeah. I mean there's, investors aren't getting ready to go anywhere near it cause the building issues, I'm to start then not great investments.

Chris Bates: The rental issues now of scaring investors even more to buy them cause they're starting sand, the risks with vacancies. And so I think if you own apartments, yes, you're going to potentially, if they're kind of that bulk standard apartment, you know, you've gotta be a bit concerned about it in the next, you know, five years around rental yields because just as an oversupply and you know, potentially not going to get filled with migrants. But for example, that's a house. They're not building any more houses and every year one hits the market, you know, if it's in those, you know, rings they're getting bought by owner occupies not invested. So rental stock, actually a valuability of houses for rent are actually going down. And so you know, I think you, you shouldn't be worried too concerned about longterm yields on houses or not being able to rent them because there's always going to be a demand and as process got higher, there's even more demand for renters because people can't afford to buy.

Chris Bates: I think you said Stuart around the home upgrade. I think it's a, it's a point that is a really big one, you know, so I'm glad you said that because I think that is the real big shift because a lot of people were thinking, you know, a few years ago is that, well, you know, I need to build well for my retirement, the best thing I should do is go and leverage up into some properties or whatever it is. But because of low interest rates, potentially their best strategy cause there's a home gross tax free is potentially just upgrade and to buy any, if we find that people are doing that, that's a, that's probably going to be the best strategy because you're buying a family sort of suitable asset, let's say in a more potentially better area. And because of low interest rates, they can afford to hold it. And so I think it's something that, you know, is kind of reshaping the way that we consider advice.

Chris Bates: Yeah. And you know, we, we always want to go and buy a home. We buy it for lifestyle, a lot of lifestyle reasons and we, and any financial considerations as sort of secondary except for, you know, obviously the baby boomers have in the main fallen into a situation where they've accidentally, you know, their homes being accidentally arguably one of their best investments and, and definitely their best investment from an after tax perspective. So, you know, if someone walks into our office and says, look, I'm going to retire tomorrow, develop me a new investment strategy and their net worth is half a million dollars and need to fund the next 30 years. You know, you're not a magician at that. Money's not going to go very far. Whereas if their net worth is $10 million, but all that is in a family home asset, well you've still got plenty of opportunities to build a investment strategy for them.

Stuart Wemyss: It's almost always going to mean downsizing, but at least there's a strategy there. So it's a good plan B, plan C if nothing else to approach the family home decision with an investment lens. And you, you're doing yourself, I think a good service and that by definition an investment grade property should have wide appeal. So it's not like, and it's going to be an area that has good amenity as well. So it's not like you're going to have to probably make too many lifestyle compromises either. So in a way you can take both those boxes. Lifestyle and investment.

Chris Bates: Yeah, we just don't want at the moment where clients in a like are in a house that two young kids, you know, considering option one you know, do they do a rhino basically or do they upgrade and ran out and then do an investment property or upgrade. And you know, by just looking at the numbers and the situation and what they really want from a lifestyle point of view and et cetera and then the type of asset and that, that price point shifts them into. It's kinda, it's, it's kind of an easy discussion really to kind of show them that actually that's actually a better decision than potentially overcapitalizing on this property and say Leica, which is where it is. And potentially not getting something that it's super happy in and it potentially going getting a sub par investment because there's not much more than capacity left over. And you know, and that, that was kind of counterintuitive to what they thought they were going to do. And it's just kind of, sometimes people need to be a little bit more open to, you know, potentially things that weren't the conventional strategy five years ago. Cause that probably wouldn't have been a good idea five years ago, but potentially cause a low rates. It is intense

Veronica Morgan: Like compensation with a lot of clients as well. We know, should I stay or should I go? It's you know, and there's, there's so many elements involved in that. Sometimes they're really, really, really wedded and tied. We've got deep connections to where they're living and their decision might be to renovate under those circumstances just because of that, that pool. But quite often what they don't fit, what they fail to really understand typically in these inner city areas is actually the scope to renovate. What they actually get when they spend all that money. Sometimes it's not what they want, not enough. And also their relationships with their, with their neighbors that they always loved sharing that process can sour through the actual virtue by virtue of that process, but also the costs of getting plans approved and going through that whole exercise. And most people underestimate that. You know, basically by the time you pay the architects and all the fees and various reports, et cetera, et cetera, you know, you can get yourself up to close to $50,000 before you've actually even hit a nail into the wall. 

Chris Bates: The reason I laughed is because clear clots, I'm working on one. You know, they love the area, they love the view and they want to stay in this house, but they cannot, they've got a really poor relationship with the neighbor. And I kinda, that was just about the gum, you know, I probably put a few hundred thousand dollars in this property and over capitalize on it. And you know, we had a conversation. I said, well, once you've done that, are you still going to want to leave there with these neighbors situation? And I kind of realized that I didn't. And and the other caught is they've just finishing the rent out at through that process they've realized they don't want to live there because of the backlash and the relationships they've created with their neighbors. Through basically getting something through cancelled it. They didn't think they could get through council. And they actually got it through council. So you're right. You've got to really understand that, you know, the impacts on the, you know, the, the stakeholders around you with a renovation because they do shift

Veronica Morgan: Unless you've been through it. And actually had that happen. You, you it, you don't even think it's possible. I know when I was selling real estate, the amount of times we'd sell property with plans approved purely because the people, the vendors had got to the point where they hated their neighbors through the actual approval process. So it's just like, and it was quite common and you think, Oh dear, it's not good.

Stuart Wemyss: And from a fundamental perspective, you know, you're spending more money on the building value and the land value, it doesn't really change. So of course, you know, if you, if you, if you're constructing something that's in keeping with the area that you'll get your money back initially, but over time you know that that part of the asset depreciates, whereas you potentially can move to a different area, someone that's already been through the pain through renovating and get yourself a higher land value component, then it's probably going to perform much better.

Veronica Morgan: It's very true. There was some problems that just don't deserve to be renovated and all that or you just can't justify it. And, and particularly in inner city areas, you find that because you know, they are typically on smaller blocks of land and so, but you know, and look, you know, building a four bedroom home on, on 150 square meters of land, you can't really do that easily now, but it has been done in the past. And I remember as a sales agent trying to sell some of these properties with a postage stamp for outdoor space. They've got a family sized home, but somebody said, I don't want to move. I want to stay in this area. They're massively overcapitalized because they built the wrong asset. It's out of keeping with what the rest of the market is after and what, what else is available. You know, for those properties, they've ended up de-valuing their, their property. And then credit rule noose around their neck, down the track when they did go to sell. So there's, there's a lot of considerations when you're looking to renovate this for sure.

Chris Bates: So one of the things you would have said when you're an agent for Ronica is it's always a good time to buy. Now. I'm just pretending in shape, you know, and that's what, you know most I will say. But unfortunately though then say the opposite to the vendors, it's always a great time to sell because, and it's going to crash 30%. But putting that aside, what are the connotations with mortgage brokers is the same thing. It's always a good time to refinance. You know, you should always get yourself a better deal, et cetera. And sometimes not really that different to what it was. It's always, so I'll say it the best time possible to refinance up, but it's not really that, you know, it's not really always the case, I don't think. Because you know, your situation might change in the future or blending policy could change better rather than worse. Sure. Do you think at the moment though, is one of those points in time where you really should be looking to refinance?

Stuart Wemyss: Well, I think I think you're right that it's not necessarily dictated by the market in terms of whether it's a wise thing to do to refinance, it's more dictated by individual circumstances. But there's one massive caveat on that, which is, makes it very difficult. And that is that you don't always know when it's right for your personal circumstances to refinance. I'll, I'll share a quick story. I just did a refinance. I moved from Westpac to a ed. That settled about a month ago. I started that process that he started talking to back I think around about August, September last year. So, you know, six months, seven months ago. And I quickly worked out the Westpac weren't going to do what I wanted them to do and as a result I was able to pull out a lot more equity than what I could, even if Westpac did say yes at lower interest rates.

Stuart Wemyss: Now, certainly it took me a bit of time and hassle switching and making that move. But I also didn't or could never have foreseen or I had no I have no particular use for that equity at this stage. I, but I just knew I wanted to, I always kind of followed my own advice naturally as you'd expect, try and pull out equity and, and bring my LVR back up to 80% is as often as I can. And so I started that process mid last year. While I had no idea that coronavirus was going to happen. In fact, I'd probably, my view back then was that 2020 was probably going to be a really strong property market. And I had no intent of using that equity either. And, but it's just turned out really good timing that now I'm in a position where I've got that investible equity and I can find an opportunity over the next 12 months where I'm sure there'll be one that I can put that equity to use.

Stuart Wemyss: So I always advise the best time to borrow is, and when you don't need it, when you've got no plans, when nothing is on the horizon, if you wait until when you actually need the money, it may or may not be the best time to do that. So that's your way. So therefore, you know, you make worse decisions as well. Less deliberate. At least you can at least I could go, well I don't really care for us to have to switch to Aiden's ed and if it takes a few months, I don't really care cause I don't need the money. And that was my view then and it allowed me to sort of take that longer term view. I guess the only other consideration, the only other caveat on that is comparable sales. So if I go and revalue properties today, it looks the, the value is probably, I'm not going to consider what's happened since the sh the lockdown.

Stuart Wemyss: But in terms of data, they're going to be looking at data from the beginning of this year or, or end of last year, which is probably going to be relatively helpful data. But if I consider refinancing saying September later, you know, later this year in September, then they're going to be looking at data that throughout the lockdown period, which it may not be perfectly comparable property because maybe it's Alyssa grade property that have been selling, but the data's not going to be helpful. And that's going to have a drag on sort of borrowable equity from a evaluation perspective. So making sure you monitor what's selling that particular market, you know, that's comparable to your property assets and therefore having them individually secured means you can be strategic about when you want to revalue. So I wa I have an interest in property, in natural interest in property, so I like to, to see what's going on, but, but I'll know what sort of comparable sales have occurred in the markets where I own property and I'll then know also when's a good time to to go back to the bank revalue locking a higher amount of equity. Uh even if I have no plans to use it.

Chris Bates: I think you're right. I think that, you know, when you have got, if equity is the goal of refinancing is to pull a bit of equity out then yeah, you've got to be really strategic around your valuations. When you order. I mean, we're just doing one at the moment and it's a really scarce apartment and involve clothes and you know, and I knew that if we did OT evaluation on at any point in time, it's just going to come in low because not going to value it scarcity that's on the cliff edge. Right. And so, but it's, you know, we've just waited for two sales, actually just wa we've got the first sale in the building and then Quizlet and there was another cell. It was just, you know off market behind the scenes that he didn't even know about.

Chris Bates: And then we've got these really two good comparables in the building. And then evaluations come back amazingly. And so you've just got to be a bit strategic there. But I think you know, I think at the moment, just with refinancing, I think there's a few things. Why you really should be thinking about it. Firstly, you just don't know what your income situation. So most Australians that are going to be like in three to six months time. So you know, just having an income today might mean you can and you might not be able to in the future. Is there anything is we just don't know what's going to happen with valuations. Now. Good properties will probably hold their value because of lowest stock. But if you've got different properties in your portfolio, you might find some fire sours or you have valuation issues, you know, in the next kind of six months.

Chris Bates: And the other thing is we just don't have banks. They're going to change their credit policy and you know, they go through cycles. They go through, let's take on lots of debt, let's do ex-pats, let's do, you know, investors, let's do, you know, 10 year interest on it. They go through, you know, increasing risk. But they also go through periods where they try to take risk the table. And you know, I think you would agree, Stuart, that what you're saying is that a lot of banks are retreating from the risk and saying, Oh, I don't want, I'm not sure about that income. I'm not sure about those types of assets. I'm not sure about ex-pats or bonuses at the moment. Let's kind of take a bit of risk off the table. And so if banks all starts to tighten up even if you do want a refinancing six months time, you might not be able to because they're not going to look at your bonus as favorably as they would have six months ago.

Stuart Wemyss: Exactly. Right. Yep. If, if money's on offer, always take it. And, and if it's not where you can always come back in six or 12 months and and try again. So that's why that being strategic and boring when you don't need it rather than waiting to when you do need it is always a hundred percent. Always the best. Right.

Chris Bates: Every way we are incredible stories that dumb things, property buyers do, dumb things ended up costing a whole lot of money. I know a whole lot of stress mistakes that can be avoided. Please show it. Can you give us an example of a property Dumbo? We can all learn what not to do from these stories.

Stuart Wemyss: Oh, I do. And it's a bit of a surprising one. Actually I'll say it's surprising because I thought the mistake would be painfully obvious, but but I guess many mistakes aren't necessarily so obvious to most people. But the, the thing that we've been seen, or the question that's been coming up is should we move or we have moved money from our home loan offset to our investment offset because the interest rate is higher, obviously interest only investment loans attract higher interest rate. And so the clients were thinking they were doing themselves service by offsetting higher interest rate debt rather than lower the interest rate debt without considering the fact that when you get a tax deduction for, so the after tax cost of data is close to half the interest rate and when you don't get a tax deduction for. So the after tax cost of data is exactly the same as the interest rate. So that's been a really I guess a surprising because we've got quite a number of questions about it and we've come across it where clients have done it without even asking as well. So that's my, my Dumbo.

Chris Bates: So I've got a client who has it's quite, quite big purchases and things like that, but Hey you know, it wasn't kind of getting advice. It was going directly to CBA private. And you know, he was kind of directing his own mortgage strategy and he basically was making that same mistake. So he was buying it, you know, a home and he thought, well, you know, if I it's going to be a lower interest rate on my home than it is on my investment, probably. So what I'll do is I'll, I'll pay off my investment property and then use and Bo borrow at low 2% on the home and just didn't understand the consequences of that decision. And it was that to me was the reason when you actually want them as a client off CBI private was the strategy around actually understanding that actually this, that's actually cheaper than home loan debt because it's tax deductible and longterm he probably wants to keep that as an investment anyway. And so the benefits of holding that with investment debt on. And so I've seen that mistake as well where people, you know, they pay off the wrong debt or they offset the wrong debt just because they don't understand the after tax and the real cost.

Stuart Wemyss: Now we'll take a longterm view. So they think, I will have got no nondeductible debt today, so I may as well just repay investment debt, not thinking about what might happen in the future, whether it's a holiday home or a home upgrade or renovation, these sorts of things. They aren't uncommon events in people's lives. And so it's also preparing to some degree for the unknown, you know, the, the unexpected that might occur in the future.

Chris Bates: Very good. Thank you Stewart. It's been amazing. And I believe you've got a offer on your book.

Stuart Wemyss: Yeah, I do. Thank you. So normally we sell on the website for 30 bucks plus postage. So for listeners we'll discount that to 25 bucks and I'll pay for the postage. So the coupon code is elephant and the link to the book that will be in the show notes I believe. So if you just follow that link and put in that code elephant 25 bucks including postage.

Veronica Morgan: Absolutely. And we can encourage you to read Stewart's book. Also. I encourage you to read and check out his podcast because if you do want to you know, and I've read investible twice, actually it's well recommended to a lot of people. Just because I think that from investors you know, my, my background obviously is property. And for me to understand better or better understand principles outside property is really important. And, and I encourage everybody who thinks that they're a property person to also understand those principles.

Stuart Wemyss: Thank you. That's very kind.

Chris Bates: We want to make you a better elephant rider. And this week's elephant rider training is,

Veronica Morgan: Well, I wanted to have a quick chat about the possibility of new South Wales. I'm not charging stamp duty anymore on the purchase of property. Now this is look, this episode might or will go to where a couple of weeks or a few weeks after we record this recording is the beginning of may. And there have been a couple of newspaper reports and media reports that new South Wales is considering X-Wing stamp duty on purchase property. And so I've been talking to some sales agents and they're saying that they've had some people say that they don't want to make an offer on property at the moment because they're waiting to see what happens. We stamped duty now. I think we need to sort of make it clear to people if there's a change to tax to state government taxes, it's not going to be quick.

Veronica Morgan: And it will get replaced with something else. I mean, stamp duty is a earner for the state government. You know, the whole economy relies on stamp duty revenue. And so therefore the government in their, their fuel, generosity and, and desire to kickstart the property industry post coven isn't going to absolutely ditch their main source of revenue or massive source of revenue without replacing it with something. And I think that also there's a process that is in place that you know, a process that they need to go through in order to change this sort of stuff. It has to, you get through parliament and BB legislated. So none of this is going to happen overnight. So I just think it's quite interesting though that there is this immediate, I guess, reaction to a bit of press on this topic. Have you found that Chris, with your inquiries?

Chris Bates: Ah, so this is a, it's been spoken about for on and off. And now that the treasurer has kind of come out and said that he thinks it's a good idea it's kind of getting a bit more airways, but it's such a massive shift. And even if it makes sense, there's a lot of people's think it does. Like you say, how long is it going to take? This could be three years, it could be six years. We just don't know the reality is as well. You might actually find that that's actually more expensive than actually paying stamp duty.

Veronica Morgan: Well, that is what you're talking about there. Is that what they replace it with? And there's, there's talk of a broad based land tax, right? Is that what you're referring to there?

Chris Bates: A hundred percent. And it's gotta be going to be quite high because the amount of income that the government's going to lose by switching off, they're going to have to recruit that and they can't just go, well, it's only going to be, you know, one or 2% because yeah, it's just, it just has to be a big tax, I guess. And so I think if you're delaying your property decisions to whites or what happens there, there's going to be an opportunity on the other cost if potentially a prices rise. Now, it might not be the case at the moment, but you kind of just can't be saying, well, I'm just gonna wait to see what happens there. If anything though, it could actually create more demand for the property market because what it would do is create, allow people who haven't got the deposit to cover the bank deposit, which is say 10% or 20% however, where you want to look at it, but also the 5% for stamp duty. So it is potentially going to give first home buyers a lot more hope. And also investors. And so moving to this model, people can afford an extra outlay per month or per year, but they might not be able to afford this big one off hit. So I do think you wouldn't really want to wait for a change like this because once that does happen, you're going to be, have more competition. So yeah, it's kind of counterintuitive anyway, I think.

Veronica Morgan: Yeah, and the, and the flip side too, I mean, yes, potentially you're lowering the barrier to entry by, by taking away stamp duty. And so therefore more people can participate. The other side of that is if they do replace it with a broad based land tax, which you know, we've discussed that in our first interview with Brendan coats. You know, in terms of the, there's different types of models that could be proposed or considered by government. Abroad place based land tax means that every property owner would be paying land tax every year. So it's additional rate. So you pay land tax effectively to your council, you know, in terms of rights. And this will be a land tax to your state government in terms of addition, different type of late rates if you like. But you'll be paying that for the length of time that you own that property.

Veronica Morgan: Okay. So in a transitional period, in some countries that have gone from one type of text to another, you know, sometimes I think Brendan gave us examples and I can't remember what country it was, where it was offered to purchases during that period of time to choose. Do you want to pay Lantech or stamp duty the old way or do you want to switch it not to pay stamp duty and take on this longterm land tax liability? And I think for people who want to get into the market and don't want to save up for stamp duty, they might choose the latter. And then you got to think how long are you going to own the property for? Because sometimes you might, if you're offered that choice, Eddie's, if you're going to own it for a long, long, long time, then ultimately longterm meaning you're paying more instant in land tax than you are in stamp duty.

Veronica Morgan: So there's all these sort of questions that will have to be posed in terms of the unfairness on all the people that have already purchased property and paid stamp duty. Why should they be burdened with a land tax burden that they didn't, weren't aware of when they bought that property and they've paid their dues in terms of paying stamp duty. So there's just so many aspects to this that have to be considered and legislated for and also got through parliament. So like you said, so there's lots of reasons why holding off your decisions now thinking that the government state government is going to take away land tax, sorry, stamp duty, I'm getting confused myself here. May not be beneficial for property buyers and behind the scenes there's lots of, you know, key stakeholders in the property market that will have a lot to say and you know, the banks might like it, you know, they might be for it, you know, they might not be for it.

Veronica Morgan: Because it, you know, they look at their loan book, it might create additional risks. What I potentially would do though is it would probably create more transactions and that's what the argument is here is that it allows people to transact. You can downsize because you haven't got this big stamp duty bill. And you can just pay and you'd have to lose a lot of your money to stand Judy with transactions. It would track flippers, you know, if you were going to flip up you know, instead of factoring into your cost, the 5% for stamp duty, well that might only be 0.2, five or whatever it is, you know so, you know, flippers are do it. The problem is I find though with, with transactions though is a lot of the time if you create transactions, you increased it. Cause through that transaction people go back to the bank and then they borrow more. And so what you will do is not only increase kind of more people going out and buying, but they could potentially borrow more money cause that's why they're back into the marketing. And so unfortunately

Chris Bates: That will create price rises. So first time buyers might be saying, Oh, this is really good. I don't have to pay stamp duty. Well you might have to pay an extra five, 10% in your price anyway because you know, prices have gone up because there's more demand. So you know, it's the same as first home buyer grants. You know you provide that, you've got more first time buyers out there, you've got more competition, you're going to pay high prices, so it might not be as big a benefit as you think.

Veronica Morgan: Please join us for our next episode. We're doing a Q and a episode. These are your questions and so we'll be covering what would happen to your property if the bank, your mortgage is with those bust alternative forms of property investment for first time investors, capital gains, tax exemptions, and my favorite texts to hate Glenn techs and we'll also be discussing fixed rates versus variable and the current climate and whether to ever forego an offset account. Please join us. Don't forget we're on all the social channels. We're on Facebook, we're on LinkedIn, we're on Twitter or you can connect with us on the elephant in the room.com did I you? The links are all there for you. Please connect and send us a message. We'd love to hear from you until next week. Don't be a Dumbo. Now remember, everything we talked 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 buyer's agent who will tailor and document their advice to your personal circumstances with a statement of advice.