Property Hub - Investment Insights & Inspiration - Get Invested: Part 2: Stuart Wemyss on investing as a game of finance

Episode Date: November 15, 2020

It’s absolutely critical that all investors learn the rules of the lending game. The banks set the rules, and they can no longer be bent or broken.  Those that learn the rules and how to use them to their advantage will win the property investment game. Stuart Wemyss explains this in the continuation of our conversation, along with his book The Rules Of The Lending Game. Stuart is a qualified chartered accountant, an independent financial advisor and a mortgage broker. The Rules Of The Lending Game book covers how to: – Safely maximise your borrowing capacity,– Position yourself as a low risk borrower to the banks,– Correctly structure your investment loans,– Use mortgages to reduce your taxes,– Maximise bank valuations of your properties,– It outlines strategies for first-time buyers,– And shows you how to build a financing strategy to achieve your goals So, our advice to you, if you’re turned off by the topic of mortgages and all that mind numbing confusing money stuff, is to read Stuart’s book at least once and then immediately go out and find yourself a savvy and trusted finance broker.  And after listening to today’s episode, if you’d like to enjoy all of the detailed gold that Stuart shares in his book, he has very generously offered you a special reduced price.  His books normally retail for $29.95 + $6.50 postage at a total cost of $36.45. However, As a Get Invested listener, Stuart has very generously agreed to offer you a massive 30% discount on both of the books Investopoly as well as The Rules of the Lending Game where you can get them for just $25 each including postage – all you need to do is jump on www.prosolution.com.au/books and enter the code ‘Bushy’ to secure this great discount. Alternatively, and as an added bonus, just email me at [e-mail] and we’ll email you the special discount link to Stuart’s books along with a link to my award winning book Get Invested that you can get for free (excluding postage) that normally sells for $17.25. And if your serious about optimising your capacity and comparing your current lenders and loan structure with the best of the rest to see how much more you can access safely, securely and affordably while reducing your risk, then don’t hesitate to reach out to me or our Know How Property Finance team on www.knowhowproperty.com.au or email me at [e-mail] and we’d be happy to give you an initial free finance assessment, as long as you start by mentioning Get Invested. Get Invested is the podcast dedicated to time poor professionals who want to work less and live more. Join Bushy Martin, one of Australia’s top 10 property specialists, as he and his influential guests share know-how on the ways investing in property can unlock the life you always dreamed about and secure your financial future. Remember to subscribe on your favourite podcast player, and if you're enjoying the show please leave us a review. Find out more about Get Invested here https://bushymartin.com.au/get-invested-podcast/  Want to connect with Bushy? Get in touch here https://bushymartin.com.au/contact/  This show is produced by Apiro Media - http://apiropodcasts.comSee omnystudio.com/listener for privacy information.

We're taught at a very young age the interest rate is actually important. I think we're taught from a lot of the advertising and the articles that are written in newspapers, it seems to be that the best way you go and choose a mortgage is on interest rate. But I don't think I've ever really worried about interest rate so much, but I would much prefer to pay half a percent more or even a percent more if that's going to extend my borrowing capacity because I know I can put it to work And I can more than make up for, you know, that which is what is a relatively small differential in cost. Welcome to the Get Invested podcast, where we share great conversations with experts from all walks of life to uncover their secret know-how and where they invest their time, their skills and their money and the benefits that this has created.

You see, the truth is that everyone invests every minute of every day. We're investing our time, our skills, our energy and our money in something. Some of us are investing consciously, some unconsciously, sometimes for good, sometimes for bad, sometimes for no impact. Get Invested will help you to start living by design, not by default. I'm going to help you to make it happen, not let it happen. You'll hear the top tips on how you can live with conscious intent so that you can live more, work less and leave a living legacy by investing now. Listen to the show to discover the top tips on how to get started, make the most of your investment journey, and ultimately, to be living your dream, not someone else's.

More episodes can be found on iTunes or at bushymartin.com.au forward slash getinvested. Thanks for listening, and now, let's get invested. Hi, Freedom Fighters. What's your most valuable asset when investing or buying a property? And what do you focus on when getting a loan? I'm guessing that most of you thought about the quality of the property and the loan interest rate. Am I right? Now, imagine taking yourself back to the time when you bought your first home and you got your first home loan.

And if you haven't, then imagine what it's going to be like. In the paraphrased words from the book The Rules of the Lending Game by today's continuing guest Stuart Weems When I applied for a mortgage to buy my first property I had no idea of what I was doing. There were so many mortgage options and so much different terminology that I just couldn't make head nor tail of it. I was more excited about buying a property than about the boring mortgage. I just wanted to know that the bank would give me the money and that was pretty much it. The mortgage was a mere distraction. I ended up putting my trust in a mobile banker from the big bank that I had my savings with.

I didn't speak to anyone else for comparison purposes. I didn't spend much time considering cash flow and affordability. I didn't think about my future needs or the future use of the property. I probably didn't even worry too much about the interest rate. I pretty much just said, show me the money. I was more focused on getting the house than anything else. is this similar to your experience or similar to what you imagine it's going to be like where a mortgage is just a means to an end it's really nothing to get excited about

or is it well today our guest Stuart Weems and I are going to propose that is something that you need to get excited about what if we suggest that there's something far more important to your long-term future than the look of the property and the interest rate on your loan. Now, I can hear you thinking, what are you talking about, bushy? Well, let me ask you another question. What's the most important thing you need to focus on to achieve and sustain your long-term lifestyle and your financial future?

Yes, what you invest in and the interest rate of your borrowings are small parts of the picture But there's something far more significant that will impact and determine your future What is it? And why do I say this? Now, have I got you eagerly anticipating the answer yet? I hope so, because the answer and the focus of today's entire episode will have the most significant and the most determinate impact on your financial future. So I implore you to listen up and continue to re-listen

and pursue the suggested readings to upskill yourself on this critical component of attaining and sustaining your ongoing lifestyle. A big claim I know, but from personal experience I know this to be true. So before I give you the answer, I'm going to keep you in suspenders by sharing a story that has the answer hidden within. So while you're listening, see if you can work it out.

It's a story about two identical twin brothers, Mark and Matthew, who both decided to invest in a property, 1H, 20 years ago. And just like the old industry super funds ad, we're going to compare the pair, as Mark and Matthew were exactly the same age and started investing with the same income and the same savings. However, there's a lifetime of difference in where they've ended up. Mark's property is now worth $1.25 million, while Matthew's property is now worth a whopping $2.23 million. In other words, Matthew's property is worth 75% more than Mark's.

But how can this be, I hear you say? Well, it's the difference between a focus on cost versus a focus on capacity. Mark did what most people do, and he rang around to all of the banks chasing the lowest rate loan that he could get his hands on. This meant that he was able to secure a property at a price of $400,000. So he bought a unit in a group of 12. Meanwhile, Matthew adopted a completely different approach. He didn't have the time or interest to run around splitting hairs on interest rates, so he engaged an investment savvy mortgage broker to get it all sorted for him. As a result, he was able to secure a property for $600,000 which enabled him to secure a nice home in a tightly held

high demand suburb. But how was Matthew able to secure a property with a value 50% more than Mark? Because his investment savvy mortgage broker focused on capacity over cost. Now you may be surprised to hear that there's actually more than a 50% differential on what you can borrow between the banks based on exactly the same income and liabilities. And yes, while Matthew's loan had a higher rate than Mark's by say half a percent off if I was being really generous, his ability to secure a better investment quality, higher value and higher growth asset meant that Matthew was much better off in terms of the size of his nest egg long term. By increasing purchase price power, Matthew was able to buy a high

value home that historically enjoys an average annual growth of 6.8% versus Mark, who is stuck with a lower value unit that only grows at an average of 5.9% a year. And ultimately, this is what it's all about. Growing the size of your income producing investment nest egg to help fund and sustain your lifestyle long-term. The take-home here? Focus more on borrowing capacity, not cost, as capacity is actually your scarcest and most valuable asset if you're looking to build wealth.

And there's also another lending element to this that Mark, and perhaps you, don't realise yet. Not only did Matthew secure a loan with a lender that gave him significantly better borrowing capacity, but the lender used valuers who were realistic, not overly pessimistic or conservative. Matthew's bank valuation on the home came in at purchase price. Mark's low-rate loan bank, on the other hand, came in on a bank valuation on the unit that he purchased

at a figure that was below what he was paying for, which meant that Mark was forced to use thousands more of his savings to secure the property. In other words, in chasing low rate alone, Mark was limited to borrowing less while spending more to secure a lower priced, lower quality and lower growth property. So here's the real lesson. If you're investing to build wealth, you need to focus on banks and lenders that will allow you to maximise your safe borrowings and have realistic valuers. If your lending costs are a little bit more but it allows you to secure a significantly higher value and higher performing property

then don't worry too much about it as your lending costs are tax deductible anyway Asset size and growth potential driven by the combination of your borrowing capacity achieved from your income and liabilities alongside your deposit required from your savings or equity in an existing property are both mission critical to the property purchase price that you can achieve.

And in this regard, size really does count. The bigger or higher value investment you can secure, then the bigger the size of the nest egg long term, even based on the same growth rates. It's why I talk about your investment future revolving around what I call the bare facts in my book, The Freedom Formula. You need to optimise the bear facts where BEAR breaks down into B for borrowings, E for equity or your savings deposit, A for affordability and R for risk or your sleep at night factor. These are the core and critical elements that will make or break your investment results.

So don't chase rate or limit your focus to cost. Focus instead on optimising your capacity. remember my wealth by stealth strategy is driven around using as little of your own money to secure as big an asset as possible as quickly as possible and as affordable as possible and then letting time, the tenant, the tax office and capital growth

to do the heavy lifting to secure your financial future so one of the most important but most unrecognised elements of your investment strategy is to optimise your achievable borrowings and your available equity at all times. In my and Stuart's opinion, these are your scarcest assets during the accumulation phase of your investment journey that need to be maximised and protected at all costs and at all times. And interestingly, your achievable borrowing capacity and available equity

changes constantly with the banks over time. What a bank will and won't do today is not what the same bank will do next week, next month or next year due to the constant changes in their lending policies to reflect their internal appetites for loan volumes and risk. So what does this mean to you? Firstly, that you should be regularly revisiting, restructuring, renegotiating and potentially refinancing your lending every two to five years to optimise your capacity. And this doesn't mean waiting until you're about to secure your next property

as this may not be the best time to secure extra borrowings or to access increasing equity as your property values grow. It means revisiting it every time you can to increase your capacity and access to equity so that you're then ready in advance to take advantage of any property opportunities as they arrive or when you need to. And access to borrowings has a massive flow-on effect

to the value of properties generally and across the board. The more you can borrow, the more you can buy. And if a lot of people are doing the same and it puts pressure on demand and the overall value of properties continues to rise, conversely, the less you can borrow, the less you can buy and with a decrease in demand, property values generally go down. Access to borrowings is one of the major drivers of property price movements, and generally

the only time property values decrease in Australia is when access to borrowings is reduced or restricted. This happened in the recession we had to have in the early 1990s, after the GFC, and more recently in the years before and after the Royal Commission on Banking, when bank lending was severely restricted, and we're actually continuing to feel the effects of this right now. the good news is that the federal government has finally recognized that the pendulum has swung too far in relation to the almost forensic analysis of loan applications and applicants living expenses

that's currently occurring and this is severely restricting the flow of credit and spending so the government's proposed announcement to relax lending laws in march 2021 is likely to have a significant flow-on effect to increasing purchase price capacity and consequently to put upward pressure on property prices. Now at the time of this recording, we have a rare window of opportunity to secure property prices that are going to look extremely cheap in a couple of years' time, when borrowings have increased to put upward pressure on property prices, together with strong population growth from immigration when internal travel is allowed, when the floodgates are opened and the even

luckier country that we're privileged to live in, that has actually become the envy of the world in terms of health and economic conditions, becomes a safe lifestyle haven for the rest of the world. Watch this space. As I've repeatedly said, investing in property is a game of finance and an elite team sport. It's why I actually started a mortgage-breaking business 15 years ago, because I realised that it doesn't matter how cheap money is or at what rate, if you can't get enough money to buy a property and or you don't have the extra capacity, you won't be able to increase

your property portfolio. It's also why I constantly refer to the need for you to give yourself lots of TLC when it comes to investing. What I mean here is not only giving yourself lots of tender loving care, but taking advantage of T for time over the long term, L for leverage by using other people's money, namely the bank's, and C is for the law of compounding growth combined to build your wealth. Leverage is a very important part of this and the higher the leverage,

e.g. the amount of money you can borrow, the bigger the size and value of your portfolio, which means the bigger the size of your income producing nest egg in the long-term future. And property continues to be the best growth asset to achieve this in Australia as long as your loans are structured cleverly. And at the base of all of this is your borrowing capacity

and your access to equity. As I mentioned earlier, the process of applying for a mortgage these days is like a criminal forensic financial investigation where you're treated as guilty until proven innocent. Banks are currently looking for an excuse to say no, not yes, with layer upon layer of risk mitigation. It's intrusive, it's laborious, and it's pedantic.

But you can make it easier by becoming borrowing ready. And today's discussion and Stuart's book will show you how. If you find it hard to get motivated to ensure you're structuring your loans correctly, that's no surprise, and we completely understand, because most people fall in love with the idea of buying property, not with taking out a mortgage. We get it. But think about it this way though. Every person in the world has a borrowing limit. There's only so much money a lender is going to be prepared to lend you so it's a very scarce asset. Therefore you must think very carefully about how you use

that scarce asset. Use it wisely and it's more likely that you'll achieve your financial and your lifestyle goals. Now the three main things that determine your personal property purchase power and your borrowing capacity are one, your cash flow, two, your equity in terms of savings or available unused equity in an existing property and three, the risk tolerance and financial stability of both yourself and the bank. The way you go about structuring your mortgage can dramatically affect your maximum borrowing capacity. A poorly structured loan portfolio will choke cash flow, waste equity and expose you to higher risk. This means you borrow less and guess what? For those property lovers but mortgage haters out there, it means you buy

less property, invest less and or don't reduce non-detaxable debt at the fastest possible rate. This probably means you create less wealth and you're further away from your financial freedom. So let me restate and reinforce the importance of investment being a game of finance. If you really want to be successful with your investing, then you really need to understand the rules of the lending game. And while I dedicate a chapter to it in my book, The Freedom Formula, today's continuing guest, Stuart Weems, has recently published an entire book on the subject, aptly titled The Rules of the Lending Game.

As mentioned last week, Stuart Weems is a qualified chartered accountant, an independent financial advisor and a mortgage broker, a very rare combination that enables him to deliver truly holistic advice that considers all aspects and impacts of investment options. Now, we both strongly believe that building wealth and getting ahead financially is a game of finance, and those who know how to play the game get ahead. Most people consider mortgages to be liabilities, however, if used correctly, and Stuart's book will show you how, a mortgage can be an asset and a very powerful and effective asset at that. Let me share with you just some of the golden lending nuggets from his great book to further whet your appetite. mortgages can be relatively easy to get however it's as easy to establish an incorrect loan

structure as it is to establish a perfect loan structure and that's just the problem you often don't realize you have the wrong structure in place until afterward sometimes many years later frustratingly you may have to live with your mistakes because often They can be too costly or difficult to correct. And therein lies the problem. Mortgage structuring can be insidious and it's deceptively easy to make a mistake. And it's not often that we meet new home buyer or property investor clients who haven't made a costly mistake with a mortgage in the past.

Most people make the same mistakes. They go it alone thinking it's a simple process and learn through error that in fact they should have paid much more attention to their financing. That's generally when they come to see us. And frankly, it makes our jobs a lot easier because they immediately value our advice and often save them tens of thousands in the process. It's not uncommon for the lending guidance

that Stuart's Pro Solutions and our Know How Property Finance team gives clients on structuring their investments to save them well over $10,000 a year. Now, this is not a sales pitch, but you can never underestimate the value of the right structural advice. It's a gift that keeps on giving as good loan structuring advice results in recurring savings.

On the flip side, beware. A poor loan structure will continue to cost you money each and every year. You simply don't know what you don't know and good guidance and knowledge is the only way to change it. Now when it comes to property finance, It's important to first determine the best structure, then choose the best loan products to build out that structure, and then finally to select the best lender to meet your requirements. Portfolio planning and preparation are crucial to the long-term success of your property

endeavours, and they go hand-in-hand with loan structuring. And there are two parts to this. Firstly, the financial structure of your investment property portfolio, and secondly, the ownership structures to hold your properties. So why is loan structuring so important? Loan structuring influences many things, including the interest rate and fees you pay, the amount of tax you pay, the amount of flexibility you have, your access to additional finance, i.e. your ability to invest more, and so on. And a sound structure will ensure that your Debt is tax effective, that you're able to successfully borrow the amount that you need,

that you aren't tied to or controlled by any lenders, that your risk is contained, and that account keeping is relatively easy and straightforward. There are two principal ways to structure your loans. Some might say a right way and a wrong way. In my opinion, in the majority of cases, the right way to structure your investments is to take out what's called a stand-alone loan structure. The alternative, or wrong way, is to cross-securitise, which unfortunately is often the case. Stand-alone loans provide the greatest flexibility both immediately and in the future. The general method is to establish a small standalone loan of say 20% plus costs, what

we call an investment and rainy day reserve war chest, which is secured by one existing property only, which is often initially your home. And this finances the new investment property deposit plus costs, and then you arrange a separate further loan secured only by the new property for the remaining 80%. So many investors borrow 100% of the investment property's purchase price plus costs and to do this they often initially need to use the equity in their home. However, time will come when they accumulate enough equity in the growing value of the investment properties to secure their own lending.

For example, if the investment properties increase in value over time they can increase the loans against the investment properties to then pay out the deposit loan war chest on the home. The investment properties would then be standalone and the home would no longer be needed for security. Now as an investor, it's often also a good idea to use a number of lenders rather than keeping all of your eggs in one basket with one bank. The concern is that if you have all your lending with one bank

and something goes awry, say there's a breakdown in your relationship or a disagreement that can't be resolved, you could find yourself at the mercy of a bank or a lender who holds sway over all of your mortgages. For example, after the GFC and the more recent credit crunch, excuse my French, lenders tightened credit policies for new-to-bank customers, i.e. people who didn't have existing lending with them,

and kept credit policy more relaxed for existing customers. This meant that borrowers using multiple lenders had more borrowing options. The other advantages of using different lenders is that it allows you to control information flow. For example, if you have all your lending with one bank and you apply for another investment loan, that bank can see all your details,

what you spend and what you earn via your transaction account. But if you separate your transactional banking and your lending, you have control over what information the lender gets to see. Now, I'm not suggesting that you should purposefully withhold information, just that you should have control over it. Spreading your lending across a few lenders is therefore a prudent risk management practice. Now, avoiding cross-securitisation provides many benefits and significantly reduces risks. Again, cross-securitisation is where a loan is secured by two or more properties.

and if you've arranged a loan for an investment property directly with your bank then there's a very high likelihood that your loans are cross-securitised across all your property and your home and you're exposing yourself to greater risk while significantly restricting your future flexibility, your control and limiting your capacity. Cross-securitisation is a real no-no and by restructuring to a standalone structure

where a loan is secured against one property only This can decrease property re-evaluation costs, it can increase your flexibility, it allows you to maximise and increase your buying capacity, it puts you in a better negotiating position with the banks, it means that you can enter into fixed rate products safely, it allows you to control sale funds when you sell a property, and much, much more. When investing, you only get one opportunity to establish the maximum tax deductible loan, and that's when you first purchase a property. So, think very carefully before you contribute cash towards a purchase.

If possible, borrow 100% and deposit your cash in a linked offset account instead. Avoid using redraw facilities with investment loans as any redraws are treated as new separate loans for tax purposes. Lines of credit are very messy for tax purposes so our general recommendation, avoid them Pre-paying interest is worthwhile if you expect your taxable income this financial year to be unusually high An interest-only loan with an offset is a very powerful product

that allows you to reduce your interest costs without compromising future interest tax deductions All investors need to be aware of this now these extracts are just the tip of the iceberg in relation to the range of considerations that need to be incorporated in your loan structure to optimize your capacity while minimizing your cost and your risk and as i hope you've gleaned already from today's discussion stewart and i both believe that most property investment strategies rely heavily on an investor's ability to access borrowings the more you can safely borrow the more property you can

buy and therefore the more wealth you can build. However, being locked out of the lending market will put the brakes on your investment plans. Therefore, it's absolutely critical that all investors learn the rules of the lending game. The banks set the rules and they can no longer be bent or broken. Those that learn the rules and how to use them to their advantage will win the property investment game. To assist you with this, Stuart Slater's book comprehensively covers all the rules of the lending game, including how to safely maximise your buying capacity, how to position yourself as a low-risk borrower to the banks, how to correctly structure your investment loans, how to use your mortgages to reduce your taxes, how to maximise bank

valuations of your properties. It outlines strategies for first-time buyers, and it shows you how to build a financing strategy to achieve your goals. So our advice to you, if you're turned off by the topic of mortgages and all that mind-numbing confusing money stuff, is to read Stuart's book at least once and then immediately go out and find yourself a savvy and trusted finance broker. Stuart's book will give you the knowledge to select the right broker, someone who's an expert, not an amateur or just a good salesperson. Once you have the best mortgage broker that you can find, hang onto them throughout your investment journey. This approach will allow you to focus on the sexiest side of the undertaking, investing

in the property, the shares or the like. And it means you'll be able to maximise and optimise your borrowing throughout your life. If you're serious about investing, then Stuart's book The Rules of the Lending Game is a must read and a constant re-read for your book collection. And after listening to today's episode, if you'd like to enjoy all of the detailed gold that Stuart shares in his book, he's very generously offered this to you at a special reduced price. Now, his books normally retail for $29.95 plus $6.50 postage at a total cost of $36.45.

However, as a Get Invested listener, Stuart's very generously agreed to offer you a massive 30% discount on both of the books in Bestopoli as well as the Rules of the Lending Game where you can get them for just $25 each, including postage. So all you need to do is jump on www.prosolution.com.au

forward slash books and enter the code BUSHY to secure this great discount. Alternatively, and as an added bonus, just email me at bushy at knowhowproperty.com.au and we'll email you the special discount link to Stuart's books along with a link to my award-winning book, Get Invested, that you can get for free, excluding postage,

that normally sells for just $17.25. And if you're serious about optimising your capacity and comparing your current lenders and loan structure with the best of the rest to see how much more you can access safely, securely and affordably while reducing your risk, then don't hesitate to reach out to me or our Know How Property Finance team on www.knowhowproperty.com.au

or email me directly at bushey at knowhowproperty.com.au and we'd be happy to give you an initial free finance assessment as long as you start by mentioning Get Invested. In the meantime, enjoy the concluding part of my great conversation with the walking, talking encyclopedia of all things property and finance Stuart Williams. What I'd love to do now is leap into your latest book because it's sort of a subject that I've got some real passion around. And as I said in the intro, investing in property is a game of finance in an elite team sport. So let's now dig into

your new book, The Rules of the Lending Game. And where I guess I'd like to start obviously is why did you write it and who should read it? I wrote it because 20 years ago, you could walk into a bank and say, I'd like some money. And they would just fill your wheelbarrow full of it and you'd walk out. And it would be a very, very easy process. In fact, you would have to say stop rather than start. And I remember when I started ProSolution back in 2002, we would quite literally set up a loan for someone, sorry, for a client,

and then sometimes provide the application and the supporting documents, their payslips, and so after the fact, oh, by the way, we need some compliance documents on file, you better give us that. Now, it was way too lax and it was ridiculous And it was open to misuse, which we certainly saw through the Royal Commission, which was terrible. So it needed to be tightened up.

But it's a completely different landscape today. I mean, you almost have to beg for it. And you've almost got to prove that you don't need the money, and that's when they'll give you the money. But if you look like you need the money, forget about it. They won't give it to you. It's almost ironic. So you've really got to – the analogy is that I use, it's like teaching your kids playing Monopoly. There's certain rules that you've got to abide by, and we all first – that's the first step is to learn those rules.

When can you buy houses? You know, how do you buy these things? When do you build hotels, et cetera? And then as we – as kids start to mature, they start to learn how to exploit those rules for their own games. They're still playing within the rules, but they're playing to win. And that's why I wrote the book because I think people need to know the rules in order to win the game of finance. And the game is really to be able to borrow as much money as you possibly can as safely as you can because the greater amount of investment capital you have, then the more you have to invest. And if you do that well, that is invest in quality assets, the more wealth you'll build in the long run.

And that's not me saying go and borrow to your eyeballs and have no consideration to how you're going to fund repayments and repay the loans one day and all those sorts of things. No, that's just stupid. That's a recipe for disaster. What I'm saying is you borrow to your absolute maximum and that's going to be dictated by your own risk profile and your own situation and the possibility of your circumstances changing as well. So, of course, I need to put that caveat on it. But really, the more investment capital we have access to and we put it to work, the more wealth we can build. 100% agree. And before I sort of dig into that a little bit more, having read the book now kindly, you give me the opportunity to do that, my take home from the book is that statement that investment and property is a game of finance and in an elite team sport.

Why do you think that's the case? um sorry bushy what why is uh why is it the case yeah why is investment and it's not just property but why is investment a game of finance and and why isn't it a late team sport oh because uh because i think you've got to have you know if we had an unlimited borrowing capacity then it's really um our ability you know if i had an unlimited pot of money just like you've had unlimited pot of money to play Monopoly, you're never going to lose. You're always going to be in the game. But we all have a limited borrowing capacity. We all have a limited pot of money. And we've got to then think about what is limiting that. Is it our own beliefs around

borrowing? So is that a risk profile? Or is it our financial circumstances? Or is it we're not using the right lenders? Or is it we're not getting the right advice? So I think you need to build those team of experts to help you understand what are those limiting factors and how do you go about efficiently maximising it. And then you've got to learn the rules of the game which is set by the banks and different lenders are going to have different rules that apply in different situations. And then you've got to then use those rules to your advantage.

I guess the best example, personal example I can share would be last year I went to go and refinance some loans. I wanted to access some equity and I wanted just to restructure some loans. And I went to my bank, Westpac, at the time and said, that's what I want to do. Now, because we went and bought a coastal property I just spoke about, about four years ago, we had a certain loan structure and a credit manager at the time said, this is the structure we want, Stuart. We're happy to approve the loan because I went and bought without finance approval,

of course, which is not what you should do, but it's a long story. It was sort of circumstantial the opportunity to buy that property. So, whilst I might be able to sit here and demonstrate till I'm blue in the face of why the loan structure I wanted was not risky for the bank and incredibly achievable, because the credit manager has already signed off on the loan structure two or three years ago, what needed to happen in that scenario was that the new credit manager had to come and almost overrule that previous credit manager. And if you understand how banking works and how people get rewarded and measured in the bank, no one's going to put their job on the line just for one application approval. So, I knew that it wasn't going to work.

Westpac was saying, oh, we don't know if we want to do that, do that restructure. So, I took it to ANZ and I got a much better structure, got access to a lot more equity and got a cheaper interest rate. And that's just because you've got to know the rules of the game and you've got to play those rules to your advantage and then it minimises my cost of borrowings and it maximises my borrowable equity. And as I said, we're just about to settle on a new home today. And if it wasn't for me undertaking that refinance and I didn't have anything in mind at that stage other than just proactively maximizing my borrowing capacity um if we hadn't have done that i wouldn't have been able to take advantage of this opportunity so it's really that's the key thing around why i wrote the

book is to make sure that people understand the rules and then obviously how to play them to their advantage love it love it i think there's a really key distinction that we probably need to make for the listeners uh because unfortunately there's still a big perception uh that a bank is a bank is a bank and that all of the banks are the same. And you and I both know only too well that that is absolutely far from the truth. The old Caltechs said that oils ain't oils. I always say that banks ain't banks because what we're now seeing is not only the 40-odd different residential lenders that you can tap into these days have extremely different internal risk profiles, therefore different appetites, different policies, different procedures,

and therefore based on exactly the same situation will allow you to do all sorts of different things but also we're now in a world where that's extremely dynamic so what happens today mightn't be the case next week or the week after so we're in a really interesting situation where people who have bought money to buy a home some years ago think oh well I'll just go back to the bank

and they don't think any further than that But if you start to look at the fact that every lender at every time is likely to have a different appetite and a different approach, then you start to look at the whole world of borrowing and property extremely differently. so yeah yeah yeah and you've got to take rejection well i think so the analogy is that the banks are the the spaces on the monopoly board that you have to move around the monopoly board um and you don't necessarily have to you know use the same bank the whole time and i find it interesting that we typically um our egos get in the way sometimes because you go and apply to a bank or you know for example my situation with westpac um i could have sat there and gone oh well, why not? Why not? I'm a good risk. What's your problem? Try and convince them until I'm

blue in the face. But you've got to know when to hold them, know when to fold them, know when you're going to win the argument, when you're going to lose the argument. And just because the bank's saying no doesn't mean the answer is no. The answer is no for them. It's a little bit like speed dating, I guess. Not everyone in the room is going to want to have a second date. And that's okay. It's fine. Westpac was fine four or five years ago for me. They're not fine today. it's no big deal you just keep playing that game to your advantage and you use lenders to your advantage not in a way that you know you refinance every six months that's probably unnecessary but um if you're actively investing typically would think the the reasonable expectation is

to refinance every two to four years just because a particular bank may not ever always be the best bank for you could be no don't read don't leave just for the sake of it um but but be open to the fact that they're not always going to be the best bank for you. Yeah. And the other thing that goes with that is that, unfortunately, most of the banks will bend over backwards for a new customer, but just take an existing client for granted and often don't pass on the, when there's rate reductions and changes, they don't pass it on to the existing client. So definitely within your best interest to be revisiting that at least every couple of years to make sure that you're optimizing your capacity minimizing your cost and minimizing your risk so but um sort of drilling

into some of the contents of the book then and the sort of framework i'd like to apply to this if you don't mind is is something that we that we refer to as the bear facts which is we break the word grizzly bear bear down into the the four letters b is for borrowing so how do you maximize your borrowings e is for equity so you know how do we maximize your savings and the equity you have any existing properties to collectively between those two, because that's the lowest common denominator of borrowings and equity that determine how much property you can actually buy, but then we've got to make sure that it's affordable, both from the initial cost perspective, but also more importantly, what's the true cost of that property ongoing on

a weekly, monthly basis, and then finally the R is for risk and the old sleep at night factor to make sure that, you know, you might be able to go out and secure a $2 million property, but if it's going to keep you awake at night, then of course you won't be doing it. So if we sort of apply that sort of framework to the key aspects of the book, and we start with borrowings, and I think you make a really good comment in the book about borrowing capacity actually being one of your scarcest assets. Can you expand on that for us? uh yeah so i mean um borrowing uh which is distinct from equity is all about income and expenses um and i guess there's two parts to that the first part is what is your actual

affordability so how much money do you have left over every month so that you contribute that you can contribute towards servicing a new loan and the second part is what will the lender assess you know because their assessment might be significantly different and certainly we've seen that over the last two or three years where there's been changes in serviceability and assumed expenses and all these sorts of things that weren't necessarily in place and hopefully we get some relief from some of those conditions over the well sometime next year so they're the two sort of facets to play around with so the first one it's really just about understanding what your core living expenses are and what your discretionary expenses are and so if you can

understand that then you can play around with it because obviously the discretionary is discretionary if the money's there you can spend it if the money's not there you obviously can't spend it but you really need to know what your non-discretionary expenses are what your sort of fixed costs if you like are which would include food and those sorts of things assuming you still want to eat at night and that'll help you plan because then you can plan kind of worst case scenario, well, I can afford this, but I'd have to make some compromises. And you can make the decision at the outset to whether you would be happy or unhappy to make those compromises and then therefore unhappy or happy to take on that additional debt. But understanding where your

money is going is key to that. And I think the biggest mistake that people make is unconscious expenditure. And unconscious expenditure is expenditure that typically adds nothing to our standard of living, but costs a lot in terms of cash flow. And it's typically a whole bunch of small little items. Maybe you buy two or three takeaway coffees every day. And if you reduce that to say two coffees or one takeaway coffee, you wouldn't even notice it. But it's just more convenience. You don't even think about it. I'll just get it. But then if you sat down and add up how much you spend on takeaway coffee, maybe it's five grand a year. And if you sat down at the beginning of the year, will you be happy to spend five grand on coffee or achieve your financial

goals? You'd go, no way, my financial goals are far more important than some takeaway coffee. And so, in that situation, you're making a very conscious decision. But if you don't track those amounts, you make an unconscious decision. And so, most of us don't want to track every dollar and cent. Some people, they're happy to do that. But most people, that just feels too restrictive and too hard. And so what I say to people is just put a certain amount of money into a bank account that's specifically used for discretionary items. And then all the non-discretionary items can come out of your normal accounts, so bills and mortgage repayments and school fees and anything that you're never really going to overspend on, that can come out of that separate account. But the

discretionary account, you just put maybe, for example, $2,000 every fortnight across that discretionary account and you can spend away on whatever you like but you know at the end of the fortnight if it's gone it's gone there's no more spending to be done you don't have to track every dollar and cent uh that way but what it does do is it makes you far more conscious about your expenditure and it's not a painful process because the things that you're you tend to cut out are the things that never added anything to your standard living anyway hey i'm spending a hundred dollars on foxtel for example i never watched the thing well if you cancelled it if you never watched it you're never going to feel it. It's no big deal. But it helps you really track that expenditure.

And so, that's the practical element of really minimising as much as you, you know, spending less than you earn and hopefully spending a lot less than you earn so that you can invest the difference. And as that Vanguard example, the $500 a month since 1990, as that demonstrates, that if we can find a surplus every single month and invest that surplus wisely every single month, We know over the long run that's going to generate significant wealth, and that's really key. The second element to borrowing capacity is then what lenders will look at and lenders calculate, and that will vary depending on lenders, depending on your circumstance. And that's the sort of stuff that you should be engaging with your experts, your mortgage broker, that's going to help you be able to sort of structure your finances and make financial decisions around maximizing. things like for example you know do you go and pay cash for a car or lease it those sorts of

decisions whilst um let's put aside the financial impact of of that whether it's wise to do that just from a borrowing capacity perspective those two things could have a significant difference on whether you can buy that next property or not and so that's the sort of stuff that your mortgage broker and mortgage advisor can help you with yeah love it love it so you've covered often a couple where but if we and again the listeners may not realize that uh because we look at this all the time through our finance breaking arm and there's you know on average about a 55 variation across the lenders in terms of how much they'll let you borrow based on exactly the same financial position and i often say to clients that don't focus on rate because there's

no point getting a really good rate if you if you can't borrow enough to do what you need to do if you focus on the on the capacity and then understand that you deliver it in such a way that it's actually going to give you the money that's going to allow you to build your portfolio making sure it's affordable of course but then it opens up a world of opportunity and you know in the last 12 months Stuart you'd probably have the same situation I had a client 12 months ago a bit over 12 months ago who was thinking about getting another property and at that stage he could borrow an extra million dollars and it took him a bit shy of 12 months before he was ready to do and he came back and said right i'm ready to go i want that million bucks and we said i've got some bad

news for you you can't borrow another cent because the the dynamics of the changing policy that's occurred over that time not just with the bank they're with but with the others meant that he's he's out of the game so what are some of the other other key uh ways that um potential investors can maximise their borrowing capacity? Well, interest rate, I think the way you're on that topic, Bushy, is a really good one because I think we're taught at a very young age the interest rate is actually important. I think we're taught from a lot of the advertising and the articles that are written in newspapers, it seems to be that the best way you go and choose a mortgage is on interest rate. But I don't think I've ever really worried about

interest rate so much. It sounds kind of perverse from someone that started a mortgage broken business almost 20 years ago. But I would much prefer to pay half a percent more or even a percent more if that's going to extend my borrowing capacity because I know I can put it to work and I can more than make up for, you know, that which is what is a relatively small differential in cost. And if you think about it today, when interest rates are between two and three percent or sometimes even below two percent now, what are we talking about? I mean, we're starting comparing interest rates when they're 2%. Who cares what the interest rate is? Just give me the money and let me put it to work. So, I think that's a really important point is that maximising

your borrowing capacity will make you a hell of a lot more money than trying to save half a percent on an interest rate and finding the cheapest lender. And plus also, you can use different lenders at different stages as well. So depending on how their assessments work and in particular how they look at what they call external debt and whether they take it at a sort of repayment amount or whether they add the interest rate buffer and whether they look at interest only or whether they assume principal interest repayments starts to get a bit technical and that's why you really do need a good quality mortgage broker that can sit down and develop a financing strategy for you. And so for example, I'm working with a client and we know we need to,

we want to buy two properties, we might say, let's use lender A first because they have a lower borrowing capacity. And then lender B second, because we know they've got a higher borrowing capacity and the way that they're going to treat the debt that was already at lender A is differently to what lender A would do. And so, by using, by having a strategy and thinking these things out as much as you can, I mean, things always change, not only in personal circumstances, but lenders. But thinking these things out allows you to plan these things, knowing that you can use those different lenders. And of course, you know, going direct to lender A, they're never going to say, well, lender B is going to lend you more money. And that's why having someone that can

compare those things and understands the idiosyncrasies between the lenders and the different credit policies is certainly in your best interest. Yeah, absolutely agree. Brilliant. And another area that I, again, we're in concert with your thoughts around is the need from a risk management perspective, but also from a flexibility and capacity perspective to think about using potentially multiple lenders across properties. Can you expand on that subject a little bit for the listeners? Yeah, sure. Look, I mean, I often get asked, should I be spending my lending across multiple lenders? I'm not really sure that there's a, I mean, sometimes there's a necessity to do that because you're trying to maximise borrowing

capacity. And by not doing that limits your ability. So, for example, if one person stayed at CBA and only CBA, they can't afford to buy another property. Whereas if we spread their debt across a couple of different lenders, they can. In that situation, it's a no-brainer. It's far more important to execute the strategy than it is to remain loyal to CBA. So, of course, then you would go and diversify. I think that if you've got a business, so you've got a trading business, I would almost counsel everyone to have their personal and investment lending with a separate institution and just creating sort of Chinese walls between the two, controlling the information flow is valuable. For example, if you have a trading business and COVID hits, for example, or

something occurs that creates a cash flow shortage, even if it might be planned, it might be a planned business restructure and you go and apply to change your personal investment loans, the bank can very easily dial that up and see what's going on. And they will. They'll have a look at your trading account and see how things are going. And that will naturally then invite a whole bunch of questions. Whereas if you're with a different bank, you've got control over the information that you supply. Not to say that you can not supply the information, but at least you can give them the correct commentary that underpins that so it doesn't look as bad as it might seem. So if you've got business, if you're in business, it's a trading business, I'd certainly

keep those separate. But apart from that, it really depends on circumstances. I have some clients where they have all the debt and a significant amount of debt with one lender and it's working absolutely fine. But then I have some other clients that I just won't do that for. And it really just depends about your future plans, your future goals, whether you need to access equity and borrowing capacity, the strength of the borrower, the type of lender, all these sorts of things come into play. But at the end of the day, the way I look at it is I say that's the mortgage broker's problem. I've got my goals. I've got my investment strategy. I know how I want to execute it. They're the experts. They're the ones that are dealing with banks five, six

days a week. Let them tell me what I need to do. And again, I eat my own cooking. I have a mortgage broker. Even though we run a mortgage broking business, I have a guy separate outside of my business, partly for privacy, but mostly because I've got better things to do with my time. Even I've written a book about it, I still outsource it because I want someone that's a specialist in that area looking after my loans. Yeah, that's very good. I guess just on the same subject around multiple lenders, we've sort of shifted over time, Stuart, given some client activity we've seen. So we've always been very strong advocates of having standalone structures. So each property has a standalone loan to avoid the cross-securitisation risks

that go with it. And for a long time, we were doing that with one lender. But we have seen clients in, particularly in the last few years, and a quick example, a client from Perth came to see us who had a home in Perth, had an investment property, unfortunately, in a mining town, and while it was with one of the major banks, I won't name who it is, and each of those loans were standalone, but when she went to sell her home in Perth, the bank still triggered a valuation on that second property, even though it was standalone, and because it was in a mining town, effectively the value was less than the value of the loan, so the bank actually wouldn't allow her to sell the property

because of the exposure that would then create. So we've now moved to a situation where the home has got all the bells and whistles on it, is with one lender, and the rest of the investment portfolio can be with a separate lender under a standalone exercise. But from a risk protection perspective, we've found it's just prudent now to even avoid that possibility

by creating that extra layer of separation. yeah i've heard some um pretty ordinary stories over the the time as well and the banks used to have i'm sure they still do in their contracts what's called all monies clauses which means they can consolidate accounts if the um if the holders of those accounts are the same um and so you're right and i imagine that's what they're relying upon in order to do that to sort of consolidate those accounts and control it um you know the other thing too is that around GFC they were talking about, and it happened a little bit, I guess, during the pandemic,

that they were talking about sort of reducing redraw and, you know, having those sorts of controls as well. And ME Bank, that's right, ME Bank did that when the pandemic happened. I don't know if you saw that in the paper. I did. And they made those decisions around redraw. So having all your eggs in one basket can be risky. It's not for everyone.

and it really, really does depend. But I acknowledge that. I acknowledge that and sometimes it's good to spread your lending. I think diversification as a strategy in almost every respect when it comes to financial services makes sense. Yeah, I absolutely agree. Okay, something on a related topic I'd like to dig into a bit too if we could is around the different approaches to ownership

and particularly related to the lending view of that now. because, and again, we've seen a lot of cases where an accountant is, for a bunch of reasons, very keen on doing property ownership under a trust or a corporate trustee in a trust. But in the current environment, that's becoming very challenging for lenders because the lender's appetite for anything that's outside of the vanilla has evaporated, particularly since COVID. What are some of the key considerations and impacts of different forms of ownership that you've seen from an accounting and a mortgage-breaking perspective in terms of its impact on buying and borrowing capacity, for that matter?

I think what you're touching on there is holistic advice and taking a holistic approach, that the right hand must know what the left hand is doing. And isolation for an account to sit down and say, well, we think this is the best ownership structure is one thing, but then it needs to be practical. Can we implement it from a lender perspective? What are the cash flow outcomes and how does it impact on borrowing capacity, that particular

structure? Does it help it or does it retard our ability to continue to implement our investment strategy? So you either need to get everyone on the same page, you know, so you need to be dealing with an accountant and mortgage broker that interact regularly and understand what each other's doing and then understands your circumstances, or you need to use a holistic firm that can sort of bring that approach. But in terms of factors that I tend to think about, I tend to think about the tax consequences of the ownership structure.

So, not only is, you know, obviously one is negative gearing. Can we utilize the negative gearing benefit, which I must admit, based on current interest rates, is worth a whole lot less than what it used to be at sort of more normalized interest rates, but it's still there. Then you've got to think about, well, one day the property is going to generate a cash flow profit, an income profit. obviously over time if I hold it long enough.

So, how's that going to work, particularly in retirement? Capital gains tax, if we go and sell the property one day and we're buying a quality asset and we hold it for long term, the capital gains is going to be significant, sometimes a lot more significant than the income characteristics of a property. And then land tax and then borrowing capacity is the kind of the last element to overlay. Land tax is an interesting one

And we don't necessarily want to go and structure investments purely just to optimise one particular tax outcome. That would be a mistake, but it's one of many considerations. But the problem with land tax is that it's a bit insidious. You might first go and acquire a property and not pay any land tax, and you might not pay any land tax for the first few years. But if you buy it, bought well, and it's a high land value property, the land tax will start to accumulate in terms of liability over time. And it will probably be more considerable when you get into retirement, when really you want to be minimizing your expenses, not having a situation where it maximizes it. So, having that forethought and really thinking that longer term, dare I say it, playing that longer game and understanding, balancing out, you know, what's going to help or balance out my taxation outcomes in the shorter term, but also how does that work in the longer term? It's important to balance these things out.

whereas accountants typically they're quite they tend to be short more short-sighted they don't tend to think out very long term and that's and that's a that's a problem or a challenge that I guess people need to be aware of you know they spend most of their time looking at historic information preparing last year's tax return preparing financial statements for the last six months and so forth they spend more of their time looking backwards than looking forwards Whereas a financial planner, I'm much more interested on what's going to happen for the next 10, 20, 30 years. And so it's more forward-looking.

So you really need to bring those different elements. In terms of a trust, I typically like to have shares in a trust and property and personal names. That tends to work better from an income tax perspective and a land tax perspective. But that would be just as a generic comment. Of course, it's going to be different for different people. But one of the downsides to putting property in a trust,

there's two downsides, is the negative gearing is trapped and they tend to attract higher rates of land tax, particularly in Victoria, but particularly in New South Wales as well. New South Wales is a killer for property in a trust. Absolutely. Dead right. And that's where that holistic approach is really key. And if there's one thing I implore the listeners to do

is make sure that you get the heads together of an accountant, a financial planner, and a finance broker to make sure that collectively they are operating on your long-term strategy, not just looking at their particular patch. Now, that's brilliant, mate. So jumping into the second part of the bare facts exercise, the equity component, and given the importance of equity to purchase power as well, how can investors maximise their valuations? Being strategic, I think, is the key here. Understanding how valuations work and how they're performed and what data is really going to produce a better outcome. And then also understanding that different banks, which means we'll use different valuers and different valuers

will have different opinions, sometimes significantly different opinions. I remember I got a valuation of one of my properties. One came in at 1.1, I think. One came in at 1.5. That's a massive difference, not only in dollar terms, but in percentage terms of valuing the same asset in the same market at the same time. So, the first one would be track your comparable sales. Understand what's going on in the marketplace. If you get two or three really good sales of very comparable properties that suggest that the value of your property is higher, great time to go to the bank and get the bank to revalue it and increase your LVR to 80%. So, lock in that equity. And I would say you should do that proactively,

even if you have absolutely no plans for the use for that equity, much like my example where I was trying to restructure with Westpac and refinance to ANZ. I had no intention to buy a property this year. It worked out. I mean, it was on the radar for a certain period of time, but certainly I didn't expect it was going to happen this year. So being proactive, following the market, and then as you've alluded to, if you don't cross-securitise loans, it means that you can revalue different properties at different times. And that's the other misnomer is that it's silly

or sometimes quite often unnecessary or inefficient to revalue all your assets all at the very same time. There's obviously the property market has different So, geographical regions, different segments and sub-markets within that that are behaving differently at different times. So, you're much better off then to make sure your loans are structured in a way that allows you to revalue different properties at different times and then proactively lock in that equity. The second element to that is understand that different banks, which I should really mean different valuers, will have different opinions at different times. So, just because you send a bank value out and they come back with a valuation that you think is low, don't necessarily take that on face value.

Do your research, understand whether that's realistic. You know, if there's no comparable sales or very few comparable sales, then it is what it is. But if you still think that the valuation is undercooked, sometimes going out and getting a second valuation can mean the difference between having enough equity to buy another property versus not. and then sometimes that might mean switching banks. But as we've learned or talked about,

that's just kind of the rules of the game to get your way around the board. Sometimes you've got to switch just because you're getting a higher valuation in a different bank, which I have done many times myself personally. And again, you play the game just in order to advance your own financial plan.

I think you make a very good point there and you sort of mentioned it earlier in our discussion that a no isn't a no, it's just a no from that bank or from that valuer. It just means, okay, well, we need to keep looking. And we've had a recent example, Stuart, which I'd love to share as well, where we had, quite by coincidence, we had two investors secure properties very close together in the same suburb. And one valuation came in, and very similar property profiles,

not exactly the same property obviously but very similar that there wasn't a you know meaningful distinction in terms of the quality of the of the property uh one came in eighty thousand dollars short of the other and interestingly enough it was actually with this very same valuer and uh the only difference was valuation one was through bank a where there was no mortgage insurance the other purchaser was in mortgage insurance territory through another bank and and what's become evident and again this is a lesson for the the listeners is that the brief from the bank will potentially influence the valuation that's that's actually produced because again the bank's operating within its own risk parameters and valuations can

at some time has been used as a volume switch in terms of their appetite for certain loans. So we actually queried the value on that exercise and while they couldn't go into the details, it was like, well, different bank, different rules. So understanding the intricacy of the rules, and your point's a good one, getting a savvy mortgage broker

who understands those levels of intricacies and therefore can place an opportunity with you with the right bank and the right value to get the result is really the key. Yeah, yeah. And you've got to think, you know, long term and the compounding nature of growth, what's the difference between getting yourself in a position where you're able to execute and buy an investment property today versus spend the next two years building that equity or sufficient amount of equity in order to do it that time? You know, the compounding nature of growth, it makes a big impact in the longer term, I should say, which isn't to say that we should rush in tomorrow and implement all our strategies. But we need to be more proactive, I think, in driving that bus, driving our strategy forward rather than necessarily letting lenders tell us when we're able to move or not.

Yeah, very good exercise there. Now, sort of moving and sort of bringing the discussion to a close around this, given I think we could talk for days on this subject. But one of the key things that I think is important for investors and property owners of any area to contemplate, and you talk about this in the book as well, what are the best strategies to reduce and start repaying debt? uh really cash flow management is the is the key again here and it's really about allocation of surplus um surplus cash flow and working out when is the right time to start reducing debt when is the right time to start to really continue to build your asset base so i think if um if your asset base is small then your your goal really is to um make decisions today that in 10 or 20 years time your asset base, so your net asset value is going to be significantly improved as a result of

those decisions that you make. That's your single focus. But you'll get to a time where you have accumulated substantial assets. And as long as they are quality assets, they will perform in the long run. So then the next strategy is then to think about debt management and debt reduction. And you can really do that in a couple of different ways. You can rely upon cash flow. So, just gradually build up cash in offset accounts to notionally reduce debt and therefore reduce your interest rate exposure and interest rate sensitivity. You can acquire assets with a view to divesting of those assets as a way of retiring debt or repaying debt. So, you might, for example, go and buy three properties with a view to selling one in 15 or 20 years' time to repay all the debt. You can take money out of super, so that is you might concentrate on contributing as much

as you can into super with a view to building the balance at a much higher level than it otherwise would have been without the additional contributions and then using that increase to reduce debt. There's a few different strategies that you can utilize in order to repay debt and you might use a combination of all those strategies and that's what the key would be, I would think, is that typically I want to have two or three different strategies that I'm relying upon in order to get rid of debt, or at least get it to a level that is no longer a concern. You know, if you have $10 million of property and $1 million of debt, most people are going to be comfortable

to move into retirement. $1 million is a lot of money, but $10 million is a lot of property assets as well, and it'll be positive cash flow. We don't really need to worry about it too much. so you want to take you should be happy to take some debt into retirement but just not too much and you really want a multi-pronged approach or at least more three three or four different strategies you can utilize just in case if your strategy is using cash flow and it doesn't come off for whatever reason because of changing circumstances at least you've got plan b and plan c in order to implement but it's really again that long-term approach and really taking that holistic approach in order to make sure that you've got a satisfactory answer to that question

of how you are going to reduce debt. And I guess it does do to some extent highlight the holistic nature or integrated nature of different assets and ownership structures, like how does super then integrate with my property strategy? If I'm investing in shares, how does that integrate with my property strategy? You need to take that holistic approach because you can even out the pros and cons of those different asset classes and different ownership structures at a sort of portfolio or client level, if you like. Yeah, I love it. I love it. Final question that sort of teases together the aspects of what we've been talking around the borrowings. And I'd love your opinion on it because the sand's shifting a little bit here. But because

we're now in an environment where the lending costs and the policy treatments are quite different between owner-occupiers and investors. Is this impacting at all on investment strategy options that you're considering for clients? As an example, in days gone by, we've always focused on if they've got a home, use some of the equity to start building a portfolio because there were some benefits in doing that from a number of sectors. But with where things are at now with lending and that quite significant differential between how an owner-occupier is treated and an investor is treated,

we're sort of almost bridging a gap and creating a new investment strategy to some degree where for some investors it may be worth securing a higher quality owner-occupied asset with an investment mindset that may actually get them further down the track than a lesser quality home and a lesser quality investment property. What are your thoughts around that? Yeah, look, I definitely agree with that

and mostly because of the interest rate outlook but less so because of the differential between owner-occupier and investment debt interest rates. Typically, I typically always try to counsel my clients, If it's possible, go and buy yourself an investment-grade property and then occupy it. So, take an investment lens to your home buying decision that is by something that's going to maximise growth. And typically, it's easy to tick both those boxes because by definition, an investment-grade asset should be in a very liveable suburb that has wide appeal.

So, it's a relatively easy thing to do. But I think even more so given where interest rates are at today. I mean, let's just say that, well, the RBA has been pretty clear they're not going to increase interest rates for at least three years, but it's conceivable that they won't do increase interest rates, or at least not significantly for maybe much longer periods of time. If we look at Japan, they've been stuck on zero interest rates for 20 plus years. So, we know that once, and we also know that government indebtedness is a lot higher as well. So, the economy can't and the government can't necessarily stomach much higher interest rates as well. So, it's quite possible, although I don't want to be

lured into this false sense of reality, but it's quite possible that interest rates will be much lower for a much longer period of time. And that just means that the financial impact of carrying high levels of non-deductible debt are significantly less than what they were when interest rates were 6% or 7%. At 6% or 7%, a million-dollar home loan is a problem. It's a problem from a cash flow perspective because the interest will eat up most of the surplus cash flow, not leaving us much ability to be able to reduce debt. But when the interest rate's at 2%, then the interest cost of that million-dollar loan is now only $20,000. We've still got capacity to be able to reduce debt. So, having a higher non-deductible home loan today in order to increase the quality of the asset that we're going to occupy, I was going to say invest in, but really occupying, I think is a very, very good strategy because interest rates are low, because the capital gain will be tax-free.

And then there's some obvious lifestyle positive side effects to that as well. you're in a better area, better location, larger house, you know, quieter street, whatever it might be. But I think that's a really good strategy and something I've been helping probably more clients with over the last couple of years than, say, 10 years ago. It's still important not to be single point sensitive. So, the strategy should be certainly upgrade the home, buy a really good quality investment grade asset. But then after that, you know, you still need to build wealth outside of the family home. So you can't put all your eggs in one basket. But as a strategy and a priority, I'd be more comfortable or happier to sort of push the envelope and level

up in terms of quality, in terms of the family home today more than I was maybe five or 10 years ago. Yeah, excellent. Final question before we jump into the ambush round. Given that we've we're sort of at the time of this episode where we're sort of still emerging from the impact of the contagion and the pandemic and given that there's some very varied views on what's likely to be happening particularly in the property front that varies by location and by commentator in in the current climate if you were someone who's in their 30s to 40s that own their own home and let's say they've got a residue home loan, they've got a couple of hundred grand's worth of available equity and some money sitting in offsets, what would you be

doing with your money now? And this is not financial advice, I've got to qualify. Yeah, yeah. I'd be borrowing money and buying an investment grade asset, the highest quality asset that I could buy and I'd be taking advantage of the fact that interest rates are low and that'll do two things. That'll mean that my affordability or borrowing capacity should be expended, at least extended, I should say, at least from a practical perspective. Buying, investing in property today costs you very little in terms of cash flow, particularly if you compare to situations where

interest rates were 8%, 9%. And then also, we know that low interest rates will eventually stimulate asset prices. That means that low interest rates will contribute towards higher property values. So, it's almost a double-edged sword. It's higher growth for less cash flow cost and so it's almost a perfect storm to allow you to do that. So, assuming that that's in your appetite, that makes sense from a strategy perspective, that's what I'd be focusing on. I think the pandemic and what's occurred in Australia will only make it a more desirable location to immigrate to. And remember, I'm not taking a two-year view here. I'm really looking in a sort of 10-year view and maybe beyond that,

that immigration over the next 20 years will probably, at least from a demand level, far exceed the previous 20 years and we know that population growth creates that supply-demand pressure in regards to property prices. So I'm optimistic, very optimistic of investment-grade locations. Now, there's going to be some property markets or segments in Australia that are going to struggle. I mean, student accommodations probably really struggling right now.

Areas that are dominated by a sort of lower socioeconomic sort of sector or cohort, they're going to struggle because really the virus has impacted lower income earners to a much greater extent than higher income earners, unfortunately, and its impact has been patchy. So it's not to say that all property will rise, but good quality investment grade property that's sound, fundamental, has a proven track record to provide strong capital growth, those assets will do well. I think they'll do particularly well because of COVID and also because of low interest rates. Yeah, very well said. I think COVID's actually been an accelerator and a volume switch. So good property, high demand, limited supply property will do well moving forward. It's actually brought the exercise forward and poor property will actually do worse for exactly the same reasons. Yes.

So I think there's a great window of opportunity, despite what the mainstream media still wants to peddle and scare us with. The fundamentals are in a very good position. And you make a very good point. Australia is the envy of the world in terms of not only how we've handled the pandemic, but economically the position that we're in. and if you look back to the Spanish flu and the world wars in the past we became a safe mecca for people to migrate to I have no doubt that exactly the same will happen once once they lift the border restrictions and people are allowed to come in then the floodgates will be open so pretty exciting times I think Stuart mate been an awesome discussion I only really scratched the

surface so I'm really looking forward to getting you back to sort of dig a bit deeper into some of subjects that are near and dear to both of our hearts but uh being mindful of your time i want to jump into what i call the the ambush round where there's quick five questions that the listeners always want to um glean your words of wisdom on and the first of those is what's your favorite quote and why uh my favorite quote is hold strong opinions loosely um and the reason why is because I think you should have conviction with your beliefs, but not be so arrogant to believe that they're continually correct. So, be open to different ways of doing things and the fact that you might be wrong, but also still have strong conviction in what you believe.

I think it has great application when it comes to investing, but it also has good application really across the board in all matters of life, I think. Love it. That's great. I've never heard that one. Yeah, that's a beauty, actually. Now, as a multiple author, apart from your own books, what's the top book that you'd recommend people read and why?

Oh, look, there's so many, but really I think Jim Collins' Good to Great was a book that has resonated with me for many years and isn't particularly – I mean, it has some investment application, i guess but mostly it's about business and what makes great business um business is great i should say i mean it's a good um demonstration of sort of playing the long game and short-term profit doesn't drive long-term value which is a quote by howard schultz who who built starbucks by the way which is probably my second favorite quote but yeah good to great jim collins yeah absolutely great and it does have a placability there's no doubt and i love the way the hedgehog concept and

all of those things that he talks about in that book can be applied to investment and other realms so uh yep really good value now this one's a little bit left field but for you it's probably right up your alley yeah because a lot of australians believe that they pay too much tax what's the top legal thing that you've done to minimize the tax that you pay stewart uh structure of business and structure of investments i know we sort of uh we sort of touched on it but making sure that you get some really good structural advice. Good quality professional advice is never expensive in my view. And that's easy to say, but again, I eat my own cooking. I have paid tax experts significant amounts and I've paid lawyers significant amounts for good quality

professional advice. And it's always cheap because the value of that advice is always more, if it's good quality advice, always more than it costs you. And the ability to sort of restructure business, restructure your investments to create better tax outcomes has saved me substantial amounts of money. So easily getting good tax advice. Yeah, it's not what it costs, it's what the value is. And if you're spending thousands to get tens of thousands, then that's still a no-brainer in my view. Yeah, love that. Now, back on the investment subject, what's both the worst and the best place for investment advice that you've ever received? Okay, so the worst advice was I was almost dragged into,

in the very, very early days, it would have been 2002, into potentially buying an investment property off a guy called Henry Kay. Cool. And I don't know, people that have been around for a while will remember he was a property spruiker. I think he got ran out of town. I'm not even sure he's in Australia anymore but he's a complete nutter criminal without a doubt and it didn't pass the smell test for me and I was just, you know, I don't know if it was

really how astute I was at the time or whether it was just dumb luck but I decided not to go ahead. It just didn't, it didn't feel right to me and so that was probably the worst advice although I never acted upon it. But I sort of dodged that bullet. The best advice I got, which seemed almost very flagrant at the time, but Richard Wakeland, who started a business called Wakeland Property Advisory, which is a buyer's agent business here in Melbourne, said to me, Stuart, the price you pay for a property doesn't matter. It's buying the right property that does. And he said that to me just before he was going to act on my behalf at auction to buy a property. I thought, okay, well, it's easy if you're not spending your own money,

isn't it? But it's true, right? Overpaying $10,000 or $20,000, $50,000 for the right asset, if you're going to keep it for 30 years, you never. It's inconsequential. And I know it sounds really flagrant. Of course, no one wants to overpay mostly because of ego. But certainly, from a financial perspective it makes no difference the price you pay if you overpay for the right asset or the right property and hold it for long term no problem yeah i love that and that's a really good perspective it's all about the the timeline because if you're spending 20 grand but that's going to give you an extra uh 200 300 400 500 grand in 20 30 years time then it it changes perspective on what that overpay is because it isn't so yeah no that's that's that's awesome

and it's something that i don't think a lot of people think enough about now it's like um it's like someone trying to sell your pink diamond 20 years ago and you've overpaid for that pink diamond so rare it's so scarce it's so highly desirable that um any any amount you've overpaid will just mean you'll see no growth for maybe one year or something like that but then you've still got the other 19 years of fantastic growth and to get access to the pink diamond because it is rare sometimes you have to overpay you know you'll pay a premium going in and you'll get that premium going out um and so sometimes being too analytical so i always said sort of our property's part art part science sometimes being too analytical about it doesn't isn't in your best interest

yeah very well said mate uh coming back to yourself as a person then what what's a rewarding ritual or a happy habit that you've developed that you think contributes most to your investment success today? Delayed gratification. Playing the long game again, not really worrying about the outcomes over the next one to two years. Always coming back to the decision, the question I should say is, what can I do today that's going to create value over 10 plus years? Always coming back to that question, whether it's in my personal life, whether it's in business, whether it's with my investing. That's what I'm focused on. And that's why I didn't buy afterpay. And now when it's trading at $100, it looks like a stupid decision. But let's have the conversation in 10 years' time

and the investments that I did make. I put some monies into a couple of commercial property acquisitions this year. One was a distress sale around COVID. So, let's look back in 10 years to see what those decisions were like, where's afterpay in 10 years' time versus with those investments. I don't know, but I'm probably more confident that my investments will do well. Very well said. Excellent. Now, final question, mate, and it's a big one. If I gave you a microphone that spoke to every single one of the 7.7 billion people that are currently alive in the world, and I gave you one minute to talk, what would you say? Something by now that's very boring which is um sow the seeds and play the long game again one thing that i really i mean

my wife and i love to travel to france and one thing i think the french do incredibly well is they play the long game and so anyone that knows anything about the wine industry in in france they have um very tight controls over the the labeling of wine and then how it's produced and they control producers that in certain areas they can only grow certain grape varieties, they can only have a certain yield per hectare and so forth. And it's very codified, but it's all about playing the long game. It's all about building a brand, building a value,

and therefore these what are small farmers can go and attend to their land and make reasonable profits in order to afford them a very luxurious lifestyle, a very low stress lifestyle. And it's because the six or seven or 10 or 20 generations before them have done exactly the same thing. And I think that if we can apply the same approach, particularly when we're voting for politicians and get them thinking beyond a four-year term and really sowing the seeds to build Australia to be a fantastically valuable country i think we've got a tremendous opportunity to do that and so if we all start adopting and playing that long game i think not only do we get to to reap some of the benefits initially but then

we leave uh benefits for future generations as well very nicely said mate uh really enjoyed our chat today and this is going to be the first of many i'm sure so i really appreciate you being so generous with your time uh before we close off uh what's next for yourself and pro solutions and how can listeners uh find out more and get in touch with you if they want to uh more of the same i hope to spend more of my time writing and uh doing podcasts and blogging and those sorts of things so sharing more information uh and i write a weekly podcast So if you just Google ProSolution, which is P-R-O-N solution, ProSolution blog, it'll come up with a subscribe link for you and you can certainly subscribe to that. And all that also includes links to my weekly podcast, which is the same content as well.

So hopefully people can stay in touch that way and I can share some ideas or strategies or tips along the way. Everyone wins. Terrific, mate. Well, thanks again. Looking forward to this being the start of some great conversations. I really enjoy the learnings that I've picked up from you personally, but also the tremendous value that you're bringing to Australia generally, mate. So thanks for your time, and we look forward to talking to you again soon. Thanks, Bushy. The pleasure's all mine.

Thanks, Stuart. Well, Freedom Fighters, how good was that? To get a summary of all this investment gold in the show notes, just email me on hello at khgroup.com.au it's h-e-l-l-o at khgroup.com.au or check us out at www.bussymartin.com.au forward slash get invested i look forward to joining you next week for another episode of the get invested podcast so thanks for listening and as always dream as if you live forever and live as if you die tomorrow Thank you.