Property Hub - Investment Insights & Inspiration - Realty Talk: Low Pain and High Gain + New Funding Options + ‘Other Fish’ Strategy

Episode Date: November 6, 2021

RealtyTalk is your trusted voice in property investment and Australia’s most popular online property show.  Founded by Kevin Turner and hosted by property expert Bushy Martin, RealtyTalk brings you exclusive interviews with Australia’s property industry leaders who deliver the latest, red hot property investing news and insights.  Subscribe now to get the latest episodes delivered to your inbox three times a week. RealtyTalk is brought to you by Realty, Australia’s leading search and social property distribution platform that helps investors like you beat the crowd, giving you the earliest access to property opportunities, listings, and insights. Check out Realty. RealtyTalk is hosted by top property investment expert, author, and founder of KnowHow Property, Bushy Martin. Find out how Bushy’s KnowHow team helps investors unlock freedom with finance and property here, and check out Bushy’s podcast Get Invested.  RealtyTalk is supported by BMT helping property investors save thousands of dollars each year by maximizing tax deductions from investment properties. Find out more.See omnystudio.com/listener for privacy information.

Welcome to Realty Talk, the show that brings together the country's most authoritative and respected property experts. Follow us on all the socials and subscribe for updates and exclusive offers. Realty Talk is powered by realty.com.au, connecting buyers, sellers and agents differently. Hi, and welcome to this week's Realty Talk show, your go-to place for all things property. I'm Bushy Martin from KnowHow Property Finance, and we've got lots of property gold to share with you again this week. We kick off with a great chat with Realty Talk favourite Eliza Owen from CoreLogic who dives into the details of the latest pain and gain report and what it means for

you as property sellers around the country in the current climate. We then continue our engaging discussion with Godfrey Dinh from Future Rent in the concluding part of our two-part special where he reveals the benefits of his innovative alternative to property funding that doesn't involve the banks. And to close out the show, I conclude our special series on the art of negotiation, where I reveal the benefits of adopting the other fish in the sea strategy. That'll keep you guessing. As usual, we've got a lot of great insights to share. So let's get underway. Hi, and welcome. Now, since the small downswing in residential real estate following the initial impact of COVID-19, the country's seen an extraordinary recovery and rise in housing

values. But what impact is this having on property sellers in recent quarters? Well, to quantify this, we're joined again by Eliza Rowan, Head of Residential Research at CoreLogic, who have recently released their latest pain and gain report. Welcome back to the show, Eliza. Thanks for having me again. Yeah Eliza, what are the key observations and insights that are emerging from the recent pain and gain report? Yeah so the pain and gain report is analysing resales through the June quarter. We observed about 106,000 resales which is worth noting is an uplift from the March quarter certainly through the first half of 2021 we saw some very strong turnover and transaction activity

So that's all the more data for us to play with. What's interesting is that we've seen that uplift of sales volumes and an increase in profitability through the three months to June. So the rate of profit making sales was up to 91% from the June quarter. And that is up from 90.6% in the three months to March. So many, many resellers of property making those nominal gains. And I think what's interesting about the June quarter was that for those who had held their property for, you know, up to two years had made a median nominal gain of $123,000. Wow.

So for just that short hold period, you've got this massive return, and that's just a reflection of the strength and momentum that's been held in the property market. We've definitely seen, similar to previous pain and gain analysis reports, a much higher rate of profitability in the house segment as opposed to units, and owner-occupier sales also had a much higher incidence of profitability as well. Yeah, interesting. So where are the highest instances of profitability occurring and what's your thoughts on why? So generally, it is across regional Victoria. We've seen 98.7% of sales across regional Victoria enjoy this kind of nominal gain from resales in the June quarter. Digging a little deeper into that, tree change areas like Ballarat, for example, had over

99% of sales make a profit in the June quarter. And these are the highest rates on record for regional Victoria and for pockets of the market as well. I think it does reflect some of the demand trends that we've seen through COVID-19, where there has been that kind of preference for lifestyle markets, certainly an uplift in migration from Melbourne to regional Victoria in particular. And I think that it's, yeah, just broadly that kind of reflection of more owner-occupier purchases, keeping the house segment profitability very high, and that the kinds of properties that are popular with owner-occupiers are the ones that are really seeing that high level of profitability cemented over the quarter.

Yeah, okay. So on the flip side of that, are there any pockets of risk or high concentrations of nominal loss that you're seeing? And if so, where, roughly by how much? And again, your thoughts on why that might be the case? Yeah, so again, it's kind of consistent with what we've seen in previous quarters. The highest rates of loss tend to be concentrated in resource-based markets like Perth and Darwin. But what's interesting is that even in Perth and Darwin, because of the broad-based nature

of the current housing market upswing, the rate of loss-making sales has been declining substantially quarter after quarter. The highest rates of loss-making sales by LGA were concentrated in the Perth city LGA. So about 64% of resales made a loss. In Darwin's LGA, it was 39%. And the the other big one is Melbourne City LGA. So about 35% of resales making a nominal loss there as well. This is largely tied to a high concentration of investor-owned units where that kind of big investor cycle that we saw through 2012 to 2019 has created an overhang of supply and then coupled with subdued rental market performance with the closure of international borders that really hitting inner city markets that sort of created some ongoing stagnation in prices as well which

is why we're seeing those high rates of loss making sales yeah okay that makes perfect sense so the the big question on everyone's lips eliza is how is profitability expected to trend in coming quarters as you see it now? So what's really interesting is that the rate of profit making sales pretty much just follows capital growth patterns. We know that at the moment capital growth is still positive, but the rate at which property values are increasing is starting to slow. We're seeing the same thing in the rate of profit making sales. It's up to 91.5% in the quarter. So it's a 90 base increase, but in previous quarters, the increase has been even more rapid, you know, 150 basis points a quarter. So I think that's what we can expect going forward

that the profit making sales ratio is probably going to keep increasing, but just at a slower and slower rate until we start to see that turn in the market, whether it comes from change in lending conditions or you know affordability or whatever it's just I think going to peter out a little bit. Yeah okay and now you've touched on this a little bit but I'd like to expand on both of these the comparison between the performance of houses versus units and the owner ox versus the investors can you sort of just sort of broaden that discussion out a little bit for us? Yeah. So there's quite a significant gap between the profitability in houses and units. So of the unit resales in the quarter, over 15% made a loss, 15.3% made a loss.

It was just 5.6% across the house segment. So the likelihood is almost three times as high of making a loss-making sale across the unit segment. If we look at the same data for owner-occupiers and investors, we can see that profit-making sales across the owner-occupier segment was 93.9% in the quarter compared to just 87.7% in the investor segment. So it's worth noting as well that both segments are improving and this is the same with houses and units. profitability is rising across both cohorts both property types but it just is inherently

we see a higher rate of profitability in owner-occupied properties and in houses yeah and that sort of makes common sense i guess and in one respect to given firstly that owner-occupied properties are likely to be held longer potentially and the sorts of properties that have owner occupier appeal are more likely to command higher prices than some of the investment grade properties so that's it's pretty logical i guess so again you've touched on some of this already just to wrap things up are there any potential headwinds that you're seeing that may slow or reverse the housing market growth as we move forward i think the big one is going to be or the one that seems most real and present would be a change to credit conditions just in the past

couple of weeks we've heard from the council of financial regulators that they're keeping a very close eye on debt growth in housing debt earlier this year governor low also flagged that the trigger for macro prudential changes would be where you had credit growth outstripping income growth. And we have in fact seen housing credit grow about 5.6% in the year to June compared to income growth of 1.6% in the same period. Sorry, I don't know if you can hear any extra guests in the background. Kids next door. So the credit conditions at the moment are not necessarily sustainable where you have debt outstripping income, basically. So Governor Lowe flagged that that would probably be the trigger for macroprudential changes. And we know that that's

probably going to take the form of either limiting the amount of loans that go out with a high debt to income ratio, or it could be some increase to serviceability assessment and just making sure that there are those capital buffers and those repayment buffers there as well. and just just anecdotally by the way our finance breaking businesses are already seeing steps into that as we speak so there are a number of lenders who are taking a much harder line on debt to income ratios and and using the the magic six threshold as a as almost an auto decline if an application comes in above that and we're also starting to see an increased scrutiny on living expenses again so that sort of comes in and out but it was pretty hard and fast about

a bit over 12 months ago or pre-COVID loosened off a little bit we're starting to see much more scrutiny around living expenses so those sorts of measures are already starting to creep in on and impacting on borrowing capacities obviously. Yeah there you go and I think you know the Council of Financial Regulators and APRA did explicitly say earlier this year that banks should be proactive about it. You know, we've already seen CBA, for example, increase their serviceability assessment rate. So it's fair to say that that stuff can transmit into the lending space in a more subtle kind of gradual way. Certainly not the kind of harder line restriction that we saw in say 2017 around interest only lending. So it's really interesting that ultimately

any limitation on demand for credit is going to impact demand for housing, because that's how we buy housing with lots and lots of debt. So I think that's the main headwind. But then, of course, you've got affordability constraints, the potential for savings to be more depleted when we come out of lockdowns. And, you know, I think in the short term, housing demand is still very strong conditions still very positive for sellers but you know historically these kinds of upswings have always been followed by downswings so it's just a matter of what will trigger it when it will happen yeah i think the other thing that we haven't really taken into context yet is that when the international borders open up again yeah there's potentially going to be a second wave of immigrants

and it won't be an immediate impact it'll be a slow release exercise but uh i would have thought that that's going to potentially sustain some demand once once that occurs what's your read on that i think it's a really yeah it's a good point so my initial expectation is that when you get the reopening of international borders you'd probably see um some delay to to that having an impact on housing purchases just because people are typically renters when they first come to australia So I'd imagine those inner city rental markets to be more buoyed. I would have thought the high-end, you know, really high-end buyers were maybe already trying to get in to Australia. Maybe I'm just over-inflating our importance or the lifestyle appeal. um but yeah i think it it'll take a while for that demand to fully manifest um not least because you know there's still a lot of wages recovery that has to happen in other countries for for

that international travel to start happening again as well so um yeah it's it's hard to call but i'd say the initial impact would be a pretty swift uh uplift in in the rental space for those markets that have been suffering through COVID. Yeah, good call. Very good read. Well, as usual, some fantastic work there. Thanks, Eliza. I really enjoy your illuminating observations, and we really appreciate your time on the show today. Well, thanks again for having me. It's great to be here. Thanks, Eliza. Well, it certainly appears that we're in one of those rare times when the rising property tide is floating most ships. So if you're holding B-grade underperforming property now may actually be a good time to consider offloading it so that you can actually

free up your capacity and put it towards better performing properties. And if you want great data to support your decision making, reach out to CoreLogic. You're watching your trusted voice in property here at Realty Talk. Property deductions can save you thousands of dollars each year. To make sure you maximise deductions, you need to work with the most experienced quantity surveyor in the country. BMT Tax Depreciation is the leading specialist in the industry. They've completed over 700,000 tax deduction schedules for residential investment and commercial properties Australia-wide. BMT guarantee to find double your fee in the first full financial year deductions. Call BMT on 1300 728 726 today for an obligation free quote.

Greetings and welcome. Now, traditionally, one of the biggest challenges that many property investors face is the inability to grow their portfolio quickly due to the inability to access equity easily, fast and affordably. But all this has changed with the recent introduction of an innovative funding solution called Future Rent. So in part two of our special feature on this equity access alternative, we're joined by the CEO, Godfrey Dinh, to outline how property investors can actually use Future Rent. So welcome back to the show, Godfrey. Thanks again for having me. Great to be here. Awesome. Now, Godfrey, what are the main uses for how future rent clients actually use their upfront rent?

So it's really all about wealth creation, or that's the vast, vast majority. So, you know, a couple of categories in there. So, you know, renovations is a big one. People renovating not just their investment property, but also often their own principal place of residence. Because when you think about it, that ties into their overall picture as well. and ties into their valuation, their financing strategy, and a whole range of things. So in addition to renovation, then buying additional properties.

And within that, obviously, there's a spectrum again. So we're helping, you know, not just investors who are buying additional properties in their portfolio, but also even, for instance, the bank of mum and dad who, you know, more and more are helping out the next generation buying their first homes. Then people, for instance, who are rent investors who might have, you know, one investment property

but don't yet own their own home and they're able to get two years' worth of rent up front on their property to, has a deposit to buy their first home. So that's all within the sort of realm of, you know, investing in property. Then also investing outside of property into things like small business. You know, if any of you listeners are sort of small business owners

and have dealt with small business lending, they would have found it to probably be very, very expensive and difficult as well and that's an area that we're you know doing more and more in um obviously tied to just the investment property but giving people that you know that income up front so they can invest in their business and then investing in things like the share market where you know we're a better alternative to dealing with say a margin or something like that that's super volatile super expensive and you know if you're lucky enough to have an investment property why shouldn't you be able to just get your rent up front and use that instead um so um so yeah the

vast vast majority wealth creation there's a small percentage in there that's sort of more to do with cash flow and that's understandable because obviously owning an investment property it ties up such a big chunk of equity that that can make it hard to manage your personal finances and your personal budget um so you know a small portion is um is just helping people with the day-to-day um bigger expenses yeah i love it so so quite a broad range of opportunity there so So can you give us an example of a recent client who's used Future Rent, Godfrey? Yeah, so for example, we had Darren,

who he actually lives in Canberra. He's got an investment property in the northern suburbs of Darwin, a place called Alla. And that area, I think, you know, did well a couple of things. I think he did well in terms of time to the renovation works that he did to the property.

So that area is sort of going through like a bit of an increase in rents. But he really capitalised on it by bringing the property up to the market, right? And I think that's happening in a lot of areas where we've had, you know, some phenomenal rental growth in some areas where we traditionally wouldn't have seen. But often the property needs a little bit of a lift to be able to get the tenant that's going to pay that premium rental. so in his example you know the rent was say five hundred dollars a week he spent twenty five thousand dollars on a reno just some really cosmetic stuff and managed to get the rent up to eight hundred dollars a week which is an extra fifteen thousand dollars a year now that's like a sixty something percent return on on investment in terms of the money spent on the reno most

commonly obviously it's you know that's a terrific example but most commonly it's less we most commonly say have someone spending say 20 000 on a renter and getting an extra 100 to 200 bucks a week but that's 20 to 50 percent you know per annum on the actual cash invested and in addition to that you've got the increase in the value of the property which can often help you then you know maybe refinance and play like you know more broadly with your investment or your financing strategy. So yeah, but that's, I think, a pretty good example. Very good example. So how do you think future rent is used most effectively then? Well, I think it's all about someone's overall financing strategy. And, you know, as an example, at the moment, there are some really low fixed

rates right where people can sometimes pay half a percent to a percent less on a fixed rate compared to a variable rate yeah and you know you if you do the math that's maybe on say a five hundred thousand dollar loan that's maybe fifty to a hundred thousand dollars worth of savings over the life of that loan yeah um so if you're not planning on selling and you're in the property for the long term um then you're best off sort of you know obviously people's situations and circumstances are different but you're best off you know taking out a long-term capital solution that's the most efficient and affordable and then dealing with your more short-term and investment capital related needs with something like future in and then combining that with your investment

strategy is where you really really do well and you know to give you another example we've got a client in say southwest sydney who his whole strategy is around you know buying a house that's big enough to include like a granny flat on the back and and that'll yield him an extra 350 to 400 a week um and then he can recycle that capital using future and to do it again pay for the next deposit fund the next granny flat and just recycle and recycle and you know we've got clients doing that sort of all around um australia and a lot of areas where there has been that rental growth like you know the central coast and some other areas as well where suddenly that rental growth can translate to an incredible return and an incredible capital extraction which can allow

you to sort of do you know a hell of a lot more than you otherwise could. Yeah brilliant so you've touched on this already but how do your clients think about the return on investment after the cost of future rent then yeah so i think people generally think about the cost of future and it's just like a fixed amount of rent that they're effectively foregoing which is maybe say six percent of that rent um each year yeah um and that's just the cost of getting the money you know up front but it's allowing them to work that equity a lot harder and make the next move and you know work that rental income harder um so on average say for example if you look at a property and the yield maybe is say three to five percent so say five percent for argument's sake so um

so if you you know to make the numbers easy say it's a hundred dollars right we're giving someone five dollars um of that property value or five to ten dollars of that property value if they're getting two years up front yeah um yeah and say we're giving them five dollars um and it's costing them six percent so it's going to cost them 30 cents right on that hundred dollars right and if the property goes up by three dollars in a year they've made 10 times that investment and that's the brilliant thing about property right it's leveraged yeah and if you're gonna you know get a nice hedge against inflation and even take a really conservative view on capital growth which is really just links to inflation the return on your equity can be really really phenomenal

um so i think a lot of our clients like um you know they they see our cost and they they think about it in those terms and i think about it as well look it's like it's a small percentage of a small percentage and i'm going to make a much larger return overall um from you know being able to move on with my investment plans and unlock the next investment opportunity yeah and i love that So to sort of crystallise this for us, can you sort of run through the numbers on future rent and then summarise the benefits for us? Yeah, so say, for example, your property is rented for $500 a week. So a year's worth of rent would be $26,000. So you get $26,000 upfront.

So that's instead of, you know, your tenant would have been paying about $2,200 a month, roughly. Yeah. um so um so instead of getting that two thousand two hundred dollars a month you get twenty six thousand up front um the cost of that is um basically a hundred and thirty dollars a month from the rent which is half a percent of that upfront amount right so a hundred and thirty dollars a month comes out of that monthly rent paid by the tenant um and then you know the client or the the property investors left with then effectively or they're paying back say they choose a three-year term they're paying back one third of the rental income each month to future

rent so about 850 dollars to future rent and then they're still getting two-thirds of the rental income less our six percent cost so they're still getting over 60 percent of the rental income or over 1 300 a month right in terms of ongoing rent that they get every month and and for you know for most people and obviously everyone needs to run their own numbers and um and work it out but for for a lot of people um that's generally then enough to cover their ongoing expenses their mortgage their property expenses all those sorts of things but they can use this as a tool to bring forward part of that income so that they can invest right and they can think more deliberately about what the best loan is for their long-term financial objectives rather than trying

to maybe optimize for the wrong thing when they're choosing that that that financing exactly and and preserving the equity for other purposes as well. So it's sort of a double benefit there. So did you summarise the benefits for us? Well, I guess from the client's perspective, compared to dealing with a bank, it's quick, it's easy, it's simple. It doesn't impact your credit.

You're not dealing with, you're not entering into a loan. You're just getting your rent up front. And it allows you to do more with your rental income and to um to invest and get more out of your investment property um so that's what we're really all about yeah i love it i love the uh all great ideas have a simplicity about them which which yours certainly does and the ease of access and the speed with which you can do that is certainly a a major advantage as well so i want to thank you for opening our eyes to this exciting

equity access alternative godfrey and thanks again for your time on the show today such a pleasure. Thanks a lot, Bushy. Thanks, Godfrey. Well, there you have it. So if you're a property investor who's stuck in no man's land because you can't access equity in your properties to build your portfolio, or you need funds for other purposes, or it's just too hard, time consuming, expensive to refinance, then reach out to the team at Future Rent at futurerent.com.au. More to come. So keep watching here on Realty Talk. 726 today for an obligation-free quote. Hi and welcome.

In this week's Bush Byte, we finalise our special series on the art and science of negotiation, given the absolute critical importance of your ability to negotiate in all aspects of your life, and especially in the current hotly contested property seller's market. Now, in recent weeks, our negotiation specialist focused on how you may need to change your outlook, to build good rapport by using mirroring and labelling techniques, and the perceived power position, which you may feel is actually tipped against you. We covered why cash is king and how to know the prevailing conditions, that negotiation starts with hello, we've revealed when to deploy the knockout offer,

and that negotiation is not just about price. This week, we conclude our negotiation focus on the importance of timing, the effectiveness of the other fish in the sea strategy, and the importance of independent professional assistance before summarising all of the key points from our negotiation series. So let's kick off with the importance of timing, because it pays to consider seasonality when you're buying property. Now, this is generally less in demand in the winter and the most demand in spring. so buying property during the quiet times can often be to your advantage and on a micro scale

a successful tactic that I've personally employed in the past is to make an offer on a Friday night before the weekend opening inspections so that you effectively take a property off the market before the others get a chance to see it. Then it's worth considering the other fish in the C strategy. When you're making an offer on a property, always make sure you're perceived as someone who's seriously considering at least two similar properties. What I mean by this is a selling agent needs to think that you've always got a suitable and viable alternative property that you're also considering. Let's call it option B. If you've been out and about looking at property, you'll be familiar with a lot of real estate agents that say, hey, look, I just need to let

you know that there's another buyer in the mix. Now, this is negotiating 101 for the agents, but you often don't know if this is actually true. So a good candidate of this is to say, that's great. I'm still interested in the property, but I've also got an interest in another property. This way, you still show that you're keen, but also that you're not desperate for the property. Equally, depending on the market you're in, you can then say to the agent, hey, here's my offer. But just letting you know, I've put two other offers in on other properties that I really like. So whoever gets back to me first is going to be the one I take. Again, this gives you a position of strength, provided the course of the market dictates it can actually

do this. Then there's a need to consider independent professional help. If you're looking to purchase a property, particularly in an overheated seller's market, it's important to your arm with as many winning negotiating tactics that you can, particularly when you're up against fierce competition and you're dealing with a real estate agent who negotiates all day, every day for a living. So if you don't come prepared, chances are you're going to be outmatched during the crucial negotiation phase. And this leads me to the biggest tip I can give you to optimize your chances of securing the property that you want at the price you want under the terms you want. Engage an independent and expert buyers agent. It still staggers me that with over

half a million sales of property each and every year in Australia, only about two and a half percent of them involve a buyers agent. Now this compares with about 45% in the USA, where most buyers engage professionals, buyers advocate to find, negotiate and secure the property on their behalf. This is in order to level the playing field and to eliminate the biggest risk in a property purchase and that's you and your emotions because you just don't know what you don't know and this can be really costly when it comes to property purchases. So to summarize, think about the timing of your offer and have alternative properties up your sleeve. Be as prepared as can be and consider seeking professional advice. And this brings us to the end of our very special

negotiation series. So to refresh your memory on the 11 key pieces of negotiation advice that we've discussed in recent weeks, start by changing your outlook, build good rapport with those that you're negotiating with by using mirroring and labelling techniques, be aware of your relative perceived power position, particularly when you may feel that things are actually tipped against you. Remember that in all negotiations, cash is still king. Make sure you know the prevailing market conditions. Remind yourself that every negotiation starts with hello. Know when to deploy the knockout offer. Differentiate and broaden your offer by remembering that negotiation is not just about price and that everything is up for grabs when it comes to negotiation.

And finally, have alternatives and engage professional help in the form of a property strategist, a savvy mortgage broker, and most importantly, a buyer's agent. Now that wraps up our special negotiation series. So I hope you've added to your negotiation armory so that you're fully prepared to successfully negotiate your next property purchase, or indeed negotiate better on any transaction in the future. That's more food for thought. I'm Bushy Martin from the Get Invested podcast. Stay tuned for more. Well, that's it for this week's show. A special thanks to our guests, Eliza Rowan and Godfrey Dinh, and a reminder that you can see all of our shows at realty.com.au. And while you're there, check out one of Australia's most extensive range of

properties for sale from over 7,000 agencies nationally. Thanks again to realty.com.au and BMT Tax Depreciation for their ongoing support. I'm Bushy Martin from KnowHow Property Finance and I look forward to seeing you again next week.