Property Hub - Investment Insights & Inspiration - Realty Talk: New capital growth drivers

Episode Date: October 21, 2023

This week Bushy wants to know what really drives capital growth and his guest on this topic is property researcher and data analyst Jeremy Sheppard who sets about shooting down some misunderstood and potentially misleading drivers. Then we hear from Rasti Vaibhav about holding onto high growth properties without impacting how you live now. NEW – Join the Property Hub community on Substack! Sign up to get Australian property news, opinion, and episodes in your inbox: https://propertyhubau.substack.com/ Subscribe to RealtyTalk on the Property Hub channel: Apple Podcasts | Spotify | Google Podcasts | Email Property Hub is a collaboration between Bushy Martin from KnowHow Property, Kevin Turner from Realty, Andrew Montesi from Apiro Marketing and Apiro Media, and Australia’s largest independent podcast network DM Media. Business and partnership enquiries: [e-mail] omnystudio.com/listener for privacy information.

hello and welcome to another realty talk show well first up this week bushy wants to know what really drives capital growth there's been a lot of advice given to property investors to seek out suburbs with these uh sort of favorable amenities but there's actually no support in historical data for it bushy's guest on this topic is property researcher and data analyst jeremy shepherd jeremy sets about shooting down some misunderstood and potentially misleading drivers then we're going to hear from our old mate rusty about holding on to high growth properties without impacting how you live right now now if we are not managing that out of the pocket money then it becomes too hard for the property owner to the extent that it becomes unaffordable

They have no choice but to let it go as a distressed seller. Rasty along a little bit later in the show. Hey, if this is your first time with us, big welcome. You're going to find us on all podcast players and through the Southern Cross Austereo Network. If you like the show, make sure that you hit the subscribe button. Help us to continue to bring you the very best guests each week. We'll be back in just a moment as Bushy kicks off this week's show.

property deductions can save you thousands of dollars each year to make sure you maximize 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 1-300-728-7222 726 today for an obligation free quote. Realty Talk and your host Bushy Martin. Now there's been a lot of talk post-pandemic following the unusual meteoric rise in property values across the board and right across the country about what really drives capital growth

and this is going to be even more important than ever given that many locations are now likely to flatline for extensive periods of time in the absence of new and continued growth drivers. So what really drives capital growth? Well, as you're about to hear, many of the widely believed and regularly reported growth drivers are actually misunderstood and potentially misleading. So to reveal the little-known realities, we're joined by renowned property researcher and data analyst Jeremy Sheppard, the creator of the widely acclaimed DSR demand-supply ratio, who's now the co-founder of Suburb Data. So welcome to The Property Hub and let's get invested, Jeremy.

Thanks for having me, Bushy. Been really looking forward to talking to you for a long time, Jeremy. So I'm going to really enjoy our conversation, but to sort of kick things off on this, you know, very topical area at the moment in relation to capital growth driving this, one of the most widely reported beliefs captured by Demarco for Bernard Salt's fried egg analogy revolves around proximity to the CBD. So the obvious question is, should investors be aiming to buy as close as possible

to our capital CBDs for better long-term capital growth? Yeah, well, it is a hotly contested topic, but the short answer is not really. There's nothing wrong with it, but it is of no help over the long term. So there are a lot of old schools out there who believed in this for quite some time. It is hard for them to accept what the data analysis is showing. And on top of that, what's made it worse is there's been reports put together in the past, some big names there, Reserve Bank of Australia, suggesting that proximity to CBD is actually a driver of above average long-term growth. But every report that I've seen in the past on this topic has been flawed in in some way in the analysis and most of them have actually been flawed in multiple ways

so some analysis has only looked at a single city in fact some reports have only looked at a handful of suburbs in a city rather than all of them some reports only classify proximity to CBDs either inner or an inner ring or outer ring which is a little too you know black and white rather than looking for, say, a correlation to growth on a, say, per kilometre basis. But one of the most common mistakes is to only use a single time frame. And because of the cyclical nature of growth, there can be eras when suburbs closer to the CBD outperform, and then other eras where suburbs further away outperform. So the analysis needs to cover a range of different periods to look for consistency across eras. And the analysis that I've done, I used a data set of 40 years of

Australia-wide growth. I included multiple cities in the analysis. I did the cross-validation of multiple eras, and I examined multiple rings or multiple distances from the CBD, all to try and find this per kilometre relationship between distance from the CBD and long-term capital growth. And overall, there's no clear pattern in the data to suggest there's any point buying closer to the CBD. And I suspect the misunderstanding has come from the fact that suburbs close to the CBD are usually more expensive than suburbs further from the CBD. So the question is, well, Jeremy, how did they get more expensive, if not for above average capital growth over that time? But the answer to that question is they've always been more

expensive. And they've maintained that same relative difference over decades. So investors wondering whether they need to stretch themselves to afford a higher priced property that they don't need to. Yeah, I love that because there's certainly been a quarter of the buyers agency fraternity, probably for vested interest reasons, who live and operate close to the CBDs where that sort of old vanguard of getting close to the CBD is a good catch cry. But certainly the the exodus to lifestyle uh during the pandemic would fly in the face of that and a lot of those same buyers agents now saying well we're now returning the old boomerang effect we're now returning so it's you've got to get blue chip close to the cbd what i'm really relieved to

hear is that the data is actually not reinforcing that exercise and it means that all of us as investors need to to look uh more broadly than that and look at other parameters that are actually driving driving price so it's a great uh eye-opener there now the the next widely held capital growth driver belief tends to focus on surrounding lifestyle amenities like schools shops transport nodes beaches etc now based on your research jeremy are these actually important for investors in choosing the right suburb no not really um surprisingly they're they're largely irrelevant and I've done analysis of the long-term growth rates of beach suburbs in Sydney for example versus other suburbs of Sydney and over about a 30-year period the growth rates are very

simple similar so you'd think that if having a beach made a difference we would see that in the data eventually over a period as long as say three decades it should start to show through but it doesn't and the same is true for suburbs with good schools so there are there are some melbourne suburbs with a reputation based on the quality of school they have but analysis that i've done of historical data showed no discernible difference in long-term growth rates and i've repeated the same kind of research for suburbs with train stations versus those without i also looked at the the influence of shopping centers and airports and it was the same same story so there's been a lot of advice given to property investors to seek out suburbs with these sort of favorable amenities

but there's actually no support in historical data for it. Interesting and why is this then Jeremy because intuitively that doesn't seem to make sense can you sort of shed a bit more on that for us? Yeah it doesn't it doesn't really make sense does it when you first think about it but when you when you do a bit of a deeper thinking it actually becomes quite clear So probably one of the key things about this research, which I just need to clarify, is when I was looking at the train stations, for example, I made sure that every suburb that had the train stations had that train station for more than 30 years. So this is a feature of the suburb that has been there comfortably for a longer period of time than the period of analysis. Same with shopping centres, same with the schools and, of course, beaches. I mean, you don't tend to find new beaches turning up at a suburb, although with, you know, coastal sea tide levels and coastal erosion, you might see some new beaches pop up.

But generally, that's not something that a suburb acquires, although a shopping centre or a school could. So I made sure that in all this research, the feature, the amenity, has already been there for a long period of time. uh and what happens is the the the price of properties is already factored in the benefit of having that uh amenity there uh probably the easiest illustration um is i i rely on this um analogy the apples and oranges analogy so imagine 100 years ago you walk into a fruit shop uh apples are worth one cent and oranges are worth two cents now if oranges outgrew apples so they grew at 8% per annum over the next 100 years, whilst apples only grew at 4%. Then an apple would go from 1 cent to 50 cents, and an orange would go from 2 cents to $44. Now, picture yourself walking

into a fruit shop today. There's been that 100 years of extraordinary growth for oranges and ordinary growth for apples. You're looking to buy an orange, which is still just an orange, for $44 when you could buy 88 apples for the same amount of money. So long before that ridiculous price difference ever eventuated, people would walk into the fruit shop and say, oranges are expensive. And that would reduce the demand for oranges, slowing their capital growth rate. People would look for cheaper alternatives like apples that would accelerate the growth rate of apples and so what we find is that over time there is this great leveling of growth rates there is a tendency for all property markets to grow at the same rate over time so this varies

if there's a new train station or a new shopping center new school etc that may influence growth rates but even then only for a short period of time enough for the market to factor in the benefit that new amenity. So it is a mistake for investors to focus on the features or amenities that a suburb has when trying to pick an outperformer. Yeah, I love that. And what I'm hearing from what you're sharing with us is that the longer your time horizon, the better opportunity you've got

providing that there's other growth stimulators that are helping that long term. So very interesting. Now, the other generally held growth driver belief relates to high wage growth suburbs, Jeremy. So is there any truth in the old saying that you need to follow the money and should investors be seeking out high income areas?

Yeah, so this topic is another, there's another big misunderstanding amongst investors and even professionals in the industry on this topic. And it makes sense why they have been confused. I mean, you think about surely higher incomes enable buyers to pay higher prices, but an analysis of historical growth rates for high and low income suburbs over the last 30 years has shown no correlation. So I've analysed

the ABS household income data from 1991 to 2021, which is the last census, and there's been no clear pattern between higher income suburbs and higher growth rates. It just doesn't happen. Very interesting. Well, what about trends and changes in income, like rising incomes? Does that have any different influence? Right, yeah, good point. Yes, I have actually analysed that too and came to the same conclusion, same result in the data. In fact, I also analysed suburb income versus the state average.

So that's another thing that I've heard some professionals use to gauge should I buy in this suburb. They compare the suburbs income versus the suburbs state average. And again, there's no correlation. At a cursory level, again, this seems counterintuitive, but when you have a deeper think into what's happening, it does become rather obvious. So firstly, you don't need to be a resident of a suburb to buy there.

So the incomes of residents are actually irrelevant. It's the incomes of potential buyers, and buyers can come from the other side of the city. So there's this potential disconnect immediately. And secondly, if the incomes of residents rise significantly, then they may simply choose to move out to upgrade to a better location taking their high incomes with them and thirdly there are quite a lot of ducks that need to line up for the increased income to flow into increased property values so if for example the resident is a tenant and they

get wage increase they've got more surplus income well they're not going to pour any of that money into the property because they don't own it so that immediately eliminates about 30 percent of the residents of a suburb because typically 30% of a suburb's residents are renters. Now out of the remaining 70%, there's a lot they can choose to spend their surplus cash on. They could choose to pay down their mortgage, they could buy shares, they could spend their money on food and drink, maybe furniture, cars, boats, caravans, motorcycles, holidays. There's only a small percentage that are actually going to pour their money into the property uh and that so that could be quite a small percentage and for the broader market to know of the increased value after this renovation

is taking place the owners need to sell their property you know if you renovate your property you don't sell it nobody knows that that it's now worth more value unless of course you you contact the bank uh and get a valuation done to borrow against that equity but but the broader market doesn't know about that so as you can see it's it's quite unlikely that an increase in incomes for the residents of a suburb will flow through into into higher prices and the data confirms that very interesting indeed well given these sort of quite myth-busting insights jeremy what are actually the true and key drivers of capital growth based on your research and can Can you share a couple of good examples with us?

Yeah, so there are loads of indicators that are now available. This is to identify suburbs with great growth potential. I mean, you've got metrics like auction clearance rates, days on market, dip counting. There are some fancier ones like market cycle timing and ripple effect potential, online search interest. There are loads of these, but these indicators, they lose their efficacy over the long term they're usually only useful over about a three

to five year period and uh so um yeah since we've been talking about long term i'll address that uh but i first just need to point out there are a few problems trying to identify long-term outperformance so firstly there's as i mentioned before there's a tendency for all suburbs to grow at the same rate over the long term now there are exceptions but the longer the time frame the harder they are to find because time is this great leveler of sub-performance that's the the apples and oranges analogy the second reason is that data from 30 years ago is rather threadbare we have all these fancy metrics now but decades ago there wasn't nearly as much the data age is still relatively new. So we don't have a lot of historical data that we can look at and say,

oh, this definitely works. And thirdly, because everything changes, even if it did work in the past, over a long period of time, there's a risk it might not work now. So with those caveats out of the way, here's some easy guidelines for investors. Number one, buy a house, not a unit. So houses have outperformed units over the last 30 years. There's definitely historical data support for that strategy. So buy a house, not a unit. Secondly is you want to buy an old house, not a new one. New properties tend to underperform in terms of capital growth.

And that's because of all the faster rates of depreciation. So it's the land that appreciates, the building depreciates. so you want to put more of your money into the land component of the property rather than the dwelling so uh number one is you buy a house not a unit number two you buy an old house not a new house and the third one is to steer clear of vast tracts of vacant land uh it doesn't matter if there's a vacant block next to you if next to the property you're planning on buying but you want to avoid those sort of growth corridors where um it could be additional supply from developers over many years into the future. Supply is the enemy of capital growth. So you want to buy

in an established suburb and you want to buy an established house. And that's something that's very easy to research. You don't need any special data for it. And over the long term, you should be right. Yeah, but I guess combining those two, if you were to build a place in an area of scarcity where there's, like, you can create a block of land in an existing tightly held suburb, you can, I guess, potentially still get the benefits of both from a holding cost and a potential growth perspective. Yeah, you want to be the developer, yeah.

Yes. Because then the profit margin is you, not... Yes, not the builder or someone else. Yeah, spot on. Now, I guess one other thing I wouldn't mind, just before we close, Jeremy, you know, you talked about how time's a great leveler over the long term what is the long term and i guess a lot of investors are investing

uh generally they're going into with a sort of a let's say an average 15 year horizon is is that 15 years going to level out all locations are we talking longer or shorter periods than that um the analysis that i've done shows a remarkable correlation over 20 years uh whatever growth there was whatever outstanding growth there was in the first 10 years uh it reverses over the next 10 years and vice versa um now i haven't done exhaustive analysis on 22 years or 19 or 17 years or anything like that but generally over a 20 year period um if if things didn't go well in the first 10 don't worry uh the next 10 it will come good so so time covers over um a multitude of ineptitude in investing what i'm also hearing though

If we turn that around a little bit, if an investor is going in with a 20-year horizon, then the need to have to, unless they're looking for instant equity uplift to contribute to ongoing property purchases, then that 20-year horizon is going to even out the need to try and buy at the bottom and sell at the top because it's going to desensitise that to some degree. Am I right in saying that? Yeah, I mean, yeah, the risk, a lot of it, it's a huge investment, isn't it? uh to buy an investment property and so a lot of people do panic about this am i putting the money in the right place now if you start early enough then then you're reasonably safe as long as you don't buy in some uh genuinely uh cruelly remote area and it's a it's a one trick pony there's only one industry there and that industry caves um well that'll that'll crucify and the property market as well however you can get better performance by

timing your entry into the market i'm a big believer in timing the entry into the market because you've got some equity straight away well maybe not immediately but within the first year or two but even if it doesn't work out if you just sit tight things will come good so you know For the last however many decades in this country, there's been very little risk for property investors. It's really those mining towns that have proved problematic. Very interesting. And I think given we've seen so much growth post-pandemic,

without sort of clear growth drivers sitting in behind, as I'd said earlier in the exercise, there'll probably be a lot of areas that tend to flatline moving forward because we've effectively brought forward a lot of growth. I guess before we close then, one of the things that would be interesting to me, as you mentioned, timing the markets is important, particularly if you're looking for short-term equity uplift to contribute to your portfolio. Are there any growth drivers that tend to give you a better indicator of areas that are about to go through that growth spurt that we should be aware of? Yes and no. I've never met a data set that didn't try and lie to me.

So if you just focus on one particular metric, for example, auction clearance rates or days on market, you're going to come undone. And the algorithm that I came up with back in 2010, the demand to supply ratio, it's a combination of a lot of those metrics, so you're less likely to get fooled. So without giving away too much intellectual property, um i would say things like market cycle timing are quite important so that's that's an examination of historical growth to look for uh patterns of growth that that reflect this market is about to

enter its next boom uh but even then i don't rely on that a hundred percent and and even the the demand to supply ratio is is not a perfect algorithm it's had failures uh in the past uh some of them have been quite embarrassing for me um so you still need to do a fair amount of research you still need to you can't just look up a single number and go right i'm buying there uh it just gets you in the right ballpark and gives you a higher chance of success yeah um so yeah market cycle time i'd say that's that's a good one um yeah that's that's going to be my my vote that's that's my top one yeah and i think the the danger in property is trying to apply an economic rationalist and almost reductionist approach to a very complex and

dynamic arena where there are a multitude of changing in varying contributors so trying to boil it down to a a number of very uh small and and potentially linear indicators is very dangerous territory when we're dealing with such a complex animal and you know i guess i get personally a bit frustrated uh because our our approach to everything these days if we can't quantify it a number then we don't believe it but the danger is we try and simplify it so much down to a couple of indicators that that we're getting a very misleading picture potentially of what what's going to happen and what could happen in the area so i look like yeah we've only just scratched the surface here jeremy yeah really appreciate it i'm looking forward to getting you back to uh

to talk more about this and other areas in the property space so i really want to thank you for you know, unveiling these really commonly believed capital growth driver misreads and misunderstandings. And I want to suggest that anyone who's looking for true validated growth or cashflow data reaches out to you and your team at suburbdata.com.au. So thanks again for sharing your myth busting insights here on the Property Hub. Well, thanks very much for having me on your show, Brucey. Thanks, mate. Hi, just before we get back to the show, I want to take a couple of seconds to tell you about a great live and free workshop that you can enjoy. It's going to unpack the art and science of true property investment,

and it's got the potential to transform your investment approach and give you a GPS that's going to help you to achieve your version of financial freedom. Now, it's fair to say that there's lots of property information out there these days that can often leave you more confused, but very few provide you with the information and the inspiration that's going to give you the comfort and clarity to make better informed property investment decisions on the road to your ideal lifestyle. It's why I strongly suggest that regardless of where you're at on your property investment journey, be it as a beginner or an experienced investor, you need to take the time to do yourself a favour and invest in one of Get

Rare Property's upcoming free live online workshops, which is hosted by active investor and highly acclaimed national buyers agent, Rusty Vypav, who's also the author of the must-read book, the property wealth blueprint. So take a second now and jump on getrare.com.au forward slash financial freedom. Repeating that again, that's getrare.com.au forward slash financial freedom as the first step to taking your property investment to the next level. This is Realty Talk powered by realty.com.au. Now the rapid rise in interest rates over the last year or so has had a significant impact on the increase in resulting holding costs and the cash flow affordability of investment properties generally. So how can you balance the needs

of securing high growth properties while making them affordable enough to hold long term without biting into your salary or savings or hamstringing your lifestyle? Well to reinforce what's important from an investment perspective and to open your eyes to opportunities to manage your cash flow more affordably, particularly during high interest rate periods like we're experiencing, we're joined by our show favourite, Rusty Bypad, the author of the Property Wealth Blueprint and the founder of leading national buyers agency, Get Rare Properties. So welcome back to Realty Talk, Rusty. Thank you so much.

It's an honour to be back with you, Bushy. Always like having a chat to you, mate. You've got a, well, in your name says it all, you've got a very rare approach to looking at investment property. And in this particular exercise, given the challenges that a lot of investors are having around the increasing holding costs of property, it's a great topic to jump into. But sort of to kick into that, Rusty, why is capital growth critical? And as an aside, why does cash flow need to be managed carefully? Now, great question there. So first of all, let's understand why people invest. Typically, people invest for the simple reason that they

They can create wealth, and the creation of wealth can only happen when you invest, for example, a dollar, and you're expecting it to become $1.25 or $1.50, eventually basically making your dollar working harder for you to get your $0.25 or $0.50 in the piece. So in property's context, if you're talking about a property purchase of $500,000 and we're expecting it in a few years' time going to $750,000 and you're making a capital gain of $250,000, this is the prime reason why people tend to invest. And probably I would argue it should be the reason people should be investing, especially just like stock market, residential market is also a growth asset. So when it is a growth asset, we should be investing for the growth. That's why it is important. That's why people invested for that. But having said that, cash flow management is super critical in this particular asset class, especially because of the reason of the leverage that we are taking in this asset class. And what it means is that we are borrowing money from the bank, from the lender, who's charging us interest rates. Now, when we have a loan against a property, yes, there's a capital growth happening, which is probably on the paper that the growth of the property is happening. but in reality, the property owner might be actually feeling the pinch of more outgoings

than the incomings. Of course, we are collecting rent and there are lots of expenses around it, like property management and whatnot. We are taking some incomings as the rent that we are collecting and there's outgoings. When there's a differential, when there's more outgoings than the incomings, that means someone is out of the pocket. Now, if we are not managing that out of the pocket money, then it becomes too hard for the property owner to the extent that it becomes unaffordable. And now from the experience of working as a buyer's agent, you have seen so many people having that due stress, especially with the interest rate hikes that we have seen over the last year or 15 months or so, it has just become so unaffordable for them that though

they wanted to hold the property for long term they have no choice but to let it go as a distressed seller so yes capital growth is super critical but more important we can't really miss out on the importance of cash flow management because that's a daily routine cash flow management that one has to go through absolutely agree rusty and i i guess uh you know you and i you're very active with uh investors every day of the week and i i think a big reason why over 50 percent of first-time investors sell a property within the first five years is they haven't paid enough attention to the actual ongoing week-to-week cash flowing of the property and suddenly it's costing them a lot more than I expected and they knee-jerk and make a decision that has

long-term unfortunate consequences for them. So I think that cash flow affordability piece is something that a lot of investors need to pay a lot more attention to, to understand what the true actual holding costs of a property is when all of the purchasing and and ongoing holding costs are affected into the mix but uh sort of coming back to this then uh you know given that interest rates have increased how can we better manage the shortfall to maintain that ongoing cash flow affordability rusty yeah sometimes i would say that sometimes a bit but too late because the property is not even purchased because one of the argument i would say just like you mentioned here that 50% of the first-time buyers,

first-time investors actually sell the property back because they have actually bought the wrong property or the wrong type of the property or maybe paid too much. So for someone who's actually starting, I probably have a certain suggestion out there that to be mindful of the real true holding cost. And there are certain ways to be mindful of

and also some deliberate action a property investor can take. One is that, of course, like buying the quality property, like making sure that, so let's talk about the components of holding costs. That would really probably help us understand more. So the biggest component of that is that of the interest rate that we are paying or the loan that we are repaying on a monthly basis. Second part of it is that any expenses around the property in terms of maintenance that

we are paying. And the third component would be the incomings, making sure that the incoming as a rent that that you're collecting is consistent more so than otherwise. So of the three components, if you really talk one at a time, so for example, interest or the repayment that you're making to the bank, the first approach would be much more easier to simply go and start thinking about paying interest-only loans. Now, of course, this can't really stay there for long because there's a regulation there, like banks can't really allow you to hold interest-only loans forever, unlike last time.

So whatever we can afford to, going for our interest-only period is probably one of the ways to think about it. Of course, it also comes down to the renegotiating the loan rates, talking to your mortgage broker, talking to your bank, because that's an easy win. Just picking a phone to your mortgage broker, asking for a better rate or debt consolidation, things like that can really happen. Second part of it is lowering your maintenance costs around it. And that's really comes down to the quality of the property purchase, also the quality of the property manager. So all just think of property investing as a business of yours, whereby understanding that the property manager, your mortgage broker, your tenant, they're all stakeholders in your business. Now, when you have picked the right business partners like property manager, they should be not just going there to collect rent, but rather managing the property truly on your behalf. And what it means is always reporting back, even if the slightest issue or any errors that the tenant is making, reporting it back and be more, I guess, proactive in looking after them rather than letting, so for example, a moisture in the bathroom, letting it slip through and then it becomes a big expense, as an example.

So if you can lower down the holding cost, that's probably one of the best ways. And that really comes down to the property manager, because that's their duty to do it. yeah the third part of it is basically making sure the rent is coming consistently it's again the duty of the property manager and and also sometimes property manager can only do enough sometimes the consistency of the rent that matters rather than becoming greedy and going for extra 10 20 dollars rather than going for the quality tenant who's taking care of the property making sure that they are treating it as a their home rather than just a property they're living in and then that due care also means lower vacancy rate in that property yeah now all of this is

possible when we have actually done the right research we have bought the right property then there's always i guess the vacancy rate that there's always a good tenant ready to replace your existing tenant so a lot goes around buying the right side of property so so that's one aspect of it basically second part of it is in the days like this when interest rates has gone up there's not much people can do second part of what would be to really build up the office like build up more of a cash buffer yeah because what really you're saying is for example in the like so for example 24 months ago the the outgoings were only 200 per month which was very easily affordable but now they have really gone up to say 1400 1500 per month and if this is still okay for

a property owner having only one property imagine that person having three or four properties that's really facing the the heat of this of unaffordability issue so second part of it would be really building up a lot more safety net making sure that there's always some money in the kitty whenever there's some issue with the with the with the outgoings going too far ahead and the third part i would also say is that let's make sure that we always have this money in terms of the safety net. And it might also mean that for someone who's buying a property now in this market, taking the advantage of the supply-demand imbalance

that we are really seeing, which is probably, in my opinion, one of the best times, again, the way it is all, you know, with the population rise and low construction numbers that we are seeing through, this is probably one of the best times in making sure that we are buying it right. We are really making sure that we have enough safety net. And then maybe it also might mean that really paying LMI, which is a shot for lender's mortgage insurance, instead of paying 20% or avoiding LMI, because lots of people psychologically think that, oh, I should really save 2%, which probably most of them are right or wrong. I'm not too sure.

But when it comes to personal finance, it really comes down to the risk of investing versus risk of not investing. And when they really hold too little money in their pocket in order to save that 2% of LMI, I would actually argue that LMI is not just the insurance for the lender, it's also serving as a very good insurance policy for the borrower, because it's really serving as an extra 8% or so extra money in the kitty. So buying it well, maybe keeping a lot more money for themselves for the safety net, even if it means less upfront costs, maybe as a virtue of paying LMI. And also maybe if it's getting too close as a number, then maybe we should be thinking about lowering the budget at the upfront so that the upfront costs are low, so that we can really increase our safety net, if that makes sense. Absolutely. you make some very good points there uh you know i totally agree with you on the lmi front because you know if you're borrowing money for investment then the lmi is actually tax deductible and a good accountant can write that off in in between one and five years depending on how they decide to

treat it so having that potentially extra eight percent of equity they can access and then potentially using that additional funds almost like a tax-deductible rainy day reserve so that if you've got an interest-only loan with extra capacity over and above what you physically need to purchase the property and that becomes your reserve, then one, it's tax-deductible.

Two, it doesn't cost you anything if you're not using it. But when an issue occurs, whether interest rates are going up or you have a period of vacancy that's unexpected and you don't have the physical savings or cash there to do it, then that remaining what we call the war chest, that equity loan interest only that's got that additional capacity can be almost used like a credit card in the context that if you're not spending it, no cost. If you do need it for certain periods, then you've got that to fall

back on without putting yourself under financial stress. So you can't emphasise enough the real importance of creating that rainy day reserve using the equity that you have that's sleeping in your existing properties to fund that so you're not having to put your hand in your pocket with actual cash and therefore removing that stress barrier in relation to that ongoing affordability piece so some really good points made there thank you rusty now just to sort of bring this to our head then any any final concluding thoughts on the on this subject rusty for sure so i'll probably say two things here like first of all like lots of people are getting too much pressure what they're already holding but at the same time there are lots of people out there

who are really trying to take advantage of this imbalances in the market and then they're also conscious that there's so much pressure of holding the property especially the risk involved just like what we have been talking about interest rate rises the tenancy risk bad tenant and whatnot and i would also argue i would always argue that that certainly there are risks in investing in the property. There are always risks. Let's not be blind to them. Let's be aware of them. Let's be educated around them. What are the risks? Let's also understand what those risks are and how do we go about mitigating them. But then bigger than that, there's also a risk of not investing. So let's go back to your why, why you really want to go and invest, make your money work

harder and build wealth. And what if you can't really achieve that? So to me, that's a far bigger risk, which is very hard to handle. So to me, there are risks of investing and risk of not investing enough. So there has to be the right balance. And second point that relates to that is basically there has to be a personalized strategy for each and every individual, like where they are in the financial world or financial journey, where they are today, where they want to end up and how much risk they can take as in terms of their appetite, In terms of their tolerance, as well as their willingness, as well as what they can do, what they are really holding, and then come up with their own personalized strategy, rather than just getting too bogged down with this, something called analysis paralysis. Of course, I'm not really saying that we should certainly be analyzing each and every thing, but let's really understand from the context of risk of not investing as well.

A really important point, because as you and I know too well, those that rely on the old Australian dream exercise of just paying off their home loan and putting money into super are going to end up in penny-pinching poverty when they get to the point where they decide they're going to stop work. So I think the risk of not investing is actually far greater than the incidental affordability risk that we've been talking about. So I think you make a really good point. And it's really important for investors to build it all out on paper before they commit so they understand what the true growth and cash flow affordability pieces of a property are before they start, rather than buy the property and then try and work out how it's going to work.

So I know that the work that you do with investors is well attuned to really laying out that turf and making provision and contingencies for all those things that we've spoken about so they're never actually putting themselves in a position where they're going to be in financial stress. So, look, again, Rusty, I want to thank you for these very timely insights, and it certainly reinforces the importance of investors focusing on affordable growth and the real sense of utilizing your suggestions to better manage the cash flow while a property does grow in value to achieve their needs without impacting on their hard-earned salary savings or restricting their lifestyle. So, if anyone listening wants to explore their personal options with you further, Rusty, what's the best way for them to do that? for anyone like who would like to talk about their own journey where they are today where they want to end up like i'm more than happy to catch up with them on one-on-one um they can really jump on my website which is get rare.com.au forward slash ready as an r-e-a-d-y for them to book a time one-on-one with me um because that link would actually expose my calendar link and they can happily you know without any obligation can choose to

have a one-on-one chat with me. So the link again is getrare.com.au forward slash ready. Perfect. We'll make sure we put that in the show notes so that they can book in to do a readiness call with you. And again, I'll reinforce that. It's getrare.com.au forward slash ready. So Rusty, thanks again.

We'll make sure we've got all of that in the show notes. And I also suggest that anyone who's interested in taking their property investment to the next level needs to join you on one of your free and very informative upcoming financial freedom live Zoom workshops, which anyone can register on for now, again, on getrare.com.au forward slash financial freedom. That's getrare.com.au forward slash financial freedom. So thanks again for joining us here on the Property Hub's Realty Talk Show, Rusty. Thank you so much. Thanks for having it successful property investment is a game of finance do you have the right team and the right

game plan realty talk is brought to you by know how property more than mortgage brokers bushy martin and his team of investment architects set you up with a sustainable strategy structured to lower your costs tax risk and stress while increasing your capacity for growth know how has helped over 1,900 homeowners and investors secure more than $800 million in property wealth. So get set to live more, work less, and live your legacy. Want to know how to invest in your freedom? Visit knowhowproperty.com.au. Subscribe now to Realty Talk. It's out every week. Well, that brings us to the end of this week's show. A big thanks to Jeremy, to Rasty and Bushy for a really great show.

They're all great, aren't they? And make sure you don't miss a single episode of Realty Talk or Bushy's Get Invested podcast. And they're delivered to you each and every week. You can do that by subscribing to The Property Hub now on your favourite podcast player or wherever you're listening to or watching this show. Thanks to our supporters and to our content partners to realty.com.au, BMT, Tax Depreciation,

Know How Property Finance, Get Rare Property and Apiro Marketing. I'm Kevin Turner and on behalf of Bushy and The Property Hub team, We look forward to seeing you again next week.