Property Hub - Investment Insights & Inspiration - Realty Talk: Two big questions to ask now

Episode Date: December 23, 2023

As we approach the end of year, this is the time to take stock, assess your position and decide if now is the time to pivot.  One of the questions you should ask is - if it’s better to pay off your home loan or to invest any of your surplus funds, especially now with interest rates at historic low. In the second part of the show today Bushy will look at one other question you might want to explore to do with property management. NEW – join our Facebook group, The Property Hub Collective: https://www.facebook.com/groups/1857513011165686 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 the show. Well, as we approach the end of the year, this is the time to take stock, assess your position and decide if now is the time to pivot. And one of the questions you'll likely ask yourself is if it's better to pay off your home loan or to invest any of your surplus funds, especially now with interest rates as low as they are. That's one of the questions. And in the second part of the show today, Bushy will look at the other question and that's to do with property management. Hey, if this is your first time with us, welcome. You're going to find us on all podcast players

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Realty Talk and your host, Bushy Martin. Welcome. Now, with interest rates at historic lows, I'm often asked the question, is it better to pay off my home loan or to invest? So in this week's bush plot, we're going to dig into this and answer this for you. Now, from a purely mathematical perspective, if the interest rate on investment after tax is higher than your home line interest rate, then you're better off investing. And with current home line rates at between 2% to 3%, compared to 6% to 8% returns on

shares and property, you're 3% to 6% per year better off by investing. Now, this is significant, as I'm about to show you. And remember that leaving your hard-earned money in a savings account, you're actually losing money and going backwards when inflation is taken into account. So let's have a quick look at an example. Let's say that you've got a surplus of about $500 a month to play with, and we'll assume that you've got a home loan balance of about half a million or $500,000 and a 30-year loan term.

Now, paying that extra $500 a month off the home loan will knock about eight years off the term and save you approximately $95,000 in loan interest. Now, that sounds pretty good. But if you compare that with the investment option of putting that same $500 a month into an investment that's earning around 8% per year, over that same 30 years, you'll have gained a nest egg of about $800,000 before tax. So we're comparing $95,000 in saved interest versus $800,000 in your nest egg. Now I don't know about you, but that's an absolute no-brainer. But here's the real kicker. If you invest in a cleverly structured investment property, the tax savings and the rent can actually help you pay off your home loan years earlier and save

you tens of thousands of dollars in interest, as well as growing your nest egg. Now that's the best of both worlds. Now, if you're still not sure, at the very minimum, make sure you look at refinancing your home loan to put up to $400 to $1,200 a month back into your pocket, and then you can decide what to do with it. So to find out how this might work for you and to look at your specific situation, make sure you reach out to a savvy mortgage broker and or an accountant to see what's best for you, your particular situation, and your sleep at night factor. That's more food for thought. This is Bushy Martin from Know How Property Finance. Stay tuned for more. 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 1900 homeowners and investors secure more than 800 million dollars 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. This is Realty Talk powered by realty.com.au. Hi and welcome. What's your take on property management? Over the next few weeks, we're going to explore in detail the challenging world of property management, given its critical importance

to your investment success. If you're a current or potential property investor, do you or will you self-manage your property or pay a property manager to do it for you? I ask this because depending on who you talk to, somewhere between 20% and 33% of the 2.6 million investor-owned dwellings in Australia that are owned by just over 2 million residential property investors are self-managed. Interestingly, according to research done by finder.com.au, Tasmania has the highest percentage at 43% of privately rented properties, while New South Wales has the lowest at 22%. That means that somewhere between one in five and one in three residential investment properties are self-managed. In other words, between 400,000 and 660,000 Aussie investor

landlords still manage their own properties. Now these numbers still amaze me given the huge amount of money and risk that's tied up in their investment properties. So starting today I'm going to delve into the world of self-management versus professional property management and to set the scene let me start with Tom's story. A few years ago Tom wanted to help out an old friend in need so he entrusted his home and leased it to her when he had to move interstate for work. As he felt he knew his friend well, he decided to save a few bucks on employing a property manager and he collected the rent himself directly from Carmen who was a separated mother with her young daughter. Carmen and her new partner reassured Tom that you can trust us, we'll look after your

house, it'll be better than when you left it. I mean he was helping a friend through a tough time so what could possibly go wrong? Famous last words. Six months later he stopped receiving rent payments and by the time he managed to get time off work and return home to his property, he arrived to find it completely trashed by drug users and squatters. The internal walls had been smashed and kicked in, most of the wiring had been stripped out, used syringes and shattered glass covered the floors and dirty clothes, piles of rubbish, maggots and faeces were strewn everywhere. There was well over $50,000 worth of damage done to Tom's home and to make matters even worse, his home insurance policy had lapsed because he got too busy at work and the tenant

forgot to forward the mail. And he hadn't bothered to take out landlord insurance because he didn't think he needed it. So all of the lost rent and repairs had to come directly out of Tom's pocket. So saving under $40 a week in property management fees end up costing him over $50,000 that he just didn't have. And for $50,000, he could have engaged a property manager for the next 24 years. and still been in front. Tom was penny wise and pound foolish and unfortunately this is a common story. Now let me ask you three questions. If you're a long-term property investor who's focused on securing high capital growth properties that are cash flow positive, where will most of the time, energy and cost be spent on holding and maintaining your property? Secondly, if you spend

between three and 12 months securing your investment property and then rent it out, maintain it and hold it for 15 years plus to enjoy maximum capital growth, what key skill is required for the majority of the time to ensure that you last the distance? And lastly, what property expertise is most needed, but least considered and often unappreciated? Now, the answer to all of these three questions is the same. Can you guess what the answer is? yes, it's property management. If you spend 5% of your time finding and buying your investment property and the remaining 95% renting it out and holding it, then property investment is mostly a waiting and maintaining game. So if property management is the key core skill that will make

or break your long-term investment journey, who's the best person to do it? You as a part-time amateur, or a dedicated independent professional property manager. Given the critical importance of this subject to your property investment success, today we'll start delving into the challenging world of all things property management. Because if you're like most investors, once you've bought your investment property, you think the worst of it's over. And all you have to do is find a tenant, collect the rent, and the rest is going to be plain sailing. I mean, how hard can it be? Why would you bother paying a property manager all that money to do something that you can just as easily do in your spare time.

I mean, what could possibly go wrong? Surely it can't be that hard. It's just a matter of collecting the rent, right? Eh, wrongity, wrong, wrong, wrong. Why? Because when it comes to managing property, you just don't know what you don't know. And ignorance is certainly not bliss.

In fact, it's downright dangerous, especially in the increasingly litigious world of property. There's a good reason why over half of the first time investors sell their property within the first five years. And a lot of this has to do with the ongoing time consuming and life-sucking headache and hassles of managing the property. So do you manage your properties yourself or pay a property manager to do it for you? Because with investment property, everything is fine until suddenly it's not. Over the 10 years plus that we owned and ran a dedicated property management business, we saw the dynamics of

tenancies change overnight. Like Jekyll and Hyde, great tenants can quickly become problem tenants due to changes in their circumstances like relationship breakdowns or job losses, resulting in non-payment of rent and or damage and degradation to the property. And you, as a landlord, are left holding the can. As I've always said, it's not a matter of if you're going to have problems with your investment properties, it's a matter of when, how big and how often. And with residential tenancies legislation in each and every state differing, constantly changing and increasingly stacked in favour of the rights of the tenants, I always wonder if saving a few dollars on a property manager is worth a very considerable

financial risk. Let me share another quick example. You've no doubt heard the old expression, they took everything but the kitchen sink. But in this tenant horror story, they even took that as well. A self-managing landlord found tenants privately on Gumtree and then ended up with a big and expensive shock when they suddenly and unexpectedly did a runner. They pulled out and taken the entire kitchen and yes, even the kitchen sink was gone. Now this may sound extreme, but if you ask any specialised landlord insurer like the team at EBM Rent Cover, you'll hear that theft from investment properties is far more common than you might actually realise. The other concerning an increasing trend in privately managed properties is the growing incidence of hidden

methamphetamine drug labs in properties where tenants manage to bypass professional property managers and they use fake IDs to rent property direct from unsuspecting private landlords who don't apply the same screening scrutiny. Not only does this incur massive cleanup costs, but it also means a significant loss of rental income for extensive periods of time while the police matter is sorted out over months through the courts. In addition, the landlords and any future tenants may also face potential health risks from lingering chemical residue. So when you buy an investment property, you don't want to have a similar current affair or 730 report TV moment. So let me ask you again, should you self-manage your property or get a

good experienced property manager to do it for you? I think you can guess what my answer is, but let's dig into it a bit more. Let's start by understanding what's really involved in managing an investment property. A lot of first-time investors think it's just about finding a tenant, collecting the rent, and doing the occasional bit of maintenance. Well, good luck with that. Let me enlighten you on the scope of just some of the tasks involved in managing your property effectively. Firstly, you need to start by doing a full photographic survey and complete inspection and condition report on the property to document and confirm its current condition and repair any items that aren't up to scratch prior to a tenant moving in. Next, you need to

advertise your property in order to attract a tenant. This involves arranging professional marketing photos and writing a good description that will attract the highest number of quality tenants. And don't make the mistake of taking dodgy photos with your iPhone as they just won't cut the mustard when you're competing with other rental adverts. Then you need to list the property online on multiple sites. And again, don't make the mistake of just listing it on Gumtree or similar Facebook pages, because this is where tenants who've got bad rental records and who've been blacklisted by professional property managers tend to prey on the unsuspecting. Next comes conducting open homes for tenant walkthroughs. You also need to determine a

competitive weekly rent amount. Then comes the arduous task of tenant screening along with all of the checks required and they include identity checks, criminal records, tenancy databases, credit reports, financial and employment checks, delving into their rental history and talking in depth with referees. Then you need to prepare and execute all of the screeds of lease documentation that's required. Then we have conducting entry condition reports and exit condition reports at tenancy changeovers. You also need to lodge and release bonds from the trust account of the state-based residential tenancy authorities. You have to collect the rent every week, fortnight or month, depending on how you've set it up. And you need to provide statements and

invoices for rental payments. Then you need to implement and activate a preventative maintenance program to keep the property in good working order and compliant with the ever-changing regulations. You need to fill requests from your tenants at all hours of the day and night and quote and book in repairs with reliable trades with professional indemnity insurance as and when required. You need to inspect completed repairs. Then there's fielding tenant concerns and complaints. You need to be able to moderate and mediate issues with the tenants. And depending on the state, three to four times a year, you need to conduct full routine inspections of the property and provide the advanced notices to the tenants within the

required and stipulated timeframes. You need to deal with any and all tenancy issues and rent and then there's following and complying with the ever-changing restrictive legislative requirements you need to keep appropriate detailed written and photographic records of all communications and associated matters for both insurance or legal disputes you need to book regular smoke alarm inspections and swimming pool compliance if applicable then there's the invoicing of tenants for excess water damage etc water usage etc is dealing with body corporates and strata bodies if appropriate. You also need to pay bills for rates, water, insurances, etc. You need to issue appropriate notices for anything associated with the property in accordance with strict

legislated procedures and timing. You need to claim bond releases in alignment with these strict policies. And then there's preparing and attending tribunal hearings when tenant disputes arise. You need to follow very strict and detailed procedures when evicting tenants if and when necessary. Then there's finding new tenants when vacancies occur and the whole circus starts again. And of course, every year you need to collate and prepare all of your income, expense and depreciation documentation in readiness for accountant and tax return preparation. Now, this is just scratching the surface of what's required to actually manage a rental property. So does this sound like something you want to do or even have time to do on top of all your work and family commitments? So before you decide to crimp a few bucks and give yourself a second job,

ask yourself the following questions to determine if self-managing is the right option for you. Firstly, are you in a position to be on call 24-7, day and night? Secondly, are you prepared to evict tenants who seem to have good excuses for non-payment of rent? Can you keep your call and remain professional with tenants that are being unreasonable? Are you prepared to give up your personal time and weekends when required? And lastly, do you have the time to learn the ins and outs of the ever-changing legislation in your local area and how to manage a rental within the strict confines of the law? Now, this last one is particularly important and will help ensure that you don't get yourself

in a difficult and expensive predicament without even realising it. So when you're deciding whether to self-manage or use a property manager, you need to consider a whole range of factors, including the time and effort required to manage your property, the costs, and most importantly, your legal requirements, obligations, and protections. Now, I can't stress this strongly enough. If you're an owner who's self-managing or considering it, you need to be fully aware of the applicable rental laws and understand their obligations, because as far as the law is concerned, ignorance is no defense. And many states and territories have recently amended and or are implementing changes to tenancy legislation that's actually

increasing the protection and rights of the tenant. This means that if you're leasing property you need to be intimately aware of the changes and how they apply in your situation. It's also worth noting that adequately maintaining a property in accordance with all laws, compliance codes, policies and procedures is a minimum expected requirement for landlord insurance. If you don't follow the letter of law then your landlord insurer is unlikely to honour or pay any claim. This includes finding and contracting the right tradies who have suitable business and liability insurances in case something goes wrong, setting up suitable times with the tenants in accordance with required notice periods, checking the work has been done satisfactorily, and then paying the invoices all

within certain stipulated timeframes. And this is one of the biggest reasons to engage a good dedicated professional property manager, to ensure you're getting access to all your legal protection, as well as access to specialised landlord insurance policies that are only offered when a property is professionally managed. Now, don't get me wrong here. For some investors, being a hands-on landlord and self-managing the property suits them, particularly if they live close to the rental,

have a good long-term tenant, and can spare the time to arrange maintenance and repairs, rent collection and inspections. It's also an option for those who wish to have total control over their investment, which, aside from their own home, will be the biggest financial investment they're ever likely to make. But as I've already said a number of times now, self-managing comes with inherent risks and lacks the legal and insurance protection offered when the property

is being managed by a recognised professional. And this is one of the major reasons why landlords choose to go with property managers in addition to their expertise and connections. Because as a landlord choosing to self-manage, the onus is entirely on you. From finding tenants to making sure that all legal obligations are followed, the ball's in your court. Next week, I'll continue our discussion on self-management versus professional management of your property by drawing your attention to property management risks, outlining the reasons why it's worth investing in a good property manager, and I'll break down the costs. That's food for thought. I'm Bushy Martin from KnowHow Property Finance, so stay tuned for more.

Hi, just before we go back to the show, I want to spend a few seconds and tell you about a book that was sent to me that's now become my go-to reference when I'm looking for inspiration about property investment. You know, sometimes it's not about knowing all the answers. It's certainly more important to know what questions to ask. This book by Rasty is called The Property Wealth Blueprint. And it's one that you don't read just once and then put it away. It stays out as a reference. It's a book that you go back to time and time again, as I do, because it's packed with personal experience

and with great examples of how to get property investment right. It's very frank. It's to the point. And as you can see here, I've needed to bookmark several points. And I can tell you that it's a constant companion on my desk here. The remarkable thing is that it's absolutely free on Rasty's website, getrare.com.au. Get Rare, it's a gateway to a richer life. The website there for you again, getrare.com.au. So get this book, get it for yourself.

And that brings us to the end of this week's show before we close make sure that you don't miss a single episode of Realty Talk or Bushy's Get Invested podcast which are both delivered to you each week and 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. Also join the conversation anytime on Facebook at the Property Hub Collective. I want a special thanks to our supporters

and content partners, 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.