Property Hub - Investment Insights & Inspiration - Realty Talk Vault: Property Risks vs Rewards

Episode Date: January 18, 2023

We bring you another classic Realty Talk episode from the vault, which was originally published on February 7, 2022, but is still just as relevant today. Many investors continue to get caught up in FOMO chasing property rewards without considering the risks, so to add some balance to the equation, successful active investor turned Buyers Agent Rasti Vaibhav from Get RARE Properties join us.  RealtyTalk is part of the Property Hub podcast channel, your home for property investment insights, inspiration, and stories from Australia’s top property experts, investors, leaders, and analysts. Subscribe now to get every RealtyTalk episode delivered to you each week for free, and also get full access to Get Invested, the leading podcast for Australians who want to unlock their full ‘self, health, and wealth’ potential and get inspired by the stories of investors, founders, and entrepreneurs. 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.

Greetings and welcome. Now, in the current asset boom that we're experiencing in most investment classes at the moment, I get very concerned when I see a lot of investors getting caught up in the herd hysteria of the fear of missing out or FOMO to chase property rewards without considering the risks. So to add some balance to the reward versus the risk equation, we're joined by a successful active investor turned buyer's agent, Rusty Bypath from Get Rare Properties, whose strong investment background has sent him to devote an entire chapter of his new book, The Property Blueprint, to this very important subject. So welcome back to Realty Talk, Rusty.

My pleasure, Matt. Thank you so much. Rusty, I know that you're a very firm believer that risks are underrated in the property industry. So let's start with how you define risks. Sure. Before I talk about my definition, I typically would love to share that what is a typical understanding of risk and people talk about that it's a first of all it's not really it's a dirty

word not many people want to talk about it and b for them they define it as a capital preservation as the risk of losing money now that's a very traditional definition in the minds of people who don't really know about much about investing but coming from our financial markets background the way we like to define in the as in the financial literature is more about risk of unknown like as a volatility like it can go up and down as well so and that actually is a very good point from the viewpoint that it can be of two types a downside risk where we are losing money but then there's also upside risk which whereby it is delivering a lot more than what if we had So the reason I shared this two different definitions that are traditional and more

of a modern or a financial literature definition is that lots of people get too much worried about risk as well. And what they say, no, I don't want to invest money because I might lose money. Now, I do challenge them and ask them that that's perfectly fine. You keep money in your bank. Of course, you earn change over there as interest rates are super low. Now, there are far more bigger risks around it as well. And the risk of not meeting your goals, not meeting your aspirations, being so dependent on your active income, like as in like a human capital.

So the way I say is that definition of risk is that it's a risk of unknown downside and upside risk. Yeah, beautifully said. And just to add on to it, like risk and returns are two sides of the same coin. They have to be going together. and for any potential investor, they should be looking at the ratio as in risk-adjusted returns that what they're getting out of it.

Because if it's a consistent five cents in a dollar, if it's consistent, might be meaningful to someone, especially when people are retired towards their retirement age versus 10 cents in a dollar, which can be two cents in a year, a particular one.

So someone who can take the volatility, that means there's a more shift in the expectation of the returns will be considered more risky from that perspective as otherwise. Yeah, nicely said. That puts a very different slant on risk itself in terms of the opportunity side of it. So, sort of drilling down a bit then, Rusty, what are the risks in the property context? Look, there's quite a fair bit of risk involved in property investing. But before I get into it, I would also say that there's a far bigger risk of not taking any risk because if i look at like one of the research says that 56 percent of australians

will not have enough money even at the age of 65 to retire upon now to me that's a far bigger risk of not doing anything so there's an opportunity cost yes there's a downside risk that whatever you do today you might lose but there's an upside risk as i said before that as on a long-term average property has been a wonderful asset class of course we have to be mindful of the specific risk specific to the properties as well so i'll touch base upon few um on that if that's okay so first of all it's a market risk a market risk which basically saying that market might fall or the property value might go down um but then to me that's also an opportunity because not always if you go by the law of averages it has gone more up than down it's a long term it should

be all right the other one is a property risk like risk specific to the property what if there is a storm what if uh you know um uh the building collapses or the wall falls over so of course there are ways to mitigate them maybe if it's okay maybe i'll share how to mitigate them as well because knowing the risk is not enough we have to also know how we should be embracing them how we should be mitigating them would that be okay yeah absolutely yeah okay so for market risk it's more about how we go about diversifying it because because diversification the great thing about property is in australian market context is we have multiple markets within the market so and and as a smart investor or a strategic investor one can choose to buy properties in

diversified locations because when it is not synchronous markets what it means is that if one property is going up second one is probably might be lower so that might be on the downside But on the better side of things, it's like when some properties are not doing so well, there will be other properties which will be holding their value very well. So diversification is the key thing. Also, the research around buying the properties in those areas which are the supply and demand equation is tilting towards the growth, but the demand is more than the supply. So that's how we can take care of the market risk.

When it comes to the property risk, it's all about buying the sound properties, making sure that our professional building and pest inspectors going out there looking at the quality of the property at the time of purchase but even beyond that it should be more about how as an investor you are maintaining the property because sometimes it's easy to fix a small issue before it becomes a larger one and of course having a kind of a landlord insurance for building insurance as well so that in case something goes you know like a storm comes there's no not much one can do but but insurance cover would actually help us. Third type of risk, I would talk about the interest rate risk

in the sense that, okay, what if the interest rate, especially when we are at such a low end of the market, it will go up. It has to go up because that is the, I guess, one of the liver that RBA or the government professionals or officials can actually pull to sustain the market in the longer run. But as an investor, we have to be mindful of it.

You have to be conscious that what has been the average rate. And of course, banks, when they are lending money, they are conscious of that. But as an investor, we have to be mindful of our own buffers out there. So having held the buffer for the properties that we have, maybe one of the tactics would be to fix the loan for some time. Because then we know the exact cash flow, irrespective of what happens with the RBA cash rate. Other type of the risk that people are very worried about, because I get to see or hear a lot, is about the bad tenants and the vacancies. Because we are relying that the mortgage payment will be covered, almost covered by the rental payments that we receive. But what if there's a bad tenant or what if there's a vacancy in the property?

Now, again, it comes down to the due diligence of buying in those areas where the demand is higher. that means there will be always a demand for the tenants to live in the property now what we also have seen that they might it might not be the case and sometimes the case of not really having the right property manager so i've always believed that property investing is a business and property manager as well as the tenant are stakeholders of your business yeah if we treat our tenants nicely if there's a reasonable request from the tenant always always listen with an open open mind that it might be worthwhile also not really overly charging them or you know going for meager rates because then sometimes for the sake of getting a quick tenant we are probably compromising

the quality of the tenant so having a quality property manager again that's something that really people think about the pricing only the fees whether six percent plus gst or eight percent plus gst they're worth the salt when it comes to the quality they can offer so having that kind of assessment of the tenant and presenting the property. We'll make sure, and also the pricing of the property. Let's not be greedy. It's more about getting the right tenant and have a longevity of the tenant in the property that will help. So another thing that I talk about is over capitalization. And what it means is that we should take investment as an investment only, not really taking as an emotional aspect, not really paying over too much for the property

when it's not deserving that money or even when it comes to renovation so the idea is that we should follow a strict budget when it comes to any a purchase or b as a renovation something that I also talk about is cash flow and liquidity which is more around okay what's what's really happening because most of the time like when we are working on building our portfolio we always feel that okay we should you know someone who gets uh i guess the bug of buying multiple properties very quickly we have to be very mindful of that what might happen later on because are we actually biting more than making what we can chew or or it is just realistic and we are taking the right amount of opportunity at the same time keeping the buffers with us so not really overdoing it is also one of

aspects that we look at. And maybe if I can touch upon a different type of risk, which is a personal risk. Now, what it means is that, yes, we are building up a property portfolio, but we as a property owner are a significant part of this business of investing. We have to really make sure that we as individuals are covered with the right insurance cover. So what I really mean is that have the life cover, trauma, TPD, even income protection that has to be there. And that's how we say that, okay, these are the risks. If we know them, then they are not really unknowns anymore. We can go and tackle one at a time, look at how we can avoid them or mitigate them.

And sometimes like a market risk, we should embrace them. Yeah. Yeah, very well said. So just to conclude then, because you've covered a lot of territory already there, Rusty. should should we avoid all of the risks then in the context of what you've talked about not really it really depends on what type of risk we are taking about because if we avoid all of them we are probably parking our money under our mattress it's not really going to get us anywhere right it's more about being open-minded to and being educated on what those risks are

yeah the risk yeah the risk is unknown but when we know it it's no longer a risk so yes we should avoid all the risks because it it means that it's all unknown but when we know them but then there are few things you know the nature the force of nature we can't really avoid that's what we have to cover ourselves with the right insurance in place yeah yeah extremely well said so i know you You've actually written an e-book specifically around risk. How can listeners get a copy of that? Sure. So the background of that was that I was looking for the risk in property investing.

I couldn't really find much of material there. So I was then preparing a book, writing a book. So it's a specific chapter on the risk, but I didn't want to hold back and actually release an e-book on that. So it's very much available on my website, which is www.getrare.com.au slash resources. That's where you can see all the resources and one of the things over there. Brilliant.

Excellent, mate. Well, look, thanks for these very timely reminders, Rusty. And thanks again for joining us on the show today. My pleasure. My pleasure. Thank you so much.