EP. 1222 WHAT IS THE FORMULA FOR PROPERTY INVESTMENT?

Embark on an enlightening journey through the maze of property investment as we unravel the formula for real estate success that could redefine your financial future. Discover why location reigns supreme and whether the one-bedroom property debate holds water for your portfolio. We weave a cautionary tale of a friend's advisory entanglements, highlighting how conflicts of interest can cloud the path to wise investments. Then, we shift gears to demystify the yield versus capital growth conundrum, arming you with the knowledge to identify which should guide your property pursuits.

Billy and John, our special guests and seasoned investors, join the conversation, illuminating the often-overlooked strategy of leveraging in real estate. Feel the palpable tension as we contrast it with the straightforward nature of stock investments. We also dive into the psychological comforts of investing in familiar territories, acknowledging how emotional ties can influence our biggest financial commitments. This episode is a treasure trove of insights for both the novice and the veteran investor, poised to propel you toward triumphant investment decisions with confidence and clarity.

Transcript

Speaker 1: 0:00

Okay, so good friend of mine in real estate, in that sort of social media sector, reached out to me last night and said Mark, what's the formula for buying property investment? It was a really big question that I had to answer in a really small sort of sentence. So stay tuned, we're going to talk about buying property and what to look out for, the magical mix of what you should buy.

Speaker 2: 0:47

I'm the ringleader, so I'm gonna the magic mix. It's like a potion.

Speaker 1: 0:51

How am I going to answer this in five minutes, Billy? How are we going to do this?

Speaker 2: 0:56

Yeah, good luck putting this into a text message. I would have just said tune in tomorrow, You'll get all the secrets.

Speaker 1: 1:02

Well, I called him, but I was running into another appointment and I was like so I'm gonna right now, you go first well to start off with.

Speaker 2: 1:14

There is so many ingredients to this beautiful uh mix. The successful quick, quick, quick quick get into it. I guess you could say that um, you can start with location price. I've even had people say to me mark, I don't buy one bedrooms ah, it's hard.

Speaker 1: 1:37

It's really really hard. And look where it came from a good friend of mine, jonathan. His accountant turned around. This is normally how it happens. His accountant turned around, said you've got to buy a property for tax reasons. So he's like cool, what do I buy? He's like I think you could buy in your soups. Like cool, what do I do? So he's like you've got to go talk to a financial advisor.

Speaker 1: 1:56

I spoke to a financial advisor. Helped him save some money. He said it was actually very expensive to do. Helped him save some money. He said it was actually very expensive to do. Helped him save some money with some of his insurances. But he still got there, didn't really get that sort of property guidance information he wanted. He then was referred from the financial advisor to property people and he felt like he was getting the slick sell job on new developments and he's like, yeah, I sort of understand that they're a good investment. But I know good people in the industry. I'll reach out to them and ask them. I was, fortunately, one of them. What did I say?

Speaker 2: 2:37

well before. Uh, you gave him your wise words. The feeling he got was being handed around a little bit. You know probably you know where, if something came to fruition he purchased, there might be a bit of a you know a referral fee there, and I don't think that's a nice feeling. And I think you summed it up really well off there. You know the advice that you take from any professional, not just in real. Is it the same practice they do? You know? Do they practice what they preach?

Speaker 1: 3:08

I think that's what you gotta look, yeah and look, you know, I sort of get it because you know, if I'm a stockbroker and I've and I'm, and I'm, and I'm presented with a person that says I don't know whether I should buy a property or I don't know whether I should buy stocks, like I'm a stockbroker and I'm going to go, these are the stocks I've bought that I think are great. This is what you should do. Property no. So it's sort of like I get that. That even works with property. That you know you may be getting.

Speaker 1: 3:40

It's a bit different with us because we get pretty much the same commission across the board, but with new developments and new, new areas in sydney sometimes a developer will pay a five percent commission or a three percent commission between paramatter and chatswood. You know and you will go. Well, you should really buy paramatter and like you're getting five percent off the paramatter commission and a three percent off a chatwood commission. But is that in the best interest of the clients? That's what. That's what I'm talking about. How do you watch out for that and what is the actual, the proper, true combination of what to look for?

Speaker 1: 4:14

yeah, well, tell us please okay, now this is, this is the most powerful thing I can say. Everyone gets caught up in like sort of the cogs, not the machine. And what I have to say is when I was talking to my mate I said look, let's talk about yield. Yield is rent right, good yield, bad yield? I said, well, if your yield is going to be sort of 4%, 5%, 6%, whatever that's going to be, that's great. But I said you've got to also consider capital growth because capital growth is probably going to double. In a proper way it should be doing well, capital growth should double every 10 years. So let's pull that apart 4%, 5% for your rent every year, doubling in 10 years is probably eight, eight percent compounded. So I said you talk about 13 to 15 percent per year is gonna be what the good property will will surface. One third of that is going to be your rent. Two thirds of that is going to be your capital growth. So I said capital growth is twice as important in your consideration than rent. And he went uh-huh.

Speaker 2: 5:31

Yeah, compared to someone who just focuses on the cash flow, which obviously is equally important. But if there's no capital growth there, you're only relying on the rental income and as that property or investment ages, you know, is it going to keep up with the same return? Is there going to be any future growth in the market? So I think that's you know where people's considerations in new and upcoming suburbs, you know, gets revised and looked at. Because if there's going to be an influx of stock, there's no real price protection there. Okay. There's going to be an influx of stock. There's no real price protection there, okay.

Speaker 1: 6:08

That's a really good point. Influx of stock. So that was the next page I turned. So this is all within a couple of minutes. It was elevator conversation and I was like, let's talk about influx of stock, let's talk about supply and demand. So what do you mean? I said, well, I'd love you to buy in an old, established suburb that's very sought after. So what do you mean? I said, well, to give an idea in my he's a melbourne guy, uh, jono. And I said to give you not what, what an idea of what I'm talking about. Northern beaches, uh, eastern suburbs, uh, north shore. We've never, we don't really have new stock. Good example, bad example I said Mascot and that area through there, within a 12-year period they went from 2,000 units, 4,000 units, 8,000 units, 16,000 units, 32,000 units total. What does that do to your rent and what does that do to your rent.

Speaker 2: 7:09

And what does that do to your property value? Well, it doesn't. It doesn't mean there's no growth, it just the supply is constantly meeting demand. So, as you know, people move into the area they can build more. So it doesn't, you know, foster the same capital growth as suburbs and properties that have a limited supply.

Speaker 1: 7:34

Allow me to give you an example. Dy, in 60 years, sat on 8,500 units, which then moved to, over a 60-year period, 9600 units. It didn't even change 10 over 60 years. That's a good example of an area that's not pumping in a lot of supply into its, into its core market there. So there's your capital growth, there's your yield. Where do you buy? Um, you know, try, try to balance those things that we're talking about today. And if you can buy wholesale and what I mean is if there's less people in the loop accountant getting a lick, financial advisor getting a lick, real estate agent getting a lick, broker getting a lick another real estate agent, buyer's agent, right.

Speaker 1: 8:25

So often, if you can sort of shorten that, go direct and you can be going to open houses and just saying, look, this is a good investment. And also, I think, just talking to people in the know they're always going to help you. You'll be shocked the agents that you're meeting on the street. You just have a good old-fashioned open chat with them. What's the formula before we go? What's the formula billy?

Speaker 2: 8:50

can you read? It I'll take it off the message. Ah, here's, it was the here was the formula that we got that we got asked last night purchase plus costs, minus rent equals return. What does the final figure need to be? I think the final figure really is well, it's case by case, certainly um, it's okay don't say it depends.

Speaker 1: 9:19

I, when you ask someone a question, they they go. Yeah, it depends, it's a relative.

Speaker 2: 9:25

I have a stab. We love that one as well. What's the formula? I am a believer that it's costs, it's maintenance, it's everything packaged up into one minus the rent. Quite often that can be a negative number. You might be negatively geared, but the capital growth plays Trump's trump card in this war.

Speaker 1: 9:53

So where I think believe it or not, and no one really talks about this trust is unbelievably important, is unbelievably important um to have that, this, this is probably the biggest investment, aside from your home, that you're gonna make in your life, so there's enormous amount of trust involved in that. So I think the formula requires trust. I think the formula requires um low stock, requires low stock for rental purposes and for resale capital growth purposes. I think the formula requires familiarity to make you comfortable, and not a lot of people say that, but I think when you know 10,000 things about a suburb that breeds familiarity, 10,000 things about a suburb that breeds familiarity, so trust, low stock in that area, familiar familiarity to help you sleep at night that's brilliant.

Speaker 1: 10:57

I think that's it all right what do you think, billy? What's your, what's your magic combo formula?

Speaker 2: 11:03

yes, similar I what I. What I always get asked from investors is why would I buy a property that loses money each week?

Speaker 1: 11:12

negatively geared.

Speaker 2: 11:13

Yeah, you know that would be the biggest hurdle they've got to step over in their head. Can I answer that Go?

Speaker 1: 11:26

You're buying, you're investing in a capital growth area rather than a high rental yield area. And back to what I said at the beginning capital growth is two times more than your rent, so you're investing in at the beginning. Capital growth is two times more than your rent, so you're investing in the hope of capital growth and generally there's a certainty there. You can see trend. You can see suburbs trend over 50 years. So that's why and you're losing money for a short period because it catches up and you're making money with capital growth that you can't spend it till you sell it. Probably a good discipline.

Speaker 2: 12:05

Yeah, it's a great discipline. In addition to that, you're enjoying the growth on the full amount of the property worth, not just the portion you put in to begin with. That's right. It's quite different to a transaction with shares $10,000 in, $10,000 out, plus your growth With the property, it's $10,000 in, plus the banks $50,000 if you're using a 5x calculator and then enjoying the growth on the full amount.

Speaker 1: 12:37

Spot on. So there you go. It's funny. People want to buy within 20 kilometers where they live or grow up. Again, that third pillow what I spoke about familiarity. That's exactly right. You're making one of the biggest investments, or the biggest investment you in your life. You want that familiarity with where you're investing. Boom, see you guys. Thanks Billy, thanks John.