How to Plan to Build a Passive Income for Life with Property Investment?
(This presentation is part of the 2014 CPA Public Practice Conference in Lorne, Victoria)
Tim: I’m so pleased to be chairing this afternoon session Property Investment – How to Build a Passive Income for Life. It’s my pleasure to introduce Ben Kingsley and Holdaway.
Just a little bit about Ben and Bryce. Ben Kingsley is the founder of Empower Wealth and the chair of Property Professionals of Australia. He’s a qualified property investment advisor. He’s a licensed real estate agent in Victoria, New South Wales, and Queensland; a licensed financial adviser; holds an associate diploma of business and has become one of Australia’s leading experts in residential property investing. He’s a regular media contributor and keynote speaker in Australia featuring in the Home Buyer and Property Investor Expo around the country. He appears regularly as a panelist and commentator on Sky Business News ‘Your Money, Your Call’ and Melbourne Property TV, and some of you have probably seen Ben there. Ben also provides content for Money Magazines, Smart Property Investor and Your Investment Property Magazines and Property Observer.
Bryce is director at Empower Wealth and co-host of Relocation Relocation Australia and Location Location Location Australia on Foxtel’s Lifestyle Channel. He’s a qualified Buyers Agent and Financial Planner. Bryce holds a bachelor of Commerce in Accounting, Real Estate Agent License and Diploma in Financial Services (Financial Planning). So I think they’re highly qualified for the presentation they’re about to give us. So what I would like to do is hand over to Ben and Bryce. Thank you. If you could welcome them. Thank you.
Bryce: Thank you very much. Hello, everyone. Has anyone in the room actually watched the show in Foxtel? Great. Thank you for watching the show. I get the privilege of riding around the country helping people buy real estate and I get to see all corners of the real estate market, people buying for the home, but for the last 15 years, I’ve been a property investment advisor born and bred in Perth, and for the last 14 years, been living on the East Coast. So really, what we’re going to talk about today is how to build a passive income for life.
So I guess what we find is when we tour around the country we’ve talked this message in a few different locations and we found it’s been really quite popular because most of the time, when we’re talking about investment property, what we find is people focus on the number of investment properties that you have. You only have to open the magazines and you’ll find seven properties in 7 years or 21 properties in 21 months, so it’s really based on the tally of properties that you have.
Whereas the way we focus on it is that we decided to think well, the end goal of this property is to provide us with a lifestyle, and that lifestyle requires to have some form of cash flow so I was talking with Effie Zahos. She’s the editor of the Money Magazine a couple years ago now, and she set us the challenge of how to earn $2,500 per week building a property investment portfolio, and that was debt-free. So we received that challenge and we were happy to take that on, and I must say that $2,500 a week was a very tall challenge. It’s not something that we took lightly, but we did it for three different scenarios. It was a single 28-year-old female, a mid-30s couple with two younger children, and a mid-40s couple with two older children who’d never invested in property before, and what they would need to do to actually be able to build a passive income plan retiring all their debt as well as buy investment property, the investment-grade ones.
So I’m happy to say that the first scenario, they needed one principal place of residence and three investment properties. In the second scenario, they needed their principal place of residence and three investment properties, and in the third scenario, they were in their mid-40s and time was a bit of an enemy to them. They actually needed 5 investment properties plus the principal place of residence. So we find that very encouraging when we talk and the client also find that very encouraging that you don’t actually need multiple properties. There are people who have very strong ambitions to do that, but the fact remains that you can actually buy investment property in this country and it’s… maybe it’s a little as three and create a very good passive income.
One of the things that we’ve learned from doing the presentation around the country over the last sort of 18 months is that to show people how we actually do that, how we actually do build that $2,500 scenario. So Ben is going to come up after me. We’re actually going to do a live demonstration and show you exactly how we do that, exactly how we arrive at the dollars, exactly how we arrive at the yields so that you can actually see that live, which I think is really quite good.
So what we’re going to chat about today is just have a quick chat over how many investors there actually are in this country, who has multiple properties. I think that might surprise you, and where they actually do buy those investment properties. Having done this for a little while, we’ve come up with a formula that we think to build a multiple property portfolio plan, the formula that these four areas that you actually do need to master so we’re going to have a chat about those. We think that investing in property is actually a process, not an event, and unfortunately, in our industry, unlike the accounting industry, unlike the financial planning industry, unlike a lot of industries, the barrier to entry for property investment is really quite low. In fact, all you really need to do is get a haircut and put on a suit, and then start talking about investment property as an expert.
So one of the things that Ben has been doing in his role is the chair of the Property Investment Professionals of Australia is driving regulation, driving a minimum standard that is required to if you’re in the space of giving property investment advice, and we think that there is a five-step process that you need to follow irrespective of whether you’re a first time property investor or whether you’re a seasoned property portfolio Buddha. And of course, we’re going to talk about that, a lot of case study on how to create that $2,500, how we do it with one of the scenario.
So just by a quick show of hand just so I can see who I’m talking to tonight. Who is already investing in property and hands up if it’s multiple? Okay, so we’re talking to a very educated room so we’ll make sure we pitch you at that level. Of course, this is basically… The disclaimer say you haven’t taken into account your personal circumstances so that is the cover that we were talking about.
Now, as Tim talked about in his opening address tonight, properties done very well over a long period of time, and in fact, here in Melbourne, it’s done significantly well. And you see back in the GFC that actually dropped 8.33percent during that time, and there was a lot of people at the time saying that it’s going to drop 40percent. So residential real estate has been a very long-term performing. I still don’t know… Most of you, put your hand up if you’re investing in property. You know the values of residential real estate, I think, is arguably Australia’s greatest wealth creator, but I don’t necessarily think that there’s no place for, you know, anything else in terms of business cash, shares, but also, I think that over a long period of time, residential real estate has performed very, very well.
[Watch: Top 3 Reasons Why people choose to invest in Residential Property?]
And it’s interesting if you approach the Australian Taxation offers to see how many residential property or how many property investors there are. In 2009, there was 1.7 million, and you can see in the latest data we can get from the ITO, there’s 1.89 million people. So really what I’m saying is one in ten Australian taxpayers actually do have an investment property, claiming, you know, just under $14 billion in rental losses, and that’s got an average income loss for all negative geared property of around $10,895.
As I travel around the country, I find it really that these numbers quite… They actually match up what I do in terms of the stories that we shoot because we shot in every state and capital in this country, but the figures skew when most of the investment properties are in this country is 30% of them are in New South Wales and 24p% of them are in Queensland, and 23% of them here in Victoria, and then 11percent in my hometown in Perth, and that’s actually I find it intriguing when I look at these numbers, and that’s probably a simulation as to the amount of people that want to come out to our show in terms of where they want to be searching for. There’s no direct link, of course, but I think that it’s fair to say that the East Coast has the majority of the investment property, will be the location of choice for the majority of investors in this country.
And interestingly, I couldn’t get the breakdown for the 2012 stats, but you see that the percentage increase in the number of investors, you could probably marginally adjust this, but of all the property investors that there are in this country, 73% of them stopped at one. They actually stopped at one investment property which I find intriguing, and particularly given the fact that the survey we had before, the number of you actually multiple property investors from my experience and in our experience in the business that if you do buy one investment property, it’s much better than buying none, but chances are, you don’t want to create a passive income and chances are that it’s not going to give you, you know, a huge kick to your financial independence going forward.
So you know, and it’s even more intriguing that 9 out of every 10 property investors stop at either one or two. So why is that? I don’t know the answer, but maybe because getting the first one right is quite hard to do, and maybe because there’s a fear around debt as well so once you’ve actually got one that would be quite a steep learning curve for a lot of people, but at this point, the question is why. I mean 1 in 3… 1 out of every 10 people actually buy three or more, and I think that really comes down to probably the property investment industry being a little bit difficult to navigate on your own. It’s largely driven by do it yourself-ers. Of course, people who are in a previous position, well, I can have their, you know, their accounts and advise them, but a lot of people do go into loan, and I think there’s varying degrees of advice that comes with that.
In terms of the market insights, there’s 9.4 million dwellings in this country. It increases, by about, you know, up to 160,000 per annum. The value recently was put on at 5.4 trillion. There’s 15,000 plus suburbs in this country, approximately 70% owner, up to 30% rental. So the question you need ask yourself is which investment property do you need to buy out of those 9.4 million – Excuse me. Clear my throat here – 9.4 million dwellings in this country because not every property makes for great investment. And then to compare that to the size of the Australian stock exchange is roughly below the 2,000 listed companies and it has a value of $1.5 trillion.
So I’m not going to get into an argument about which one’s better because I think there’s a strong case for both. Usually, my central empire is which one can you get the most leverage on, and residential real estate is quite strong in that department, but certainly not having a sort of property vs shares discussion because I think it’s a place for both.
This is where we think that if you can actually provide a formula to investigate property and find out which areas you do need to have some form of mastery that’s where we find and we see on a daily basis that people can build their property portfolio properly and that can actually be one of the small percentage of the population who actually do go on to buy multiple investment properties. So we think this formula is as simple as ABCD, the first one being asset selection, and I’ve got a slide here that you would have seen some form in the past that just shows the difference of making the right purchase can actually have on some long-term wealth is absolutely critical.
The second form or area that you need to master is that of borrowing power, and I certainly understand that there’s multiple parts to this particular discipline. I’ll go through that in a bit more detail shortly, but certainly, much more than interest rates and establishment costs.
The third part is really cash flow management, and I think probably the hardest part of the four because there’s lots of information out there on how you can – Well, lots of software on how you can manage your property portfolio a bit where we see a weakness in the marketplace in some of that, I guess, material that is merging the family budget with the numbers that you’ve got for your investment portfolio, often a hard-to-do because over here, you buy more investment properties on what you can afford, but over here, you could, you know, send the kids to school, you better renovate the kitchen, you go plan to go on a holiday cheer, so getting the two to talk is very, very difficult in our opinion, probably the hardest part, hardest section to master out of the four.
And up until recently, we thought it was the ABC, but now, it’s the D, it’s the defense, and it’s largely the domain of your financial planner in terms of helping to get some of these defenses in place, but there’s no point building this portfolio if you leave yourself a little bit vulnerable and at risk in some of these areas, so let’s have a look at that in a bit more detail.
As I said before, you’re probably saying something kin in some form of this in the past where what’s the difference between slight differences in asset selection and the choices that you actually make, so a property that’s worth $500,000, and we track its progress in compound growth terms over a 20-year period. What’s the difference of small percentage increases in the purchase, probable the decision that you make in terms of the property that you buy?
And you could see here from, you know, far off to 70percent makes the $600,000 difference, but if you can get a property that actually does perform, outperforms the average, you can say that it’s several million dollars that actually does make a difference. So I guess having 9.4 million dwellings in this country, and again, trying to work out which one makes for a grand investment is really the hard part. And for us, we’ve got three things that we look for. It has to have owner-occupier appeal. It has to have some form of scarcity, and the third one will come to me in a second. There’s certainly… There’s a framework that you need to I guess consider, and the third one is investment grade. So not all properties make for a great investment property.
So when it comes to investing in property, Australia’s question to you, who is the most important person in the entire equation when you’re building a property portfolio? You know?
Bryce: Tenant? Tenant is really important if you’re likely to rent. It’s really, really crucial, but I think there’s someone a bit more important than that.
Bryce: Actually, important person, I think who’s more important is the subsection of the bank. It’s actually the valuer because if you’ve got to buy and hold property investment strategy, basically, what you need to do is get the bank to come back and revalue your property’s highest leverage against that to buy your next property or do whatever you want to do with it. So effectively, if you’ buy investment property that don’t have an owner occupier appeal, in my view, that’s going to set you back, and it typically, an example of that is something shooting a combination, for example. If it doesn’t have owner occupier appeal, you put a for sale on the front. Typically, our new investor is actually going to invest in that property, and therefore, it doesn’t have that same emotional drive than an owner occupier property does, and I’m going to auction this Saturday for a property that we’re going to buy for a client on the show, and my job there is to try and proficiently intimidate as many people as possible from beating against me on the day.
[Watch: Tips for Buying at Auction – Part 1]
I’ll bring two cameras with me which usually helps a little bit, but if they’re not around, my job is to try and give the person who’s up against me every occasion that I’m going to buy this property no matter what, and I’m given that I’m not using my own money, I don’t have the same emotion involved in it, I’ve been in hundreds of auctions before. I can actually be quite successful, you know, against 99 over 100 people, but really, what I want is every now and then, someone will come along no matter what I do they’re going to outbeat me because I do have a limit despite the fact my job is try to convince everyone that I don’t, and really, what typically happens at that point is emotion has taken over, and the heart section invested in that decision because the school down the road is exactly whether they want to send their kids or the fact that it’s only 7 stops to the city on the train, and I can walk down to the village and have coffee on a Sunday which is just packed, so rough that they are going struggle to get a seat. So all these things just mean that they’ve got to have this property and they’re going to outbeat me no matter what.
And that’s the type of thing that I want for my investment property because if I’ve got to buy and sell strategy, it means that someone’s going to fought it out against other people to pay hard cross. We’ll probably choose my aims, but if I have a buy and hold strategy, it means that the value is going to be hmm, something different about this property. I can see that one around the corner sold that much and that one around the corner sold that much. So I can actually comfortably value this property up, so I’ll get a better value. I should option a better result for the portfolios.
So asset selection is absolutely critical and this is a bit of a framework that you go through in terms of determining where you should be buying, and ultimately, it’s determining which state. And to be honest, you saw the stats before where most people are: It’s New South Wales, Queensland, Victoria, and WA mean third with 11percent, so you could see… And that’s usually largely driven by population basis as well where the income is caught off the wind. I mean I’d like people to ask what… We don’t recommend that a lot of people invest in that line. It’s just generally largely speaking income drain and also population challenges in terms of Adelaide and Tasmania only having about… and the Northern Territories only having about 10percent of the entire population of Australia.
[Read: Top 5 Aspects to Look at During a Property Inspection]
So it’s important to know that not all states work together and knowing which state you should be at any one time is really, really important. And once you’ve identified that, we, as a business, we’ve got 21 suburbs in Victoria that we can see the investment grade, and for us, we don’t actually think that the past trend of all properties going up in value is going to continue in the future. It will come up in chats, usually about some of the things that he specialize in, but one of the chats that I had with him recently is where is the injection of affordability going to come into the household over and above what happened in the ’70s and ’80s when we we’re from single income households to double income which put an injection of cash, and the second major one is obviously the fact that we’re at low interest rates now, which is, of course, improving cash flow, but where are we going to get the next wave of or the next injection of cash flow into the household.
It’s very difficult to see where that is, so therefore, not every suburb and not every house in the country will continue to grow as historically. So you need to be very specific about which suburbs that you’re buying, and for us, we got our sites around us, and largely, we’re looking for professionals who are in their sort of 30 to 40 age gap who are largely likely to get a payroll as next year in professions that allow me to get a payroll as next year because they’re likely to be able to pay more for a property in the suburb that people, you know, for example, add in the mortgage belt who aren’t likely to get a payroll as next year and despite the fact that they do want to pay 10% more for property next year, once they go to the bank and show them how much they own, the bank is going to say we don’t serve serves up so we are not going to lend you the money, and therefore, they’ll hit some of those glass ceiling.
So for us, there’s a very clear set of criteria as the 21 suburbs that we consider investment grade and that’s where we put our clients in. And then, of course, it comes down to straight, you know, the good straights and the bad straits. Once it applies to the villages in the train stations versus the ones in the dead corner which I’m going to cut through straight. And then, of course, property. Whether it’s a house or whether it’s an apartment, I find them interesting when I have a discussion with my father who was born in 1939 so he’s pre-baby boomer. My mom was born in 1948. She actually is a baby boomer. I’m Gen X. My wife is Gen Y, and so my dad tells me that there’s no money to be made in flats cause that’s the generation that he grew up in. Whereas now, you know, with the generational shift in property, it was Jack and Jill went up the hill to fetch a pile of water. It’s now Jack and Jill went down the lift to fetch your babychino. The cold’s doing find. It’s still in my head.
So the fact that people are now starting to make decisions about land that they didn’t make in the past. Baby boomers said it’s all about the land. Generation Y doesn’t think that. So that’s the position. So land is still, in my opinion, is still very strong, but it’s land value that’s really, really important.
[Watch: “Is Land Size still King”]
So again, determining what sort of property that you want to buy, you then go do the due diligence, and then the difficult part if you don’t negotiate with it every day as part of your job – I have those parts as skill set – is to negotiate with the real estate agent who’s certainly got power for that is their armory, but that’s the framework, but obviously, it forms part of your asset selection to make sure that you make a really good decision.
In terms of the borrowing power, you know, in terms of mastering this, these four parts – Excuse me – in my view of who the players are, we’ll get who the lenders are. Of course, I mentioned the value is really, really important. I understand who the two more insurance players are and how that actually works together in terms of what you can borrow because it leads into the borrowing capacity and the 3Cs, you know, your capacity by your equity – Sorry – your income, the collateral which is your equity, and then the character which is your credit worthiness so your history of having poor credit; understanding the products for us and we use offset accounts. That’s a very, very strong part of what we do. In fact, we recommend that clients have interest only loans not only on the investment properties but also on their principal place of residence so they can use the offset account 100 percent to their advantage.
And then the last part there is loan structuring, which is the stand-alone loans versus having cross secure ties and the difference between those is really, really crucial, is really, really important, and for people who actually do want to build multiple properties into their portfolio, understanding the difference between stand-alone and cross security ties actually is only everything.
And last would be this ownership name. We’ve seen a lot of people buy properties in their Self Managed Superannuation Funds (SMSFs). They need to understand how that works and it’s probably something that you guys do very, very regularly with your clients, but for… Whether it’s in your own name, whether it’s in a trust, or whether they’re doing under a Self Managed Superannuation Funds (SMSFs), all has different ways that you need to understand this discipline of borrowing power.
[Watch: The Biggest risk of using SMSF to Invest in Property]
[Watch: Three things to Consider before setting up a SMSF]
The third part is cash flow management as I mentioned before and that’s kind of understanding the flow of money within the household and Mark who’s going to come up with them shortly. He… When I first met him, he just said to me, “Look, budgets don’t work.” And I was, “What do you mean budgets don’t work?” He got to say, “They just don’t work because we rot them at the beginning of the month. We put them in the drawer for the month, and then at the end of the month, we look and we reconcile and we go where did the money go?” And so he says without a system that supports your budget, it’s largely irrelevant, and I think that’s really important distinction too because here, we can see that below the green line is really where a lot of the discretionary spending is actually done, and that’s where a lot of the waste is done.
So part of the cash flow management is in two phases: understanding how the cash flow goes underneath your roof so you can trap any surplus and use that surplus to actually invest in whatever your preference is, and obviously, property is a strong preference for you based on your attendance today, but without getting this under control, really, that’s the tough part, and so that’s the first part.
And the second part of this is then being able to simulate the purchases. Your life, all of this, the fact that you want to buy some investment properties and interest are different I guess levels and also real-life events, childcare, renovating the kitchen, going on a holiday, all that sort of stuff, and that’s really what we’re going to do, and Ben said he’s going to show you how it all comes together alive and throw it out to you to see if you have any questions around that as well.
So here’s some of the things that we go into when we’re trying to understand what it is that we need to unpack in helping someone build a plan. And I guess in the financial planning industry, they have a full stack of advice. Ben is leading the charts. He holds the chair of Property Investment, Professionals of Australia have a form of standard advise that likes to property as well, and this is some of the variables that we actually go through to achieve that.
The last part is the defense, and really, there’s three things that we need to consider here as part of the defense. We need to protect their assets, and so typically, this is in the form of, you know, whether it’s building insurance or whether it’s landlord’s protection insurance, so you can protect that side of the portfolio.
The other thing that we need to defend is your income. So again, this is the domain of a financial planner so I’m just being very sort of general, but you know, some form of income protection insurance to make sure that should something happen to that, you’re covered.
And third part of that is really protecting your lifestyle and defending that, undergoing through trauma or TPD or whatever is the term is important to you to make sure that you’ve gone to the trouble of choosing the right assets, you’ve understood the borrowing side of things and made sure that you see borrowing like a game of chest, thinking sort of in the game of chest, you think two or three moves in advance. Well, building a portfolio is the same. You’ve got to think two or three loans in advance that’s structured off in a certain way. The cash flow management is making sure that you get the budget and the properties and everything to talk to make sure that the money is still there in the end, and he would go to make sure that we cover once we’ve gone to the effort of building all that. We’ve actually covered or defended all of the things that are really, really important.
So that’s the formula. Here’s the five step process that we go through. And it doesn’t matter if you’re first time investor or you’ve got 10 investment properties. It’s the same thing.
[Click here for a more detailed explanation on the Property Investment Formula]
Number one, you’ve got to clarify where you’re at. So it’s snapshot in time of where you’re currently seated so that we can see what it looks like for you and set some short, medium, and long-term goals as to what you want to achieve. And it doesn’t matter where you are. That’s the first step.
The second one is to evaluate. So I liken it to going to a doctor. The first thing the doctor does is he asks you what your symptoms are, and you explain them to him, and then evaluate. The doctor says, “From all my years of experience and everything that I’ve done in the past, based on what you’re telling me and where I can see, this is the recommendation that I’m thinking that I would need to make.”
And then the third step is the plan and build that plan. For us, it’s a robust numbers driven plan so some of you actually knows what that looks like in terms of a blueprint. So a guy and the doctor would say, “You need to go and exercise more. You need to make sure you don’t drink as much red wine. You need to go on… Use this script,” whatever it is that they’ve suggested from, then clarifying what’s going on for you, evaluating from their experience, and then giving you a plan of what you need to do.
The fourth thing is when you get that from the doctor, whatever their advice is, you then are going to go and implement it. You’re going to go to the chemist. You go to walk the dog. You go to buy 3 bottles of red instead of 6. Whatever it is for you, you still got to implement what it is that that plan is, and then the last thing is the manage to go back to the doctor, and you say, “These are the things you asked me to do. These are things that I actually did and how we’re actually tracking.”
So that’s not too dissimilar to property investment. In fact, it’s a five-step process. You can’t jump ahead. You actually have to stay in the moment and make sure you check each one off before you go unto the next one.
Then I found this one really interesting in terms of the manage because I remember meeting… She was an air hostess, worked at Qantas. It was back in 2010 when I first met her. She said that she bought an investment property back in 2002. She traveled from Sydney to Hong Kong, Hong Kong to London. Every second week, she’s on a bit over $100,000 paying on to tax, and her plan when she bought her first property was to buy one investment property each and every year from that point forward.
So basically then, well, okay, 2002 and its now 2010, its 8 years later. Surely, you’ve got somewhere between 5 and 8 investment properties now based on that plan, so I said to her, “How many do you have?” Of course, she still has that one investment property because this step was often… is often overlooked, it’s often missed. That’s actually where we measure what we’ve done. We monitor and we fine tune to see if there’s anything we need to do to tweak it, certainly moving forward.
So that’s really… And I’ll do the areas of discipline that you need to master: asset, selection, borrowing power, cash flow management, and the defense, and then the process that needs to be followed is very, very simple. We need to clarify. We need to evaluate. We need to plan. We need to implement. We need to manage.
So that’s what we’re very good in theory, but how does that actually work in practice? So again, here’s the case study that we’re about to run through with you. It’s actually in this magazine here. We can make it available to you. I was asked to contribute to the cover story in March this year, which is a continuation of our story, so if anyone’s interested in seeing those articles, we can definitely make those available too, but here’s a mid-30s couple that are starting to move into their peak earning capacity but also starting to move into peak spending as well because they’ve got two young kids, so the heat on the family budget is done to become very, very strong.
Their monthly after tax is $8,500. Their bill payments including Foxtel, if you’re wondering, so they can watch the show $2156. Their lifestyle and discretionary spend was $2750. Loan payments including the mortgage was $2904, which means I have a total expenditure of $7800 per month, and I surplus of $770.00 per month. So really, the goal that we set to us was actually how do we create $2,500 passive income per week, and so, we’re about to show that to you, but Ben got an introduction at the beginning as to what his qualifications are, but I can certainly say that I think that Ben is one of the elite minds in the country when it comes to property investment and putting it together, plans like this. He’ll probably correct me, but he’s put hundreds of plans together. This is what he does every day and part of it is to make sure that whoever is the circumstances, he’s looking at it. He develops a unique solution for them. so hopefully, I think you’re going to get a lot of benefit out of this next session, so as I call Ben up to talk to you about how he’s going to put $2,500 per week, debt-free, into this capital. Thank you.
Ben: Thanks, Bryce. Thank you for choosing our session. My goal here today is to understand you and the practice and the work you do in your business. As the chair of the Property Investment Professionals of Australia, I’m forever frustrated about the immaturity of our industry and the amount of people who play on unregulated marketplace and how they go about earning their income and putting potentially their self-interest before the interest of their clients.
Now in speaking to a professional audience like you guys, this is great for me because I’ll actually share with you how we go about doing that, how we go about identifying the opportunity the potential of our clients, how we clarify, and how we evaluate, then how we build this plan.
So what you’re about to see is work that Michael and myself built over 2-1/2 years in terms of building out a sophisticated modeling software that allow us to get real-time answers for our clients in terms of what the best direction is for them to move forward, and of course, you can feel free to use this in your own personal situation as well.
Is that my phone going off? No, that’s Bryce’s. Bryce, your time’s up.
Okay, so this is where we capture that information. So I’m not going to spend a lot of time in here because we haven’t got a lot of time, but it’s a fact find, pure and simple, okay. So we’ll look at spending. We’ll look at income. We’ll look at costs. We’ll also look at money management. We’ll look at everything around the current situation and we get to a summary result, and that summary result tells us what they’re spending on certain things, the big ones here, as we look at them.
So this is the money flowing through. The tax is set, just a little fraction above. Thank you, Michael, for helping me. So there’s the tax that’s being paid and this is the money that’s going on bills. This is the money that’s going on spending, obviously including discretionary, and then the loan repayments currently on their existing owner-occupied home.
So the bottom line of that is we’ve got a surplus, okay. So we’ve got a surplus, and to make money in property, you’ve got to spend money. And the reality of while we invest in property is the return that we get. I don’t necessarily have a love affair with bricks and model because I love property. I have a love affair with the outcome that can potentially give me and my clients.
So we move from this information, and this information then pushes across into our simulation software, which is where Michael is hopefully going now, where we get to… I’m sorry if we just go back to the main page, Michael.
Ben: Sorry, that’s my fault.
So this is the landing page where all that information goes into, and what we show to our clients is three things. What if you keep spending that $770? What does that do to your potential to carry out your wealth. Number two, what if we actually were to trap that money and retire it, and then put that additional money into super and savings, and then number three, what if we actually look to leverage and manage that cash flows really well to potentially secure property portfolio? It’s as simple as that. Okay.
Now, in saying that, we scroll through those numbers and there’s a lot of information in behind here, but the most important message I’ve got here is all those variables that you saw before as part of the logging to the information you have here at the conference. We’ll actually have that as a download. We also have our slide presentation as a download as well for you. So that just tells you the types of variables and assumptions and things that are going on in real time and in our modeling.
So with that information, we can have a snapshot of their wealth projection. So we have a look at how they currently sit right now. How’s your mouse going in there?
Michael: You expect me to go get it?
Ben: Okay, so inside here, we’ll move across to the chart because I’ll explain this chart too. So this is the value of their principal home and these white bars are their savings and superannuation. The yellow represents the debt. So this is strategy 2. So if we’ve trapped all that surplus cash, and we look to focus on just retiring debt, and then we trap 50percent of that surplus, and committed that to super and savings, that’s the outcome we would have.
And obviously, this couple here are retiring around this period of time, which is the age of 60, and so that’s when you can see they draw then on the capital, and eventually, they’ll run out of money. Okay, so they’re trying to get to this target of 130 or $2,500 a week. They’re not going to make it, okay. So what are the alternatives for them?
And as an advice… Now a really important thing for us to do, we’re taking our clients and we’re actually giving them tailored solutions and tailored property investment advice for their specific needs because every client that I see isn’t the same as the next client that I see, okay, and it’s the same in your… in the skill sets that you have in terms of how you look at after your clients.
So the next thing we look at is their household cash flow position, and these two graphs that Mark was about to go to show us the cash flow position. Now let me explain this graph here. This is flow in, flow out every month for the next 40 years, indexed at 3percent. We’ve got all of our assumptions and so forth and I’m happy to talk about those assumptions we used because we figured out its value to our practices and business as well.
So this is the opportunity for that client. This is that surplus position that they’ve currently got, okay. So my job as the property investment advisor is then to look at what is the best opportunity. What’s the right fit for them? what is the value of the property that’s best suited for them and what type of investment returns are we going to get as supposed to just going off the shelf and picking a product, and then say, “Here, have this one,” and doing exactly the same thing for the next client that walks in the door. “Here, have this one. This one worked for that couple. It should work for you,” okay, because everyone’s circumstance is different.
And the reason why they’re different is because if we go into, back into the fact find, Michael, this is the moment in time, but what about their future plans, all the stuff that Bryce was talking about before? What are they going to do? They’re going to need money to change cars over. They’re going to need money for one of special events. They’re going to need money to put their kids through school. They’re going to need all this particular things and that’s what we’ve got here.
So we can see in terms of Rebecca’s position and the kid’s position. So we got Rory and Amelia. So there’s child care finishing and there’s the school fee starting, and we know exactly when they’re starting. We know exactly when to penetrate those numbers into the spreadsheet, and you can see there. Then we’ve got… In this particular case here, we’ve got primary school and secondary school public fees, okay. And that’s what we’ve got. So that real time projection is actually forward forecasting all those lump sum things.
Now I’ll tell you a quick little story. The reason why I was so keen to have this information is when I first started working in this industry some 10 years ago. The property market in Melbourne had had a really good run, and after 12 months, I had clients coming back into the business saying, “You’ve just made me $60,000. Do it again, you know.”
And the reality was that when you’re about to start a family, once you’re about to start to get some costing to your family, and so the reality is what if we get that wrong and what if we have to sell that half standard in the next 3 to 5 years. You could lose money rather than make money. So it was really important for me to be able to demonstrate that in a relatively quick time and that’s why we spent 2-1/2 years in trying to put this thing together.
So that’s just the current snapshot of what they are. So I didn’t go in and say, “Okay.” I know obviously I prepared this one early. I thought the first investment property I’m going to put in here is a $500,000 property, okay. Now that’s one component of what we need to understand. That information is we’re going to buy that in mail. It’s pretty good light mail, but we’ll probably buy it next month or the month after so we can put in the full projection in terms of how looking at it.
So Michael is going to click this button, and it’s going to show us in terms of the cost, so it’s factoring in 5percent for the costs, all the acquisition costs and so forth are all flying through, and you can see here it’s stepped down spending up, and just behind that – Very hard to see if you guys are in the back, but there’s a green line in behind that as well. Obviously, the income’s growing because we’ve got rental income coming in. and for the record, we use 90percent occupancy, so we basically have 5 weeks of every year that the property is vacant, you know, models. I said we’re going to… And we also focus on 7.25percent long-term interest rates, 200 basis point above where the real market’s at at the moment.
And the reason we need to do that is because we’re as advisors and as professional people who guide others through, we need to make sure that they can not only afford it today, but they can hold on it for the medium or longer term, and that’s our responsibility as professionals. So you can see how that stepped up in terms of how that looks.
Now, if we go back into the parameters, the reason why those models are stepping out is this two other valuables that I want to introduce you to. I know these variables here. I’m putting an 8percent compounding growth return on that and I’m putting a 4percent yield on it, okay, but you can say though they’re properties that we’re about to introduce that we’ve prepared earlier. I’m putting 7, 5, 6 and 6.
So depending on that surplus that your clients or my clients have got will determine the top strategy that I’ve got for that particular client. So if the surplus is a list, then the reality is for that client if they do want to invest in property that we’re going to have to get a high yield. In other words, we’re going to get the property supporting itself a little bit more, okay. And that means that we’re potentially going to get a different asset than what this asset is that we’re going to get here, right?
So that’s what I wanted to try and illustrate to you today. It is not every asset. It’s not an off-the-shelf set formula that you should adopt yourself or you could adopt for your clients, alright. So we’ll put those other two properties in and you’ll see exactly how that sits out. So if we go back into the fact find, and we’ve got a $400,000 property which again, we can forecast into the future, and then at 22, and that index is out, and the cost index out, and in terms of whatever capital growth rate I pick, it automatically works out the line costs so I can sit the line to value ratios in terms of how it’s looking, and what I’m doing here is reverse engineering plan for client.
Now there’s two types of plans we can do and use, professionals can do. You can advise them on their next best move, or in this particular case, they want a portfolio plan strategy built so we’re working back in terms of what are these that I want to retire and what sort of income I want to retire on? And again, everyone has the capacity to do this type of work. It’s just about getting the right type of solution for your client.
So Mark was just step those two in, okay, and you see. I’ll explain this. This is the money, and obviously, this is the cash bucket. So Bryce talked about offset account so this is surplus cash. So this is about controlling your wealth by. So for me, this is really important. Now it gets a little tired in here, and as I said, this challenge of 130,000 is an aggressive challenge. The magazine really put it on in terms of, you know, can you do it? I said, “Well, we’ll give it a go.” You know, what’s the reality for most house sold? $80,000. Maybe $90 to $100, depending on surplus incomes and depending on the amount of money that’s coming into a household and what they’re prepared to embark on.
[If you would like to talk about setting up an offset account, do book an appointment with our Mortgage Brokers]
So that sort of gives you an idea. The success of doing this type of thing for your client is starting to answer questions, and for this particular couple, what I’m going to try to do is I’m going to try and break it, okay. So by breaking it… I mean one of the things that are potentially going to stop this family from executing this because they’ve got a few other ideas. They’re thinking about having a third child so let’s…
We’re actually birth control in our business as well not only… When you do this type of work, you’re birth control, you’re everything. So what we actually did here is we’re going to turn Rebecca’s income off, and so, she’s on $60,000.00 a year so we’re going to turn that income off for a year; the time that she’s planning to have the baby. In addition to that, we’ve obviously got the paid parental leave so we’ve factored that cost in for the paid parental leave as well.
And this is happening in terms of, you know, by month indexing and covering off inflation. In addition to that, the child is going to have to go into childcare for a period of time. I’ve also got some costs for the arrival of the baby. The medical fasces show a shadow with that, and all of these numbers that Mike was putting in on guards that we’ve gone off in source in terms of what are the indicative rights of those costs for those household.
In addition to that… So here’s the… You know, so it was 4 days a week in childcare, and so that’s calculated through. And then we’re putting in the primary school fees, the secondary school fees, and one other important thing that you need to consider is the cost of that child in your household. They eat. They need clothing so we put in additional $400 a month in terms of the cost into their household to ensure that this is a feasible plan for our client, okay. Yes, Jess?
Participant: Sorry mate.
Participant: In your analysis, when you’re acquiring each property, are they just… you just start in lines of equity?
Ben: Yes. So you know analysis, what we do is we sit everything to 2 inch with Stanley, and all the spare cash goes in offset account. Yup, so it’s exciting interest so it’s just like paying principal and interest. It just means that we’re controlling a bit of that, correct.
Participant: Tom and I’m probably jumping ahead, but… So this is intriguing me. At a point in time, are you selling them a cut of property.
Ben: No, in this particular case, we don’t need to sell them. So the actual amount of wealth where I would create. These are now we’re indexing for inflation and all the other costs. So go through the assumptions when we get to it because you’re fine. So this is showing that. So there’s property 1, property 2, property 3, and then the death retiring now.
Now interestingly enough, the date that they do retire, there’s still a residual debt. There’s still a residual debt, but the actual value of the assets and the income, the increases that have occurred have actually made those properties cash flow positive over a period of time which is also helping to release that debt. Well, it’s also are providing them disposable income of$130,000 a year.
Participant: Wow. So they get those disposable income while servicing, after servicing whatever existing debts?
Ben: It gets even better. In addition to that, we climbed 1.5percent maintenance cost on every property every year based on the original value of what you bought that property for.
Participant: That’s a contingency sir.
Ben: That’s a contingency and we can contingent 7.25percent interest as well.
Participant: Seven and a quarter.
Ben: Seven and a quarter interest from day one, and lets me know in real time with that client that they’re going to be able to have a fixed rate per period. We’ll be having a lot of fixed rate in real time.
So this is just one example of the type of professional standard that our industry needs to get to, okay, in terms of helping a client better understand the roadmap.
Now it is a roadmap…
Participant: 140 grand in a month. They got enough with 130 grand.
Ben: Well, that’s because of leverage, you know, and that’s obviously because of that, but with leverage comes risk, and when you got those risks you got to make sure you can cash flow, okay. So in our particular plans, we also give our clients the 36-month cash flow forecast every 36 months, so they know exactly how they’re tracking to their model, alright?
[Read: The Impact of Leverage]
So the idea behind this is, again, sort of getting a benchmark set for what the industry should be looking to do to assist their clients, and you personally in terms of what you’re going to do.
Now there are a lot of assumptions and forecast in these models. There has to be. It’s a 40-year, you know, exercise. I’ll come back to you. So I’ll keep going because I will get no time. I know it’s your passion. I know it’s your passion.
So from that point of view, it’s really important. These are the assumptions that we’re making. We got superannuation, contributions. We’ve got cash and savings account to three percent. So we’ve built a lot of modeling into what we’re doing and we think we’ve built a lot of comfort into those numbers.
Now the reality is still going to be. The asset selection still has to be very important so the implementation of that asset selection is really determined on the types of variables and the types of returns you’re chasing. So in our business, if we just go back into the other slide pack, Michael…
Ben: …because I’ll take as many questions at the end as possible just so I can hopefully answer all of them. Sorry mate, jump into the next one. Can you model it?
Okay, so in our… So what we’ve gone and spent a lot of time working on is we spent a lot of time analyzing area growth. So growth areas are going to give us areas that give us growth as opposed to give it to you, and property is the actual types of properties that gives growth, and we’ve given them some interesting names proving to form a rare million dollar chip changing place, changing face wave rather, and what we do is we explain to our clients exactly what type of demographics and what type of information we’re getting for those particular clients.
So that’s our growth strategy and this property is a growth strategy so it scares our rival general piggyback investment strategy and these are area strategies that delivers income or higher rain toll for our property, and that’s obviously where we get the 6 percent, the 5.5 to 6 percent, the 6.5 to 7 percent yield in suburbs, okay, and that’s where we go. So no vacancies. None-expire boom town, slice and dice failure, and Brady bunks.
Now that’s just all that how do we increase the income that’s coming on for that. So if you’ve got a client who’s got small surplus cash flows, the reality is they probably is going to have to do a fair bit of heavy lifting, okay, but those tops are probably not necessarily properties that are going to deliver strong capital returns. If it got a strong surplus for your client or for yourself, then you should be chasing growth properties because the reality of the growth property all the time is that that’s going to actually outstrip the income it delivers even know the percentage yield is a lot if that makes sense, okay.
So that’s the type of thing that we really focus on, and now we’ll throw it to you guys to test it. Yes, Jess.
Participant: I have a last question for me.
Ben: Yeah, right.
Participant: Let’s say I had a hard headed client – I don’t know. Let’s call him Jessie.
Participant: And he had a property portfolio.
Participant: Would you… I remember Ross had a daily slide… Do you guys can say, “Look Jess, that property you got there is probably not ideal.” Would you advice on selling them some property because they, you know, might have selected or maybe this heartbeat of a person may not have selected the right deal.
Ben: Yeah, great question. We’re often fixing claims, but I’ll tell you this. We think we’ve done about 280 of this, rough numbers, and about $220 million in forward purchases that we’re planning for our business. Of those 280 claims, I’ve recommended to clients to sell one property each, and let me explain to you why, and this is my view in terms of because obviously, I’ve got a personal view as an adviser. This is not the association view, but the reality is the cost of entering and exiting out of the property market is extremely expensive, and I always factor in the first year is not only just the capital return, but also the cost of holding that property value, the interest rate you’ve paid in that first year.
So in real terms, the switch of a property is almost 20 percent in terms of getting out of one and getting into another. So the types of returns you’ve got to be able to achieve by sitting there, waiving your hands, and follow me into this darkness because I’m a guru is crazy. I mean we’re playing with people’s lives here. It’s got to be sensible in terms of how you look at that. So yeah, there might be an underperformer in the portfolio. I get that. We’ll keep an eye on it, and if it keeps underperforming and the others do better than we expect, then we might reconsider that. But in reality, they’re probably going to hold more often than not.
Any other questions, Garth? Yes.
Participant: Do you prepare this for us, you said?
Ben: Yeah, it’s an interesting question. In an unregulated industry, there is profiling that we do in our property sense is [0:51:35] [Indiscernible] high, and so it went on sitting down with the client I’m advising. The first thing I say, “What are your general risk profiles [0:51:43] [Indiscernible] high,” and then I’m going to, “Okay, what about property, number one, and does that change your comfort level?” And in most cases, that actually moves their comfort level a little bit high especially residential property does that.
And then finally, the final piece of the puzzle is how comfortable are you with debt because what we’ve done here is forward project and I’ll just show you the numbers behind what we’ve done. So we’re going through the scenario of three modeling model, and that’s pretty hard for you. Get across. It’s a small screen. So we’re going to… Not into the fourth… Beautiful.
Okay, so what’s sitting behind in those little graphs that’s just come up in instant time is not only 40 years by year, but 40 years by month, okay. So any one variable that we change in there has a minimum calculation of third and thousand apples, and then some of the larger ones that also impact on the text and so forth had as high as hundred thousand transactions that are happening behind.
But if I’m going to sit there and play with people’s futures, I want to get a fairly good idea how bad the right type of move in terms of how those clients are going to be able to help themselves. So what we’ve got there is a series of the income coming in, all of that income being assessed, moving across from them.
Mark is going to try to help me illustrate that. So here is our income coming through, our salary, our superannuation, any salary sacrifice going into super, the gross income overseas, the interest, the deductible interest, the other deductions, the total tax, the tax carried forward, the taxable income, the personal super contributions, the actual overall super, etcetera, etcetera for every client and then that gives me an overall household world bucket by month, and it allows me to be in a position to… And as I said, our industry struggles with 90 percent of people in our space who are cowboys, who have absolutely no idea what they’re doing and has got no regulation controlling them, okay.
So my passion about being able to speak to you today is about just saying, you know, we are playing with people’s lives. We’re playing with their financial futures, so by sensible understanding of those cash flows and understanding their future needs and what they’re trying to do, you’ll have a wonderful business of very, very loyal clients because you’re taking them on a journey but you’re holding their hand as well, okay.
Participant: I just want to know if being an asset [0:54:15] [Indiscernible]?
Bryce: That’s a good question.
Ben: Yeah, great question. Yeah.
Ben: Yeah, obviously, in our business, we have a financial planning business as well so I can only talk from my experience. The first occasion for our clients as they go through the property side, how they diversify different states, but they definitely have a waiting in property. They see the results that they’re getting. We’re not advocating that every client walk in the door and we set up a self manager if I’m putting a property into all that. We do none of that.
But what we do so, we’re definitely going to have a big wait in property so your portfolio, I was going to be heavily over weighted, and how would you… You know, how would you minimize those risks? We’ll try to mitigate some of those risks. Maybe, you know, that property is in Melbourne, Sydney. Bryce has an example.
Participant: You have [0:55:03] [Indiscernible].
Participant: You and Jacob often be in direct need and establish fund, establish a [0:55:12] [Indiscernible]?
Ben: Yeah, great question. Yeah, again, this is my professional view, not the industry’s professional view. I’m a big fan of this thing. I love a market being tested. I love properties being resolved and made testing the variables that are associated with that and off to play in property has developed profits and has marketing profits built into that, and there could be a risk associated with that, and having a brokerage business, I’m saying their relations consistently coming low. For every 10 other relations that come in low, 10 of them are off the plane. Now that’s how bad it can only get.
Okay, so my answer to that is we have a predisposition for existing stock.
Participant: [0:55:57] [Indiscernible].
Ben: Depends on the strategy. Depends on the client. Now if you’re saying to me what would be better? Buying an existing apartment in South Yarra as opposed to a three-bedroom half set in Tarneit, I’d go to South Yarra apartment every day, okay. And the reason why… The reason why I would go that is because I’m looking for income. I’m looking for professional people whose incomes grow exponentially to the rest of the market. They’re the people who enjoy value. You can move 5,000 people to a location and give them the same income and affordability will stuff the values, and a perfect example is the Gold Coast, and I had it the Gold Coast profits around, and I was too because industry is in the Gold Coast, construction and tourism. Well, and they pay much for delivering the bacon and eggs out to the tables or the Donald Duck suits. You got to run around it, and certainly, once construction finishes, where’s the income coming from? And that’s why you saw blood on the streets and those tops the market when the peak is over. So if you prefer the type and potentially into that type of thing… Yes.
Participant: With you being per strategy, when do you [0:57:09] [Indiscernible] to stop hanging down from all of this.
Ben: So the lions are being paid down in real time. It’s just what’s happening is that the offset accounts are buffering up, okay, so that’s what’s getting that date retired, but once you’ve finished your accumulation phase, so in other words, once we’ve applied the number that we need to get to an inlet property in time do they work, that’s the time we stop focusing on retiring the dead act. Yes sir.
Participant: I just want to [0:57:38] [Indiscernible] capital growth and [0:57:41] [Indiscernible].
Ben: So we’ve got an 8 percent in there as well. Yeah, so our numbers are based on the research we get from the Value General’s office. So since 1974 is when the value general has been keeping, you know, relatively good data and right up until now especially in property investment. Melbourne, since 1974, the average compounding turn of properties has been around 8.34 percent, okay. The better suburbs, the real blue chip suburbs have delivered 11 and 12 percent over that time.
As Bryce mentioned earlier – And I’ll have to finish on this one because I probably not have enough time – that this three critical things could have happened during that period: the wife into the workforce, then she got a professional job, okay, and then interest rates moved from long-term averages of 12 to 14 percent down the 7 percent. Those are massive indicators of better borrowing pair, and so those things have changed.
So what Bryce was highlighting before is the rising tide that’s lifted these property values over the last 35 years is done, okay. So the signs of picking the right asset is absolutely critical now, and one of those areas and one of those assets that are going to deliver well, well again, we think it’s going to be an area where it’s fully mature, it’s a lot of lifestyle, and there’s a lot of professional people in there who are going to get exponential incomes over others if we’re talking about growth drivers.
If we’re talking about yield, we actually go to fringe areas within our commute of the major employment center. That will still be there.
So I’m not sure where there was, you know, you are going to get the slides tonight or today back lots. I’m about how you actually are going to just, you know, follow formula. Those formulas and those frameworks are there to help you and help you sort of guide your clients into this area, and if you can be better advisers and if you’re interested in also becoming a property investment adviser and getting the qualification around that, then we’d love to hear from you from the people’s point of view, and you know, if you want to be in that space, and there’s definitely a lot of opportunity and that’s basically we’d love to see more professional people like yourselves in it as opposed to someone who’s come off for frustrating our soup.
Thank you very much for your time. If you want further information or if you want to get those articles downloaded, there’s some brochures and information up here in the front. Just pass on your details and we do appreciate your time.
If you would like us to help you to build a Passive Income Plan for retirement via property investment, just book a free one-hour appointment with us now.