Hear from Peter Gianoli, General Manager of Investor Assist, as he talks you through a 9 step guide on how to become a property investment whiz.
Transcipt: Peter Gianoli discusses the steps to successful property investment
This presentation, How to Invest in Real Estate – A 9 Step Guide, is augmenting this book that I've recently released entitled, funnily enough, “How to Invest in Real Estate – A 9 Step Guide.” So this is the 30-minute version. This is going to put bones on what's in the book, add a bit of personality to what's in the book. But please, if any of the jargon gets you a little bit confused, either ask me about it or don't panic. It's pretty well explained in the book once you decide to download it. So, there are nine steps. You don't necessarily need to read that at this point. We're going to go through each of those nine steps one step at a time.
Step number one is getting comfortable with what is the idea of property investment. What is it about property investment that makes it such a good idea? Well, generally it's less volatile than shares or any other investment, obviously. Property can be deemed sometimes a boring investment because you purchase, you sit, you leave and you hope that your ingredients have come together well, that they increase in value. It's not as volatile as opening up the paper and checking what's going on in the market. If the U.S. dollar drops overseas, or oil drops overseas, or iron ore drops, your property isn't going to plummet overnight. Right? Not as volatile, therefore seen as a little bit more desirable for people that don't have the skill and expertise to watch a market.
Probably the most attractive thing is you can leverage it and use somebody else's money. The big advantage of property is you generally just need a deposit and that deposit can vary for a West Australian typical investment, from about $20,000 through to probably $40,000. As long as you've got access to that amount, either in the bank or equity in another property, if it's gold fillings, it's a little bit difficult. We do have to take them out to use them. But if it's equity that you've got in other assets, then there can be a way to utilise it to help you purchase a property. We'll talk about leverage a little bit later on in the presentation.
Obviously with a property, you can put a tenant in it and that tenant will help you own the property. The right type of tenant in the right type of property could actually pay the entire loan. That would be your goal, to try and have a tenant in there so that they're there long enough, paying enough for the property so it covers the entire outgoing. But to be honest, we say if you're looking at investment in Perth, Western Australia, you should have a long-term view, perhaps seven years' worth of view, and in seven years, sometimes interest rates do go up, and in seven years sometimes rents do come down.
So we gear our properties so that the most you might have to chip in yourself is a coffee a day, $5 a day. I use coffee a day in Western Australia because it's the dearest place in the world for a cup of coffee. But it's roughly the worst case is $5 a day throughout a seven-year period. Not every day, not every time, but on occasions, that may be what you're up for, which is not a massive compromise to your household budget. Another reason a lot of people enjoy or think about property investment is to try and minimize their tax. We'll talk about that a little later on.
Of course, if you buy the right type of property that's a desirable property, then you can actually improve it to increase its value. So just because it's seven years old doesn't mean it's worth less than when it's brand new. In fact, far from the truth. But if it's the right structure, if it's the right backbone, if it's the right skeleton, you can improve it and continue to add value to it. And we encourage you, when you invest in property, not to be thinking, buy today and make money tomorrow, but to be having a longer view in life. If you really want to have a flutter, then you're probably better off taking your $20,000, $30,000, going to the casino, putting it all on black and you'll know straight away whether you're going to be lucky or not. But that's not the type of investor we're trying to find or see if the property suits them. So that's step one.
Step two, second thing I encourage everyone to do is to set up the right team. Property has a lot of jargon. There's a lot of mumbo jumbo. There's a lot of mistakes you can make if you don't have the right team around you. Now, most people in property will work for nothing until you buy something off them, or build something with them, or borrow money from them. So if they're working for nothing, be wary of what they tell you. As long as you know that how they ultimately get paid, then you can look at their information and make your own rationalisation accordingly. Does that make sense to you?
So let's see who you should have on your team but more importantly, let's see how they get paid. So you should all have a real estate agent or two or three or four looking for you. The better you know what you want, the more people you can get to go looking for you. And their job would be to find deals and bring them to you. Now, who knows how a real estate agent gets paid? They get paid by the seller. They get paid by the owner of the home. They are their agent and obviously, the more they sell it for, the more they make. Normally 2% is what they work for.
So if they're bringing you properties and then you say to them, which one should I go for, right one or left one? And they say right one, and you know it's dearer, then you maybe understand why they’ve pushed you in that direction. I'm not saying they're all like that, but as long as you know that, then you can make your own rational decision as to how much you listen to their advice.
The second one, the mortgage broker, a really important person to have on your team. If you want to get into investing in property, then probably the first thing you should know is how much have you got to invest. Does that make sense? Because if you know how much you've got, then in a market where the sellers are desperate, and there are more sellers than there are buyers, then if you're cashed up, you know exactly how much you've got to borrow. You can go in and negotiate much harder than anybody else who doesn't know how much money they've got.
Or if it's the other way around and the seller has the power and the buyers are plentiful, then if you've got a cashed up offer and you know how much you've got to borrow, they'll deal with you because they know they're not dealing with a time waster. So whether the market's going up or whether the market's going down and you want to invest in property, rule number one is get a mortgage broker to tell you just how much you've got.
Now, a lot of people say they don't need a mortgage broker, I’ve got my own bank. And look, there's nothing wrong with your own bank. But your own bank loves to tie you up so that they've got control over you. So often, they will lend you money on an investment property, but they want to tie up your principal place of residence, your family home. So if your investment property performs badly, they've got coverage by also getting ahold of your family home. That's an obvious thing to do. If you're going to lend money, you'd try and tie everybody up. It makes sense, right?
But if you get a mortgage broker, their job is to find an institution that will lend you money that's best for you. And if you find an institution that's prepared to lend you money and it isn't your normal bank, well then by all means, do it and keep the assets separated, because if the investment property for whatever reason doesn't perform, you don't want to jeopardise your family home, and dare I say it, vice versa. So to keep them apart is probably a good thing.
But even if you want to stay with your bank, at least a third party mortgage broker can say to you, well, this is what P&N Bank are going to lend you money for. I'm just looking for the closest bank. Thanks, guys. This is what P&N are going to lend you money for. Then you can say well, but I'd rather use Westpac. And they go, okay, we'll go and ask Westpac what they'll do. That's the mortgage broker's job. Once again, they don't get paid unless they lend you money. And I'll talk about them a little later on because they deserve their own slide.
Lawyers and settlement agents, well, in Western Australia, you don't need a lawyer generally. You can get by with a settlement agent. It's good to know who your settlement agent is before you go and buy something. They vary in prices from about $300 to maybe up to $1,000. So you're better off negotiating that first knowing what it is, so then when you write up your offer and acceptance, you say, and I'll use XYZ settlement agent because I know how much they're going to charge me.
As opposed to the other way around, you buy something and then you say, look, I'll let you know next week who my settlement agent is. And then you go out there and then you say to someone, look, I've bought a property, I need a settlement agent. You don't have the power. Now, they've got the power and they'll charge you more. So go out and put them in your team earlier. Once again, unless you use them, they don't charge you.
Financial planners, if you want to build a portfolio, a big portfolio, then a financial planner is a good idea. Now, there are two types. There's some who charge you for their advice and their advice will come to you with no strings attached. There are others who won't charge you for their advice, but if they put you into something, they get commission. So if you go to a financial planner and say, look, I'm thinking of buying this property, and they're not charging you for advice, they'll go, oh yeah, maybe, but I'm not getting anything for that. Have you thought of something over here that I'm getting something for? Don't not listen to them but acknowledge how they get paid. Does that make sense?
Finally, if you're going to build, you need a builder. A builder gets paid if he builds. And generally, it doesn't matter if it's a $200,000 build, or a $300,000 build, or a $500,000 build. Their commission is about the same, a few hundred dollars. It really doesn't matter. They're not going to try and push gold taps at you thinking they're going to get a lot more money, not really. The bulk of their money is if you say yes to a build.
And then if you're going to get into more elaborate things like subdividing, small unit developments, etc., you will need a planner, a designer, a surveyor. And if you're going to buy a second-hand home or a real estate transaction of a home that's already out there, don't buy it unless you get a builder's inspection. You definitely need that. And that will cost you money but it will be safe money in the long run. So that's generally the team you should put together. Unless you do anything, unless it's a lawyer, they generally don't charge. Probably the one missing off there is your accountant. If you're going to build a bigger portfolio, you'll need to have accounting advice as well.
So we've done steps one and two. Now it's step three, the all important finance preapproval. And this is my bit about using a mortgage broker. What should you look for? Well, what you should look for, this is probably one profession where a little bit of grey hair is not a bad idea. If they've been in the game, they're probably better than a rookie. A rookie's got energy, but in this game of mortgage broking, experience is pretty important.
So it is their job to look at your circumstance, look at what the banks or the lenders have to offer and find the best deal for you. And the best deal may not be the cheapest. Because sometimes the cheapest deal wants bigger hooks. They might want to have your family home. Sometimes cheapest is not necessarily best. You can also go to a website online and compare the mortgages. You can do that. But there's so much fine print. There's exit clauses and exit fees. There's sign-up clauses and sign-up fees. Unless you're in the game yourself, you should find a mortgage broker you can work with and get them to work for you. It's pretty complex.
So what's the services they offer? Well, they're right in the middle. Their job is to look at your circumstance and find the best possible deal that suits you the best. That's their number one role. Who do they work for? You or the lender, the borrower or the lender? Well, they're in the middle. But the only difference is they get paid by the lender. They don't get paid by you. So as much as they're meant to be working for you, it's the lender that's paying the money. You've got to understand that.
But it's well within your rights because by law, they have to tell you how much they're getting paid. And they'll generally do that by having a sheet of paper and getting you to sign it. And on the very bottom, it will state the average we get paid is .055%, sign here. Because then by law they can say, yeah, I told them how much I get paid. Now, that's the truth but it's not the truth. That's they're saying the average we get paid.
So, what you should say is when they present you with deal A, you should say, thank you. How much are you being paid for deal A? And by law, they have to tell you. They might say $700. They don't get a lot by the way, $700. Yeah, okay. And then they say there's deal B and we like deal B. You say, okay, that's fine. How much do you get paid for deal B? They have to tell you the truth. They might say $1,000. Then you've at least got the power to know that he's getting $700 for that or she's getting $1,000 for that. Maybe I'll just watch their advice a little. Does that make sense? Understand how they work but they're very important. They're very useful to have on your team, and the costs I've just talked about.
And then at the end of the day, you'll get something like that which they’ll say… Actually it’s a bank's letter and it won't be like that. It will be boring. And it will say, da-da-da-da-da, Dear John, you're good for $480,000 subject to, subject to, subject to, subject to, and it's valid for 90 days. Why is it valid for 90 days? Because your life could change. If you're like me, boring as hell, I can guarantee in 90 days' time I'm going to be just as good as I am today.
But if you're like Jade here who's got a great life ahead of her, they're probably cautious of even telling her in 90 days where she'll be. She could meet some millionaire between now and 90 days or some loser who takes all her dough between now and 90 days. So it's good for 90 days, not to rush you but so that you can do some planning. And obviously if your circumstances change dramatically, they'll want to have another look at you again. So that's the whole point behind that particular step.
Now we know how much we've got, let's go find something. How different is that to most people? Most people go to a home open, fall in love with the color of the splash back or the tree or the pool and say, geez, that's going to be a good investment, and then talk themselves into it for the rest of the two weeks whilst they put all the ingredients together. That's perfect if you're an emotional person but it's not great for investment.
You should find out how much you've got first, know what suits you first, then go find the thing that matches your needs. So we like to tell people to follow the hundred rule. And I know of everybody sitting here, maybe one of you will do it. You could be dropped anywhere in the world and if you follow the hundred rule, which is in the book, clearly how to do it, you just have to visit a hundred properties either online or physically and compare and ask those questions, and you'll never pay too much for a property.
Now, it's easy to do it nowadays online because of realestate.com.au. They are the portal for real estate in Australia. Every person that sells a home, advertises on realestate.com. Every person that rents a home advertises on realestate.com. And when you sell it or you rent it, you've got to take it down because otherwise you'll go mad with people ringing you and pestering you. So you tell them I want it down.
To get it down, you have to tell them how much you sold it for or how much you rented it out for. And they're collecting all that data every day, live to market, day in day out, across every suburb of Australia. So their data is magnificent and it's available free, at the moment, online. And a good property investment specialist can show you how to use that data and how to find out the best places to target because that data tells you what to look for.
Now, this is what we look for. We look for a suburb like Woodvale in Western Australia. In 2012, you would have a look at what the median house price is. The median house price is the midpoint. I don't know if you remember maths at school. You did it at about year nine or 10. Not the average, so if you’ve got a hundred sales, the cheapest is down there, and the dearest is up here, and the median or the midpoint is number fifty-and-a-half, whilst the average could be up here if a lot of expensive things sold and not many cheap or it could be down here. You remember the difference, average and median or mean and median? Realestate.com uses median.
In 2012, on this particular slide, and I've used that because I'm going to show you a case study, the median house price was $610,000. So that means the average mum and dad, four-bedroom, two-bath home in Woodvale was $610,000. Now, our investor at the time, the best thing to do was to buy a block because there is land available in Woodvale and build a house. And they had about a $40,000, $45,000 deposit because thing thing's going to be around $500,000-odd. So they bought a block for $270,000, they built a house for $250,000. So they’ve got the asset, 12 months later, for $520,000. That's how much they paid, $520,000. What was the median house price? $610,000. Does that sound like a good deal? It does feel like a good deal, doesn't it?
Well, they rented it for $600 a week and it was valued, in October of last year, so 18 months after, $630,000. They've made $110,000 in capital gain. That's equity, $110,000. Now, it wasn't because the market went mad because the median was $610,000, and now their property is worth $630,000. So the market only moved $20,000. It wasn't that the market went ballistic. And let's say the market came down to $600,000. It was what they've got in it that made the critical difference. And that's from doing your research, looking at realestate.com, listening to real estate agents, reading good areas.
Woodvale, I might add, if you go on to the high school website, NAPLAN or whatever it's called, Woodvale is the highest academic high school of state government high schools in Western Australia. People die to get into Woodvale, to get their kids into the school. That's part of the reason that Woodvale's up at $610,000 whilst neighboring suburbs were more like the $550,000 mark. So there's lots of ingredients that go in there but that's what your research will tell you. And these bargains, these opportunities are available today. You’ve just got to either do the research yourself, or find somebody you can trust who will do it for you, or know the person you're trusting how they're going to get paid, and factor that in to the advice they give you.
So we got that far. We've now found the thing we want to buy. Now, you’ve got to sign a contract. This is not a contract law talk and you need lawyers to do that. However, there are four clauses every mum and dad investor should know. And they are subject to finance approval. So if you have not gone and found your mortgage broker and you do not know how much you can borrow, then do not write up a contract without making it subject to finance.
Now, understand this. If you think that's fine, I'll just go out there and buy anything and just put, subject to finance, and then say, I couldn't get my finance, I'm out. To get out, you need a bank letter saying declined. And if you've got a bank letter saying declined, you've given yourself a negative mark in the eyes of bank world. So don't go out there getting declination letters all over the place because that won't help you in the long run. So by all means use the clause if you don't know but don't use it inadvertently because it could shoot you in the foot.
Now once again, remember what the market's doing. If the market is hot and I've got two people in front of me, one who wants to pay $610,000 and they are subject to finance, and the other wants to pay $600,000 but they're guaranteed cash unconditional, I'll probably go there. I don't have to worry about any declination. So if you've gone out and know how much you've got, you can negotiate harder. So that's why I put the mortgage, find out how much money you've got first before you buy the product. But if you don't, that's the clause you need.
The other clause is the subject to inspection. If you buy something second-hand, because it doesn't come with warranties and maintenance, brand new does. If you buy something second-hand and a lot of people do, then make sure you buy it subject to an inspection report. And if the seller won't let you do that, run away. Why wouldn't they let you do it? Because they've patched up some dodgy stuff. If they've got no problem with it, they should let you do it.
And let me tell you, let's say it's a pretty good home and you want it, and it stacks up and you say subject to building inspection report. And the building inspection report comes back and says, yes, buy it. But you know what? There's problems with the roof structure, there's problems with this. Then your next question would be to your building inspector, how much is that going to cost to fix? And they'll say, oh, $15,000.
Then you go back to the seller and say, I'm going to walk away because the inspection report says this. But I’ll tell you what. I’ll take $25,000 off the price and I'll keep going ahead with it. Now they're going to go, geez, I didn't even know there was anything wrong with that. But if he's found it, they're going to find it with the next person and the next person and the next person, they'll probably say yes. So you can't lose if you use that clause if you're going to buy second-hand. Do it. It's not expensive, by the way.
Then obviously, this doesn't apply so much in investment. This is if you're going to move out of your current home and buy another home, you'll generally make it subject to the sale of your home. That's a very common clause not used by investors. You might use it when you sell your investment property though. Someone might want to say, I'll buy it off you but I've got to sell my home first.
Now, there's nothing wrong with accepting that clause if you put in the escape clause, which is the 48-hour clause which says, I want to sell my home. Justin here wants to buy it. He has to sell his home. He says, I'll buy your home subject to me selling my home. I go, that's fine. But if I find another buyer, you've got 48 hours to say yes or no or I can accept the second offer. If you don't put that 48-hour clause in, you're stuck with him for as long as the contract's there. So they're the four bits of law you need to know today. You keep those under control, your life will be bliss. You'll never get divorced. You'll be as happy as Larry for the rest of your life. I've got a disclaimer on that in the book, by the way.
We've done all that. Now, we've just got to pay for it. Well, this is about leveraging. My Father is Italian. He's never borrowed money in his life. So if he was to buy an investment property, he would want to say $400,000 first, buy an investment property for $400,000 and away he goes. He said, “At least no bank is going to pick on me.” That's pretty good advice. But nowadays, debt is a good thing not necessarily a bad thing. So as I said to you, you can control the property with $20,000 or $30,000 or $40,000 depending on how much you spend.
So in my father's case, if he bought a $200,000 property and paid $200,000 for it and it went up $20,000, he only made 10% on his money. Correct? $200,000, it's gone up $20,000, that's 10%. However, if you put down $20,000 and you borrowed $180,000 and the property went up to $220,000, then your $20,000 has gone up $20,000. You've made 100% on your money.
But you're going to say, yes, but I had to pay interest. And you did. But if you paid interest, what could you do with the interest? Claim a tax deduction. You could also claim depreciation. Once you put those two together, okay, $20,000 may not have gone up 100% but it's definitely gone up 80%. So don't be scared of debt if you can manage it. Don't be scared of debt if it's a sensible amount and don't be scared of debt if it's good debt. Leveraging is a good thing. Don't be afraid of it. Obviously, leveraging can improve your after-tax result via the deductions that the government makes available.
So okay, we've bought it. We've signed up for it. We've got the dough for it. One more step is to settle it. You don't have to worry about this. This is why you have a settlement Agent. And the first thing they have to do is ensure there's no other mortgage on it. So for example, if I sold Justin a house, but I still owed the Commonwealth Bank $300,000 and I sold it to him for $400,000, and he pays me the $400,000, but no one gives it to the Commonwealth Bank, his house isn't very secure. You don't have to worry about this. Your settlement agent and your bank will insist this happens. That's one of the things that occurs.
The other thing is to ensure any caveats are lifted off the property. Now, this is the difference perhaps from a bargain basement settlement agent and a good settlement agent. A good settlement agent will ensure that all of this occurs. Bargain basement ones may miss one or two things. And a caveat is as simple as I lend Justin $20,000 and I say, but until you give it back, I'm going to lodge a caveat on your property. So it's not a mortgage. It's just a before you sell it, you have to pay me back first routine. Not always are they detected prior to settlement. Generally they are. But a good settlement agent, no problems. But this is the best thing that a settlement agent can do for you.
Generally when you buy things, you might say, look, I'm going to buy that but it’s subject to you fixing the tap, subject to you getting the possum out of the roof, it’s subject to you taking your plasma screen off the wall but fixing up the hole you're going to leave in the plasma screen. Now, a lousy settlement agent when it comes time to settle, will just transfer the money and you're gone. And then you're going to go fight to get the hole repaired, the possum out of the roof, whatever.
A good settlement agent will say, look, we'll give you this much money so that we've got possession but we're going to hold back $5,000. Once the possum's gone and the thing's gone and this is gone and this is gone, we'll give you the balance. That's the difference between a good one and a bad one. So they're the questions you should ask when you're selecting your settlement agent. Will they do the hard work for you? Because you don't want to do that lousy work. You want them to do it. That's what you're paying them for. And then ultimately they all do this, they'll register the transaction and make sure the transfer is official. That happens.
Now, it's time to find someone else to pay off your loan, called the tenant. And they're your best friends. You should love your tenants. You should give them Christmas cards. You should do everything in your power to keep them because they're paying off your loan. Don't resent your tenants at all. Love them. They're very important to you. So how do you keep them and how do you attract them? Well, it's to buy where people want to live. So even though sometimes you might find the cheapest block or the cheapest house, it's on a busy road, or under high-tension wires, or next to the service station, or next to a house that has people coming and going every half-hour. It might be the cheapest property but it isn't the best place to live. You wouldn't live there so do you think you're going to get a tenant to live there?
So give it the reality check yourself. It's very important. Buy for families. Don't be scared of families. A lot of people don't want to rent properties to people with kids. I say that's a big mistake because if they're kids, and they go to school, and they make friends, or they're teenage girls, they don't want to move. And if they don't want to move, the family doesn't move. If you rent to poor old Jade here and she gets that boyfriend that she's been looking for… I don't even know whether you've got one Jade. But I'll pick on you anyway. She'll leave you next week if the guy is offering up a penthouse. But if you've got a family with kids that are in school, the netball team, the football team, whatever, they'll stick around.
Because what happens when you lose your tenant? You've got to find a new one, right? At the moment, it will take about four to five weeks to get a new tenant. So that's four to five weeks without income. How much do you pay the real estate agent every time they get you a new tenant? Two weeks’ rent. How much do you pay your real estate agent if they renew your current client? A hundred dollars, much better to renew than to go hunting for new. So cherish them, look after them and be rent-realistic. Even take $10 a week less than too much because you'll keep them longer and that will be cheaper in the long run. As I've indicated, look after them.
And then also, get a good property manager to work for you as well. It's not a great job managing your own property. You might save 8% but you'll earn it. The only time I'd advocate you do it yourself is if you've got the house next door that you're renting out because you can't avoid it anyway. You're there. But generally, I'd use a property manager every day of the week. It's a far better service. And in the book, there's some questions to ask before you appoint a property manager.
And now, the final step. What's it all about? Well, it's all about this. It's all about using your first deposit and buying property number one. Buying it so well that it grows in equity. And then using the equity here to put into property number two and continuing to roll the system. You could sell the home when it makes $110,000. But what's wrong with selling the home when it makes $110,000? You have to pay capital gains tax. You have to give 50% of it back to the government if you've held it for less than a year, or 25% of it if you've held it longer than a year. Plus, you’ve got to pay real estate agent a sales commission. So rather than do that, use the money, borrow against it, buy another one.
And then when you start to retire and you're not earning any money and you want money, you sell off your assets one at a time. You'll still have to pay some tax but it will be based on your income, which won't be anything like when you're working. You do it that way. That's the game. So that's why it's important if you're thinking about setting up a portfolio to, yes, talk to real estate agents but also think about talking to property investment specialists. Because a real estate agent gets paid once and they're happy with that once every time they sell a home. A property investment specialist is keen to work with you to get the first property to work so they can get you a second and then a third. And so you've both got the same agenda, which is get in and buy something that's going to make money fast or quickly. Does that make sense to you? So that's the game.
That concludes the presentation on How to Invest in Real Estate – A 9 Step Guide. If you'd like some more information on how to invest in property, please go to our website investorassist.com.au.
35 min 55 seconds
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