What Loan To Value Ratio (LVR) are you comfortable investing in and how many properties is enough and is it even possible to time the property cycle?
Ryan: Definitely. Okay. What have we got? Easy B’s asking, “What LVR are you comfortable purchasing with?”
Ben: Do you want to start to answer this one?
Ryan: Well for me, I don’t own any properties yet, but I am looking at purchasing my first one, and for us, it’s more a situation of what the cost is going be in order to run or to live in that property ourselves versus renting. And so at the moment, I would be happy with a 90% LVR, but I’m just starting out. Whereas when you grow, and you have more properties, then obviously, more properties equals a larger portfolio equals more debt equals potentially more risk, and so lower LVR might be better for some people.
And a lot of people I know, they don’t want to go over 80 because they don’t want to pay the lenders mortgage insurance, which I’m not too fussed about, but some people don’t like paying that and therefore want to stay under 80 forever, and I know you’re even more conservative than that, Ben.
Ben: Yeah I like my LVR and my portfolio to be as low as possible, so I used to put down 5% deposits when I was silly, and I didn’t really know what was going on, back in the early days, and the bank would let me do that, but now, I’ll put down a 20% deposit at least then I would try and make money on the way in too, so ultimately, I only feel comfortable with my LVR below 50% these days, but there’s a luxury there of getting to this point from selling other properties to get it there. It just didn’t magically happen. You know what I mean?
Ryan: And that’s the thing. Depending on your situation or depending on how much risk you’re willing to take, depending on your age, your employment circumstances, if you can’t save more than a 5 or a 10% deposit, then maybe you feel like you need to get into the market with that.
And if you feel like you can do it, and you can as Ben was saying, make money on the way in, and do it successfully, then you might be willing to take that risk, whereas other people might be further down the track and might not be.
So again, it’s the same as interest-only versus principal and interest. It’s not one size fits all. It’s like, analyze it for your own situation. Do you want to pay lender’s mortgage insurance? What sort of risk are you happy with if the market was to change? All of that sort of stuff. Even we’re looking at buying, I’m looking 10, 20 years in the future, or looking … I’m analyzing all of these different situations that could happen.
Let’s say if the area goes down in value, how can we recoup that through the property that we buy. Or if we decide to leave the area, how can we then convert that into an investment property that’s positive cash flow.
So I run through all these different scenarios in my head, ad so that really narrows down our search, which I guess is what we were talking about earlier, is really narrowing down your search so you get a property that meets your specific financial criteria, and that would include how much of a deposit you want to put down as well.
Ben: That’s a really good point. At different times of the cycle, you can afford to be more … You can afford to take on higher risk. If it was 2011 now, which was the bottom of the cycle, the later stages of the last major recession, when that time comes back around again, I’ll be very aware of it. And so will you, and so will your audience, Ryan, like I will be buying as much as I can, knowing that I’ve got 14 years of relatively strong growth ahead of me after that. I will be leveraging at 90% or 95% or whatever I can to get my hands on as many of those distressed properties as I can buy, but at different times of life and different times of cycles, you’ve got to be more careful. And knowing that we’re seven years into this thing now, I don’t want to be the guy that’s getting strung out come top of the marketplace when everybody does get really hurt.
Ryan: Yeah well I have met people who owned over ten properties and then were forced to sell multiple, multiple properties because they were just … They went so gung-ho and they leveraged themselves so much that it was great while the market was going up, but a few of the areas that they purchased in had a downturn.
Properties went down in value and they were then forced to sell a large, large portion of their portfolio to pay off debt, and they even had to sell good properties that hadn’t gone down in value to pay off bad proprieties that had. They’d just got themselves in this really bad situation that … They were just too aggressive.
Ben: That’s a really good point. In terms of another question that I consistently get is, how many properties is enough, and sometimes with this game, people think that owning property is enough, and they don’t look at it as a, “This is my overall strategy, this is my long term goal, this is my first property,” and they make that first purchase very well.
And then they get excited and they just want to jump in and buy another purchase, and that’s a major problem. Every time you buy you really need to be coming back to what is my long term strategy and goal.
What is my immediate next step and how is that step going to complement a couple of steps from now or a couple of properties from now, so it’s really about looking at it on a case-by-case basis as part of a whole, and making sure that every property you buy is a great one, because I’ve seen people in … What we’re going to see in the next seven years I can guarantee is there’s hundreds of thousands of people in Sydney in Melbourne that have made an absolute fortune in the last five years, and unfortunately these people think that because they’ve made a fortune there, they can replicate it and make a fortune elsewhere.
And you’re going to get all of this equity coming out of these properties and into the market, and there will be mining towns popping back up everywhere, there’ll be-
Ryan: Oh, not mining towns again. I thought we were done with that.
Ben: Commodity prices are going up too much for mining to not come back heavy in the next seven years, and this is a problem. You’re going to have all these people with this equity that just get so burnt because one, it’s called investor bias.
One experience has given you confidence, but that doesn’t mean that just because the rising tide lifted all boats, that you’re a competent investor and you still need to go back to basics. Every property that I buy for myself, I thoroughly look at that property in isolation and make sure that fits my current goals and also in alignment with the longer term plan.
So just make sure it’s one property a time, and action doesn’t equal results, especially at the wrong time of the cycle. And sometimes when everyone else is buying, as hard as this is for us to come to grips with as humans, it is the wrong to buy sometimes when everyone else is going crazy, and that’s why we haven’t considered Sydney or Melbourne personally or for clients for such a period of time.
There’s this concept at the end of cycles which is the “winner’s curse” at the top and that’s when most people get strung out and burnt because they’re highly leveraged. They think the good times are never going to end.
We’re at this stage at the moment where there’s still plenty of people talking about how the world’s going to fall on its head. And that always happens or has always happened for the last 200 years in the first half of the cycle and then the next half of the cycle we’re going into is people talking about the good times are never going to end. And when people start talking about the good times never going to end, that’s the time to be super-cautious, eh.
Ryan: Then you should be worried, eh?
Ben: Real worried.
Ryan: Well I think, I want to make a video on this but I haven’t quite worked out how to structure it, but more just like being an investor, there’s certain things that you can control and certain things that you can’t. And a lot of investors will just invest, often blindly, like they’ll invest in Sydney because that’s where they live.
They actually haven’t really done any research, and then the property goes up. And they think they’re a great investor, but really it was something completely out of their control that caused that to happen.
So it wasn’t any level of skill from them, and so you can’t just take that and transfer it across to another area. I want to try and get investors focused on what they can control, because that way you can make consistent money or you can at least minimize your risk and maximize your chance of return.
But I worry for these people that they’re going to be taking equity of Sydney, putting it into mining towns. I remember looking back, like Port Hedlands, back in the day, which is a mining town in WA, that was all the rage and people were talking about that for positive cash flow.
I’m just looking at it now. Back in June 2014, so three years ago, average house price or median house price was $990,000. And then June 2017, today, it’s $342,000. And units were $810,000 and now they’re $158,000. The median price for this area.
Ben: [inaudible 00:09:09] control, the marketplace will always recorrect property prices. That’s the thing, we haven’t seen it in a long time in Australia, but the marketplace will always dictate where prices end up sitting and leveling out at.
Just because they’re high now in Sydney and Melbourne, doesn’t mean that those prices are going to be high like that forever, and I can almost guarantee in all of our lifetimes that there will be major corrections.
People forget that because Australia’s had 27 odd years of great growth that it’s always been like that, but there’s been multiple recessions in Australia where property prices have dropped by anywhere between 30 and 70%. They definitely come back again.
I don’t want to go down this path because I don’t believe we’re anywhere close to that happening yet, but you just got to remember that that’s at the back of my mind all the time when I think about buying and when I think about leverage and I think about risk.
Ryan: Well, that’s another possibility right, that could happen, and you need to have at least some plan in place if that was to happen. You hope for the best but you need to expect the worst or at least prepare for the worst.
Ben: In terms of coming back to that video that you were talking about creating. I sat down on the weekend because I’m starting to write this book about the property industry and some of the things that I’ve learnt from buying in the last three years, primarily for my clients and myself.
And one of the chapters is going to be around timing. And what I’ve started to do to prepare for that chapter is go back and look at, over the last 50 years, the times in the market that people have made money. Because people have this philosophy in Australian property which they don’t have overseas, which is you need to buy and hold for life. As opposed to, you need to time the market, get in and get out at strategic points.
And a good example of this is, you could’ve bought property in Sydney 15 years ago, and if you held it to today, it would be worth a shitload more than it was worth at that time, but it’s not because it’s consistently increased in value. In fact 9 out of those 15-
Ryan: I’ve lost you man. You still there?
Ben: Yeah I’m here.
Ryan: Yeah, you’re back.
Ben: I’m back and I’m throwing my screen around. Sorry man.
Ryan: That’s all right.
Ben: What I’m going to do from researching this 50 years of data, is I’m going to look at the two to three year periods in Sydney, Melbourne and Brisbane where it was worth being in the market, and then the flat periods that followed, to show myself and to show other people that timing is absolutely the way to make money in property investing, more than anything else. And I think it gets the least amount of attention.
A perfect case is buying in Sydney five years ago-
Ryan: It gets a lot of attention but just no one knows how to do it. Like even all the analysts and stuff got Sydney and Melbourne wrong, was it last year?
Ben: Yeah. And they’re still getting it wrong now. They’re slamming it. And it’s gone up by 2.4% in the last month.
Ryan: Yeah. That’s like timing is so key. But I wonder if that falls into the realm of something that you can’t really control. We can do our suburb research and we can try and predict, but do you really know? You don’t.
Ben: You don’t really know, and this is the thing. It’s understanding indicators around what’s put that pressure on prices over a long enough period of time to understand what indicators contribute to that, and then monitoring maybe those indicators and strategically entering markets and exiting them.
And you say it’s not possible to predict the future in property, I 100% agree. But there’s a girl in my office named Ally and her mum is an economist. I think she’s 65. She’s bought 50 investment properties in the last 30 years. And she came into our office and did a presentation on every property that she’s bought in the last 25, 26 years now, and I looked at it, and at the start of her investing she was just buying stuff, but then she got very specific in the last two cycles in particular, entering and exiting the market close to the bottom and close to the top.
Not the true top or the true bottoms, and what I learnt from her being in here, I mapped what she’d been doing against the 14 to 18 year real estate cycle that a lot of different people are talking about.
Phil Anderson one of them, and it was just crazy how well that, I don’t even know if she meant to do it, but I think she did by the end of it, but she was mapping timing, and she was making those 60, 80% gains over a very short period of time and then strategically exiting as well.
And so I didn’t believe it was possible, but I do believe it, I honestly believe that if you can really understand this timing stuff, you cou;dve known to get into Sydney if you knew your stuff in 2011, or 12. And you could’ve known to get out in 2016, early 2016, if you actually really understood this stuff.
Ryan: Though I think I agree with you that yes, it’s possible and you could do this. But I think for the average, or not even the average investor, but for almost all investors, this is out of their reach of understanding.
Ben: For sure.
Ryan: You would need to completely understand and study this for years, and stats and combine different economist theories and look at everything. It’s not something … It’s something that maybe someone who would study it for life and become a master at this sort of stuff could do, but I question whether it’s even within the realm of possibility for someone who’s just property investing on the side of their day job.
Ben: No, I completely agree with that and I think that book that I’ve talked about with you, where someone else, one of the wealthiest economists in Australia, has already gone and done 253 years of research, following the American boom and bust property-led cycle, he’s gone and done that research.
You can read that book, The Secret Life of Real Estate and Banking, and get an idea about this stuff.
There’s other economists that have literally mapped out every boom and bust from the 1900s, until now, but they died in like 1913, and they’ve predicted within a 12 month period of itself, exactly what has happened up until this date, and their predictions go out a lot further than til today, so this is just like me talking and me just having a conversation with you, but it’s something that I’m super excited about.
If your average punter read that book and understand the 14 year cycle and try and buy as close after the recession as possible and hold 10 years, 11 years after that and sell out, but if you’re more sophisticated and have the time and research and energy to do this stuff, there’s many windows in between larger windows where you can really make good cash.
Ryan: Yeah. Dude, I could go on for this for days.
Ryan: I love this conversation and kind of arguing with you about the different sides of it, because I’m really passionate about helping people who don’t know as much as you, and basically hardly anyone knows as much as you, so I just like … I worry when we talk about all this sort of stuff that most people will never go down that path to be able to do it, I don’t know if that’s the best thing that will help people.
Ben: Yeah. Probably not the best thing that we could be talking about, and I’m sorry to overdo it but I’m so passionate about this, and now that I’m researching it for this book, I really want to help people understand timing. I think that’s the thing that I want to contribute to the property space in the next ten years.
Ryan: Well, I’m excited to hear it and learn from you as well, because I don’t really know at the moment either. I know how to research suburbs and areas and work out what the good suburbs are and what have potential, but in terms of larger trends and stuff like that, it just all goes over my head.
Ben: Yeah, for sure.
Ryan: All right. Well, we’ll move on to some more questions, hey?
Ben: Yeah sorry man.
Ryan: Hey guys, I hope that you enjoyed the answer to this question which came from my live Q&A episode with Ben on YouTube. We will be doing more of these in the future. If you want to check out Ben, then he is offering free strategy sessions to On Property listeners. To find out more about that, go to onproperty.com.au/session. And you can see all the details over there. That’s it for today, and until next time, stay positive.