Investing in Residential Property as an asset class

Alan Kohler and Evan Thornley talk about the investment elephant in the room !!!!

So what does the founder of Looksmart and a tech guru , Evan Thornley , know about property?

A lot , it seems 

His company, LongView, now manages 4300 properties for individual investors and is also a national buyers’ advocate. 

Thornley  is about to disrupt this lazy giant! 

Property and Gearing 

Residential property and gearing …. A cocktail that has been given Australians exponential returns since 1926.

 Solidly built properties, preferably on a rail corridor, have been an investor’s best bet for capital growth , as major city’s rapid population growth pumped up residential properties !

Total residential housing in Australia is $10 trillion, of which about $2.1 trillion is mortgage debt and $300 billion is in new developments. That leaves $7.6 trillion in equity in existing residential property, which is three times the size of the sharemarket.

And yet the $3.4 trillion in super funds don’t currently invest as there is not a liquid market and the risk/return equation makes it worthwhile.

It is certainly a big asset class – the biggest, in fact:

Research by Shane Oliver, of AMP, shows that the total return from residential property since 1926 has been 11 per cent a year – almost identical to the 11.3 per cent p.a. return from the sharemarket, but with much less volatility, so that’s a tick.

Shares vs Property and gearing (using OPM)

Real estate earns lower rental yields (2% than company dividends 6% (after Frankish credits ), but the gap is made up with  negative gearing and capital gains.

The math

The magic formula for exponential returns - gearing and being able to afford rental repayments through net rent received and negative gearing! 

An example of how the average property owner with a mortgage has made money since 1926! 

Investor  holds an investment property for 15 years at a net 3% shortfall (after tax 2%) - after 10 years property needs to increase by 30% in 10 years to breakeven .

No gearing 

Let’s assume you purchased a property for $500k 15 years ago - and sold it for $1 million today. 

Returns :- 

After costs and negative gearing , your return would be $350k or 23k per annum (circa 5 %pa on an investment of $500k ) 

Gearing 

Let’s assume you purchased a property for $500k 15 years ago - put down $200k deposit and sold it for $1 million today. 

Returns :- 

After costs and negative gearing , your return would be $350k or 23k per annum (circa 11.5% per annum ) 

So why don’t superfunds invest in property ? 

• Rent returns are less than share returns
• Inability to Scale 
• Low gearing policy 

They need large investment vehicles, preferably with the ability to sell quickly, in large lumps, if they need to. 

Enter Evan Thornley’s property fund 

Evan Thornley puts business 101 into property

Customer Service 

The goal :- To improve the rental experience for both tenants and landlords – to “dignify tenancy”, and provide a better service for investors, including guaranteed rent, where LongView takes the risk.

Investing in “solid older dwellings on well-located land”, as Thornley puts it, in the suburbs.

1. The bank of mum and dad and the Bank of Government - shared equity 

One of the funds will be for long-term rental, and the other will invest alongside home buyers in a shared equity scheme….. much like the government is doing!!!! 

In the shared equity arrangement, the fund wouldn’t own any part of the house but would provide up to a third of the deposit and stamp duty in return for a contract to share in the capital gain when it’s sold.

“Our shared equity clients are almost all migrants and children of migrants; sole parents and the children of sole parents,” says Thornley. “That is, people without the Bank of Mum & Dad.’’

2. Invest for rent through a REIT 

The other fund will be a straightforward real estate investment trust that will create a suburban land bank of existing energy efficient  houses for rent close to stations and shops so that large aggregated sites can be used for affordable housing in future.  

The investment will be geared to rely on long term capital gains 

Thornley says the initial interest in these funds will come from family offices and high net worth individuals.

Says Alan Kohler 

Whether it’s Evan Thornley or someone else, the only way the superannuation pool can be mobilised for housing is if it can be pooled into funds that break down the super funds’ bias against it as an asset class and work as a decent investment.

Are investment properties a good investment class?

An interesting post by Christian Stephens on the demand for rental properties ! 

As student migration into Sydney increase and the allocation  of migration increase from 165k to 190k per annum  , 

Together with the difficulty and bottlenecks of the supply chain for builders  - 

It seems that  the demand for rental properties will increase ! 

Budget 22 - and focus on solving housing shortage

This budget delivered last night is all about addressing housing affordability over the long term by ramping up supply - say Treasurer Jim Chalmers

The Pain

• There is a shortage of property 
• Property starts have been reducing 
• Capacity constraints’ caused by material and labour shortages across the building industry are a constraint and needs to be solved 
• Affordability is a major roadblock for many Aussies looking to enter the property market. According to the Australian Institute of Health and Welfare, 163,000 are on a waiting list for public housing, and Census data shows 116,000 are homeless. 
• rents have surged by 10% nationally in the past year as demand soars and supply dwindles.

Towards a solution 

A mission

“We want more Australians to know the security of decent housing and more Australians realising the aspiration of homeownership,” he said in a joint statement with the housing minister, Julie Collins.

A vision 

“It’s more important than ever that we work together to ensure there is an adequate supply of affordable housing where it is needed – close to jobs, transport and other services.”

The federal government Budget has set an "aspirational target" to "build one million new well-located homes over five years from 2024".

A plan 

The states and territories will be expected to "expedite zoning, planning and land release for social and affordable housing".

Labor’s flagship election promise – a shared equity scheme –  aims to help more people enter homeownership with a smaller deposit and smaller mortgage.

The federal government's main role will be to create conditions that lead to more private investment from #superannuation funds and other institutional #investors.

“We have the world’s third-largest pool of capital in our superannuation system, which is hungry for investments that will deliver stable returns over the long term for the benefit of members.”

Housing supply and affordability is an important piece of the solution. 

Under the new National Housing Accord:

* 10,000 of the one million homes will be financed by the federal government costing the budget $350 million. This was on top of the $10bn Housing Australia Future Fund, promised by Labor before the May election to build 30,000 new social and affordable housing properties in five years.

* 20,000 will be financed by the states and territories

* most will come from the market - superfunds and investors - we need to support them and remove barriers 

* In 2020, the Victorian government announced a $5.3bn “big housing build” to fund 12,000 new social and affordable homes in four years. tripling the size of its Victorian Homebuyer Fund to $1.1bn

* The Queensland government, meanwhile, recently announced $2bn to deliver 13,000 social and affordable homes by 2027.

The challenges 

Property prices are high 

The median cost of a home in Sydney is still a whopping $1,053,131. A 20 per cent fall would only bring that down to $908,255.

In Melbourne, the median home value is $774,531. A 20 per cent fall would bring that down to $638,625.

The median price of a home in Brisbane is currently $746,017, while in Adelaide it’s $649,983.

The median home price in Perth is $558,879 and in Hobart is $705,079.

Property starts are low 

According to the Australian Bureau of Statistics, about 985,000 new homes were built over the five years to March 2022, though the majority were completed before 2018-19.

Housing starts have been reducing due to COVID, weather , bureaucracy .

Treasury forecasts there will be about 180,000 housing completions on average across the next three financial years,

And yet there is a plan to bring in 190k immigrants a year 

(Which is great)

Potential fixes 

- “Removing tax barriers to institutional investment in new residential development projects such as build-to-rent could play an important role in tackling the undersupply of rental accommodation.

- “Improving planning regulations and removing inefficiencies that reduce approval times are key to this. So too is rezoning, releasing, and decontaminating land to enable more residential development,” 

- freeing up ‘well located’ land, for example in and around train stations and TAFE campuses.

Support of frontline workers and others 

Under the scheme, the government will co-purchase up to 40% of a new property (or 30% of an existing home) with an eligible buyer. Over time, the buyer could buy out the government, or pay out their share once the property is sold.

Help to Buy will be open to 10,000 Australians each year. Individuals earning less than $90,000 and couples earning under $120,000 could be eligible.

The government hopes to have the scheme up and running in the first half of next year.

For example, if a buyer purchased a $400,000 home with a 25% shared equity, they’d only make repayments on a $300,000 loan, minus any deposit paid up front. They will, however, need to cover the ongoing costs associated with owning a property.

This  is already operating in several states, including Western Australia, South Australia, Tasmania and Victoria. And just weeks ago the NSW government proposed its own shared equity scheme.

From 1 October 2022, the Regional First Home Buyer Guarantee will help 10,000 buyers per year enter the housing market outside of the capital cities.

eligible applicants can purchase a home with a deposit of as little as 5%, with the government guaranteeing up to 15% of the purchase price. 

Jim Chalmers

7 keys to getting rich - slowly

Anthony Keane shares in the Sunday Mail on Aug 28 2023 the 7 keys to getting rich - slowly! 

1. Become an Investor - invest in real estate, property, your own business . Begin early - as time and compound interest is a magic source in wealth creation 
2. Leverage your investment with good tax effective  debt - use other peoples money - where the interest you pay will be covered by the income earned from your investments and tax deductions - (make sure you have a great accountant, financial and mortgage broker who work together to maximise your opportunity 
3. Buy Property - it tends to double every 10-15 years - and easy to borrow against it at lowest interest rates 
4. Buy a business/businesses that you understand - most billionaires started with a business idea that worked - after many had failed before striking gold 
5. Diversify into other assets 
6. Seek passive income - where you earn income without having to work -  such as dividends or rents 
7. Plan - write down your plan - and monitor your progress Don a regular basis 

The IK formula  steps simplified 

Make sure that more money comes in than goes out on a monthly basis - and with that surplus 

Buy low , Sell high with other peoples money - and do it regularly. 

Don’t be afraid to take risks and fail until you succeed !  

Great article /podcast on Property in USA - very relevant to Property anywhere!

Molly Wood , JCAL , Redfin CEO Glenn Kolman and Divvey CEO Adena Hefets share what’s happenning in the USA real estate market ! 

Interest rates rising, housing unaffordable, , growth doubled since 2020!!!

Divvy - rent owner company - great way to purchase a property with the support of a capital base . Individual rents a property - buyer picks a home - part of rent to purchase - pays more to own 10pc over 3 years and then takes a mortgage 

gets  people into property faster 

Redfin Online realestate  - charges 1pc - using technology to sell a property 

• Raising interest - massive impact - debt to income ratio - you can buy less home !! Banks only lend a percentage of what you earn !!
• Demand falling off a Cliff - currently down 30pc demand - inventory building up !
• Tail of many cities - hitting various regions differently 
• IBuyers , institutions , builder mark properties down weekly 
• People can’t buy - need to rent
• Most rental mom and pop. Not institutional - won’t sell in a hurry 
• 15pc to 20pc increase for new tennants 
• Land lost cost of capital increasing to cover higher costs 
• Lower vacancy 

In Australia - openning up for  international students , building costs increasing, limited supply , government support , Airbnb back - will this put a cap on property prices 

What does this mean for property prices over next 5 years ?

Shares end the 22 EOFY year in Red - But Chant West says don’t panic 😱

Chant West senior investment research manager, Mano Mohankumar, is acknowledging super balances will end the financial year in the red ….

But suggests that people  should not panic and sell

Why?

“This is only the fifth decrease in 30 years comes on the back of the outstanding 18 per cent return in financial year 2020/21, the second best in the history of compulsory super.”

You risk missing out when markets rebound – as they will at some point. 

Those who switched to cash during the Covid-19 market meltdown missed out on $110,000 in returns by panicking, Chant West’s research showed.

2030 predicted Growth - expectation that cash is not a place to hold your assets long term 

A member who had $300,000 in super savings at the beginning of 2020, were projected to have $480,000 in super by the end of 2031 if they stuck with their growth fund.

But a switch to cash in March 2020, would mean they have just $369,000 by the end of 2031.

6 things to help Make your Customers and Stakeholders Feel Special

I have just read a great article by my good friend Rana Kordahi - who has presented at our forums a number of times  and been a member of BBG .

In order to understand and develope a relationship with your customer, employee or shareholder , your child spouse or friend (your stakeholder )  - you need to know what they want - what presses their buttons -  what influences them. 

A10X principle comes to mind - Give a person what they want and you will get what you want

Make your stakeholder feel special! 

Do you make your prospects and clients feel special? 

Be sure to listen to them, ask questions and help them? Both face to face and online

Perhaps give them a piece of information no one else knows? What are some specials that you have for a limited time? (But you need to do this with integrity and be honest.)

Here are Cialdini’s 6 principles of influence will help you develop that relationship and close more deals

John Maxwell says about leadership…. Leadership is About being able to influence nothing more nothing less

Robert B Cialdini, a well-known social psychologist, who spent three years undercover working in places such as used car dealerships, fund-raising organizations, and telemarketing firms. In this time, he observed real-life situations of influence and persuasion.

1. A spirit of generosity and Reciprocity

 If you’re a business coach, perhaps think about giving a free discovery session or webinar. 

If you have a software or app, give free trials and spend some time helping those who sign up using it. 

People feel more indebted to someone who has offered something for free, whether it’s a product, time, advice or service. 

But in the end, give because you’re a nice person and the other person FEELS that you genuinely wants to help whether you get something back or not.

Make your stakeholder feel special! 

Some ideas to build a spirit of generosity and  reciprocity: 

Do you offer value, give free information, time and resources away? Do you go above and beyond to help your clients?

Do you invite them to an event that they may be interested in

A super powerful gift that does not cost a hellava lot is to make a referral .

A problem is that you are giving of yourself - and can be very expensive…. What if the other person doesn’t do a great job? What if he/she does not follow up?

How can you track measure and reward that referral - or warm introduction? 

Referron 

(Referron is a free app that enables you to  send your business card and simply refer people to others (and track those referrals ) .   Would love your feedback.   Click here to view my profile and connect with me https://members.referron.com/bsivc   )    Here is a little instruction video https://youtu.be/s-jhxmABIm4  looking forward to catch up soon.   Best Ivan )

Make your stakeholders feel special

2.Scarcity  

Many times, we are influenced to purchase something when there are not many of it left. It is human nature when somebody tells us that we can’t have it, we want it more. 

Other times, when a product or service is at an unbelievable low price for a limited time, we will be more inclined to purchase because of the fear of missing out. Now as a salesperson or a marketer, don’t ever drop your prices and say that they are limited unless they are limited.

Make your stakeholders feel special 

3 KlT know like and trust 

Klt is l fundamental aspect of being able to sell. People prefer to say yes to those they know like and trust . 

Research done on Tupperware parties shows that the guests are three times more likely to buy products because they liked the party’s host and not because of the products themselves. 

So, it’s important  to make a good impression not only face to face, but online through your social media. Videos, blogs or write Facebook statuses. 

Come across as a positive, authentic  inspiring trustworthy person who the people you want to be your customers want to be around. 

Stay real , authentic and true to your values , be sure toml be what you do and the values of your organisation align with your

 Don’t  compromise your integrity or values to win a deal.

Trust, Credibility  and Social proof - Advocates testimonials 

• A testimonial is effectively like a referral - on steroids - can go to masses

the trend is your friend

 We prefer to buy things that many other people have used and tested. 

Why is a restaurant packed and the one next door is empty?

 People follow the latest trends and use products and services that are working on others. 

Testimonials from customers and influencers are key - maybe  share photos/videos of your customers and influencers and advocates  using your products and services.

Questions about your   social proof: 

Get  testimonials and happy customer stories you can share with clients? 

Does the company you work for have credibility, and presence when you search for them online? 

Would your existing clients recommend you and your company? 

Do you highlight your company’s social proof in client meetings or even through your email signature?

If you refer - do you track measure and reward your referrals or testimonials ?

Make your stakeholders feel special 

4. Continuous Commitment and consistency — 

This shows that you know what you are doing and are authentic. That is they buy your product or service that it will last 

 How do you get your customer to say yes and get them  to agree and say yes if this is what they want. 

Rana’s gold - ASK and Get agreement - get them to say  yes 5 times  - show them your final offer and gain some sort of commitment from them to take action.

Questions to consider for consistency commitment and consistency: 

Can you show consistency? 

Do you walk the walk - consistently ?

Do you ask clients to commit to their word in regard to showing up to meetings, renewals or even giving you referrals? 

Do you ask good closing questions to get the customer to close themselves?

Make your stakeholders feel special 

 5. - Be an expert - be the centre of influence - have authority 

Be credible and know what you're talking about. Building your centre of influence  - online or offline. 

Share  content that highlights your expertise. Give talks, write articles, feature on podcasts, host events  or simply be good at what you do. 

You cannot fake authority. And it does not come easy - it takes work, practice and time to be an expert and centre of influence in your field

Some questions about your centre of influence 

Are you the go-to person in your field? 

Are you a trusted adviser? 

Are you a centre of influence 

Do you professionally develop yourself rhgilatly and consistently 

Do  you show up with confidence, look and  the part ?

The key 

The 5 Cs - to build a connected collaborative community of people around you 

Connect collaborate contribute competently and consistently

Make your stakeholders feel special 

Learn Collaborate and Grow with us - BBG