Stick to the game plan
One of our great clients just purchased his 17th property.
I want to tell you all about his story simply because, like anyone’s journey of success it’s never a straight line. There have been a lot of bumps along the way but his discipline to maintain a commitment to his personal strategy and constantly working alongside the Custodian team has had tremendous rewards.
I distinctly remember when he bought his first property the valuation came in lower than the purchase price. As you know, I’ve written about valuations more than any other single topic over the years. Valuations are the number one key to finance, and certainly something we can’t ignore. In my opinion, 6 valuations will most likely give you 6 different numbers anywhere; from the purchase price to 20% less of the purchase price, depending on the valuer and the bank instructions (which are subject to change from time to time). What we do know is that valuers use direct comparable sales, however, those sales are settled, meaning the indication is usually 3 – 6 months behind the current market, due to the time it takes for Corelogic to collect the data.
When our client purchased in Melbourne, the market was starting to run, meaning valuation evidence was behind. He asked for my opinion – I simply said “I would have gone ahead with the purchase (as most of my valuations are below purchase price, sometimes 20% or even more on a recent buy, because I use the major banks who are very tough on valuations)”. He did his homework on comparable sales and decided to proceed with the purchase.
That particular property has been a great foundation that has allowed him to build on, despite all the typical challenges life dishes up.
I often think people are busy with everyday life and it’s Australia’s biggest challenge. Taking the time out to make decisions for the future is the number one encumbrance to why, the vast majority of Australians retire flat broke.
Our good clients are a great example of the opposite. What he did, and what do most of our successful clients do? Formulate a strategy and stick to it; that’s all. We don’t have to be any smarter than that!
Interestingly, the client’s last 3 properties he purchased were in an area he already owns; 2 of which have already performed. Some clients think they shouldn’t buy where they already own. I do understand that, but many of my properties are in areas I have bought in before.
He now has amassed 9334m2 off land with 17 houses in high growth areas. The future I see for him is that within 10-20 years that will translate to 37-46 tenants as density averages continue to fall to 200m2-250m2. Land is foundation of all wealth.
In other news…
Finance is concerning me at the moment as APRA’s made changes to the main four banks. These changes are now going to spill over all of the 2nd tier lenders, starting January 1st 2018. Changes will require lenders to hold more capital in order to make residential loans. This means that residential loans, particularly on investment properties, are going to be harder to attain and pricing could go up, which it has more recently with the top 4 banks.
I was recently viewing a client’s borrowing capacity who qualified to buy at $450,000 house and land package at the beginning of 2017 – however she procrastinated and today her borrowing capacity is now just on $400,000. If she continues to procrastinate, come January 1st 2018 her capacity will be in the low $300,000’s.
As I said above, sometimes we can be too smart. We get consumed by the property – “Where is the best location, is there something better??” I, myself often buy the remaining properties in our estates that others have disregarded. The properties are located in high population growth areas. We build a house that uses 39%-45% site coverage (for example – 190m2 house on 450m2 land). They all go up by the same percentage.
To me it’s not the best property, it’s the best property for you – meaning, how can you get the largest block of land in the highest population growth area for the lowest cost per square meter, that won’t cost you a single dollar each week and still give you a tax deduction. That’s really the whole ball game in one mouthful. Compound growth and cashflow.