EP. 18 | Is Buy & Hold Still the Best Property Investment Strategy?

Mudit

Hello, Julius. Welcome. How are you doing?

Julius

I'm good. How are you?

Mudit

I'm doing very well, Julius. And these have been very, very interesting times. Yes, discussions like, like the budget changes. I mean, they, they re-initiate and start getting focused back on certain, certain things, right? So, for example, I mean, what kind of strategy you choose, depending on what your goals are, and for property investment, and some macroeconomic change, like this budget, they make people go back on to their drawing board and see that what kind of different strategy, what for, how does it impact, right? Yeah, exactly. That in the last couple of weeks, have you? Yes,

Julius

I'm talking to a lot of investors, and then it's our duty to explain them in our own capacity, and to advise what are the budget changes versus what, how they are going to impact on other factors like their own financial goals, whatever strategies which we have made for them, whether they are the right strategies, because there are few things which have changed in the budget, so yes, there are a lot of discussions have been initiated so far, and yes, we are attending those discussions.

Mudit

Yeah, no, interesting. And let's focus on one particular strategy, which is the buy and hold strategy, which a lot of investors, a lot of investors follow. And so today, let's discuss more about what is the strategy. How is it different? How does it align with your goals? How do young and first-time investors, how do they use this strategy to hold and then make a portfolio? How do these properties that you buy in the under the strategy, how do they actually rack, how do they perform, what, how do the metrics change over a period of time? Then how do you go about choosing the right location, right suburb around it? What kind of risks are there? What kind of mistakes can happen, and how do you mitigate some of those risks? What kind of things you can plan so that you can mitigate those risks? What are the basic financing and loan related strategies that you can use when you're thinking about holding for a long period of time, and then when you're using this strategy, how do you scale, and let's say, if you're looking to build a portfolio, then how does it align with that? Yeah, how to scale? Yeah, we're gonna cover all of this today. Yeah,

Julius

yeah.

Mudit

So quickly, that when we talk about different strategies, right? So some people use buy and hold, where you're saying that, okay, I buy an investment property, I hold for a period of time, and then sell it later, so it's not a short term strategy versus some people use a flipping strategy, purely flipping, that I buy, I renovate, or I do something to the property, upgrade it, and then I flip it, that's

Julius

quite a lot happening nowadays, it's another avenue which has been created, so that's that's a very, very popular strategy, where a lot of people trying to find properties which can have a short term gain, so they power property under a certain structure, they renovate it and flip it. When, during that time, the market cycle timing has to be in your favor versus assessment of the property has to be precise, or else you'll be in deep problems. Yeah, so this is kind of strategy.

Mudit

Absolutely, absolutely. And, and the choice of which one, whether you use flipping, whether you use buying and holding for a long time, or use a short term investing strategy, what you choose depends a lot on what your goal is, right. So if people can have different and people do have varying kind of goals, it could be that I want long term financial security, that's a valid goal. Some people have that I want to build a passive rental income in the long term, that's another one. I want to plan for my retirement. I'm 35 today, and I want to plan that when I retire, will I have enough wealth, will I have enough stream of income via my investments, that I'm able to plan for my retirement. That's another goal. People also use another goal, like I want to buy my home, I have not bought my home yet. I want to buy it in, let's say, five to 10 years' time, but I want to build some deposit, I want to build some wealth, so that I can buy the kind of house I want to buy for living.

Julius

Correct, every property strategy is built upon what your objective is. Say, as you rightly said, objective could be passive income, objective could be repay your mortgage faster. Objective could be, yes, I am early age investor, and then I would like to buy my home later, but I have very small amount of deposit, so how do I scale? And then how do I make those big amount of equities to get my owner occupied properties? So, yes, so these are kind of strategies which we always see across horizon and in Australia, when you say the property market, it's always a long-term holding asset, because if you look at last 35 to 40 years' data, as per the ABS, on an average property growth rate is around 7% sometimes it's higher, sometimes it's lower. So, it's because property markets always go in a cycle, so on an average it's 7% growth, and the hold period for those properties to achieve that goal. Because when you say, okay, property prices are going to be double in next 10 years, that means you will go through the multiple cycles. So on an average hold period is more than seven to eight years. During Covid, it was reduced slightly, but on an average it will be around seven to eight years. That means when you plan for something from where what objective which you would like to meet with the help of the property as a tool, then yes, the long term holding is very, very important.

Mudit

Absolutely right. So, holding, holding gets very relevant as a strategy when you're talking about goals like security and long term retirement planning, passive rental income building. So, these are, if these are your goals, then definitely visiting this strategy and thinking about it, that not just short term flipping but long term holding, because it has its own inherent advantages. That becomes an important strategy to keep in mind, so let's talk about when, when people start. Let's say some young investor or a first-time investor. How do they start? So one way in which a lot of people start is that use the investment to build a deposit, because you're you build investing in a property, let's say, and you want to eventually, let's say, first time investor, first time buyer, first time investor, they are looking for buying a home to live in after some time, right? So, but it requires you to have some cash from your side, so people use this as young people use that. Okay, let me invest in a property, let me build some deposit for that, and then it will help me build deposit, and so that I can eventually buy a house to live in, right. But then the most important parameters that come into play are your financials. How much do you have? How much deposit do you have currently? How much is your borrowing capacity, that is a function of what your income is, what your expenses are, what your liabilities are, and then the interest rate, which will determine that what kind of repayments will be there now, based on all of this, you as an investor or a first-time investor will have to think that what is it which suits your budget, what matches your budget, and that will determine that what kind, what, how will you start this, how will you initiate the whole process? Right,

Julius

yeah, that's right, because when you build strategy, it's, it can't be just on the paper. It depends on, like, how much you can borrow versus what you have and how much your finances will support it. So, there are a lot of investors, or young investors, or those who are very early migrants in this country, where you have, you spend little time in this country, but you still want to get into the property journey, then your deposit or savings are less, so all, not all properties are expensive property, or not all properties are cheaper property, but they are, their market scores with the cycle, so a lot of investors, okay, if I have around 40 $50,000 of deposit, then yes, I might have a good income, I might have good borrowing capacity, but my deposit will allow me to get into a small ticket size properties, so that's that's the starting point. There are a lot of people, which we have seen, that okay, they are in this country for around 1015 years, when started rate, they have a good size investment, or the goods are deposit saved with them. Then you can start with the capital cities, where you can buy a property worth of 800 $900,000 also. So it's actually depends on the EO financials as well as what kind of property you can buy, so for an example, when you are getting into lower ticket size properties, or sometimes objective is okay, basically, yes, I can't hold, or I can hold property for a longer time, but I can't repay a lot of negative payments on the property, then not an investor will choose with the apartments, or when the deposit is not enough, then probably few people will try to go towards the aftering suburbs or affordable growth areas, every area of the every all of these areas will have their pros and cons, like when you look for the apartment, yes, apartment growth rate is slightly lower, depends on where you buy. When you look at the apartment in Sydney, Melbourne, probably there will be little slower growth, but feds in from last three four years, few states apartment have gone significantly higher. So in that deep research is important when you look for the when you when you buy property towards the affordable segments or fringe areas of the entire city, then probably there will be always a risk of getting more supply in that property, so that means your growth of the property can have a little impact. Yeah, so sometimes when you go towards the extremely affordable areas, then those would be in regional areas where the growth rate will be a cyclic, so it's always very important to waive your options and understand, okay, what kind of asset you can afford versus what kind of asset you can fit in a strategy. Oh,

Mudit

no, absolutely right. So, depending on the financials and how long do you intend to hold, how the cash flow will work, how the capital growth you're looking at, it becomes important to see that what kind of ticket size, do you go with, and in that ticket size, what are the options, and which one suits you? Now, one important point that happens there is that a lot of first-time investors, young investors, there are fears in mind, right, that a lot can go wrong, or then it's very common that seeing, I think some of the fears that we have seen, and we have come across is that. The choice of wrong suburb. What if I invest somewhere, and what if, if my, my suburb doesn't grow at all, or it goes, it crashes, or there is always, uh, there is always some kind of media noise around that property market will crash, the market will crash. So these are some very common fears that a lot of young investors have at right, and these are these are these come up in discussions every now and then another fear that what we have seen is that which is like in current regime right impact interest rates are going on the higher side or there is certainly an announcement how the macroeconomic changes how the an announcement of a budget can can make you relook at what you have been thinking about how you invest, how your decision is. So, these are some, some risks and some fears in the mind of young investors, first-time investors. You've seen some of these discussions, you have gone through. Yeah,

Julius

it's in a lot of time, because when, like, anyone is investing in property, the fear is, okay, wherever I'm buying, whether that property will perform or not, whether I'll get good rentals or not, how that entire property market will perform. There are a lot of people. Okay, they're trying to over leverage, or it always depends on whether whatever I'm buying, whether it is sustainable or not. So, they're like, there are a lot of fears, which I've already seen in within a lot of investors.

Mudit

You've touched on a very good point, Julius, that if I invest in a property, how will it perform, and that's a very, very valid concern for, or valid, valid thought for everybody, right. So, when we talk about performance, I think it's about one very important in this thing is holding,

Speaker 1

yeah,

Mudit

the capacity to hold a property is one of the most critical parameters in this strategy, right. Yeah, and that depends entirely on the cash flows. Now, cash flow is important because if you're not able to hold the property, you can't sustain that property. Then it puts a lot of pressure on you, on your lifestyle, and it on the, on the most, on the extreme side, it can force you to kind of sell it in a desperate condition, where, where you are not willing to write, so cash flow plays a very important role in holding, and I think a lot of properties, when people are looking at buying a new buying a property, they start with negative cash flow, especially in current kind of climates where interest rates are on the higher side, the initial cash initial interest rate is high, so your rental yield may not match the, if your rental yield is close to, let's say, five five and a half, four and a half, five five and a half percent, but the interest rate is close to six and a half percent, then there's a negative cash flow. So, there's a negative cash flow, so that means on a monthly or yearly basis, there's a negative cash flow from your pocket. You have to keep investing some money from your pocket, right? Eventually, what we have seen is that a lot of these properties within four to seven years turn either neutral cash, either neutral on the cash flow side or positive important reasons. Right, let's say over a period of time, your interest, if you're paying principal interest, then your principal portion starts increasing, your interest portion starts redising the contribution, the balance between the two rentals. There's a pressure on the rentals, especially with the changes in the budget. It is expected there will be more pressure on the rentals going forward. The rentals, if they increase, if there's rental supply crunch in the market, so these changes help eventually turn the cash flow to positive.

Julius

Yeah, the core DNA of buy and hold strategies is basically you have to hold, you're going to hold those properties for longer time, so you will get that leverage over the time, the compound effect of the property growth, and then you are going to witness that immense amount of growth, or probably if you hold that entire portfolio for 10 years, it is going to be doubled. Yeah, so to hold that property cash flow is very important parameter, unless you have a cash flow, then probably there will be time, or there will be uncertain time when the interest rate will be top, and then whatever you plan for all these years. Okay, I'm going to put this much of amount for these properties, and I'm going to hold it. It will have a lot of impact. So, basically, what the couple of points which, which build the wealth, right? Because property, property will grow over the time, so that compounding effect in a property market is very important. Second thing is in which market you're buying versus what is the timing in that market, because time in the market and timing in the market both are important parameter. Property market will always go with the cycles, so you will have, you will have a rising market, you will have recovering market, you have declining market. Declining means basically declining in the growth rates, and then you have markets which are recovering also. So, in which cycle you are entering versus how many years you will hold, that will define how much growth you're going to make. So, time in a market versus timing in the market, both are important, and then how much equity you're going to generate on an entire portfolio that is the goal, which should be with buy and hold strategy.

Mudit

No, absolutely, 100% correct. So, both from a because, as an investor, whether I'm young, new, or if I have a portfolio, whenever I'm investing in a property, the idea is first, is of course, that it should. I should see growth in my capital. I should capital growth, right? So that's the first one, and, and that for there, like you rightly said, that it is very important that how long are you holding, because compounding effect is critical, correct? And second, second is that can I sustain, can I maintain that correct? I think that's where it is important, because whenever I think there's also, there's generally a anchoring bias, I would say that when I, if the cash flow is negative today, a lot, a lot of times investors assume that of the cash flow is negative, and if I hold this property for 15 years, my entire loan cycle, the cash flow will remain negative, but the nature of cash flow in most such properties is that if the rental pressure continues, which is, which we have seen, that rentals generally have supply has been pretty short, and this pipeline is not so great that in the next five years that there will be supply, but so if the rent rentals are expected to grow up, right, if that continues, and because your interest component of your repayment comes down, so it's not that it's going to remain negative for 15 years. In the next few years, the cash flow does turn positive in most cases, so that helps in terms of sustaining such properties.

Julius

Yeah,

Mudit

yeah. When, when we're talking about that, how the cash flow goes, right? Yeah, and how the capital growth is, but the most important parameter that comes to mind, Julius, there is that if I'm looking at holding for long periods, property should perform, and the performance depends, of course, I will choose as per my budget, correct? I will do the financials and understand what my borrowing capacity is, what my financials are, what my, and depending on that budget, but then ultimately it comes down to what properties. This is a good strategy, but then everything goes and boils down to what is the choice of the property. Where should I invest? What is the suburb? What is the, and what is the kind of right property? What I.. what's.. what's your thought there?

Julius

Okay, so before you buying a property, we have to define where to buy a property and how to choose a right suburb, because you're buying a property which you're going to hold for longer time, that means you're expecting a capital growth. You're going to hold that property for a longer time, you need a sustainable cash flow. You're going to build that property for longer time, that means you want that cash flow to be increased over the time. So, when you look at all of these parameters, there are few important parameters in data, which you track, so for an example, you don't want to buy a property where they're like more than four to 5% vacancies, and your property will be vacant after tenancy changes for two to three months. So that's why vacancy rates tracking is a vacancy rate,

Mudit

you're saying is one of the most critical parameters, very critical parameter, because tighter the vacancy rate, that means there are less property in the market for the rental, and you always have a rental rise, which will give you additional cash flow. So, rental growth is important. Second thing is rental demand, whether it is increasing or not. How we track that rental demand by, by seeing, okay, how fast the properties are turning over for the rental. So, rental turnover rate is also very important, I think. So, see, generally, my understanding is that from a long-term growth, of course, we look at population, we look at the demand factors, right? Yes, exactly. How the how the economy is, what is the diversified risk? How the infrastructure and developing social infrastructure, how the population is growing. I think these are general parameters, but specifically, what, what my understanding of, based on what you're saying, is that if you're looking for holding the rental-related parameters, which is vacancy rate, the rental growth, those are more important or equally important.

Julius

Yes,

Mudit

compared to them,

Julius

because you always have cycles, right? So, when demand and supply is a lot of gap, then you say property prices are rising. Yeah, yes, property prices rising, they'll be cycled when the property prices will be flat for some time, but the rental is important parameter, which will help it to sustain that property for another cycle. That's why rental rising is very important. Other than that, we look for affordability, how much they are earning versus if they have a good buying affordability and renting affordability. That means you always have a growth gap. So, how soon you can repay the mortgage? If it is less than 3040 years, that means there is a lot of gap between your growth and what had been achieved. So, basically, you can actually see, okay, this much of gas is still remaining, but with that, we need to find out the renting affordability also, also the locations.

Mudit

Yeah, so in fact, I was about to come to that. So, see, when we talk about, there are there are metros, there are regional areas, right. So, from purely from a holding point of view, I'm sure that not every location is same, not metros are not same as regionals, because metros have a certain kind of cash flow, regional have a certain kind of cash flow. So, what, as an investor, to keep in mind when I'm looking at holding for a long period of time, is metro better? Is regional better? Because cash flows are very different,

Julius

both are equally important. So you have metro location where you have a very good suburb, where you have moderate suburb, and where you have very bad suburb. So bad suburbs characteristics will take a lot of time to change that's called gentrification. In versus so, when you're getting into, for an example, in metro cities, then if you are at the right time or right market cycle timing, then, and if market is changing, then in next three two to three four years, even touch you around 40 50% of the growth, then market will be sluggish for a longer time, versus when you go towards the very good side of the suburb of that metro, then yes, it will be a little bit expensive, but then your cash flow might have little bit of impact, because it's an expensive suburb, so property prices are more, but your growth will be sustainable growth, because your type of population who is living there is little affluent, the growth gap is pretty good. There is good affordability. Similarly, in regional, also they are good town, and they are fringe town as well. For an example, in regional, you have a very good suburb where a lot of people would like to leave. It's a non-occupy suburb. If you're getting into that suburb, and when you look at the historical growth rate, it will be around 78% So both are equally important. It depends on your budget, but when you're selecting a suburb, we need to understand if you want to hold this property for longer time, wherever you're investing, those long-term hold parameters have to be matched in

Mudit

data. And correct me if I'm wrong on this, that recently what we have seen is that most of the metro cities, if you talk about, let's say, Sydney, Perth, Brisbane, all of these, because a lot of capital growth has happened in the last few years, the rental yields have taken a hit. The rental yields have gone down, correct, and that's why for someone who's looking at investing, holding in metros is starting to get more and more difficult for investors, exactly. So then, when people are young investors, are looking at thinking about holding for a long period of time, then from a cash flow perspective, some either, either significant urban areas or regional areas, they become more interesting from that angle.

Julius

Correct. Yeah, so it's always a choice versus what you can, what you can achieve. Every market have cycles, so from last few years the capital city markets had been through a good growth cycle. Now there is a market cycle where suddenly, because of all these interest rate scenario, budget scenario, we could see there are a lot of the bulk of investors can easily afford those affordable properties where markets are under supplied and demand is higher, plus your rental income is extremely stronger. So that when you do the research, then we need to find out what are the long-term sustainable pockets where there is a good employment, there is diversified employment, then that will match your budget. Then why not? Then there are few good regional town centers, few good significant urban areas, so in long term holding, or when you build a strategy, it's always depend on what you can achieve versus what you can afford, so whatever comes in a budget, then we need to find out what's based in that,

Mudit

yeah, and there's always a trade off, so some places may offer higher capital growth, but maybe negative more bit of negative cash flow, but some other properties might, some other regions, which are better on the cash flow, but they may be not as, not the kind of growth that you see in the other one, so there's always this trade off, and that's always a rope, a tight rope to walk on that. How, which one, which one? I think it ultimately comes down to what my goal is, and what my budget is, and what, how do I want to start. Also,

Julius

we, when we look at these strategies, then Lucas type of properties was very important. It's already not necessary that either you buy houses or apartments. There's nothing wrong in all of this. So, you buy a house in a good area, it will grow. Doesn't mean that apartment will not grow. We had seen from last three, four years the in few states where apartment grown significantly, so it depends on what you analyze versus where is the most of the supply coming up, and how much is the gap between houses and apartments, and according to that, we have to choose the right asset, which will suit your requirement as well as suit your budget. Also, sometimes a lot of people who are looking for properties which is extremely old in those type of properties strategize to be clear, for an example, you know that, okay, this property can't sustain more than three four years, and then if you are at the right market cycle timing, then is three four years, you will see the good amount of growth where you can exit, but if you are buying this property at the peak of the market, where you know that, okay, if you want to do or manufacture some growth from that property, but amount of money which you already spent for the potential of the land in next three years. If the market is slowing down, then you need to have that holding capacity to hold it for next 10 years. So, right, asset selection is also very important.

Mudit

Absolutely right. So, if I am, if I'm thinking about holding long strategy, then the choice of property based on what you're saying is that if it's a very old property that might become a bit of concern or a risk, because then it may require a lot of capital capital inflow to make it sustain for a long period of time, and especially given times like these, when the construction costs are through the roof, then such cost, capital cost, can increase significantly higher, and then. Holding may become a concern.

Julius

Yes, of course. So that is always a concern. That's why when we see what kind of asset we buy versus what are the risks we carry and what mistakes to avoid, the number one is while buying what kind of research you do. So if you, if you're doing, if you, if you're not doing a correct research, and then you're buying in a weak suburb, like, okay, you're buying, you're buying a flashy home where there is extremely high supply, you, yes, the property is little bit newish, but there are 1000 more properties of similar sort of building, and then might 3445, years, there is no moment in the property prices, versus your rental yields are so low that basically you're going to carry that negative impact that is also not good, a set to carry

Mudit

100% correct. So, so there are I think you're absolutely right that what kind of risks are there, what kind of mistakes as an investor I need to avoid, so that I can hold long term. And I think very rightly said that the kind of property, the kind of choice of suburb, if it, whether the kind of growth we are going to see, the kind of supply which is going to come there, that research becomes critical. Yeah, I think another important point there is that, how much leveraging am I doing right? So, if I am stretching too much on my budget and over leveraging right now, it might be okay today, and I might be like, okay, my cash flow is allowing me that, and I'm stretching a bit, but I'm almost there. But then the times are uncertain. The time can be uncertain, and a slight change in market factors. I'd say, because of some reason, the interest rate goes up a little, maybe half a percent, point two 5% Can I sustain that? Leveraging that, how much can I stretch? That becomes very important point,

Julius

exactly. Because always plan for the worst case scenarios, like now when we are buying the property, we look at, okay, wherever the yields are in between five and 6% it's a worst case scenario. We know that, okay, interest rate might go down sometime in next 334, years, and whenever they'll be in 344, percent, then probably you're profitably positive, but whenever the interest rates are 2% and if you're all leveraging with what, while knowing that, okay, in future they're going to rise, that is like the biggest mistake. Tell

Mudit

me more about it, Julius. Last few years, especially on the interest rates, have been, have been so varying. I mean, COVID, yes, it was an anomaly, and we, we got, we've seen a lot of people who, who in the lure of that 1.98% interest rate, went leveraged more, assuming that this is going to hold for long, but see, I think the, we have to keep in mind that the market is dynamic, and yes, we, we can't plan for everything, but at the same time, How much to stretch, what is comfortable? It should not be. Am I okay with sleepless nights or not? That becomes an important parameter there.

Julius

That's right.

Mudit

Now, another thing I think important there is that when I'm holding right, there should be some kind of plan on how and when will I exit. I'm not saying that it should be that okay, exactly in five years I will exit, but there should be some kind of thought in mind, because that becomes a risk that do I continue to hold a property beyond what was actually the right time to hold, so there should be some clarity in kind of what parameters are important and at what point will I exit, so I think there it becomes very important to continuously keep a track of how the performance is, how the market is behaving, where I've invested, how the property is performing, what parameters become important there, Julius. From a, from a purely from a market, purely

Julius

from the market perspective, if, see, there is always opportunity cost, right? So, when you're tracking a performance of your property, and for an example, you're holding a property for five years, but it's not moving, or property severely negatively geared, and market is also not moving during that time. Rather than holding those data sets, exit from that property and take a leverage of time, as well as that money, and get into the markets, which are moving, so that market performance tracking is very important. Also, when you are buying a property in a region where, when you can see, okay, there is a lot of new supplies coming up, then it is going to kill the growth for another seven eight years. So, if you're witnessing this type of things, then it's better to exit from that property and get into a market where you have imbalance between supply and demand.

Mudit

Absolutely right. So, I think what's important is that it's not invest and sleep strategy. Correct, buy and hold doesn't mean that you, you, you, you bought it and you're holding, doesn't mean that you're kind of become a completely passive guy. You will have to keep tracking what's happening in the market, because markets change, market change all the time. We have seen that, any, I mean, right now, right now, we are going to that change in the market, a massive change, few years ago, massive changes in the market, kind of grow, probably grow that has been happened in the capital growth that has happened in a lot of cities, some markets are very slow growing, have been slow growing, like Melbourne, for example, has not grown, so that, that I think, I think it important. It's important there that to understand that. Okay, I invested money, okay, and I'm tracking the parameters, supply demand related. How the property is tracking and keep on weighing the opportunity cost, right? If am I better off putting my money somewhere else or am I better off in continuing to invest there? I think that's where also important becomes the cost of the concept of sunk cost, that what has happened has happened. Now you have to look if you have invested somewhere, and if you have to start from saying that, okay, let me start looking at today. Today this investment is behaving like this, correct? If today I were to exit and enter another market, this is how my financials will be, versus if I continue in that, this is how my financials are continuing, going to be right. So, your financials changes in your own financials, what has happened with, let's say, you've, how your expenses have changed, or how your incomes have changed. Then, second, tracking how the how budgets or economic indicators or inflation or interest rates, how they are impacting, and how the property in itself, the market itself, in terms of supply demand, how it is changing. These are very, very important to keep on tracking, not that you have to decide right now today, correct, but keep tracking and keep evaluating that what is making sense from a financial point of view and from a stress level point of you correct, and it's not that I thought when I bought that I'll invest for 10 years and I will not exit before 10 years, that's not something that works.

Julius

Annual performance tracking of your portfolio to leverage the opportunity cost is very, very important.

Mudit

Absolutely right. No, and I think that's where also it becomes important when we are talking about that. What, how my financials are changing, right? So, how the financial setup of the property is. How have you structured the loan? What is the best loan structure under which you should buy a property? If you, if the investment property, is it, have you taken a loan, which is, let's say, should you take a principal and interest repayment or an interest only repayment? Both have their own advantages, so in principle and interest, you're paying back the principal also, but then your monthly repayment will be a little higher, while on interest only you're just returning the interest, but you're not paying back any principal, so your principal amount outstanding loan remains the same, but you will probably have a little less repayment per month, because you're not paying back the principal, so based on how your financials are, if you're getting crunched on the cash flow, then switching may help, right? The kind of borrowing capacity, which remains for, let's say, if you want to build a portfolio, if you want to buy another property, which one will suit you better? It is important to decide and kind of see that which structure works better for you. Second important point, there is that when you've set up a loan, do you have offset features set in? Do you have redraw? How are you keeping the money so that you're keeping more money? If you have savings, are you keeping in the offset so that it reduces the interest rate overall? Whether your repayment is still the same, but your overall loan term is reducing because your overall interest component is reducing, right.

Julius

Yeah, that's right. Because planning your finances is very, very important. Sometimes you've seen the structures, also what kind of structures you use to boost your portfolio versus whenever you see which kind of loan type you go with. So, if you sometimes, yes, principal and interest is good, you're paying your mortgage faster, but during that time, if interest rates are higher, whether you can sustain with that cash flow or not, so the planning is very important.

Mudit

Absolutely right. And, and I think one important thing we've seen is that how do you use equity there? So, a lot of times, if you have investment in a property, and then an important parameter there becomes valuation, because if your property has property value has gone up, then your valuation can go up, and valuation also can vary bank by bank, so whether you should refinance, whether you should not continue with the bank, and which bank is allowing you to access equity, because if you're looking at building a portfolio, or if you're looking, not even building a portfolio, if you're looking at access to money from the property, because you want to buy something, you want to invest something, you want to maybe do a construction in the property, or you're looking to invest in shares, or whatever, right? So access to that equity from that property becomes important. That's where, which bank to go with, what kind of loan is important. How is the bank seeing the value of your property? Those kind of parameters become very important.

Julius

Yeah, that's right.

Mudit

And when we talk about that, we're talking about portfolio, right? So, if we touch upon that building this portfolio, many people, I think, they get worried about that. If I'm holding a property for a long time now, will I be able to build a portfolio using those, or how are the means? What are the ways in which I can, if I'm looking at building a portfolio, maybe not saying it can be whether for somebody it might be just a two property portfolio, for somebody it might be just a single property, somebody might say I want to build at least five properties, right? There are people with different goals, different objectives come and say this is my study, so what big. Becomes important to keep in mind if you're using holding strategy for long to build a portfolio and I think that's where to scale the equity component that becomes very very important and that's where the power of leverage becomes power

Julius

of leverage is something which we use in the entire portfolio scaling for an example I have a capacity to buy property worth of $3 million and if I'm able to buy those all properties by taking out equities, and then finally I build my $3 million property portfolio, that that's most of them, it's it's leverage, so by using that leverage, if I'm buying the right properties, then if you just consider the growth on the entire portfolio is 7% then in 10 years your entire portfolio will become $6 million That means that's the power of leverage, but with that, with that most important thing is how you maintain your cash flow as well, because when you buy property, when you withdraw the equity, equity is also loan. When you buy a next property on the equity, that means you are buying that property on 100 loan plus we are including a stamp duty according to the state, so your loan will be in between 104 106% So how you can manage that cash flow to maintain that entire portfolio, that is also very important, because for an example, current interest rates are around six to six and a half percent.

Mudit

Yep,

Julius

if your entire portfolio is at three and a half to 4% that means there is a gap of 2% Only thing

Mudit

you mean the rental yield of three or 4% if

Julius

your property entire portfolio is earning around 4% and then the expenses are on 6% then there is a gap of 2% Then we need to know how to sustain that portfolio, so that means the bigger the portfolio is, there is a risk of sustainability as well. That's why, when we select an asset, it's very important to find out. Okay, if I'm buying one asset where it's highly capital growth intensive, but it would be highly negatively geared. Then we should buy in a pair, where, okay, you'll have, you should have another property with the dual income, house and granny, or duplexes, or dual key properties, whatever suits your requirement and budget, or at least we should have properties in your portfolio where you can have a provision to have ancillary dwelling, so in future, if suppose you're struggling with the cash flow, and if you access to the equity, then probably in next 346 months you can build those ancillary dwellings and increase your cash flow, so scalability will come with the holding as well. So when you are trying to hold the property portfolio, you need to plan it accordingly. You can't just go and buy all the property which are negative, highly negatively geared, and later we don't have any availability of that, like you can go and build some insulated dwellings. So that planning is very important.

Mudit

Absolutely right, 100% I think that's a very, very, very critical, especially when you're talking about holding strategy. That how do you sustain this? And there is, you will, it's very hard, or you never get that best of both capital growth and best of cash flows, so that I can get 10% growth also, and I will have a seven 7% capital cash flow, also rental yield also, that's that's not what happens, mostly you will have to kind of slightly tilt towards one or the other, you will have to make a trade off that. Okay, I'm okay, I'm okay with a little lower growth, but I want longer sustainability, and the cash flow that that becomes the king there. The rental yields become kings, so finding those properties, finding those market, finding the right mix of what you have in terms of the properties that plays a very, very important role, and I think one one type of structure, which becomes also an important in this strategy, is SMSF. Given that in SMSF, your one is that your borrowing capacity, personal borrowing capacity, and is not impacted, so SMSF can be a parallel asset structure or asset holding type in which you can buy a property which doesn't impact your personal borrowing capacity, so if you're getting constrained there, you can explore that. Plus, in long-term basis, if that is something that you, you're exploring, the capital gains benefit are there, so that that structure also plays an important role in this strategy.

Julius

Yeah, SMSF is most popular strategy now, because for an example, if you have $200,000 sitting in a super account growing at eight to 10% subject to the market risk, then probably you'll be making around 20 grand a year, versus you buy a property worth of $700,000 by power of leverage, you'll be putting 20% and then rest 80% is loan, but the $700,000 is going at 7% where you have two incomes coming in, one is your rental income, and then your employer contribution, that means, and then it's a principal interest, that means if you're putting more extra, then you can actually repay that loan faster, and you will have a set. Which is double in the value in next 10 years, if you look at just 7% growth rate, and then when the asset will be fully paid off, then amount of cash flow, which is coming up, that's additional cash flow, which is coming up in a super, so that's most popular strategy.