Uncensored Money Season Five: Is Property Still Worth It, With Mel and Lawsie
Melissa Browne: Ex-Accountant, Ex-Financial Advisor, Ex-Working Till I Drop, Now Serial Entrepreneur & Author, Financial Wellness Advocate, Living a Life by Design | 27/05/2024
Show Notes
With rising interest rates, mortgage repayments, and a cost of living crisis, it's no wonder the question of whether property investments are still worth it.
In this episode of Uncensored Money, join Mel and Lawsie as they discuss, investing in property in the current market. Using a case study to understand the numbers, they break it down explaining how they feel about property investing, and whether they still think it's worth it.
Books and resources mentioned in this episode
If you're on insta, come play over at @MelBrowne.Money and make sure you’re signed up to Mel's Money Musings for more tips, tricks and ideas on how to best work with your money.
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Transcript
Mel: Hey everyone. I'm Mel Browne. I'm an ex-accountant and ex-financial advisor, so I have the theory, but I also have the life experience. I'm now financially independent in my own right after coming back from less than nothing in my early thirties. I want this podcast to be like a chat with your girlfriends about money. My aim is to help you discover why you're behaving the way you are with money, to suggest new ways you might behave that are a better fit for you, and to increase your financial literacy and financial confidence. I hope it inspires challenges, educates and empowers you with how you do money. So let's get into it. Welcome to Uncensored Money.
Mel: Last week Lawsie and I were chatting and she said to me, do you think property's still worth it? I think she used that voice too. <Laugh>. I answered her and we ended up geeking out about shares, property liquidity, negative gearing, capital growth and so much more.
Lawsie: Good conversation
Mel: And I have, but it occurred to me afterwards that it was a conversation so many of you would've loved to have been privy to. So we are rewinding the clock and we're having it again here.
Lawsie: Does that mean we get wine?
Mel: No, we are doing it without wine <laugh>. So it might have been a better conversation if we did. This episode is all about is property still worth it? And a little bit of a shares chat as well. But we're going to next week do a episode all about property versus shares. So if you like this conversation, make sure you look for that one too. Now I want to just put a caveat that obviously we are not property agents, we are not property experts. However, we are ex financial advisors, we investors ourselves and these are the sort of thing that we look at all the time. And we used to, especially as accountants too. Lawsie, tell me what prompted you to ask the question? Because I said in the intro, this was a genuine question from where you were and we had a whole chat about it last week.
Lawsie: Yeah, it came from a number of points. Like I think it came from me personally. So disclosure to everybody that's listening, I am not looking to buy another investment property. So that's kind of my skew and my lens that I'm looking at this. And also because I was looking at just different sort of things that we'd been weighing up personally and looking at the rental return you could get say on our home versus if we sold and put the money into a bank account and that kind of thing. So that's where I was just like, mm-Hmm <affirmative>. Hmm. I'm really curious about this property thing because the other side of that is obviously with people that we work with in My Financial Adulting Plan plus when I'm doing the one-on-one coaching sessions with people, property is still something that people are still really into. And I found that in itself a little bit curious 'cause when I started working for you 14 years ago in two days time, don't forget.
Mel: Oh my gosh.
Lawsie: But that was like everyone inverted commas. Everyone seemed to have an investment property and I know that's skewed because it was an accounting firm and that's why people were coming to do their taxes list. Mm-Hmm <affirmative>. But it was this thing where I'm like, oh, everyone had an investment property. And I know for me personally, I was like, oh I want to get an investment property and that's what we did and I wasn't looking at shares at the time. But then it sort of surprised me when I was sort of hearing these conversations and things that I'm talking about with other people and it's despite the fact that property prices are far higher then they're relative to what wages have grown by. Plus the fact that interest rates have gone up, as we all know over the last couple of years. And yes, they're still not as high as they've ever been, but it was one of those things I'm like, oh, I just don't feel like there's been this shift with the people that we're talking to when it comes to investing. There's still just this thing around want to have a property.
Mel: Still have an appetite for property
Lawsie: And I want it paid off and that's going to give me an income stream when I'm older. I'm like, yep, great, got it. Let's go down that. Let's crunch the numbers and let's see what's going to work for you. So yeah, that's where it was coming from because I was like, as I said, I'm not looking to buy an investment property. I've had one in the past, I still have one. Like all of those things. But just, yeah, it was really interesting when I was crunching the numbers and again on some of my own staff looking at our own home. Our home is not an investment, our home is our home. So there's definitely sort of skews with some of that as well. But I was like, hmm, hence yeah, while I was asking you your thoughts on it, which
Mel: Was a such a random, can I just ask the question <laugh> <laugh>,
Lawsie: Because I think we all have opinions on it. Everyone can have an opinion on it and it's ultimately going to depend as you and I, whether or not you should have a property or investment property or any of those things is going to be absolutely personal dependent on your goals, your objectives, all of those things. But yeah, just as a broader question, I was like, cool, this is quite interesting and then we nerded out from there. Yeah,
Mel: Totally nerded out. My answer to you is that I do think property is still worth it and I still hold by that, but I absolutely don't think you can run with the same strategy that property spruikers have been selling for the last 20, 30 years where you can buy 10 properties and retire early. Like it's just at the affordability
Mel: It's moved on and I think it's really important that people understand that that what worked in the past is not necessarily going to work in the future. And we're absolutely not saying that you still don't have a property. Certainly you are not looking to buy another one. But I am within the next 10 years, but I'm not looking to buy 12 of them. Yeah, <laugh>. It's just I think that there is a move on from what there has been. I don't like just saying things and then going the end. That's what I believe.
Lawsie: Lawsie's not buying your property
Mel: It's on the podcast!
Lawsie: Mel is, end of story <laugh>.
Mel: My thing is, well let's actually look at the research, let's look at the data. I'm always going to do that. Whether I talk about Afterpay, whether I talk about shares, whether I talk about whether credit card points are worth it, I'm always going to say, let's look at the data. So let's look at the data. Ooh, exciting. I know property, like all things in a capitalist society is affected by supply and demand. Let's just talk about basic economics and I'm going to look at Australia for the moment, but you could apply this lens to any country. So the data I'm using is from the Center for population in Canberra for the next 10 years. So I'm looking 10 years out. But again, this is the same data that's used by the Australian Bureau of Statistics. So we know this is proper data. It's not just this is what someone thinks it's a good sample size.
Mel: That's important. The first observation in Australia is that we will see growth in lots of it. So Australia is expected to grow by 14% in the next 10 years. That's more than 3.7 million people added to the population or roughly three Adelaide. I really like breaking it down like that. Three Adelaide, that's a lot of people. We need to feed, shelter, educate, careful and entertain 30.9 million people by 2034. That's a lot of humans. So when we're talking about supply and demand, that means there's going to be more demand on housing and housing prices and rents are affected by supply and demand. But we can't just stop there. We then need to understand what's going to be the makeup of that. 18 to 25's are going to grow by 16%. Massive jump early crew professionals interestingly. So your 25's to 35's only growing by 11%. So a much smaller amount.
Mel: What the experts are saying is that 25 to 35 will overwhelmingly be renting and not have kids yet potentially of them. About half of them will want to work in jobs located close to a CBD or a big city. So that's going to put a demand on renting, but it's going to ease demand off buying. So again, we need to look at supply and demand. Now millennials, which we know millennials with a boom generation, that cohort, so that's like a 34 to 51 or kids in childcare or primary school will have millennial parents, which is wild to me. So that sees a growth of 16%, which is slightly above the average, but interestingly, so they're all go, the demand for a lot of that's potentially going to be housing 52 to 64, only 6%, but 65 and over 29% growth. The most dramatic growth. 85 plus, 68% ridiculous. So in that, what we will see, like if you think about trends, downsizing obviously, and the experts are saying we'll start to become a mass phenomenon in the 2000 thirties potentially townhouses and apartments and densification of middle suburbs.
Mel: If we look at the data and ask the question, is property still worth it? The answer would be yes. Because more humans, more demand on rent. More renters entering the market. More people needing homes, but it's the type of homes they're going to be wanting and needing. That will depend on property. It's still worth it. Like before, it was like shooting fish in a barrel. It's my favorite analogy. It's easy. They're there, it's a captive audience. Now you need to do your homework, run your numbers and do not just chase negative gearing for the sake of it. And we are going to talk at the end of this podcast about tips, but for me that data for Australia, and you can run that numbers on any country that you're looking at, that's what we need. And then you would obviously want to look at it per state, per town, et cetera. That's what's going to be more and more important to know. But that answers the question really simply for me is, is it still worth it? Sure. Yeah. But then it's going to be depending on, does that surprise you, those numbers Lawdog?
Lawsie: It does a little bit. And like I said, I still will look at this skeptically a little bit <laugh>. I mean it makes sense. You can't have population growth of that many people and not have housing and everything else to support them. And yes, I think we'll continue to see the changes with how people live. Like I think more people will be comfortable living in apartments or townhouses. They're not going to be on the quarter acre block and all of those things, which I mean those stats and stuff were highlighting that anyway. There are
Mel: A lot of millennials potentially that might Mm. But who knows how we'll want to live as
Lawsie: And also like that intergenerational living. Yes, that as well. Like if I said to you, you had to go and live with your parents or.
Mel: Hell no, that's not happening.
Lawsie: You know, like <laugh>. No, but I think there's, we'll see more of that yes as well. So that's where I'm like, well those kind of things. If you've got more people living in the one property, then of course that would have, it's less demand for, but you'd need bigger homes. Like I think there's a lot of variables in it. So it'd be really interesting to see how as a society, I guess things change with that. But overall I look at it and go, yeah, there still will absolutely be demand for property. Like absolutely I believe that it was, yeah, I at this point still don't want to invest anymore in property. But <laugh>, I also still then go like, this is great. Particularly 'cause I diversification. It's all of the things I know why it should be part of it. I still am in the property market. Like it's not like I've abandoned ship. But yeah, it's really interesting to see those stats and then go, well of course there still will be demand, but like you said, it's not going to be as easy as no, some of the people older than us, you know, you just do this and you buy this many properties and then you home run, that's not not going to work. Those days are done. If
Mel: You just took those numbers and ran with it and went, oh my gosh, look at these numbers, I need 10 properties. One, you're probably not going to get 10 properties regardless. But also I want to keep going 'cause I want to run us through an example but also what we want to talk about is affordability and how that has changed. Because I feel like we're looking at the elephant now and we are touching it, but we don't know if we're looking at it's dark and we don’t know if we're looking at the trunk or the behind or the legs. Like we can't actually see what the elephant is at the moment 'cause we're only seeing such a tiny bit of it and we've put an example together so that we could workshop. All right, well what about today? You and I love numbers. Let's talk through an example.
Mel: I don't know about you, but sometimes I wish there was an easy way, a silver bullet, a magical unicorn, a fairy godmother ready to grant me three wishes. I mean, think of all the miracle diets, fitness fads, promising a six pack in six weeks, or finance bros promising riches by following this easy formula. Do you believe a word of it? Well, the part that longs for a quick fix might be taken in, but you are smarter than that. Personally, what I believe in is consistency, educating myself, finding an expert to help me, surrounding myself with a community who are going to motivate me to keep going and make me feel like I can do it because they're doing it too or are further down the road than I am. That's exactly what we've created inside the My Financial Adulting Plan. If you feel like you're on top of your finances, you have a plan for this year that you're super comfortable with and have everything you need to make that happen, then just ignore this ad. But for the rest of you, make sure you check out my life-changing 12 week course or for less than the price of a cup of coffee a day. Head to the show notes to join the wait list for the next round. Or you might be lucky enough to find that the doors are open and you can join now.
Lawsie: So if you were to buy an investment property that's worth 800 K and let's say that you borrowed the full amount for that, which you can do if you anyway won't dive into all the specifics on that and you had it on interest only. So that means you're not paying down that loan, you're just paying the interest on the loan. It's a good debt. And if you held that for 10 years, that would mean that you are interest that you're charged over that period of time would be about 48 K and per year. You obviously have costs of running that property each year. So think real estate agent fees, council rates, whatever repairs, anything like thats insurance, blah blah blah. Which would be, we've allowed for 10 K. So we're saying it's going to cost you per year 48 K in interest plus 10 K in running costs.
Lawsie: Mm-Hmm <affirmative>. So that's your outgoings. And then we're going to look at it and go, well if you've got $500 a week rent coming in, that would be 26 grand for the year. So go nice. But that 26 grand obviously isn't going to cover your 48 k plus your 10 K of outgoing. So overall that's making you a loss of 32K. Now again, in Australia, negative gearing subject to anything ever being changed with it. But that would mean that you would get a tax benefit for that loss would help reduce your taxable income and he'll give you a refund. So once we factor in that refund that you'd be about 21 K behind. So it's still going to cost you about 21 K a year to hold this property. Even though you've got this rental income, all the outgoings and everything else you're still technically behind, which is why it's negatively geared. So when we look at all of that, this means that the property needs to increase by more than 2.62% per year just to break even. 'cause You are like that outlay of that 21 K that you're actually behind. You're wanting to make sure that you've got capital growth in your property that's going to help
Mel: You want 2.62 and then some. Yeah.
Lawsie: That's where you just, I guess need to be mindful of when people go, oh but you just have a property and it's all you need to do. It's like yeah, but this is where it comes down to even more so than it ever has historically is it's got to be in the right area where there is going to be that growth. 'cause If you weren't even getting 2.62% or one we'd go, maybe you should just keep the cash in the bank because you're going to get 4 or 5% return interest there. Or look at other investments as well. So it is just meaning that if you are going, yep, property's still the thing that I want, just being aware that particularly if it's going to be negatively geared, you need to be in an area that's going to have that capital growth and it's got to exceed your two point. In this example, your 2.62.
Mel: Or it needs to have a much higher rental return so you don't have the loss. Yeah. With your 2.62. If you ignore the covid years where we had large gains, according to core logic research, Australia's national median dwelling value increased by 6.8% annual growth, which means you're ahead not by the 6.8%, you're ahead by 4.1 something percent because we've got to take off the 2.62 that it's cost you every single year. And again, that's something people don't factor in and you look at that to go, huh, four point something percent, that's not a great gain. Which is why, but because you've leveraged it as far as dollar terms are concerned, leverage simply means there's a loan with it. Therefore it is a big gain because of the loan that's there. You can see by that the property is still worth it. It's worth having it in your portfolio, but you don't want that to be only thing you've got because it's more expensive than it was.
Mel: And rental used to be able to get used to look at rental properties and you would want about a property was 800,000. You'd expect your rent to be about 800 bucks a week. We are not getting that for a lot of rents now, which is why we use 500 bucks a week. Obviously for every dollar you can get that's more then this becomes a more attractive equation. But if your rents a low percentage and probably just rising in value by the median amount, it's worth it. But it's just being aware. So what people used to say to me is, oh it doubles every seven years. That's 4%. That's not doubling for 20 something years. How's my math? It's 22 and a something.
Lawsie: I was just looking at you in awe. I was like good work. Look at you go <laugh>.
Mel: I know. So it's still going to do well, but it's not the old, it's going to double in seven years that we are used to hearing. But of course what we're not talking about Lawdog is also affordability and the ability to repay loans because wage growth isn't rising in conjunction with housing price. Both the median house price and average annual income 30 years ago are kind of hard to believe by today's standards just 144K and 33 k respectively. Just to explain that in 1993, the average annual income was about 23% of the median house price. Meaning that if my home was a million bucks, I was earning about 230,000. Like that's where the wages sat in relation to the house prices. Today it's 8.9%. That's insane. And that is why the tactic of 10 properties just doesn't work for the majority of people. Like it just doesn't, the question has to be asked, can we continue to see the growth we've had in the past if wages don't move with it. So the question is, will we still get 6.8% growth if people can't afford to buy the properties? I guess my crystal ball prediction is that we won't, that 6.8% may, I think there'll still be growth but it might be more like say 5% more and more people will be looking for higher rents to offset that return. It's going to be a lot harder. Yeah to find properties.
Lawsie: Or it might be that something potentially like lower price properties might continue to go up. Yes. Because that's the thing that people can afford. Whereas your multimillion dollar homes Yes. Might not experience that 6.8% growth. Absolutely. Like it is, we've got to remember that that growth is across. Yeah. From the little rundown fibro shack to the waterfront.
Mel: I agree with that. So first time investor properties and I think we'll potentially still experience that for some time to come, which is where investors will potentially live as well and 'cause there's extra demand for that
Lawsie: And then it Yeah. Mm-Hmm. <Affirmative> pushes it up. So it'd be interesting. But yeah, it's fascinating to look at that and go, well yeah, 30 years ago it was 33 k average income and you're buying a home for 144K. Like it's just so far removed from what we see now.
Mel: What we wanted to do is to put out the case study for sure. It can still be worth it but not how it has been in the past or it's about really being purposeful about how you choose the property. That's going to be more important than ever before going forward. I don't think people are going to have the same, I've got to wealth through property that perhaps we've seen in the path where it's I own eight, 10, whatever properties. I guess what we want you to understand here is it's about diversification. We banged on a lot about shares. I think that's why more and more people investing in shares because they're realizing they can without the massive capital outlay, I still believe diversification is so important. So it's about having access to cash, to potentially bonds, to shares, to property. Not to say, oh well I'm not doing property anymore because, but to have that beautiful, well-rounded basket.
Mel: But with shares, certainly there's not the same limitation with wages growth that there is for shares growth. 'cause There's such a low buy-in whilst we're looking at over time we are going to have diminishing returns potentially property. I don't see that for shares because it's not a percentage of your wages the the value of companies. It's an intangible thing and it's something that I'm not buying the whole company. So if there's more people there to buy more shares, that demand can be exponential. I think it'll end up becoming very much a, we're not comparing apples and apples anymore and not be able this, this, this and this is this. And maybe there will come a point where more people reject property, who knows. Hmm.
Lawsie: I think we are seeing a shift in that. Like I think yeah, we're absolutely so many people living in there. I have to have my own home. And again, just,
Mel: Which is a good thing.
Lawsie: We are fortunate that we work with so many people where they're and got that insight into where they're thinking with their finances. But there is definitely a shift away from everyone going, I have to own my own home. And so then the flow on effect with that and how that plays into all of this would be really interesting to watch as well.
Mel: Yeah, I agree. So I guess the tips for buying property, 'cause what we've said at the beginning is certainly I do still believe that property is worth it. We're certainly not saying that. We're just saying that we think more than ever before, it's going to be all about the data, it's going to be about the research and it's going to be about the numbers, which is why we have a whole property module inside the My Financial Adulting Plan. And more and more we are creating templates, et cetera. So you can plug your figures in and figure this out for yourself. 'cause This is really important to know. I thought what we'd do to close is just lawsie and I just going to run you through some tips for buying a property and we're talking investment properties here if this is still something you want to do. So I'll start off. So obviously look for a place in a growth area with incoming infrastructure like schools or shops or transport interchange. What you want to make sure is that there's always going to be demand and that there's growing demand for that area. Because if it's stagnant then there's no reason for that property to go up in value.
Lawsie: You also want to check upcoming developments. Like if there's going to be a whole range of new multi-story developments and things happening in your area that may actually impact the value of your investment. So you might decide, oh, I'm going to buy into this apartment block and then realize that there's going to be 70 other apartment blocks built around you. So it is just being aware of what else is in the pipeline, in the area that you're looking at buying to make sure that you've got a unique property and that there hopefully is more demand for it than there is supply.
Mel: One is, is it close to shops and public transport and being aware. So if you are someone where you're looking at going, this is absolutely older demographic, it might simply be shops and transport that you can get to nearby. If it's families, it might be shops, transport and schools. So if you know that there's schools where families want to be part of that school suburb, then that might be a highly desirable place to buy where people are happy to go in and rent because they want to be part of that school system.
Lawsie: When you're sort of looking and scoping out different properties, are you able to find cost effective ways to make the property more appealing to tenants? So this could be refreshing the kitchen and the bathroom and no, it doesn't necessarily have to be done to the same spec that you'd like in your own home. We're saying refresh, not totally renovate.
Mel: Yep. Paint them,
Lawsie: Have some decent flooring, but again, it doesn't have to be whatever, like it's just do it in a way that costs adverse benefits analysis is basically what you're wanting to look at here. So is there ways that you can get some quick wins on the board that might mean you can even buy that property a little bit cheaper, put a little bit of money into it and suddenly really increase the rent that you can get for that because it's suddenly more desirable to more people.
Mel: Yeah. And think about who you would like to rent the property and how you make it suitable then for them. So if it's a family home with a home office or maybe it's an apartment for students, it's close to the university campus and has really good security. 'cause You know that's desirable. I know for Brisbane for a while it was land because that was more desirable and then even more it was could I put a granny flat on it because then I've got two things I can rent. So it's specific to your area and the demographic. What do they need? What's going to be attractive to them to put your rental property over the other one that they might be looking at?
Lawsie: And buying a place where you are highly likely to have your choice of renter application so you can put someone trustworthy in the home. So again, we're all about supply and demand today, aren't we? But you're wanting to make sure that there is actually a whole lot of renters that want to live in that area. So heaps of them can apply. You're going to be one of those amazing properties that's got the line up for it. But it ultimately means that you can choose who's going into that rather than only getting one or two applicants and you go, oh, I don't really want either of them but I really need someone in there that's going to be paying the rent. So I makes my contributions to the mortgage. So again, just making sure that you're buying in an area where people are keen to rent. So then you should buy virtue of that. Have your choice of who actually lives in your investment property
Mel: And rental vacancy rates like oh this is publicly available information. Or going and talking to the real estate agent. This is not something that's hard to to find out, but it's really important that you need to know. Second last one is consider a property agent if you don't know the area. So certainly for the one that I will purchase, I absolutely will use a property agent 'cause it will be an area that I don't know or that there's potentially one of the two I'm looking at. It's a higher demand, I don't want to get it wrong. Property agents often get first looks at certain things as well. That way you can say, this is my budget, this is what I'm after. Go, yes, it's costing you money originally, but I would just factor that into the cost of the house or apartment.
Lawsie: Yeah. And then knowing Inverted commas but all going to plan, it's actually, it's going to pay off you in the long term
Mel: If you have a good one. Yeah, yeah. And we are not talking property agent where it's, this is a factory and all we're selling is brand new spec apartments off the plan. No, we are talking about property agents that are showing you houses and apartments and maybe some new as well. But that is not the only thing. They're not just basically a spruiker for a developer.
Lawsie: And I'm with you. I think that too, if I was going to change my plan, I was like, actually no, I want to have another investment property as part of our asset holding. Like I would absolutely be using a property agent, particularly now like, I mean we've, as we've already gone through the stats and things like you've get the right property to make sure that you're getting the growth to cover any negative gearing losses that you've got, let alone still be making positive gains on that as well. And our last tip is don't just buy what you know and where you live. So this comes down to diversification. You and I have seen it a few times. So common more than a few times, if you know people go, oh I love this area that I live in and a house comes up down the road or next door or whatever and people go and buy it, which you just, you basically got two big assets then in the one exactly the same area. And what you really want to do is diversify, spread that risk. What if your area goes down in value? Make sure your other properties in at least another suburb or in another capital city or another state. Like it's just about making sure that you've got diversification there. Because like we said, if something goes down in value, then hopefully the other one is going up. Whereas you are increasing the risk of that investment if you've got two properties in the same street.
Mel: Oh absolutely. I'm sure for some people you are more confused than ever before. What I really want you to hear is say is there is going to be an increase in population, there is going to be an increase in demand. However, there is also some negatives, there is affordability, there is a potentiality that we aren't going to get the increases that we have seen in the past. If property is something that you want to add to your investment portfolio, it's being really wise about it, which I think is a good thing. These are things we should be doing anyway, but now it's just more important than ever. So take note of those tips, but also a couple of resources we have. One is a property masterclass that we've done. So if you're like, I just want some more help on that, go check that out, we'll put a link in the show notes.
Mel: But also we do all of this inside the My Financial Adulting Plan, whether it's creating your financial strategic plan so you know if this is even something that should be part of it. And a whole module on property where we have downloads, we have templates and calculators and more. So again, you can actually figure out if this is the right strategy for you. 'cause What we don't want is you just to do it hoping that it's going to be right <laugh> yes, we want you to do it knowing that this is the right decision for you.
Mel: If you enjoyed this episode, we would love it if you subscribed and give us a review, then make sure you come and play with me on Insta. I'm at @melbrowne.money Remember there's an E on the end of Browne. I'm one of those fancy Browne's, and don't forget to check out the show notes for even more ways you can work with me to transform your finances.
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