Hello, and welcome to The Australian's Money Puzzled podcast. I'm James Kirby, well editor at the Australian. Welcome aboard everybody. One thing I've discovered doing this show, and particularly when we have a sort of concentration on property on Tuesday's edition of the show, we find that property people and they're very good at many of them. And you hear a agent, surviyor's advocates or mortgage brokers or economists. Everyone involved in property has a view, but they're not advisors, right.
And then financial advisors, in my experience, they concentrate on listed securities. They're particularly good on shares and funds and ETFs and superintext they're not really good on property and advising on property. And only some advisors really have any
clue about property and it's so important. So what happens to people, and in my experience is they go into financial advisors and they say I'm doing this and I'm doing that, and they say yes, and they're good on these areas that they have some expertise in and they haven't really got much to say on property except they just can't they can't communicate with them. So we found every now and again, folks, it's been very useful to bring an advisor in to talk about property strictly as
an advisor, because they're hard to find. I have found one. It's James Gerard, a regular on the show from Financial advisor dot com dot U Hi, James, how are you good? Thank you?
James. Good to chet you today.
Apart from the fact that you are always been interested in property and you monitor it, you write about it, and you've actively been an investor yourself in different forms of property, and I think that's great experience for you, but also for you as an advisor. That's one of the reasons I was asking you to come on today.
There's some mental block with financial property or is it a regulatory gap or what's that explanation that people can't they really can't get very good advice on property from people who aren't up to their neck and selling property.
Seem to me, Yeah, it's really unfortunate. It's one of the inadequacies of the financial advisory industry is that we're not very good at giving property advice as the whole. And I think it comes down to really just conflict of interest. The all vested interest may be more to the point of the financial advisor. Most financial advisors they'll charge a fee for this in called a statement of advice, which lays out your current situation, what recommendation should be made,
and then shows you a roadmap into the future. And to execute that statement of advice, it usually involves setting up super accounts, investment accounts, and inside of those accounts are usually ETFs and managed funds and not so much physical property. And that comes down to the financial advisors ongoing remuneration. To retain that financial advisor, they'll usually charge you either a flat dollar retainer or a percentage based fee.
But their skill set is on monitoring the share market, monitoring the bonds in the portfolio, interviewing the fund managers. It's not on looking at is adelaide a great hotspot? Has Hobart turned a corner with the property market, and as such, they don't.
Not in the exams of anything like that at all.
It's not. No, it's not and maybe partly regulatory as well,
because ACID don't consider property as a financial asset. They consider if you own property through super an a financial asset, but property itself is not, which means all of the regulation is carved away and there's no education requirements and there's no regulation there from an investment advisory perspective when it comes to property as an investment, so you really need to if you're a person looking to invest in property as part of a diversified portfolio and you want
to seek advice, you should have a financial advisor because we come in handy as a sounding board. We keep the buyers agent and accountable. We'll probably delve into this a little bit more, but firstly we just lay it up with what's the strategy, why we buy in a property, how much, where are we're going to buy, and then when it comes to the execution, that's where we bring in the buyer's agent.
So just to flip it around. Then, if I'm going in the door to a random financial advisor and I am building an investment portfolio and it's very important to me, it's going to be my super probably and I've got my shares, I've got my bonds, I've got my ets,
I've got it all nicely. And then i have property, and it's it's a property in some suburb, it's just got basically got an address, or it's a property multiple properties, But can I reason why can I reasonably expect the advisor to advise me in this on.
This Yeah, you can't seek advice from an advisor, But it just comes down to going to the right advisor. I mean, if I could simplify it and put the advisors into three different buckets, that will help the consumers sort of pick the right advisor for them when it comes to property advice. The first type of advisor is the one all the way down the end of the spectrum that I mentioned that has no desire to recommend property investments for you because their fee and their service
model is around managing your share and your bonds. So if anything, if you go to that advisor's office, he's probably going to tell you He or she will probably tell you to not worry about property investment as too concentrated, as too much hassle. Let's just put that idea on the side of buying property and put more into your share and ETF and managed firm portfoluo. And by the way, that advisor will probably want to take over that portfolio
and charge your fee. So that's the first type of advisor. And then down the other end of the spectrum, we have the advisor who's really pro property and he'll go look, he or she will go, yes, look, that's a great idea. Let's buy some property, but maybe not the one you're thinking of. I've got a really good contact. You can help you buy a brand new property that's in it by the land, and then I'll induce you to the builder and then he can build the property for you.
So the problem with that advisor is that there's usually some deal under the table there with regards to getting commissions on the build for these brand new properties. So they like property, but they'll steer you towards ones that benefit them from commission.
That's all legal, is it, that's all within the law. Yeah, because the property is excluded because it's not a financial asset.
Yeah, that's right. Like as us as funnage advisers, we're not meant to take or not meant to we're not allowed to take commissions. But there's lots of ways to divvy things up. So advisors business people, they're creative. What if they have a stake in the property development business and they get a dividend rather than a referral fee. There's all sorts of ways to skin a cat as the same goals.
This is exactly what I was hoping to find out. Well, this is getting to the heart of it, like why why why is advice so hard to find for property investors? Which is the use of this show obviously and shows like it that people This is why people listen obviously because they can't get advised. Sorry, James, keep going. So you had you were going through the types of Yeah, that was the second, and you had one more, yeah, the second.
So far, I've gone through both ends the spectrum. The advisor who doesn't like property tries to steer you towards funds. And then you've got down the other end of the spectrum, the advisor that does like property, but they're trying to line their own pockets with some commission on some property
deal they're trying to shovel you into. And then you've got the third type of advisor who sits in the middle where they're usually self license and they'll usually charge you at flat dollar fee and they'll say, okay, well we can advise you on what's important to you. If you're set with your ETF portfolio, that's fine, we'll scope that out. We don't need to give you advice on that.
If you're coming into our office and you'll seeking advice on this commercial property investment around the corner from you, great, we'll talk to you about the pros and cons of it, the tax aspects of it, the funding, the future CGT implications, how it fits into your broader portfolio, and then you
can go ahead and make decisions on it. So that's the third type of advisor, which i'd have to say is the minority of advisors, but is probably the biggest asset for a property investor to have on this.
Yes, but it's not typical, and it's not typical. Why are they so rare.
It's because it's a harder business model for the advisor. They need to charge on an hourly basis or retain a basis linked to the property, and it's harder to show ongoing value. It's more transactional in nature, whereas financial advisors more like to have ongoing relationships. And what I mean by transactional is that the advice is given on a specific property or a couple of properties and then it's done. But then how can you charge a fee every year as a retainer on that property if the
client just collecting the rent, paying their mortgage. There's not too much to add. Maybe, sure, there's an argument for once a year to do a review to say should we sell the property or should we keep it? But outside of that, it's tough to give advice, whereas advisors like to keep giving advice. So that's why they prefer that managed fund and ETF type portfolio, and that's why the property financial advisors are few and far between.
Oh see that really good answer. It explains it all. I don't want to be fatalistic, but in a way, it seems to me that most of the time most people won't be able to get advice from advisors about property being realistic about it.
That's right.
Yeah, And then you're left with the property people, and then they're always going it's like you went to the shop, you try on the jacket, the assistant says that jacket looks really good on you. What else would they say, I can't believe how bad it looks on you. So property is the same. If you're dealing with someone that's selling, what else would they say? Do you think this is someone standing there talking to a really staying agent saying do you think this would be a good investment. What
are they going to say no? And then where do they seek advice outside the property industry financial advisors, But financial advisors don't do it. So something of a real catch twenty two there, And I think we might just leave that there, James, for people think about listeners to
think about it. And as I say, perhaps it's one of the reasons that there are sor there's so much property media, so many property investment gurus out there are various types, but also so many publications and podcast et cetera on property, and that I think essentially is the reason.
And it was one of the reasons that I did ensure that we concentrated in a sort of screen fashion on property within the podcast as it rules, because I do believe that many of our listeners need to know and want to know more about property, and it's very hard to get a very good information. Obviously, we're not in the business of providing advice, but we are in the business of providing information, as you're well aware of, folks, when we do the questions each week. Okay, we'll take
a short break. We'll be back in a moment. Hello, and welcome back to the Australian's Money Puzzled podcast. It's the two James's here, James gr R James Kerby talking to you on the podcast, James the course regular guest and marvelously heroically stands in sometimes for me when I
am off on my Venturers Elsewhere. Now, James, the biggest mistake then, from your side of the desk as an advisor, that you see when people who are diversified, active, useful investors when it comes to property, the biggest mistake they make. I have no idea what answer you're going to give, which is good. So what's the biggest mistake?
In my opinion, it would be listening to people and listening to the wrong people and not listening to your own gut. Because, as you've hinted that, there's a lot of people in the property industry. You have real estate agents, you have buyers agents, you have mortgage brokers, you have lawyers, and all of them only make money if you do something, if you transact, so their vested interest is to make you do something, oh, usually to buy a property or
if you have the property, to sell a property. So the issue there is using your own judgment to go okay, well, is this person telling me this is a fantastic property investment, whether it's a buyer's agent or a real estate agent, is this the right thing for me to do. And a big mistake that goes hand in hand with that is people being pressured, so people going, well, I need to make this call, otherwise I'm going to miss out on this property. You really need to just step back
and go, well, this is just one property. If it goes fine, you know, it might have been a great property, but there's going to be more of them. There's not the only property that it's ever going to come up on the market. And usually when people step back and where they're in that pressured situation to make a call and buy it, if they don't, it usually fate happens and then the next week something better and cheaper comes
onto the market. But had they been pressured and went ahead with that, I usually see that that can be a big mistake and they regret that purchase, having overpaid on the buy side and taken too low of a price on the cell side.
Yes, it's a terrific observation, and it reminds me of a story I can cross one time, which is I thought so revealing. So we as property investors will think that as you say, the lawyer's calling, the mortgage broker says, everything's ready, the property is ready to be boat, and you're there, and you're sort of being rafted along with
all this. But in fact, the most powerful position is that they all want your money, basically, and you have the power to say yes or no. And there was a marvelous anecdote about a one of the founding fathers, if you like, one of the patriarchs of the Rich List, one of the big families on the rich List, who was famous property operator, but became famous slash infamous for what you could call a trick he had, and this was in commercial property, and basically what he would do
was and this happened consistently, so it was clearly a plan. They would get to a point when this particular tycoon was ready to buy the property. Let's just pick a property, okay, let's just say it's whatever, you know, number four Pitt Street, and let's say it costs eighty million or something, and they would all go along to a certain point and the deal be ready, and they'd finally meet the last day. Everyone's there, the lawyers are there, and the brokers and
the agents and the buyers, et cetera. And everyone's ready. They're there to seal it, there to see the deal. And he would stop and he said, I just don't know about this. I'm just I think I just think we'd have to go back and look at a few And everybody was weakened by this because everybody said, we're here to do it. It's done, and everyone thought they were across the line and it would be renegotiated, always in his favor. Very interesting. I thought it was most
interesting about that true story is you're in charge. It isn't that you must buy, it's that they need you to purchase. And I think if you kept that in mind, which is very much underpinning what you're saying, would be very good. Okay, that was a very good answer. The biggest mistake people make, and I expect James, the less experience you have, the more likely you make that mistake.
Flipping it over, what did you think was the trait that you thought most common among successful property the best investors. And you deal with people who've been dealing in property all their lives, So what do you see that they have in common?
The thing I see in common is that they have a plan. They know why they're buying a property. They have an idea of when they're going to buy a property, and I'm not talking about the next property. I'm talking about ten properties down the track, so that they've got a plan to buy a property every six months or every twelve months. And when I say they have a plan, there's a multiple parts of this plan. They're taking into
account taxation. So they're thinking about structures and buying properties in the right structure, whether that's through their personal names. They might pick one of the spouses for tax reasons. They may buy it through a family trust, they may use super, they may use an investment company. There's pros and co of these, and so seeking advice on that is important if you're interested in learning more about structures.
But the long term successful property investors will understand the different structures and they'll know, Okay, for these ten properties I'm going to buy over the next five to ten years, I'm going to buy a property two in super, property five in my personal name because I can negative gear that one property eight through the family trust to distribute income through the family and someone and so forth. But
it's not just that. They'll then have a look at the characteristics of the property, because investment properties will have income the rental return, they'll have potential capital growth, and some properties will have more growth, some properties will have more income. So understanding what type of property are you targeting in that particular structure is important, and that's what these property investors do. And that relates back to the
bank as well, because usually there's borrowing involved. They borrow money from the bank to buy a property, that property goes up, they then leverage the equity, they buy a second property, and just repeat that process over and over again. But the smart long term investors realize that the banks aren't going to just keep giving them unlimited amounts of money unless they shape their property portfolio in a certain way.
So what they'll do with these property investors, they'll forecast to go, all right, I know what my employment income is.
I think I know what it will be over the next five years with increases, and then they'll forecast their borrowing capacity, and then they'll put in the properties that will maximize their ongoing ability to borrow from the banks, because at some stage the bank will go you don't have enough serviceability, your income's not enough to service its next loan, or the bank will say you don't have enough equity. If I have, your properties aren't enough for
us to lend you more money. So the property investor will think ahead and then buy the right properties to make sure the banks will keep lending the money ongoing and ongoing, to keep building their portfolio.
That's very interesting, So begin with an end in mind, a sort of a lifetime approach. Absolutely interesting, isn't it. Rather than that idea I must buy it, I must buy a property, I must buy come bank shares, I must buy a property, and deeper plan than that, just that I should have one. Everyone does it. I should have it. There's no plan there at all. Very interesting. Okay,
great answers, James, thank you very much. We'll take a break, folks, and we'll be back with some terrific questions from David and Jack and John. Hello, and welcome back to The Australian's Money Puzzled podcast. David, I expect that customers of the wealth industry are typically older and more established in their careers, and so sometimes it seems that discussion is too focused on lower risk wealth strategies. That's the discussion on the show, David things. I wonder whether these apply
to all listeners. For example, those that are much earlier on in their careers should potentially be encouraged towards taking much larger risks, like starting a business. It would be interesting to hear this explode on the podcast. Okay, David, no problem what you're saying at all, David, Yes, absolutely, the younger as a very broad principle, the younger you are, the more risk you're you're able to take. And if you are much older, there's two things on if you're
much older. One is you've got more to lose. That's the first thing, which probably doesn't come up very often, but it's psychologically very importantly. We've got if you haven't got much to lose, if you've got fifty grand and super, that's one thing, and you take risks. If you've got a million and super and you're close to retirement, it's a very different approach to risk at that stage. But
I would completely agree with the principle. Maybe sometimes on the show there is an emphasis on I hope there isn't an emphasis too much on by the preservation, because that's the sort of I think if you get to that point, then the show is less useful to you. What do you think, James, I agree with that.
I use the analogy of climbing a mountain, So the younger willth accumulators down the botto of the mountain and the pre retiree or the retirees at the top of the mountain. So when you're down the bottom of the mountain, you can afford to take risks and try and climb faster, and you fall down a bit, that's fine, you can dust yourself off and you go back up that mountain. But when you're near the top, you don't want afford
down half the mountain. You don't want to lose a lot of your assets, so you become a lot more cautious. So David's right. A lot of the wealth industry is focused around the older investor, and that's because they have the money. That's said that, there are a great amount of younger financial advisors and younger property advisors who service those people who are in their twenties and thirties who
are just getting started. It's just about doing research and interviewing a couple of different people and finding the ones that focus on that younger demographic and which one resonates with you.
Yeah, And we have had advisers on the shore and they say, my main business is worthy people come to me and I keep them money, and that's good and that's fine. We all walk together someday on the show. But actually a lot of the show is focused on building and starting and aculating phase of wealth and investing because I think that's where people really need some support, and that's the nature of the show that we're in.
Just as an aside. Unfortunately, the tax system is also loaded towards the older Australian and you think about how SUPER works and that you can have from July. It's going to be two million per capita in Super tax free from July this year for sure, the way inflation indexing works. But at the same time, the most you can put into SUPER on a contributing basis as you're building it is thirty per annum. This is a pre
tax concession. How many years are you going to have to be contributing to get up to where these people are? So I think there's a terrible it's quite upside down, and I say it all the time. The Super innovation systems upside down and the older Australians are treated better than younger ones. Okay, question from Jack? Can you see that you want to read it again?
Jack, I'm currently sixty eight years. I'll old own my house and have nine hundred thousand in super. I want to work another three to four years. I've been told to close my accumulation super account and turn it into a pension as you pay no tax on the gains in pension super if you are over sixty five, take the minimum out each year, which is five percent, and reinvest it in the accumulation account. When I'm ready to retire, close both the pension and accumulation down and put them
into a brand new pension account. I'm doing this to get better returns. Can it be done? It might seem greedy on my part, but I don't want to be a burden on my kids or society when I get too old.
Thank you Jack. This is never advice, of course, but recontribution strategy is crazy, daft, wacky, but utterly legitimate and recommended by advisors. And why not because our system is on nuts that it's no surprised that there's a sort of a knotty. There's a knotty business going on, which is called recontribution. Take money out of soup and put it back in believe it or not, and that's better in lots of ways. Is Jack on track? And what he's saying there everything sound sensible.
It does sound sensible as a general strategy. So maybe just going through that the technical rules at a very high level, when you're sixty years old, if you stop working, you can access your super so you can start that pension accounts. Jack describes if you're between sixty and sixty five, you need to have a break and employment to be able to start these tax free pensions. You don't have to retire, but you just need to not be working
at that point in time. And if you're sixty five years old, it doesn't matter if you're working or not. You can start these tax free pensions out of your super account. And this is where Jack is because he's sixty eight. So a lot of people come to me and they say, I don't want to touch my super. I'm happy with my salary. I don't need to draw
down on it. But what they fail to appreciate is that even though they don't need that money out of that super account that SUPER accounts currently paying between ten and fifteen percent tax on earnings and capital gains that it's making each year. And if they start that pension account, sure that they're getting four or five percent out of their Super each year, which they don't need because they're fine off their wages. But they can recycle that back
into SUPER again. So just using simple mass on someone with nine hundred thousand in super, if they're making about seven percent return, that seven percent return gets taxed at ten to fifteen percent, and that equals about ten thousand dollars a year in tax. So if someone with that nine hundred thousand dollars balance, if they're over sixty five, and they start that pension account, they're saving ten thousand dollars in tax because that's not being chewed up inside of their Super.
And apparently it's common. Isn't there a lot of people out there who could be paying less tax if they just sat down for a second and said, Hey, I'm an age of which I can chante my super arrangements and contributions and I shouldn't be paying the tax I do. So keep that in mind, folks. It's an issue. It's that strange not strange, but it's an issue where people are between so somewhere between sixty and seventy. Basically all the rules change as you because you because you're moving
from accumulation to retirement. But it's phased under our system. So it's an area that that's an area people really do need advice on and it's an area where their advice could be quite rewarding. Quite if you're paying too much tax and suddenly you can do something and not pay that tax, that sounds pretty useful to me, all right, John, final question with the government's goal for a one point two million new homes in the next five years. That's
a goal, John, that's a target, very ambitious one. There's a need for speed. Perhaps this would be an election issue. What if everyday Australians like me could more easily invest. He's leading to the into building and into residential property. John asks what would need to change in the supersystem make this possible without the need without the need for a self managed superfund. You're smiling there, James, because you did something smack on this a while ago, didn't you.
We've had a couple of people you and I have both come across people who have had various schemes and ideas where super can be used in the housing industry because at the moment you can do everything super. You can buy crypto, which can't buy the house around the corner. Similarly, big super funds are in every conceivable assetask, but they're not in housing. And here we are with a rental crisis and a vacancy rate of one percent. There's two sides to that, isn't there how big super could get
into housing and how smsfs could get into housing. On the big super side, they say that they need a lot more help for that those investments to make sense for them, despite Jim Charmers really trying to get them to do that. That's where we are so far. The buill to rent is some sort of hybrid area where that's coming on just for individuals. Maybe people are more interested. You can go in and buy the market for super savers.
Am I right? You are? Yeah, you are. You can use your super to convert to a self managed super fun You can buy a residential property, but you can't live in. That's's something which a lot of people have tried to solve because it's interesting challenge, particularly with cost of living pressures and the property price growth over the past fifty years, people are constantly chasing their tails. They may be able to service a mortgage, but it takes
on average ten years to save up a deposit. The average person to save the average posit to buy the average property in Australia where that wherever they live, and so these people are left renting for ten years and
sometimes much longer than that. So if there was a way that they could use their hundreds of thousands of dollars sometimes in super to help kickstart and fast track that goal to buy a property, a lot of people see that as a greater good, but as the rule stand, that's definitely not allowed.
And big super by the way, folks they similarly, but more to do with their investment disposition, are shy of going near housing in the sense of residential housing as
we know it and fixing that problem with shortage. There has been efforts and there are several schemes that are in front of big super funds and they are looking at right now to see if they can do this, if there are ways, for instance, that they can go into housing as a fund, or if there are ways even more creatively for an individual through their big super fund, can go into housing. In one case we've come across
wherever they can go into their own housing. That is that you could they would deal with your superfund, and that super fund in turn would invest in a house in which you aspire to live in. Eventually, there's all sorts of efforts going on. They are all hypothetical at the moment. No one's managed to crack it yet. Someday, if somebody does, it would be a very successful business. Okay, we might leave it there for the moment. James, Thank you very much for being honest today. Great to have you on.
As always, my pleasure is always, thank you, James.
Really good to have an advisor talk about property, it's something we must do. I have to commit to you folks to do this regularly, to have an advisor to talk about property. Because everybody in property likes to have an opinion. But the vast majority of people who know anything about property are in this and they're probably selling you something. Is that sort of divide we have to try and cross, and it's up to us to try and help you with that one. All right, thank you
very much for listening. Today's show. Thank you very much Leah Samuel Glue for producing and keep the emails rolling the money puzzle at the Australian dot com dot au. Talk to you soon.