Hello and welcome to The Australian's Money Puzzle podcast. I'm James Kirby, the Wealth editor at The Australian and welcome aboard. Everybody we have could show for you today? Could we make it more interesting? The Prime Minister Anthony Albanesi Noles is quitting the investment roberty market and finding himself in all sorts of difficulties in trying to extract himself as well.
He's not entirely quitting, he's selling one of his investment properties and unfortunately for him, he has a tendant who doesn't want to leave. So just what you wouldn't like as an investor part one, but part two unfortunatelyave you with the Prime Minister. You do also have the additional complication that your struggles in the property market were on
the front pages of the papers. But that's what we're going to take a look at, because of course, as we know, many investors are getting out of the market and you wonder why when got rising prices, rising rentals, negative gearing, what's going on? Take a look at that in a moment. Also the concept of super being used for first homes. What do you think about that? I
have I must say, gone on a journey. I might say on that one and have come right around, and I do at this stage actually think is at the least worst of the options out there. By that, I mean, yes, I supported in a better world or a better tax system, I wouldn't. But the way in reality, pragmatically the tax system is loaded in favor of the home owner, and you win if you own a home. So if that gets you over the line, it gets you over the line. One other thing that it might also take a look
at is about the NDIS. And you know all about the NDI, I s I'm sure this is very poorly scoped, very poorly designed system which is now a byworld really for waste and fraudulent opportunity. It's terrible what's going on. And it's terrible because it's going to weigh on public sentiment against the provision of care for people with disabilities. And we can't go deeply into that, but we can warn you about the property dimension of any and schemes that are being pushed out there. So we say, who
on earth could possibly talk to us about all this? Well, the ideal guest is, of course James Gerard of Financial Advisor dot com dot au who is also your host next week on Tuesday. On Thursday, when I am off for a few days.
How are you, James Girard, I'm doing great, Thanks for having me on.
You're very welcome. Great to have you on. And you already have you got all your notes and your homework down for your two special shows next week? I have.
I've been busy preparing to fill those big shoes, the big boid that you're going to leave. So hopefully you listen to this will have something nice to listen to next week.
Thanks. Just I've never been I've never been total. I had big shoes before. That's that's a new one for me. So now are you up to speak with this story? I might I might just refresh for folks listening. Anthony Albanezi has a house on Indulge Hill in Sydney. It's an investment properly, it's had it for a couple of face, had it for nearly ten years, and he has decided
to sell us, which he's perfectly entitled to do. The surprise part here is that when he went to sell it, the tenant at the property didn't want to leave, and in that respect, I'm sure anyone who's ever had an investment properly says, oh, gosh, you know, what does go? What happens when that happens? What happens to you? Well, how what do you do? And he's had to serve an eviction notice, which is really, I imagine most uncomfortable
for the prime to have to do this. It looks like he's going to make money on the sale of this property. He's not going to Romp Pullman and sort of it hasn't exactly hit the jackpot on it, but it's it's I if I recall the numbers he bought it for I think is one point two million at about a decade ago, and he'll set it for about one point nine and he faces all these issues that every property investor faces, and a lot of people are just saying it's too hard. I'm getting out, it's not.
The numbers don't add up for me. Are you seeing this, James? And if people said that to you, what would you say to them If I was a client of viewers and I said this, I've had this rental. You know, honestly, I lose money on it every year. I know there's negative fear in but you know, so, so what it's all too much?
So definitely those conversations, I mean had a lot more over the past twelve months. And that's a function of interest rates going up thirteen times over the past two years. So if you go back a couple of years ago, so a lot of investment properties were cash flow positive, even in the expensive capital cities like Melbourne and in Sydney, because interest rates on investment loans were below three percent.
And fast forward to twenty twenty four and interest rates on investment loans are six and a half to seven percent, So you need to have a pretty high rental yield to make that property cash flow positive or even neutral, and that's not happening for a lot of people. So they're finding that they're reassessing their investment property portfolio because where they were getting income from these investment properties, they're now having to spend out of their own cash flow.
And remember that rents have gone up significantly, interest for payments on mortgages on your home loan has gone up as well. So people are finding the bit of a cash flow crunch and they're looking for ways to move into a more comfortable position. And one of those ways is to sell off something that's costing you every money every month, and that's an investment property. But I think you just have to step back and look at the fundamentals of it. So you're just in an investment property.
You benefit two ways. One is through the rent that you generate and the other is through the capital growth. And at the moment, half of that equation is negative. Half of that equation is positive. So for most property investors, they're getting negative income i e. The cost to maintain that property, the interest on the mortgage, the strata the council rates, everything that is associated to cost to own that property as an investment is more than the rent
that they're receiving. But on the positive side, most capital cities around the country are getting capital growth. The national property prices have gone up ten percent over the past twelve months. Some places have done better than others. PERFO is up over twenty percent. You know, Sydney's up ten, Melbourne's up three to five percent. But some places a negative, like Hobart in Tasmania. But overall property investors are making money.
So I think it's a case of using that what you call them the idiom or saying that you don't throw the baby out with the bath water.
Think about it. Yeah, so you're saying, hang on, folks, this is the game. It's a long game, and you have to you have to sit with it, and you have to go through good times and bad times. But but at the same time, you are saying that the numbers have changed, that basically your interest rate has probably doubled if you're in, if you're on this property for
more than five years or whatever. So it seems to me when I look at the surveys as to where people are selling, it's throughout Victoria and in areas on the edges of Sydney. The Hills District was mentioned, the Blue Mountains district was mentioned in this survey from suburb Trends where they actually said, you know that this the sale by investors had gone through the roof in pockets,
not across the board. I suppose to wait the challenge it orders to say, geep, isn't it much easier life just to put it all into a share market fund and forget about it. There's never any maintenance. No one ever calls with a with a with a broken toilet. If you have shared it's a lot less trouble year to year. Is it worth all the effort we need as property industrial It's interesting.
A lot of it is investor psychology, and you have to say I'm biased by that myself. I like the I can go and touch the bricks on the investment property and it's there as a physical thing that can never be taken away, Whereas you have that sometimes irrational bit concerned that something on the share market can evaporate, which generally doesn't happen if it's a property related stock. If you buy into a Goodman Group or or something
like that, those warehouses aren't going to evaporate. Goodman Groups always going to have a value, same with the other property stocks. But I think the thing to remember here is that the banks don't make it easy and cheap to borrow money to buy shares on the share market, but they do make it more accessible and easier to leverage up to buy physical properties. So that's been the major reason why most investors have property in their portfolio, because they can borrow the money from the bank.
But the state governments don't get involved with your shares, and they don't throw in new taxes with every budget, and you don't get up and find out, Oh, another tax, so another cost, so another duty or regulation has come in on my whatever my vedsit or my townhouse somewhere
or other. That seems to be the key issue actually, apart from rate rises, which perhaps not that we can deal with them though, but that we know it's a cycle, that we know perhaps this is as bad as it gets in it and from here on it may start to drop. We don't know when, but it's most likely that the pattern on rates or mortgage rates is that they will fall lower from here. They'll be lower this
time next year. So then you're left with the issue of state taxes, and that seems to be really even though it's probably uncoordinated, all the states have the same idea, which is you can get some money out of property, and they keep adding new obstacles that I suppose you could call them, particularly in Victoria, and that's where the market is week a self rre. The investors are leaving the most. So do you think that's everyone to stop.
Well, it's definitely a valid concern. The government's state governments seed as an easy target to add more taxes to investment property owners. But I feel that if they add too much, Basically, they'll just get voted out at the next election. So there's only so far that they can push it before it becomes unpopular. But I don't want to sound like that the champion of investment properties, because
I'm relatively agnostic between shares and property. But we also have to remember that the share market is subject to regulation. You're correct, not so much to state government, but to federal governments. If we cast our minds back a few years when there was that proposals to remove imputation credits from retirees, and that they've changed the tax treatment on share buybacks as well to make them not so attractive as previously. So both share and property markets will continually
be effected with tinkering from from governments. But I think in summary, you're writing saying that there's more hassle factor. If you own a few is a coal property, then you buy a stock, a property related stock.
Yes, okay, But as you say, the offset is, you don't get up in the morning and find a fall and twenty percent overnight. In fact, it might have fallen twenty percent overnight, but you won't know that unless you try to sell it, And there's something very arresting. Arresting it would be in the nice words. So there's something
quite stumb up churning about share market drops. No matter how many you've seen, they really are alarming, and the more closer you are to retirement, the more alarming they become. The other thing I think which we always underestimate, I think is the long term value of property. I mean the serious long term value of property. And I often tell stories about, you know, certain properties that that handed
down from generations, that generations have had benefit from. And that's something we rarely think about what we should because it's a key part I think of property investing on the super, using super to buy a home? Do you think that's a good or bad idea? So I'm forty.
If I cast my mind back to when I was in my early to mid twenties and put myself in the shoes of first home buyer, would I have liked to be able to access my super? And the answer was yes. It was my in laws that lent us money sort of off the record as a gift quote unquote to be able to buy our first property, and that allowed us to get in a few years quicker than we otherwise would have. So if it wasn't for my generous in laws that to help us out, it
would have been difficult to crack the market. And unfortunately, property markets grow. Unfortunately for people trying to get into the property market, it always seems to be the case of you're chasing your tail, like your ability to save is often trumped by the growth in the property market,
so they just fall further and further behind. So I agree that it's not ideal for the long term to pull money out of SUPER, But in terms of somebody's financial life and the stages they go through, one of the fundamental and foundational things is generally to buy a property, whether that's to live in or as an investment, and definitely to live in. If they can use one of their assets that they won't be able to access for another thirty to forty years to help them achieve a
goal today, well then fantastic. But I just think that the execution of it needs to be thought through because in theory, somebody in their twenties could be salary sacrificing into SUPER and effectively paying fifteen percent tax to build their SUPER, and then they could be pulling that money out to buy a property and then they can upgrade that property when they retire, and when they're sixty seven, if they've dumped all of their assets into this house
they're living in, they can then pick up the age pension from the government. So I think the governmany needs to think about the equity of this with regards to scent a link at retirement and tax benefits that were generated throughout if they are going to let people access super.
I did agree with you will coming in from a different danger. So I'm saying I'm coming in from someone who's older than you, and who up until very recently would have said, hey, listen, you know super policy for super housing, policy for housing. Don't mix the two of them up. It's all wrong. But I'm doing that from the comfort of buying my first home for exactly three and a half times my salary exactly, and a person
in the same position now could not do that. A person in the same position could no way could they do that by a house in the middle of Melmour for three and a half times the salary that I was on, even if you win dexted up to today. And so I'm coming from a different point of view I'm saying, Oh, it's easy to sit here and say super is very important, But actually, as you allude to, and this is I think this is the million dollar point. The tax system has been designed and has morphed to
a shape that is totally biased towards the homeowner. So it's not just that you win when you're thirty five or forty five I as a homeowner because you get CGT breaks, et cetera. You win forever because when you're older in retirements, the value of your home isn't included
in pension, but every dollar of SUPER is. So it's as you say, it's it's a as a result of that system that logically, I think you have to you have to say that if you can get money, your money out of your super to buy your home, then why wouldn't you. Okay, hey, we might take a short break. We'll be back in a moment. Hello and welcome back
to The Australian's Money Puzzle podcast. I'm James Kirby, the Wealth editor at The Australian, talking to James Girard, lancial advisor at TRIPLEW Financial Advisor dot com dot you, who is of course a regular contributor to The Australian's Wealth Section, and we'll be hosting the show for you in the first full week of June. Those two two shows coming up now. James. I mentioned NDIS at the start and hey, we could do an hour on NDIS, but so could anyone.
Our speciality here is investing and the investors are looking at the world through an investing prison, maybe like investors to the extent that they are exposed directly to NDIS
tends to be on property. And you've done a little bit on this for the paper which is about these schemes and promotions which suggests to the retail investor, come and participate in this NDIS property and you'd get very good returns and the government backed and they often give the impression that they are actually government certified or whatever. But you when you looked at this that was not the case. As usual, the NDIS had a leak. What was the leak on this one?
So yeah, I went down to the rabbit hole on the NDIS having a look at it with regards to how attractive are these property investments because you often come across it if you google NDIS Property Investment Guarantee ten fifteen percent returns. It sounds really great, and I always felt there was a catch to it, but I never really looked into it. So when I did, it really just comes down to understanding what the numbers are and
understanding the likely projected outcome. And it is possible to get ten percent yield fifteen percent yield, but you need to thread the needle perfectly, and there's a lot of cases where you don't. And so, for example, the vacancy rates are higher than a normal investment property with NDIS property, So there's four different types of NDIS accommodation depending on the needs of the participant in the NDS scheme, and
one section called fully accessible. The vacancy rates are over fifty percent and it can take up to six months for a quarter of those properties to be out to somebody. So that sort of vacancy rate generally isn't factored in it in the cash flow. It's assuming that or one hundred percent of the times that the property is tenanted to get your double digit gross rental yield. And the other thing to remember is that it's the NDIS participant that is allocated the money from the scheme. It's not
guaranteed from the government over the particular property. So if you don't have NDIS participants who want to rent your property, you're not going to get anything from the government. It's just going to stay vacant. You're not going to earn a cent. So location is really really important. So what I sort of determined out of my research was two things.
One is that you need to understand where the demand is for NDIS properties, and you need to get your cash flow forecasts right because sometimes the people who promote the NDIS property investments they're a little bit creative, you could say, with the accounting and the forecast because.
They give the oppression their government sanctioned and they're not right. They're just pitching into a government scheme and helping there again, that's it.
And assic have come out and said that, hey, you know, watch out if people are saying that this is a government certified scheme or subsidized scheme, you don't run the other direction, because in reality it's not. There are grants through the NDIS scheme to help people with accommodation. But again, just because you have a property that's accredited to be eligible to have people under the NDA scheme rented doesn't
guarantee you anything. You need to be in the right location, have the right management agency who can help you place people in there. And just one last quick thing is that with the four different categories of disability accommodation, there's
different payments that the government make. And I've seen in some forecasts where the property firm have assumed one hundred percent of the occupancy would be from the high physical support, which gets the highest payment from from the government, whereas in reality assume they assume assume the very best, but in reality it's about a quarter of the All of the accommodation is for that high physical support, So it's misleading to project one hundred percent of the mental income
from that higher payment. So again, just doing your research, you can make good money from it, but you know it again goes back to that if it's too good to be true, it usually is type things, So there's a lot of work involved if you want to make good.
It's very, very disappointing because I'm sure many listeners would earnestly see, gosh, that be good. If you could do that invest in this, it would actually be impact investing virtually, and you would get a reward. So just for those who stick with it, or stick with the notion of those four categories, is there a category that is you would.
Think the most middle category, which I think is called robust or the fully accessible one that seems to be where the majority of the demand is. So that was the sort of the safer place to be in withinside of the NDIS scheme. So I absolutely agree for you that it is great social invest in it. It has a good feel about it that you're purchasing an investment property that has benefits to the broader community by housing
people with disabilities. However, I feel the big problem is that because the property sector in general isn't regulated by ACIK, there's too much sort of eagerness with the promotion of it, and I think sometimes the claims that are being made aren't fully factual or they're being exaggerated a bit, which then leads to people being disappointed. Which otherwise is still a decent investment, but not as good as what was being hyped it up to be.
Okay, very good, we're very well explained. Disappointing, as so many things are in relation to the NDIS. I mean, really, if they had sculpt this out properly at the start, in rigorous fashion, and had allowed and had looked forward and said, if it could go wrong here, is there any chance at all that a property developer might exaggerate the scheme? And had you know, really had it ironclad,
then this wouldn't have happened. Then wouldn't be warning about a government scheme which is just you know, absolute inverse of what should have happened here. Anyway, all right, we will leave that when we would take sure a break, we were back in a moment with some great pieces of correspondence, some very good questions, some very cheeky questions to back in a moment. Hello, and welcome back to the Australian's Money Puzzle podcast James Kirby with James Gerard.
We've got some really good questions. First questions from Andrew. Would actually read the first question, James, can you see you there?
I can, It'd be my pleasure. So Andrew asks there was a comment from a Neil about the notion of limiting negative gear into one property or one million dollar value. I know you were very busy with the budget at the time, but feel like you went over this a little bit too quickly. I think there is a real
opportunity in there for discussion. Surely anyone with two or more investment properties, or owns a single high grade investment property would fall outside the quote unquote mum and dad investor, which is the usual cohort politicians claim that they're trying to protect it. Sounds like the tax change that might
actually work politically and financially. The only sticking point I can see is if the one million dollars is the right amount across all of Australia, I should be could be saying that it's cheaper to buy a property in Hobart then it's in Melbourne for example, And how it could be indexed to remain fair into the future. What do you reckon, James?
I don't know. I wondered if he means a million in equity? You know I could have I could have a TV piece of equity on a million dollar property. Am I gone? Is it all over for me already? On the on that basis, Andrew and all the Andrews out there, this is never advice on the information. It's very hard to know how they might restrain or reform negative gearing. It is not impossible, but it's take it for granted, it's politically very difficult. Pulcating could manage it.
When Portkating was managing just about everything under the sun. He couldn't do it, and he brought it back. So that's the political backdrop. And then you have the fact that there's too manyon people already engaged in property and they would have to be I suppose going for through the system. It could of course, it could be modeled and capped in the fashion that super is capped, so it's not impossible, and I would just leave it at that.
How you actually do it will be difficult, But I think you'd have to zone in on the equity the person has rather than the value of the property, because the value of the properties could be multiple of the equity be have. What do you think, James g.
Every time negative gearing and changes come up, my mind cast back to Bill Shorter. Any of the unlosable elected highly politically unpopular to make any changes to the tax benefits that Mum and Dad property investors generate. Okay, it's a really difficult one. I don't think there will be any change because the federal politicians know they'll be out of power the next election if they do something like that. But you know that it does make sense because we
do have caps for a lot of things. We have caps of superinhoation, so it makes sense. You know, we have caps for the age pension as well. There's caps for taxation and and other government benefits, so it makes sense that there is some sort of ceiling. I feel
a million dollars is too low. You buy average investment property in Sydney or Melbourne, it's going to be close to or exceed a million dollars, whereas you buy something in I had to client buy an investment property in Rockhampton in Queensland, three bedroom house, thousand square meters of land last week three hundred thousand dollars. You can buy four of those or one property in Sydney or Melbourne.
How about that? What's then sery like in Rocky pretty low.
I don't know what's driving that market, but I suspect it's probably similar to other places that have done really well in recent years, like Perth, which is sounds a little bit silly, but I think it's just the thinking behind it is that people are looking outside of their own capital city as it becomes expensive it's expensive if you live in Sydney or Melbourne. So they go, where can I buy something cheap?
And previously it.
Was Adelaide, it was Hobard, it was Perth and now those my it's have gone up again. It's not so cheap an YouMore so Rockhampton your turn to shine?
There you go cascading effect. Okay, yep, yeah, Well logically I can see what people are doing, okay, Phil asks I keep hearing stories about unfair the new three million dollars superannuation cap is because it introduces the concept of taxing people on realized gains on their superasset. My simple retort is, get over it, folks. The government here is clearly intending to have no one with the balance over three million. Yep, yep, no problem with that statement at all, Phil.
I think I put it to Julie Dolan, head of SMSFT KPMG, last week, which was like, really, this cap, in a way, it's basically saying we don't want you to have more than three million super It's not a it's not a cap, but it's effectively so. And it's not formally a cap, but it will work as one. And I think what we will see, of course, as people will be money all over the place to ensure
that they're not in there. And the only people who might get stuck up people with extraordinary amounts of the super and they are obviously being targeted and they are obviously not going to get enormous public support. Okay, last question is from Michael. You want to read that one.
Yes, my wife and I both retired in our early sixties, although our financial advisor continues to suggest managed funds and more recently are separately managed to account consisting of direct shares ETFs and managed funds with a quote unquote growth profile. I question whether a simple strategy of investing in a small number of passive index funds such as the ASX two hundred or the S and P five hundred would provide just as good or even better returns at a lower cost. What are your thoughts.
Well, these financial advisors are going to watch them so closely. Look, we don't know any Michaels particular circumstance, and again as to say that this is advice, however, they're both retired. No, so I don't know why there's this wind up for growth if you're both retired you would imagine income is the primary driver there. And I don't know what exactly was agreed between everybody, but a simple strategy of investing in passive index funds underpinning a portfolio would seem to
be perfectly sensible to me in retirement. We don't know, right, we don't know, But just talking in very general terms, what do you think of the of the suggestion that the that you could just passively invest in ets rather than setting up all these new growth focused vehicles in retirement.
Yes, it's a great question from Michael. It's a healthy level of cynicism about the structure that he has and being suggested suggested. I guess I let let you all. This is into a little secret in the financial services sector, and it's that the SMAs A separately managed to counts one of the biggest routs going around. So if your financial advisor is recommended one, have a think about it, because you hit with four layers of fees.
I have always thought so, James, I've always thought so. Every time someone explanded to me, I just said, I should actually have of course I should have gone and done something, honest, But they seem so arcane and so to me, I just couldn't see the attraction. But just to be fair to all concerned, what is the alleged attraction of the self managed separately managed account?
Yeah, the alleged attraction is that your financial advisor who's charging you a fee, will recommend a separately managed account manager, So they're basically outsourcing their function saying it, Look, I'm your financial advisor. I can talk to you about state planning and other things, but I'm not an investment experts, So we're going to pay this other company to manage your portfolio. So this other company you will run the SMA. They'll charge a fee, and then but they won't directly
invest in two shares. Most of the time, they'll go buy managed funds and ETFs, which both have fees as well, and they'll run the separately managed to count through a platform which also has a platform cost. So that's where your four different costs come in. So you sort of around three percent outgoings from day dot before, you're sort
of making anything behind the ball. So if you wanted to simplify things, you would just go for what you said, the simple strategy of a couple of index ETFs that get the asx the SMP five hundred, maybe the property sector as well, and then some bond ETFs and your total cost is going to be less than half a percent. So again, anyone who has an SMA, go ask your financial advisor what exactly are you doing because they can't make changes on it. That's what the SMA manages for.
So if you're paying the advisor fees, make sure it's not for the investment management side if you're in an SMA, So.
If you're paying four or five times the fees, it would want to be kicking it out of the park to make sense. It seems to me broadly. Okay, well, isn't that an interesting turn of events? That question turned out to be very juicy? Indeed, Thank you very much, Michael, and thank you everybody who sent in questions to speak they're great questions. Keep them rolling, Thanks very much, James.
Everyone's looking forward to you taking the week of next week on the show, and I know you always get interesting guests so they'd hear from you, So thanks for today.
That might pleasure And everyone's sent through some questions, so we've got lots of interesting things as always, so have a chat about let's next week and I look forward to chatting to everyone.
Then I leave plenty in the camp for you, James, all right, and in any event, let's have some more. The money puzzle at the Australian dot com dot au is the met Talk to you soon,