What’s going on guys It's Jordan de Jong here and today I want to talk about how the property investment game has changed over the last decade, I’ve spent a solid amount of time over the last 12 months researching and learning as much as possible about property investing and I want to go over the results I found. I think I’ve listened to over 600 podcast episodes, watched at least 100 YouTube videos and read somewhere between 20-30 books, all of which were directly related to property investing, I have even been so committed and excited about the topic that I’ve started my own YouTube Channel. What kicked off this whole adventure was a book I read when I was probably 15 years old but had long forgotten about, and now, it was Christmas 2018, I had a whole two weeks to relax and there it was, sitting on my bookshelf, beckoning to be read again. I know I’ve talked about this book a million times but it was Steve McKnight’s 0-130 properties in 3.5 years, with a title like that and some free time how could you not read it. 8 hours later it was done, I was totally inspired to become a property investor, rip out the equity of my PPR and purchase my second property. Little did I consider that the book I had just read was written 15 years prior in 2003 and although the fundamentals remained the same, the market, government policies, and financial regulations have changed. Experts now refer to the methods demonstrated in that book as “Gaming the System” where, The way to get around reaching your borrowing limit is once the ABC bank has said ‘no more’, create a new trust structure and approach a different bank, which will then provide you with another loan to invest with. This was possible as long as the loan was not in default, because the debt to the ABC Bank is owed by the trustee company on behalf of the trust, and you had no personal liability and do not need to record the guarantee on your personal financial statement. So I set out to find an investment savvy Accountant who could set up a trust structure for me to buy the next property under, which I did, but to my despair after discussing this method with my broker, he explained that this strategy may have worked in the past, but he didn’t believe it would work under the new Positive Credit Reporting and Open Banking that we are now dealing with. If you want to learn more about Positive Credit reporting and Opening banking you can watch the previous blog I’ve done. This totally broke my heart, I thought I could, as they say, “Game the system” and build a multi-million-dollar portfolio overnight just like all the other success stories you here In the news like, 6 properties in 12 months, or property millionaire buys a 5 million dollar house on the beach. However, after all this additional education, I’ve realized all you really need for early retirement or financial freedom is 2-5 properties, depending on how lavish you want your lifestyle to be, and even that has now shifted in my mindset, if I was finically free right now and didn’t have to work, I might travel for a while, but when I get back home, twiddling my thumbs I’d be bored in less than week… probably end up reading Steve McKnight’s book again. Because there’s no more gaming the system, it now all revolves around incomes, with all of our banking data now being shared between banks, we are fully exposed, and you might say well we can choose whether to share our data or not, but really, can you, you don’t think it will be an absolute requirement when applying for a new home loan? If you can’t afford to repay a mortgage, on at least a 6% PA principle and interest loan, why would they lend you the money, lenders need the reassurance that you have the ability to pay back what your borrowing, otherwise it’s only going to cause them a headache and cost them money. This all feeds into your borrowing capacity, which right now you can roughly calculate at about 6-7 times your income, if you’re a couple buying together, combine your incomes and then calculate. This number represents the maximum amount a lender will loan you, providing your spending habits are all in order. This is where the 2-5 properties comes into play, because we are limited by how much we can borrow, without dramatically increasing our income, there’s only so many properties we can get a loan for. Now you might be thinking there are other alternative strategies out there to continue buying properties. The main one, of course, is buying lower-valued properties with higher yields, in other words, buying a property that’s paying for itself from the rental income, sounds too good to be true right? We’ll it can be done, yes, but these properties come with some unfavorable elements too. According to the ABS in May 2019 the average Australian income was $1,695 per week or $88,150 per year and for the September 2019 Quarter, the mean price of residential dwellings in Australia was $660,800, if we times this income by 6 as discussed before, it comes to a maximum borrowing capacity of $528,902, which is $130,000 under the Australian mean property value. So, an average income earner has instead decided to go down the multiple investment properties path, and has been sold the dream of using the equity to buy a new one every year, they go ahead and purchase two properties in rural areas at $250,000 each with high rental yields and “making money while they sleep at night” as they say. The problem here, is these properties are now $410,000 under the Australia Mean, and if you didn’t know it already the value of property basically comes from the cost of construction plus a number plucked out of thin air which is purely driven by supply and demand. Human emotion, economic activities, government policies and financial regulations all play their parts too but essentially just play with the supply and demand levers. So what drives property prices is a shrink in supply and an increase in demand, for context picture two extremes, an auction where no one arrives apart from the 3 neighbors next door, and an auction where there is 8 registered bidders and 80 people at the auction, which property do you think will sell for more than the reserve? This is demand-driven pricing. So, for properties priced significantly lower than the mean, it could demonstrate that there’s not a whole lot of demand for these properties, to begin with, potentially stunting long term growth. and please use the capital city or suburb mean, the “whole Australian property market” doesn’t exist, I’m just using its mean here to prove a point. Now you might be saying, I don’t care about growth I just care about passive income, well at best let’s say both these properties are making you an additional $420 a month, or $5,000 a year, so $10,000 in total, well now you have to pay tax on that so it comes down to $6,000. Well done. and what happens if your tenants move out, and there’s not a lot of demand for people to live in that area, how long could your property sit vacant for? Two weeks, a month, 3 months? Who knows, but regardless it's going to be digging into this $6,000. The same goes for other market impacts outside of our control, such as interest rates and unemployment, if your interest repayment goes up, it takes away from the $6,000, if your tenant can’t afford to pay the rent, it takes away from the $6,000, now this is juggling between only two properties, but imagine if you had 10 or 20 of these things all being impacted at the same time. And hang on, wasn’t your goal to pull out equity from the capital growth and buy a new one next year anyway? It’s much better to focus on a smaller number of A-Grade properties that have strong capital growth potential, if you purchased a $660,000 property and it grew by 6.8%, in the first year it would grow by $44,880 minus capital gains tax and selling costs, you might only see $25,000 of it, but that’s huge compared to $6,000 from the two lower grade properties. The best part is, this is compound growth, so it increases by more every single year, and that’s the play, to sit and hold A-Grade investment properties that have good compound growth over time, the more of these you can have the more growth you will accumulate, but because we are limited by our borrowing capacity we can only really hold 2-5 of these things. So, leave the passive income dream for real retirement, and even then, you’ll of needed to pay down a significant amount of the mortgage to be able to live off the rental income, for now, focus on income, increase that borrowing capacity and find A-Grade investment properties that will have demand in 20, 40 or even 60 years. Lastly, you can now pay someone to do absolutely everything for you, so if you lack the time, knowledge or drive to thoroughly research for A-Grade Areas and properties, then outsource it, it might seem like a large additional cost now, but this is your biggest financial asset, and if we only get 1-5 shots at buying an A-Grade property we should do I right from the start. If you do want to learn more about what makes an A-Grade property, I’ve made an entire playlist dedicate to just that. Until next time, happy house hunting.

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