Today, we speak about the differences between buying as an owner and buying as an investor. What you need to know prior to buying.

HERE’S WHAT YOU’LL LEARN FROM TODAY’S EPISODE:

• Things you should look at when buying for yourself;
• When buying as an investment, key criteria to focus on;
• Research tools we use; And
• Much More

LINKS OR ARTICLES WE MENTIONED:

• None

SPEAKERS IN TODAY’S EPISODE

Michelle May – Sydney Buyers Agent

Marcus Roberts – Mortgage Broker

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Please note that any views or opinions presented in this podcast are solely those of the speakers, and do not necessarily represent those of any business. These views and opinions are general in nature, and do not take account of your personal objectives, financial situation and needs. Please consider whether it applies in your circumstances and seek professional advice wherever appropriate.

Transcript

Marcus Roberts:	Hi, and welcome to the Sydney Property Insider, this is episode 3. Are you buying as an owner, or as an investor? And, the tricks and traps to know, if you’re doing either of. Michelle, welcome.
Michelle May:	Hi.
Marcus Roberts:	What’s in the news this week?
Michelle May:	Something that rolled into my inbox this morning was an email from The New South Wales South Fair Trading email that I signed up with. It’s regarding anything and everything to do with property matters and the law. The newest thing here is that window safety devices in strata buildings, or in apartment buildings, have to be installed by the thirteenth of March, of this year. This applies to all openable windows, where there’s the internal floor is more than two meters above the outside, obviously to protect children from falling out, and adults at times, and hurting themselves.
Marcus Roberts:	We’ve all gone through university.
Michelle May:	No more talked about that.
Marcus Roberts:	Yes.
Michelle May:	We just want to make sure that you are aware that you can actually sign up for these email alerts, New South Wales Fair Trading Property matters, because they will keep you updated with anything that you really should know about. So, if you are living in an apartment building, and your owners corporation has not already done so, or checked out whether the windows in your apartment need to be rectified, you can actually face fines. Obviously, that’s something to be concerned about, apart from your own safety, or your child’s safety, in any case. I highly recommend just signing up for that email alert.
Marcus Roberts:	If you’re buying, it’s certainly something to look at in the strata. Now, it’s to say whether have abided by, or whether there’s any talk of them abiding by the new standards that have been set out.
Michelle May:	Absolutely.
	That is one of the things that I always look out for my investors end, and/or owner/occupies on a buy-in to an apartment building, is whether the actual building is compliant with the law. You know, anything to do with windows, pools, fire safety. Have they actually followed the rules? And, are there no issues on moving forward? Definitely look into that.
Marcus Roberts:	Absolutely.
	That’s a great email to come out on a weekly report monthly basis, you mentioned. Which, we will link to in the show notes, so you can easily sign up through the Department of New South Wales Fair Trading, to make sure that you are top of the same things that Michelle and I get on a regular recurrence.
Michelle May:	Absolutely. Well worth it.
Marcus Roberts:	Today we’re talking about whether you buy as an owner/occupier, or as you’re buying as a property investor, what are the things to know for each? And, where are the similarities, where are the differences? Specifically, if you’re an owner/occupier, what are the things to look at, just as if you’re a property investor, what are the big ticket items that you need to look for when doing your inspections?
	To start off with, Michelle, why are owner/occupiers and property investors different?
Michelle May:	Obviously, they have different objectives. Owner/occupier, first and foremost, we want a home to live in. We want a place to call our own. We don’t want to be subjected to any whims of the landlord, “I want to paint my bedroom purple.” You know, those kinds of things that owner/occupiers are looking for. They want to find a good school for their children, they want security.
	Investors, their main objective is wealth creation. They’re chasing that yield, or capital growth, depending on what they’re looking for. It’s a very different way at looking at property, I think.
	But, let’s start with owner/occupiers. The first thing to decide is, are you ready to buy? The best time for me, I always say, is to buy now. There’s no point in wishful thinking that the market will crash, or come down. Ultimately, you want to buy a home. So, let’s start looking today. The first thing you need to do is making sure you’re ready to buy. Have you got your pre-approval in place? Or, financially, have you got your wallet with you go into look at the properties?
Marcus Roberts:	Not just when you have the pre-approval in place, but even before that. Do you know how much you’re willing to pay on your mortgage, week in, week out, for the next 25 to 30 years?
Michelle May:	Yeah. Absolutely.
Marcus Roberts:	It can be very different from rental, which might go up every year with a rental increase. But, a mortgage is a completely different vehicle. Rental you can easily walk away from. You can walk into a smaller property, and pay less rent. Mortgage won’t really change as time goes on, in terms of you having the ability to walk away from it. Unless, you sell, or pay it down quicker.
Michelle May:	It’s a big commitment.
Marcus Roberts:	Absolutely. It’s the biggest commitment that most people will make in their lives. I really think that, with an owner/occupier, if you’re looking at a property, it’s really a question of life, and a life stay. So, what is it that … Why do I need to buy now? Is it a new episode in your life? So, is it, just had kids, or we’re just getting married, or kids have even moved out of the home? What is the driver here? What’s the real reason of wanting to buy a place?
	Or, is it simply, as you say Michelle, “I don’t want to pay a landlord anymore. I don’t want to be at the whim of someone else.” Saying, “Oh, you know, I’m thinking of selling”, or, “I’m thinking of doing this or that to it, and here’s your month’s notice.”
Michelle May:	Absolutely. I think one thing that you really need to be realistic about, is affordability. So, rather than chasing your tail for years on end, I see buyers out there who have been looking, literally, for six years. Can you image the amount of dollars that the market has gone up along in that time? Just check recent sales in the area, and be honest with yourself. Can you really afford to buy what you want within the suburb that you want to live in? If those sales that you can afford are only on Parramatta Road, for example, you know massive thoroughfares. Maybe, think again about what it is that you want.
	You’ve got to compromise somewhere. Usually, the compromise can be made in a number of areas. You can compromise in your budget. Can you actually afford a little bit more? Or, is it just a comfort factor that you’ve put your budget at a certain level.
Marcus Roberts:	Yeah.
Michelle May:	Clients come to me and say, “I only want to spend 1.5, because that’s where I’m comfortable.” But, as it turns out, what they really want is something that’s above that, and the bank is willing to lend them that. And, they’re willing to live still comfortably, it’s not just baked beans on toast for the rest of their lives, at that point. So, they go, “Okay. If that’s what I really want, I’ll up my budget.”
	The thing to compromise on is area, those suburbs. If you really want to live in Newtown, but find that you really price out of the market, look at the suburbs around it, because they will have similar types of lifestyles on offer. I mean, look at Maryville, for example. Very similar, only down the road, but considerable cheaper.
	All of the types of properties. So, if you decide you really want to be in the Eastern Suburbs, you really want to be in Woolahra. Okay, but you can’t afford that house that you’re after, look at townhouses, look at courtyard apartments. That will allow you to stay in the suburb that you were in, but you’re choosing, effectively, a cheaper kind of property.
Marcus Roberts:	It’s really about seeing pros and cons. It’s sitting down, almost, with a checklist, and putting a line through the center of the page, and saying, these are the must-haves, and these are the nice-to-haves, probably more so than a pros and cons. If you’re buying for yourself. If you’re buying for yourself, as well as a partner, sitting down over a bottle of wine, saying, “These are the things that we want. These are the things that we need.”
Michelle May:	Yeah.
Marcus Roberts:	And, really getting comfortable with saying, to your point, “I have to live in Newtown.” Well, that’s fine. But, there are other things that will have to be nice-to-haves, rather than the must-haves. Unless, you have an unlimited budget, which 99.9 percent of the people don’t.
	Absolutely. What are the things that are both location, the type of property, and the price, and access roads, and similar? What are those things that are primary factors for you in your decision?
Michelle May:	Yeah. Sometimes that could be something like proximity to family, proximity to public transport. Children, you know, are you already thinking about school catchments? So there, I’d have to say, be careful with school catchments, because they do change. But, if you want to live close to a particular school, then that can be something on your must list. Only you can decide how important that is for you.
	Ultimately, the objective is to find something that you really love. Something that you want to live in long-term. Perhaps do nothing to, perhaps do lots to. If you’re that way inclined, go to Bunnings every weekend.
Marcus Roberts:	Horrifying. Truly horrifying. As we said earlier, Bunnings would be my nightmare. Every wake in the hereafter. Yes.
Michelle May:	Also, just put your investor cap on it, and think about how attractive will your property, that you are buying as your home, be also in the long-term. Yes, this is your home, you’ve got to love it. But, it is also your biggest investment for the long-term future. So, make sure it is a good property. Whether or not your personal lease gets ticked off, it has to also be attractive to buyers in the long-term.
Marcus Roberts:	Yes, absolutely. Where the two meet, we’ll come to later in the episode. We say this a number of times here, taking some of the emotion out. I know it’s a huge emotional decision to say, “Yes. This is the place that we want to raise the family. This is the place we want to live in for the next few years.” But, taking some of that emotional pull away from what should be a rational decision.
Michelle May:	Yes.
Marcus Roberts:	Just saying, “Yes. Absolutely, this is where we want to live.” But, also thinking, “Is it where other people want to live?”
Michelle May:	Yes, absolutely. And, making sure that the foundations of the property are solid. So, get expert advice, and get a building and pass inspector, check the strata report, get the contract reviewed. We’ve talked about this before. You know, you are probably only buying a property once or twice in your life. There are people who do this every day of the week. They are probably able to guide you with whether this is going to be a smart decision or not. So, don’t be afraid to reach out and get some help. I’m talking particularly, perhaps, to gentlemen in the market. Women are usually easier to reach out for help in that respect. Think about, am I comfortable investing a million, or more, into this property that I really don’t know that much about. So, get some help.
Marcus Roberts:	Building [inaudible] really isn’t going to cost your, for what you’re going to receive in guidance from someone that, as you say Michelle, does this every day. This is their bread and butter. This is what they do for a living. If you’re going in, and just looking at it, and just saying, “Yeah. I don’t see any cockroaches on the wall.” Then, it’s probably not the level of detail that you would hope to provide if you were investing in something that is potentially a million dollars, or more. So, certainly have that expert advice. Listen to the experts, listen to the people that do this on a day-by-day basis.
	The last part that I’d probably add to this, and this goes back to buying capacity. Be realistic with what you want to spend, versus what the bank will lend you. Banks will typically say, “This is your borrowing power, Mr. And Mrs. Smith. And, we believe that we can provide a loan of five hundred thousand dollars.” But, if your budget over the last six months, or over the last year, means that you would be eating baked beans on toast, maybe it’s not the right thing to take everything that the bank throws at you as an owner/occupier.
	Really look at, how much would we be comfortable giving up in lifestyle to being able to live in our own home, and what does that mortgage look like? But, not just for today, but in five years time. So, in three years time, two years time, and four years time, whenever it happens. As rates continue to increase in due course, are you able to afford the mortgage, both now, as well as in the future?
Michelle May:	What do you think would be a sensible amount of rate increase before you sign up for that mortgage, then.
Marcus Roberts:	A lot of banks use what’s called assessment rates. And, they usually apply a buffer. So, as a very general rule of thumb, general hypothetical example, let’s say your interest rate you negotiate with the bank is four percent. The bank’s assessment rate might be three percent over that. So, they’ll look at it and say, “Well, okay. We understand that not everyone has a budget that they stick to. And, not everyone knows exactly how much they’ve spent in groceries, or Wooly’s, or Kohl’s. Not everyone knows exactly how much they’ve spent on school uniforms, and so forth.
	So, what we will do is, we’ll say, this is how much the mortgage will be, if there was three percent worth of extra added on top.” The banks typically do allow buffer in there. Which is why you might think borrowing power, why don’t they give me more money? It’s because the banks have added that in. But, if you were doing it for yourself, calculate on a home loan calculator. I’ll certainly provide a link or two in the show notes. Do it on an as is, as well as what a worst case scenario, or even a bad case scenario would be, if three percent increases. That’s going to help you in figuring out whether you can afford later, as well as today.
Michelle May:	Yeah, yeah. That’s a really good point.
	All right. Then, we’re looking at investors. What I always ask my investors is, “What are you trying to achieve here?” Determine your strategy upfront. Are you looking for capital growth? Or, are you looking for high yields? There’s different schools of thoughts in this. I’m firmly in the 50 bucks a week is never going to make you rich camp. So, I’m looking for that tipping point of good capital growth, versus a reasonable yield.
	I always, always look at yields. So, you’ve got gross yields and net yields. But, what I always provide my clients with is a yield that’s net of levies. Because, one building to the next, your levies can make a significant impact on your yield. Some buildings will have the full scale of building manager, a sauna, a pool, a car stacker. You know, it can be quite costly.
Marcus Roberts:	Yeah. Car stackers, especially. My goodness.
Michelle May:	Yeah, absolutely.
	Have a look at that, and then try and calculate your yield net of those quarterly costs. Then, you can really get a good idea of what your returns will be. But, try and look for the … I would certainly recommend you look for that capital growth, because that’s where you can really make a difference for your long-term future.
	In terms of risk assessment, would you be taking a risk in investing in a market that you don’t know, because it’s all you can afford? Before you listen to these properties … Because, there’s a lot of voices out there in the property market. Just look at, you know, what is their vested interest here? What are they trying to sell you? I’ve heard so many horror stories of people buying somewhere, that they think, “Ah, it’s going to get a great return. It’s going to great capital growth”, only to find that, actually, they just wasted a lot of money. Because, in four or five years time, they still haven’t made any growth at all, and the yields have been quite disappointing. If you are taking advice from others, make sure that they’re not trying to sell you something.
Marcus Roberts:	Yeah.
	Again, you can certainly buy good, new property. We’re not saying for a second that all new property is bad. But, listen to what the key points, the developer, the sale’s agent, is honing in on. If the major one is tax breaks, or if the major one has anything to do with tax, then look at some of the underlying feature. And, try and take a step back and reevaluate exactly where it is that you’re going into. Again, to Michelle’s point, you’re looking for that capital growth in the long-term. Just playing the investment purely for tax reasons, look, I’m sure it can work. But, it wouldn’t be the primary strategy that I would necessarily go straight into.
	We also mentioned yields, which we’ll certainly put some definitions, and some links to in the show notes, if it’s a term that you haven’t heard before. Look at it not just from the property itself, but look at it as if you were a tenant. So, if you were a tenant, what are the things that you would look for? Is it close to public transport? Is it in a good location? Does it have parking? Is parking even necessary?
	Try and look at it as you would, if you were on a Saturday morning, going to a 15 minute window to see eight properties and 50 renters around you. Have a look at some of the underlying, “Yeah. I like this. I could see myself living in this for a year, or two years.” If you look at it rationally that way, and say, “No. I could see myself living in here for six months, or less”, then, you’re going to have a high turnover of your tenants. Which means, that ultimately, especially if you’re doing this through a property agent. Every time you list it, you’re going to be paying that initial fee for relisting.
Michelle May:	Yeah. What you really want is a tenant who never leaves. A tenant who thinks it’s their own house. That’s what you really want to promote. Ultimately, nobody wants to live in a damp, dark cellar anywhere, without any fresh air, in the middle of town. What you’re looking for is internal light. You want an airy feel. You want it to feel like you could really make it your own. Because, like you said, that will keep the cost down of releasing it, and advertising it.
	You know, tenants as buyers, are getting more and more savvy. All you have to do is Google the address once, and you’ll see how often it’s been up for rent. So, tenants will realize, “Oh, there must be something wrong with this apartment.”
Marcus Roberts:	Yeah.
Michelle May:	It can look great online, but when you come to see it, it’s awful. It might be really noisy, which is not directly apparent when you come for the inspection. Really try and go for quality as much as you can. Like you said, not every [suburbal] wants the same thing. So, parking in Potts Point is not as relevant as it would be in, say, a suburb that doesn’t have a train line. Think about that very carefully. What are your tenants looking for?
	When I talk to my investors, I always advise them to think like an owner/occupier. You know, what is it that you would want, and how would you enjoy living in your place? You want to buy something that you’re proud of. It’s a lot of money to put into something, bricks and mortars that you’re not even going to live in yourself. So, it’s got to be a good one.
	Really do your due diligence when it comes to, for example, the rental assessment. Agents typically provide you with a rental assessment that is usually done in-house. It would be good, and wise, to get an independent agency to do a rental assessment for you, so that you can just compare the two.
Marcus Roberts:	Yeah.
Michelle May:	If they’re the same, that’s great. If they’re slightly different, go with the lower assessment. So, just building that buffer. If you get more money at the end of the day, that’s great. But, you’ve always got to go with the most conservative number.
Marcus Roberts:	Which, in terms of rental assessment, if you’re purchasing it and using bank money to help finance the purchase, banks will typically ask for rental assessment that’s been provided a real estate agent. It’s something that real estate agents are going to know that most purchases will want a copy of on letterhead. So, it’s certainly nothing that should be out of the ordinary to ask for. But, also similar to what we had mentioned about doing some calculations prior to purchase, is sit down, say, okay, let’s use 500 hours a week as a model. If we only receive 90 percent of that, or 450 dollars. What does that mean that our payments are, after the rental, after the agents taken their fees, after costs? Because ultimately, you’re still on the hook for the mortgage, even if you’re not living in the property.
Michelle May:	That’s right.
Marcus Roberts:	Really know how much out of your pocket is going to that mortgage every week, or every month.
Michelle May:	Mm-hmm (affirmative). Yeah. That’s right.
	Now, it’s also worth talking to companies that do depreciation schedules, to really maximize your return on it. Have a good tax accountant, all those people, again like last time. Get independent advice, like an owner/occupier. Get good advice on, really, as you said, you’re on the hook for, and what your potential returns will be. So, the better advice you get, the better your returns will be, also.
Marcus Roberts:	And, depreciation schedule can really assist. Especially, with new properties, or recently built properties. It’s a topic that we’ll cover in later weeks, certainly. Now, where the two can, and do, meet from time to time, we’ve spoken over the course. The episode being, if you’re an owner/occupier. Is it somewhere that you’re planning on renting out down the track?
	Myself, my first purchase was a small studio apartment. It was fantastic, loved it. I was single, close to the city, didn’t have a car, didn’t need parking. But, in later years, certainly not somewhere where I could live for a long-term. But, buying it at that period of my life, I know that I could then rent it out, and it would be attractive to tenants. Being that it was in North Sydney, it was very close to train line, bus line, north Sydney CB, as well as CBD.
	Likewise, if you’re a property investor, and if you’re looking at buying something so that you can rent it out, is it something that you yourself would live in, if you were in that state of life? So, if you’re buying a small studio apartment, or a one bedroom apartment, is it somewhere that you would have lived in if you were in your younger years?
Michelle May:	Yep, absolutely.
Marcus Roberts:	As an example.
Michelle May:	That’s a really good way to look at it.
	The last thing I would mention would be, as an investor, you will be having to meet different requirements from your lender. I know that a lot of my clients have a minimum square meterage requirement. So, they have to have an internal size of at least 50 square meters, excluding the balcony, I should add.
Marcus Roberts:	Yes. And, parking.
Michelle May:	And, parking. Yes, absolutely.
	That means that a large proportion of the market, for example, in the inner city area, of Potts Point, Elizabeth Bay, where there’s a lot of studios, is discarded, because, they can’t borrow on an apartment like that.
Marcus Roberts:	Yeah. There is the odd lender, here and there. There is the odd bank that will do it. We even go down just to 40 square meters, or 35 square meters, even. However, it comes with some caveats, being that you need much more of a deposit. So, instead of being able to do a five percent down, or a 10 percent down, suddenly you need 40 percent, or 35 percent deposit.
	It is doable, but to your point, what does occur more is that people, after they’ve seen a few properties, they go, “Wait a second. We can’t actually get the financing for it.” As a result, the market sort of gets locked out of those places. So, it becomes very attractive to someone that’s cashed up. Maybe retirees that don’t need debt, and they just like the idea of getting rent in without having to pay mortgage. But, it certainly diminishes the amount of lenders that you can work with. And, diminishes therefore, the amount of market that’s available for purchasing, if you’re looking at capital growth, in the long-term.
Michelle May:	Absolutely. Yes.
	Make sure, that as an investor, you know exactly what your bank is willing to lend on, before you go in there.
Marcus Roberts:	Absolutely.
	That’s all for us for this week. As always, please let us know if you’ve got any questions at [email protected]. That’s a-s-k @sydneyproperty.com.au. We’d love to get your queries. If you have a question, then fifteen to twenty other people will have, as well. This is really about you. What are the things that you want to know about in the Sydney market, or property in general, that we can provide our opinions on?
Michelle May:	That’s right. Thanks for joining us, and see you next week.
Marcus Roberts:	Thank you, and we’ll see you soon. Aye.