When investing sounds too good to be true

This is a Momentum Media production. Nerd alert! Property nerds. The home for data-driven property investors, where we uncover Australia's hot and cold markets, latest headlines and trends. Welcome everybody to another episode of the Property Nerds podcast.

I'm your host, Arjun Paliwal, CEO of InvestorKit Buyers Agency. And has it been feeling good to be on the mic again? It's really, really good to be back in action. And I just wanted to say again, thank you to everyone who's been dropping me messages after I've been away with some intense open heart surgery, what now coming to 12 weeks ago. So I'm officially at that intense recovery part behind me, and now it's just a bit of lifting strength and improvement, that sort of stuff getting better.

But yeah, look, I just wanted to say I'm blown away with the messages of support, whether it be WhatsApp, email, phone calls, texts. Thank you all so much. But today's episode, I've got a few cool things to run through. But before we do, there is an announcement coming up. So not on the next episode we record, but the episode after.

We've got a new face joining me as the co-host of the Property Nerds podcast. So I cannot wait to share more on that. Now, for those who don't know, the previous co-host was my lovely wife, Lee. She has joined full-time motherhood. And as a result, the podcast isn't up there with the top priorities right now for her, especially with little Ruby keeping her very, very busy.

And so she's absolutely supporting me, supporting us a lot with her move into that, and she's loving every single bit. So I'm honestly so happy for her and how much she's thriving and enjoying that space and just supporting us as a family with that. And I consider myself super lucky to get that support as well. So that's a big change on the Paliwal household front. But also it means that we've got a new name coming in to help me run the show.

And I'm sure everyone's probably sick of my voice in isolation, so it'd be good to have some banter with someone else. And with regards to that new person, they are a finance guru. So we started this podcast in recent times with myself and Lee with the theme of property and finance both coming together. It's very rare you see things transact one without the other. Finance plays an important part in the role of property investing, growing a portfolio, leverage is the name of the game.

And I think there's a saying out there, right? Property is a game of finance with a whole bunch of houses thrown around. I don't know if I nailed it right, but it essentially means finance comes first, which in many cases before you buy a place, that is what happens. And so, yeah, it's going to be really, really good to go deep into the world of finance and property coming together. And that is happening in a couple of weeks from now.

So I think end of September, mid-September we're recording together and that's the kickoff. So end of September, you should see some pretty cool episodes start to fly out with my new guest in play. Now that one is for later. Now in terms of today, I've got a couple of other cool things to share and that is regarding our latest white paper. So the last white paper we released was the Australian Housing Fundamentals, totally free.

And if you're new to InvestorKit and this particular podcast, The Property Nerds, we go through white papers, research papers in more detail. And that research paper is now one of our highest downloaded ones ever. And so it's the Australian Housing Fundamentals. It's a rerun. So we do that every single year.

And this one's the Housing Fundamentals for FY24-25. So if you'd like to go grab a free copy of that, it's investigat. com. au and there is loads to uncover in that. So firstly, you'll see fundamentals broken down across demand, supply and confidence.

And with those fundamentals, you'll see it broken up into, I believe it's like 25 indicators, each having a ranking from very strong, okay and weak. And I think that's a point to zone in on because very few housing commentators that are running businesses in property like I am will actually comment on the weak. Because as you know, there's a bias element that property businesses want property to always go well. Therefore, they comment on only what's good. And then you've got the opposite.

We've got the economists or others that come in and they go, hey, stories sell for us either way. So we'd rather be in extremes. And they come in and talk about 30, 40, 50% declines and deep danger. So you've got issues on both end. Now, hand on heart, I want to say to you, this is a report that isn't the bullish commentator of property markets and isn't the actual person who's bearish either on the other side saying everything's going to fall.

You will see every single major fundamental broken down across those three categories of demand, supply, confidence. You see it all with rankings from strong to weak. And you'll actually see the data point behind it, the source of the data behind it. You'll see overall summaries and breakdown as to how we got to them, what's happening in the landscape. And then my favorite part is the best part towards the end, which is the actual market pressure review.

So the market pressure with regards to those rankings is here to tell you what's going to happen across those cities, the eight capitals and the 25 regional centers, the largest ones, across the next 12 months. Now, what's pretty cool here is since this is a rerun of last year's, we actually have the pressure rankings and the growth forecast we gave for last year across all those same cities. And then we also recap how they actually performed. So you'll get to see accuracy levels, how well were they placed, what went right, what didn't in terms of forecasts. And I hope when you see that, you'll get immense confidence around our forecasting, but also what we see for next year.

So again, that's investigat. com. au and that's the property research tab. If you click on that part of the website, you'll get that report totally free. So that's a shout out on the last research paper by the research team here at InvestorKit.

And today I'm going to go through something that's been really bugging me actually. So I see a lot of commentary in property markets and property investing, data breakdown. And some of the biggest things that I see an issue with is oversimplification of property investing. And this can actually be an issue because when you oversimplify property investing, you make the story like too good to be true almost. You actually make it just sound amazing.

And I think it's too good to be true. And so to give you an example, let's talk about the stories around how many properties you need, retiring in 10 years, retiring in 20 years, breaking it down in more detail. And one of the most common ones I'm seeing out there often is, hey, four properties, 100K passive income, you're done and dusted. So just this oversimplification of data. And that's what I want to make this episode about, getting your math right.

So if you take four properties, and we're going to use these numbers because it's what I'm seeing out there, 500K prices, and they rent out for $500 per week. Seems like some pretty good numbers firstly, 5. 2% rental yields. Now the notion of where these four properties came from and how people think that four properties equal 100K in passive income and everything's great is that if you do the math of 500 per week in rent times 52 weeks equals 26,000. And then if you times that by four equals over 100K in income, right?

That is where the issue is straight away, oversimplification of property data. And I think the dangers of this is that when you simplify that much, the messaging is really easy. And then the following to that message becomes easier because anything that's made into child's play, it allows it to be a concept that they can then be followed. And I think as a result, what people don't recognize is yes, simplification is great when you understand it deeply, but don't simplify it if the numbers are just out of whack. And this is the importance of getting your math right.

And so let me break this down for you in this particular example with the four properties at 500 rent per week, 500K purchase prices, and see how that actually gets you to 100K passive income. And firstly, does it or does it not? Now, when I saw this, it was also stating it happened in 10 years. I just want to tell you that that does not happen by just buying four. So I'm going to give this calculation 20 years to even make it more friendly.

Now, firstly, what I did is the first breakdown of where this is an issue is I took out things like rates, water, insurance, two weeks of vacancy, two weeks of maintenance and letting fee. And all these bills, by the way, I just used a sort of normalized amount. There can be some cities that are higher for insurance, some properties that are higher for maintenance, and some markets going through cycles that are higher for vacancy. But I said that these things would hit the dollar signs every single year. 8,250 was the metric I took.

Now, if you take away that from the initial rent of 26,000, that's 17,750. So immediately at 71K for now the four properties is already less than 100K. And that's now before tax as well. So even if someone handed you those four 500K properties and they handed it to you today and they were all debt free, that 100K number is already incorrect. So firstly, what we should learn here is that It ain't that simple.

There's a lot of things you have to consider, whether you buy more, whether you save harder, and now it's a 30-year loan that you're trying to get rid of in 20. Or whether you use other assets to clear that debt. That's the first part. It needs to be debt-free. So it's not just your four properties anymore.

Maybe not even five or six. That's the next part. Number two is here's the biggest issue with oversimplification. Since when do you buy four properties in one go all at once? I'm not saying it can't happen.

Maybe you have your family home. Maybe you use the equity there. But if you're starting fresh, you won't buy four properties at 500K in day one. All this math was done as if you had the four today, and then you gave it 20 years. So one of two things has to happen now.

Either the 20-year journey has to actually be 25 to 30 years, because you'll need that five to 10 years of time to save up, grow your income, have equity growth, unlock equity, and buy those four properties. And then you hold for the 20 years and figure out how you can pay them off with aggressive savings, rent increases, or whatever you need to have. Super, downsizing your home. You can see there's a lot of variables. But the main thing is you need 25 to 30 years now because you need the five to 10 years to actually acquire the properties.

Or number two is that you don't calculate them on a 20-year having them from day one. You calculate them correctly. For example, you bought one property in day one of your 20-year plan. So now you've got 20 years of rental and compounding growth for that. Then number two is you bought a property three years later.

And so now you've got 17 years for that property compounding. Then the third, you bought in five years in total. So that property's got 15 years to compound out of the 20. And then the fourth one, you purchased with 13 years compounding, meaning you bought it from year seven from the initial days of calculating. So this is an acquisition window of seven years.

Because when people do the calcs in 20, you don't start off with the five properties or four properties with 500K renting for $500 a week. So it's four properties over seven years. So one has the full 20. The next one has 17. The next one has 15.

The next one has 13 years of rental compound growth. So we mentioned earlier that 170K is the inflation adjusted figure that you need using RBA's calculator. 188K is what was achieved if you assumed you had four day one and they all had the 20 years, which means you would have been buying over the 25 to 30 year period. That was 188K, so it crossed the 170. Now what's the figure if you start today and you have to buy over seven years, but you're holding the whole portfolio for 20, that figure is 158K.

Not enough. You're under. 12K under. Now for that 12K under, you divide that 158 by four, it's 40K or 39. 5K per property.

So you actually need a fifth property and that needs to be debt free too, but you probably only got 10 years compounding for that one. So all of a sudden, it's not that simple now, is it? Can it happen? Of course it can happen. We've seen families that we've helped to get eight, nine properties renting at these amounts in a few short years.

That isn't the position for the majority. So why mislead the majority or why have barbecue conversations, well-meaning barbecue conversations that you're just going to buy 500K times four, 500 a rent a week, get to 100K passive income and you'll be fine. Sorry, you won't. You'll either need more time, you'll either need more aggression to then sell some, you'll either need properties with higher rents and a combination of the other two factors, and you'll need to make sure you figure out your discipline over this whole 20-year period so you can pay off that debt and get it all free. Because having four properties is one thing, having four properties debt-free is another thing.

And yes, even with 20 years. Remember, the banks themselves loan you a 30-year terms. And since when have you seen an investor rushing to pay their loans down? They don't. In the name of tax-free.

No, I don't want to pay tax. I need tax. You save my tax. So, you know, you don't want to pay tax. I want my deductible debt to be high.

I want to save on tax. Okay, well, great. Sounds cool. Great to do it earlier on. Then as soon as you need to draw an income from it, then what?

You need to think of that exit plan. So there are so many variables. I encourage you to rewind this so you can make sure you get the math right. Firstly, if I break down this into just a couple of actionable bullet points, number one, you need time. You know, 20 years is the sweet spot.

Number two, you need to look at rent after expenses, not rent at a gross level, even if the property is debt-free. There can be almost 30% plus of expenses made up in a property that aren't to do with the debt. Then you've got to be conservative with your calcs. That's the third point. You can't just use the booms of today forever.

That is not the normal. The fourth point is you've got to consider inflation adjusted for your targets. Can't just say 100K passive income because it's easy to say. 100K in 20 years is probably 170. Then you need to figure out, this is usually debt-free based.

So how do I get this debt-free? And then you figure out the final point that it's not likely you having purchased them all immediately at once. You purchased them over a time period, three, five, seven years. So your goal should be reducing that time period as much as possible, increasing income, savings plans, and financial management, building a team around you so you don't think or overthink so much. Paralysis analysis is huge on your own.

Execute intensely for the first three, five, seven years and try not make your positioning of buying longer than seven years if you can. Now this is residential property. Obviously, if you go down the path of commercial, the number becomes slightly easier with incomes that are higher, but the concept is the same for all the other metrics in terms of time consideration, inflation, rental growth, bills, vacancy, all of that's still the same. So as part of what we do here at InvestorKit, we construct portfolio plans. Now we can't give financial advice so they're not holistic about your stocks or investment products or anything like that.

They're just property plans. But I say just very loosely because it's powerful. It's not just a property plan. It's powerful. You can use platforms that we provide as part of our service.

And in these platforms, you can input your goals, we'll calculate inflation adjusted, where you are today, where you're trying to get to, and the tools can help you reverse engineer how many properties does it take? How do you go through an acquire phase, a holding phase, then consolidate phase and actually clear the debts? Our strategists do this day in, day out. And so to get the right math, just jump on investigate. com.

au, request a free consultation. And then if our services are fit, that's the first thing we do when someone's onboarded officially as a client, building portfolio plans for property investors. Wanted to make this note here just to make sure you get your math right. Anytime you're scrolling on the internet, chatting to a mate, at the barbecue, out for dinner, out for a bevy, just a quick beer, anything, get your math right. Do not let someone oversimplify property investments.

Oh yeah, just buy a couple and you'll be fine. Buy them, sell that, debt free, ha ha, off to the bank, yeah, 100K, me and the missus, 10 years, we're done. We've got passive income. No, no, it's not that simple. Break down the math.

Now I want one more thing to share with you on another thing I've seen. I told you this was bugging me, just the whole simplification of stuff. It's been bugging me. Remember, I live in this research world. I've got my team who are data scientists, senior research analysts, research analysts.

I don't share that to brag. I share that because we truly live and breathe this. And when we live and breathe this, the simplification stuff is not on. Because we know that when we actually dig deep, it's not the case. You've got to go deeper.

So here's an example. The final one I'll share with you is land size. Yes, there's measurements of land to asset ratio and thing, but land size, when you isolate metrics, really doesn't matter much. Because the thing with property investing is if you can find the isolated example, that is enough to prove something wrong. You don't have to group things in data because when you're grouping things, there is a big mistake that people make when analyzing property data and they group things to create an analysis.

For example, first quartile, second quartile, next one, or the 20th group versus the first group. And you're investing it across all these groups based on whether it be available land or land size, incorrect ways to look at it. Because as soon as you can find one exception to the rule, the rule is flawed. Because in property investing, humans don't buy quartiles.