This transcript was generated automatically and may contain small errors.
If you're paying tax, it's a good thing. Tax means you made money. Exactly. It hurts me. Believe me, it hurts.
Their net position, they're not accounting for tax, so they feel like they're losing wealth, but it's wealth they never had. For a lot of investors that are a bit more experienced, they usually do face some sort of roadblock. Customers for us don't pay us to do the easy thing, they pay us to do the right thing. It's actually easy for brokers to do the other thing. We're not taking the easy route.
The experienced investors have been doing this for so long, they just think that it's the natural next step. They don't even question why they're doing it. I know for a fact that this client spoke to many brokers, many buyers agencies, and the reason that they went with our team is because we're the only ones that... Welcome to the Property Nerds podcast, and in this particular episode, no guests in today, you're stuck with the three nerds, myself, Arjun from InvestorKit, Adrian, our lead strategist at InvestorKit, and then the man of the hour, Jack Fouracre from Fouracre Financial. We're jumping in on another finance specialized episode because property is a game of finance.
In today's episode, we're jumping into the world of experienced investors. Many people think finance strategies to do with the new investors just getting started, so they get started right, and they forget that there's experienced investors who go along the journey thinking they know everything, thinking they've got everything sorted, or thinking the opinion they first got was the right thing to do. Today, we're going to bust those thoughts because that is not the case. When you hear the strategies, when you hear the where clients were, and then where they are today, you're going to be blown in terms of results and the impact being made. Stay tuned right to the end of this episode though, because we actually go through three key scenarios, and you won't want to miss the third one, which goes deep into something that looks so simple, but suddenly it's turned into an extra two properties where their current bank said no more.
This is going to be one to go into. Let's jump into it. Nerd alert! Property nerds, the home for data-driven property investors, where we uncover Australia's hot and cold markets, latest headlines, and trends. Jack, here on the Property Nerds show, mate.
Let's start off with the first scenario. Who have you got in terms of the client scenario here? Yeah, so this is a client that we had a conversation a couple of weeks ago. They came to us with two residential properties worth about $650,000, $700,000 apiece, and a commercial property worth about $1. 15, $1.
2 around there. So they've gone to commercial pretty early. Yeah, yeah, they did, and they actually purchased it in their personal name as well. So they came to us and they wanted to know their options. Now, what they could have done, or they spoke to another broker and they said basically they could get another $700,000 or $800,000, and they were going to do it in their personal name again.
So basically, the way that we were able to... They were pretty tapped out, and to get a $700,000 or $800,000 commercial asset in their personal name, it would have had to be with a third-tier lender. They were really towards their max. Very rare as well for the right assets to sit at that price point too, right? We like to typically operate at that over $2 million for most deals, sometimes a couple just under two hit the spot, but it's rare.
Yeah, so basically, if they were to go down that path, they would have just been digging themselves into a deeper hole of what they've already put themselves in. So typically, when you've got a property that you own in your personal name and you want to put it into a trust, a lot of the time, you might as well just sell it because you're going to pay stamp duty and capital gains on the transfer of the ownership. There is one thing you can do specifically with utilizing an SMSF, like an SMSF purchasing a commercial property off yourself. Wouldn't you still have to pay the fees there? Yeah, you still have to pay stamp duty and capital gains tax, but if you like the asset, like if it's a DART asset, obviously, you'd consider getting rid of it, but they actually like this asset.
So they had the option of selling it, but they like it. So you can put it into a trust and pay the stamp duty and capital gains tax, or you can put it into your super because then... You free up a lot more. Well, not only do you free up borrowing power because it goes from your personal name into a trust, but you're also selling it to your super fund. So the super fund has a deposit, they get the loan, they pay a market price, and as a result of that sale, they're going to generate $400,000, $500,000 plus free up $700,000 or $800,000 worth of debt.
Now, the key thing of why that's important, right now, they're looking at maybe a $700,000 or $800,000 commercial asset, right? Whereas if they free up the debt and generate $500,000, well, their borrowing power is back up and now they could get up to closer to that two mil mark for a purchase. That's massive. But the key thing is to do it first because once you do that, then they've still got the two residential properties there that have equity in it, but now they have access to the borrowing power, whereas before they didn't. So you've got the two residential properties and was one of those two the ones they sold or was it another third one that they sold?
No, they didn't sell anything. They just came to us with two residential properties and a commercial property. Got it. And it was one of those residential properties that were moving into the super or the commercial itself? No, so you actually can't move residential property into your super because it's harder to value, it's harder to get a fair market price, but with commercial, it's actually really easy to value commercial property.
Got it. So in this case, they're moving their commercial to their super. They've obviously got their own advice and reviewed that too. But now what's happened is that their commercial sits in a lower tax environment. Yeah.
Their commercial borrowing capacity is freed up because it's not in their personal name, it's in their own fund, which is a separate borrowing capacity. And then number three is they've unlocked cash, which by the way, in commercial, it's not a very thing to easy to unlock cash because people don't take equity loans commonly in commercial, right? Yeah. They usually have to sell it or hold it. And in this case, they unlock the whole cash.
Yeah. And then number four is that they now have not only the cash to make a subsequent and larger investment, but you're saying that they can reinvest into another commercial. So they've suddenly gone to two commercials and that second commercial is much larger. And number five, the second commercial can be in a trust, which means it's again, positive cash flow excluded from liabilities and their borrowing capacity is again, good to go. Yeah.
And if you look at where they started... Boom, power of strategy. Yeah. I mean, like power of strategy. It's huge.
It's like, if you look at where they started versus where they're going to be, I mean, they were staring down the barrel of, you know, let's use round numbers. They had about 2. 6 worth of property and they were looking to make that three mil, right? As a result of doing this, they're still going to have 2. 6 worth of property.
But now they're going to add a $2 million asset to that plus potentially another residential asset with the change in a separate trust. So just by restructuring that commercial asset into the super and then redeploying, like having the access to funds to now access equity in the residential property, generate a large deposit for a big commercial asset in a trust, they're still going to have change left over and they can set up a separate trust to purchase another residential property in there. And in the right structure, it's actually built for scale. Like because they've redirected money into trust, technically, individually, they've still only got those two residential properties. So their ability to use that to build on top of, man, it's, you know, big.
And when you do these strategies, it takes time because paperwork, advice. These days, I could do it in the first conversation. You can do the strategy in the first conversation, but other brokers who aren't you are looking at it and going, oh, you need to speak to your accountant now. And then after that, you need to go to a lawyer to run those transfer papers. Then you need to look at advice on this.
Then you need to look at advice on that. And then you need to come back to me and then you need to go back to your accountant to set up a trust for another one. Then you need to come back to me for a pre-approval. Then you need to search for a commercial property. I could get paid now after the next purchase for a resi quickly just by getting that one property.
Or I could take many, many months for me to have any benefit from this. And who knows? Customer might just put in too hard basket and go away and not even do it. And that happens, mate. That's ethics for finance right there.
That's so powerful. And you always run that risk of saying like, yeah, I could do that for you right now. But if you just take a step back and be a bit more strategic about it, yeah, the process might take a little bit longer. But by the end of So what's holding you back? Because it's actually staring you right in the face.
Like a net position after tax, commercial assets, minimal debt, the cash flow is your goal cash flow. And then, you know, because of the high cash flow nature of these assets and the fact that you have such a good equity position now, you can go back and invest in more residential properties, you know, just for further growth and for fun. But right now, you're kind of looking at, you know, suboptimal lender options and roadblocks all the way. Whereas if you wanted to retire, genuinely, you could do it. You could put this plan in action and you can do it.
And I know for a fact that this client spoke to many brokers, many buyers agencies. And the reason that they went with our team is because we're the only ones that didn't look at it from a transactional point of view. We took a step back, said, what do you actually want? And this is the strategy that's going to get you there. It wasn't the easiest road.
And we had to challenge a lot of his ideas. So, yeah, the fact that he came back and saw the value and he's actually executing on it is, you know, he's very grateful and it was a good one. Well, it turned into an over $5 million commercial purchase, one that he didn't think that he would be getting to that type of purchase price ever before. But he was able to get to that purchase with over $5 million in commercial. That too, a multi, multi-year lease, major, you know, company that's like a national plumbing company.
And so from that perspective, when you get that type of industrial showroom over $5 million in assets and you asset price, you get that quality of lease, everything like that. It changes the game, not only on income and retirement goals, but also stability. Because with commercial property, he's actually seen the opposite. Him and his wife have looked at the portfolio and realized that let's get into commercial in the past. So it was also hard for them to come to it because they saw the bad side of commercial.
They went into a commercial property with someone else and a buyer's agent bought them something and it was vacant for almost two years. It was a lower price point, you know, and they compromised on the purchase price because they wanted to retain their residential assets. That's right. That's the key. They were literally almost going to either make the same mistake twice or go to residential and not feel like it's the commercial mistake, but it's a strategic mistake.
And so this is an example of wealth building at the front end, younger age in life is really powerful to residential, is really powerful to debt acquisition, paper wealth. But at some stage, if your goal is to live on it, it needs to turn into an income. And it doesn't turn into income from paper. It turns into income from real cash flow. Yeah.
I think for a lot of those clients that get to that end goal and struggle to have that mindset shift into another strategy, it's because they weren't primed for it initially. It was never in their thinking process. No, it was never an option. It was like for them to think about paying hundreds of thousands of dollars of tax on the way out, for them to just come to that and accept it, it's a lot if they weren't primed for it in the beginning. Tax means you made money.
Exactly. I mean, tax means you made money. If you're paying tax, it's a good thing. It hurts. You made money.
Believe me, it hurts. But as long as it's gone to a good cause. 100%. I think it's also a good reminder for a lot of people that, like you said, it's that mindset shift of making sure people understand, hey, this is what you always wanted to do or where we were always going from the very start. And even though there is, it's probably also the whole mantra of never sell, that also comes to feed into the mentality of a lot of people.
I've only ever seen podcasters over 60 say that. But it's true, right? Everyone says never sell, never sell, and that gets into your head. Whereas the reality is once you've built up that equity, you've built up that portfolio, you do need to sell so that you can, in some sense, graduate to commercial assets and get to that goal. That's a really important point as well, Adrian, on the never sell part.
I've seen some sad stories on that. I've seen in my banking days, I was a branch manager in Marrickville. Marrickville has a big Italian Greek community as well, people who've been multi, multiple generations, Aussies, their kids here, their kids' kids here, like grandkids, even some with great grandkids. It's like proper pensioners and inner west own that home for many, many years, debt free. Now, firstly, that whole never sell part has meant that some of these couples have properties worth two, three, four plus million in the inner west of Sydney, zero mortgage.
But because it was just that one asset they could get to debt free and they kept paying their mortgage down, thinking they've been great Aussies, pay off your home, just sit tight, they have nothing to show for themselves. They don't have solid supers. They don't have anything that's like investments wise. They got into a high risk environment. And so they don't understand many times that, yeah, there's an emotional connection to the home, but like that's a three, four million dollar downsize waiting to happen.
And look, I'm never one to say I should force you to downsize with policy. That's a shame. Like never tell someone what to do with their money when they've built it, worked hard, paid it off. But I mean, there is strategy. You can live somewhere, still have a place, unlock this capital and have a life that you can look after yourselves.
I see many of these elders like coming in door knocking and the emotional part for me was like, we have pension Thursdays. I think it was pension Thursdays. If any of my CBA folk remember, remind me in the comments. But pension Thursdays was I think like once a fortnight and Marrickville Road was one of those branches where they're like, I mean, some people joke about this. I'm not joking, but some people say it was like a apocalypse of zombies outside the glass doors.
There's like a hundred plus people just knocking on the glass door, the canes and everything just like going, hey, open up, open up. It's like one minute past and the doors are meant to open. We'd have good laugh with them. And I'm like, I had a few lovely ladies I can remember like they're walking in with their walkers and they try and beat the other lady with the walker. And I'd be like, auntie, auntie, come, come, let's race, let's race.
And she's like, you know, walking over. But it made me think of just many of those scenarios and stories where people are sitting on that because of that never sell. They don't have to. It's their choice. They should decide what they want to do.
But if they knew the strategy that would just unlock tax free wealth in that case, tax free, not the tax scenario, but tax free, they wouldn't be having pensions and things like that and relying on this little passbook stamp and every fortnight or Thursday for a couple hundred bucks and get some of that tax back where they work so hard for. But I know that's another note, but I just wanted to say like for anyone listening to this is maybe this isn't a finance scenario for them. They don't need to really get any finance for that. But it's like just important to teach your family strategy because even them like the generation from before, my dad was under that opinion too. And similar things impact him on that part.
So I just think like selling can be a big part of success in property, but it's about when to do it, when to transition, when to make the right time. Scenario number three, this is a good friend of mine. And this particular scenario is a client where they're high income professionals, financial professionals, banking executives. They got it all figured out. Surely, right?
Bankers know everything, but they're humble. They wanted professional support. They wanted guidance. Banker walks into banker typically because the one company staff benefits, you think like, hey, that's where I go. And what do they say?
You're stuck. Borrowing capacity is done. And they built a really healthy portfolio. Queensland, Queensland, New South Wales, South Australia, Victoria. They got a lot of assets, like three, four, five properties.
I think like for fifth property now. So a lot of assets there. They're stuck. Good earning professionals, rent festers, and they want to add another couple properties. And so could talk to us about this scenario.
Yeah. So this is a classic example of when you kind of need to level up and move away from your banker just at the one bank. I think why they got to that position, like, because usually when you see high income earners, typically they want to continue to grow. And, you know, the trust strategy really does allow them to continue pushing forward. So because they lacked that strategy in their first few purchases, they kind of buried themselves into that hole of, you know, you know, I'm stuck.
So naturally, that's typically when they seek out a broker. And, you know, obviously, because we have access to a lot more lenders than just the one, we're able to get them much more lending and pivot into that trust structure and give them a bit more of a strategy on how to move forward beyond that. So not only did we do that, we also looked at SMSF as an option, which quite often is not available when you deal directly with the bank.
