Paul Glossop: Welcome to Pure Property Investment one on one. I’m joined today by Aaron Christie-David. Aaron is the director of Atelier Wealth. What we want to talk about today Aaron is, probably a little bit more subject to the rise of both the Sydney and Melbourne property markets over the last five years. Sustained capital growth of that 10-20 percent on certain markets year-on-year has left a lot of owner-occupiers and home owners in a position where they’ve got a quite an amount of, quite a large amount of capital growth and equity ultimately in their properties. And compared to the LVR on their loans on those properties, they’ll be sitting with a pretty large chunk of equity and left with the option now of saying well, “Do I continue on that road that we’re on, pay off my home loan and then think about what’s next?” Or “Do we look at just consistently maybe leveraging a small portion of that equity that’s gained to therefore reinvest that into a different market and create additional wealth as opposed to the trajectory that I am currently on?” But I am sure you probably come across that day-in and day-out with those questions coming from your clients. I’d be happy for you to share maybe some of the ins-and-outs that people that need to understand.
Aaron Christie-David: Yeah, sure. We see a lot of clients have got their owner-occupied properties. So they own, like you’ve said, they’ve got a home loan against it and they’ve got a good amount of equity and what they’re saying is, “Should we be paying down our home loans as fast as possible before we look to buy an investment property?” I guess you do need to seek financial planning advice or speak to your accountant about your options. But for a broking point of view, what can we do? So what we do is that we say, “Right, continue to pay down your home loan as fast as possible.”
I guess it comes out of that good debt versus bad debt train of thought. And we say debt is debt, but if you do want to plan for the future, where what you can do is tap into the equity, so we can draw out a portion which becomes a deposit for your first investment property. And then what we can do is finance the investment property itself. So, that all becomes deductible debt for you as well.
What we want to do with every client is work with their cash flow. Because ultimately, everyone’s big question is, we don’t have to contribute towards this investment property, we want to pay off our home loan as fast as possible, which is right. So what I say is, why don’t you get the best of both worlds. So, ideally look into a neutrally geared property, which takes care of yourself. Best case scenario if it’s positively gaining, it is actually helping to pay off your home at the same time. And again that’s best case scenario. So what we want to do is work with someone like yourself to say, here’s a realistic rental expectation, here’s all the outgoing costs that you need to hold this property. Account for rate rises because eventually they will go up as well. That’s giving you a fairly defensive and conservative view and then even if we take a fairly market standard increase on capital growth and what we are left with these assets that are sitting on the background that should be gaining good returns year-on-year, and in the meantime you are paying your home loan as fast as possible.
Paul Glossop: Yeah, it’s really quite a Pandora’s box when it comes down to people’s position, where they are sitting in that point of time, how long they’ve got left to pay off their home loans and ultimately, how long do they have left in their working careers as well you know. We might say that you’ve got 20 years left to work and earn good incomes in that time and that might mean well there that you don’t need to necessarily focus on just cash flow. You might then say look; we can sustain a small hit because we’re going to earn decent income for the next 20 years. And that might mean that you can go chase more a capital growth-targeted asset rather than a cash flow asset.
But alternatively, if your cash flow is relatively tight, and also your timeframe might not be as long as far as your time in the working career environment, then you might say, we want to get an asset that is going to be self sustaining, still with capital growth focused but being able to be cash flow neutral if not, cash flow positive. The key with that is obviously, you might need to make sure it fits your specific position and your objectives.
But then secondly making sure you release that money in a way that’s going to be tax-effective and also is going to be the right structures which are not going to lock you on something that’s nasty and you haven’t been explained. And all of a sudden now you’re very much a fixed component of one big bank whose got their paws locked tight into you. And unfortunately, there’s a lot of people that go down that path who probably don’t answer the right questions or get the right advice before releasing that equity to invest.
Moral of the story, get the right advice early but really be aware that you’re probably sitting at the opportunity a lot of home owners in the Sydney and Melbourne markets specifically of the last five years, they’re probably in position now, if they haven’t tapped in to equity to potentially look out releasing some equity to reinvest into the market and get compounded returns on what they are going to be leveraging out off and better their retirement ultimately as long as that investment is going to be the right strategic property.
Guys again, if you do want to contact Aaron for any reason regarding structures finances and etcetera. His team is more happy to set up some time to have a chat. His details are at the bottom of the screen.
Likewise, for our own, our details are at the bottom of the screen and we are more than happy if you would contact our team and we could setup a meeting to discuss your objectives and strategies. Speak soon! Cheers.