property house for rent

if you've purchased one property, you maybe wondering how should you buy your second investment property. what sort of propertiesshould you be looking at in what sort of area and what's going to help you get to propertynumber 3, number 4, number 5 and onwards towards financial freedom of whatever it is you'reseeking for yourself. today, i have with me ben everingham frompumped on property, my buyer's agent of choice. and we're going to talk about this issue ofthings that you should look for in your second property. ryan: hey, ben. how's it going? ben: hey ryan. thanks for having me here.

ryan: no worries. first, let's say how manyproperties do you own now? ben: quite a few. let's just sort of say itthat way. we're definitely starting to get towards 10 now, which is great. ryan: okay. so, you definitely past your secondproperty and so you've been through this experience before. what we wanted to do is kind of chatback and forth about what are some of the things people should consider when they'relooking at buying their second property to set them up for a win in the future. becausei'm guessing most people won't want to stop at 2 because 2 is unlikely to get you towardsfinancial freedom, so you're probably going to need 3, 4, 5 or something like that. andso, right off the bat, what do you think are

some things people should consider? they alreadyown a property and they're now looking to purchase their second one. ben: i think something that you actually mentionedin your intro, which was looking at property 2 in terms of how it's going to help you getproperty 3, 4, 5. as we're both aware, less than 15% of the population in australia evermoves past property 2. and i think so many people get stuck there. so, the first thingthat i would be doing before rushing out and buying property 2 would be getting a strategyof how i'm going to get to property 3, 4 or 5. as you said, 2 properties is going to beamazing and you're going to be in a great position by the time you retire. but if you'vegot the intention like we did to get out of

work in our 20's, then it's going to be extremely,extremely difficult to do that. the first thing is definitely get that strategy in placeand understand how this property is going to affect the next and the next property afterthat. ryan: yeah, and we'll talk more about thatin this interview, but it's easy to say to someone, "oh yeah, get a strategy in place."but i think most people have no idea how to even start and how to even think about a strategyor think about how property 2 is going to affect property 3. so let's go through thatsort of stuff. how should i be thinking if i'm going to purchase property 2? what aresome things that could affect the purchase of property 3 down the track?

ben: the major hurdles that most people comeacross at the moment, due to the recent changes in apra, is servicing property 3. we talkedabout this briefly before today's call, but in a nutshell, they're trying to stop investorsentering the marketplace or they're putting the brakes on investors entering the marketplacebecause prices in melbourne and sydney have obviously boomed in the last couple of years.so some of the things that they're doing is making people either earn more income to servicemore debt or they're devaluing the rental yield on the property that instead of lookingat your rate, from an interest perspective, at 4 or .5%, which is what they're chargingyou, they're looking at it like it's a 7% interest rate. so, those sorts of things arewhat's stopping people moving forward.

in terms of the right type of property, it'sreally a property that's going to enable you to jump into property 3. and what does thatlook like? over a 2-year period, it's probably a neutrally geared property. so, somethingon current interest rates on an interest-only loan. say, you spend $350,000, you want itto rent for $350 per week. you also want that property to be in a growth market. so somewherelike brisbane or new castle or the central coast in new south wales. and you also wantthe ability to add a secondary dwelling to that property, so something like a grannyflat in the backyard that can take your rental yield from 5% through to 7.5%-8%. and that'sgoing to, again, look better on paper from the bank's perspective for you.

ryan: i think something that people reallyneed to be aware of is with these new rules that came in with apra, a lot of the banks- i'm not sure if it's all of them, i'm not a mortgage broker - but are saying that, "okay,interest rates at the moment, 4.5-5% or whatever they are, but we're actually going to assessyour ability to service a loan based on a higher interest rate of 7%. and they've alsoput caps on how much yield they're going to look at from a property. so, you could buya super positive cash flow property with a 15% yield that's just out of this world, butthe banks are only going to look at if that property was generating a maximum of 7% yield. i think what you're trying to get across orwhat i'm hearing is that if someone's going

to purchase a property and they want it tobe a leapfrog to get them to number 3, they need to be careful of these two factors interms of the rate and the yield of the property. so, you don't want to, i guess, over-extendyourself of property number 2 because they will be saying, in terms of serviceability,looking at a 7% interest rate. if you buy a property that's too expensive or at thevery limit, well then, you're just shooting yourself in the foot for property number 3,but then, also, if your yield is too low, that's going to affect serviceability andif it's too high, it's not going to count for anything. so it sounds like you're sayingto go for the middle ground, find something that's got a decent rental yield, but it'skind of neutral and then looking at pushing

it towards that 7% yield. ben: absolutely. that's a perfect way to wrapit up. i think putting my shoes back on when i was purchasing my second property, and thisis what i'd find from speaking to a lot of investors each month is that, for some reason,when we're buying property 2 or it might be investment property 1 after we've bought ourown home, a lot of people look in their local marketplace. but if your local marketplaceis sydney where the average house is $1 million or melbourne where the average house is $600,000but the rental yield in those areas is only 2.5-3%. you're potentially picking up a propertythat feels comfortable and safe, but is going to put you so far back from achieving yourlong-term goals.

it's far easier to buy a property at a reasonableprice that has the potential for future growth than to spend all of your money and put allof your eggs into one basket in a market that may already have done it's dash for the immediatefuture and then, that's also a type of property that's really going to stop you moving forwardlong term. ryan: while we're on this about people buyingmultiple properties in the same area. what do you think about - i've read articles aboutpeople diversifying their properties in different areas? let's say sydney has peaked, we don'tknow that it has, but let's say that it has and it's going to be stagnant for the next2, 3, 4 years or something like that. if you bought a property in brisbane and say thatgrew a bit, then i guess it helps you because

at least one property is growing. do you thinkpeople should take that into account when they're looking at property number 2 and diversifyingfrom the area they bought their first property in? or do you really, it's about researchingand looking at the growth factors of an area and if you're in a good spot, buy again inthat area? ben: 100% the second option. there's no ruleof thumb to go let's diversify here and there. because even in a market like sydney, forexample, you could be in sydney west and then the eastern side of sydney and while bothof them have gone up in the last few years, they work completely differently in normalcycles. so, i would suggest that, as you said, you go back and you do your fundamental research.if you could have bought 2 properties in sydney

3 years ago, it would have been far betterthan buying a property in brisbane and a property in sydney 3 years ago. so, if you think anarea has got some potential for growth based on that high quality that you're doing, thengo for it. put some more eggs in the one basket. i don't really like having too much valuein one suburb. so, i'd suggest don't buy 3 properties in the one suburb because it'scomfortable and it feels safe. maybe look at something on the north side of sydney andsomething on the south side or same in melbourne, same in brisbane, same in perth. ryan: i think when it comes down to doingyour research; don't just look for one suburb that has the right indicators for growth.you want to find multiple suburbs with those

indicators and then try and find propertiesin areas that have all the right growth indicators, but not necessarily all the exact same area. i guess we've talked about we don't want toprice ourselves out of the market in terms of serviceability when we're buying number3. we don't want to go with something with super low yield because, again, that's goingto screw us in terms of serviceability. what do you think, in terms of purchasing a cashflow property for number 2, in terms of generating some passive income already? or do you thinkmost people at this stage shouldn't really worry about getting passive income out oftheir portfolio, but should more just worry about growing their portfolio?

ben: you and i have had some pretty good conversationsabout this off-camera and i really believe that a foundation of a great property portfolioshould be built on capital growth with an option to manufacture growth on top of thatwith cash flow on top of that. it's really easy for me to say that after buying the sortsof properties that i have and learning those mistakes the hard way, but if i was startingout again, i wouldn't be sacrificing cash flow for capital growth or vice versa. i'dbe looking for a property where i can get both options because capital growth is what'sgoing to make you really wealthy. let's say a property you buy for $400,000,it increases in value by 10% in the first 2 years, that's a $40,000 increasing in value.there's no property in australia that's going

to put $40,000 per year in 2 years in yourpocket that's also going to give you the cash flow on top of that. so, what i would be suggestingis that people should be chasing that capital growth because that $40,000 is the next depositfor property 3. i'd also be chasing properties that aren't perfect that you can put a dollarinto the renovation and get $2 out. and then on top of that, as we discussed, find somethingwhere you can add that granny flat in the background. that's probably the sort of triplethreat almost of the property industry. ryan: i think this is a good thing to touchon because for most people, they're like, "am i going after capital growth or am i goingafter passive income?" and they only look at high growth, really negatively-geared propertieswith 2% yields that are just going to cost

them an arm and a leg every month to own.or they look at super rural, really high cash flow properties that may not growth in thenext 10 years. and they just compare these two and go, "what am i going to do?" whereas, really, it's not either-or. it canbe both-and. you can get capital growth and you can get cash flow, but it's going to takea lot more effort. it's going to take more research. the cash flow might not be as extremein some of these other areas, but you can still get good cash flow. you can generatea neutral or a positive cash flow from a property, but if you've done your research and you'veinvested in the right area, you're going to get some capital growth as well.

i think what you're saying, in terms of ifyou want to buy number 2 as a stepping stone to number 3, then capital growth is goingto be a major factor because you're going to need that equity to draw from in orderto go and invest in number 3. unless you're a super awesome saver and you can go aheadand save another deposit, which let's face it, it's hard enough for most of us to saveone deposit, rarely people will save two deposits. it's just very difficult to do that. you definitely,i think, and i'm like the positive cash flow guy, but i definitely say, in this situation,you do want to look for a strong growth area and something that is going to grow. however,i'm not a massive fan of highly negative-gearing properties because i've seen life situationsturn on their head for people. people get

divorced or lose jobs or go through all ofthese different situations. and if you're heavily negatively-geared, you can get allthe capital growth in the world, but if you can't afford the property and you've got tosell it because you can't afford to own it, then you're not going to get any of that capitalgrowth. i definitely think it's a balancing act in terms of what you're looking for. ben: 100% agree with you. it's interesting,the more that we learn, most investors end up in the same situation where it's capitalgrowth, manufactured growth and cash flow. everybody is at a different life stage. recently,ryan referred me to a mutual client of ours now and he came to us and his goal was replacing$100,000 of income within a 7-year period.

he was an aggressive businessman with a lotof available equity and so; we've just bought his 4th property, which was a set of 4 unitsin a regional area in new south wales. i personally, based on my stage of the cycle, wouldn't havebought that property for me. but his goal was to achieve $10,000-$15,000 per year passiveincome for these properties, so he won't mind me saying that we paid $485,000 for these4 pack of units which rents for $40,000 per year. so, for him, that's a 10% return andthat's exactly what he needed at that time. and then, there's other people that are lookingfor that inner-city-11-kilometers-from-brisbane-type option where you can renovate it up and thenput the granny flat out the back and still achieve your 7% rent return. plus, you'regetting the flip side of the 4-5% per year

capital growth, long term, out of the property,too. there's all different types for different folks as well. ryan: yeah. let's move on and talk about manufacturinggrowth. because i think this is something that's overlooked by way too many investors.so many investors assess the property market and they buy in an area or they choose a strategybased on i'm going to buy and hold this property. it'll go up in value over time. rent willgo up over time. and that's all well and good to think about, but i kind of wish more peoplewould take an active approach to their property portfolio, treat it more like a business andsay, "how can i add value to the world?" and the same thing that we do in business or thatwe do in our jobs is that we add more value

then it cost us and that's how we make a profit.i wish that people would start to look at properties and look at property number 2 andsay, "okay, where is a property where i can actually add value to the world and i canactually add value to this property more than it's going to cost me with some creative input?"which may be a renovation or it may be a granny flat or it may be re-zoning or it may be aface-lift. what do you think for property number 2 andpeople in terms of manufacturing growth? is there a particular strategy that's going towork for more people than other strategies? ben: definitely. my first rule of thumb isdefinitely don't bite off more than you can chew. people buy their first property andthen want to do a subdivision for property

2. that's all well and good if you've got$200,000 in equity or savings, but if you don't, a safer strategy, so that you don'tcome undone, before you even begin running is to look for the ugly duckling in the beststreet and something that you can cosmetically renovate. we've talked about this before,cosmetic renovation might be repainting, it might be re-dressing the windows, it mightbe changing the light fittings, it might be rendering the house. it's all that reallybasic stuff - polishing floor boards, replacing carpets. that simple stuff. to me, that'sthe first step. if you look at a 5-year strategy of just buyingthat second property, in the first 12 months, you probably just chuck a tenant straightin and leave it as is. after your 12 months,

you go and do that basic cosmetic renovation.and then, you re-value the property because the market's increased if you bought well.if you bought under market value, obviously, you've got some value there, plus the renovation.so you should be able to get a 10% gain in that first year from those couple of things.and then, maybe at the end of year 3, i like to buy 3-bedroom, 1-bathroom houses that ican convert into a 4-bedroom, 2-bathroom house. that's a bit more of an aggressive strategy,but it enables you, again, for every dollar you put in to get at least $2 of value backout of the property. you've done the cosmetic renovation in the first 12 months; you'vepulled out a deposit to move on to your next property. in 3 years, you go add those bedroomsor bathrooms, that's again another deposit

to move on to another property. and maybeat the end of year 5, when you care about cash flow more, you actually go and add thatgranny flat and that granny flat enables you to increase the yield. there's so many ways of doing it, but manufacturingthat laid strategy, that's the perfect option for a second homebuyer. ryan: yeah. i think people should considerthis as well when they're looking at buying a property is what can i do throughout theyears to constantly improve this? so, maybe, like you said, you purchase it and you maynot have the money upfront to do a cosmetic renovation so you leave it for 12 months.you get enough money to do a renovation. when

you do it, you go to your mortgage broker,potentially get it re-financed, pull some money out of it so you can go in and investagain. you might then want to leave it for a couple of years. and then, always be lookingat your properties and saying, "well, what more can i do? what more can i do to improvethis property and to get more out of this property?" like you said, in year 3, you can go aheadand do some conversions or things like that. i guess the message that i want to get acrossto people is that constantly be looking at the properties you do have and say, "well,what can i do to get more out of this property to make it more valuable so that i can goahead and move forward to property number

3 or 4 or whatever it may be." you were saying cosmetic renovations. youdon't always have to do a conversion. i was just looking to rent. we looked at literally2 places next door to each other, 2 townhouses. one was renovated, that was really nice, thatwas on the market for $410 and the one next door, exact same layout, basically exactlythe same house, was un-renovated and was renting for $365. ben: wow. ryan: i didn't go to the $410 place, but weended up moving there, but my wife saw it. but i went to the $365 place and i was like,"yeah, i wouldn't live here." just because

it wasn't renovated. so, if it does that forrent, it can also do that for the value of your property. don't underestimate the valuea good cosmetic renovation can do to the value of your property. ben: absolutely. yup, 100% agree. ryan: i think, in summarizing, we would sayyou need to be careful with serviceability, right? ben: absolutely. ryan: so we don't want to buy something that'stoo expensive that's going to lock us out of the market because we'll never be ableto service anything again. we want to be careful

not to go for something that's too low-yieldbecause, again, that's going to ruin our serviceability. ben: correct. ryan: we were talking about super high cashflow isn't going to help you in terms of serviceability. it may hurt you in terms of getting the capitalgrowth you need. so that might not be the best strategy, but obviously, everyone needsto assess their own situation. we're saying that, really, we're looking for those middleground properties that are decent cash flow, but neutral or slightly positive or slightlynegative, but they're in good growth areas. but then, also, properties that we can improveupon and manufacture some growth out of it. did i miss anything?

ben: no. i think we've spoken about a lot,but you wrapped it up really well. ryan: yeah. i hope that helps people who havepurchased a property and they're looking to move on to their second property. in the nextepisode, we're going to talk about un-stuck when growing your property portfolio. so ifyou feel like you're currently stuck whether it's at one property or you're stuck at 2or 3 or 0. if you're stuck, we're going to talk about some strategies and ideas to helpget you un-stuck. maybe mentally, maybe financially, all of that sort of stuff. you guys can check out ben, he is a buyer'sagent and a very good one at that. ben, do you want to give them a little bit of informationinto what you do for your clients?

ben: we work with ryan's community. everymonth, we offer a strategy session for 10 of his listeners, which we think is quitecool. that's really about, as ryan said, how to identify where you are, where you wantto go and bridge that gap in terms of identifying where that next step is. i think that wasthe challenge for me at property 2 and that's a challenge for a lot of people at property0 to property 5. you know, what's next and how can i achieve my goals fastest? so ifyou feel like dropping in for one of those sessions, we can definitely help out. they'recompletely complimentary and free for ryan's audience. as a business, we help a numberof investors every month from all over australia purchase high quality properties that areexactly the same as the ones that i've been

able to replace my income with. i'm obsessedwith them. love this stuff just like ryan does. ryan: yeah. i think in a previous episode,we were talking about how many open homes you went to and it was like something over100 or 300 a month or something like that. so ben looks at a lot of properties, findsa lot of properties for his clients. so, if that's something that you guys are lookingfor help with, if you want help finding a property in one of those areas that we talkedabout - something with a potential that i can manufacture in the future. maybe you don'thave the time or the skills to do it yourself, then hiring and paying for a buyer's agentmight be a worthwhile investment for you.

as ben said, he is offering on property listenersa free complimentary strategy session. if you want to check that out, just go to onproperty.com.au/sessionand you can go ahead and book in a time over there with ben. look, i just thank ben forall that he does for the community for the free knowledge that he shares and we reallyappreciate it. so, until next time, guys, stay positive.