It is always easier to deal with a problem you can see than one you can’t. It is always more urgent to deal with today’s problem than tomorrow’s, let alone one that is 10 years from now. Maybe that’s why so many property investors focus most of their time on the least valuable issues and the least of their time on the most valuable issues. If that sounds like a problem, read on and we’ll unpack our “two triangles” – where people spend their time and attention versus where the money is.
To illustrate our point, we are going to take the example of a property investor who has two, $500,000 investment properties – so a $1m portfolio. All the numbers we give here are for this example, so you can compare “apples to apples”.
Time and Attention is on the immediate and easy to see:
Firstly, people focus on issues they feel they can control – like the rental price or the management fees they pay their property manager. A $10 pw change in rental price will make you an extra $500 per year. A 1% change in management fees is worth about $250 per year. Both are important, but compare with the numbers below.
Property Management Fees $250 p.a.
Rental Price $500 p.a.
Seasoned investors know that the bigger costs are vacancy and maintenance. Having the property vacant for say 5 weeks rather than 2 weeks between tenants (a poor result, but not uncommon) will cost you $1,500. Or, having a 5 yr tenant versus 3 x 18 month tenants will likely save you $5,000 (for two lots of vacany, letting fees, advertising etc). Similarly, maintenance costs often vary between $500 and $3,000 per year – a $2,500 difference. And a good portion of that is determined by whether you pro-actively solve problems before they become emergencies and how efficiently they are resolved once identified. Similarly, a lean Body Corporate may cost about $1,000 p.a. A “fat” one can easily cost $3,500. So you can see the difference between these issues being managed well and badly is much greater:
Vacancy $1,000 – $1,500 p.a.
Maintenance $2,500 p.a.
So while these are harder to control, they have a much bigger financial impact and so are logically worth spending more time and attention on.
But none of the things above that you can “see” will have anywhere near as much impact on your ultimate investment returns as how you finance the properties and how you manage taxes. These factors are tricky to isolate from each other as sometimes (and it is only sometimes) you will pay more taxes the more money you make, so the net result has to be calculated to compare to other issues. But some of the big issues: by using bank debt to pay for a portion of the purchase price, you can potentially afford to buy additional properties. You can then capture the capital gain across all of them while only having the pay the bank back the original amount plus interest. Getting negative gearing tax benefts can be worth tens of thousands of dollars per annum. Minimising land tax can be worth $5-10,000 per annum. We have done many models of actual client situations and some fairly standard scenario’s – like the base case all these numbers are based on and the net of it is:
Taxes $10,000 – $40,000 p.a.
Finance $20,000 – $100,000 p.a.
So these issues are more complicated and can require some costly professional advice from tax accountants and lawyers, but their impact can be many times their cost.
Finally and most importantly, buying the right property to maximise long term capital growth is the single biggest driver of investment returns. For example, the difference in price after 20 years for our portfolio between getting a fairly poor rate of capital growth (say 2% p.a.) and a very good rate (say 10% p.a.) is a startling $5.24m ! That is because you would only get $1.486M on the sale from a low capital growth path and $6.727M on the high growth path. That is a difference of $262,000 every year of ownership. Now THAT is worth paying attention to. Preferably before you buy and even when considering whether it makes sense to sell an underperforming property to replace it with a really strong performer. Even though the transaction costs (stamp duty, solicitors fees, bank fees, advertising, agency fees) can be very substantial, our modelling usually shows that the payback period for those costs is covered in the first 1 – 4 years and you are still miles in front after a decade or two. So …
Capitial Growth $250,000 p.a.
So if this is where the real money is, is it worth checking if your priorities of where you spend your time and attention are focussed on the most valuable issues ?
A big reason why people tend to focus on the smaller issues (and don’t get us wrong, they are always important – and our property management experts manage them professionally for clients every day for decades) is because they are harder to see and harder to unravel and understand.
But that’s where LongView is so different to traditional real estate agencies. Our Executive Directors have decades of experience in managing and modelling these complex issues and our data scientists and business analysts can do all the work for you so you can make fact based decisions that optimise your investment returns. And our real estate experts can then carry out those decisions.
To talk further on the big issues of capital growth, tax and finance, call our CFO Antony Cohen on 0419 381 905 or our Executive Chair Evan Thornley on 0438 899 301. To understand how to manage vacancy with our Guaranteed Rent service, call either of the above or Cath Stubbings on 0411 101 999