February 4, 2025 • 25 mins
Property can be a great way to build wealth. But if you're a property investor, or thinking about it as a wealth strategy, you need to do it with your eyes open. Join Canna and Michael as they go through some of the common pitfalls of investing (or just owning) property.
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The information in this podcast is general in nature and does not take into account your personal circumstances, financial needs or objectives. Before acting on any information, you should consider the appropriateness of it and the relevant product having regard to your objectives, financial situation and needs. In particular, you should seek independent financial advice and read the relevant Product Disclosure Statement or other offer document prior to acquiring any financial product.
Canna Campbell is a Corporate Authorised Representative and Corporate Credit Representative of Wealthstream Financial Group Pty Ltd ABN 35 152 803 113 Australian Financial Services Licensee AFSL 412079.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:01):
Welcome to How Do They af Follow That? The podcast
that peeks into the financial lives of everyday Australians. I'm
Michael Thompson. I'm a writer and the co host of
the podcast Fear and Greed business news. As always, I'm
with Canna Campbell, financial planner and founder of sugar Mama TV,
the financial literacy platform covering YouTube and podcasts like this
one obviously, and books and Instagram threads, TikTok and more.
Speaker 2 (00:24):
Hello Canna, Hello Michael.
Speaker 1 (00:26):
Today, Canna, This episode is really one for the property investors,
isn't it.
Speaker 2 (00:32):
It's one that I've been wanting to talk about for
a while from talking from because I want to come
from personal experiences we are.
Speaker 1 (00:38):
Yeah, it's a it is It's not even actually just
for people who are already property investors. It is for
people considering investing in property, because.
Speaker 2 (00:47):
Just property investors people who buy property to live in
as well.
Speaker 1 (00:50):
Yeah, that's a good point, particularly when we I feel
as though I'm at risk of just kind of sidetracking
ourselves entirely. Let me finish describing what we're going to
talk about today. Is it is about you hear about
kind of people that just buy property, and it's all
kind of everything is everything is.
Speaker 2 (01:08):
Fine, right, how much money they've made.
Speaker 1 (01:11):
And I'm a sucker for clickbait, like I will click
on any article that I see online that says I
bought forty nine properties by the age of twenty three
or something like that. Okay, smashing that that link, just
trying to find out how they did it. And it's
all kind of upside it's all positive, right. They kind
of makes it sound as though it kind of just
pays for itself. There is no hassle. But but and
(01:32):
it's a big butt and we don't want to be
kind of too much of a Debbie downer on this one, right,
but we are going to look at some of the
pitfalls of property investing.
Speaker 2 (01:40):
It's wide open here. It does rose tinted glasses off.
Speaker 1 (01:45):
That's actually a really good way to look at it
is with eyes wide open, because if you're going into
property investing, you need to do it aware of certainly
the benefits, but also some of the risks and some
of the things that you could encounter along the way.
So the first one, Canna, is a big one, the
first pitfall, and it doesn't just relate to property investors.
(02:05):
As we kind of mentioned before, this is for anyone
who owns a unit, for instance, or any property that
comes under a strata title scheme. Tell me about special levies?
What are they kind of? Why do we need to
know about them? And why is this such a personal
issue for you? Because I know that this comes from
(02:26):
a place of great.
Speaker 2 (02:28):
Pain, pain, massive pain. So special strata levees there are,
for most people's unexpected costs that the property owners in
the strata scheme may have to pay when the owner's
corporation doesn't have enough money in the sinking fund. And
this is normally to help raise funds to help pay
for major repairs or even upgrades. And they can be significant,
(02:53):
and sometimes it's tens of thousands of dollars or in
our case, hundreds of thousands of dollars or even millions
of dollars, and they are non negotiable, so you can't say, well,
I refuse to pay that, or I'm only going to
pay half of that. You get issued with your allocation
and you have to pay that full amount. And sometimes
(03:13):
I mean I had a situation where when I was
a single mother, I got hit with a twenty three
thousand dollars special struggle, maybe with three weeks notice because
something had happened to the roof of the apartment block
and it needed to be fixed as a priority.
Speaker 1 (03:27):
Wow. And often it's related to water damage, all these
kinds of things. And there's been a lot of issues
lately over the last few years where there's been buildings
perhaps with cracks in them, things like that, where structural problems,
and often it comes back to the owner's corporation and
that the strata scheme needing to find the money to
(03:48):
do it. And if it's not there in the sinking fund,
if it's not there kind of in the savings essentially
for the scheme, then that is when owners are going
to have to put their hands in their pockets exactly.
Speaker 2 (03:59):
And that's what Tom and I went through. And it
was all due to water damage.
Speaker 1 (04:03):
So what happened there? What kind of tell us the story?
Speaker 2 (04:06):
It's huge, I'll be quick, I'll be quick. But to
cut a long story short, for eight years, Tom and
I had been complaining about water damage. There had been
two situations where the water damage was so bad when
it came to a storm. I had sees out twice.
Speaker 1 (04:22):
This is an apartment apartment.
Speaker 2 (04:24):
We complained year after year after year, saying this has
got to be fixed. There's a hole in the roof.
There's a hole in the roof. It's causing all this damage.
They ignored us for eight years. If there's any lawyers listening,
please let me know. They feel free to reach out
to me. So they ignored us for eight years, eight
years of mold and rot in the roof of the apartment.
(04:45):
It wasn't until eight years of damage festering. And then
obviously we had Alnino over the last couple of years,
but three years ago. Then those problems then trickle down
into the other apartment blocks. So then they started jumping
up and down.
Speaker 1 (05:00):
The heavy rain ones. I think that's that's Lanina.
Speaker 2 (05:03):
Sorry Larino.
Speaker 1 (05:05):
Al Nino is the dry one.
Speaker 2 (05:06):
Sorry, my poor geography.
Speaker 1 (05:08):
That's why I'm going back to high school. You learn
it in year ten something like that. Yeah, and the
only kind of Spanish words I know. And it's just
because of the weather gone.
Speaker 2 (05:18):
Well, anyway, it caused huge damage, and then it caused
a huge legal issue because the special strata levy was huge,
like in the millions of dollars, So we had to
and we had to wear the bulk of it like
a huge chunk. That's why I say hundreds of thousands
of dollars.
Speaker 1 (05:36):
Wow, Because it is based on kind of the size
of your apartment in terms of the number of kind
of square meters and things that you actually own within
the building is and that's how they calculate it exactly.
Speaker 2 (05:46):
And we own some of the space, so they basically
had to deconstruct a level and rebuild it in its entirety,
and it was a very difficult body corporate to work with.
We had to have a not only do we have
to pay this huge special store levee which is still
going by the way, we also had to have a
lawyer involved because it became so complicated. We needed to
(06:07):
make sure that we protected our rights and we were
paying what was fair and reasonable. So it became really
challenging and extremely stressful, and it's something we flagged over
and over again multiple times previously.
Speaker 1 (06:22):
So special levies, these kinds of things can happen to
basically anyone who owned a property that is part of
a strata scare, and so you're already paying levees, You're
already paying your strata fees, and you were paying those
typically quarterly, Yes, but how do you prepare for a
(06:44):
special levee? If you are a property investor or if
you're living in one of these properties, how do you
should you be budgeting for one? Or is that kind
of one of the rainy day kind of expenses that
you might say, go, I don't need to be specifically
saving for this, but maybe I will allocate some money
within my emergency fund.
Speaker 2 (07:04):
Emergency money. Definitely this was where these funds would come from.
But obviously not everyone has access to large amounts of money.
Necessarily if it's a big strata levey, obviously you need
to be very careful as to what is the health
of the sinking funds, so knowing you know, looking at
the strata reports before you purchase, or making sure you
keep in contact with everyone who's part of the body
(07:25):
corporate to make sure that there is always sufficient funds
in the strata, and also making sure that there's good maintenance.
You know, I walk around where we live and now
there are so many buildings around me just covered in scaffoldings,
and you know a lot of water damage is things
like where maintenance hasn't been done. You know, pipes have
been clogged and blocked because they haven't had the leaves
(07:46):
cleaned out. That was one of our issues with our home.
So you know, it's you need to make sure that
special strata is there to help protect for when big
things need to happen, but also what responsibility and proactive
management has happened along the way. So to answer your question,
and it's normally taken out of emergency money, and that's
why you should have some emergency money because this is
a realistic cost. But also there are situations for people
(08:08):
that don't have that set aside, which was the case
for us because it was such a huge amount of money.
And that's where the value of having a really good
mortgage broker who literally went to our bank on our
behalf and said, look, this is the situation, this is
the special strata levy, this is the amount they've been
allocated with. And the thing I will point out, and
(08:29):
this is why I want to talk from a personal experience.
We had previously tried to sell that apartment and we
even agreed to pay for the special strata levy and
we didn't actually know what that was going to be,
what that amount was, but we said in the contract
we will pay whoever buys this apartment. We will fund
that ourselves. So you don't need to worry about this.
If you want to go and sell something it's got
a large strata livy attached. I'm starting to get a
(08:51):
bit tongue tag because I get so passionate about this.
It also may be really hard to then sell that
property if it's got dramas going on.
Speaker 1 (08:58):
That was my next question for you in terms of
what this actually means. Say for an investor, right if
you have a special levy attached to your property that
something has gone wrong, it would have an impact on resale.
Speaker 2 (09:14):
Definitely, it would have an impact.
Speaker 1 (09:15):
Like we couldn't.
Speaker 2 (09:16):
I think we've gone through about seven different real estate
agents trying to sell this place, and we just it
was like we had a curse on it. We couldn't
even though we agreed to pay for this. Thank good
as we didn't sell, because we'd have sold it at
a ridiculously low price, and we would have happily sold
it at a ridiculous though ridiculously low price. But also
you know things like you can you get the social
(09:37):
strata work done whilst the tenant is still in there,
or whilst you're still living in there. You know, for us,
no one could it was inhabitable, roof was taken off,
you couldn't live in it. And that was for about
nine months, or maybe not nine but just up nine months.
And then for other people, you know, maybe you've got
to get the tenant out. Now. Is that tenant out
for a month? Do you have to then pay that
(09:57):
tenant's rent somewhere else or pay for them to stay
in hotel? What about access that tenant may say, well,
hang it, I'm being massive inconvenienced here with scaffoldings, noise,
you know, people coming and going, I want a rental reduction.
So there's lots of things that you've got to sort
of face, and it may devalue the price of the property,
you know, because you're not getting that yield anymore.
Speaker 1 (10:18):
Interesting to see though, that you had so many agents
attached to it and so many kind of potential buyers
over those those years and none wanted it. It does
show that buyers are doing their research and going through
this because we've talked about the importance of if you're
buying property, to go through and check the strata reports
and do all of these things and make sure that
you're doing your research and assessing these things objectively. It's
(10:39):
I do find it extraordinary though, that no one kind
of jumped at the opportunity when you were offering to pay, yeah,
the special levy that okay, here we go.
Speaker 2 (10:46):
Well and thank goodness, I mean Tom and I did
tried to work out what the strata special strata would
be and what we had in our minds, and from
speaking to our Laurie about what it could be, it
was not even a quarter of what we were actually
eventually hit with. Wow, So thank goodness we didn't agree
to it. It shows you how scared people are when
there is a complicated strata issue going on. But obviously
(11:08):
an experienced investor, if they had seen that, they might
have thought thought, oh my gosh, what an amazing opportunity
to buy something at a dirt cheap price and not
have to worry about ever having to fund this special
strata levy. Because over time, obviously you know, time hills,
all wounds, water wounds, you know, they're building more obviously
increase in value, and there are special stratle levees. I
should point out that actually add value, you know, giving
(11:31):
the building a facelift, updating the windows, the balconies, repainting.
Those are things that actually can increase the value as
well and make it more attracted.
Speaker 1 (11:40):
Especially when it's not like remediation work, not not trying
to fix a problem that it is actually just improving
what's already there. They are are kind of two different categories, almost,
aren't they exactly? All right, we have spent a bit
of time on special levees, but it is an important one,
and it's obviously one that that you have experienced. And
then you say that the time heels all words, it
does sound like that WORND might still be a little
bit raw.
Speaker 2 (12:00):
Well, we're still paying special strateg levies.
Speaker 1 (12:02):
All right, Well, let's take a quick break. When we
come back, we're going to go through some of the
other pitfalls for property investors, things like challenges with tenants
or damage that's done to property, kind of market fluctuations,
interest rates, all of these things that you do need
to take into account if you are considering investing in property.
Don't go anywhere Cana today we are talking about property investing,
(12:28):
but in particular if you are investing in property, some
of the pitfalls that you need to be aware of.
This is not to discourage anybody from investing in property.
It is just making sure that here we are very
upfront about some of the risks and that you go
into it with your eyes open.
Speaker 2 (12:44):
And we're showing things that people don't actually often share willingly.
Speaker 1 (12:49):
Tenants, what happens if you get if there's a problem
with your tenants, for instance, in the property. Could you
be looking at things like damage done to a property,
unpaid rent for instance, which I suspect is probably quite
a delicate kind of thing to have to resolve, particularly
(13:10):
in the current cost of living crisis. But these are
factors that the owner of a property would have to
deal with.
Speaker 2 (13:18):
Yeah, the breaches of the lease agreements. I saw a
situation where someone the tenant was running in a legal
brothel in what Yeah, and the apartment You are.
Speaker 1 (13:27):
Well that one that one to me would be more
kind of clear card get out. But that's a that's extraordinary.
Speaker 2 (13:34):
But you know it's the laws are different now, they
protect the tenants, and you know, obviously there's legal costs
involved and the loss of rental income and obviously the
emotional stress. You might have insurance in place, And that's
why landlord insurance can be very valuable and is highly recommended.
So at the end of the day, the best way
to try and mitigate that risk is to have a
(13:56):
property manager or do your own solid screen of tenants
before you agree to let them move in, and do
as much as you can to reduce that risk. Have
a good line of communication with the tenant as to
you know what's reasonable, what's expected, and how you'll be
handling problems. To make sure that you know they are safe,
(14:17):
they're protected, and they're in they can make that property
their home.
Speaker 1 (14:20):
You mentioned insurance, How does that work in this in
this situation.
Speaker 2 (14:25):
Well, you can take out landlord insurance and it's not
actually that expensive and it's for most people it's tax deductible.
But obviously always talk to your accountant. But this can
help cover any damage. For example, Okay, I know someone
who had some tenants destroy the property and the insurance
company paid for everything to be fixed, not to improve it,
(14:46):
but to bring it back to what it was before
their tenants moved in.
Speaker 1 (14:49):
And when we're talking about this kind of damage, it's
not always not necessarily talking about malicious damage as well.
These are accidental kind of things that can happen within
your investment property while you're owning it, and so it
does makes sense to have your insurance, just as you
would ensure the house that you're living in, the car
that you're driving. It is an asset that you are
looking to ensure. Another pitfall can be the time taken
(15:12):
to get new tenants into a property, because you kind
of think that in the current kind of environment, with
essentially a housing crisis, that it should be really fast
if one tenant finishes their lease and they move out,
that it should be quick to get new people in.
But really you are probably looking at a few weeks anyway,
(15:33):
while the apartment is being shown to potential tenants, while
the screening process is going on, while you're perhaps going
through a cleaning process or any repairs that are being
done in between paint new carpet. Absolutely, you might actually
be looking at a month or more without tenants in there,
and that is time when you are still paying the mortgage.
Speaker 2 (15:52):
Those vacancy periods are a bit of a hidden cost,
and again one that people just don't really talk about.
But you know, a couple of weeks or if up
to a month, that's a huge dent on your cash flow,
because you've then got to dip into your own pocket
with no income coming in or rental income coming in
to help them cover that. So there are things, though,
I think you can do to help reduce that. And
(16:13):
I should also point out, while you're paying that mortgage phone,
we've still got to pay the council rates and strata
levies and all those other things on top of But
what I would say to people is if in this
situation is try and avoid tenants if you can moving
out during periods like Christmas time.
Speaker 1 (16:30):
Oh yeah, because no one's going to want to move
in or be attending inspections on kind of boxing that exactly.
Speaker 2 (16:36):
So if you can have an open, frank conversation and say, look,
can you you know, can we work with you, even
if it means slightly reducing rent to avoid them moving
out at such a crucial time, that can really help
reduce that gap. And you know, I've seen situations where
tenants have asked for a rental reduction whilst the open
inspection period goes on. So they'll say, look, I'm going
(16:58):
to be moving into state, going to vacate this property,
and the landlords said, okay, Well, if you would let
us do an open inspection, say five weeks before you
move out, will reduce your rent accordingly, give you a
certain discount just to help bridge that gap and help
make that in between period much smaller.
Speaker 1 (17:15):
Funnily enough, it's coming back to a common theme that
we've talked about, and that is communication. Yeah, right, and
whether that is directly with your tenant, if you have
that relationship, a direct kind of landlord tenant relationship, or
through your property manager kind of observing all the rules
and everything that are in place around it. But communication
really helps. And as a tenant, I know, speaking from
(17:36):
past experience, you appreciate good communication and open, honest communication
about what is going to happen with the property exactly.
Speaker 2 (17:45):
And another other little hack is always have some good
quality photographs of the apartment or property I should say
this massive such of the property inside and out. So
the moment you know, someone says, okay, we're moving out,
you've actually got something at least that can go up
online and to engage the interest and the bites as
to whether you'll be able to move this property into
(18:06):
another tenant quickly.
Speaker 1 (18:08):
That's a great tip.
Speaker 2 (18:09):
I thank you. I'm very experienced in this area. That's
a lot of stressful situations to try and avoid myself.
Speaker 1 (18:16):
I'm going to bundle a few things into one question now,
market fluctuations, interest rates, over leveraging themselves. How does a
property investor prepare for all of those? I'll get thirty
seconds to answer.
Speaker 2 (18:36):
All right, Budgeting a cash flow obviously number one. You've
got to be run your numbers actually before you buy
anything like this and go okay. And I've always said this,
can you afford a three percent interest rate rise? Not
three interest rate rises? A three percent interest rate rise?
If you had followed that advice, which I've been saying
ever since I've launed sugar Mom on TV, which is
(18:56):
like ten years ago, that would have allowed you to
see exactly how much stress can you take on before
it actually buckles. So be realistic as to the fact
interest rates can go down, but they can also go up,
and as we've seen, they can go up consistently and
in not just quarterly increases twenty five basis points, but
(19:16):
obviously fifty basis points as well at a time. So
do as stress test beforehand and also review your finances
as well, so that if you've got multiple properties with
different loans. You can see how each of them manage.
Also look at things like the impact obviously if someone
moving out, If you have over extended yourself and the
rental market has softened and you're not getting the returns,
(19:37):
you've got to speak to a mortgage broker, a good quality,
experience mortgage broker who deals with this all the time
and can look at tweaking and changing your existing loans
strategy or if necessary, refinancing with another institutional lender so
they can maybe get you a lower interest rate, or
perhaps they can change your terms from interest only to
(19:57):
maybe principle and interest because will bring the interest rate
loan down. So in it obviously is subject to what's
going on in the market and what's a competitive rate.
But you've got to work with people and people who
are experts when things go wrong. So also obviously no
brainer talking to your accountant as well, making sure that
you're claiming all the deductions that you can, as speaking
with the property manager can help make sure the whole
(20:18):
process is managed more smoothly. Understand what your legal entitlements
are with mental increases and so forth.
Speaker 1 (20:24):
Because you do worry about people that have borrowed to
their absolute maximum in order to invest in a property.
And again it's kind of like the mistake and belief
that when you borrow money when rates are low, that
they will stay low forever, and it doesn't happen. And
just the same as thinking that the high rental rates
(20:47):
and the yields that are available now that they will
continue forever. And sure, they may remain elevated for some time,
but markets can go both up and down, and so
you need to be prepared for perhaps the rent on
your property to fall exactly. There is a lot in
that one. You mentioned an accountant then just in passing
(21:09):
to make sure that you are claiming the deductions to
which you are entitled as part of this that is
then linked to another pitfall, property pitfall, which is not
understanding the tax implications of property investing. For instance, everyone
talks about negative gearing and it is a really big
political issue as well, kind of whenever it is frequently
(21:32):
in the headlines. But if you asked some property investors,
can you define negative gearing for me and how exactly
it works and how it affects your income and your
tax that you pay at the end of the year,
they may struggle to do it like it is about
actually understanding the tax implications of your investment.
Speaker 2 (21:51):
Absolutely, you need to understand not just negative gearing, but
also all the other taxes along the way and what
you can legally claim and what you can't.
Speaker 1 (22:01):
Capital gains tax as well. These are things that you
should have a conversation with your accountant.
Speaker 2 (22:08):
And active conversation. Don't go and sell the property then
book the appointment to see your accountant. That could be disastrous.
Go and see your accountant saying I'm thinking of selling this,
what are my tax implications and they can run some
numbers and scenarios for you where they can help reduce
that tax legally.
Speaker 1 (22:25):
And would you recommend having a conversation You're talking about
proactive conversations about even before you are buying as well,
just to go, okay, this is what I want to do.
I want to take advantage say of negative gearing. Is
it actually going to make any difference to me if
I do this? Is this going to actually be a
good decision?
Speaker 2 (22:45):
Yes, your accountant, but also your financial planner as well,
because your financial planner might say hang on, like ease up,
we actually need to pay attention to your superannuation here
because there's greater tax savings for you by using a
superannuation vehicle. Or perhaps we need to look at buying
a property but buying through a self manage super fund.
Speaker 1 (23:01):
Yeah.
Speaker 2 (23:02):
So you know, there's lots of things stones to unturning
before you make any big decisions.
Speaker 1 (23:08):
I like that place to finish out proactive conversations, actually
getting in there, talking to your financial planner, talking to
your accountant about the tax implications and about the right
strategies for it, because really that will then help you
kind of prepare. If you're having those conversations with your
financial planner, that will prepare you for the other pitfall
that we were talking about. Market fluctuations and interest rate
(23:28):
rises and perhaps potential drops in in kind of rental
yields and things. If you have those proactive conversations, then
you are more likely to be prepared for all of
those things.
Speaker 2 (23:37):
Right, absolutely, And can I say one last thing, Oh, yes,
have a strategy.
Speaker 1 (23:41):
So many people great idea, but so.
Speaker 2 (23:44):
Many people go and buy a property. They great, I
bought a property. I bought an investment property. But if
you ask them, okay, well what's the plan? Oh I
don't know. I'm just going to rent it out? All right? Okay,
how's that going to work? So? Is it the planet
to have it paid itself off over time? Or is
the plan on it to build up the equity within
it and then buy another one, or is the plan
to actually flip it and by crystallize that gain and
(24:06):
then by a bigger property, or what is the actual
strategy behind it? We can all very easily get caught
up in that herd mentality and that properties the bill
and end all to build wealth. What's your game plan?
And everyone is different with what they need and this
is why you need personal advice.
Speaker 1 (24:23):
Yeah, absolutely, all right. Well, we started with kind of
special levies and understanding the implications of those and making
sure that you are saving and preparing just in case
one of those do actually does actually hit the property
that you are investing in. We've talked about tenants, unpaid rent,
the time it can take to get new tenants into
a property, a bunch of strategies they're dealing with, market fluctuations,
(24:46):
interest rate rises, drops in rents, and understanding the tax implications.
We've covered a lot, and we've made it probably sound
like there are a lot of potential pitfalls. For property investing,
and there are, but there's also a lot of benefits
to it as well. But you just need to go
into this kind of thing with your eyes open, exactly, Cannah.
(25:06):
If we want more information from you, where do we
find you?
Speaker 2 (25:10):
If there any lawyers listening to just going she might
have it, they might have a case. Please feel here
to reach out to me at Sugar Mamme tiving can
a cable official.
Speaker 1 (25:18):
And you can hear me every day with Sean Aylmer
on Fear and Greed, daily business news for people who
make their own decisions. Thank you very much for listening
to how do They Afford That? Remember please to hit
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(25:38):
next week
Welcome to How Do They af Follow That? The podcast
that peeks into the financial lives of everyday Australians. I'm
Michael Thompson. I'm a writer and the co host of
the podcast Fear and Greed business news. As always, I'm
with Canna Campbell, financial planner and founder of sugar Mama TV,
the financial literacy platform covering YouTube and podcasts like this
one obviously, and books and Instagram threads, TikTok and more.
Speaker 2 (00:24):
Hello Canna, Hello Michael.
Speaker 1 (00:26):
Today, Canna, This episode is really one for the property investors,
isn't it.
Speaker 2 (00:32):
It's one that I've been wanting to talk about for
a while from talking from because I want to come
from personal experiences we are.
Speaker 1 (00:38):
Yeah, it's a it is It's not even actually just
for people who are already property investors. It is for
people considering investing in property, because.
Speaker 2 (00:47):
Just property investors people who buy property to live in
as well.
Speaker 1 (00:50):
Yeah, that's a good point, particularly when we I feel
as though I'm at risk of just kind of sidetracking
ourselves entirely. Let me finish describing what we're going to
talk about today. Is it is about you hear about
kind of people that just buy property, and it's all
kind of everything is everything is.
Speaker 2 (01:08):
Fine, right, how much money they've made.
Speaker 1 (01:11):
And I'm a sucker for clickbait, like I will click
on any article that I see online that says I
bought forty nine properties by the age of twenty three
or something like that. Okay, smashing that that link, just
trying to find out how they did it. And it's
all kind of upside it's all positive, right. They kind
of makes it sound as though it kind of just
pays for itself. There is no hassle. But but and
(01:32):
it's a big butt and we don't want to be
kind of too much of a Debbie downer on this one, right,
but we are going to look at some of the
pitfalls of property investing.
Speaker 2 (01:40):
It's wide open here. It does rose tinted glasses off.
Speaker 1 (01:45):
That's actually a really good way to look at it
is with eyes wide open, because if you're going into
property investing, you need to do it aware of certainly
the benefits, but also some of the risks and some
of the things that you could encounter along the way.
So the first one, Canna, is a big one, the
first pitfall, and it doesn't just relate to property investors.
(02:05):
As we kind of mentioned before, this is for anyone
who owns a unit, for instance, or any property that
comes under a strata title scheme. Tell me about special levies?
What are they kind of? Why do we need to
know about them? And why is this such a personal
issue for you? Because I know that this comes from
(02:26):
a place of great.
Speaker 2 (02:28):
Pain, pain, massive pain. So special strata levees there are,
for most people's unexpected costs that the property owners in
the strata scheme may have to pay when the owner's
corporation doesn't have enough money in the sinking fund. And
this is normally to help raise funds to help pay
for major repairs or even upgrades. And they can be significant,
(02:53):
and sometimes it's tens of thousands of dollars or in
our case, hundreds of thousands of dollars or even millions
of dollars, and they are non negotiable, so you can't say, well,
I refuse to pay that, or I'm only going to
pay half of that. You get issued with your allocation
and you have to pay that full amount. And sometimes
(03:13):
I mean I had a situation where when I was
a single mother, I got hit with a twenty three
thousand dollars special struggle, maybe with three weeks notice because
something had happened to the roof of the apartment block
and it needed to be fixed as a priority.
Speaker 1 (03:27):
Wow. And often it's related to water damage, all these
kinds of things. And there's been a lot of issues
lately over the last few years where there's been buildings
perhaps with cracks in them, things like that, where structural problems,
and often it comes back to the owner's corporation and
that the strata scheme needing to find the money to
(03:48):
do it. And if it's not there in the sinking fund,
if it's not there kind of in the savings essentially
for the scheme, then that is when owners are going
to have to put their hands in their pockets exactly.
Speaker 2 (03:59):
And that's what Tom and I went through. And it
was all due to water damage.
Speaker 1 (04:03):
So what happened there? What kind of tell us the story?
Speaker 2 (04:06):
It's huge, I'll be quick, I'll be quick. But to
cut a long story short, for eight years, Tom and
I had been complaining about water damage. There had been
two situations where the water damage was so bad when
it came to a storm. I had sees out twice.
Speaker 1 (04:22):
This is an apartment apartment.
Speaker 2 (04:24):
We complained year after year after year, saying this has
got to be fixed. There's a hole in the roof.
There's a hole in the roof. It's causing all this damage.
They ignored us for eight years. If there's any lawyers listening,
please let me know. They feel free to reach out
to me. So they ignored us for eight years, eight
years of mold and rot in the roof of the apartment.
(04:45):
It wasn't until eight years of damage festering. And then
obviously we had Alnino over the last couple of years,
but three years ago. Then those problems then trickle down
into the other apartment blocks. So then they started jumping
up and down.
Speaker 1 (05:00):
The heavy rain ones. I think that's that's Lanina.
Speaker 2 (05:03):
Sorry Larino.
Speaker 1 (05:05):
Al Nino is the dry one.
Speaker 2 (05:06):
Sorry, my poor geography.
Speaker 1 (05:08):
That's why I'm going back to high school. You learn
it in year ten something like that. Yeah, and the
only kind of Spanish words I know. And it's just
because of the weather gone.
Speaker 2 (05:18):
Well, anyway, it caused huge damage, and then it caused
a huge legal issue because the special strata levy was huge,
like in the millions of dollars, So we had to
and we had to wear the bulk of it like
a huge chunk. That's why I say hundreds of thousands
of dollars.
Speaker 1 (05:36):
Wow, Because it is based on kind of the size
of your apartment in terms of the number of kind
of square meters and things that you actually own within
the building is and that's how they calculate it exactly.
Speaker 2 (05:46):
And we own some of the space, so they basically
had to deconstruct a level and rebuild it in its entirety,
and it was a very difficult body corporate to work with.
We had to have a not only do we have
to pay this huge special store levee which is still
going by the way, we also had to have a
lawyer involved because it became so complicated. We needed to
(06:07):
make sure that we protected our rights and we were
paying what was fair and reasonable. So it became really
challenging and extremely stressful, and it's something we flagged over
and over again multiple times previously.
Speaker 1 (06:22):
So special levies, these kinds of things can happen to
basically anyone who owned a property that is part of
a strata scare, and so you're already paying levees, You're
already paying your strata fees, and you were paying those
typically quarterly, Yes, but how do you prepare for a
(06:44):
special levee? If you are a property investor or if
you're living in one of these properties, how do you
should you be budgeting for one? Or is that kind
of one of the rainy day kind of expenses that
you might say, go, I don't need to be specifically
saving for this, but maybe I will allocate some money
within my emergency fund.
Speaker 2 (07:04):
Emergency money. Definitely this was where these funds would come from.
But obviously not everyone has access to large amounts of money.
Necessarily if it's a big strata levey, obviously you need
to be very careful as to what is the health
of the sinking funds, so knowing you know, looking at
the strata reports before you purchase, or making sure you
keep in contact with everyone who's part of the body
(07:25):
corporate to make sure that there is always sufficient funds
in the strata, and also making sure that there's good maintenance.
You know, I walk around where we live and now
there are so many buildings around me just covered in scaffoldings,
and you know a lot of water damage is things
like where maintenance hasn't been done. You know, pipes have
been clogged and blocked because they haven't had the leaves
(07:46):
cleaned out. That was one of our issues with our home.
So you know, it's you need to make sure that
special strata is there to help protect for when big
things need to happen, but also what responsibility and proactive
management has happened along the way. So to answer your question,
and it's normally taken out of emergency money, and that's
why you should have some emergency money because this is
a realistic cost. But also there are situations for people
(08:08):
that don't have that set aside, which was the case
for us because it was such a huge amount of money.
And that's where the value of having a really good
mortgage broker who literally went to our bank on our
behalf and said, look, this is the situation, this is
the special strata levy, this is the amount they've been
allocated with. And the thing I will point out, and
(08:29):
this is why I want to talk from a personal experience.
We had previously tried to sell that apartment and we
even agreed to pay for the special strata levy and
we didn't actually know what that was going to be,
what that amount was, but we said in the contract
we will pay whoever buys this apartment. We will fund
that ourselves. So you don't need to worry about this.
If you want to go and sell something it's got
a large strata livy attached. I'm starting to get a
(08:51):
bit tongue tag because I get so passionate about this.
It also may be really hard to then sell that
property if it's got dramas going on.
Speaker 1 (08:58):
That was my next question for you in terms of
what this actually means. Say for an investor, right if
you have a special levy attached to your property that
something has gone wrong, it would have an impact on resale.
Speaker 2 (09:14):
Definitely, it would have an impact.
Speaker 1 (09:15):
Like we couldn't.
Speaker 2 (09:16):
I think we've gone through about seven different real estate
agents trying to sell this place, and we just it
was like we had a curse on it. We couldn't
even though we agreed to pay for this. Thank good
as we didn't sell, because we'd have sold it at
a ridiculously low price, and we would have happily sold
it at a ridiculous though ridiculously low price. But also
you know things like you can you get the social
(09:37):
strata work done whilst the tenant is still in there,
or whilst you're still living in there. You know, for us,
no one could it was inhabitable, roof was taken off,
you couldn't live in it. And that was for about
nine months, or maybe not nine but just up nine months.
And then for other people, you know, maybe you've got
to get the tenant out. Now. Is that tenant out
for a month? Do you have to then pay that
(09:57):
tenant's rent somewhere else or pay for them to stay
in hotel? What about access that tenant may say, well,
hang it, I'm being massive inconvenienced here with scaffoldings, noise,
you know, people coming and going, I want a rental reduction.
So there's lots of things that you've got to sort
of face, and it may devalue the price of the property,
you know, because you're not getting that yield anymore.
Speaker 1 (10:18):
Interesting to see though, that you had so many agents
attached to it and so many kind of potential buyers
over those those years and none wanted it. It does
show that buyers are doing their research and going through
this because we've talked about the importance of if you're
buying property, to go through and check the strata reports
and do all of these things and make sure that
you're doing your research and assessing these things objectively. It's
(10:39):
I do find it extraordinary though, that no one kind
of jumped at the opportunity when you were offering to pay, yeah,
the special levy that okay, here we go.
Speaker 2 (10:46):
Well and thank goodness, I mean Tom and I did
tried to work out what the strata special strata would
be and what we had in our minds, and from
speaking to our Laurie about what it could be, it
was not even a quarter of what we were actually
eventually hit with. Wow, So thank goodness we didn't agree
to it. It shows you how scared people are when
there is a complicated strata issue going on. But obviously
(11:08):
an experienced investor, if they had seen that, they might
have thought thought, oh my gosh, what an amazing opportunity
to buy something at a dirt cheap price and not
have to worry about ever having to fund this special
strata levy. Because over time, obviously you know, time hills,
all wounds, water wounds, you know, they're building more obviously
increase in value, and there are special stratle levees. I
should point out that actually add value, you know, giving
(11:31):
the building a facelift, updating the windows, the balconies, repainting.
Those are things that actually can increase the value as
well and make it more attracted.
Speaker 1 (11:40):
Especially when it's not like remediation work, not not trying
to fix a problem that it is actually just improving
what's already there. They are are kind of two different categories, almost,
aren't they exactly? All right, we have spent a bit
of time on special levees, but it is an important one,
and it's obviously one that that you have experienced. And
then you say that the time heels all words, it
does sound like that WORND might still be a little
bit raw.
Speaker 2 (12:00):
Well, we're still paying special strateg levies.
Speaker 1 (12:02):
All right, Well, let's take a quick break. When we
come back, we're going to go through some of the
other pitfalls for property investors, things like challenges with tenants
or damage that's done to property, kind of market fluctuations,
interest rates, all of these things that you do need
to take into account if you are considering investing in property.
Don't go anywhere Cana today we are talking about property investing,
(12:28):
but in particular if you are investing in property, some
of the pitfalls that you need to be aware of.
This is not to discourage anybody from investing in property.
It is just making sure that here we are very
upfront about some of the risks and that you go
into it with your eyes open.
Speaker 2 (12:44):
And we're showing things that people don't actually often share willingly.
Speaker 1 (12:49):
Tenants, what happens if you get if there's a problem
with your tenants, for instance, in the property. Could you
be looking at things like damage done to a property,
unpaid rent for instance, which I suspect is probably quite
a delicate kind of thing to have to resolve, particularly
(13:10):
in the current cost of living crisis. But these are
factors that the owner of a property would have to
deal with.
Speaker 2 (13:18):
Yeah, the breaches of the lease agreements. I saw a
situation where someone the tenant was running in a legal
brothel in what Yeah, and the apartment You are.
Speaker 1 (13:27):
Well that one that one to me would be more
kind of clear card get out. But that's a that's extraordinary.
Speaker 2 (13:34):
But you know it's the laws are different now, they
protect the tenants, and you know, obviously there's legal costs
involved and the loss of rental income and obviously the
emotional stress. You might have insurance in place, And that's
why landlord insurance can be very valuable and is highly recommended.
So at the end of the day, the best way
to try and mitigate that risk is to have a
(13:56):
property manager or do your own solid screen of tenants
before you agree to let them move in, and do
as much as you can to reduce that risk. Have
a good line of communication with the tenant as to
you know what's reasonable, what's expected, and how you'll be
handling problems. To make sure that you know they are safe,
(14:17):
they're protected, and they're in they can make that property
their home.
Speaker 1 (14:20):
You mentioned insurance, How does that work in this in
this situation.
Speaker 2 (14:25):
Well, you can take out landlord insurance and it's not
actually that expensive and it's for most people it's tax deductible.
But obviously always talk to your accountant. But this can
help cover any damage. For example, Okay, I know someone
who had some tenants destroy the property and the insurance
company paid for everything to be fixed, not to improve it,
(14:46):
but to bring it back to what it was before
their tenants moved in.
Speaker 1 (14:49):
And when we're talking about this kind of damage, it's
not always not necessarily talking about malicious damage as well.
These are accidental kind of things that can happen within
your investment property while you're owning it, and so it
does makes sense to have your insurance, just as you
would ensure the house that you're living in, the car
that you're driving. It is an asset that you are
looking to ensure. Another pitfall can be the time taken
(15:12):
to get new tenants into a property, because you kind
of think that in the current kind of environment, with
essentially a housing crisis, that it should be really fast
if one tenant finishes their lease and they move out,
that it should be quick to get new people in.
But really you are probably looking at a few weeks anyway,
(15:33):
while the apartment is being shown to potential tenants, while
the screening process is going on, while you're perhaps going
through a cleaning process or any repairs that are being
done in between paint new carpet. Absolutely, you might actually
be looking at a month or more without tenants in there,
and that is time when you are still paying the mortgage.
Speaker 2 (15:52):
Those vacancy periods are a bit of a hidden cost,
and again one that people just don't really talk about.
But you know, a couple of weeks or if up
to a month, that's a huge dent on your cash flow,
because you've then got to dip into your own pocket
with no income coming in or rental income coming in
to help them cover that. So there are things, though,
I think you can do to help reduce that. And
(16:13):
I should also point out, while you're paying that mortgage phone,
we've still got to pay the council rates and strata
levies and all those other things on top of But
what I would say to people is if in this
situation is try and avoid tenants if you can moving
out during periods like Christmas time.
Speaker 1 (16:30):
Oh yeah, because no one's going to want to move
in or be attending inspections on kind of boxing that exactly.
Speaker 2 (16:36):
So if you can have an open, frank conversation and say, look,
can you you know, can we work with you, even
if it means slightly reducing rent to avoid them moving
out at such a crucial time, that can really help
reduce that gap. And you know, I've seen situations where
tenants have asked for a rental reduction whilst the open
inspection period goes on. So they'll say, look, I'm going
(16:58):
to be moving into state, going to vacate this property,
and the landlords said, okay, Well, if you would let
us do an open inspection, say five weeks before you
move out, will reduce your rent accordingly, give you a
certain discount just to help bridge that gap and help
make that in between period much smaller.
Speaker 1 (17:15):
Funnily enough, it's coming back to a common theme that
we've talked about, and that is communication. Yeah, right, and
whether that is directly with your tenant, if you have
that relationship, a direct kind of landlord tenant relationship, or
through your property manager kind of observing all the rules
and everything that are in place around it. But communication
really helps. And as a tenant, I know, speaking from
(17:36):
past experience, you appreciate good communication and open, honest communication
about what is going to happen with the property exactly.
Speaker 2 (17:45):
And another other little hack is always have some good
quality photographs of the apartment or property I should say
this massive such of the property inside and out. So
the moment you know, someone says, okay, we're moving out,
you've actually got something at least that can go up
online and to engage the interest and the bites as
to whether you'll be able to move this property into
(18:06):
another tenant quickly.
Speaker 1 (18:08):
That's a great tip.
Speaker 2 (18:09):
I thank you. I'm very experienced in this area. That's
a lot of stressful situations to try and avoid myself.
Speaker 1 (18:16):
I'm going to bundle a few things into one question now,
market fluctuations, interest rates, over leveraging themselves. How does a
property investor prepare for all of those? I'll get thirty
seconds to answer.
Speaker 2 (18:36):
All right, Budgeting a cash flow obviously number one. You've
got to be run your numbers actually before you buy
anything like this and go okay. And I've always said this,
can you afford a three percent interest rate rise? Not
three interest rate rises? A three percent interest rate rise?
If you had followed that advice, which I've been saying
ever since I've launed sugar Mom on TV, which is
(18:56):
like ten years ago, that would have allowed you to
see exactly how much stress can you take on before
it actually buckles. So be realistic as to the fact
interest rates can go down, but they can also go up,
and as we've seen, they can go up consistently and
in not just quarterly increases twenty five basis points, but
(19:16):
obviously fifty basis points as well at a time. So
do as stress test beforehand and also review your finances
as well, so that if you've got multiple properties with
different loans. You can see how each of them manage.
Also look at things like the impact obviously if someone
moving out, If you have over extended yourself and the
rental market has softened and you're not getting the returns,
(19:37):
you've got to speak to a mortgage broker, a good quality,
experience mortgage broker who deals with this all the time
and can look at tweaking and changing your existing loans
strategy or if necessary, refinancing with another institutional lender so
they can maybe get you a lower interest rate, or
perhaps they can change your terms from interest only to
(19:57):
maybe principle and interest because will bring the interest rate
loan down. So in it obviously is subject to what's
going on in the market and what's a competitive rate.
But you've got to work with people and people who
are experts when things go wrong. So also obviously no
brainer talking to your accountant as well, making sure that
you're claiming all the deductions that you can, as speaking
with the property manager can help make sure the whole
(20:18):
process is managed more smoothly. Understand what your legal entitlements
are with mental increases and so forth.
Speaker 1 (20:24):
Because you do worry about people that have borrowed to
their absolute maximum in order to invest in a property.
And again it's kind of like the mistake and belief
that when you borrow money when rates are low, that
they will stay low forever, and it doesn't happen. And
just the same as thinking that the high rental rates
(20:47):
and the yields that are available now that they will
continue forever. And sure, they may remain elevated for some time,
but markets can go both up and down, and so
you need to be prepared for perhaps the rent on
your property to fall exactly. There is a lot in
that one. You mentioned an accountant then just in passing
(21:09):
to make sure that you are claiming the deductions to
which you are entitled as part of this that is
then linked to another pitfall, property pitfall, which is not
understanding the tax implications of property investing. For instance, everyone
talks about negative gearing and it is a really big
political issue as well, kind of whenever it is frequently
(21:32):
in the headlines. But if you asked some property investors,
can you define negative gearing for me and how exactly
it works and how it affects your income and your
tax that you pay at the end of the year,
they may struggle to do it like it is about
actually understanding the tax implications of your investment.
Speaker 2 (21:51):
Absolutely, you need to understand not just negative gearing, but
also all the other taxes along the way and what
you can legally claim and what you can't.
Speaker 1 (22:01):
Capital gains tax as well. These are things that you
should have a conversation with your accountant.
Speaker 2 (22:08):
And active conversation. Don't go and sell the property then
book the appointment to see your accountant. That could be disastrous.
Go and see your accountant saying I'm thinking of selling this,
what are my tax implications and they can run some
numbers and scenarios for you where they can help reduce
that tax legally.
Speaker 1 (22:25):
And would you recommend having a conversation You're talking about
proactive conversations about even before you are buying as well,
just to go, okay, this is what I want to do.
I want to take advantage say of negative gearing. Is
it actually going to make any difference to me if
I do this? Is this going to actually be a
good decision?
Speaker 2 (22:45):
Yes, your accountant, but also your financial planner as well,
because your financial planner might say hang on, like ease up,
we actually need to pay attention to your superannuation here
because there's greater tax savings for you by using a
superannuation vehicle. Or perhaps we need to look at buying
a property but buying through a self manage super fund.
Speaker 1 (23:01):
Yeah.
Speaker 2 (23:02):
So you know, there's lots of things stones to unturning
before you make any big decisions.
Speaker 1 (23:08):
I like that place to finish out proactive conversations, actually
getting in there, talking to your financial planner, talking to
your accountant about the tax implications and about the right
strategies for it, because really that will then help you
kind of prepare. If you're having those conversations with your
financial planner, that will prepare you for the other pitfall
that we were talking about. Market fluctuations and interest rate
(23:28):
rises and perhaps potential drops in in kind of rental
yields and things. If you have those proactive conversations, then
you are more likely to be prepared for all of
those things.
Speaker 2 (23:37):
Right, absolutely, And can I say one last thing, Oh, yes,
have a strategy.
Speaker 1 (23:41):
So many people great idea, but so.
Speaker 2 (23:44):
Many people go and buy a property. They great, I
bought a property. I bought an investment property. But if
you ask them, okay, well what's the plan? Oh I
don't know. I'm just going to rent it out? All right? Okay,
how's that going to work? So? Is it the planet
to have it paid itself off over time? Or is
the plan on it to build up the equity within
it and then buy another one, or is the plan
to actually flip it and by crystallize that gain and
(24:06):
then by a bigger property, or what is the actual
strategy behind it? We can all very easily get caught
up in that herd mentality and that properties the bill
and end all to build wealth. What's your game plan?
And everyone is different with what they need and this
is why you need personal advice.
Speaker 1 (24:23):
Yeah, absolutely, all right. Well, we started with kind of
special levies and understanding the implications of those and making
sure that you are saving and preparing just in case
one of those do actually does actually hit the property
that you are investing in. We've talked about tenants, unpaid rent,
the time it can take to get new tenants into
a property, a bunch of strategies they're dealing with, market fluctuations,
(24:46):
interest rate rises, drops in rents, and understanding the tax implications.
We've covered a lot, and we've made it probably sound
like there are a lot of potential pitfalls. For property investing,
and there are, but there's also a lot of benefits
to it as well. But you just need to go
into this kind of thing with your eyes open, exactly, Cannah.
(25:06):
If we want more information from you, where do we
find you?
Speaker 2 (25:10):
If there any lawyers listening to just going she might
have it, they might have a case. Please feel here
to reach out to me at Sugar Mamme tiving can
a cable official.
Speaker 1 (25:18):
And you can hear me every day with Sean Aylmer
on Fear and Greed, daily business news for people who
make their own decisions. Thank you very much for listening
to how do They Afford That? Remember please to hit
follow on the podcast, and the best thing that you
can do is tell somebody else send them the link
to this episode if you think that they might benefit
from hearing it, spread the word about how do they
afford that? Thank you for your company. Join us again
(25:38):
next week
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I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com