87. Should You Buy A House?

Check out this mate. 57% of household wealth is tied up in housing. So in Australia and It's currently worth $9.3 trillion.

I was even speaking to someone last night. He is a doctor and all of his doctor mates, all they basically go do is just leverage themselves up to the tits to go and buy a property. They make a lot of money off it because this is how the banks work. You can lend money, they make money. You buy the property, the property goes up, you make money. It's just like this revolving cycle.

Exactly. So you could redraw equity, you get a loan for investment. Any cash flow that throws off or wins you can then pump back into your non tax deductible loan and that's how you debt recycle.

And you've got property now.

Yes.

With people living in there that's paying the rent. Yes, that's the model that I think works well. Welcome back to the Ben and Bergs Podcast. I'm Ben, your favorite high school dropout and CEO of Collective Shift alongside me as your favorite MBA and CEO of Collective Shift Australia's leading crypto portfolio insights company. Providing professional analysis and portfolio strategies for crypto investors like you. We're a unique blend of the established and the self made and we're here to break down crypto business and personal growth. We don't just talk shit, we give you the insights you need to make better investments, build six, build successful businesses and level up your life. Bergs, how are you man?

I'm doing really well man. How are you mate?

I'm good, thank you. I'm excited because we've just hit a new record on the pod. We're up to 10,200 all time plays. I don't think we've done a pod since We've been over 10,000 plays total downloads and we've just hit a new record of unique audience size in the last week. So we've got over 203 unique weekly listers. Man. That's pretty exciting.

That's incredible man. You told me that. I was just so pumped. Thank you guys so much for listening. And this week, Ben, I have been triggered, mate. I have been triggered. There's a thing that's been going on in the background where for some reason all of my mates are, they're either looking to upgrade their houses or they're buying investment properties or you know they're modifying their houses, they're doing renovations, everyone's just into it. Interest rates are through the roof. And this episode is on. Should you buy A house. And we're going to talk through this. And I've been triggered by a guy called Ramit Sethi. So this is the I will teach you to be rich guy. I love this guy. He doesn't give an F about anything. He just talks his mind. His podcast is amazing where he gets people on and he gets rich people on. He gets people with not much money on or people that have a lot of money and can't spend it. And he talks through their money psychology and their problems. He's got a brilliant book, helped me a lot with my money psychology because I've been great at saving and investing, terrible at designing my rich life and spending. So he's helped me a lot. But he's got this one thing, Ben, and he's. He's a rich man and he rents. And he always tells people, you know, always run the numbers between how much you'll pay for renting and how much you'll pay to own a home. Completely agree with him. And he says statements like rent is the most you will pay, but owning a house and your mortgage is the minimum you will pay. Because there's all these things he calls phantom costs, like stamp duty, variable insurance rates, maintenance, you know, house rates you have to pay, building insurance. But he posts this thing time and time again because he triggers people. He triggers them. And you know what he does? He's so he's rich, but he just doesn't care about cars. So he drives like a Honda. And everyone gives him about driving an old Honda. So he posts a photo of him in his Honda and started playing this song. He's like, they see me rolling.

Shitty old hunter. Anyway, he posts this thing up and it says, was this a good investment decision? He says, person buys a house for half a million dollars, five years later it's worth $700,000. That's it. That's all he posts. And he posts it for engagement. But, mate, do the people come out of the woodwork? My God, they're like, no. If you took that money and you put in the S P500, you return 8% per year. Looking at historical values, you would have had this amount of money. And it is just the worst comparison. Run the numbers on the two. Yes. To see if you can afford it. And you need to make decisions like, can I afford it now? Am I getting married? Am I going to have children? How much will they cost? Absolutely. Run those numbers. But this is very misleading. Was it a good investment decision? And I'll walk you through it now, Ben. Let me hit you with some facts. This is the way it works, right? So let's look at this kind of system.

If we go on a spectrum from the.

Least risky investments to the most risky ones, you go from cash, because already cash is least risky. Foreign currencies, then you go to bonds, you step up to real estate, then you step up to stocks, then you have things like private deals, private equity, then you have startup investing, then you have things like crypto, right? In the extreme end. And I'm pretty sure you've got more risky things like different derivatives and everything on that. So real estate's more towards the conservative end, right? That's, that's just a fact. People know this second factor, houses are the lowest risk leverage you can get. You can get a lot of leverage from a bank and a leverage just means I'll lend you a lot of money if you get a home. Everyone understands housing. Everyone on the street knows you buy a house, you live in it, it potentially goes up in value. They know how a house works. Check out this mate. So CoreLogic, and we're basing this on Australia, CoreLogic estimates that 57% of of household wealth is tied up in housing. So in Australia, close to 60% of our wealth is tied up in housing and it's currently worth $9.3 trillion. Right. And then everyone actually owns property. Even if you're renting, I guarantee you own some property. And the way this works is if you've ever had a job in your life that pays superannuation, which 90% of people will go to your default super allocation and you will see a chunk of that is allocated to real estate. So you start to see how the system works here, how it's kind of set up. And a few of my mates say, you know, this system is set up to be impossible to fail due to our tax and banking laws. I don't think anything's impossible to fail, but it's definitely a huge advantage if you're in these areas. And a lot of what we do in Australia actually relies on property.

And let's just look through this. Let's start off with the banks. Ben. So we'll go through this as a system kind of way. And at the end I'm going to ask you what you think about property. So when you go to buy a house, generally there's a 20% tolerance built in. So let's say I buy a house for $1 million. If I have a 20% deposit, that's great. I don't pay lenders mortgage, insurance. So there's a 20. The price can go down by 20% before the bank is underwater. If property prices go down by 20%, a lot of bad things are going to happen. Right. So it doesn't really happen too much. But if I don't have that 20%, the bank takes out insurance. I have to pay for that insurance. And it insures the bank. Brilliant. They got a bit of time there. And what most people don't understand is that banks actually create money through loans. They just print money out of thin air. And where we tend to think about banks, but I'm curious to get your view on this, is we think of banks as someone puts money in a bank and then they lend that money out to someone else. But then the economy relies on savings. And as everyone knows, people aren't too good at saving. But then we go to the next level and it's fractional reserve banking. So they say, okay, everyone that puts their money in the bank, not everyone is going to get their wants of their money at the same time. So we'll hold maybe 5%, 10% of their money and we'll just lend out the rest. But then there's another level that most people don't know about, which is called money creation. So a loan comes to existence through signing contract. Then you want to go get a house, you go, I've got a house. And Tassie, it's a million bucks. I've got a 20% deposit. I'll give that to you, the bank or whatever, and I'll sign. And all of a sudden, money just appears and is secured against the asset. That is the economy that we live in today. So you're starting to see how much we hold in housing and how money is created through housing and how people get this big chunk of leverage. All right, you with me so far?

Yeah, with you.

All right, let's go deep. We're going deep now. So what you need to understand, we had a guy when I was studying business, and, and he came in, he was this big finance nerd, some hedge fund guy, and he said, are you on the buy side or the sell side? And let me. Let's just look at superannuation funds. They are on the buy side, right? What happens is everyone has a job at the moment, 11%. There's a super guarantee. Your employer has to pay 11% to your super. It's going up to 12% in two years. Now the superannuation funds have a money problem. They get all this money in. What do we do with it. People need to create products for them to buy. What's one of the main products? Real estate. The other one is stocks. It needs to be relatively safe in your super, so the government doesn't have to pay your pension. Ben superannuation assets 3.5 trillion at the end of the March 2023 quarter. So annual increase of 3.2%. So not only is that super guarantee going up, the amount under management is going up as well. For the year ending March 2023, super guaranteed contributions were close to $100 billion. So every year super funds get a hundred billion dollars they have to invest. Where do you think they're going to put it? Stocks and real estate, predominantly.

It's like a forced Ponzi. It's like. Yes, it's like it's literally forced buying that you can't do anything about because it's literally illegal not to pay employee superannuation. And then who controls the superannuation funds? Most likely private people that are, you know, in bed with the government, which then they buy more property and then it's like, it's like this ever evolving.

Exactly right. And you need to understand the system. And so superannuations are growing and.

Look, this is legislated. So this, this will not change. And if you think about this, superannuation funds, they buy things called REITs, which are real estate investment trusts. What that is, think of it like a managed fund for real estate. So they go, they have companies, companies go out, they buy lots of real estate, they manage it. And there's two versions of that. One's the equity side where you just own properties, you have capital growth and a cash flows. The other side, which is not as common, is mortgages. So people just keep creating products based on real estate. So let's look at this before we get into the advantages and disadvantages of renting versus purchasing. Let's just look at the entire system of everything that I've said. First of all, the government actually artificially restricts land. Like it doesn't open it up. And then people come in like they did with the estate. I mean, used to be a farm. Real estate guys will buy the entire farm and they'll slowly release over 10 years different parts of the estate so it goes up in price because they're artificially restricting supply. In Australia, we want to own our own homes, right? It's built into our culture. It's what our parents told us is what our parents did. It's what we strive for. It's all over the tv. It's what the media tells us that we need to do. We have favorable tax. If you own investment properties, you can get huge leverage. If you buy a property, you can then take that leverage you have when you've had growth and you can redraw equity from it and have a cheap loan facility to buy more stuff. So what are you going to buy? Probably more property or shares. Right. You can even do things like debt recycling. Then you've got superannuation. So people need to be paid money, right? Your employer pays money to a guy, the guy has to go out and buy things. What are they buying? Real estate. The majority of Australians wealth is held in real estate in super funds, self managed super funds and their own property that they own. Now they get to retirement age. What do you think's going to happen if the money that they have goes to zero or goes down significantly? The government has to pay out pensions. Do you think they're going to pay out pensions or are they going to get businesses to pay for a prop them up or are they going to prop up real estate? So this is just the way the system works. There's no scams in there, there's no insider secrets. Anyone can know this. It is just the way that the system is set up. So back to why I got triggered. Because initially that is such a simple question of which investment is better. But when you start to look into it and the fundamentals behind it, you're like, actually there's something to this. All right, let's look at the advantages and disadvantages of renting and they're going to ask you a question about property. So if you're renting a property, and I appreciate not everyone can afford to buy a property, but you can get exposure to properties, to property through investing in rates and other managed funds, ETFs. So renting advantages, you know, the costs upfront, there's no lock in, you can bail out, you can go somewhere else, you have a shorter term contract, cheap exit fees and there's zero upkeep. So you don't have to worry about your house. My, you know, plumbing's broken, this is broken, the landlord will come and it'll fix it. Disadvantage, mate. You've got rent inspections, you got rent increases, you got low power because the landlord has all the power. You can't really modify the property. So renting is great if you don't want to worry about things, if you want to change it up every now and then and you basically just want to outsource a whole Bunch of thinking and a whole bunch of cost. Absolutely brilliant. And then take your money and you can invest it wherever you like. You quite like, you know, going around renting, you know, rather than having, like, a primary residence.

Yeah, my lifestyle would suit more renting. Well, I don't rent, I just live in Airbnb. But the. For me, I think it comes down to, like, do you live in that property or is it. You have other people living it? Like, that's. That's a cool question for me.

Yeah.

And then we'll probably talk about this soon. But, yeah, renting gives you a bit more the freedom to. To move around, especially if you're not ready to settle down.

Absolutely. And let's look into purchasing a property. Right. Whether it's for your own property or for investment, the advantages are you can modify the property, you can do whatever you want to it, you can add value, you can bang holes in the wall. It's yours, Go for your life. No one can kick you out if you pay the bills. Whereas if you're renting, you can still get booted out even if you're paying the bills. You have potential upside to capital gains, which is great. You have equity redraw, which is cheap capital. So if your property's gone up by a hundred grand, the bank will lend you $80,000 worth of that, no worries. And you can go and invest that elsewhere. Brilliant. Brilliant leverage. It pays dividends daily. So every day you live in your property, you actually get a dividend. You get the enjoyment of living there and, and accessing that property. It's forced investing, Ben, is dollar cost averaging. So you'll pay that mortgage down constantly. So it's forced dollar cost averaging, which is what sometimes a lot of people need, because it's difficult to set up yourself and maintain it. And again, the big one is just leverage. The bank will lend you a lot of money. Whereas if you want a margin loan for shares, that's going to come with a lot of different terms. Or even commercial property is a lot of different terms. Higher deposits, higher rates.

And that comes back to the initial tweet. You know, you buy $500,000 property, it's worth 700,000 in five years. You know, is that a good investment? Well, hold up. How did you get the 500,000? Do you have 500,000 in cash? Did you put a, you know, did you get a loan?

Exactly.

You know, if you got a loan, you can't. You can't go and buy Bitcoin because they're not going to Give you a loan for 500,000 by Bitcoin.

So like, exactly. You need to go deeper and understand how these things are funded and the first principles of how these things are structured. Now let's go to the disadvantage of purchasing interest rates. They will kill you. How? Buying housing is expensive. First upfront the capital sum, but then to maintain and service that loan. And interest rates are around 6% at the moment. It is expensive. There are a lot of phantom costs that we talked about at the start, like paying for, you know, upkeep, paying your rates, insurance, those kind of things. There's also high entry costs. You need to save up a bit of money in, in order to get into property. And especially over east, it is quite expensive. It's like double the price of it that it is in wa. It's very competitive. And then you do need to pay things like lenders, mortgage, insurance, everything is in the bank's favor because they're the ones with the money and they're lending you that money. So it's their rules. Right? So I think you nailed it there. Ben, what are you talking about? You need to understand how this is structured. And I want to ask you, after listening to this, what do you think about property in Australia? After understanding how things are structured and how the system actually works, what do you think about, like, you know, purchasing a place or renting or what is on the horizon for you?

Yeah, I think one of the core things in Australia, and then you've just backed that up by data, is it's literally like a forced Ponzi. Like it's nearly built to not lose. And it's why the property continues to go up and up and up and up and up and up, whether or not you like it or not. The way money flows into the property, like Australia's economy is kind of built on that. What did you say? Household wealth in probably 50%, 57%. 57% of household wealth is in property. Because no one buys anything else here in Australia. It's like, you know, what else would you put your money into?

Exactly.

And I was even speaking to someone last night who, who works with a lot of doctors and he was talking about. So he is a doctor and all of his doctor mates, all they basically go and do is just leverage themselves up to the tits to go and buy a property. And that's all they do and that's. And they, and they make a lot of money off it. Because this, this is how the banks work. You can lend money, they make money, you buy the Property, the property goes up, you make money. It's just like this revolving cycle.

And there's even laws where if you can't pay back, you can't service your debt on your property. There's financial hardship laws so you can access your superannuation. So all that money that business has paid, that's put away for, you can't access till you retire. You can access that to pay off your property under financial hardship laws.

Now I'll probably just.

Just add another comment to that. Like right now, property is not in my wheelhouse in terms of. Because if to put a deposit on a house, I'd have to sell crypto. I don't want to do that because I think that the shorter term returns on my crypto will be higher than property. However, in saying that this next cycle, one of my goals is to buy my parents a property. So being able to do that, you know, whether or not I can just pay for it for fully or if I just put some down on a deposit. Because then again, that's, that's back the benefits of buying property, you don't need to buy it all in cash. If you have the cash, let's say you've got a million dollars in cash and have to give all the cash up, you can go and give them 100k, take out a loan for 900, you know, start to pay off the mortgage, keep that 900k in cash, probably could buy 4 properties if you wanted to. Like now you, right now, that, that's the, that's the benefit. And then as you're paying off that property, you could debt recycle the cash off that loan to buy more crypto. That's tax deductible.

Exactly. So you could redraw equity, you could then invest. And again, everything in this episode is not investment advice.

So you get a loan for investment, you can take that money, you can invest that in crypto. Any cash flow that throws off or wins, you can then pump back into your non tax deductible loan. And that's how you debt recycle.

And you've got property now.

Yes.

With people living in there that's paying the rent. Yes.

Yeah.

So, so that, that's, that's, that's the model that I think works well.

Exactly. It is so favorable and I think people need to understand this before they poo poo it. Yes. There's high entry costs. Yes, we hate landlords, a lot of it sucks. But you can be on one side where you complain about it or you could do Something about it, understanding, understand and start investing, or understand and invest in something else. So you really need to understand the fundamentals. And I hope this episode is really driven at home. And I sat back last night and I thought, my 10 closest mates, how many of them own property? All them. Then I went out to 20 mates, 30 mates, 40 mates, 50 mates. And again, you know, we're getting into acquaintances now, not necessarily close mates. And I could only think of one of them that hasn't bought a property.

Which is wild.

It's built in the society, it's building the culture. Like that is. That's what you do.

It is. And think about all these people that have property. What do you think would happen if property prices absolutely tanked? First of all, there'd be pandemonium. The government would be scrambling. What would they do? Would they lower, you know, put pressure to lower interest rates? Would they offer incentives? What would they do to keep all of that going? Because when you fuck with the money, people are going to get really, really uptight.

Well, look what happened, Covid. Everyone got upset and they just printed money and give it. They just gave it out to people. So, like it's, it's built not to lose.

Exactly. And it's not to say that property can't fluctuate. There's not. There are markets within markets. And, you know, this, this is supply and demand. Like, man, even right now in Perth, the median days on market for a house is 11 days. Houses are sold within 11 days. I've literally got real estate guys knocking on my door asking me if I want to sell my property. That's how crazy things are at the moment.

Yeah, I, I think too, like, do you live in the property or do you not? I don't know about you. If you did an analysis of those mates that you, that you, you know, sort of saw if they live in their property or if that's more of an investment. Because for me, like, the idea of living in that home is great. You get the dividends of living in the home, it's yours, you know that. But then from an investment perspective, it's not really an investment. It goes back to the book on the rich dad, poor dad, you know, like, people think that they're buying.

It makes a comment, something about people think they're making the investment, but then they go live in the property. And as it's not, you know, if an investment is something that, you know.

Cash flows, it's, yeah, an investment. His exact words are, investment is something that puts money in your Pocket. Yeah, that's it. But investment like dividends can come in non monetary forms as well, like enjoyment, quality of life, you know. But yeah, we're talking about cash. People don't.

And that's different for different people. Right. You might really want your own home just because you're ready to just live there and like you just want to be happy and you know, love that. For me, like I'm probably the opposite.

Like you're younger as well. Right. And so for all those 50 people I talked about, all of them, well, 49 of them own their house and live in it. And by, by when I say own, I mean their name is on the title. But they all have mortgages. Maybe one or two don't have mortgages and I would say less than 10%, maybe even 5% would have investment properties. All of them. Yeah, all of them would own shares anyway through their super.

Actually buying shares themselves that the company hasn't given them because a lot of them work in mining as well. I'd say probably 15, something like that.

A lot of them are quite conservative with investing, but as soon as it comes to a house, they're like, yep. And a lot of them even buy a house and they'll pay off a significant amount and then they'll just upgrade their house and continually doing that and they'll just build wealth that way. But it's stuck in their one asset that they can't necessarily sell.

Yep. No, it's fascinating, man. I think, I think it's a great rotation strategy for me anyway. Next, next bull market to, to move into a property that I don't live in that I can start to pay off the mortgage and then leverage the cash that I have from those profits to.

Diversify.

Absolutely. And even like you hear about tiger 21. So this is like people that have over. I think it's 20 million. Like rich people, right. They eventually join a club because you know, they're just so up there that they need other people to talk to. They might have sold their business. They now need to know how to invest. And it was something like the guy that runs it, they asked him, it was an interview, what percentage of people's wealth in your club is in real estate? And it was over 80%. And he said, why? And he's like, because it works. It's simple. You understand it, you know the numbers, you know how to make money. And even an idiot can collect the rent because these are long term investments, these are things that you will pass down to your kids. It's not a quick, you know, I need liquidity. It's, you know, 10 years, 20 years, 30 years, thinking way out ahead. And if you look 30 years back and how much property costs and how much it is now, there's a significant increase if you do that across the globe, significant increase. Again, it's an in demand commodity that people want.

Yeah. And then you have those micro markets within market. So like bull and bear markets, you have those, you have down periods, but over a 10 or 20 year period.

Exactly. So mate, that's real estate. That's why I was triggered. Now Ramit's comments are very surface level. We went right down, got the submarine right down to the bottom of the ocean, mate. We did. We didn't implode, we didn't crash and we came right back up. So hopefully, dear listener, this gives you an idea of how the property market will, how our market is structured, who owns what and what the different levers are so you can make better decisions around property and understand it at a deeper level.

Amazing, man. You crushed that. That was great. I learned a lot. So thank you so much, man. Thank you everyone for listening. If you have a friend or family that you think will find find it's valuable, whether they're getting into property, they own a property, they're getting into investing, maybe they're into crypto, we'd love for you to share it with them. It's how we can grow the podcast. We bring these to you two or three times every week. And yeah, we just want to keep growing the podcast and getting more and more people educated on investing and crypto. So thank you so much. Bergs, you crushed it. We'll see you next episode.

Thanks, champion. See you later.