Ep. 213 | Jane Slack-Smith – How to Adjust your Renovation Strategy for 2019?

Welcome to the Property Couch, where each week you get to listen to two of Australia's leading property experts. Bryce Holdaway, co host of Location, Location Location Australia on Foxtel's Lifestyle Channel, and Ben Kingsley, chair of Property Investors Council.

Of Australia and the 2014 and 2015.

Property Investment Advisors of the Year.

Alright, folks, John the Property Couch Rich with Ben and I bring you the insider's guide to property finance and money management. Hello, Ben.

G', day, mate. How are you? Very good.

Good to see you come off the hammock.

Yep. Like to get off hammock. Come in on this summer series.

Thanks for coming in twice a week, Ben, for the summer series.

I appreciate that you would not miss this content for the world.

You wouldn't. And we've got superstar guests lined up. We do, with amazing content and today is no exception.

Insights, knowledge, wisdom, experience. What else is there to do other than find some time for the couch?

I know, and today is going to be exciting for the renovators amongst us. Ben. It is because we have the none other than Jane Slacksmith with us today to talk all things property. But she's probably going to throw a little bit of Renault in there, I'm sure.

Yeah, look, I mean, ultimately, during these times of uncertainty, the best part about property is you're in control. So we're going to talk more about control and looking at ways in which you can add value or you can do things during these maybe softer, quieter times for some.

I like it, Ben. And we may even ask Jane about her thoughts around negative gearing. So shall we have a listen to what she has to say?

Let's go there.

Alright, Ben. So another very special guest for our summer series. I am of course talking about Jane Slacksmith. How exciting is it to have her.

Back on the couch? Absolutely. Thrilled to have her on the couch again.

Welcome, Jane.

I'm thrilled to be here.

Yeah.

How have you been? How was 2018 for you?

Oh, my gosh, 2018, what a year. There were so many things happening. And I think the thing around 2018, this is the period of time where we have major transference of wealth happening, this time of change. And it's when the ignorant or the uneducated get worried, they stay out of the market, they sell down. And those that are savvy, they have the education, they have, you know, some confidence, are the ones that are making money. And I think it's just been this huge kind of opportunity that we have in 2018, 2019 to see and help facilitate this transference of wealth to the savvy investor.

How did you find the conversations that you were having with your clients and your students around that very thing that you talked about? Was that a. Did you find that that was easy to transfer that over to them, or did you find there was a little bit of fingernails down the chalkboard?

Look, you know, you look at the media and every single day we're hearing about, you know, changes to the tax system potentially. And, you know, with the changes that we saw in the Victorian government. Well, not the changes in the incredible labour downslide. Labour downslide. You know, we have to anticipate that labor is going to have a good chance of getting in in 2019, and, you know, that will have its own impact. But we've got the changes, we've got the ASIC changes, we've got the royal commission, and every single day someone seems to come out in the media with something negative. And then you sit back and you look at the numbers and you look at there's markets going up, there's people making money. You know, we've got clients and students that are just doing amazing things at the moment and finding incredible opportunities. And it's so hard to go up against that type of negativity when you know, this is the opportunity that people have to make have an action. So that conversation is happening every single day.

So in the renovation space, you're seeing it as more of an opportunity than ever, given that you can sort of negotiate a bit better. And are your students having any sort of anxiety around? Sure, okay, it's easy to get in, but will I still have a buyer at the other end?

Well, that depends if we're talking about the buy, renovate, hold or buy, renovate, sell. So with renovation over the last year, I have got so many letters and emails from our students in Perth saying, thank God we put in place your strategy. Everyone else on the street is going backwards in negative equity and we've either kept above what our price was two years ago or value of our property or still on the mark. So we're not in a negative equity position. But our properties, where we've got an over 5% vacancy rate there, our properties are renting when others aren't because we've updated the property and we've been able even to put the rent up a little bit.

And tradies are cheaper because there's an oversupply they've come off. The builders are more competitive. They want the work that makes sense.

So looking at that, where we've got. And if you potentially said The Sydney and Melbourne market are going to go through some stagnation or quite a period. Would renovation and would buying in the market now still be something that you can do? Renovation is actually the one kind of go to strategy in my mind that actually gets people through this. So I talk about using, getting to the right location. So every month I do an analysis of over 8,000 suburbs. Only 331 get through my first four filters. And from there we get down to the streets where people should buy, where the renters are, and then we look at the pricing disparity between renovated and unrenovated properties. So people who are buying now because everyone's in chaos and confused and worried, are buying, you know, putting the trident strategy in place. They're buying below the market because they're negotiating, because everyone's worried. They're adding value through renovation and they're sitting on that renovation for maybe two to three years whilst they're getting low vacancies because people want their properties because they're renovated, they're putting the rents up, if possible as well. But then two to three years time they're in the growth area and all of a sudden they've got the growth potential of the property, so they've got everything happening. So I just, you know, I just think this is the time of opportunity and those that take the opportunity are really going to capitalise in the future.

It's interesting, isn't it, because we see in the share market where we're buying shares probably like the market gets caught up in the overall sentiment and it's very rare that you see some shares pushing through because at the end of the day their business is behind that. But whatever it is, the market doesn't necessarily value those shares appropriately or those businesses perfectly every day. So there's latency in that type of thing. But you're not in control of that, right? You've got a small percentage of a particular business or stock when it's your property, when it's direct residential property, you're in charge, aren't you? So you can make those decisions about renovating and adding value to be able to, I suppose, navigate through these uncertainties.

Absolutely. And I look at. I was speaking to a student just last week, so she was in Perth and she went through like location Masterclass and as you know, you know, we use location score and all people's different reports that come up with a short list and we put that into our suburbs, like software. And she ran this analysis very quickly against some suburbs and she came up with three suburbs in Geelong. Now she's sitting in Perth. She's done this over two weeks. She's then gone and looked at these suburbs in Geelong. One suburb had $150,000 pricing disparity between renovated and unrenovated properties. She flew over here, organised to have a look at some of the properties. She managed to find a couple of properties that we discussed. One of the properties, there's a smell of cat piss, turned everyone off. She was able to get it below the market and so within four weeks, he's put in place and being agnostic about her investing, so not just limited herself to Perth, she's looked at the best possible area she could buy. She's border, she's bought, she's ready to renovate. And, you know, the community down there in our community are sharing with them the trades that they have so that she can get in, go back to Perth and put a remote renovation in place as well. So it's amazing if you have the knowledge and you know where to buy. I mean, we're all on board about good locations and waterless investing.

Yes.

And then, you know, take the opportunity to renovate and push the rent up to improve your cash flow and borrowing capacity, which we're all going to need with the changes that we've had in the banking servicing models. You know, it's a great strategy, fits any market.

Well, it's a good point that you raised that, because I was going to ask you, because you run the dual sort of expertise of, you know, the renovation, but also having that mortgage broking background, what are some of the observations you're making sort of of where those two crossover? How are people able to get better finance? Are they better to release their equity now so that they can do the renovate? What are some of the things that you're seeing for people to be one step ahead of? What's going on with the handbrake?

Look, it's interesting because the people that we're talking to who already have property portfolios and they're sitting there and they're going, we've hit the ceiling. And obviously we know that just because one bank says no doesn't mean that every bank's going to say no. And everyone assesses things differently. So we had the opportunity to introduce them to lenders that potentially have better servicing, but it may not be the right time for them to buy. So we also have the conversation with them about how they can improve their cash flow with the renovation strategy of their current portfolio or take the Time now to evaluate their portfolio and see if there's a dog in there they should get out of. And they may not have the borrowing capacity, but they may be able to move one property from their portfolio and use portability to put in another property. So substitute. So there's some really great things there. But I mean, as you know, the conversations with lenders are harder and harder. It's taking us on average another 10 hours just to help get a loan process through. Just because the questions we're having, well.

There'S a lot more investigation, isn't there, in terms of their spending habits. And we're saying this to all of our community. You need to get your ducks lined up. If you're going to put an application up, make sure it's not in the time you've done a one off special purchase for your loved one. We're seeing declines on silly things like that. So it really is about making sure those last three months are squeaky clean, if not the last six months, because you're just going to get knocked on the head.

Well, look, I'm telling my clients there's a forensic analysis going on. These guys are like, they're looking for a reason to say no.

Yeah, crazy.

One incident recently, we had, you know, a complete straight through opportunity for a family. They're renovating the property and they're improving this property they service. Everything's fine. And the lender came back, well, the assessor came back with a question and said, I see there's been a $67 expense on a at Harris scarf. You know, Harris Scarf have debit cards? Well, no, this is on their EFTPOS statement. You know, this is not, this is just a once off. And they said, we really would like to know about this once off expense.

$67.

$67. So we went back to the client, she went, I bought a training bra and a bit of underwear for my daughter. So we had to go back to the assessor and go, this is really embarrassing, but we're talking about underwear. Could underwear actually get your loan declined? And the reality is that they're going back with a red pen and just looking at every expense and going, well, this is out of the ordinary. You don't usually go and spend this much money, so it's silly. But on the other hand, you know, we look at the Productivity Commission and we look at the Royal Commission, we look at everything that's going on and these guys are under scrutiny and they're going to, you know, reflect that down to the people who are they're giving money to and, you know, as long as we are prepping our clients on making sure that we know exactly what's coming up and what their plans are long term, and they're investing for the long term and the loans they're getting for the long term and allow them to potentially renovate when they can afford to with the right lender rather than going to a lender that is the one and done, you know, kind of cheap right now, it gives them the opportunity to plan their portfolio and the stupidity will stop.

You know, with all these types of things, the pendulum has definitely swung too far in the opposite direction.

Right.

So you need to find that balance. And when we're talking about delinquency rates at very low levels for the panic that's set in to the. And in all honesty, from the lending side, they haven't found any systemic risk in the system. They haven't. They've found a couple of cowboys doing the wrong thing. But I think if you did a royal commission into anything, absolutely, you're going to find poor doctors, you're going to find poor car salesmen, you're going to find poor mechanics. So that's the disappointing part.

Right.

Whereas where we're seeing this stupidity or trying to show their muscle or their weight or their relevance. But yeah, so it's frustrating. So, you know, when we talk about these types of things, we've just got to put it into perspective. And we're seeing, you know, the RBA now starting to talk about. Exactly, you know, bankers are here to lend and that's how they fought through. So I think the stupidity will stop.

And I think the other thing is we don't disagree that something was needed and we don't want the property market in five years time to be hit with all of these properties on the market because people going from interest only to principal and interest can't afford the properties anymore and maybe they've bought in the wrong areas and we never wanted that to happen. So we did want some rigorous around the lending space.

Yes.

So there was a time and place for it. I think, as you say, it was taken a bit too far.

Yeah.

The handbrake's locked on, isn't it? They need to unlock it. But you talked before about your clients. Percentage of them are rent on hold, percentage of them rent on sale. What rough percentage does that look like for the ones that hold?

Look, it's interesting because a lot of people watch the block or they watch TV shows and they see how easy the Flipping seams. Or they read. Yeah.

And they read an article, 48 minutes a night.

I know, I know. We could all do that.

70 tradesmen that they have behind the scenes.

I know, I know. And it's interesting just talking to people behind the scenes of those shows and how they've gone. Well, in actual fact, we had to put some extra money in to get it across the Renault, across the line or, you know, the numbers are always rubbery and it's entertainment. You know, we know it's not a realistic show. Yeah. Infotainment. But the thing about this is a lot of people come to do my renovation course and they want that flipping experience. So I would say potentially 20% would come into the course saying, I want to buy, renovate and sell. And then they get into the course and we run through. So we're very stringent on the feasibility. So understanding what is the comparable sale price of the property, what is the cost of the renovation? We give people the access to to calculators to help them work that out quickly. What is the holding cost? What is the profit you want to make? And that calculation translates to what you should purchase. For now, the only thing in there that will change is the profit you get to make. So if you make any assumptions that are wrong along that equation, you're going to get it wrong. So we kind of teach people the fact that they have to get that equation right. And when they start looking at that, I would say maybe 5% end up flipping.

So let's put the crystal ball on the table and let's put our focus into 2019. Where do we see, you know, where do we see it sit in terms of, you know, what are some of the big headlines you think will come out of this year?

Okay, well, I'm going to make a big prediction here. I think that as soon as there is an election called, all of a sudden people are going to go, oh, my goodness. I would like to have the policies grandfathered in for capital gains tax or negative gearing, because I think the writing's on the wall that labor has a pretty good swing at being able to get it across the line. And what we will possibly see is a bit of an increase in activity. So we're going to see increased clearance rates. People come artificially into the market for a three to four month period and they're going to push up the market and it will be artificial and be driven by the fear of not being able to have negative gearing, which is not a strategy, it's just a Cash flow management tool. We know that, but I think there will be a smart, small blip there. I think we're going to see a transference of wealth. So, you know, I'm talking to people at the moment who are saying we're getting rid of all our investment properties because everything's going to be bad for two years. But they don't plan to retire for 10 to 15 years time. So I think the people who are uneducated are going to lose out and those that are savvy with education and information behind them are going to sit there and they're going to reap the rewards. They're going to get into the market. I think they've got maybe three months before the election's called that people can act now and get in and apply the Trident strategy. Buy below the market during the chaos, put renovation in place so that they can improve their cash flow, they can keep the tenants in there and they glide through the next two years when the banking comes back that increase cash flows and help them with their servicing, they'll be able to start accessing equity when the growth comes and they'll be in good places. So I think there's opportunity.

There was so much in just that one statement that you said, using that analogy of, you know, someone said there's it's going to be rubbish for two years, therefore I'm going to sell them, but their outlook is 15 years.

Breaks my heart.

But the thing, the thing that I think is people are boxing at shadows because they don't actually realise what it's going to be rubbish for two years means. Because if they could feel comfortable with a bit of discomfort, okay, I'm going to read a lot of headlines, I'm going to watch a lot of television stories that are actually negative. But what really matters is during those two years is do you have enough cash flow to get you through the two years? Not does my wildly fluctuating artificial balance sheet, based on the headline of the day, going up and down for two years, does that actually mean that I can't still do what I want to do? And that's what Ben and I are trying to do, is to shine a light on that and say, if someone said that your cash flow is going to drop by 40%, that's a real issue. If someone says your value of your property is going to drop by 40%, one, we question the logic behind it. But the reality is if you've got the cash flow to go through the 40% fluctuation and you bought the right property. It doesn't matter if you're playing the long game. So you said people are selling for the next two years. It's going to be rubbish. But they've got a 15 year outlook. That is just a gold statement that you made and hopefully everyone who's listening to this gets it that it's about cash flow, not balance sheet.

Now we're really low on detail when it comes to this policy that labor is putting forth. I mean we don't know about companies, we don't know about trusts, we don't know about. Do you have any indication, have you read anywhere about renovations and the fact that that cost could be borrowed money and whether you could negatively gear the renovation cost?

Nothing. There's so much hypothetical. And you know, I think the sad thing is we know labor put this statement out about this policy change when the market was different and they're so stubborn and you know, and don't want to break promises even before they get into government. So making a change now doesn't look good for them. I think they get probably far enough ahead that it won't make a difference to what happens in the election. But there's nothing. It's like with the superannuation, you know, we get changes every single week around self managed super funds. And what does work, you know, a.

Month ago to say politically damaging.

No.

It doesn't change the voter.

No, exactly.

Yeah.

I think this one is going to morph into probably one of the two biggest challenges in the election. Like a real clear difference between both political parties. And I wonder whether households who are caught up in this because everyone keeps forgetting that the investor lives next door to the five owner occupiers, that whether that's going to start to play a role in people's mindset, I think there will be a scare campaign and I think it's well warranted because of the damage that this policy can do to the broader longer term economic environment that we're trying to strive to. We want a sustainable property market. We don't, you know, but like any type of market there's ups and downs, there's cycles. So it's going to be interesting to see how it plays out.

And I think the other thing is we need to keep in mind that most property investors are on less than $80,000 a year. You know, we're not talking about the millionaire next door that you want to kind of, you know, tell Poppy syndrome, bring him down. It's around we're average people who are, you know, investing in Property. They might have one or two properties. We're not talking about people who are.

Multimillionaires and we're seeing the commentary around. Well, that's after they take their negative gearing benefit off.

Right.

So they're trying to play it up as if this negative gearing benefit is 20, 30, 40, 50, 60,000. It ain't. It's about on average four, six thousand dollars. Yeah, it's like so they're so, so maybe they were on 90, you know, so. Okay, well, not the 120 to 150 that labor's trying to, you know, talk about, but it resonates with the voting community because they don't get it right. And everyone has an opinion on it because like property. Everyone has an opinion on property. They're all experts.

Because we all live somewhere.

Yeah, exactly.

And you look at some of the promises, like for instance with the Victorian election in November, you know, you look at those promises, they're delivered and going to be cash flowed by the funds that come through through stamp duty and through purchases of property. And when we start affecting the change in the property market, there's going to be a lot of these promises that can't be delivered.

And the R word, Ben?

Well, yeah, I think it is recessionary. Right. I mean, I've called that early, you know, so I can't see how it can't be. Once everyone works out that it paralyzes people because no one knows what's going to happen. I can tell you what I think is going to happen. Land values are going to get more expensive closer into the city. And so as an investor, I'm very comfortable buying low at the moment whilst everyone else is panicking because that is true and that'll be true whether I need that extra bit of cash flow from a negative gearing point of view or whether I don't. Because we've always said this all along, we haven't deviated from this point. Owner occupiers set the price and investors take the price in the better locations. If you go out to the mining towns and the yield play, I'm scared of that. I don't like playing in high yielding areas. If I'm looking for capital growth, if I need it for cash flow and I want a little bit of growth along the way, I'm going to get that. But fundamentally, not only am I getting that land, someday I might even subdivide that land and all of the neighbors next door and all that aren't going to be too happy with me. Because they bought in this beautiful street with all these lovely homes on it. And they're all going to be bowled over by investors who are like, well, now I can get my negative gearing benefit. So it's a silly policy. That's not to say that there doesn't need to be some changes to the aggressive nature of the policy, but the way in which they've approached it is wrong.

And we talk about Ben's R word. My R word is obviously renovation. And I look at that situation and I think, so we've got the opportunity for people to be buying well in these areas and renovating the property to sustain them from a cash flow point of view through this period of time and then maybe use the equity from the renovation to fund the subdivision at the back. Renovation is one of those strategies in any market that can actually be the answer. And I think be it recessionary or be it changes of policies that come and go, there's an opportunity for you to create money out of nothing. And if you can create at least $2 for every $1 you spend, you look at whatever's ahead of us. And we think there's an opportunity here. So educated people will actually make sense.

Because I'll be devastated if labor come out and say not even the money to renovate your home is interest deductible. But that's, that's a new renovation.

Exactly.

Like, why can't I, why can't I provide better accommodation, safer accommodation, more. I mean, renters. Just because they're renters doesn't necessarily mean they need to have poor accommodation. They all, they too might want to be house proud.

Exactly.

In the area in which they live. So it's, it's being very elitist in that sort of approach. No, no, good property investors don't provide really nice accommodation. That's rubbish. That is absolute rubbish. And good renters want to pay and they'll pay for that. So if we lose that. And what about your view on the capital gains exemption? Given that for some of your flippers or sort of sellers, that's obviously going to mean that the government's going to capture a little bit more of that. Does that change your view on renovating for sale?

Look, it does. I think a lot of people who are inexperienced or uneducated about flipping the buy, renovate and sell, a lot of the time they don't even, they're not even aware about the capital gains tax. So when they start talking about the profit I make and we start talking about, so what was the capital Gains tax you actually paid away. Oh, well, we didn't make money. We made three to five grand. Gee, that's a lot of effort for six months work. Right. So I don't think there's, that's actually a great understanding other than those that have done this many, many times and often they have started from a position of not making money because they weren't aware of the capital gains tax. So this could impact those people even further. So what concerns me is there's not enough knowledge about the flipping strategy to start with, about that fundamental FISO equation I mentioned. Understand the end sale price, take off all the costs, take off your profit and that then gets you down to what you need to be spending. But the tax has to come out too, and that's what's missed. So if we're going to make the tax position worse, there's going to be people in worse situations.

I mean the TV shows, they all just show the gross profit, don't they? I mean the American chose the Australia, oh, $90,000 made in 14 weeks and then, okay, well then I have to give 50% of that back to the taxpayer.

100%.

Yeah. And in some cases 100%.

So did it within 12 months.

You know, it's crazy, right? So ultimately that's the point that needs to be explained there and feasibility studies where you actually then saying, okay, well the gross profit is that, but the tax man's going to get their clip of the ticket and under labor a higher clip of the ticket again.

Exactly. So I think it's definitely a high risk strategy, the flipping strategy. And I don't think a lot of people realise that because if it's on TV it's got to be easy, right? And so everyone's doing it. But the other thing is that it could get even worse. And in a down moving market where we have the property value that you buy at today without renovation could be worth less in six months time when you finish your lovely structural renovation and put on top of that the capital gains tax. I think there's real opportunity for people to lose money. It's why you need to get the numbers right. First of all, you need to work in the buffers. You need to understand what your budget is and the holding time. Everything has to be planned before you even put in an offer. You don't start with the property and then go, let's flip.

Ben, always a pleasure to have Jane on the podcast, particularly the summer series. So if you're kicking back now, relaxing by the beach or having a good time. Going for a run. I'm sure you would have got some wisdom out of our very special guest, Jane Slacksmith. So thanks for coming on, Jane.

Been an absolute pleasure as always.

We'll see you later on throughout the year.

Alright, mate. Some gold there. Another ripper. Some gold there in our summer series.

Thank you, Jane, for joining us. It's always a joy to have her insights because she's one of the good folks in the property industry because her heart is to help people, isn't it?

Yeah, that's right. I mean, she, you know, created a portfolio that saw her pretty much ready to retire by 2006. And she is still continuing to share her knowledge and pay it forward.

Wants to leave a legacy, which is a great thing, which is why we love having her on the couch. So hopefully you enjoyed that, folks. But Ben, until next episode.

Knowledge is empowering, Bryce, but only if you act on it.

Well said, Ben. See you next episode. Want more great content from the property couch? If you haven't had a chance to go back to the foundational episodes, we got good news for you. Go to ThePropertyCouch.com TPC20 and check out the free Binge Guide, which gives you the insights you need from the first 20 episodes where we unpack the foundational pillars of the Insider's Guide to Property Finance and Money Management. It's completely free and available now.