Chapter 1: What are the common pitfalls of owning too much property?
we are back in your life oh that sounds weird anyway over the last few weeks we've talked about upgrading your property from your first home to your forever home then we've stepped back and asked the bigger question should you even be upgrading at all or would buying an investment property better your position in the long term but today we're here to talk about what happens after that so
Jessica.
Yes.
A lot of people buy their investment property, then they do it again, then they do it again. And then 10 or 15 years later, they've got this humongous property portfolio and they don't know what to do.
We see this all the time. And if you see somebody like that, you always send them to us, which is great because the sad thing about it is that they've done what they thought was the right thing. their whole life, right?
I'm not saying it's the wrong thing.
And it's not the wrong thing. We're not saying it's the wrong thing, but they're going, well, I've done this, I've done this, I've done this, I've made sacrifices, da, da, da. And then I've got to a point where I've got this huge property portfolio, but I don't really feel wealthy. I don't feel like I'm living the life that I want.
Yeah. And then you had the discussion with them and you're like, cause they always come to me and they're like, I want another one.
And I'm like, that's going to fix it.
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Chapter 2: How can being equity rich lead to cash flow problems?
I'm like, I can't do anything here, man. They're like, oh, what if we refinance? I'm like, it gets you like... some cash up front, but like you're going to rip through that eventually. And they end up in this situation where they're like, I can't retire. And you're like, you have like 5 million bucks that you can retire on.
You could have retired 10 years ago. Yeah. Honestly, it was like that. So I guess today we're going to break down a bit more about that. What should you actually do about it and how to fix it?
And we're talking about this like everyone has a giant portfolio. Not everyone has a giant portfolio. But even if you don't, don't turn off because the principles are still the same, right? Because when you're looking at how to build a property portfolio, it's really tempting to just go out there really quick and be like, give me one, give me one, give me one, give me one.
But you can focus on different kind of areas of the property market or different types of properties, yield, cash flow, active properties where you get yield and cash flow, but you have to do things to them. So again, even if you don't have a huge one, don't turn off. So the main property investor trap that we say is like, you know, we always talk about this. Equity rich, cash flow poor.
Can't eat a brick, can't sell a bedroom to go on holiday. Jess, you see that quite a bit. Talk me through it.
Yeah, all the time. So, you know, I've actually done a plan recently for somebody who had a ton of property, like $4.5 million worth of property. And even if, like we said, not everybody has this right now, but if that was your goal eventually, you should still know what your exit plan is. You should know why you're doing it now. Give me the why. Yeah, yeah. Why are you doing it now?
What is it for your future self that you're doing it for? So anyway, talking about like a $4.5 million property portfolio – they might have $2 million worth of equity in there, but they've still got some debt that they're servicing. So there's still some top-ups required for that portfolio to take off.
Yeah, because everyone just chucks it on interest only. Everyone's like, I'll pay off my own occupied debt, maybe if you're lucky, but I'll just chuck everything else on interest only. So you end up with this huge equity position, but your debt hasn't really reduced and rents will keep going up.
But often if you get a kick in that interest rate, the rents just aren't going to catch that and you'll need to keep topping up.
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Chapter 3: What strategies can help restructure a property portfolio?
Like you could buy anything and it like double in value in like five years. So people can be lazy about the way that they're investing because they're still doing the right thing. They're still getting the right return. There's actually no need to overcomplicate it. Whereas I think now we might see more tapered growth rates in the future.
So people really have to start thinking about what they're buying. And one, what are they focusing on? Is it capital gains? Is it cash flow? Is it both? Two, what do they need in their portfolio? Because you don't need you know, 15 capital gain properties, you probably need some cash flow properties in there to prop it up as well, right?
So I think people just need to be a little bit more strategic about that. And if we look at an example, let's say we've got two investors, one focuses on capital gain, one focuses on cash flow in their property, right? So both start with $2 million. They've got a 20-year time horizon.
The capital gain-focused property, they get a 7% growth rate per year, but they're paying $1,500 a month to top that up, right? Right. Investor two, same thing, $2 million of property, but they're cash flow focused. So they get a 5% growth rate per annum, but they're earning $1,500 a month. So it's an easier portfolio to hang on to, right?
At the end of 20 years, investor one, so this is the capital gain focused property, has $7.4 million of property. That's how much it's gone up. Investor two, $5.31 million. So you can see they've got substantially less in terms of their property. They've still got a pretty good game, right?
If you take off the money that investor one spent because they're topping everything up and you add the money that investor two earned, which is the same amount, the net capital gain for investor one is $5.36 million and the total gain for investor two is $3.69 million. There's roughly $2 million difference there and then net end position at the end.
It's just that you got to have the cash to top up.
that portfolio right yes and because they've had the like if you have dealt with it's just the risk return thing like if you've dealt with the burden of topping up a portfolio and taken the risk of topping up the portfolio you've been rewarded for it but it's taken a long time oh absolutely so you've got to make sure you've got the cash flow to get there yeah but
Again, people will be looking at this and going, right, if I just knuckle down and top this thing, I'm like, yeah, okay, you will get more in the end. But what do you want? What for? Yeah. What's an extra $2 million going to get you? It might be that you go, no, I need that because of X, Y, Z. I want this much money. Come retirement, I never want to deplete the capital.
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Chapter 4: Why is it important to understand your investment 'why'?
Like why wouldn't I? I'm like, yeah, but why? Yeah. Like what for? Yeah. And they almost like couldn't get their head around why I was even asking the question.
They look at you like you're weird, right? I know. And I'm like, we don't just buy things. I do. But, you know, like any clothes. But like, you know, it's kind of like it's one of those things where you go, cool, if that's you and you want to be the David Goggins of your intergenerational wealth and you're going to carry the boat and you're going to like build this giant portfolio. That's great.
You just might need to live off rice and beans forever to get there.
Yeah. And I think if you don't have your why clear, doing that is very hard.
And very depressing.
Yeah, yeah, exactly.
Whereas you might look at it and go, hey, you know what? The extra two million would be nice, but hey, an income would be nice along the way as well. I get to enjoy my life. There's probably less stress related to my property portfolio, hopefully. And it's still got a really good gain at the end.
What are you like in terms of, because I talk about this with heaps of people, so I think about it a lot. Yeah. Oh my God, don't ask me a personal question. I'm very much more like, I would rather enjoy the journey because we don't know what's going to happen next.
You're asking me if I would rather enjoy the journey or knuckle down. I reckon, Jess, do you know me at all? Yes, I do. Yeah, let me think about that. I'm a journey guy.
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Chapter 5: What are the differences between growth and income-focused investing?
And I'm like, man, I'm probably not going to get there. So it doesn't matter. Right.
And I had the best time.
Yeah. I've had a great time, right? I'm still doing okay. Yeah, yeah. And again, what I think it all boils down to is the why. And that's the bit where people really get this wrong. And there's a ton of other stuff that can go wrong here, right?
The messy stuff, the messy structures, you know, separate lending facilities for each property, separate banks, loans all over everywhere, things rolling off all the time, interest rates going up, interest only periods expiring. There's a ton of stuff that Cross-securitization, heck, divorces, ownership structures, LTCs, trusts, contracting out agreements, like all of this stuff.
That's a lot to get wrong.
It's actually not that much that can go wrong. It will likely all go wrong because you're holding these things over 20, 30 years, right? So when I list them all out, you go, oh man, nah, if I hedge this and get this right and do this thing and do this thing, probably like pay attention to my partner a bit more, I won't get divorced, you know.
But like at the end of the day, these are 30-year assets, right? You know, this is not a two-year time horizon. All of this stuff will eventuate, hopefully not the divorce for you. But, you know, it's kind of one of those things where it's like you can plan it as much as you want, but it's stressful as hell.
And so are you also partially saying that you could get all this stuff right at this point in time, but because of like changes with banks, changes with your life and dynamics and relationships, changes with laws and regulations, like by the time you get to the point that you need to sell it, it might not have been perfect, right?
A really clear example of that would be I could have structured everything perfectly. I could, like starting from the start, be at the right bank, in the right entity, with the right property, have a good mix of cash flow and capital gain. I could have a contracting out agreement in place to protect my assets. I could be regularly getting some income from my property portfolio.
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Chapter 6: How can debt pressure affect retirement plans?
Who knows? And to be honest, they're cashflow positive. Like we've gone for a really specific property type, which is not for everyone. You've got to be active in the portfolio. You've got to be managing our tenants. It's a big unit. Yeah. It's like, it's a big beast and it's not for everyone, but it's cashflow positive. So there's no initial need for us to like sell anything anytime soon.
We could probably just carve it up. You know, we could probably just divvy it up if we really wanted to. And you get that one and you get that one. And like, I don't know, we sell that one or something. But like, to be honest, it's so far in the future. I don't think James or I have actually thought about it. We've talked about it once. And we both agreed, like, why would we ever sell?
Is this like builders in their houses?
I can't see a situation now. We have...
stuff in play and like the agreements of what would happen if it all went wrong like if we were not speaking to each other like that is not the wealth cash in play which well the cash in play for me i don't want to cash them in what i want is the income and they are producing income already so i'm not actually worried yeah counter to that you can't like they're producing an income right
And some people, so like your situation might be different, but say like someone will come to me and be like, yep, I'm getting an income from my investment property portfolio. That income might be like...
grand a year and they're sitting on a lot of equity and property right yeah but we're the opposite we've gone for like cash flow properties yeah so we've focused on cash flow properties we've got the capital gains out of them by actively engineering that right we've gone in and renovated them these are not capital gain properties they're not going to appreciate at the same rate as like
a block of land on the edge of Auckland or so. Those are cap game properties.
But these people, so the people that I'm talking about, they've got equity in there and they're getting an income, but it's not substantial enough.
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Chapter 7: What signs indicate you need to reassess your property investments?
You are not thinking about tenants, vacancy risks, ups and downs in interest rates.
Well, that's the big thing with commercial property, right? As everyone goes, if that tenant moves out, what am I going to do?
Yeah.
And that's the thing. I think however you play it down, and if we use that earlier example, the person who's just hung on to these capital gain properties for 20 years, they've got five and a bit million to play with. Let's say you give me two million, I'll go buy you a banger commercial property, get you like – 120 in income per annum. Give the rest to Jess. She'll figure it out.
You can deplete that capital. You can leave your little kiddies the commercial property when you finally depart.
And everybody wins. I love that plan. That sounds like a perfect plan. I think that's the sad thing in some of these plans that I see or projections that I see is that you've got somebody who's accumulated all the wealth and they're just not willing to enjoy their life and use it to any degree. And if you look at what they're going to get to 100 with, it's, you know,
I always say either your flying business or your kids are, you know, like you can't take it with you. All you can do is spend it, work less or give it away.
Yeah. It's funny. I was talking about a funeral with someone during the week and they were like, my granddad doesn't want a funeral because he doesn't want to spend the money on the funeral. He doesn't. And specifically in his case, he's like, I don't want to spend money on people I don't like coming to the funeral. But I'm like, the money's gone. You're gone. You can't take it with you.
Yeah, it's so funny. So moral of the story is that we do like property for growth. You have to be conscious about the types of properties you're buying. Understand your why. When you've got to the point where you've accumulated the wealth and you're sort of feeling like you're not living your life the way that you thought you were, maybe it's time to talk to somebody and mix things up.
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Chapter 8: What are the benefits of diversifying your investment portfolio?
Bye.