Mike Mortlock: Hello. Welcome and thank you for joining me on "Geared for Growth". This week we've got a real exciting guest, we've got Pete Wargent, co-founder and CEO of AllenWargent Property Advisory. He's written four finance and investment books including, "Get a Financial Grip", "Four Green Houses and a Red Hotel." In the podcast we get into selecting the right type of property, the power of leveraging and compound growth and starting with why. Without further ado, here's Pete. Pete, thanks for joining us.
Pete Wargent: A pleasure.
Mike Mortlock: Now I just wanted to kick off with a bit of a bio or an introduction, so who are you and what do you do?
Pete Wargent: I am, well as you said, Pete Wargent. I'm a property advisory. I work in, I have a buyers agency. I also offer property advisory to hedge funds and international funds, and so I have a couple of strings to my bow. I also have a financial education company, so there's a few different bits and pieces that keep me busy. As you can hear I'm an Englishman by birth, but I've lived in Australia for a long time now.
Mike Mortlock: In terms of us getting to know you a little bit on the personal side, what posters were given prime real estate on the bedroom walls as a youngster?
Pete Wargent: Well as a pom, as you can probably guess, lots of football and cricket posters mainly. I'm a long suffering Spurs fan, for my sins, so it's mainly sport.
Mike Mortlock: Yeah, good on you. How did you get started in property? What was your first investment?
Pete Wargent: Well, my first investments were actually in the share market, but I'm going to show my age here, it was actually my wife that got us into property. It was her first purchase which is more than 20 years ago now, but actually back in the United Kingdom in a place called Cambridge, which is about 45 minutes out of London. Still got that house today and it's actually even out-performed the London property market with a capital growth of about 400 or 500%.
Actually in terms of Australian property, we were based in Sydney about 12 or 13 years ago and we started out eastern suburbs, Darling Harbour and Inner West, that kind of areas, and we've actually never sold a property. In all these years of buying we've always held on to them. More recently we've been investing in Victoria and Brisbane.
Mike Mortlock: Yeah, and that is an interesting concept that you talk about in your book at length, holding on to property, so we definitely want to get into that. You've been described as one of Australia's best or brightest financial minds, the most knowledgeable person on real estate markets, and an opinionated little twit. You're writing all your own reviews are you?
Pete Wargent: I think some money must have changed hands with a couple of those reviews, but maybe not the third one.
Mike Mortlock: The third one was admittedly said about yourself by yourself I think, or it might have been your university professor.
Pete Wargent: Yeah that's probably true. I think, yeah, I mean I like to try and cover a broad range of financial information on my blog, so well my professional career was actually in finance with Deloitte's, I was a director a Deloitte's some years ago. I don't just talk about property when I do my blogging and writing articles for the media, so I try to bring a broader scope where possible.
Mike Mortlock: Yeah, and just getting back a little bit to some of your highlights as well, you achieved financial freedom at 33, you obviously had a high-powered job at an ASX listed company, and all this with long hair. You're really bucking the trend.
Pete Wargent: Well the long hair is a relatively recent addition. I think in the professional services environment, having facial hair and long hair wasn't really the done thing, but one of the things I think self-employed does afford you is the opportunity to dress a little differently at times. Yeah, I was a chartered accountant by profession, so a very straight down the line career, but an invaluable way to learn about how businesses work and how the economy and financial markets work as well.
Mike Mortlock: Yeah, it's obviously going to give you a great grounding. I mean accountants are some of the best people to run businesses, such as you do. Obviously that financial analysis has given you an amazing ability to dissect property information. Just looking at your blog, we get right into the nerdy nuts and bolts on a daily basis there.
Pete Wargent: Yeah, that's cathartic for me, because my friends and my wife don't really like listening to it too much, so I get it all down on my blog every day, but over the last few years I've built up quite a fan base or readership there of well past a million blog hits now, and getting plenty of interest from overseas as well, which is great.
Mike Mortlock: Yeah, that's fantastic. Now you obviously, you're an Englishman as you reference, and the listeners will be able to hear. You also interestingly, when you did get to the point where you had financial freedom, you took a year off and travelled Australia in a combi van, I guess to see Australia, your new adopted country, and also to have a look at property markets as well. Can you tell us a little bit about that trip?
Pete Wargent: Yeah, I mean I think, I wouldn't necessarily think of myself as a particularly entrepreneurial type of person, a very traditional type of professional career, though one of the things I did discover is that once you've built an asset base that can go out and work for you on a daily basis, that can actually give you the confidence to then move away from reliance on full-time employment.
As I mentioned, we were pretty lucky with the London and surrounding property markets in the UK. Then we had an another, I suppose strongly performing period in Sydney property as well, and I think once you start to see the fruits of capital growth and particularly the compounding effect, that can actually give you the confidence to step away from a full-time career with a bit more backing I suppose.
We actually took 15 months out, to go and travel. We did as you said, we drove round Australia, to actually go and see some of this great country. We also did a world cruise, and that was actually where I wrote my first book, during that period. It just gave us a bit of breathing space, to think a bit about what do we really want to do from a business point of view, because whilst travelling is great, I wouldn't want to do it necessarily permanently, and you need a purpose for your every day.
That trip just gave us some breathing space and some ideas to think about.
Mike Mortlock: Yeah, and you obviously, it enabled you to chat in a bit more detail about those property markets and obviously it's easier to see the numbers, but you're referencing in your book about just things like graffiti and little things like that, that you don't notice until you've got your boots on the ground.
Pete Wargent: Yeah, and I think, I mean coming from a mining resources location, as I do myself, I'm from south Yorkshire, I've seen how cyclical all those places can be. I mean Britain went through the coal miner's strike way back in the 1980's, and, I don't know, Australia has a very different, a different type of economy today, but nevertheless, we have seen just how cyclical resources can be.
At that point in time, around 2011, when we were just coming up to the very peak of the resources construction boom and all kinds of exuberance happenings in those property markets. In fact my former employers, Deloitte, were often derided for calling the peak of the mining boom, the 2004-5 peak, had a few cracks at it, but yeah, when the top did come, the downturn had been very sharp, and there was a lot of pain being seen in some of those regions, and in particular in some of those property markets.
When you've seen some of those things first hand, I does give you a different perspective.
Mike Mortlock: Yeah for sure, and these resource states are potentially, maybe good investments in the short-term as well, as they've had quite lot of time of low growth. We've seen commodity prices changes, so it'll be interesting to see what happens there. I did want to just touch on another little dot point on your resumé, you did some work for East Timor’s Central Bank, now how do you get a gig like that? Now that's not going to be on Seek, surely.
Pete Wargent: No, that was part of my work at Deloitte's, so yeah we had a year or two in East Timor, which was a fabulous experience. An amazing country, if you ever get the chance to visit. As you probably read in the news, Timor has a petroleum fund, from its deposits there, so the work was obliquely related to that, but a fascinating place and yeah, it's definitely a place worth visiting if you can.
Mike Mortlock: Yeah, and an interesting comment was made in your book about moderating your spending and living expenses and that thing, and that seems like it's been a strategy of your in wealth creation as well.
Pete Wargent: Yeah, I think, I mean the simplest points are often overlooked, but spending less than you earn, it sounds like an obvious thing, but in today's consumer focused society it's very easy to, at the very least, spend every pay rise. If you're going to actually get ahead, spending less than you earn, and investing the difference is always the starting point.
Mike Mortlock: That is the main thread of your book, "Four Green Houses and a Red Hotel", which I do want to touch a little bit on today. You had a fairly good grounding in moderation, by going to Wales on holidays every year, to camp in the rain. What did that teach you about moderation?
Pete Wargent: Well that to be said, that was a part of my childhood, yeah, my parents, my dad was a probation officer or a social worker as you'd probably say in Australia. A family of seven, so we weren't setting off overseas on holidays, but yeah, I mean and obviously the budget was a bit tight at points in time, but yeah, I think, I mean holidays being one of the big ticket items that people spend big on these days, weddings, cars being other ones.
I think there's nothing wrong with spending money, but I think it should be done in a considered fashion. I think living beyond your means is the key thing to avoid for investors.
Mike Mortlock: It is a very simple concept, I mean spending less than you earn, investing the difference. Spending less than you earn just sounds, really, really simple, but we're not doing it are we? Most of us aren't doing it. Why do you think that is?
Pete Wargent: Well I think it's, no it's, the story of the economy really over the recent decades has been the triumph of consumerism, and you only really need to think about your average day, I mean we're sitting in front of screens now, you go to work, you sit in front of a screen, and even in food courts, you go to the gym, you see them lined up facing a screen.
We're becoming conditioned towards the whims of advertisers, and it makes it very difficult for young people, because we're sold a lifestyle dream and it's something that it's difficult to move away from really. Especially in higher income earning positions there's an expectation of a lifestyle that goes with that.
It doesn't mean to say, it doesn't mean you can't spend and enjoy life, but it's probably better that you've built a solid financial base first, rather than spending too much while you're trying to work your way up that ladder.
Mike Mortlock: Yeah, so delayed gratification I guess. It's funny how, you do talk about, in your book, the salary trap and why just getting a higher salary is not the best, necessarily the best way from a tax perspective and a strategy perspective, to achieve financial freedom. It is funny isn't it, I mean I can remember 10 years ago, maybe drinking $12 bottles of wine and then five years ago they ratcheted it up to 18. Now from time to time they get up to 30.
It's a common theme isn't it? When people earn more money, their expectations or their holidays and the wine they drink and the purchases that they make, they almost follow with perfect correlation.
Pete Wargent: Sure, and in most professional jobs these days, people are expected to work long hours and work very hard. There's inevitably a feeling that you do deserve a treat at the end of a busy and long week. Yeah, as I say, it's really about, it's not necessarily about trimming the budget down to the last cent, but it's more about considered spending and having a ... it's just probably a household budget.
I think the trouble with budgeting is it sounds so tedious, so even for an accountant. You might be better to think of it as a spending plan rather than just a budget.
Mike Mortlock: Now you personally were on your way to a pretty high paying job, if you'd stayed the course. You decided to chuck it all in, I'm not sure if that was the long hair about to drag you off the noble path of chasing the corner office and the big bucks. What made you decide to change that and change your mindset and look towards financial security?
Pete Wargent: I think it was really, being an accountant I've was always prepared my own P&L and balance sheets, and I think it was once I'd started to see really the compounding of creative, good quality investments, and you reach a position eventually, it doesn't happen overnight, but it does take time. You reach a position eventually where you can see that you can earn far more from buying and holding investing than you can from a heavily taxed salary.
I think it was really just that realisation, as the equity started to build, particularly up to a position where you have the choice to actually liquidate your assets and invest in income earning investments. I began to feel that I didn't necessarily need to be working 60 hour weeks to, I needed to pay 46.5% tax on my salary income, so yeah, it wasn't an overnight thing, it was really the gradual realisation, and the plan that we'd put into effect eventually began to work.
Mike Mortlock: Yeah, fantastic. Now in your book you highlight the importance of a balance of property and shares. Obviously you've got a financial background, you've got a lot of runs on the board with equities and index funds and that sort of thing. We're bit of a property podcast here, but why is diversification of both, across both property investment vehicles important do you think?
Pete Wargent: Well I think it's, as you said, the key word is diversification. I think a lot of people, probably including myself are feeling very smug about the performance of the Sydney property market. I think what people always need to remember is that all markets by necessity are cyclical, and they'll go through strong periods. Every asset class will have downturns and probably periods where people are wishing that they'd never been involved in the first place. I think, I mean there are different ways to diversify. You mentioned different asset classes, so property, equity and business.
There are other ways to diversify too, so diversifying over time is another one. By staging your investments, so purchasing maybe one investment a year for example, is another way. Also geographical diversification, so for example, in our portfolio we have properties in London, Cambridge and the south-east of England and elsewhere in the UK, but also around different parts of Sydney, Victoria and Brisbane.
The idea of building a portfolio like that, and it can save you some land tax for one thing, but I suppose just as importantly, you'll generally find that when one property market is performing exceptionally well, such as London and Sydney have been recently, some of those other markets might not be doing so well and vice versa. It's really about spreading your risk.
Mike Mortlock: Now getting to property investing, you mentioned in the beginning of the book that people should start with their why, a bit like Simon Sinek. Why do you think it's important to take this approach and did losing a mate when you were young affect that viewpoint? What was it about starting with the why that was important to you?
Pete Wargent: I think it's, I suppose the reason is, it doesn't matter what path you take, whether it's share markets, starting your own business, property investment, at some point you're going to come across major challenges. That's just the nature of it, nothing goes 100% smoothly. What success is really based upon, how you respond to those problems. If you have a resolve to just keep on going, regardless of adverse outcomes or problems that you may come across, then eventually you will reach your end goal.
If you, like many people, you dabble in investing, but at the first sign of trouble then you just give it all up, then you're almost guaranteed to have a sub-optimal outcome. I think it does pay to spend some time at the beginning, just thinking about what your ideal day would be, how you would, how would you run your own business or would you be, where would you be living? Thinks like that, because if you don't have an end goal in mind, the motivation can drop away.
Mike Mortlock: Yeah I agree, I think it's powerfully important, and sometimes trying to achieve these things are difficult day to day, and without that long-term viewpoint it's difficult to know what you're doing it for. Just getting on to property, you mentioned that it took you around 15 years to achieve financial freedom through obviously property and equities and things such as that.
You also mentioned that around two real estate cycles is probably a good timeframe for property investors to look at to achieve financial freedom. Why is this the case?
Pete Wargent: Well I think the real reason is that when you start out, by necessity you start out small, so for most people I mean literally by buying one investment. If you're able to save deposits, you might be able to buy two or three, but even a couple of breaks on a small portfolio of property is maybe two or three. It's unlikely to be enough to get you to your end goal, so for most investors what it probably means is taking some of the equity out of your gains and actually reinvesting in further assets, and probably in another market that hasn't experienced a boom period.
If you're able to do that and go through a second cycle, you'll find that, your portfolio is by that stage much larger and therefore the compounding effect is much more powerful. It's not to say it's impossible to create financial freedom through one market relatively quickly, but for most people the reality is, you probably need to go through a couple of cycles to really benefit from the upside.
Mike Mortlock: Yeah, and the title of your book, "Four Green Houses and a Red Hotel", is maybe an accidental reference to the amount of properties that you suggest someone needs, or was that purposeful? You say in the book, that around five, six or a handful of properties is about the sweet spot of what you need to achieve I guess a comfortable retirement.
Pete Wargent: Yeah, and I think, it was obviously a reference to Monopoly, without using the word and getting sued. I think though, I mean there is an element of truth in that, I mean it's not to say you can't then go on to build a much larger portfolio of properties and most successful investors probably do go on to do that.
I think, as I say, if you've got a core portfolio of five or six really good properties, because of the leverage that can be used in property markets, then you may find that that's sufficient to actually build the level of equity that you need to create financial freedom.
If you want to talk numbers, if you're thinking you might want a retirement income of say, $150,000 per annum, then you probably need to have equity in the region of around $3-million today. Just because it's been a lower interest rate environment, so if you're investing 3-million at 5%, there's your 150,000 per annum. Those are the kind of numbers that you might be talking.
It obviously sounds very intimidating for somebody starting out, but I suppose the key message is, that just by compounding your results over time, so what seems unachievable when you start out, gradually does become achievable through that multiplying or compounding effect.
Mike Mortlock: Exactly, and you do say the best time to start investing is today or yesterday if you can manage it. Getting back to your Monopoly reference, and obviously I'm now worried about the litigious nature of that company as well, but you mentioned growing up with a house full of brothers, and there was one particular brother that absolutely gave you hiding in Monopoly.
He was a bit of a mentor to you, there was something about his rational approach to the game that you think correlates with successful property investing. What made him so good at that, and what are the lessons we can learn for investing?
Pete Wargent: Yeah, that's my older brother Nick, he's, these days he's a lawyer, so I better be careful what I say about him. Yeah, I mean he took a very rational approach to the board game of Monopoly. He understood it's a numbers game, as investing always is. It's also about understanding the odds and when the odds are in your favour, placing a big bet.
That's something that he was able to do well, and I think if you've ever played Monopoly, that the key to success there is to invest hard and early, and to build those assets early on in the game. Because it's very hard to come back later on if you don't have that initial asset base, as just to some extent there is in the real world really.
Mike Mortlock: I think it absolutely does. Interestingly Monopoly has the pass and go of $200, which is I guess a little bit of a hint of the powers of inflation as well. You talk about having targets for what you want to retire on as an income. Inflation is chasing us all the time, how do we factor inflation into assessing our investments?
Pete Wargent: Yeah, I mean I think inflation, there's been a lot of talk in recent years about, oh there's a lot of these developed countries, they're going to follow Japan into deflation. I think, I was never a subscriber to those views, as you probably read in my first book back in 2011. I think, and what we've really learned in recent years is that policy-makers in central banks, they're going to throw the kitchen sink at the risk of inflation, which then interest rates are cut to zero, right across Europe, the United Kingdom, the United States.
Australia fortunately hasn't got to that point, but even beyond that we've seen quantities easing, bond purchases, so pretty much anything to stave off the risk of inflation. I think if people are going to learn anything from that, then it's really we need to invest in inflation-busting assets like equities and property for the long-term, because as you said, the value of the cash in your pocket is going to devalue year after year and the compounding effect is almost working in reverse there, against you.
It's very important that you've got assets that act as an inflation hedge for you.
Mike Mortlock: Yeah, and I do want to talk about compounding and leverage, but before we talk about, a little bit more specifics of the types of property and that sort of thing, you talk about self-sabotage as a concept quite often, and speak about why people aren't, generally aren't successful with real estate. Can you highlight some of the main reasons why you think that the majority of us are not investing in property and a very small percentage of us are getting portfolios around that five and six properties?
I think we're talking around about 15,000 people in Australia having six properties or more, which as a pretty surprisingly low number for Australia being a property-loving nation.
Pete Wargent: Yeah, and I'm a numbers man, I go back to the statistics, and what the stats tell you is that most people who own an investment property will sell it within a remarkably short space of time. I think there's, one of the most common laments here from long-term investors, is there's nearly always a property in a portfolio that they bought for 20,000 and sold for 22,000 and thought they'd made a tremendous gain.
I think, I mean I was quite lucky in that whether by design or otherwise, is that we've always held on to our properties, even after seeing a market triple in seven years and things like that. Because for one thing, the transaction cost of buying and selling property can be very high, particularly for investors because you've got Capital Gains Tax and stamp duty and potentially agent's fees.
It all chips away your return, but also as you're probably well aware yourself, the serviceability criteria for a new investor range, are in the process of being changed over time and I think it may be harder to get access to credit in the future than it was when I was starting out. I can remember going to a mortgage broker and him saying I could borrow seven or eight times my salary, no deposit needed.
Mike Mortlock: Yeah, yeah, those were the days.
Pete Wargent: Yeah, I mean, I think it's a good thing that's no longer going to be ... I think it's good thing for the market, but I think for individuals, it probably means that people will find it harder to build very large portfolios of property, so I think if you can buy good quality assets and focus on the best location you can afford to buy in, then the compounding effect, the longer it can work for you the better.
Mike Mortlock: Now talking about these assets, you mentioned a value sweet spot in your book, of around 500 to 800K, that's probably a couple of years out of date now, and on your website, in Sydney you've mentioned you're around the 700 to 2.5 mark, and I'm guessing you prefer a little bit closer to the bottom end of that bracket. Is the idea based on the proximity to the mean value and the inherent competition, if you're looking to sell the asset or at least revalue it?
Pete Wargent: Yeah, there's a few different things, really, I think being close to the median value for the area your investing in, it can actually just help to smooth volatility. What I mean by that, if you were to invest in for example, a premium house in Watsons Bay or Vaucluse, you'd generally find that the long-term result from such an asset will be very good, but the journey would be more volatile. Naturally there's very many fewer buyers of that type of property, due to the expense.
The other thing is that the higher the purchase price, as a general rule, rental yields tend to fall away, so serviceability can be very difficult. There's really two or three good reasons there, that being somewhere close to the median price, so as you said, there are more people competing at that price level, it tends to just keep a floor on the values, and it can just make the investment journey a less volatile one.
Mike Mortlock: Getting onto houses versus units, you mentioned you don't have a specific preference for either, but you do like to favour two-bedroom units around 100 square metres. Does the old adage, land appreciates, and buildings depreciates, you're not a big subscriber to that belief are you?
Pete Wargent: Well I think I am. I think, well I might, just a caveat, because funnily enough I was talking about this only yesterday with somebody. I think if there was one thing I'd probably change about the book I wrote in 2011, I think it's just, it was something that nobody was talking about at the time, the prospect, the combination of low interest rates and an unprecedented burst of activity from investors in mainland China, has really encouraged the over-development of apartments in certain areas.
In Sydney places like Parramatta and Blacktown, it's just tower blocks coming out of the earth on every street corner, but also around the airport and places like that. Brisbane, if you've been to Brisbane, you don't need me to tell you, but all around Newstead, Fortitude Valley, Southbank, even in places like Toowong, there's just very, very many apartments being constructed. I think that might have just changed the supply and demand dynamic a bit.
For that reason houses probably have outperformed units on average over five or six years. That's how you want things, just to bear in mind is the area and the supply and price tag. I'll give you an example, I recently bought an attached dwelling in New Farm, so it's not a detached house, but the fact that land appreciates and buildings depreciate as you say, even if you're owning a relatively small share of the land in a suburb like New Farm, where the long-term result will still be very good, because the value of land in this area is extremely high and rising.
I think the adage is useful to a point, but then you've got to try and apply those to the markets relatively after that.
Mike Mortlock: Yeah, and I've certainly noticed myself, sales agent contacting me saying they have fantastic investments in units in Brisbane and certain areas where there's over supply, and that raises some warning bells as well. When you're looking at, let's say you are looking at units, you're looking in areas where there's some inherent scarcity and you mentioned the grid system of Sydney and the fact that most of our capital cities are where the population resides, and they're all on the coast.
How does scarcity fall into your criteria when you're looking at a property?
Pete Wargent: Yeah, so I suppose, if you're looking at where new supply can be constructive, and in the suburbs, New Farm is a very good example, there's a height restriction on buildings, it's fully land locked on the peninsula, it's a very leafy, green suburb. There's very, very few new developments. There's a couple of just at the very top end of New Farm, which is really close to Fortitude Valley. Essentially in the heart of the suburb there's very, very little new supply can be constructed, so it's a naturally constrained supply.
If you're looking for scarcity, things like a view, a water view for example, I mean that's something which will always have value and it makes your asset somehow unique or different from others in the area. There are different ways to achieve scarcity, so I think if you're looking at a unit on the 35th floor of a tower block, well almost by definition there is no scarcity, because there are hundreds of other properties just like yours and some of the new builds are a bit on the small side shall we say.
Yeah, I think regardless of whether you're buying a house or an apartment it's really something that's in high demand, but also scarce in nature.
Mike Mortlock: Now we talked a little bit about the types of properties that you favour, but I want to talk a little bit about property markets as well. You're an advocate of counter cyclical investing, what does that mean and how can we see a location that is right for growth?
Pete Wargent: Well as a general rule, although I do own quite a few regional properties, generally speaking the demand is highest in capital cities relatively close to the employment hubs. Counter cyclical investing is really about trying to invest when sentiment is low. I would say, at the moment Perth will be coming back on to the radar, maybe not just yet, but if you give that another say year potentially, the sentiment in Western Australia is currently very low and so that's a counter cyclical element.
Just as an example, when I was buying in Sydney, through the period leading up to the financial crisis, I mean people were practically giving properties away, or at least they couldn't give them away quickly enough because people were fearful of falling prices, which looking back, of course in today's very hot market and people are very surprised about that. That's what counter cyclical really means, it's being greedy when others are fearful and vice versa.
Mike Mortlock: Yeah, and you mentioned that the long-term trend for the property market should track household incomes over the long-term. Are there any factors that will alter this correlation, like super funds going into property, and how do we explain what's happening in Sydney where we've got booming prices but wage growth is pretty soft?
Pete Wargent: Yeah, so at a macro level I think you'll find that over time going forward. Now I mean there have been factors historically that have pushed house prices ahead of incomes, so a very simple factor has been females coming into the workforce and the growth of two-income households. Another factor has been interest rates falling from decade of double digit levels to around about half that today.
There are obviously those macro factors that have helped to keep house price growth ahead of incomes. Yeah, you mentioned some of the more micro factors, like super funds and so on. I think though in a country like Australia, where you don't have death duties in the same way that we do in Britain, there can be a lot of family wealth built up.
In some of the prestige locations prices have really become disconnected from incomes entirely, because the people buying them are using equity, business wealth, inherited wealth, and where there's a genuine scarcity of property, well prices they're almost marching to their own drum to some extent.
Mike Mortlock: Yeah, and I want to talk about demographic trends as well. They have a big influence on property markets. You mentioned females coming in to the workforce, obviously we've had changes to the availability of credit, but we've had a lot of inter-state migration, we've had pretty strong population growth. How do these demographic trends influence property markets and how can we use some of the things like Bernard Salt's releases, to get an idea about where we should be investing?
Pete Wargent: Yeah, I mean demographics are a huge selling point for the property market. We mentioned the mining boom previously, well that rolled into a population boom for Australia. At the peak the population was growing by more than 450,000 per annum and the population growth has slowed at the national level, largely because of those resources, regions and states. Speaking of Melbourne, it's kept its population growth very high. I would say 100,000 per anum, so those two locations have been creating jobs on the back of construction.
If you were to ask me going forward, what I think is already starting to happen, and it's not yet come to the state where it's lagged, that would be inter-state migration, we've already seen people from Perth heading to Melbourne, but I think at this stage in the cycle you would expect to see people leaving Sydney in favour of southeast Queensland. I think we've seen about four or five courses of that already, but actually the data is behind, and I think that's actually already taking off.
The outcome of that will be some stronger growth in southeast Queensland's market, but maybe not in some of those apartment markets that are over-supplied.
Mike Mortlock: You talk about property markets having natural speed limits as well. Is that what you're talking about when you're saying that Sydney is likely to slow as affordability becomes worse and people move out? Is that an example of something that helps set a speed limit for the property market?
Pete Wargent: Yeah definitely, I mean we've sent these fees as high as they are now in places like Sydney, there comes a point where whilst speculative buying keeps prices moving north, there's a lot of people now who are moving towards renting or moving inter-state or simply because of the affordability factor.
You only need to look at the western Sydney markets where prices are actually getting ahead of what people can actually afford to pay. If interest rates were to nudge up a notch then, yeah, I mean, I think those markets could easily flood.
Mike Mortlock: Now your viewpoint is that we should not necessarily look at what's happening today and tomorrow, and you say things like, you make more money while you sleep. Your timeframe for assessing property is a bit longer than maybe people would be used to. You talk about thinking about what the demands are going to be in 20, 30 or 40 years, has there been a philosophy that you've adhered to throughout your investing career?
Pete Wargent: Yeah 100%, and I think, far too often in today's world, I mean it goes back to what you talked about, delayed gratification, but in property terms people are so interested in the next hot spot. What's going to happen in the next 6 months, 9 months, 12 months? I mean you really can't predict, there's so many variables, you can't really predict accurately what will happen over such short timeframe, so I've never really focused too much on that.
All I really look to do, to some extent try to buy counter-cyclically, but just trying to buy in the areas that over the long-term I think where there'll be high demand. In for example, in Sydney, I've got properties in Umina Way, I've still Bondi. I mean places like that, near the beach, there's a relatively constrained supply close to the city. There will always be a long-term demand. In Brisbane really those ... somewhere very easily commutable to the city will be in high demand, and I'm sure Melbourne's the same.
Mike Mortlock: Your philosophy on leverage and compounding capital growth seems to fit pretty well with the title of the podcast, "Geared for Growth", can you run us through the concepts of leveraging and compounding and capital growth and why these are important concepts for us to master and consider?
Pete Wargent: Leverage, if you were to define it, it really means doing more with less, so in property we traditionally think of borrowing the banks money to invest, and obviously that comes at a cost in terms of the mortgage repayments. What it does mean is that everyday people can invest with more money than they would be able to otherwise.
I suppose the flip side to that is that there's leverage such as using mortgage that actually magnifies results both good and bad. It means that it's important to have a long-term outlook and try and de-risk the investment to the extent possible.
Compounding is really, it's probably the most powerful and important concept in finance really. It's the multiplying effect of capital growth. An asset that grows by 10% in year one, might increase from 100 to $110, but the multiplying effect of that over time becomes very powerful, so an asset that's growing at 10% per annum will double in value in just over seven years, even though intuitively you might believe it might take 10 years.
Now while that might not seem all that significant when you're talking small numbers in the early years, as you multiply out over time, particularly if you're combining that with leverage, the results can be astonishingly powerful. Which is why you hear about people selling houses in Sydney today for 50 or 100 times what they paid for it. It doesn't seem possible at the point of purchase, but it's the impact of leverage and compounding.
Mike Mortlock: Exactly, and you talk about generational attitudes to money and finance, and it's a mindset of the past that you should save up for something and buy it when you've got the money, or you should strive to pay something off and then never a borrower or a lender be. There's all sorts of attitudes like this, but it's really, for some of the people that have grown up with those sorts of wealth advices, it really is a big shift in changing your mindset, isn't it?
Pete Wargent: Yeah it definitely is. Even in one generation, I think back to my parents, they were very socialist, or left wing background anyway, but even back then the mindset was very much be a homeowner. Yeah even investing in equities was really only for the top echelons of society, but also owning second homes and holiday homes, it was really only the preserve of the wealthy.
An investment property probably wasn't a very popular term back then, and it was very much about, reliant on the defined benefit pension schemes, which unfortunately are no longer with us for most people today. Really the onus has shifted back onto us, because we won't have those generous pension schemes, so therefore it's really down to individuals to invest in their own retirement.
Mike Mortlock: There are a number of reasons why we resist that, aren't there? I mean there are people that say, I'm doing okay, or it seems a bit greedy to own a number of properties. You advocate a process of calculating your net worth, and I've done this a few times, and it can be rather humbling. Why do you think it's so important, as something to do to help give you an idea about where you need to be and where you are now?
Pete Wargent: Yeah, I think it really comes down to having the right numbers for your retirement, because I think that the average super balance at retirement is so low compared to what would be really needed for an annuity at that point in time. If you're not going to invest in the future, then you're going to be reliant on the aged pension, so I think it's really about just generating a big enough pool of assets or equity so that you won't have that reliance.
Mike Mortlock: It's obviously a really important thing, and it's something that we want to try and get across in this podcast, is that most of us are going to retire unhappy, or at least with not enough money to do what we want to do. It's important to learn as much as you can about property investing, but it's a very noisy environment, there's a lot of different media outlets that are trying to push agendas or clicks, with click bait and that sort of thing, there are people trying to steer us into different types of properties.
You advocate being careful of who we listen to, but how do we assess people and how do we know who we should be listening to?
Pete Wargent: Well I mean, even just taking it outside of the property investment world, I often think, if you want to achieve something the best thing you can do is go and find somebody who's actually achieved what it is you want to. I think the main thing really is listening to property market commentary, there's a lot of vested interest of course, as we all have an interest one way or another in the property market, but if you're actually serious about generating wealth through property, I think you'd be far better advised to try and follow the types of people that have actually been there and done it.
Not just over one or two years, I'm thinking over a couple of cycles or maybe three or four cycles. Because as I say, I mean there's a lot of the focus is, through necessity today, on the short-term, but there's far less discussion over what you can achieve over the long-term. I think it's really as you said, about seeing through the noise and building yourself a plan to succeed over the longer-term.
Mike Mortlock: You're someone that gives quite a lot back to property investors and the community at large, with obviously your blog spot page, which is so prolific. You mention that everyone that has achieved financial success has an obligation to give back. Obviously you donate part of your income or proceeds to charity and you've done some volunteer work. Why do you think it's important how does that tie in to you goals and your personal inspirations, or aspirations and legacy?
Pete Wargent: Yeah, I think again, I mean it's finding a meaning or a purpose for what you do, I think is always, it's important. Investing in property and wealth and all those sorts of things, it's not all about the me, it's about as you said, creating something worthwhile. I think from an educational point of view, well just like everyone else, I learned everything ultimately from other people over time.
I think once you've, you feel like you've to some extent mastered the game, then you have an obligation to teach your children, family, friends, anyone who's interested in creating a better future for themselves. Then if you can pass on that torch then that's got to be a good thing.
Mike Mortlock: Now getting back to that, we want you to be passing on as many torches as we can get you to today. Getting back to equity, as far as you can diversify with shares, how do we get around that with real estate?
I mean obviously you can buy $5,000 worth of shares in many different companies, but you've got to stump up a fair load of cash to buy one property, and it does expose you to one particular location. How do we get around that with property?
Pete Wargent: There's no easy way. If you want to buy quality property, by necessity you'll be less diversified than you would be through the share market for example. That's why I always focus on quality. I'd leave the secondary locations for other people. I think buying the best asset you can and having a long-term outlook, I think that is, that is really the two things that you can do to protect yourself.
It is as you say, it takes a good deal of time to get diversification in property, so for that reason you want to try and de-risk the process to the maximum extent that you can.
Mike Mortlock: All right, so the fact that it's difficult inherently to diversity with real estate makes it all the more important to select the correct first property. You talk a lot about prime locations in major cities, and most of your properties match that description, how do we find that right property and how important are things like proximity to transport hubs and things like that?
Pete Wargent: Yeah, so I suppose it really comes back to budget, because obviously in an ideal world we'd all own fantastic properties on Sydney Harbour and all the rest of it. I think with what's happened to prices over the last decade that's not a reality for a lot of people today. Starting with the budget, it's really about buying in the best location you can afford to do. Almost by definition, there is more scarcity in the land closer to the centre of the city, just concentric rings, there's just less land and there's more demand for it.
It's what they call in economics, the big rent curve. I mean it's not something that everyone can afford to do, but it's really about starting with a budget and working out what's the best thing you can do with the budget that's available.
Mike Mortlock: One thing I do notice that, in the types of property people like to buy, they like to buy something that they'd be comfortable to live in themselves, which you talk about a little bit. They also like to buy something that they can potentially drive past or in the same area, because they understand the research, they understand what's happening in their back door.
You've invested in regional locations, but you don't necessarily advocate it. What's your best advice for making a decision based on the numbers rather than the emotion and that sort of thing?
Pete Wargent: Yeah. I mean I think there are two things there really. One is, people say, don't buy an investment property emotionally. That's good advice, but then I would just say there's a 10% factor there to take into account, and that's that people do buy property emotionally, and therefore if a property looks attractive to you, then other people will likely feel the same way.
One of the things that I have always looked to do, ever since the first day I starting in property investment, I looked at locations that I thought I would like to live in. I know that that might sound as though it contradicts your point, but I figured a young professional, a good salary, a two-income household, locations that are close to train links to the city, 10 to 12 minutes, that kind of thing.
In particular just looking for places that I thought that would be the sorts of places that I would live in. Although that might sound slightly contradictory, but I do know that my target tenant is essentially someone like me. Therefore I was using a lot of those principles whereby you might say that's emotional, but there's some logic behind it too, in that if I can buy the types of properties that I know will be in strong demand from young professionals, then I won't go to far wrong with finding a tenant.
Mike Mortlock: How we get across the problem of markets like Sydney? Obviously Sydney's got some great fundamentals for long-term growth, but the price of entry can be crazy, even for people that are looking for their second, third or fourth property. Would you advocate looking at regional areas, or is it better to stick to capital cities that have a lower entry point? Or should we just throw it all out the window and find someone to go in with us and Sydney all the way?
Pete Wargent: I think at this stage in the cycle, the reality is a lot of people can't afford Sydney. I think with the best will in the world you've missed most of the cycle. I think people will be looking at alternatives now, so whether that's looking inter-state, or whether they look at the central coast or Wollongong, I think that's what happens at this stage in the cycle. We saw it in 2003-4, when Sydney peaked out and prices went essentially went nowhere for a few years.
Yeah, so I think at this point in the cycle, people will look at alternatives, and there's maybe something to be said for that.
Mike Mortlock: Part of your role is helping people in buying investment properties, obviously you're a qualified buyers agent and co-founder of AllenWargent, how do you source property and how do you help people find something that you really, almost guarantee is going to grow in value over time?
Pete Wargent: Yeah, this is where I suppose you've got to try and steer away from general advice, because what's right for one person might not be right for another. It's to some extent about quantifying tolerance of risk, but also doing something that's appropriate for the right stage in somebody's life. In terms of sourcing, properties, we obviously try where possible, to try and find stuff, either off-market or pre-market opportunities, they get first look at it.
That's one thing that somebody who's active in the market on a day-to-day basis can help you with. Even listed market opportunities or auctions, it's really about matching the profile, the investment profile of the person in question with the right type of property. It's about budget, it's about sensibility, future growth prospects, all of those different things, and then making sure you get the right asset for that person.
Mike Mortlock: It is funny, isn't it, that people are quite happy to throw their superannuation in a big pot and deal with a fund manager that they've never met, who is giving them poor returns. They're wanting to save money and do a lot of things themselves. We certainly see that in our industry, in quantity surveying, and there's a reluctance to use experts and buyers agents. What value does a buyers agent give?
I mean you referenced that there's obviously the right type of property for the right type of person. They might be nearing retirement with a portfolio already. They might be looking at their first investment property. How do you help people find what's right for them?
Pete Wargent: Yeah, I mean look, back in my own investing career, and when I started out, I mean truthfully I didn't really know very much at all. When you look back I probably made every mistake that you could make. Over-paying, buying properties with special levies, all of those different things. I suppose to some extent just by buying in good locations, the market's been very forgiving in places like Sydney.
I think, what a buyers agent can really do is help you to side step many of those risks, so de-risk the whole process just through their experience. Negotiations, buyers agents can often help and save you money. Auction strategies, but also really identifying the right types of property to invest in. Because even if it makes just a small difference per annum, just 1% per annum, the difference over time of an asset that's performing marginally better can be huge.
I think there's a whole range of aspects in which, in my case a professional can help, it's just as you say, that not everyone wants to spend that amount of money because they may feel that they're in the stage in their journey that they're funds will be better diverted.
Mike Mortlock: I have to say that it's fantastic to hear you say that there was a time, a point in time where you had no idea really what you were doing. I think people will take a bit of confidence from that, because reading your books and reading your blog, you're an educated person, so it's fantastic to hear that we're all learning and it is a little bit of a journey and sometimes you make the wrong calls, sometimes it's hidden by a market that's going ahead anyway, so thanks for sharing that with us.
Pete Wargent: I think there's probably no more important message than that really. Is that, well whatever path you choose to take, it won't go smoothly, you'll make mistakes, a lot of things are very different with the benefit of hindsight and 20-20 vision, but all you can really do is make the best decisions that you can at any point in time, and you just learn as you go.
Just because markets are always changing anyway, they're ending environment is changing, demographics are changing, so it's really a question of when you come across those difficult points in your investment journey, just resolving between discerning opportunities rather than a reason to give up.
Mike Mortlock: Yeah, and I think that's a fantastic way to sum up the podcast Pete. Thanks very much for your time. If people are wanting to get in touch with you, what's the best way to do that?
Pete Wargent: Take a look at my blog page, my contact details are on there, so that's just my name firstname.lastname@example.org. Yeah, shoot me an email, I'm always happy to answer any questions or just click on that.
Mike Mortlock: Fantastic, and if there's one piece of advice that you could impart to budding property investors and seasoned property investors, what would it be?
Pete Wargent: Really just to understand the importance and the power of time and what time and compounding can do. I think that people always underestimate what they can achieve over the longer-term and they probably over-estimate what they can achieve in six months or a year. It's really what you can do over the long-term, by using compound growth to your benefit, it's almost immeasurable.
Mike Mortlock: Fantastic, thanks Pete, I very much appreciate your time.
Pete Wargent: It's a pleasure Mike.
Mike Mortlock: Have a good day.
Pete Wargent: Cheers.
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