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Lauren: Hi listeners and welcome to this month’s podcast. I’m Lauren Day, journalist with API and this month I’m speaking with property millionaire and author Jan Somers.
Today we’re going to discuss what you should do if you’ve bought a lemon.
Hi Jan, and welcome.
Jan: Hi Lauren, how are you?
Lauren: Good how are you?
Lauren: That’s good. Now, you’ve always believed in holding property, never selling. Why is that the case?
Jan: Well, a long time ago, probably 30 or 40 years ago, I decided I really wasn’t a trader or a speculator. I got burnt on a few, not quite burnt, but didn’t make a lot of money out of a couple of attempts and there were too many ‘ifs’ involved. Too much depends on the market timing, when to buy, when to sell, and so I just thought ‘do what you do do best, go teaching, do something else and hold onto your properties. Let it look after itself.’
Lauren: And you’ve always been happy with that decision?
Jan: It’s been a very reliable formula is the best word.
Lauren: I guess the thing is though, a lot of people in the Gen Y generation have bought a property in say 2007, 2008. Since then, it hasn’t had much growth in some areas, not all cities obviously, and that could be costing money to hold. So what I wanted to put forward was, is it actually worth keeping, if you think you’ve bought something five years ago and it hasn’t performed.
Jan: Okay, five years in the scheme of things is really too short a time to make that kind of decision. You need to make a whole list of what could happen, what might happen, what’s gone wrong, etc etc. But really, the decision should be made after a minimum, absolute minimum, of 10 years and preferably 20 years. I think Gen Y and all the rest of it, Gen X, is really not patient enough to see the long-term effects and to even be prepared to wait that long to see the effects.
Lauren: So even if you bought five years ago, it had gone down, would you just say, it’s still too early, don’t worry about it?
Jan: It’s still too early. It’s still far too early. It would have to be an absolute lemon, absolute. And that’s pretty much hard to define to decide to sell it, but in general, I think it’s too early to make that kind of decision.
Lauren: But what about opportunity cost? Say it’s costing about $100 a week to hold, that’s stopping you from buying something else. What’s your opinion on that?
Jan: Well, then you need to look at what’s the something else and that something else can really only be shares or cash or if you’ve put your money into self-managed funds then they’re very dependent on shares. So the opportunity cost is really about looking at the ‘what else’ is there. To me, it’s really a no brainer. Cash is just dead money, the interest rate is too low and shares is too much of a ‘what if’ kind of speculation game.
Lauren: Yeah but what about selling and then buying in another area in Australia?
Jan: You could, but again you’d need to wait at least a minimum of 10 years to decide that you’re going to do that. Buying in another area of Australia is fraught with the distance landlord syndrome and you need to make sure that the light bulb does need changing when the manager says it does.
Lauren: I wanted to ask as well, for example, my own husband bought a property in a suburb in Brisbane and that’s gone backwards. Is he better off just selling that or again, is it a case of waiting for the cycle?
Jan: It is a case of wait. It really has to be an absolute complete dud to want to sell. Perhaps if it’s in a totally flood prone area that you can see is going to get flooded every year for the next 100 years. Ipswich has always been prone to floods, way back in 1840s when land was first released it’s prone to flood. So if you accidentally bought in an area that it’s going to be continually prone to flood then of course, that might be a good reason to get out and move onto something else. But in general, I’d say 10 years is the minimum to make that kind of decision.
Lauren: Ok well funny enough, this is actually in a flooded area but it has flooded in what, 2011, and then also 1974.
Jan: Yes, and if we went back even further, probably in the 1960s and the 1930s and going back to the 1890s and even 1841 there’s records of floods in those areas. We tend to forget about it too quickly, we tend to believe there’s never going to be another flood, we’ve got Wivenhoe Dam but we should know by now, not to believe a politician.
Lauren: So in that case then, would you sell it?
Jan: Possibly, possibly. If I knew it was going to be prone, I’d move on and move out. But it would have to be, like I said, a complete dud, completely, before I moved out. We’ve only had one or two in the whole history of our 40 years, and one I’ve kept, and it’s still a dud, and the other I did sell and it just happened to be at the peak of a market so I did okay out of it.
Lauren: Wow, can you say where the dud was?
Jan: In the Redlands area, and it was mostly to do with the construction of the building, more so than the location or anything else. I had a habit of buying properties cash, no pest, no building, no controls. Most properties have problems with them. Two of these properties had a lot more problems than the others.
Lauren: So why didn’t you ever get a pest and building inspection?
Jan: I’ve always avoided it because it doesn’t always reveal everything. Ninety per cent of properties are okay, and it enabled me to buy properties cash, on the line, at a much much cheaper, discounted price. Rather than the seller know, it could be subject to finance, it could be subject to pest, it’s subject to building. It’s subject to this. You’re going to get it at 10 per cent less. And so the money I’ve saved doing that more than covers the termite control or whatever else might have been needed further down the track.
Lauren: That’s amazing, have you had people say you’re crazy to do that?
Jan: Of course, but it’s just a betting game, that I bet that something probably won’t go wrong with a property. And so I’d rather get a property for $500,000 when I know the market price is $550,000 because someone was prepared to accept $500,000 on the line and no ifs, buts, maybes, subject to or anything else, and so I’ve got $50,000 up my sleeve to pay for anything that I might have missed in the first instance.
Lauren: Okay. And what do you actually define as an absolute lemon when you say ‘if it really is a lemon, I’d sell it’?
Jan: Well it’s hard. I think one that’s costing large amounts of money on a regular basis. Large amounts. And the property is probably beyond repair in its present state and would have been better off knocked down. So in other words, the house that you bought has gone back to land value only, and they would have been the two major problems that we had with our (two) properties. One was built on very reactive clay, and the second one was just a homemade job that was very cleverly tidied up at the time.
Lauren: And you’re happy with those decisions, to sell those?
Jan: Yes, very happy. Well, sort of happy, but you sort of pass the problem onto someone else and you wonder is that an ethical decision anyway. I go along with the line that ‘buyer beware’. We’ve always had to beware and everyone else should do their homework as well. And accept, all properties have problems. It’s just that some problems are bigger than others.
Lauren: Yeah definitely. Do you actually think we’ll ever see a return of the boom times that so many young investors hear about? If only you bought 10 years ago, you’ve probably done quite well. Do you think that will come back?
Jan: Well, it sounds like my father. He said forever and a day that he should have bought the property next door back in the 50s when it was only 200 pounds, because it boomed not long after that in the early 60s and probably now it’s worth $300,000. The boom time happens at that point in time and no one knows exactly when it’s going to happen again. But with a long-term investment you never really have to pin point when that boom time is. You’re just there, you hang on and if a boom happens and if not, well, you’re there for the long haul.
Watching the pot, it never boils, so ‘watch pot never boils’ is a good philosophy. If you’re going to watch when the boom is and then buy it right then to get in with the boom, it never happens.
Lauren: So where would you be buying right now if you were looking for another investment?
Jan: Anywhere where there’s not lots of the same kind of thing. I think there’s certain areas like the Gold Coast and Sunshine Coast where there’s lots and lots of units that are there and they’re pretty much all the same. If you’re going to buy an investment, it’s not really of an investment because there’s too many other choices as far as rentals are concerned. If you’re going to be an owner-occupier it’s an absolutely great time to buy in those kinds of areas. It’s cheap and you’re not relying on the rental income, you’re just in it.
Lauren: Exactly. And what about other areas around the country?
Jan: Each one has to be judged on its own but there’s a lot to be said for location. I think infrastructure and public transport is a great concern now in Australia and I think we’re hopefully going the same way as Europe where public transport is very well defined and very well built.
But that’s just starting to happen here so the key would be to buy in very good transport locations.
Lauren: And is that what you always look for now?
Jan: I’ve always looked for good transport locations. I’ve taken a punt in the past and punted that people would buy where the train line was but in fact people were starting to buy where the bus line was because it was more reliable. There’s always those hit and miss decisions but if you stick by a few rules and have good transport, the train is better than no transport at all because if you don’t have any transport than you’ve got two cars to get yourself around and double the cost. You’ve got the depreciation and all your rego and all your insurance and all the petrol costs and spending that extra money to get into slightly better locations is far cheaper than having two cars.
Lauren: Definitely, we all know about that.
And what do you make of the low interest rates at the moment, are you advising that now is a really great time to buy because the holding costs are just so affordable?
Jan: My philosophy is any time is a great time to buy. We shouldn’t look at the overall economic condition of the country on deciding whether it’s a good time to buy. I’ve always bought property based on my own personal circumstance. I do the sums, it’s not very difficult, I draw a line down the centre of the page. I draw my income on one side, and my expenses on the other. I get another page, put my assets on one side and my liabilities on the other and say ‘can I afford a property right now’? And so I’ve bought when interest rates are as low as they are today at 4.9 per cent but I’ve also bought property when interest rates are 16 or 17 per cent because we could afford it at the time. Because the rent was extremely high at that point. So I don’t look at the overall economy. I look at my own personal finances to make that decision.
Lauren: Fantastic, thanks so much for your time today Jan.
Jan: Most welcome Lauren.
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The information in this podcast is of a general nature only. It doesn’t constitute investment advice. Listeners should seek professional advice in relation to their particular circumstances before acting.