Understanding asset selection

Show notes

Jarrod McCabe is the Director of Wakelin Property Advisory, a property advisory group that focuses on the importance of asset selection. With over 20 years of experience in the industry across valuations and investment advisory, Jarrod is proud to offer a skillset that delivers for clients.

In today’s episode, Jarrod explains what asset selection actually means, and breaks down foundational concepts such as equity and the property ladder. Plus Jarrod also shares his insights on a popular trend in the real estate market — rent-vesting.

Transcript

Michael Nasser 0:00
The information contained in this podcast is general in nature and is not to be taken as financial or personal advice. It does not consider your objectives, financial situation or needs, you should consider whether this information is suitable for you and your personal circumstances before acting on it.

Hi, and welcome to The Home Run, your guide to buying your first home in Australia. On the show, I’ll walk you through the home buying process from every angle. We’ll cover the steps to take, the pitfalls to avoid, and the answers to all your questions you’ve been dying to ask. No matter what stage you’re at, you’ll learn everything you need to know about buying your first home. I’m your host, Michael Nasser, and I’m a mortgage broker at Lendstreet. And I really love helping people buy their first home.

Today, I’m joined by Jarrod McCabe, the director of Wakelin Property Advisory, a property advisory group focusing on the importance of asset selection. In this episode, you’ll hear what assets election actually means. We’ll break down some foundational concepts like equity and the property ladder. And Jarrod will share his thoughts on a concept that’s getting a lot of attention right now – rentvesting. Let’s get into the conversation.

Welcome to the show today, Jarrod, it’s great to have you here.

Jarrod McCabe 1:14
Thanks, Michael. Great to join you.

Michael Nasser 1:16
So tell us a bit about your professional background, Jarrod. How did you get to where you are today?

Jarrod McCabe 1:21
Yeah, it’s probably a fairly long story. I won’t bore you with too much of it. But I always had an interest in property probably back in, I think it was year 11. I did some work experience with a local real estate agency who had evaluations and obviously property management in Ballarat, where I was at boarding school. And that piqued my interest through a bit of direction from that company to the directors, their suggestion was that I should do a Bachelor of Business in property. So I ended up going over to Adelaide to do that. So studied for three years over there. And then came back to that same business and suggested that I still wanted to be a real estate agent at that stage. And they told me that I should complete my qualifications to be a valuer, which required two years of supervised work and then sitting an exam after that. So I did that. And then after two years of supervised work, decided that I didn’t really want to work weekends at that point in time. So I stuck to valuations for another six or seven years in different forms, did some commercial work, and then realised that I preferred residential valuations. So went back to that I was getting a little bit sick of valuation work. So saw an advertisement for a property advisory role in residential investment advisory in a management position. So with a bit more responsibility, which was something that I was looking for that applied for that, and I’ve been with Wakelin Property Advisory for the past, I think it’s 12, nearly 13 years.

Michael Nasser 2:38
And can you tell me a bit about Wakelin?

Jarrod McCabe 2:40
The business was started by Richard Wakelin and Monique Wakelin. Back in the mid 1990s, March 1995, they started the business looking to represent investors in Melbourne residential property market, the focus was to buy investment grade property for investors in that marketplace. And it just really developed from there, there was other advocates around but weren’t necessarily specialising the investment space at the time. That’s what they were looking to do.

Michael Nasser 3:04
Seems like it’s pretty early on them as well. I mean, I guess now it’s probably more common, but back when they started, then it would have been quite a foreign concept.

Jarrod McCabe 3:12
It was and I mean, Richard talks quite regularly about the idea of people paying for buying advice, it was quite fun time when most people were used to doing it themselves in terms of buying property, there was always a real estate agent involved to assist with the sale process, but not so much from a buying point of view. So it was a big jump, but certainly something that they between the two of them did extremely well.

Michael Nasser 3:32
One thing that Wakelin specialises in is asset selection. What does asset selection mean?

Jarrod McCabe 3:37
It’s certainly something that’s a big focus for us. I mean, we talk a lot of clients come to us. And a key focus initially is we want to make sure we buy something at the cheapest price possible. And that’s always the objective, but it’s probably jumping two steps ahead as well. So the discussion that we always have is you’ve got to find the right property first. And I guess that part of that is buying the right property for the right purpose. So you need to understand of what’s the purpose of the acquisition? Am I buying it to live in myself and to have it as a lifestyle purchase? Or is it to buy an investment property, and sometimes the line can get a little bit blurred in that scenario. So we will really want to make sure we dig deep with our clients to make sure that they understand what the purpose of the property purchase is that comes to that assets selection. So if you’re going to need to make from a lifestyle perspective, compromises, understand where those compromises are, why you’re making them. And if possible, perhaps make those compromises areas of the property that could then be altered or changed at some point in time. If you’re compromising on things that can’t be changed. It’s going to stick with the property, longer term.

Michael Nasser 4:35
It sounds like it’s a real strategic process to it all.

Jarrod McCabe 4:37
And it’s something that we put a lot of upfront thought and discussion in with our clients to make sure that they’re fully aware and making the right decision. First and foremost, because obviously everyone knows that buying and selling properties, quite an expensive exercise. And so you want to make sure you minimise those risks upfront.

Michael Nasser 4:53
Do you have a recent success story that you’ve had with a first home buyer in particular that you can share with us?

Jarrod McCabe 4:58
I had a young lady that I assisted to buy an apartment, we looked at a lot of things and a number of properties to make sure that she understood what she was initially she was just looking to buy something fairly modern. And I talked to her around the risks in doing that, and why perhaps buying a modern high rise apartment may not be the best thing to do. I mean, helped her to understand why. And with that detailed discussion, we switched focus to still give her something that would provide the accommodation that she was looking for in the lifestyle that she was looking for, but to have some stronger attributes to that property and some stronger underlying land components to it and still be in a in perhaps a good location in terms of accessibility to services and to public transport in a local village, but perhaps not necessarily needing to be right in the middle of a high-rise building. And that worked really well. And we ended up buying a really good quality two-bedroom apartment in Armidale, at a really good price, because it was at the start of COVID. And she was prepared to continue to proceed with buying a property whereas a lot of other people weren’t comfortable with doing that. So she ended up buying it at quite a good price. And then with the price movement in Melbourne throughout 2020 and 21. She’s done very well out of that.

Michael Nasser 6:04
One thing you often hear about from first home buyers, it’s one thing we hear about quite a bit is the idea that they want to buy their dream home right away. What’s your opinion on this?

Jarrod McCabe 6:14
Yeah, we talk quite regularly about the property ladder and not having an expectation that you’re going to jump to the top rung on the first purchase, it’s needs to be working your way up that ladder. So starting on the bottom rung, and that can be starting small and sometimes it might mean you need to purchase something that allows you to take steps up and build equity. So it might be that looking at it from an investment lens. Rather than looking as though it’s just purely lifestyle and buying the first property that you see that your dream home and it needs to have all the bells and whistles in terms of fit out, there might be other opportunities to buy something that perhaps needs a little bit of work, it doesn’t need a full-blooded renovation. But there’s opportunities to add value in terms of improving the property as well and building equity through that, which then allows you to take steps up the ladder. So you’ve built that equity up and you might then buy a slightly bigger property or a property in a location that’s more suitable to the next stage of life, not necessarily getting your ideal style, your ideal location, and perhaps size upfront, but then allowing you to take steps up so that the next one is a little bit closer. And the next one is a little bit closer again.

Michael Nasser 7:15
One of the big things that the property we’ll talk about is the property ladder, I want to break this down a little bit. And the first important aspect of the property ladder is building equity against something that you’ve just mentioned. First home buyers who haven’t heard this term, and don’t know what it means. What is equity?

Jarrod McCabe 7:29
So equity is the difference between the value of the property and the debt that you hold against it. So if you have a property that’s worth $500,000, and you owe your mortgage against that is 400,000, then you’ve got a notional equity of about $100,000 in that property. And so you want to try and build that and expand on that. And there’s a numerous ways you can do that you can pay down the debt, which will obviously if you’ve got a property that holds its value, at least paying down the debt will continue to build your equity. But obviously, the other way to do it is to increase the value of the property. So if the markets moving then that helps, but there’s obviously ways in which you can improve the value of a property. And so sometimes first-time buyers can get caught up in buying something that’s got everything done and finished at purchase, which then limits the value increase to the only way that you can improve the equity. Whereas if you’ve buy something that perhaps needs a little bit of improvement doesn’t necessarily need to be a full-blooded renovation, but it can be paint, carpet, window furnishings, adding pergolas, perhaps, if there’s an opportunity with some types of property to add car parking at the rear, there’s ways in means that you can add value to a property and that can help to build equity as well.

Michael Nasser 8:35
I’m assuming when you mentioned the example of the first home buyer that you’d help buy the apartment at the beginning of COVID, we’re referring to the equity I mentioned, because when she bought it in 2020, it would have been worth X and now it’s worth Y and Y would be much higher than X because the market has shifted. And is that what you were alluding to earlier?

Jarrod McCabe 8:52
That’s right. And that’s been more about market movement at that stage than anything that she’s actually done to the property at this point in time. But there certainly are opportunities for her to be able to improve that property as well down the track, which will further increase the equity over time.

Michael Nasser 9:06
Jarrod, you mentioned about this concept of growing equity. Can you explain that in an example perhaps?

Jarrod McCabe 9:11
Yeah, sure. In terms of building equity in a property, if we look at, say, a property purchase of around, say $500,000, and we’ve had to borrow $400,000, to be able to purchase that property, we can build equity in a number of ways of doing that. Now, the first one might be that we pay down $100,000 over a couple of years, if we’re really good saver, and we will perhaps have a bit of a windfall and are able to knock a bit off the debt. So that pulls us back to only $300,000 of debt. And perhaps we’ve managed to have some growth in the market over that two year period as well. So perhaps the properties generally increased in value up to say $550,000 But we’ve also carried out a bit of work ourselves and been able to increase the value of the property further from that 550 up to say $700,000 Because we’ve renovated the bathroom, painted it throughout, perhaps done some landscaping And we know that the work that we’ve done has been really beneficial to that property. So all of a sudden, we had $100,000 worth of equity at the start, we’ve paid down a bit, we’ve increased the value, now we’ve got $400,000 worth of equity, we’ve gone from a debt of 300,000, versus a property that’s worth 700. So we’ve now got $400,000 worth of equity, which is how you can then build your process. But you can also then take that $400,000. And whether or not that means that you want to sell the property and take something higher up the ladder that meets your requirements, because you could perhaps borrow a bit more, you’re in a stronger financial position yourself might be able to go out and buy a property that’s worth in excess of a million dollars. But you might say, Well, I would like to be able to retain this property, because I’ve done my homework, it would make a really good investment. So perhaps I can’t get up over a million dollars, but I might be able to buy something at $900,000 because of the financial position that I’m in. And so that’s how we build equity in a number of different ways. But we also enable ourselves to take steps up our property ladder.

Michael Nasser 11:00
Yeah, the equity is the push that gets you up to the next level.

Jarrod McCabe 11:03
100%. And that’s how you create wealth through property investment is that equity.

Michael Nasser 11:07
And so now that we’ve defined equity, let’s talk about the property ladder. What does it mean to get onto the property ladder?

Jarrod McCabe 11:13
It’s basically your first purchase takes you onto the property ladder. Now, the issue that we sometimes have with first home buyers is that the expectation can be to be jumping onto the property ladder, three, or four rungs up as opposed to just stepping onto the first rung and then working your way up. So that’s part of that discussion is what’s going to be the best opportunity for me to get onto that property ladder in the first instance. But then how do I take steps up through my property journey and being able to understand that that’s what’s required, and then how that can be done and achieved is really important. So it’s to understand what’s going to build equity for you what asset selection is going to help you build equity over an extended period of time, so that you can step up year after year, you don’t have to buy a new property every year, but helping you to get to where you want to be. And that will change too, I guess, it’s not a matter of what you may think is your ideal property now, is probably not going to be your ideal property in 5, 10, 15, 20 years time.

Michael Nasser 12:11
Yeah, as your circumstances change, obviously, your requirements will change as well. So for people who are on the property ladder, it seems the ideal situation is that you buy a property, then you get another one. And then you start to build this portfolio of properties, I guess, in one way or another? Is it always necessary to keep every property that you acquire or accrue over this journey?

Jarrod McCabe 12:29
Quite often hear people talk about keeping properties that they’ve purchased? And that’s where I come back to that asset selection around? What was the purpose of that purchase? In the first instance? Some people Yes, absolutely, it’s a great thing to be able to do is to retain certain properties, because that’s going to make a good investment going forward as well. But for others, it may well be more that property suited the purpose when I purchased it, but it’s not necessarily going to be the right type of property to retain as an investment property long term. And so it may well be a case of, I’ll step up the property ladder, I’ll sell that one that I’ve had. And if I want to have an investment property, I need to go and buy something else that’s going to work well as an investment property. So it’s something that needs to be and if possible, you should absolutely consider it. And if you’ve got the financial capacity to be able to retain it, and it’s the right type of property, then absolutely, that’s a great thing to do. But it’s not a blanket rule of Yes, keep every single property that you purchase.

Michael Nasser 13:25
Again, seems strategic, and it seems like almost every purchase, you’re sitting down reviewing and determining at that point, what’s going to be right for you.

Jarrod McCabe 13:33
Yeah and has it performed at an acceptable level? Is it going to continue to do that? Is it going to suit attendance demands going forward? Is it what they will be looking for? Is it going to be a property that’s easily maintainable? Or is it something that by not having you living there, the property may start to decline in different areas, and therefore that might decline its value. And so therefore, you’ve maximised it now make the most of it and move on to something else.

Michael Nasser 13:57
Jarrod, what’s the most common problem that you see in your space, when it comes to first home buyers purchasing property,

Jarrod McCabe 14:03
They quite often can get caught up in having a bit of a bargain mentality and trying to buy the cheapest property that they can. And it might be that they see something that comes on the market and think, Well, this is really good value, it’s really cheap. And it may very well be, but that’s where we come back to that asset selection, because it may be very, may very well be cheap for a reason. And if it’s cheap for a reason, it’s possibly the wrong property to be buying. So that’s where we come back asset selection is really important. So rather than focusing on price being first and foremost, your objective, get the asset selection, right the right property for the right reason, and then go about buying that property for the cheapest price that you possibly can. And that’s how you’ll start to work yourself up the ladder because you’ve got the right property for the right reasons. It will help you to build equity, and then you can take those steps up the ladder, whereas if you buy the wrong property at the cheapest price, it’s probably not going to perform for you. And as a result, that’s going to make it a lot harder to build equity going forward and tend to take steps up that ladder.

Michael Nasser 14:58
Yeah, I think being able to understand that the price is so in this instance, can reflect on the quality. And so if you’re compromising on price, are you compromising on quality? And trying to decipher that link and then figure out what can I get? That’s perhaps better value may not be the cheapest, but it’s better value because there are aspects to this asset that make it more superior than another one.

Jarrod McCabe 15:17
Yeah, exactly right.

Michael Nasser 15:18
The first homebuyers when it comes to buying investment properties, there’s something that people have been talking a lot about lately, and that term is rentvesting, that’s similar in some ways to the property ladder, but different, what is rent vesting?

Jarrod McCabe 15:31
So it’s around the property ownership strategy, where you rent where you want to live to suit the lifestyle that you have, and you buy a property where you can afford and you want to maximise your returns. So it’s understanding again, the difference in the purchase, and what is the purpose of that. So, for instance, someone may love the lifestyle of living in a high-rise apartment where they’ve got all their facilities at their disposal, they’ve got a pool, a gym, perhaps a tennis court, it’s easy to access, and they’re right amongst the heart of the action of whatever city they might be living in. But they understand that perhaps that type of property in that city might be in that infinite asset class where there’s more and more of the same thing being built. So they don’t necessarily build equity well. So therefore, that’s perhaps not the type of property that I want to own long term. But it suits my lifestyle from a livability point of view. So I’ll go and buy a property that’s more suited to gain capital growth in a different area, but perhaps not where I want to live.

Michael Nasser 16:25
Jarrod, I heard you mentioned the term infinite asset class, can you explain what that is, and why that’s important?

Jarrod McCabe 16:30
Infinite asset class is a type of property that has got an infinite supply. So there’s more and more of the same thing being built. So we talk about that quite regularly when we’re talking about high-rise apartments, particularly in and around Melbourne, because there’s a lot of them being built. And so you might buy a two bedroom apartment, and you might buy off the plan. But as soon as that property is completed in one year, two years time, there’s a very good chance that there’ll be three or four similar developments that will be built nearby. So there’s constantly been more and more of that asset class being being constructed. So that’s what we’re talking about an infinite asset.

Michael Nasser 17:01
And why would that be something that first home buyers should consider?

Jarrod McCabe 17:04
If there’s more competition for that type of property, it’s less likely to have demand pressure on that property to push prices up. So if you’re sitting in an infinite asset class, it’s far harder to see capital growth in that type of property. And therefore, it’s much harder to build equity.

Michael Nasser 17:22
The inside equity play again, it’s like everything that we’re been chatting about today seems to come back to that concept of equity, and what property can you buy that will ensure that you manufactured the most amount or create the most amount of equity? So I guess it’s tied back to that. And what’s your opinion on rentvesting?

Jarrod McCabe 17:36
I think it’s got merit for that type of person. Or perhaps I’m, I’m a bit more nomadic in terms of how I live. And I might need to move a little bit more perhaps whether that’s work requirements, or I just don’t like to stay in one place for too long. But I do want to have a foothold in the property market, because I see it as a good strategy to build wealth. But also, at some point down the track, I want to be able to buy a property and have a long term location, then this works quite well, I think it’s definitely got a place it’s not suitable for everyone. And if you can buy the right type of property to live in yourself, and that works as a good growth asset as well, then that’s a better way to go. But it’s absolutely a place for rentvesting, it can work really well for people.

Michael Nasser 18:15
And it seems to be something that is quite discussed in the circles that I’m in at the moment, I’m not sure if you see the same thing at the moment as it being a potential first step onto the ladder, and I guess it does exist and can work for some people.

Jarrod McCabe 18:27
The other way it can look is that people might prefer to live in a metropolitan area. This could flip in total reverse as well, but they might prefer to live in a metropolitan area, but we’d like to buy a house. And the most affordable area is to go to a large regional city to buy a house. That’s not where they want to live. So I’ll go and buy a regional and I’ll use Victoria as example but I want to live in Melbourne but I can’t afford to buy a house in Melbourne, so I’ll go and buy a house in Ballarat.

Michael Nasser 18:49
Now I’d like to close out today’s conversation by getting two general tips for our listeners. The first one is if you had a million dollars to buy in Melbourne, where would it be?

Jarrod McCabe 18:57
I think at the moment if I had a million dollars to go and spend I would go out to the western suburbs probably around Footscray and buy a little single front of Victorian or Edwardian cottage two bedrooms, a nice consistent streetscape that’s got good access to Footscray market and the public transport systems there the train has got good linkages into the city. And with the tunnel that’s been put in in and around there. It’s only going to go from strength to strength, the education facilities in and around the western suburbs have improved a lot as well in Melbourne and there’s still opportunities to buy properties in that 950 to a mil maybe tick over that sort of price point. So that’s what I would do.

Michael Nasser 19:31
Another term that I’ve heard you mentioned is streetscape. Can you explain what streetscape is and why is that important when considering a purchase?

Jarrod McCabe 19:37
It’s an interesting one, Michael so the streetscape we talked about his architectural style of houses and properties within the street particularly with a lot of the inner city suburbs of Melbourne that period style is really popular and so having a consistent streetscape of similar type properties in similar constructed and similar areas. So for instance, single fronted cottages and terrace houses Victorian Edwardian type era having that type of Property consistently upper Street is sought after and highly regarded versus some other parts. It’ll be far more inconsistent and you might have a variety of property types and it’s a little bit more eclectic. So for instance, some suburbs, like THORNBERRY in Melbourne has a bit more of an eclectic mix and that’s part of its charm. So it’s not necessarily a major negative but for people that are looking for more consistent streetscape, Thornbury sometimes can be a little bit more mixed, and it might have some 1970s and 80s, brick veneer houses as well as Edwardian cottages as well.

Michael Nasser 20:30
It’s an interesting way to consider it. And I’m sure a lot of our listeners perhaps may not have considered it before when they’re looking at that straight. It’s almost like is there a signature for that particular street or that particular area and associating that.

Jarrod McCabe 20:40
some suburbs are renowned for their streetscape and their style. So for instance, Carlton north in Melbourne is full of single-fronted terraced houses, and there’s a lot of them there. And that’s what people want in that area. So having that consistency is highly sought after.

Michael Nasser 20:56
And last of all, what’s your number one tip for first home buyers trying to get into the market at the moment?

Jarrod McCabe 21:00
Probably comes back to the original as we spoke about Michael, it’s asset selection for a first home buyer getting into the market, it’s make sure you buy the right property for the right reasons. So understand why you’re buying this property. And if it needs to be done with a bit of an investment lens to it, you can buy the right property so that you can build some equity, take a step up that ladder and get closer to your ideal property.

Michael Nasser 21:21
Yeah, it’s a bit complicated than just going out and buying a property. There’s that strategy. I think that we’ve alluded to the whole way through. And I think understanding that and working with someone like you allows them to at least be strategic about what to do and when to do it and how to do it to get to that end goal.

Jarrod McCabe 21:34
And most people don’t take it this way. But it’s never a short term thing. Or you need to do your homework and you need to do your due diligence, whether that’s working with a professional or doing it yourself, you just need to make sure you do the appropriate amount of homework to get the right result at the end of the day.

Michael Nasser 21:49
If people want to get in touch with you, what’s the best way that they can find you?

Jarrod McCabe 21:52
Best is probably to have a look on our website wakelin.com.au. And you can get out all of our contact details there, as well as enquiry areas to put through enquiries about what you’d like to discuss. And we’re more than happy to reach out and have a chat to you.

Michael Nasser 22:04
And those details will also be in the show notes for anyone that’s interested to check it out. Thank you so much for all your insights today. Jarrod, it’s been a pleasure having you on the show.

Jarrod McCabe 22:11
No, I’ve really enjoyed it. Thanks very much, Michael.

Michael Nasser 22:16
You’ve been listening to The Home Run, your guide for buying your first home in Australia. This podcast was produced by Lendstreet. Lendstreet is a mortgage broker and home loan specialists that helps first home buyers find the right loan to meet their needs. We know applying for a loan can be overwhelming and complex. So we help guide and support first homebuyers through the process from start to finish. To find out more, head to our website, lendstreet.com.au. We’ve also put a link in the show notes. To make sure you don’t miss an episode of The Home Run, be sure to subscribe to or follow the show in your podcast app. And while you’re there, please leave us a five-star review. It really helps others find the show. I’m Michael Nasser, and we’ll be back next episode covering another step on the journey to owning your first home.