Analysis of the RBA’s Rate Cut in Australia – Mark II

My father was a very shrewd businessman, one of the best i knew, and one principle he always taught me was that “you make your money when you BUY something, not when you sell”. Now, I get that you need to sell something to realise the profit, but essentially what he meant was that if you buy anything at the right price, then making a profit once you sell is easy.

So at the risk of sounding all Déjà vu – with another rate cut this week from the RBA in Australia, I wanted to spend a little time analysing this and the impact on our economy from a property investor/developer’s standpoint

I guess for the majority of Aussies, the record interest rate cut to bring our cash rate to a historic 1% will bring one of two emotional responses:

Joy and expectation that the big banks will pass on at least a portion of this cut through to consumers’ loans saving of the mortgage each month;

Or irritation for those savers or retirees who base a larger portion of their income on interest from term deposits, bank bonds etc.

In reality though, to step back and look at the “bigger picture”, I myself, while not surprised at the decision to cut the rate, am concerned at the outlook for the economic future…

Admittedly, even at 1%, we are still higher than most major economies in the world, with some still around 0% and Switzerland still anchored in the negatives.  Only the US and Canada really above us, and even through the US have lifted themselves from the canvas and brushed off, they are staring down the barrel of another cut before year end…

Then there is a famous quote by Albert Einstein, that I feel I am using all too often these days but seems to be a moral to a story right at the moment – “Insanity is doing the same thing over and over and expecting a different result.”  I can only assume the RBA has not heard this quote, and/or not sure if they actual expect a different result?  Even looking at the world economies, and with so many central banks already below us still, it has not had the impact on inflation and growth that years ago it might have.  Why we stayed at rates so low, because the RBA was so focused on the exchange rate rather than our economy, driving our housing prices through the roof for 10 years – is beyond me.  But to now expect that cutting rates through the floor will suddenly make it all better…not sure Mr Lowe…

The concern for us as investors is twofold:

1. Where to from here?  They are wanting inflation to rise, stimulate growth in the economy but what strategies does the RBA or the federal Gov’t for that matter have to fix this?
2. Where to put our money to try and ensure good returns still with cuts coming left, right and centre?

While I cannot comment on the first point, not being an economist, my opinion is just that… but on the second, my 2 cents worth… I am happy to be in real estate!  Its right now, where I would be eying my share portfolio (if I HAD a share portfolio) with intense scrutiny wondering what it was going to do next.

Even in markets with the economy floundering, people need to live somewhere.  We need to watch our strategies, and I certainly would not recommend purchasing retail properties right now, with the fear that if prices fall and you are highly leveraged, you could get into trouble.

Bear with me a moment and imagine if you will a strategy :-

We purchase a distressed house for a cash investment (yep – bear with me here!) say for around $50K on the wholesale market.  Put another $20-30K into this to get it back to a nice standard and tenant the property.  As a rental this property is now giving around a $1400 per month income (approx. 15% yield net).  Valuations of the retail price come in at around $90-100K now.  All looking nice (*sips the whisky*)

Now – the “crash” hits – GFC mark II…boom!…  Prices drop 30-40%.  People are losing their homes left and right.  You drop your whisky (shame too…it was an 18 YO Glen Morangie…) and hit the numbers to see the impact…  Your investment is now valuing at around $70K (ooh look, that’s about what it cost you) OK so that’s not too scary.  Maybe even your tenant leaves, but with so many people now losing their homes, rental market is hot right now, and you have prospective tenants lining up at $1600 per month to take your place (now up to around 17% ROI net…) 

Now firstly, with the above scenario I am NOT predicting the next crash or GFC (although I would argue the world is in a financial crisis at the moment with global interest rates…but that’s another blog) and not at all saying this is a good thing.  But I just want to highlight that if you buy real estate right, and have the right strategy, even in tough times (or especially in tough times) you can still have good investments…

Hit us up to chat more about these strategies…

So, other than purchasing properties at retail, through realtors in the states, another good option for the savvy, experienced investor is Wholesalers.

Now in the scheme of real estate in the US, Realtors are essential on the “Retail” side of sales, and Wholesalers are on the “Wholesale” side of sales. Here in Australia, we generally don’t have the wholesale market as much, unless you are a larger developer etc looking at more commercial or larger residential blocks for subdivision

Wholesalers may not be someone you will be able to get access to up front, it might take some time in the market to seek out and find these guys, but can be handy to know a couple.

On the flip side, you must also be careful with wholesalers. They often may not be as reliable or honest as Realtors (that is if you can say all real estate agents are honest?!) but there are a lot less rules and regulations around wholesalers

I would certainly still use my Realtor (at least for a time until you have more experience in the region) to deal with the wholesaler, visit and walk through the properties and negotiate on your behalf, just to help keep the wholesaler all above board so to speak

Generally, you may not know a particular person who is a wholesaler so it is often a matter of finding them. Your realtor may know one – hell some realtors are wholesalers themselves, but I would be careful here, as in that case you would no longer have an “arm’s length” relationship and the realtor may not be working in your best interest and could be getting kickbacks from the wholesaler to sell the properties, just watch out for this.

To find a wholesaler, sometimes Mr Google is your friend 🙂 If you type into a google something along the lines of “buy homes in Cleveland Ohio” for instance, this will bring up a number of listings pertaining to Cleveland. Most will be realtors, but you will find scattered throughout this wholesalers as well. Can be good to get onto a couple of wholesalers mailing lists and they will then send through deals to you.

Our US Property fix and flip course also contains more information so if you’re interested – please give us a call below.