TEITR 419 (Risky lending & investing)

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Veronica: [00:00:00] In this episode, we discuss the growing gap between how property investing is being sold and how risk is actually building beneath the surface.

Veronica: We unpack the lending practices and investor behaviors that have been flourishing in recent years and why regulators are now stepping in from APRA's crackdown on risky lending To CB, A and other banks tightening on lending to trusts and increasingly loud voices crying out about poor quality, property advice and buyer's agent practice.

Veronica: The message is clear. The rules are changing. Not a moment too soon, ​

Veronica: [00:01:00] In this episode, we're exploring the advice being given to investors right now, particularly around SMS Fs or self-managed super funds, leverage stacking and equity extraction to build portfolios at speed. We interrogate what's happening and what will happening if an interest rates rise again, rent soften, and the promised.

Veronica: Instant equity never materializes. For investors who've built strategies on optimistic assumptions and glossy forecasts, the consequences could be severe and not evenly shared between advisors and clients. Alright, Chris. ~Um, ~this isn't a discussion that you and I have been having off air for some time.

Veronica: You know, and we are looking at it from both sides. From the property advice and buyer's agent side, and also the lending side. Um,~ Um, ~let's start talking about when regulators have seemed to have noticed what we've been noticing,~ um,~ for quite some time. So regulators start cracking down. Banks starting to pull back at the same time.

Veronica: [00:02:00] Is that a warning sign investors should take seriously, or one that they're gonna be encouraged to ignore? And I suspect there's some encouragement to ignore happening out there.

CB: I think, um,~ um,~ in terms of, for the people that have been following along at home, they probably picked up in episodes that we've talked about. This Ben Kingsley episode was a, was probably the precursor that, you know, we were talking a lot around. The risky borrowing or the risky purchases that investors are making and the scale at which they're buying.

CB: ~Um, ~and you know, if you look at the a FR sort of not rich lists, but the a FR fast starters, you can see many buyers agents on there, and some are. You know, got huge amount of revenue. ~Um, ~which is fair enough, they're businesses and, you know, good on them for,~ um,~ growing their businesses. But I guess when you look at the size of the revenue and divide it by a buyer's agency fee, you can see the amount of scale that they're actually buying at.

CB: And,~ um,~ while they might have other revenue, et cetera, it's, you know, it's pretty easy to see that they're buying a lot. ~Uh, ~and they're not all of them are on there as well. We know [00:03:00] that there's also a big cohort of buyer's agents that have been buying, you know, for. Investment centric for, you know, way before the recent way.

CB: But it has gone on,~ um,~ off the scale I think in recent years. You know, particularly access to ~ um,~ these, um, type of buyer's agents sort of, you know, through channels like YouTube or podcasts you know, not just through, you know, ~um, ~people sort of searching online. They're sort of finding their content and um,~ um, ~yeah, so that's been a concern I think on internally as obviously we have mortgage brokers.

CB: We've sort of sort of seen there's this been this,~ um,~ story in the marketplace that you've got unlimited borrowing capacity. If you type that into, you know, um,~ um, ~YouTube now, you'll find there's many videos on it. ~ um,~ and often that, that people not, not people even in the mortgage game. ~Um, ~and they're talking about how they do it on their situation and that, you know, and they're sort of not getting advice on the way that that you should do it. They're just saying, this is what I do. And I think that's really dangerous as well because what they do is not what you should do potentially. ~Um, ~and so I think that there's this been brewing all year. We've seen an issue with the type of properties that people buy, but then [00:04:00] also this,~ um,~ appetite to do this, what you call trust lending.

CB: And I've also, one of the guys in our team Pier, she's probably the guy I go to on this and say. what, what, what options have I got? You know, if I wanna really extend my borrowing capacity, how do I do it? And, and him and I have had chats all throughout 2025. And I'm just like, really? They'll do that.

CB: Really? Like, and I, and I keep getting shocked, particularly in the non-banking space,~ um,~ not only around trust lending, but self-managed super funds. And so, yeah, I, I think that was brewing. And then Ben Kingsley had a chat with us. And then literally straight after that, Macquarie came out who was probably one of the ones who had more of the relaxed policy lending around trusts.

CB: They said, hang on a sec, we've got an issue here. ~Um, ~and then they said they changed their policy and they came and changed it again a week later realized it wasn't hard enough and CBA pulled out So yeah, this has been, um,~ um,~ obviously a story, but a lot of people have taken it up and a lot of people have geared up hard this year, particularly if they go to these type of.

CB: ~Um, ~property advisory firms because the pitch is like, go hard or go home. You [00:05:00] know, like, you, you've gotta borrow 2 million brokers. I can get you five properties and I can do it right now. Why would you weigh opportunity costs? so a lot of people have gone from maybe not much debt to a lot of debt,~ um,~ and haven't really sort of built up that sort of confidence or understanding how cash flow is and, and investing through trusts is a whole other world.

CB: So yeah, it's, it's a lot going on. I know that was a long start to this podcast.~ ~

Veronica: ~Um, ~I've seen it in LinkedIn. I've seen it elsewhere, of course, but one of the things I've really noticed in LinkedIn, and this is before Ben,~ um,~ penned that letter, the picker letter that we discussed in that episode, which will put the link in the show notes to that episode if you wanna hear that.

Veronica: ~Um. ~So what I've been noticing is a lot, particularly from brokers, right? So I know that buyer's agents and these investor focused buyers agents, I know that they like to buy multiple properties, and I've always looked at it as being, well, they look at the total borrowing capacity and they sort of carve it up.

Veronica: Make sure you buy lots of, as many as you can, sort of squeeze into that budget. know, it took me a while to realize that there's. Often they're in cahoots with a broker who is very aggressively [00:06:00] pushing lending, you know, these aggressive lending,~ uh,~ strategies to their clients.

Veronica: Because let's face it, both the buyer's agent and the broker benefit from this, You know, the broker gets ongoing,~ uh,~ trial commissions from more loans rather than just one that they can afford in their own name. ~Um, ~obviously the buyer's agent's taking, taking a fee every time they buy a different property.

Veronica: They don't just charge you one, one fee and then, okay, well, well, your budget, we can buy three. So it's the same fee as if we buy buy one. ~Um, ~so they're sort of motivated also to go for the volume. There's inherently a lot of very unsophisticated. Investors, which I will say there are a lot of people out there investing in property that are not what you call a sophisticated investor.

Veronica: And for them they see that volume, the amount of properties that you have is, is a metric that they're chasing. And they're also lured by high rents because it feels like it doesn't cost them much. It feels like, ~um, ~if you're getting a high yield and, and the out-of-pocket expenses aren't that, great, it doesn't feel as expensive as a high growth asset that is gonna have a lower yield and is gonna cost you and is gonna hurt your cash flow.[00:07:00]

Veronica: So, you know, you can. Feel and understand how the message really appeals to sort of middle Australia, particularly a particular sort of cohort who have acquired some equity in their home and sometimes a decent Superfund balance as well. And these advisors. In sort of cohorts with the mortgage brokers, get their, be little eyes on these balances and think, what can we do with that?

Veronica: How can we sell this dream of property ownership and this great retirement to these unsuspecting, hardworking Australians who've sort of, you know, been pretty conservative up to this point in their lives? And I've spoken to a number of people I've, I've saved some from the clutches of the devil. ~Um, ~Um, others, sadly I've only spoken to after they've already bought shit assets that are sending them backwards But the pitch is really understandable and it's a willing, receptive market for that pitch. But as I said, first I saw it and you know, so I've known that buyer's agents, that type of buyer's agent wants to do this, and I've known that that practice existed. What I hadn't realized is, is the brokers were just so complicit and [00:08:00] this idea that the recommending the trust lending or the insinuating even by saying, well, this is how I've done it.

Veronica: And so, you know, and this is Ben's Kingsley's letter was really. Identifying where that breaks the law, because that is financial advice and even implicit, you know, even sort of suggesting that, oh, it's a good thing to do because I've done it, is against the law, but it's, so many people playing in this space are unaware of that, or they don't care.

Veronica: I don't know whether, you know, there's probably a bit of both, but it is alarming. And as I said, I've just done so many strategy sessions with people that are either about to do this and. On the brink of really just sending themselves down a really terrible path, or already have, I'm glad the banks have taken note, but what I've also seen is some of the social media from these buyer agents who are just as outrageous, you know, they're outraged and so now they're recommending the non-bank lending. You know, so, and they're not actually changing their practices, they're just going around it because sadly,~ uh,~ there's only, uh,~ uh,~ [00:09:00] four of, well, five of the banks that are regulated, right.~ ~

CB: ~um. ~not that I wanna talk down the broking world. ~Um, ~you know, brokers have been very, very good for Australians. ~Um, ~overall very low complaints. ~Um. ~In the scheme of the overall financial assists? Yeah, well, within the, you know, in terms of the track record and market shares dong from when I started 35, 40% to 80%,~ um,~ bank net interest margins have been dropping.

CB: You know, hence why they've been whinging in the papers saying they're not making enough money and they're lending money under cost of capital. And, you know, now we've gotta fight back 'cause these brokers are making us, you know, less profitable. ~Um, ~now we're gonna have our own teams, like brokers are highly successful and they play a great role.

CB: And creating competition in the marketplace. However, this is where I think brokers need to be really careful and they, they are stepping down this with, they just don't know what they don't know. I mean, I've had lots of brokers over the years come to me and go, yeah, ask me about property, and so I'll just stay in my lane.

CB: I'm like, well, is that enough? Like, I think you need to educate yourself. I think you need to like go, well, if you are [00:10:00] borrowing this money, if you are making a poor property decision, I sort of need to be able to identify that you are doing that. And you know, I don't have to have the solution, but just, Hey mate, I think you might need to rethink buying that off the plant apartment.

CB: You know, like this is what the old advice, you know, risks or do you really wanna buy like another one out there? Like it doesn't seem scarce. It seems like it's, you know, like maybe you should reconsider your strategy and try to find some partners, but buy property, um.~ um. ~And our mortgage brokers just weren't really interested in building relationships, like deep relationships and going on that journey of property knowledge.

CB: I think it's like they, they sort of quite like the, well my job's to get the finance, the customer's jobs to decide what they buy. And I don't think that was enough. I've sort of been trying to get them to say, well, no, like if, they're making this decision and you can see that they're a couple and they're thinking about having kids and they're spying all these properties.

CB: When they should have just prioritized buying a home, you could see that that was gonna be an issue three, four years down the line. Then they have to sell that to buy something to live in. And that was a whole waste of time.

Veronica: what are, see, what are the consequences for the broker though? You know, [00:11:00] if somebody makes a bad decision.

CB: Well, not really around their properties. I mean, they, they might go into arrears obviously, you know, it might, I mean that they sell the property and then there's a clawback for the broker if it's in the first two years. But overall, like whether the client makes more money or not doesn't really affect the broker.

CB: We are not tied to that. Right. Obviously, it's good business because if your clients make good decisions, they do well then. Obviously they're gonna be like, okay, well what's my next decision At compounds, you basically get clients for life and they're like, oh, you really helped me with that decision. You stopped me making a mistake.

CB: I'm not gonna go anywhere else 'cause I trust you. Like that's been our business model.

Veronica: it's, that's the same in buyer's agency though. I mean, but the problem with buyer's agency, we don't get retail and commissions. We just get the one-off lump. ~Um, ~but again, you know, the consequences aren't for a buyer's agent if the client makes a bad decision that a little bit more direct.

Veronica: You know, he's more direct towards the buyer's agent, but, than it is to the, to the mortgage broker, that's for sure. But you know, the broker's sort of like hands off, you know, I'm just helping you get the money. What you do with that money is your problem, you know? ~Um, ~Um, so I can [00:12:00] sort of understand why brokers may not be interested, but I think that there's is more interest these days, but it's interest in the bad way.

Veronica: Like it's interest for the wrong reasons. And it's sort of going for this, transactional,~ um,~ Accumulation type of interest and that that's, extraordinarily dangerous. I, I've drawn comparisons a number of times between sort of what's happening out there in borderless buyer's agent space and this sort of multiple purchasing and building portfolio space.

Veronica: I've drawn comparisons between that and say the mining boom, that was about 15 years ago now. That was catastrophic for a lot of people. That mining, boom, the market was full of spruikers. There was all this hubris, there was all this excitement about, the fact that you go to any, Barbecue or dinner party, and some will be talking to you about this crazy property, that decision that they made.

Veronica: Well, we call it crazy now, but you know, they were talking about ridiculous, like yields of 12% and capital growth of, you know, doubling every year or two. You know what I mean? It was, it was madness and you felt mad if you didn't take part in that. You know, this frenzy that's going on in many, ~um.~

Veronica: [00:13:00] Circles is very similar and this instant equity uplifting that I bang on about, which really does my head in, should we talk about that for a little bit?~ ~

CB: ~Um, ~yeah, we can, I think, I think you're right. I think you, these. Me these flavors. I think what happened is brokers are now competing with brokers, right? Because it's, you know, it's not us versus stealing clients from the banks. It's like. And that was easy, right? And that's what the broker industry's been built on.

CB: It's like, oh, actually no, when a customer comes to you, they're comparing multiple brokers. Like that's just the way it is nowadays. Like, and the customer's saying, well, what can you add? You know, what's the value proposition? I think what brokers are doing is they're saying, oh, okay, I want to add more value to you.

CB: But then they don't know what they don't know. Then they're like, oh, I can leverage you up. You want to invest? I can do, and I think the value add is just like exploring this way fund, you know, maximizing, borrowing capacity. Unfortunately though that. When you've got this increase in ation, we used to always get emails calls, can you sell our developments?

CB: No. You know, all the time. ~Um, ~you know, even though we were so vocal against it, we'd be like, mate, have you not read anything that we've [00:14:00] been writing or saying? ~Um, ~can you not see our website like we are against all this stuff. Like, ~um, ~so there was all the new build stuff. I think that's the offer plan.

CB: Sort of boom of 2015. I agree that the mining boom in 2012,~ um,~ that was well around that period. 2008, 2008, 2012 or something. ~Um, ~that was pretty scary. but I think this is where it's moved to the next level. And I think what you are talking about is instant equity uplift and I think the other issue we've got now is they're being proven

Veronica: explain what that is. Let's explain. Explain what

CB: Yeah, like I think that the issue is right now is that, and a buyer's agent will buy it, they will say it's under market value. No, it's not under market value. You just bought it at market value. You can't,

Veronica: Whatever you paid is market value.

CB: like that's market

Veronica: Well, actually, often it's over market value and we can talk about some examples that I've heard about that too. But anyway, so that you paid what you paid, then what's next?

CB: well then yeah, and then they go six months later and they order bank value. Now the bang values that they order. Not, they're often using desktop vows and they're often using a bank that's very optimistic with the vow. There's [00:15:00] one bank in particular whose valuations often come out much higher on a desktop than other banks.

CB: It's in the bank's interest, by the way, because the bank's interest is like, oh, you get a high vow, you're gonna do your loan with us, because all investors are trying to get the highest value. They're looking at rate, but they're also looking at the highest value. So I don't know, I'm not gonna open up that can worms, but what they do is they.

CB: Get the purchase. Six months later they order a vow. Say, Hey, you bought for 500. I got your bank bill at five 80. You've made 80 grand in six months.

Veronica: Instant equity uplift.

CB: exactly. And they can actually access that equity because if they've got their borrowing capacity, they just go to that bank. They do a reval, they release up to 80% often sometimes also going paying lenders mortgage insurance.

CB: I've seen brokers recommend that and then repaying it. ~Um. ~Which sometimes can work, doesn't say, but I'm just saying that these, this valve uplifting and it's like, is a property determined on how good what your purchase is in a bank valve is in six months or is it how it's gonna perform over five years Well, unfortunately, the issue they all these guys buys and their brokers have got is that [00:16:00] they, they've all seen quite good returns because they've been pushing prices up. And so there's this self-fulfilling prophecy of. And then they're going to brokers and saying, Hey, I've got all this done this really well.

CB: And like ever since you look at my portfolio, look at my client, it's like, yeah, but it's been done in a certain market and it's kind of been forced up. It hasn't been driven by long-term fundamentals.

Veronica: And there's two ways they do that. they either buying inner market's already on the rise, like Perth. ~Um, ~and all their, you know, which is, so there's genuine price rises in a, in a city such as Perth and such as Brisbane. ~Um, ~or they're buying in regional markets where they are buying at scale in those regional markets.

Veronica: And,~ um,~ they are the ones responsible for the instant equity uplift. Like in fact, ~um. ~Every time I go to an re i, new South Wales event,~ um,~ um, because I'm on one of the chapter committees there, I talk to the regional sales agents and you know, like I actually saw on LinkedIn too. A Wagga buyer's agent was talking about this same practice.

Veronica: I've talked to people in [00:17:00] Tamworth, in parks, in Armadale, in ~um, uh, ~Aubrey, in Dubbo. Like I've talked to agents across the board, right? ~Um, ~and they all say the same thing. I say, how many buyers agents are you dealing with? It's more and more, right? How many have you met now? Only one. And the last function I went to, only one of them had actually met a buyer's agent that was actually happened to be in, um, Tamworth,~ um,~ right?

Veronica: All the others, every single property bought sight unseen. Every single property bought for more money than locals would pay for it. Every single property,~ um,~ done bought on the strength of an agent's WhatsApp video. The agent or a property manager in their agency did a WhatsApp video. And they're laughing.

Veronica: They, they're like, on one hand they're horrified for the buyer, but they're laughing 'cause it's easy selling for them. And so, and also some of the stories they tell me about the, you know, where they're selling this stuff, like the wrong end of town, that these outside the, neither the buyer nor the buyer's agency are aware of really [00:18:00] the social economics and the, We are not to buy and where to buy in these areas. Right? So all this is going on and. You know, and I've heard stories about individualization. I'm not gonna mention here about where they say, look, you know, they've paid 2050 grand more than they needed to on a property. There was no negotiation.

Veronica: they like why it was so unnecessary, but they made this offer and then, then they see it in the marketing that they've, you know, they're buying in an area that's just had this growth. And they're like, well, they're pushing prices up. Like quite literally, they're not even, it's not even demand, it's them.

Veronica: Not negotiating. So this is really awful. And it seems to be, there's a, there's a system to it. And this is the thing. It's, at first I just thought it was a bit random, but I think there's actually a way more of a system to this,~ um,~ than I was Would've even dead thought.

CB: Yeah, like I think, um,~ um,~ the issue I find though is, is when they start talking about their own portfolios as well, like, I get it, that, you know, part of your pitch is to prove how [00:19:00] successful you've been, and everyone wants to follow in someone's footsteps, but. Everyone, you can't live the path of somebody else.

CB: You haven't got the same situation, whether it's a, a couple versus a single, whether it's a high income versus a medium income, whether it's you own a home or you don't own a home, like, you know, you can't go back in time and recreate what that are. And, finally, is it even true? Like, is it, and you don't know?

CB: and there's,~ um,~ I've known that more than anyone in recent years that,~ um,~ a lot of people don't say the truth. And,~ um,~ you know, you, you obviously, when you think, you know, your, your view on the worlds, often you look for the good in people. Let's say you're that type of personality, you often want to make believe that people are saying the truth.

CB: But in this space, I know for a fact they're not. And,~ um,~ they haven't got the portfolios they have and they, it's when you. You also, the issue that they have, if they have got a decent portfolio,~ um,~ often the reason they can leverage that portfolio is due to their income. The reason they're usually pushing their income up is 'cause they're running their own business, they're running a buyer's agency business, and then that buyer's agency business is much higher than the average salaries [00:20:00] talking about 20 grand a pop.

CB: And they're doing, you know, hundreds potentially. You can see that they can have a huge amount of income, which is allowing them to leverage much further than you can. Particularly if they can do thi they do other things, you know, in terms of different structures, or they do these JVs, they say they own it.

CB: They don't, they own a fraction of it. They do it. They're part owner in with 10 other buyers in these properties. ~Um, ~and they pretend that they own a hundred percent. And so I think there's lots to be careful when people start banging on about how well they're doing around their own portfolios. And the reason they got there is because of the a hundred percent due to their property decisions.

CB: Often it's not student running a very successful buyer's agency. And often the number that they're telling you isn't true. They're faking it,~ um,~ to make you believe that. ~Um. ~It's really hard to go and cross-reference these things,~ um,~ because they're not just gonna give you all their addresses for all their portfolios and shows their debt and things like that.

CB: It's not gonna be that transparent. ~Um, ~and so be really careful falling for that, like following what they've done. And secondly,~ um,~ often they're probably just taking [00:21:00] advantage of the markets, you know, and then when they especially say, I'm buying there. I think that's also like a bit of a concern as well.

CB: When did you buy there? When are you gonna sell? Are you gonna tell us to sell when you are selling? Like, ~um, ~and that's the other thing with these, they go in there and they say, you ask them, we find it really hard to find people to trust under about a million dollars nowadays, like a purchase price.

CB: Because like you are, you're not getting in any of the capital cities into the housing market. You're struggling to get into the high end, like, you know, apartment markets maybe in Melbourne, like there's some decent stuff under a mill, but you really struggle in sort of, you know, Brisbane and Sydney,~ um,~ even Adelaide or Perth.

CB: ~Um, ~and so there's often this under a million we find, who are we gonna refer to? And we just, we find it really hard to find who we can trust,~ um,~ and. ~Um, ~yeah, so I think that's my, I've got lots of concerns around this and we as a business have said, oh, we haven't done as well financially this year with our loans because we haven't got access to this part of the market that's really hot.

CB: And I'm like, well, yeah, but I dunno if that's the, part of the market we want access to. Yeah, I'd love to. [00:22:00] Some of those clients absolutely are great clients. this proliferation around the portfolio strategy is just not something, so we've got zero exposure to this trust lending. We've got zero exposure as a, when I say as exposure, I mean clients that have made done this because we don't want clients coming back and saying, Hey, oh, you told us to do this and so we don't have we, we can sleep at night going, okay, well we haven't encouraged any of this lending that's getting unwound.

CB: We haven't encouraged people to buy in these like riskier locations. And there's a risk of investors sort of fleeing. ~Um, uh, ~

Veronica: ~Um, um, um, Uh, Uh, ~

Veronica: I'm on a personal mission to help more people make better property decisions. You know, most people don't realize that they can cost themselves hundreds of thousands of dollars over the medium to long term when they make property decisions without all of the information that they need. And what I do is help people with tricky real estate problems, which offer masqueraders simple questions like, should I sell my investment property because the interest re payments are hurting, or should I buy before I sell?

Veronica: Or the other way around. You could connect with me and access all of the [00:23:00] tools that I've created to help you make better property decisions at Veronica Morgan dot com au. And there you'll find resources for first home buyers, details about my buyer's agent mentoring program. You could connect with my Sydney based property management and buyer's agency teams, Australia wide vendor advocacy.

Veronica: Or ask me for introduction to the small group of buyer agents that I would personally recommend across the country. That's Veronica Morgan dot com au.

Veronica: If you're considering a property move, which is buying your first time, upgrading, renovating, or investing, the team here at Alcove would love to help you think through your decision and get the finance right.

Veronica: Please go to cove.com au to reach out.

Veronica: Uh, well, there's two things I'll talk about.

Veronica: First of all,~ uh,~ some of the people that do actually have good incomes and can afford to buy really good quality properties and fewer of them, but they get sort of lulled into this idea and it's easy for them. They don't even have to go into the trust structure. Some of these people who actually got the incomes to buy multiple properties, and one of my clients that actually bought for a home for in Sydney a few years back, they contacted [00:24:00] me after they'd been meeting with about three of these sort of serial offenders.

Veronica: And some of them, uh, ~ uh, um, ~one of the ones that they'd met with had been around quite a long time as well. This isn't all just the newbies

CB: Yeah, there's a whole, there's a cohort that have been doing it for a while. Yeah.

Veronica: Yeah. And they said, look, something just doesn't smell right. Veronica. Like, and I'm like, oh, thank God you came to me.

Veronica: Thank God you came to me. ~Um. ~Look, I've re, I've referred them to some reputable buyer's agents in Brisbane and Melbourne and I haven't put together a, a portfolio plan for them 'cause I don't necessarily believe in that, in a, in a sense. But I want them to diversify.

Veronica: They wanna diversify. I want 'em to buy a grade assets and I wanted them to talk to the buyer's agent. ~Um, ~in Brisbane that I recommended and the buyer's agent in Melbourne that I recommended they speak to, 'cause I wanted them to understand what, constitutes an A grade asset for an investor in these markets?

Veronica: How much money is that gonna cost me? What's my cashflow gonna be like, you know, what's the return, the rental return gonna be, what sort of future buyer would I have? How difficult is it to buy that type of asset? And then to work out, you know, [00:25:00] to prioritize the next one that you buy. Do it one at a time.

Veronica: You don't have to do it all at once. ~Um. ~and don't be buying multiples. They were sort of advised by one buyer's agent who, apparently never spends more than 750,000 on a, on a property. I don't know how you sort of set that figure when a rising market anyway, but,~ um,~ they never spend over $750,000 on a property.

Veronica: It's like, you know, I can get you great returns from that. And, and, you know, showed all his examples. It. you know, maybe there's some good stuff in there, but like, it just didn't look to me like it was being bought in areas where you've got good upward pressure on capital growth, you know, but the, big alarm belford them was, it was a one size fits all strategy.

Veronica: Every single client that came to them, regardless of their financial position, regardless of their current equity position, was sold exactly the same,~ uh,~ formula. And if you can afford more, you get more. And you can, if only afford one, you get one. And I just found that astounding. So thankfully they're smart enough to come to me and go, we just not, you know, they're bad to sign, you know, but they just had this niggle, thank God, and [00:26:00] when I judge awards, which. Honestly, I, I, I need about two weeks to get over the judging process, to be quite frank, because I'm reading. the success stories, if you wanna call it that, of buyer's agents who follow this sort of practice and are proud of what they do and proud of what they buy.

Veronica: 'cause they're focused on the volume of property, the volume of transactions, and there's nothing in there about long term. There's nothing in there about asset selection. There's, it is all about location is more important than the asset. Not understanding the two go hand in hand, you know? It actually, it really does.

Veronica: It upsets me. I, I've cut back on my judging because it really does bother me. So, and they're so prolific and there's more and more of it. And then so there's, that sort of high net worth potential person who is squandering their borrowing capacity. And then you've got the others that I mentioned earlier who are the sort of the moms and dads who are often in their late forties, early fifties, and they're suddenly starting to think, oh, you know, we're like 10, 15 years away from retiring and I don't think we've got enough and [00:27:00] they've got a home and they've got a bit of a super balance.

Veronica: that is one of the most, I think, vulnerable cohorts in this country at the minute, because they are just sitting ducks for the promises of these brokers and buyer agents. It's really. Really horrific. ~Um, ~that's why we wanna talk about it because this is becoming so much more obvious and it's becoming more widespread, but at the same time, the voices are starting to get louder that are recognizing what's going on.

Veronica: And we just wanna add to that the word of caution, just please don't go down this path.

CB: Yeah, I mean, I, we, at the start I was talking about love, CBA and I, I sort of completely forgot about Ara coming in. ~Um, ~I mean, I did a post like. While ago on, Hey, I think APRA's gonna step in and stop investor lending. I was like, just, you could see just with the, you know, totality monthly, they do a percentage of lending's investing and it was just way higher.

CB: And I'm looking at the, the sort of loan flows.

Veronica: quarter has actually been the highest since that [00:28:00] final, that last quarter in 2016. ~Um, ~where then they started, you know, clamping down and we are back up there.

CB: Yeah. And then I can see it's, you know, in certain states it's obviously much higher than it usually, you know, is, and so what you're doing, and,~ um,~ that's not often where other investors are going. You're creating a glut of rental properties, not where the other ones are. I think we've spoken about that hundreds of times on this.

CB: But you can also see loan flows through the banks and a BS do figures as well. So you can see exactly the amount of investor lending coming. And ~um, um,~ you know, and I think you're right, like a lot of those people aren't, say the, the couple young family, 'cause they've leveraged up often into their home.

CB: It's usually maybe a little bit later the kids are getting a bit older. That sort of num magic number of 50. ~Um. ~So I'm 39 this week, so the forties coming for me. But I mean that magic number of 50 is kind of like a,~ uh,~ uh, oh, we better get going. Right? And like it was when I was in the financial advice where we get so many clients,~ um,~ some come early fifties, but often they think they should do it then, but they don't come and see the advisor till maybe mid to fifties, a 55 number.

CB: ~Um, ~and they're like, [00:29:00] oh, I've only got five, 10 years, I'm gonna get going. but that's around circa 50 age. Is, you know, they had the house, the kids are getting through school, they're getting the end of high school, you know, maybe school fees are finishing. You know, ~um, ~and they're like, actually we've gotta pick up the pace here.

CB: We've just focused on getting the kids through school and now we've gotta really focus on our retirement. We've got a house, we've got heaps of equity in it. We've got our super balances have gone up quite a lot because just naturally super and they've been on reasonable incomes and so they're super balance quite a lot, but they just feel like there's a gap.

CB: And this cost of living crisis is only amplifying that. Right. Like. God, look how much we're spending. We've gotta have to prepare for our timers. Like, you know, we're spending so much just to live. ~Um, ~it doesn't matter if we're mortgage free, we need a decent income. And I think those two things go hand in hand.

CB: I think a, they leverage up hard personally, and then I hate when they leverage up their superannuation. ~Um, ~our SMSF loan volumes so low and we've never a fan of it. And just in risk this year in particular. The non-banks have come in and the amount you can borrow and sell from super [00:30:00] funds is off the charts.

CB: It's like ridiculous. Like you shouldn't be able to borrow that much. ~Um, ~

Veronica: What's the LVR now?

CB: well it's not the LRV more than multiple times your contributions you know, and the way that they assess that and the way that they will, you know, even if you're not contributing it, you can kind of say that you are.

CB: And then even if you want to need to top up your super fund, you can sort of show, say you're gonna do it. ~Um, ~and like basically, so you could leverage like, you know, say four or five times your contributions. You couldn't buy that much in super before. So I'd be like, okay, you can consider it, but what are you gonna buy for that price?

CB: And you're gonna punt your whole superannuation on this type of property? And then everyone's like, oh, okay, I'm not gonna do that. I'm like, yeah, cool. But now it's like, oh no, now I can borrow, you know, a million bucks. Oh, I can buy a good asset. Oh, okay. But then it's like, actually no, you still gotta pay that mortgage.

CB: You still gotta cover that shore for you gotta top up. So you're basically still punting everything on one property.

Veronica: there's no voices of reasons suggesting that they don't do it and accountants aren't even suggesting. That [00:31:00] they don't do it. You know, maybe some are, but like, you know. Obviously they get more fees out of it, but you know, like that's a crazy reason to suggest somebody has an SMSF.

Veronica: But,~ um,~ the other thing that I think, and I did not even realize this until I heard this on Stuart Williams podcast, invest Ly was talking about that when you get to the age, the, the pension age, where you need to draw down a pension from your super balance, you need, it starts at 4%. You have to draw that down every year.

Veronica: Now, if you don't have enough liquidity in your fund, and generally speaking, you're not gonna end up with 4% net after costs of rent, even if that property is a hundred percent debt free. if that is all you have and it's paid off, you're gonna struggle to, ~ um,~ fit that criteria and then you're gonna be forced to sell it.

Veronica: At a point that might not be opt, you know, might not be the right time to sell it. If you are going into, if you are buying in your self-managed super fund and you've only got 10, 15 years left of working, it's very unlikely that that is gonna be debt free by the time you retire. If you don't have those cash reserve, you don't have liquidity in your, [00:32:00] in your account, you're gonna be forced to sell that.

Veronica: And then you could be asking what's the point of having it? That's apart from the fact that I've seen so many people that have bought off the plan and new house and land packages in their super,~ um, uh, ~um, uh, anyway, it just, I obviously can't advise people on what to do with their super, but I can say that there's a, in terms of property, go and get some advice from an, an expert on this before you go down this path.

Veronica: And I also warn most people don't, not to do it. Don't buy property in your super, Hey, I'm a property person and I'm, please don't do it. Please don't do it without really good guidance. Now, for some people it's, I've done it myself, right? Some people is the right thing to do, but I also did it a long time ago.

Veronica: ~Um, ~Um, it is the right thing to do for some people and they've got enough money in there to be able to do it and still invest and have a balanced portfolio. But this is, this is a real issue and as you said, you've seen the proliferation of non-bank lenders more willing to lend in this space, make it easier, and I've [00:33:00] noticed that too.

Veronica: It seemed to die off and the buyer's agents are back out, spruiking it again. So it, that is a really, really scary area in my view.~ ~

CB: ~um,~ yeah, I mean the broking world is, is it's, banks are very risk on,~ uh,~ I know that people say, oh, you know, banks don't wanna learn, and it, they have got way tighter. Like they,~ uh,~ you know, compared to when I started. I've said this story probably a hundred times outta 400 episodes, but you know, it's decreased way less, you know, you can borrow way less, but I have seen the last two or three years to lending as tight as it's ever been in terms of multiples of incomes and banks being banks just need to lend more money.

CB: Right? That's, they're all got shareholders, they've all got, you know, people that they need to answer to and credit growth. and, and the mortgage is like the backbone, right? Like the mortgage book and you know, that's what they're judged on. And if that's growing at what you call market rate, like the rate, everyone else is growing, or if it's not hitting market rate, you are losing market share.

CB: That's not good news. They're, you get absolutely smashed by your shareholders. So they're all looking at ways of, you know, and [00:34:00] they're all competing. They don't wanna compete on price. Because price is like, they're not profitable. Growth,

Veronica: But they've already done that and they've already tried the, you know, two grand to, to switch and all that sort of stuff. And they've realized that if they can do it, so can the other bank. And then it just becomes a costly exercise in swapping clients.

CB: That's right. Exactly. That's right. So they all pulled outta that. That's right. They all like the cartel went, no, no, no, no. We're all losing money. Why are we all doing this? Let's all step back. And they, but they have seen that they're relaxing credit policy, you know, 40 year loans have come out. Obviously all the non-MEC are coming in here.

CB: A lot of the, you know, which is Macquarie and other banks have sort of come outta the trust lending. ~Um, ~but you know, it's not to say that we just, you know, but they are looking for little niches and is definitely risk on, like exceptions are going through. You know, and low dock loans is a bit of an issue.

CB: Private lending is a private lending. Boom. I don't know. That's probably talked about enough. And ~um, ~asic you, if you type in private lending and asic you'll see that there's a lot of focus on,~ um,~ you know, how much money's getting lent here and the whole scheme of a $2.5 trillion market of lending. [00:35:00] It's in home loans, it's not that much, but the growth of it and the amount that's happening in just the recent years is a real,~ um,~ thing to be concerned about.

Veronica: So would you say that that, could you draw a line between that and this type of advice? You know, ways to increase your ability to build a portfolio quickly?

CB: ~Uh, ~I do think people are getting themselves,~ uh,~ uh, going down private lending. Yep. And they are doing it to, whether they're doing it to grow and do other type of more riskier lending. Or they're looking just to survive,~ um,~ because they're leveraged up and they, you know, need cash and their business isn't going anywhere near as good as it is.

CB: And, you know, they need to keep paying for these properties,~ um,~ or keep their business afloat or keep paying mortgages on things. So yeah, private lending's absolutely gotta a place where people can't borrow any more money and then they have to go to private lenders pay often much higher interest rates and application fees and things like that.

CB: Just to have access to equity, but the amount of money that's willing to do that is really [00:36:00] much higher than it's ever been. You know, as in what they're using as security is often homes or other properties or, and they're just, instead of going to banks where the banks say, no, no, we're tapped out, they go to like, not even non-banks, like private lenders.

CB: So basically private lending, private cash.

Veronica: So when things tighten up, you know, when interest rates go up again, you know, rental, at some point they'll stop their rapid rise. ~Um, ~or they'll slow down or they'll even go backwards. 'cause that, that has happened in the past, right? ~Um, ~and I think to the mining boom when everything crashed at once. but if these people who bought, built these portfolios over a short period of time, they're sort of, it's built on a house of cards or built on the house of valuation certificates, ~ um,~ their cashflow suddenly gets tight, right?

Veronica: Even if they go do a private, uh, lender to get some money to free up their cash flow, they're just making their situation worse, right? They're gonna start to have, sell, sell these houses,

CB: I think so what you see if, if the buyer's agents are buying in these areas, 'cause they've dominated the price growth, at some point they move on to the next market. Like it doesn't make sense just to keep piling in. [00:37:00] And they do that one minute we're buying Mildura, then we're buying Townsville, then we're buying Dar, and then we're buying this, right?

CB: So at some point the buyer's agents shift, right? So then all the people who have got properties in that. Then it's whoever's buying in there often is just the locals. Often home buyers or investors, the local investors are like, nah, nah, no way. I'm, I was out a long time ago. I can't even believe it's gone up to where it is.

CB: they, they're already beyond what they think. ' cause it's gone from 600 to 900 and the locals can't even afford 900 because their incomes haven't kept up that much and they think it's overpriced. 'cause they're like, not gonna wanna buy it at current prices. And then if you find the investors, start bailing now if they have to bail, because you're right, maybe if interest rates go up, they can't extend interest only terms.

CB: Their current home mortgage gets up, they lose their job, they maybe over-leverage, they can't afford the cash flow. Then they start selling and then all of a sudden it starts to, Hey, you can't sell it at 900. Now it's 800. And then it's like, well shit, we're actually getting close to negative equity. If it drops [00:38:00] to 700, let's get out.

Veronica: I've also got a bit of a theory on this as there's more buyer's agents coming in and they're starting to look for more markets, and they're trying to find markets that the other buyer's agents aren't already in. Now, data is a wonderful thing, but data can be manipulated and you can create a story. and also if you look at, you know, one of the things that we have done in the past, we've looked at past behavior.

Veronica: Now past performance is not the predictor of future performance, but we've looked at it in our core markets where we are buying. But we know these markets extraordinarily well, and they're not full of these. Sydney is not the target of these buyer's agents. So this sort of lending, so we're sort of a bit immune to this, but the thing is that it's sort of.

Veronica: Spoken about that. You look to the past and you think if this property has shown its potential to say doubling value over a 10 year period, for example, then it's got a good chance of being able to, to outperform other properties, other choices in this area. Right? That's one of the things that we have always looked at that's sort of commonly understood to be smart when you're buying property.

Veronica: then you can abuse that [00:39:00] history because then you can look at these areas that have had this sudden growth. Not attributing it to the fact that it's been other buyer agents. 'cause there's no transparency around who's buying. When you actually look into the data in these areas and you go, look, this area has had a boom and it's, it's off, it's come off.

Veronica: But reversion mean, reversion means that it's gonna go back again. Do you know what I mean? Like you, you can see how the story can be, concocted. So then a new wave of different buyer's agents can move into an area that's that's left decimated from the last site and the whole thing starts all over again.

Veronica: this is. Something that I'm sort of developing this sort of theory that this could happen. Even the fact that, you know, I've, heard of these regional agents who are operating in areas that I wouldn't thought was necessarily,~ uh,~ a hotspot for an investor, not necessarily a robust economy, not necessarily,~ um,~ you know, diverse economy and not necessarily,~ uh,~ diverse by pool.

Veronica: ~Um, ~and I'm thinking, why are they buying there? What's their, what's their story and their picture around that area, but this is happening, these stories are being created and now with this [00:40:00] history, that can then feed into more stories so they, that's the true Ponzi scheme, right?~ ~

CB: ~um,~ I do think time, time will tell,~ um,~ and I do think some people are saying in this situation, oh, well, they've done well and. Have they though? You haven't? Like it's paper. It's paper profit, like, you know, it's not well to yourself. And the problem with property is that you just, it's not, it's, and you can access equity.

CB: This is one of the best things about residential property is banks will lend on it pretty freely, like we spoke about earlier on with bank valuations. And so you can access equity without paying any capital gains tax and then reuse that level, reuse it, lifestyle, use it to support other properties.

CB: Whether you invest it like. That's your call, right? But you can access it. But that doesn't mean that it's worth that. It's just a bank valve when it's, what's actually the line in the sand is when you actually sell it one day. And I think that's where I think, you know, people will start to go, hang on a second, I'm worth this.

CB: Maybe they leverage up even further and then, hang on a sec, if there's a 15% correction in prices, what have you actually made outta this? And now you've got things [00:41:00] that are actually,~ um,~ costing you money. Do you bail? And I think there's always people who have got in really early. It made big price growth and there's people who have got in late, and unfortunately, it's usually the ones that get in late who get hit the hardest.

CB: ~Um, ~because the ones who got in early can usually sell a few things to get through. ~Um, ~and then they get, and they, they, they can, they can basically take on a couple of losses, you know, if they lost 200 grand on something, that's okay. They can sell something else. They can get out of it. And it's like, yeah, I'm okay.

CB: I didn't make it. If they've got the ability to, to ride that wave, it's the ones who get in last, who get cut, you know, stuck carrying the bag Really.

Veronica: Also in terms of risky lending,~ um,~ 'cause that's one that, you know, we're talking about risky lending and investing practices here. ~Um, ~okay, so go off outside the big five banks. Let's call it the Big five banks. Now,~ um,~ you continue to do your trust lending and continue to use non-bank lenders, and you can continue to do it that way.

Veronica: But some people might not do that. They might,~ um,~ wanna stick with the regulated banking sector. ~Um, ~what's the deal with cross collateral? I can, [00:42:00] something I can struggle to say cross collateralization. So, because this is something that investors need to be aware of as well, right? In terms of how they structure their loans.

CB: So look good. Brokers won't do this,~ uh,~ particularly if you're buying risky assets like, you know, and it doesn't mean that all your lenders, all your loans are with one lender and all your lender, your loans are with five different lenders. You can still be uncross ized, collateralized. Or you can be cross collateralized at the same level.

CB: It's just how you lodge the loan application. Yeah, exactly. And so basically the issue, you know, you can have,~ um,~ is when you basically combine all your properties together and say, Hey, I just want a facility that's secured by all my properties and I don't want to have separate loans, basically secured by individual properties.

CB: Like that's really what you want. You want is basically is. Every loan to be secured by one property. So if you default on one loan or you get late, the bank will sell that property first and then they'll come at you and say, Hey, you still owe us money? And [00:43:00] then you go, okay, well sell, I'll sell that. You know, take that property, et cetera.

CB: The problem when it's cross secured is firstly, if you get valuation issues, it sort of affects your li letting limit. Whereas if you had like unsecured, like each loan was by each property, if one vow drops, well only affects. That one, you can't borrow any more money against that property. And,~ um,~ whereas you, if another property goes up, well you could that release equity on that one.

CB: So it protects you if one of your properties falls in value as well and allows you to still access equity. Whereas if you've got this like total limit, if one goes up or one goes down, well that means you might not be able to borrow any more money. So it's just another way to protect yourself. It, it allows you to be a bit more flexible with lenders and maybe do, you know, four or five properties here, and then you do another one at a different bank.

CB: It just gives you way more flexibility. The, the dream that the, the major thing, what people talk about is if, you end up defaulting your loans, the bank will just sell your best asset, which is usually your house. If they wanna recoup their money as fast as possible, they won't ever sell it in the market.

CB: It'll just be a fire sale, bang, bang, bang. And then I think that's a, but that's a [00:44:00] disaster strategy. ~Um, ~but even if you're defaulting on one property, you're in trouble. ~Um, ~and. It's just, you know, and there's just these, these small benefits like you can have in different terms on different loans like this interest only loan could be higher.

CB: And,~ um,~ yeah, so that, that's what good mortgage advice is. It's sort of strategizing and going, how do we not only give you the amount of credit that you want, but we structure in a way to protect you the most and increase the most tax efficiency with it. The most tax deduction with it as well. ~Um, ~but then also like we've, if we go back, we've learned, I think it's like 2.8 billion now as a firm.

CB: If we look at the amount we've used non-banks, I haven't looked, but it'd be under 5%. It'd be under, it'd be under that. It'd be, it'd be probably two or 3%. So we just don't, we, we just haven't got caught up with this because it's the natural option though with brokers is, oh, I can't, I've tapped out at the banks.

CB: I'll go to these non-banks and we can just see it is, yeah, but you might become a mortgage prisoner there, which a lot of people did, or you might find that,~ um,~ you know, and that happens [00:45:00] even the last three or four years, a lot of people became mortgage prisoners at banks that, non-banks that just wouldn't reprice their loans.

CB: And then all the other banks reprice their loans in 20 22, 3. After higher interest rates and people got stuck on rates, you know, 2% above market. ~Um, um, ~so yeah, we, we are very apprehensive on this. We just wanna make sure clients are, I don't think you need to, I think you could build wealth by still just using the majors.

Veronica: It's a long time since I've bought an investment property, actually, 'cause I've moved my investment strategy some time ago. I'm a bit older than you. Um.~ Um. ~So how does someone, if they've got their home and they wanna go and buy an investment property and they want to tap into the equity in their home, how does that work without cross securing it?~ ~

CB: ~Uh, ~so what you do is you, yeah. So what you just do with, without the property, just round numbers is so much easier, right? So property's worth a million dollars. The loan on it's 500,000. The bank would, you might do a little bit of a gain. You might get a four different banks and get a vowel at 1.1 million or something, right?

CB: So the 1.1 million you refinance your loan from, say, St. George to Macquarie, [00:46:00] and 80% on 1.1 millions, eight 80. Your loan was 500. So Macquarie would release $380,000 as a equity release. And the reason they do that is 'cause it's no risk really to them because they've, the property's worth 1.1 million and they're only lending you eight 80.

CB: That free 80 would sit in an offset account against that loan, so you wouldn't pay interest on it. And then we would set up a pre-approval at a different bank. IE might be St. George, it might be ING, whoever it might be at for investment property purchase. And then when you bought that, let's say you bought something at a million dollars, what we would use is the 20% deposit, 200 plus stamp duty 50.

CB: So we would use 250,000 out of that 380,000 we released for the deposit on the million dollar property, and then borrow $800,000 at whatever bank it is at 80%. And so they're two separate properties. The loan that used at Macquarie, the three 80 or the $250,000 of that that you used for a [00:47:00] deposit on the investment property is tax deductible because the A TO care about what was the purpose of that loan, not what it's secured by.

CB: So what did you use that money for? I used it by an investment property. Okay. Well that's deductible. And so in this situation, they're not cross secured and you have got the full tax deductible debt on that investment property because, but it's just splitting two loans. You've got an 800,000 loan, you've got 250,000.

CB: Of the three 80 that you used. ~Um, ~and so that's just a real simple example. ~Um, ~rather than, you know, both loans, being at Macquarie and having 1,000,050 loan on that investment property, and then that loan being secured also by your home it's the same position, but it's just that you've got this tie up with your home, which you don't really want.

CB: ~Um, ~

Veronica: So look, I think the upshot of this episode is that we really want to warn you about risky leaning practices. We want to sort of give you a sense of what. It's like to talk to a broker who is not pushing those types of practices, so you can tell the difference. [00:48:00] And likewise with the buying practices, there's just so much risk being taken out there in the property space at the minute, and we are alarmed by it and we want you guys to be,~ uh,~ aware of it so that you don't fall into any of these traps inadvertently.

Veronica: So thanks for listening and ~uh, ~we'll be back with another guest next week.

Veronica Morgan: If you have a question that you'd like us to answer in an upcoming q and a episode, you can send us a voicemail or written question via the website. The elephant in the room.com au. Or you can email us directly at questions at the elephant in the room.com

Veronica Morgan: au.

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