04 Oct 2015

Adam Geha

04 Oct 2015

positioner

I've had over 20 friends and investors contact me recently following an article in The Australian which covered EG's latest acquisitions in Austin, Texas.

"Why Austin?" they asked. "Because I like getting rich slowly," was my slightly mischievous reply.

In a culture that worships speed and youth, it's almost reprehensible to confess a desire to "get rich slowly" - but when it comes to investing your hard earned savings, it's definitely the way to go.  

And the safest path to "getting rich slowly" is to invest long term in positively geared real estate within a fast growing city benefiting from long term trends.  

And if you happen to be living in an English-speaking Western country, ideally the city you invest in should be in an English-speaking Western country too (trust me, it will make your life a lot simpler).

The safest path to "getting rich slowly" is to invest long term in positively geared real estate within a fast growing city benefiting from long term trends.  

So here are my rules of thumb for long term real estate investment:

  • A positive spread between net yields and the prevailing borrowing rate of at least 3.0% per annum, and preferably closer to 4.0% per annum.  Why ? Because at a conservative gearing of 50%, these properties can retire debt in full in about six years (from post-tax cash flow).
  • A jurisdiction where there is minimal transaction costs and taxes (i.e. no or minimal stamp duty on acquisition or sale, preferential taxation of capital gains etc).
  • A city that has a track record of above average GDP growth and above average population growth (these two tend to go hand in hand, though not always).
  • A city that benefits from long term trends, such as the trend towards higher education, our increasing reliance on IT, ageing population etc.
  • A city that has strong family values, low crime levels and a strong emphasis on quality of education. 
  • Ideally, a city that has a vibrant interest in art, music and culture. This is a little less obvious but such cities tend to attract and retain human talent far better than their counterparts.

If you can find such a city, congratulations because you're about to get rich (slowly but surely). 

Here's a tip, it's not Sydney or Melbourne where residential net yields (post stamp duty, land tax and rates etc) are often barely over 3.0% per annum. Negative gearing sadly is the norm for these two cities. 

According to EG's research, only about one in thirty cities in the Western world satisfy all the criteria listed above.  

But if you're lucky enough to have found such a city, here's my dummy's guide on how to get rich slowly:  If the spread between net yield and the prevailing borrowing rate:

  1. Exceeds 3.0% p.a., apply all of your surplus annual cash flow to acquire more properties and ... merrily, merrily, merrily, merrily ... keep building your portfolio;
  2. Remains positive but falls below 3.0% p.a., apply all of your surplus annual cash flow to debt repayment;
  3. Becomes negative, then sell your whole portfolio as soon as possible (you are likely to be sitting on a very substantial capital gain) and start looking for another city that will make you rich slowly.

So that's the humble calculus behind why and how I'm investing in Austin residential and why I'm recommending it to my family and friends. 

Not glamorous I know - but getting rich slowly so rarely is.