Today is settlement day on my 7th IP and my one thousandth post on Somersoft . So, I thought that was something worth sharing with my very good and supportive friends here on the forum. Thanks to you all for your advice and support.
I’ve been asked many times over the past year or so to share my story, strategies and philosophies with a lot of people on this forum. Usually, I do this by way of PM and have never felt the urge to share it more widely as I didn’t think it was all that interesting. Seems some people challenge that, so what better way to celebrate my 1000th post than to share my journey in the hope that it might inspire others to either get started or think bigger than they have been.
March 2007 – my divorce and property settlement were finalised. It had been many years since the separation. During the marriage, I had no say in how money was spent or invested. My pay was totally controlled by my wife. As was I, I came to realise, later. So, when I left, I left with nothing.
The settlement left me with a small unit in a 6 pack in the leafy Adelaide suburb of Leabrook and some cash. Of the cash component, some was used to fully pay down the mortgage on Leabrook, around $12,000 was invested in another car as my crusty old Magna just wasn’t floating my boat an longer and the balance was put aside as investment funds for the strategy I was yet to formulate.
From the time I was in high school, I’d been quite pro shares and anti property as an investment strategy. My Dad did commercial property, so maybe it was the rebel in me that steered me in the opposite direction. I also perceived shares as being cool and exciting, while property always seemed such a boring “Mum & Dad” type investment.
Having spent 18 years in a marriage in which I was constantly told that I wasn’t “good enough” to manage the finances and that I wasn’t “smart enough” to come up with nay good ideas, I knew that this was my time. Given my age, I knew that I had just one shot at making something good happen in my life and to achieve that I’d need a bold and decisive plan.
It was quite clear that the share market wasn’t the place to be putting all my eggs. The fact that so many of my friends were investing heavily in both shares and share trading software told me that the market was reaching a critical phase in the cycle. Sometimes the best investment is the one you don’t make.
So, residential property became my investment vehicle of choice, due to the timing of my entry into the investment market. While I was still formulating my grand plan, I started looking around at opportunities. There were quite a few small units close to the CBD coming up for sale as “renovator specials”. These appealed to me as I had a strong skill set in renovating and a good imagination when it came to visualising the end result.
While looking at such opportunities, I checked out a fully renovated 2BR unit in a 10 pack at Dulwich. The idea was to see how they had done the reno and learn lessons I could apply to my own projects. I ended up buying it for less than I would have spent on some of the other deals I was looking at. The vendor was looking for a very quick sale to relieve her financial stress, so she accepted the first firm offer that came along after the first open. A short settlement and unconditional contract helped, in this case, too. She rented it back from day one so it’s been a win-win deal ever since.
As I wait for settlement day to approach, I start to look at the big picture and a strategy starts to take shape based on the following random thoughts, in no particular order:
1. Many home buyers and renters (empty nesters and Gen X & Y) are moving away from the traditional, larger family home on a quarter acre block. Seems a lot of them are over mowing lawns and maintaining gardens.
2. Many within this same demographic want to live nearby lifestyle facilities such as restaurants, cafes, cinemas, quality shopping precincts etc.
3. Smaller, strata properties offer an affordable entry point into well located suburbs which offer good quality schools, shopping, entertainment and efficient transport to the CBD and other transport hubs.
4. Fuel costs will continue to be an issue and proximity to the CBD and other major employment centres will be a major factor when choosing a home.
5. Suburbs which have consistently show high capital growth over a number of years should continue to perform well. I’m not prepared to punt on the next hot spot. I’d rather take the sure bet, to get steady and consistent growth.
The suburbs in which I have invested most heavily are suburbs which I have observed solid growth over a 20 year timeframe. Statistics can lie, but my first hand observations are reliable.
6. Buying smaller, cheaper strata properties offers (in the context of my strategy) many advantages over buying larger, more expensive houses.
These include, but are not limited to:
- In one particular suburb in which I invest, I can buy 4 strata properties for the cost of one house. This allows me to spread my cash flow risk. For example, if I have one vacancy, I still have 3 other rents coming in to pay the interest bill. Also, I’m going to find it easier & faster to get a tenant for a unit/villa at $250pw than someone looking for a $600-$700 house. The cheaper end of the market is less transient, too, so less downtime between tenants.
- Buying a greater number of cheaper properties is also a risk management strategy in terms of being at the effect of a changing market in any one area. If I only have 4 big houses, then my maximum spread is 4 suburbs. 8 smaller properties can allow me to spread my portfolio across a greater number of suburbs.
- Strata properties allow me to self manage a greater number of properties than would otherwise be the case with Torrens Title properties as many management issues are dealt with by the body corporate. Building insurance, leaky roof, fencing, garden maintenance etc are all issues for the body corporate. This allows me to leverage my time and benefit from self management.
- Land tax liability is another advantage of the types of properties I buy. The unimproved capital value of each property is very low relative to larger, Torrens Title properties so the aggregate value reduces my land tax liability. The same portfolio value in Torrens Title properties would significantly increase my land tax liability.
So based on all of the above, I started looking at strata villas and homettes within 7km of the CBD, close to quality shopping and schools with cafe and restaurant strips nearby. Nearby transport is a must and properties on a bus “Go Zone” (one every 15 minutes) get bonus points on the checklist. I focus on the eastern and north eastern suburbs as I have over 20 years experience watching price movements and demographic changes in these areas. I figured it was better to capitalise on this expertise rather than re invent the wheel by looking at new areas.
The types of properties of interest to me have always provided a healthy yield, but have, by and large, lagged in term of capital growth compared to traditional houses. There was some evidence, however that this trend was changing and will continue to do so. House and unit capital growth statistics on a state by state basis published by Your Investment Property magazine have provided strong evidence of this.
OK, so now IP #2 has settled and with a strategy in mind, I’m on the hunt for another. By this time, I’m committed to residential real estate as the primary vehicle for my wealth creation and the “big plan” is to accumulate 5 properties in total over the next 5 years, although I’ve yet to formulate an exit strategy, I’m fully aware that I can put this together as I begin my accumulation phase. Right now it’s more important to start getting runs on the board.
IP #3 was a very run down homette (villa), purchased in June 2007. Major reno job. The owner has lived there for 30 years and has never painted the interior or performed any maintenance at all. Got to love those bright orange kitchen bench tops. They had to go, even though there’s a chance they will make a comeback one day! At $217,000 it was a great deal. Current value, nearly 2 years later is around $295,000 with a total reno investment of $13,000. Most of the reno was complete well before settlement and I even had a tenant signed up by settlement day.
Given the low entry price of this one and the great rental yield due to the makeover, the current monthly shortfall on this property is only around $225 per month. It would be CF+ now if not for the fact that I fixed the loan for 7.4%.
I’ve pretty much out of cash at this stage in the game, but have plenty of cash flow from my day job to fund another acquisition. Given that the net rental income from IP #1 funds the shortfall on IP #2 and IP #3 only costs me, before tax, $225 out of my own pocket, I’m still in a situation in which I can leverage the tax advantages to fund more acquisitions.
Up to this point, my freehold Leabrook unit has always been my Black Chip. The one I don’t bet. The backup plan. If something goes wrong with the investment strategy or I lose my job, I can either use the income to help keep me afloat or move in and live rent free. Either way, it’s a safety net.
It’s September 2007 and I’m feeling encouraged by what I have done so far and the ease with which property can be purchased, financed, renovated and rented out in a very short space of time. I realise that many of my earlier fears have no foundation, so I make the decision to utilise the equity in Leabrook to help my buy IP #4 at an 80% LVR. No more Black Chips. If things go awry, then I just sell an IP and balance is restored. Besides, what could go wrong?
By now, I’ve lodged an Income Tax Withholding Variation (ITWV) with the ATO to improve my cash flow enough to enable me to purchase another property (or two). Instead of waiting until July to get a nice big tax return, each pay my tax gets reduced, effectively increasing my net pay. Nearly half of my monthly shortfall on my portfolio is covered by this tax benefit.
IP #5 is a 3BR homette in the same group as IP #4. It’s been on the market for many months due to a contract failure on a previous sale. That seems to have put buyers off. I secure it at a rock bottom price from a very motivated and disheartened vendor. Once again, I tap into IP #1 equity for the purchase of this one and the next.
IP #6 is in the same group as IP #3. Deceased estate and offered to me off market at way below market value. It had been freshly painted and needed very little work. I could have done a reno, but elected to rent it as is because I was running low on funds for a reno and my borrowing capacity with my one and only lender had reached its limit.
On that subject, keen observers will note that I’ve broken a couple of rules. I’ve not diversified lenders and I’ve cross collateralised. Yet I survived and the bank didn’t take all of my properties away, as some spruikers would have us believe.
Up to this point, having a single lender was a huge bonus and helped me accumulate a portfolio I might not have been able to with another lender on board. I did look into spreading my loans but the reception I received had me continue the great relationship with my primary lender.
I couldn’t have purchased IP’s # 4, 5 or 6 without cross collateralisation. It’s not an inherently bad thing, although it’s often portrayed as such. It’s just another tool that can be used to move ahead in the game of property investment.
Prior to buying IP #5, I considered myself at the limit of my capacity to make up the monthly shortfall on my IP’s. It was during a casual conversation with the legendary Rixter that I had one of those rare satori moments. Rick asked me when I was buying #5 and I told him that I wouldn’t be buying for 4 years, after number two daughter finished school and I wasn’t paying school fees any longer.
I was aware of the concept of capitalising interest, but had never considered using the strategy myself. I guess it was unfamiliar to me as nobody I knew was actually doing it. Only when Rick told me he utilised that strategy did I start to see how it could work for me. It suddenly moved from being an unknown quantity to being a safe way of growing the portfolio. Tried and tested by Rick himself. Thanks Rick!!
Around this same time, I also discovered Xenia’s Adprop sponsored Adelaide Network Group. The monthly meetings are a great place to meet likeminded investors and share ideas and strategies. Just knowing there are others out there giving it a go is encouraging and very supportive. Thanks Xenia!!
At this point, I started to use words like “consolidation”, “pay down some debt this year and maybe try to live of the equity in the portfolio” and “retirement”. Those sentiments lasted about 2 weeks.
Then the opportunity to buy IP #7 came up. However, it became clear that I had hit the serviceability wall with my lender. This was a strategic purchase in that it was in the same group of 5 villas as IP #3 and #6. I just had to have it! So, through a very stressful and complicated process, I re financed 2 of my variable loan properties away from my original lender to another lender and came out of that with $70k equity. This enabled me to fund the 20% deposit and reno costs on IP #7, with some change to act as a buffer in the offset account. I obtained finance with a 3rd lender for IP #7.
Misc things I’ve learned along the way:
1. Know yourself! Your risk profile, strengths, circumstances, lifestyle
etc. These will underpin any successful investment strategy.
2. Think big, push out of your comfort zone and never give up.
3. Focus on the goal and the dream NOT the obstacles.
4. Specialise. Find your “thing” (inner city villas, suburban subdivision,
build and hold etc) then keep doing it. Rinse and repeat.
5. Challenge everything and find out what works for YOU. Don’t always
accept what the “experts” say. Houses vs Villas & Units, buy old vs
build new, use a different lender for each property, never cross
collateralise etc etc. There are no hard and fast rules. Different
strategies work for different people depending on timing and
circumstances. There is no right or wrong. Only what’s right for
YOU.
6. Stay under the radar with any one lender. From my experience, as
soon as the lenders exposure gets to around the $1m mark, the
previously easy money grinds to a halt. So, at some point
diversification of lenders is a must in order to grow a portfolio.
7. If you’re just starting out, you don’t have to know everything and
have all the answers to all of the potential problems. Just get stuck
into it and the rest will follow. You can learn more and course
correct along the way.
8. I don’t subscribe to the view that things have to be hard to be
worthwhile. If they are that hard, then maybe you’re not doing the
thing that resonates with you. If I can’t have fun doing something, I
don’t do it.
So there you have it. A $2m resi property portfolio in 22 months. If I can do it, anyone can. What I’ve done isn’t very exciting or glamorous. However, most of the people who have done well with IP’s could say the same. It seems to be the simple, repeatable strategies, when applied consistently over time that produce amazing results.
Where to from here? I want 10 in the portfolio by the end of 2010. If I don’t get there I’ll have had fun trying.
I’ve been asked many times over the past year or so to share my story, strategies and philosophies with a lot of people on this forum. Usually, I do this by way of PM and have never felt the urge to share it more widely as I didn’t think it was all that interesting. Seems some people challenge that, so what better way to celebrate my 1000th post than to share my journey in the hope that it might inspire others to either get started or think bigger than they have been.
March 2007 – my divorce and property settlement were finalised. It had been many years since the separation. During the marriage, I had no say in how money was spent or invested. My pay was totally controlled by my wife. As was I, I came to realise, later. So, when I left, I left with nothing.
The settlement left me with a small unit in a 6 pack in the leafy Adelaide suburb of Leabrook and some cash. Of the cash component, some was used to fully pay down the mortgage on Leabrook, around $12,000 was invested in another car as my crusty old Magna just wasn’t floating my boat an longer and the balance was put aside as investment funds for the strategy I was yet to formulate.
From the time I was in high school, I’d been quite pro shares and anti property as an investment strategy. My Dad did commercial property, so maybe it was the rebel in me that steered me in the opposite direction. I also perceived shares as being cool and exciting, while property always seemed such a boring “Mum & Dad” type investment.
Having spent 18 years in a marriage in which I was constantly told that I wasn’t “good enough” to manage the finances and that I wasn’t “smart enough” to come up with nay good ideas, I knew that this was my time. Given my age, I knew that I had just one shot at making something good happen in my life and to achieve that I’d need a bold and decisive plan.
It was quite clear that the share market wasn’t the place to be putting all my eggs. The fact that so many of my friends were investing heavily in both shares and share trading software told me that the market was reaching a critical phase in the cycle. Sometimes the best investment is the one you don’t make.
So, residential property became my investment vehicle of choice, due to the timing of my entry into the investment market. While I was still formulating my grand plan, I started looking around at opportunities. There were quite a few small units close to the CBD coming up for sale as “renovator specials”. These appealed to me as I had a strong skill set in renovating and a good imagination when it came to visualising the end result.
While looking at such opportunities, I checked out a fully renovated 2BR unit in a 10 pack at Dulwich. The idea was to see how they had done the reno and learn lessons I could apply to my own projects. I ended up buying it for less than I would have spent on some of the other deals I was looking at. The vendor was looking for a very quick sale to relieve her financial stress, so she accepted the first firm offer that came along after the first open. A short settlement and unconditional contract helped, in this case, too. She rented it back from day one so it’s been a win-win deal ever since.
As I wait for settlement day to approach, I start to look at the big picture and a strategy starts to take shape based on the following random thoughts, in no particular order:
1. Many home buyers and renters (empty nesters and Gen X & Y) are moving away from the traditional, larger family home on a quarter acre block. Seems a lot of them are over mowing lawns and maintaining gardens.
2. Many within this same demographic want to live nearby lifestyle facilities such as restaurants, cafes, cinemas, quality shopping precincts etc.
3. Smaller, strata properties offer an affordable entry point into well located suburbs which offer good quality schools, shopping, entertainment and efficient transport to the CBD and other transport hubs.
4. Fuel costs will continue to be an issue and proximity to the CBD and other major employment centres will be a major factor when choosing a home.
5. Suburbs which have consistently show high capital growth over a number of years should continue to perform well. I’m not prepared to punt on the next hot spot. I’d rather take the sure bet, to get steady and consistent growth.
The suburbs in which I have invested most heavily are suburbs which I have observed solid growth over a 20 year timeframe. Statistics can lie, but my first hand observations are reliable.
6. Buying smaller, cheaper strata properties offers (in the context of my strategy) many advantages over buying larger, more expensive houses.
These include, but are not limited to:
- In one particular suburb in which I invest, I can buy 4 strata properties for the cost of one house. This allows me to spread my cash flow risk. For example, if I have one vacancy, I still have 3 other rents coming in to pay the interest bill. Also, I’m going to find it easier & faster to get a tenant for a unit/villa at $250pw than someone looking for a $600-$700 house. The cheaper end of the market is less transient, too, so less downtime between tenants.
- Buying a greater number of cheaper properties is also a risk management strategy in terms of being at the effect of a changing market in any one area. If I only have 4 big houses, then my maximum spread is 4 suburbs. 8 smaller properties can allow me to spread my portfolio across a greater number of suburbs.
- Strata properties allow me to self manage a greater number of properties than would otherwise be the case with Torrens Title properties as many management issues are dealt with by the body corporate. Building insurance, leaky roof, fencing, garden maintenance etc are all issues for the body corporate. This allows me to leverage my time and benefit from self management.
- Land tax liability is another advantage of the types of properties I buy. The unimproved capital value of each property is very low relative to larger, Torrens Title properties so the aggregate value reduces my land tax liability. The same portfolio value in Torrens Title properties would significantly increase my land tax liability.
So based on all of the above, I started looking at strata villas and homettes within 7km of the CBD, close to quality shopping and schools with cafe and restaurant strips nearby. Nearby transport is a must and properties on a bus “Go Zone” (one every 15 minutes) get bonus points on the checklist. I focus on the eastern and north eastern suburbs as I have over 20 years experience watching price movements and demographic changes in these areas. I figured it was better to capitalise on this expertise rather than re invent the wheel by looking at new areas.
The types of properties of interest to me have always provided a healthy yield, but have, by and large, lagged in term of capital growth compared to traditional houses. There was some evidence, however that this trend was changing and will continue to do so. House and unit capital growth statistics on a state by state basis published by Your Investment Property magazine have provided strong evidence of this.
OK, so now IP #2 has settled and with a strategy in mind, I’m on the hunt for another. By this time, I’m committed to residential real estate as the primary vehicle for my wealth creation and the “big plan” is to accumulate 5 properties in total over the next 5 years, although I’ve yet to formulate an exit strategy, I’m fully aware that I can put this together as I begin my accumulation phase. Right now it’s more important to start getting runs on the board.
IP #3 was a very run down homette (villa), purchased in June 2007. Major reno job. The owner has lived there for 30 years and has never painted the interior or performed any maintenance at all. Got to love those bright orange kitchen bench tops. They had to go, even though there’s a chance they will make a comeback one day! At $217,000 it was a great deal. Current value, nearly 2 years later is around $295,000 with a total reno investment of $13,000. Most of the reno was complete well before settlement and I even had a tenant signed up by settlement day.
Given the low entry price of this one and the great rental yield due to the makeover, the current monthly shortfall on this property is only around $225 per month. It would be CF+ now if not for the fact that I fixed the loan for 7.4%.
I’ve pretty much out of cash at this stage in the game, but have plenty of cash flow from my day job to fund another acquisition. Given that the net rental income from IP #1 funds the shortfall on IP #2 and IP #3 only costs me, before tax, $225 out of my own pocket, I’m still in a situation in which I can leverage the tax advantages to fund more acquisitions.
Up to this point, my freehold Leabrook unit has always been my Black Chip. The one I don’t bet. The backup plan. If something goes wrong with the investment strategy or I lose my job, I can either use the income to help keep me afloat or move in and live rent free. Either way, it’s a safety net.
It’s September 2007 and I’m feeling encouraged by what I have done so far and the ease with which property can be purchased, financed, renovated and rented out in a very short space of time. I realise that many of my earlier fears have no foundation, so I make the decision to utilise the equity in Leabrook to help my buy IP #4 at an 80% LVR. No more Black Chips. If things go awry, then I just sell an IP and balance is restored. Besides, what could go wrong?
By now, I’ve lodged an Income Tax Withholding Variation (ITWV) with the ATO to improve my cash flow enough to enable me to purchase another property (or two). Instead of waiting until July to get a nice big tax return, each pay my tax gets reduced, effectively increasing my net pay. Nearly half of my monthly shortfall on my portfolio is covered by this tax benefit.
IP #5 is a 3BR homette in the same group as IP #4. It’s been on the market for many months due to a contract failure on a previous sale. That seems to have put buyers off. I secure it at a rock bottom price from a very motivated and disheartened vendor. Once again, I tap into IP #1 equity for the purchase of this one and the next.
IP #6 is in the same group as IP #3. Deceased estate and offered to me off market at way below market value. It had been freshly painted and needed very little work. I could have done a reno, but elected to rent it as is because I was running low on funds for a reno and my borrowing capacity with my one and only lender had reached its limit.
On that subject, keen observers will note that I’ve broken a couple of rules. I’ve not diversified lenders and I’ve cross collateralised. Yet I survived and the bank didn’t take all of my properties away, as some spruikers would have us believe.
Up to this point, having a single lender was a huge bonus and helped me accumulate a portfolio I might not have been able to with another lender on board. I did look into spreading my loans but the reception I received had me continue the great relationship with my primary lender.
I couldn’t have purchased IP’s # 4, 5 or 6 without cross collateralisation. It’s not an inherently bad thing, although it’s often portrayed as such. It’s just another tool that can be used to move ahead in the game of property investment.
Prior to buying IP #5, I considered myself at the limit of my capacity to make up the monthly shortfall on my IP’s. It was during a casual conversation with the legendary Rixter that I had one of those rare satori moments. Rick asked me when I was buying #5 and I told him that I wouldn’t be buying for 4 years, after number two daughter finished school and I wasn’t paying school fees any longer.
I was aware of the concept of capitalising interest, but had never considered using the strategy myself. I guess it was unfamiliar to me as nobody I knew was actually doing it. Only when Rick told me he utilised that strategy did I start to see how it could work for me. It suddenly moved from being an unknown quantity to being a safe way of growing the portfolio. Tried and tested by Rick himself. Thanks Rick!!
Around this same time, I also discovered Xenia’s Adprop sponsored Adelaide Network Group. The monthly meetings are a great place to meet likeminded investors and share ideas and strategies. Just knowing there are others out there giving it a go is encouraging and very supportive. Thanks Xenia!!
At this point, I started to use words like “consolidation”, “pay down some debt this year and maybe try to live of the equity in the portfolio” and “retirement”. Those sentiments lasted about 2 weeks.
Then the opportunity to buy IP #7 came up. However, it became clear that I had hit the serviceability wall with my lender. This was a strategic purchase in that it was in the same group of 5 villas as IP #3 and #6. I just had to have it! So, through a very stressful and complicated process, I re financed 2 of my variable loan properties away from my original lender to another lender and came out of that with $70k equity. This enabled me to fund the 20% deposit and reno costs on IP #7, with some change to act as a buffer in the offset account. I obtained finance with a 3rd lender for IP #7.
Misc things I’ve learned along the way:
1. Know yourself! Your risk profile, strengths, circumstances, lifestyle
etc. These will underpin any successful investment strategy.
2. Think big, push out of your comfort zone and never give up.
3. Focus on the goal and the dream NOT the obstacles.
4. Specialise. Find your “thing” (inner city villas, suburban subdivision,
build and hold etc) then keep doing it. Rinse and repeat.
5. Challenge everything and find out what works for YOU. Don’t always
accept what the “experts” say. Houses vs Villas & Units, buy old vs
build new, use a different lender for each property, never cross
collateralise etc etc. There are no hard and fast rules. Different
strategies work for different people depending on timing and
circumstances. There is no right or wrong. Only what’s right for
YOU.
6. Stay under the radar with any one lender. From my experience, as
soon as the lenders exposure gets to around the $1m mark, the
previously easy money grinds to a halt. So, at some point
diversification of lenders is a must in order to grow a portfolio.
7. If you’re just starting out, you don’t have to know everything and
have all the answers to all of the potential problems. Just get stuck
into it and the rest will follow. You can learn more and course
correct along the way.
8. I don’t subscribe to the view that things have to be hard to be
worthwhile. If they are that hard, then maybe you’re not doing the
thing that resonates with you. If I can’t have fun doing something, I
don’t do it.
So there you have it. A $2m resi property portfolio in 22 months. If I can do it, anyone can. What I’ve done isn’t very exciting or glamorous. However, most of the people who have done well with IP’s could say the same. It seems to be the simple, repeatable strategies, when applied consistently over time that produce amazing results.
Where to from here? I want 10 in the portfolio by the end of 2010. If I don’t get there I’ll have had fun trying.
I really like your advice - finding something that works for "you".
