Concentrated area v diversification as a strategy

[Kennethkohsg]

I think what I need to do is go on a road trip. I'm planning (when I leave London) to take a bit of time off. I'll include 3 weeks to visit Brisbane / GC, Adelaide, Melbourne and Perth. Get a feel for how the city is laid out, drive through areas that I'm interested in, etc.
Alex

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Dear AlexLee,

1. If you do come down to Australia, please let me know as I will be more than happy, driving with you around Australia to compare notes and learning from you through our car-ride trips in Australia.

2. While the car-rides will give us an overview of the area, it will not provide us, with the required in-depth knowledge of the suburb (which we will have to do, in order to know the area well enough to do our own proper due diligence and ground research) so as to invest safely and profitably into these potential investment areas.

3. For me, I will normally literally "walk the ground" on foot, visiting the suburb at different days of the week and at different times as well as using local buses/trains services. I then spend 2-4 weeks interacting with the local people, talk to the local residents, bus drivers, taxi-drivers, shop/business owners, students, RE agencies etc, visiting the local councils to look at their development plans/projects for the affected suburb concerned and where possible I also choose to live in as a local resident in order to better "feel" and "soak up" the local suburb environment and its unique characteristics/ culture/ "special flavours" before I will officially consider investing into the area.

4. Thus, I sometimes visit and re-visit the suburbs a few times to complete my own ground research and suburb familiarisation/educational trips over a couple of months/years period before I officially invest in these areas in a big way.

5. For your kind update, please.

6. Thank you.


regards,
Kenneth KOH

 

[Leandro]

3. For me, I will normally literally "walk the ground" on foot, visiting the suburb at different days of the week and at different times as well as using local buses/trains services. I then spend 2-4 weeks interacting with the local people, talk to the local residents, bus drivers, taxi-drivers, shop/business owners, students, RE agencies etc, visiting the local councils to look at their development plans/projects for the affected suburb concerned and where possible I also choose to live in as a local resident in order to better "feel" and "soak up" the local suburb environment and its unique characteristics/ culture/ "special flavours" before I will officially consider investing into the area.

4. Thus, I sometimes visit and re-visit the suburbs a few times to complete my own ground research and suburb familiarisation/educational trips over a couple of months/years period before I officially invest in these areas in a big way.

This approach although thorough, seems much too time consuming for even the most dedicated property investor. At this rate, you wouldn't cover 1% of Australia in your entire lifetime.

 

[Kennethkohsg]

This approach although thorough, seems much too time consuming for even the most dedicated property investor. At this rate, you wouldn't cover 1% of Australia in your entire lifetime.

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Dear Leandro,

1. Do you or other members here, seriously think that safe and profitable property investing is an "easy job" to do?... Personally, I do not think so. That is also probably one of the major reasons why 95% of the population in Australia do not invest in properties even if they can afford to, assuming only 30% of them could not truly afford to invest in them.

2. That is one of the key reasons why I have decided to go full-time to pursue this passion in real estate investing in Australia.

3. Personally, I think the time spent in doing all these research and due diligence checks are critical and well-spent, given the many folds returns that I have managed to achieve from this property investing process.

4. To sum it all, to "invest" my time is to "create" more time for myself in the near future.

5. As a full-time property investor, I am able to fund my own living expenses and lifestyle as well as to acquire new property investments for the last 3 years without much problems from the returns which I am presently generating from my own property portfolio.

6. Morever, I also do not personally think that every part of Australia is worth investing into on a safe yet profitable basis;- nor is every area in Australia, worth investigating at all, given our own limited earthly time.

7. So, to each his/her own.

8. We will each have to decide where exactly is the profitable "tuft" which we can invest safely and yet be comfortable with our own property investments.

9. While covering a wider geographical region will/may provide us with more investing opportunities, not all of them are safe or/and profitable and able to meet our own property investing goals and objectives as well as our own individual expectations for our property investments requirements.

10. I have personally known of people like Rory O-Rourke, his son, Jarrad O'Rourke and his O'Rourke Realty who have chosen to specialise in one single suburb at Scarborough area in WA, and who are able to live off from it profitably and comfortably investing there themselves and marketing the properties there for their clients over the last 20 plus years period.

11. For your kind update, please.

12. Thank you.


regards,
Kenneth KOH

 

[Leandro]

Kenneth i understand what you are trying to say, however i believe that you are contradicting yourself to a degree.

You state that you "literally walk the ground on foot" in different areas to determine what is safe and profitable in a diverse approach however then you go on to say that everyone has to decide on a profitable "tuft" to invest in which sounds like a concentrated approach.

8. We will have to each decide where exactly is the profitable "tuft" which we can invest safely and "comfortably" for oursevles.

The point i was getting at though is how awkward i find your approach as stated here;

I also choose to live in as a local resident in order to better "feel" and "soak up" the local suburb environment and its unique characteristics/ culture/ "special flavours" before I will officially consider investing into the area.

This approach would mean that you would have to live in different areas every couple of years. Hardly an approach anyone is going to want to do unless they have no families or have wandering spirits.

Do you or other members here, seriously think that safe and profitable property investing is an "easy job" to do?

I think that nobody here feels that property investing is easy, but also i don't think most people want to make it their entire lives. Which leads back to Alex's question how does one effectively embark on a diversified approach with empahsis on balancing time and effort with the rest of ones life.

 

[alexlee]

I think that nobody here feels that property investing is easy, but also i don't think most people want to make it their entire lives. Which leads back to Alex's question how does one effectively embark on a diversified approach with empahsis on balancing time and effort with the rest of ones life.

I'm just struggling with the balance. Of course, if you spend every waking hour researching and mastering an area, you will get very good results. Having said, that, the point of investing is to replace your labour intensive job income with less labour intensive investment income.

Another way is to analyse macro trends and use a top down approach. Identify the state / city most likely to grow in the future (based on population trends, industry, etc) and buy a few properties. Buy cheap and spread them amongst suburbs. While you won't hit home runs you'll probably make the city average (which is impressive enough during boom times, as we saw with Sydney and Perth).

Based on a top down analysis, the best time to buy Perth and Darwin would be at the bottom of the mining / commodities cycle. Currently Sydney is worth watching, though yields still suggest a market that is still expensive.

Repeat this during a cycle, and eventually you'll have properties that catch EVERY city's cycle. That means you'll probably make the national average (over a cycle) for the long term with very little tinkering.

The index fund approach vs the Warren Buffett approach.
Alex

 

[TheAnalyst]

Sorry for my silly advice,

If you focus on a particular area, how about focusing on one or two particular properties. If you are good enough, you will save all your time and also in particular savings on your CGT (see using it as your own residence).

ie: you invest 10 properties in 1 or 2 focused areas -- total $2m worth. Assuming in Rockingham. Another option, you bought 1 or 2 properties on the beach total worth $2m. If you did these in the last 5 years. You could have made millions without CGT (seocnd one, you can sell first and move in).

how does it sound

 

[Dazz]

the point of investing is to replace your labour intensive job income with less labour intensive investment income.

This is interesting, we must have different "points"...I'm finding that building my investment income is way more 'labour intensive' than my job income. Of course, when we say labour, we both don't mean digging a ditch type of labour, but rather mentally concentrating on the job.

I find it interesting that our job freedom is bought with the cashflow side of the business and wealth is bought with the CG side of things. I think one of the guru's (I think it was M.Y.) in another thread reckon this is a poor person's mentality, and the rich folk concentrate on the equity side of things. Dunno.

As my personal funds are at risk, I'm finding it's way more difficult and intensive than cruising merrily in a job I can do well standing on my head.

While you won't hit home runs you'll probably make the city average

What's a home run worth nowadays ?? Is a homerun half a motza ??

 

[oc1]

Why not concentrate on one or two areas but become an expert on 2 or 3 types of real estate e.g. residential and industrial. That way you have investments, in this case, that operate in different cycles and are still in the same area. I have found this to be a great way to operate.

I still think a lot of it comes down to whether you buy/sell/trade realestate as a living or whether you park your excess cash into realestate as a long-term investment.

Cheers

Oscar

 

[alexlee]

If you focus on a particular area, how about focusing on one or two particular properties. If you are good enough, you will save all your time and also in particular savings on your CGT (see using it as your own residence).

ie: you invest 10 properties in 1 or 2 focused areas -- total $2m worth. Assuming in Rockingham. Another option, you bought 1 or 2 properties on the beach total worth $2m. If you did these in the last 5 years. You could have made millions without CGT (seocnd one, you can sell first and move in).

how does it sound

I’m not sure I get your point, Analyst. You’re talking about buying fewer but more expensive properties compared to more but cheaper properties, aren’t you? I’m more talking about whether you should, say, be an expert in a certain suburb of Perth and buy 10 properties there, compared to having 2 properties in each of Sydney, Melbourne, Perth, Adelaide and Brisbane.

Sure, if you’d bought in Rockingham in the last 5 years, you would be laughing your head off. If you’d bought in Sydney in 2003……
Alex

 

[yadreamin]

I know more investors that have focused on one area or city rather than several areas. Who is to say what is best.Long as it works l say.
oc1 , l like your suggestion of one area different types of investment.
Kennethkohsg mentions Rory O Rourke and son.Kenneth you have to remember that Mr O Rourke is a real estate agent in Scarbouough, a developer in Scarborough has a rent roll in Scarborough and owns property in Scarborough. If you went to him today as a buyer he would first and formost try to sell you Scarborough property and he would be the PM agent.He would also tell you how wonderful the suburb is and how under valued it is and how its gonna really take off and you will make mega$$$$s.
He has been saying the same speal for 15years l believe. I have nothing against this man l actually learnt quite a bit from him.But l dont think he really is a fair example to use as an investor in this instant.I listened to him again recently and to be honest it comes across like multi level marketing.
The Analyst, an aquaintance did what you suggested in buying top end props and in Rockingham to Mandurah.Does them up and then sells.He started doing this in 1999. it was still not rockin down that way then Any way just as he would finish one he would buy another ready to go.He had a delay in selling propA and came so close to loosing absolutley everything.He didnt, but by hell he didnt sleep too well for a long time. So to do this stratergy you would want a very very good back up plan and funds to match.But hell if it works good.
oh well thats my 2 bobs worth
cheers yadreamin

 

[Kennethkohsg]

Kennethkohsg mentions Rory O Rourke and son.Kenneth you have to remember that Mr O Rourke is a real estate agent in Scarbouough, a developer in Scarborough has a rent roll in Scarborough and owns property in Scarborough. If you went to him today as a buyer he would first and formost try to sell you Scarborough property and he would be the PM agent.He would also tell you how wonderful the suburb is and how under valued it is and how its gonna really take off and you will make mega$$$$s.
He has been saying the same speal for 15years l believe.
I have nothing against this man l actually learnt quite a bit from him.

But l dont think he really is a fair example to use as an investor in this instant.

I listened to him again recently and to be honest it comes across like multi level marketing.

cheers yadreamin

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Dear Yadreamin,

1. I look forward to learning from you how you see Rory O' Rourke as promoting multi-level marketing through his weekly wealth creation seminars?

2. Thank you.

Cheers,
Kenneth KOH

 

[yadreamin]

Hi Kenneth.
No I never said he was promoting multi level marketing l said he sounds like[comes across like] a multi level marketer when he speaks.
Sorry if l confused this for you.
cheers yadreamin

 

[alexlee]

Just thought I'd update this thread.

Received a confirmation from ANZ about the valuation on my Perth IP. On my refinancing application I gave them a pretty aggressive figure (10% more than the most recent comparable sale), and ANZ did a kerbside valuation and accepted my figure. No arguments, no nothing. This is an IP I bought partly because I thought Perth was undervalued and partly to diversify into other states.

So, based on this experience, I’ve decided on the ‘diversify across states’ strategy. Buy the unloved market, and ride the waves. Eventually, the plan is to have IPs in every state so that I catch the ENTIRE cycle across Australia. Next: Melbourne for IPs. Sydney for my PPOR, and Adelaide as another market to look at.
Alex

 

[888abundance]

Hi Alex

10% above recent comparable sale may not be considered aggressive in Perth? I think at least two things going in your favour are a recognition that Perth is a very hot market with prices and most lenders would accept this. A kerbside (only) valuation seems to support this.

Lenders would be competing hard for market share of customers. If you're already with ANZ, they probably wouldn't want to lose you. A 10% increase may be a small admin cost to loan you more money at rising interest rates. it may have been interesting if you asked them for the 10% increased valuation plus a discounted interest rate or other concessions (if you don't already have these).

You may have seen from my other post (that you asked some questions about), that I think Regional Centres can be a good option if they fit certain criteria and for the right negotiated price. This may provide a cash flow return closer to interest rates which could assist with lenders calculations on serviceability for a multiple property purchase strategy.

Land tax can be minimised across States (being below thresholds but which can be issue with concentrated portfolios all in one State/Capital City), and being based on land value, could also be a lot less in a Regional Centre as opposed to a capital city.

Just a few thoughts you might want to think about.


Gary
Author of "Property Millionaire: The Guidebook to Having Great Australian Dreams"
Creator of "Property Millionaire - The Boardgame"
www.888abundance.com

 

[alexlee]

Hi Alex

10% above recent comparable sale may not be considered aggressive in Perth? I think at least two things going in your favour are a recognition that Perth is a very hot market with prices and most lenders would accept this. A kerbside (only) valuation seems to support this.

Lenders would be competing hard for market share of customers. If you're already with ANZ, they probably wouldn't want to lose you. A 10% increase may be a small admin cost to loan you more money at rising interest rates. it may have been interesting if you asked them for the 10% increased valuation plus a discounted interest rate or other concessions (if you don't already have these).

You may have seen from my other post (that you asked some questions about), that I think Regional Centres can be a good option if they fit certain criteria and for the right negotiated price. This may provide a cash flow return closer to interest rates which could assist with lenders calculations on serviceability for a multiple property purchase strategy.

Land tax can be minimised across States (being below thresholds but which can be issue with concentrated portfolios all in one State/Capital City), and being based on land value, could also be a lot less in a Regional Centre as opposed to a capital city.

I asked them for an interest rate concession, and they promised me 0.15%. Not great, but since I’m already on the ANZ breakfree package refinancing costs are free as well.

Yes, land tax minimization is one advantage I considered. Mainly, though, it’s how easily I can refinance, since my main strategy is buy and hold. The hot markets are VERY easy to finance, and sell, if needs be. Therefore, if I have properties in each market, I will always have some IPs that are easy to get money out of. Also, even in the event of a country-wide crash, some markets will recover earlier / faster than others.
Alex

 

[DavidMc]

Hi Alex, others,

All of my properties are located in Victoria. The main reason I chose these areas was because these were areas I knew well (plus the cashflow side of the equation worked out well - I hadn't experienced the power of CG at that stage of my investing career). I knew several people who purchased properties there over a period of several years. What I perceived to be my biggest risk at the time was overpaying for a property due to lack of knowledge of an area. This was before I knew what a buyers agent was or that I could commission a valuation.

I like the idea of diversifiying across states, however I have no plans to do so just yet. My current thinking is that Melbourne will be a pretty good place to invest in over the next few years - although sometimes I wonder if I'm taking the easy option subconciously...?

Given that I only purchase property every two years (on average) and that the average slump is about three years, I don't think it's too hard to still do well in a single state and move purchases forward or back a year to align better with the cycles.

I've found that my 'low involvement' style of investment has meant that I've got property I haven't seen in over a year. I'm really hands off and I'm sure I could comfortably invest interstate.

For my next acquisition I'll still plan to do the search myself. I'll see how this goes before talking to anymore buyers agents.

I'm assuming you use buyers agents? Has that been a good experience? Do you feel you got value for money?

 

[alexlee]

I like the idea of diversifiying across states, however I have no plans to do so just yet. My current thinking is that Melbourne will be a pretty good place to invest in over the next few years - although sometimes I wonder if I'm taking the easy option subconciously...?

Given that I only purchase property every two years (on average) and that the average slump is about three years, I don't think it's too hard to still do well in a single state and move purchases forward or back a year to align better with the cycles.

I've found that my 'low involvement' style of investment has meant that I've got property I haven't seen in over a year. I'm really hands off and I'm sure I could comfortably invest interstate.

For my next acquisition I'll still plan to do the search myself. I'll see how this goes before talking to anymore buyers agents.

I'm assuming you use buyers agents? Has that been a good experience? Do you feel you got value for money?

Actually I thought the 'buy in many states' strategy is the lazier one, since that means I spread my research and don't have to go to 'street level', so go speak. I just do the research based on state population, economic and general suburb statistics.

I also think Melbourne is a great place to invest. Having said that, I don't know. For all I know Brisbane or Sydney might go ballistic first, and I don't want to miss out.

I have used buyers agents (and marketing companies) so far. I feel I did get value for money because I knew very little about those areas when I bought them (and one of those IPs was a house in Perth - in 2004). However, now that I know a little more about basic research, I believe I can do the same myself with a some regular trips to the target city.
Alex

 

[alexlee]

You may have seen from my other post (that you asked some questions about), that I think Regional Centres can be a good option if they fit certain criteria and for the right negotiated price. This may provide a cash flow return closer to interest rates which could assist with lenders calculations on serviceability for a multiple property purchase strategy.

I know very little about regional properties, so all this is just applying city property theory. My understanding is that regional yields have also fallen (in the same way as, say, Brisbane yields have fallen from 6% in 2000 to 4.5% or so average now) as values rose. I would, for example, consider 3.5% yields in Sydney and 4.5% yields in Brisbane to indicate overpriced properties (for buy and holds, I'm excluding value-adding here).

i.e. a 7% yield in a regional centre that previously yielded 10% (plucked from a hat figures only) is still CF+ but may indicate that it's overvalued relative to the long term average. For me CG is the goal at the moment, since I'm still in the 'building stage'. Of course, research into that regional centre will mitigate this. On the basis of my plan, though, I would want to be diversified across markets, so I wouldn't concentrate all of my properties in one reginoal area. Adding regional areas would just increase my research load, especially since regional areas are much more specialised (in terms of population, industry, etc) and it's harder to research thoroughly. Whereas if I limit myself to large centres (currently Syd, Bris, GC, Mel, Ade, Perth, maybe Hobart and Darwin in the future) it is easier to handle.

I might go with the bigger regional centres if it was just a small amount, though (almost like having some penny stocks as a small part of my portfolio - no disrespect intended). I hope in due course I will have lots of contacts that might, for example, just call me up and say they've found some great deals in a regional centre and send me the research.
Alex