Welcome to our very first Somersoft Interview!
We are extremely fortunate to have Ian Somers as our first interviewee and we thank him for agreeing to kick off our new “Interview” forum.
Most of us are very familiar with Jan’s story through her books…….but of course behind every great woman there is a great man.
We hope you enjoy hearing from Mr PIA himself………Ian Somers.
INTERVIEW with IAN SOMERS – 26 July 2006
How did you get involved in investment property?
By accident! You can read Jan’s version of events in the About the Author section in any of her books, but here is my slant on it…
Jan and I bought our first house back in 1972 just after we were married. It was a very small, modest chamfer board structure that faced the wrong way (into the hot western sun) and had a few water issues (it was on the high side of the street, but all the catchment water off the hill seemed to be channelled through our property and under our house), but we called it home. Well at least for twelve months or so…
Back in those days, I was the bright, ambitious scientist (at least in my own mind) destined to save the world while working at the cutting edge of fisheries science in Australia’s premier research organisation, CSIRO. However, saving the world from within CSIRO necessitated several transfers over the first 10 years of my career and of course, as Jan was just a high school teacher and dutiful wife, she was always very understanding at having to leave our home and make a new one somewhere else. The decision not to sell our first house but to rent it out had nothing to do with the idea of investing; it was all about having a house to come back to when or if I was transferred back to Brisbane.
As it turned out, we never did go back to the same place and, as a result, we accumulated several such modest properties over that decade. But it wasn’t until Jan’s retirement from the teaching profession (brought on by a dose of three young children) that she made the monumental discovery that our modest property portfolio was making more money (largely through capital growth in the early 80’s) than I was earning as an eminent research scientist. In retrospect, that was a real blow to my ego and, as someone with a professional background in mathematical modelling, I was determined to find out what we had been doing right. In fact, when Jan and I poured over all the figures, we found that the only thing we had been doing right was buying property. But, when it came to things such as financing and managing them, we had been doing a lot of things wrong (short-term P&I loans etc). I think you could say that was something of an epiphany and over the next decade or so, while I worked hard at saving the world, Jan set about putting into practise what we had learnt. And the rest, as they say, is history.
What is your property investment philosophy (CF, CG, renos, houses, flats, buy and hold, develop, flip, wrap, etc)?
A simple one… finance properly, buy and hold long-term. As you would expect, after 34 years of marriage and a multi-million dollar portfolio, I share my wife’s philosophy on investment property. You might not think so, but we still consider ourselves average property investors. We do not have insider knowledge in terms of markets, interest rates or rezoning. We do not have the time, interest or professional expertise for developing, flipping or wrapping. We tried some modest renovating (car ports, concreting, fences, etc), but in many cases these bordered on disasters and were certainly not cost-effective.
When it comes to choosing between various types of property, we are not that particular. We own a mix of property types that have all done well over time. One of the benefits of living in so many different places in the first 10 years of our marriage was that we learnt a lot about the micro-ecology of properties (i.e. the attributes that make a place an enjoyable place to live). These do not need to be expensive things, just simple things like the right aspect to suit the climate, good flow-through ventilation, a pleasant view (maybe of the garden) from the dinner table, etc. A comfortable tenant is a happy tenant is a long-term customer.
Understandably, everyone is looking for properties with high growth and high yield. After all, they are effectively a license to print money. But even if they exist, then mathematically, it can only be in a limited time window. Higher than average growth must inevitably result in lower than average yields. The house versus flat debate is simply an extension of the high growth/low yield versus low growth/high yield debate. You could even substitute inner city versus suburbia, or even new versus old. It is all a matter of comparing property types that have a different set of parameter values, including different levels of growth and yield. All can be good investments but you would need some clever software, a clear crystal ball, some pains-taking research, and all mixed with a large dose of common sense to be able to pick the big winners (did I say I can help with the software?).
In reality, we have bought properties to suit long-term goals and strategies. Early on in your portfolio path, when cash flows are most likely the main constraint, higher yields may well be more important that capital growth, but the equity that you build up will most likely be through principal repayments. However, if cash flow is not the constraint, higher growth properties can be more tax effective and will generate the equity through that growth. Both can be equally good investments in terms of allowing you to build sufficient wealth for financial independence in retirement.
Some of our more recent property acquisitions have been with actual retirement lifestyle options in mind. They may not be the best investments, but they are still good investments that will fit neatly into our bigger picture.
What is your IP / property story so far?
We currently own a lot of property. As a result, we pay a lot of local government rates and State government land taxes (sometimes you would like to have a little more control over how our politicians spend it all). But in fact, we owned sufficient property to be financially independent within 20 years of purchasing our first house, and even then, with what we now know, we did a lot of things we could have done better.
But for us financial independence did not mean retirement. What it did do was make it possible for Jan to take time out to write a book or two based on our experience with property investment. Their success in turn resulted in me having to revise my immediate goals of saving the world to becoming Mr Jan Somers and Mr Mom for a while. While this was not an easy decision for me (as the traditional alpha male and bread-winner) to make, financial independence certainly made it easier. Nowadays, I derive as much job satisfaction from the feedback I have had from the tens of thousands of users of my property investment analysis software as I ever had from my contribution to saving the world.
Is there a story of a really good IP that you would be prepared to share with us?
I did share a story at one of the BIG meetings in Brisbane about an investment in Noosa on the Sunshine Coast north of Brisbane. But I would not like anyone to think that I am specifically recommending Noosa as it could have been anywhere on the coast in south-east Queensland.
The time frame was the early nineties and we were in the middle of the recession that we had to have. No one wanted to buy investment property and a Japanese developer was liquidating a particular unit development in the heart of Hastings Street, Noosa. For those of you who don’t know Noosa, Hastings Street is THE address, like Collins Street in Melbourne or Pitt Street in Sydney. In my formative years, I always considered places like Hasting Street in Noosa to be a wonderful location but always financially out of reach to us mere mortals.
Then out of the blue, an opportunity presented itself. Jan and I, with our three young kids, were holidaying on the sunshine coast and had an eye out for that regular once-in-a-lifetime investment opportunity when I spotted this advertisement on TV. Did the usual research through an agent we had dealings with on a previous occasion and then did the number crunching using some clever software (did I mention that earlier?) and realised that here was an investment that was guaranteed to be cash positive for at least three years and that, as long as the quality of the building measured up, offered considerable potential for capital growth in the heart and soul of Noosa.
It’s hard for me to recapture the scene, but the property inspection the next day involved our three young children who thought we should have been at the beach rather than property shopping, and it also involved an agent who thought we were this family from hell dressed for the beach and would have preferred that we took these children out of his display apartment before they wrecked something. It did not take us too long to establish that the developer had spared no expense in building and landscaping a very impressive holiday resort. While the units were several hundred thousand dollars each, we estimated that they were priced below replacement cost. Thus it was with great delight when the agent asked if were going to be much longer and should the children be doing what they were doing to the display furniture, that we would take not one, but two please! The agent was clearly hard of hearing because he had to ask me to repeat what I had just said. I will never forget that look on his face... concern turning into astonishment and eventually into a smile when he finally learned who the buyers were.
Were they a good buy? Well yes, of course. As all recessions do, this one turned around and the volatile top end of the market boomed again and the property prices doubled in five or six years, and during that time both continued to be cash positive.
Confidence can be such a great attribute. It just takes knowledge, experience and a bit of common sense.
Is there a story of a really bad (or not so good) IP that you would be prepared to share with us?
No, I do not recall any bad experiences with investment property. However, one thing we might have done different was to not sell one of the first properties we ever bought because we thought we could not afford to keep it. The problem was that a banker friend at the time had arranged finance for us in the form of a short-term P & I loan. The repayments were crippling at a time when I had been transferred and needed to set up another home elsewhere. If only we knew then what we know now about refinancing and interest-only monies etc. That property is worth a small fortune today.
Do you invest in other asset classes (shares, commodities, businesses, managed funds, cash, forex, etc)?
Not actively. Because of restrictive superannuation rules, we have had to park some monies into shares from time to time. It is certainly not something that average investors like us will be good at without a lot of time spent on research and, while we have some good fortune with shares in our local shopping centre, those supposedly blue-chip Telstra shares were the only investment that we have owned that has ever gone backwards (apart from a few horses in the Melbourne Cup).
What did you think of the last boom?
Cool! Your portfolio doubles in value but your lifestyle does not change. Then again, we have seen it all before… and before that… and before that as well.
Where do you see the market at the moment?
If you are a long-term buy-and-hold investor, who cares? If you are a flipper or developer, then you probably lay awake at night worrying about such things. I don’t consider myself an expert in this area, nor do I feel I need to be. There are plenty of others who are prepared to do the research on projected supply and demand at a macro level and offer their views on markets.
Your thoughts on the next 12 months and the coming cycle?
If you can afford it, it is always a good time to buy. Those once-in-a-lifetime deals come along very regularly.
If a budding property investor asked "what are the top 5 things I should do", you would say?
And if that same budding investor asked "what 5 things should I avoid", you would say?
And in a slighty different vein - what would you advise the property investor who maybe has a portfolio of properties, but is at a loss as to how to proceed?
The only physical constraint to proceeding should be the inability to borrow the necessary funds and this would be either because of an inability to service the debt, or insufficient collateral for security. And of course there are ways of tackling both of these, but I presume that in this case, you are referring to a lack of knowledge rather than a lack of financial muscle.
For someone who may have inadvertently accumulated a few properties, but not as part of a master plan, I would recommend sitting down and working out how many such properties you will need in order to generate enough passive income to be financially independent. Then it would be a case of organising the financial affairs in such a way that there is always sufficient unencumbered collateral available for the finance for the next property. Have a chat with a knowledgeable banker or finance broker long before you actually need the next loan so that you are clear on what will be required and what options you will have. We have found it useful to establish a line of credit that allowed us to offer cash contracts during negotiations but still with a view to obtaining the finance before settlement. The ability to proceed depends on the ability to get finance and this in turn is much easier if you know exactly what the various formulae the banks will be using to assess your application.
For those investors who are a little more knowledgeable, a little more experienced and have actively built their portfolio of properties to date, I can only assume that an inability to proceed would relate to the boredom of long-term buy-and-hold property investing. Many such investors, once they have gained the confidence with the property investment process, get fidget fever and look to speed up the process through some active participation. This can take the form of a little renovation here or a small duplex development there. It can herald an excursion into higher yielding but higher risk commercial or industrial property. Fidget fever is rarely fatal and can even be financially rewarding. However, it all comes back to your goals and aspirations and doing what it is that you do best.
How important is planning to being a successful investor?
As I have already described earlier, we were reasonably successful in accumulating investment properties despite a lack of any pre-conceived plan. Property can be like that and that is why we think it best suits the average investor. Having said that, we probably made it work for us initially through being very frugal people by nature. In my dealings with others, and even my dealings with our own children, not everyone has the same attitude to money. In fact I would argue that for most people, planning is not important, it is critical.
Planning starts with a goal and ends with a budget, having decided on lifestyle and investment priorities along the way. The time it takes to achieve financial independence does not depend so much on what you earn but on what you invest and the latter depends very much on your spending priorities.
Do you consider that there is any natural progression for an investor? (eg. From owning a few properties, to owning many, to being a developer)
Like anything else, the more time and effort you invest the more experienced and knowledgeable you become. What might have started out as a very tentative first foray into investment property can often turn into a passionate portfolio accumulation as one’s knowledge and confidence builds. But then you run out of cash flow or you run out of collateral and you are stopped in your tracks, frustrated that this property millionaire thing does not happen overnight. And then the market cycle goes through a flat spot or rents are stagnating and it is all happening far too slowly.
Long-term buy-and-hold property investing is boring! Is it any wonder that many experienced property investors turn to variations on the theme to accelerate the process and/or relieve the boredom of just watching the grass grow. Some will try their hand at renovating, flipping or wrapping while others might turn to developing or even higher-yield higher-risk commercial property.
My own view on the matter is that whatever you do, it involves an investment of your most valuable commodity, your time. Some people who are not happy with what they do in their day job, or have a lot of time to spare may regard this diversion to be a worthwhile investment, especially if they have attributes and network connections that suit their new role. But always keep in mind that to do these things well means becoming professional at it. I have always preferred to focus on what I am good at and not be too distracted by the need to accelerate the portfolio accumulation process through direct intervention. Whatever makes you a happy little camper?
Do you have any thoughts on the CF vs CG debate? Or on the issue of metro vs regional? Units vs houses?
I think I have already touched on these issues earlier. The bottom line here is that focusing solely on just cash flow (high yield) or capital growth is inappropriate. Rather, the focus should be on what is the best way of achieving wealth through property investment.
Investment returns determine the rate of wealth accumulation and these are a function of yield, growth and tax effectiveness. Hence most property investors are seeking properties with high yields, high capital growth and high tax write-offs. However, generally speaking, higher than average yields are associated with lower than average capital growth and vice versa (see More Wealth from Residential Property pp 93 – 99). Because of the usual supply and demand issues, regional areas would likely have lower growth but higher yields than metropolitan areas. In the case of units versus houses in the same area, the lower relative land content of a unit would normally point to lower growth and higher yields than for a house. While there may be many other factors that separate units and houses, lets just concentrate for this exercise on the generic low-growth, high-yield investment versus the high-growth low-yield investment.
Both investments types can produce equally good results over the long term (you can always use PIA to see for yourself), but there are differences and each type may be better suited to different investors or even to the same investor at different stages of his or her financial life.
High yield properties make it easier to accumulate more properties, but the increase in wealth (equity) may largely be due to principal repayments rather than growth in the asset value. Sufficient collateral will normally be the constraint in borrowing funds for more properties.
The accumulation of high growth properties is usually constrained by cash flow but fewer properties may generate the same wealth as a larger number of high yield properties.
In practise, most investors end up with a mix of the two types. Investors who are starting out with minimal cash may, by necessity, need to seek high yield properties. Those with high incomes may chose to invest in high growth properties with the cash flow deficit being softened somewhat by the tax advantages of negative gearing. Investors approaching retirement may also prefer to retain their high yield investments when it comes time to balance some of their investment debt.
Fixed or floating interest rates?
Easy… Fixed. Unless you are a punter, but then you would be into shares, wouldn’t you?
Compared to when you and Jan were still building your portfolio, do you think it is harder, easier, or about the same now for newer investors?
We have never stopped building our portfolio. As to whether it is easier or not now, I do not know. That’s really a matter of looking at the housing affordability statistics and they differ from State to State but by all accounts, during the last boom were at an all time low (i.e. unaffordable) in the capital cities. Some would argue that many of the quoted affordability statistics are biased and that the situation, especially for first-home buyers, is actually much worse.
(see http://www.abc.net.au/rn/science/ockham/stories/s1335462.htm )
Well who do you believe? Certainly, back when we first bought a house, all we could afford was a small chamfer board box on the edge of the mud flats way out the back of our provincial city (Redcliffe). I don’t know that that situation has changed all that much. For young ones just starting out, the outer suburbs are now just that bit further out.
Another issue here is that, even if it were harder, is property still a better investment option for average investors than any of the alternatives. I would still say yes. And of course, buying an investment property is much easier than buying your first home, and there is no reason why you can’t do this while still living with mum and dad.
And finally, and of course to the extent you are comfortable with, can you tell us what effects investment success have had on your life?
Investment success certainly gives you more options and more control over what you do with your life but I would like to think that it hasn’t changed me as a person. I would still like to leave this planet a better place than how I found it.
We were certainly very fortunate to have found a way of achieving financial independence so early in life, but that path still involved lots of hard work and sacrifices. And in many respects nothing has changed. We still work hard and make sacrifices, but the choices are largely of our own making. Generally speaking, we do things now because we can, not because we have to.
If there is a downside to a large property portfolio, it dictates that you must continue to monitor and manage it closely. Sure, you may have people that help you do this, but it is not in our nature to leave it all to others. It could be a full time job, but only if you let it become so. One needs to be very organised when it comes to managing large cash flows (those huge rates and land tax bills can be mind-blowing when they all come together) and this is especially so if you hope to spend more time visiting all corners of the globe. Fortunately, this again is an area that Jan does very well, but of course it leaves her less time these days for writing or presenting.
How many properties are enough? Well I am sure that we had enough properties 20 years ago to meet our foreseeable needs, but a little out of habit, a little out of continuing to prove to ourselves and the sceptics, and a little out of not being able to resist a bargain, we continue to add to that portfolio.
However, I would again like to think that accumulating such wealth does not automatically mean that you become a huge consumer. I have come from a background of sustainable development and while I am still the person who turns off lights that aren’t being used, I must admit that I am quite fond of our rather pleasant seaside shack with its tennis court, pool and 4WD in the garage.
But there has to be a balance in your life. Jan and I have both been very keen sporting people throughout our lives and continue to be so. We also believe that prevention is better than cure and that sport serves the community well in terms of a healthy lifestyle (“healthy, wealthy & wise”). In this regard we have been finding effective ways of reinvesting in our community. In the past few years, we have helped build a new sport centre at one of the local schools, have been the main sponsor for Australian rope skipping teams, Jan has taken on the voluntary role of President of the Australian Rope Skipping Association while I have taken on the voluntary role of President of our local Tennis Club and administrative duties in relation to Tennis Queensland. I think that we are probably typical of most of the baby boomer generation: when at last, the kids become largely independent, you quickly find ways of filling all the newly available hours in the day.
And then there is Somersoft, the business. Someone very wise once said to me “Find a way to help people and you will never go hungry”. Wise words indeed. The popularity of Jan’s books and in turn my software certainly has been career-changing stuff. . It’s just fantastic to find something that you love doing and then find that people are prepared to pay you to do it! With minimal promotion on our part, those products continue to be in demand, largely through the amazing power of the word of mouth. We certainly must thank all of those Somersoft disciples out there for that support and their positive feedback. It is certainly what keeps us motivated to keep producing and improving. Continuing to support this forum is least we can do to say thank you to the investor community.
We are extremely fortunate to have Ian Somers as our first interviewee and we thank him for agreeing to kick off our new “Interview” forum.
Most of us are very familiar with Jan’s story through her books…….but of course behind every great woman there is a great man.
We hope you enjoy hearing from Mr PIA himself………Ian Somers.
INTERVIEW with IAN SOMERS – 26 July 2006
How did you get involved in investment property?
By accident! You can read Jan’s version of events in the About the Author section in any of her books, but here is my slant on it…
Jan and I bought our first house back in 1972 just after we were married. It was a very small, modest chamfer board structure that faced the wrong way (into the hot western sun) and had a few water issues (it was on the high side of the street, but all the catchment water off the hill seemed to be channelled through our property and under our house), but we called it home. Well at least for twelve months or so…
Back in those days, I was the bright, ambitious scientist (at least in my own mind) destined to save the world while working at the cutting edge of fisheries science in Australia’s premier research organisation, CSIRO. However, saving the world from within CSIRO necessitated several transfers over the first 10 years of my career and of course, as Jan was just a high school teacher and dutiful wife, she was always very understanding at having to leave our home and make a new one somewhere else. The decision not to sell our first house but to rent it out had nothing to do with the idea of investing; it was all about having a house to come back to when or if I was transferred back to Brisbane.
As it turned out, we never did go back to the same place and, as a result, we accumulated several such modest properties over that decade. But it wasn’t until Jan’s retirement from the teaching profession (brought on by a dose of three young children) that she made the monumental discovery that our modest property portfolio was making more money (largely through capital growth in the early 80’s) than I was earning as an eminent research scientist. In retrospect, that was a real blow to my ego and, as someone with a professional background in mathematical modelling, I was determined to find out what we had been doing right. In fact, when Jan and I poured over all the figures, we found that the only thing we had been doing right was buying property. But, when it came to things such as financing and managing them, we had been doing a lot of things wrong (short-term P&I loans etc). I think you could say that was something of an epiphany and over the next decade or so, while I worked hard at saving the world, Jan set about putting into practise what we had learnt. And the rest, as they say, is history.
What is your property investment philosophy (CF, CG, renos, houses, flats, buy and hold, develop, flip, wrap, etc)?
A simple one… finance properly, buy and hold long-term. As you would expect, after 34 years of marriage and a multi-million dollar portfolio, I share my wife’s philosophy on investment property. You might not think so, but we still consider ourselves average property investors. We do not have insider knowledge in terms of markets, interest rates or rezoning. We do not have the time, interest or professional expertise for developing, flipping or wrapping. We tried some modest renovating (car ports, concreting, fences, etc), but in many cases these bordered on disasters and were certainly not cost-effective.
When it comes to choosing between various types of property, we are not that particular. We own a mix of property types that have all done well over time. One of the benefits of living in so many different places in the first 10 years of our marriage was that we learnt a lot about the micro-ecology of properties (i.e. the attributes that make a place an enjoyable place to live). These do not need to be expensive things, just simple things like the right aspect to suit the climate, good flow-through ventilation, a pleasant view (maybe of the garden) from the dinner table, etc. A comfortable tenant is a happy tenant is a long-term customer.
Understandably, everyone is looking for properties with high growth and high yield. After all, they are effectively a license to print money. But even if they exist, then mathematically, it can only be in a limited time window. Higher than average growth must inevitably result in lower than average yields. The house versus flat debate is simply an extension of the high growth/low yield versus low growth/high yield debate. You could even substitute inner city versus suburbia, or even new versus old. It is all a matter of comparing property types that have a different set of parameter values, including different levels of growth and yield. All can be good investments but you would need some clever software, a clear crystal ball, some pains-taking research, and all mixed with a large dose of common sense to be able to pick the big winners (did I say I can help with the software?).
In reality, we have bought properties to suit long-term goals and strategies. Early on in your portfolio path, when cash flows are most likely the main constraint, higher yields may well be more important that capital growth, but the equity that you build up will most likely be through principal repayments. However, if cash flow is not the constraint, higher growth properties can be more tax effective and will generate the equity through that growth. Both can be equally good investments in terms of allowing you to build sufficient wealth for financial independence in retirement.
Some of our more recent property acquisitions have been with actual retirement lifestyle options in mind. They may not be the best investments, but they are still good investments that will fit neatly into our bigger picture.
What is your IP / property story so far?
We currently own a lot of property. As a result, we pay a lot of local government rates and State government land taxes (sometimes you would like to have a little more control over how our politicians spend it all). But in fact, we owned sufficient property to be financially independent within 20 years of purchasing our first house, and even then, with what we now know, we did a lot of things we could have done better.
But for us financial independence did not mean retirement. What it did do was make it possible for Jan to take time out to write a book or two based on our experience with property investment. Their success in turn resulted in me having to revise my immediate goals of saving the world to becoming Mr Jan Somers and Mr Mom for a while. While this was not an easy decision for me (as the traditional alpha male and bread-winner) to make, financial independence certainly made it easier. Nowadays, I derive as much job satisfaction from the feedback I have had from the tens of thousands of users of my property investment analysis software as I ever had from my contribution to saving the world.
Is there a story of a really good IP that you would be prepared to share with us?
I did share a story at one of the BIG meetings in Brisbane about an investment in Noosa on the Sunshine Coast north of Brisbane. But I would not like anyone to think that I am specifically recommending Noosa as it could have been anywhere on the coast in south-east Queensland.
The time frame was the early nineties and we were in the middle of the recession that we had to have. No one wanted to buy investment property and a Japanese developer was liquidating a particular unit development in the heart of Hastings Street, Noosa. For those of you who don’t know Noosa, Hastings Street is THE address, like Collins Street in Melbourne or Pitt Street in Sydney. In my formative years, I always considered places like Hasting Street in Noosa to be a wonderful location but always financially out of reach to us mere mortals.
Then out of the blue, an opportunity presented itself. Jan and I, with our three young kids, were holidaying on the sunshine coast and had an eye out for that regular once-in-a-lifetime investment opportunity when I spotted this advertisement on TV. Did the usual research through an agent we had dealings with on a previous occasion and then did the number crunching using some clever software (did I mention that earlier?) and realised that here was an investment that was guaranteed to be cash positive for at least three years and that, as long as the quality of the building measured up, offered considerable potential for capital growth in the heart and soul of Noosa.
It’s hard for me to recapture the scene, but the property inspection the next day involved our three young children who thought we should have been at the beach rather than property shopping, and it also involved an agent who thought we were this family from hell dressed for the beach and would have preferred that we took these children out of his display apartment before they wrecked something. It did not take us too long to establish that the developer had spared no expense in building and landscaping a very impressive holiday resort. While the units were several hundred thousand dollars each, we estimated that they were priced below replacement cost. Thus it was with great delight when the agent asked if were going to be much longer and should the children be doing what they were doing to the display furniture, that we would take not one, but two please! The agent was clearly hard of hearing because he had to ask me to repeat what I had just said. I will never forget that look on his face... concern turning into astonishment and eventually into a smile when he finally learned who the buyers were.
Were they a good buy? Well yes, of course. As all recessions do, this one turned around and the volatile top end of the market boomed again and the property prices doubled in five or six years, and during that time both continued to be cash positive.
Confidence can be such a great attribute. It just takes knowledge, experience and a bit of common sense.
Is there a story of a really bad (or not so good) IP that you would be prepared to share with us?
No, I do not recall any bad experiences with investment property. However, one thing we might have done different was to not sell one of the first properties we ever bought because we thought we could not afford to keep it. The problem was that a banker friend at the time had arranged finance for us in the form of a short-term P & I loan. The repayments were crippling at a time when I had been transferred and needed to set up another home elsewhere. If only we knew then what we know now about refinancing and interest-only monies etc. That property is worth a small fortune today.
Do you invest in other asset classes (shares, commodities, businesses, managed funds, cash, forex, etc)?
Not actively. Because of restrictive superannuation rules, we have had to park some monies into shares from time to time. It is certainly not something that average investors like us will be good at without a lot of time spent on research and, while we have some good fortune with shares in our local shopping centre, those supposedly blue-chip Telstra shares were the only investment that we have owned that has ever gone backwards (apart from a few horses in the Melbourne Cup).
What did you think of the last boom?
Cool! Your portfolio doubles in value but your lifestyle does not change. Then again, we have seen it all before… and before that… and before that as well.
Where do you see the market at the moment?
If you are a long-term buy-and-hold investor, who cares? If you are a flipper or developer, then you probably lay awake at night worrying about such things. I don’t consider myself an expert in this area, nor do I feel I need to be. There are plenty of others who are prepared to do the research on projected supply and demand at a macro level and offer their views on markets.
Your thoughts on the next 12 months and the coming cycle?
If you can afford it, it is always a good time to buy. Those once-in-a-lifetime deals come along very regularly.
If a budding property investor asked "what are the top 5 things I should do", you would say?
- Set spending priorities and save your money. Learn to enjoy the simple things in life. “He is richest whose pleasures are cheapest”. Do a budget.
- When you can afford it, buy a property. If it is your own home, build up some equity by paying down the debt as quickly as you can.
- Before you choose any property, do your own research. Make sure you are not paying above fair market price, that the property will be attractive to potential tenants, that the area has good growth prospects, that you can get the necessary finance at a reasonable rate, and that you can afford to fund any cash flow deficit.
- When you can afford it, buy another property, and another, etc, etc. This process gets easier and easier and you will find yourself building up a network of people that will help make it all happen (building rapport with several real estate agents, finding a good property manager, financier, solicitor, accountant, tradespeople, etc).
- Life is too short. Never lose sight of the really important things (your health, your family and your friends)
And if that same budding investor asked "what 5 things should I avoid", you would say?
- Avoid “bad” debt. Never borrow money for luxury items that depreciate in value (eg cars, big-screen TV’s, etc). Avoid buying stuff you want and stick to the stuff that you actually need. Do not be side-tracked from your long-term financial goals. You can have it all later.
- Don’t be a “gunner”. It’s Ok to stay within your comfort zone in terms of your investing style, but at some stage you are going to have to get your feet wet and buy your first investment property. Think of it as an investment in learning as much as anything else. If you don’t invest, the financial risk you face at retirement is, in my view, much greater.
- Don’t invest for the wrong reasons. It’s OK for an investment to be tax-effective and to factor that into the investment return, but saving tax should never be the single determining factor. Always do you sums to see if the investment stacks up and you can afford any cash flow deficit. Likewise, it’s OK to purchase strategic lifestyle investments such as holiday units and properties inter-state, but always ensure that all the figures stack up and that you are not being blinded by glossy brochures, sun-drenched beaches and the potential for large depreciation or travel claims.
- Don’t be impatient. Secure property investment takes many years. How many first time investors buy a property and either get bored with it, or frustrated by the fact that the market has been flat for a few years, or experience significant growth and sell it to realise the gain.
- Never forget your father’s birthday.
And in a slighty different vein - what would you advise the property investor who maybe has a portfolio of properties, but is at a loss as to how to proceed?
The only physical constraint to proceeding should be the inability to borrow the necessary funds and this would be either because of an inability to service the debt, or insufficient collateral for security. And of course there are ways of tackling both of these, but I presume that in this case, you are referring to a lack of knowledge rather than a lack of financial muscle.
For someone who may have inadvertently accumulated a few properties, but not as part of a master plan, I would recommend sitting down and working out how many such properties you will need in order to generate enough passive income to be financially independent. Then it would be a case of organising the financial affairs in such a way that there is always sufficient unencumbered collateral available for the finance for the next property. Have a chat with a knowledgeable banker or finance broker long before you actually need the next loan so that you are clear on what will be required and what options you will have. We have found it useful to establish a line of credit that allowed us to offer cash contracts during negotiations but still with a view to obtaining the finance before settlement. The ability to proceed depends on the ability to get finance and this in turn is much easier if you know exactly what the various formulae the banks will be using to assess your application.
For those investors who are a little more knowledgeable, a little more experienced and have actively built their portfolio of properties to date, I can only assume that an inability to proceed would relate to the boredom of long-term buy-and-hold property investing. Many such investors, once they have gained the confidence with the property investment process, get fidget fever and look to speed up the process through some active participation. This can take the form of a little renovation here or a small duplex development there. It can herald an excursion into higher yielding but higher risk commercial or industrial property. Fidget fever is rarely fatal and can even be financially rewarding. However, it all comes back to your goals and aspirations and doing what it is that you do best.
How important is planning to being a successful investor?
As I have already described earlier, we were reasonably successful in accumulating investment properties despite a lack of any pre-conceived plan. Property can be like that and that is why we think it best suits the average investor. Having said that, we probably made it work for us initially through being very frugal people by nature. In my dealings with others, and even my dealings with our own children, not everyone has the same attitude to money. In fact I would argue that for most people, planning is not important, it is critical.
Planning starts with a goal and ends with a budget, having decided on lifestyle and investment priorities along the way. The time it takes to achieve financial independence does not depend so much on what you earn but on what you invest and the latter depends very much on your spending priorities.
Do you consider that there is any natural progression for an investor? (eg. From owning a few properties, to owning many, to being a developer)
Like anything else, the more time and effort you invest the more experienced and knowledgeable you become. What might have started out as a very tentative first foray into investment property can often turn into a passionate portfolio accumulation as one’s knowledge and confidence builds. But then you run out of cash flow or you run out of collateral and you are stopped in your tracks, frustrated that this property millionaire thing does not happen overnight. And then the market cycle goes through a flat spot or rents are stagnating and it is all happening far too slowly.
Long-term buy-and-hold property investing is boring! Is it any wonder that many experienced property investors turn to variations on the theme to accelerate the process and/or relieve the boredom of just watching the grass grow. Some will try their hand at renovating, flipping or wrapping while others might turn to developing or even higher-yield higher-risk commercial property.
My own view on the matter is that whatever you do, it involves an investment of your most valuable commodity, your time. Some people who are not happy with what they do in their day job, or have a lot of time to spare may regard this diversion to be a worthwhile investment, especially if they have attributes and network connections that suit their new role. But always keep in mind that to do these things well means becoming professional at it. I have always preferred to focus on what I am good at and not be too distracted by the need to accelerate the portfolio accumulation process through direct intervention. Whatever makes you a happy little camper?
Do you have any thoughts on the CF vs CG debate? Or on the issue of metro vs regional? Units vs houses?
I think I have already touched on these issues earlier. The bottom line here is that focusing solely on just cash flow (high yield) or capital growth is inappropriate. Rather, the focus should be on what is the best way of achieving wealth through property investment.
Investment returns determine the rate of wealth accumulation and these are a function of yield, growth and tax effectiveness. Hence most property investors are seeking properties with high yields, high capital growth and high tax write-offs. However, generally speaking, higher than average yields are associated with lower than average capital growth and vice versa (see More Wealth from Residential Property pp 93 – 99). Because of the usual supply and demand issues, regional areas would likely have lower growth but higher yields than metropolitan areas. In the case of units versus houses in the same area, the lower relative land content of a unit would normally point to lower growth and higher yields than for a house. While there may be many other factors that separate units and houses, lets just concentrate for this exercise on the generic low-growth, high-yield investment versus the high-growth low-yield investment.
Both investments types can produce equally good results over the long term (you can always use PIA to see for yourself), but there are differences and each type may be better suited to different investors or even to the same investor at different stages of his or her financial life.
High yield properties make it easier to accumulate more properties, but the increase in wealth (equity) may largely be due to principal repayments rather than growth in the asset value. Sufficient collateral will normally be the constraint in borrowing funds for more properties.
The accumulation of high growth properties is usually constrained by cash flow but fewer properties may generate the same wealth as a larger number of high yield properties.
In practise, most investors end up with a mix of the two types. Investors who are starting out with minimal cash may, by necessity, need to seek high yield properties. Those with high incomes may chose to invest in high growth properties with the cash flow deficit being softened somewhat by the tax advantages of negative gearing. Investors approaching retirement may also prefer to retain their high yield investments when it comes time to balance some of their investment debt.
Fixed or floating interest rates?
Easy… Fixed. Unless you are a punter, but then you would be into shares, wouldn’t you?
Compared to when you and Jan were still building your portfolio, do you think it is harder, easier, or about the same now for newer investors?
We have never stopped building our portfolio. As to whether it is easier or not now, I do not know. That’s really a matter of looking at the housing affordability statistics and they differ from State to State but by all accounts, during the last boom were at an all time low (i.e. unaffordable) in the capital cities. Some would argue that many of the quoted affordability statistics are biased and that the situation, especially for first-home buyers, is actually much worse.
(see http://www.abc.net.au/rn/science/ockham/stories/s1335462.htm )
Well who do you believe? Certainly, back when we first bought a house, all we could afford was a small chamfer board box on the edge of the mud flats way out the back of our provincial city (Redcliffe). I don’t know that that situation has changed all that much. For young ones just starting out, the outer suburbs are now just that bit further out.
Another issue here is that, even if it were harder, is property still a better investment option for average investors than any of the alternatives. I would still say yes. And of course, buying an investment property is much easier than buying your first home, and there is no reason why you can’t do this while still living with mum and dad.
And finally, and of course to the extent you are comfortable with, can you tell us what effects investment success have had on your life?
Investment success certainly gives you more options and more control over what you do with your life but I would like to think that it hasn’t changed me as a person. I would still like to leave this planet a better place than how I found it.
We were certainly very fortunate to have found a way of achieving financial independence so early in life, but that path still involved lots of hard work and sacrifices. And in many respects nothing has changed. We still work hard and make sacrifices, but the choices are largely of our own making. Generally speaking, we do things now because we can, not because we have to.
If there is a downside to a large property portfolio, it dictates that you must continue to monitor and manage it closely. Sure, you may have people that help you do this, but it is not in our nature to leave it all to others. It could be a full time job, but only if you let it become so. One needs to be very organised when it comes to managing large cash flows (those huge rates and land tax bills can be mind-blowing when they all come together) and this is especially so if you hope to spend more time visiting all corners of the globe. Fortunately, this again is an area that Jan does very well, but of course it leaves her less time these days for writing or presenting.
How many properties are enough? Well I am sure that we had enough properties 20 years ago to meet our foreseeable needs, but a little out of habit, a little out of continuing to prove to ourselves and the sceptics, and a little out of not being able to resist a bargain, we continue to add to that portfolio.
However, I would again like to think that accumulating such wealth does not automatically mean that you become a huge consumer. I have come from a background of sustainable development and while I am still the person who turns off lights that aren’t being used, I must admit that I am quite fond of our rather pleasant seaside shack with its tennis court, pool and 4WD in the garage.
But there has to be a balance in your life. Jan and I have both been very keen sporting people throughout our lives and continue to be so. We also believe that prevention is better than cure and that sport serves the community well in terms of a healthy lifestyle (“healthy, wealthy & wise”). In this regard we have been finding effective ways of reinvesting in our community. In the past few years, we have helped build a new sport centre at one of the local schools, have been the main sponsor for Australian rope skipping teams, Jan has taken on the voluntary role of President of the Australian Rope Skipping Association while I have taken on the voluntary role of President of our local Tennis Club and administrative duties in relation to Tennis Queensland. I think that we are probably typical of most of the baby boomer generation: when at last, the kids become largely independent, you quickly find ways of filling all the newly available hours in the day.
And then there is Somersoft, the business. Someone very wise once said to me “Find a way to help people and you will never go hungry”. Wise words indeed. The popularity of Jan’s books and in turn my software certainly has been career-changing stuff. . It’s just fantastic to find something that you love doing and then find that people are prepared to pay you to do it! With minimal promotion on our part, those products continue to be in demand, largely through the amazing power of the word of mouth. We certainly must thank all of those Somersoft disciples out there for that support and their positive feedback. It is certainly what keeps us motivated to keep producing and improving. Continuing to support this forum is least we can do to say thank you to the investor community.
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