Welcome to the Interview Number Three.
We hope you enjoy hearing this time from alexlee………………
Interview with alexlee – 1st September 2006
How did you get involved in property?
I went to a free seminar held by a property marketing company in Sydney in 1999. I was about 2 years into my first real job (grad at an accounting firm), working and looking for ways to invest. I’d just started buying a few shares and knew nothing about property.
What is your property investment philosophy (CF, CG, renos, houses, flats, buy and hold, develop, flip, wrap, etc)?
So far, buy and hold for CG. Refinance and use the equity to buy more IPs.
I started buying units and townhouses because that was what the marketing company sold at the time, but I’ve since leaned towards houses (my last 2 IPs were houses). Higher land content, no body corp fees, and more potential for re-development. I’m limited by the fact that I’ve been working overseas for the last 5 years so I’m not ‘on the ground’. After I go back to Australia, though, I plan to develop experience with renos and small developments as well as more buy and holds.
What is your IP / property story so far?
I went to the property seminar in 1999. Everything clicked, and using savings I had (pretty much right from childhood, part time jobs, etc) I bought my first IP in Jan 2000. Standard 3 bedroom townhouse in Enoggera, Brisbane. Everything went very well: my own independent research (of agents not associated with the marketing company) confirmed that the price was fair, valuation came in at the purchase price, and the place was rented at a 6.6% yield from day one. So I bought another property in September 2000.
I left Sydney to work in London in 2001, and sort of forgot about property for 2 years (though I managed to save some good money in London: got a contract with lots of overtime, and the aussie dollar was around $2.80 to the pound). When I left London (eventually to work in Tokyo), I realised my properties had gone up a bit, so I started to really research property and started buying again from the same marketing company.
At the moment I have a few IPs, no PPOR, am renting and working in London and generally in a holding pattern because I think there will be more bargains once I’m on the ground in Australia and the market drops a bit. I’m saving money to buy my own PPOR when I go back to Sydney, and locking in some LOCs for future IP purchases.
Cashflow is still negative, but LVR is only around 65% and at my age (29) my priority is more equity growth.
Is there a story of a really good IP that you would be prepared to share with us?
A 4 bed old house in Cooloongup, Perth. I bought it in mid-2004 and ANZ just valued it (July 2006) at 80% above the purchase price . I had bought that property using equity from another IP, so it was no money down. I’ve never seen it myself (except for photos), didn’t know anything about the area except what the buyers agent told me. A very lucky buy, right in the middle of the boom.
Is there a story of a really bad (or not so good) IP that you would be prepared to share with us?
I bought a unit on the Gold Coast in early 2003. The waterproofing in the roof wasn’t done right and it leaks whenever it rains. It’s still under the standard 6 year warranty, but the builder went bust and I’m trying to get the BSA (Queensland Building Services Authority) to fix it. They supposedly fixed it in 2004, but the leaks started happening again this year. I’ve submitted another claim and am still waiting to hear from them. Lost a few thousand in rent when the unit was being repaired, and of course it’s now harder to rent out because it leaks.
Having said that, based on a valuation done last year, the value of the unit has gone up around 40% in 3 years, and it yields 6.9% on my purchase price, so I’m not complaining too much.
Also some of my later Brisbane purchases have been flat for 2-3 years. Yields are ok, though, and long term the IPs will be good. Even more importantly, had I not bought those flat ones and stopped altogether, I would never have bought the Perth property (see above). It all evens out.
Do you invest in other asset classes (shares, commodities, businesses, managed funds, cash, forex, etc)?
I’m saving cash for a deposit on my future PPOR and have some shares that I buy and hold (no gearing). I rarely trade and try to use dividend reinvestment schemes whenever I can. My Australian tax rate is zero right now so franked dividends are great for me. I don’t have any managed funds. I have a long pounds position as I’m keeping my London savings in pounds because I think the AUD will fall.
What criteria do you use when selecting a property to purchase and how do you manage the difficulties of long distance property acquisition?
After my Perth property experience, at a high level I select the states that aren’t doing very well and avoid states that aren’t affordable. Which means I’d avoid Perth and Darwin right now, and a lot of Sydney. I think buying at the right point in the cycle is easier than selecting the ‘right’ property, especially as I’m not that confident about my ‘property picking’ ability.
With specific properties, my first criterion is rental yield. I wouldn’t consider a property if I think the yield is too low (currently my general criterion is 5%+ rental yield). That might mean I miss out on some growth properties, but what I figure is with a 5%+ rental yield, I can hold onto a property more comfortably. Hold on and time will grow the property.
The second most important criterion for me is comparable values. I think property value is heavily influenced by the value of the place next door, so I don’t want to buy at above a comparable property.
Other than that, the usual proximity to transport (especially trains), schools, shops, etc, but if the numbers are right, location isn’t as important.
As for buying from overseas, make sure your mortgage broker and solicitor is aware of your situation, and find out the requirements early on (e.g. Qld contracts have to be witnessed at the consulate, and some consulates aren’t open every day). Make sure everyone has email.
Your thoughts on the next 12 months and the coming cycle?
I don’t think much will happen in the next 12 months with shares. The US economy is slowing and Australian rates are going up. I think Sydney will fall further: it is still far less affordable than Melbourne or Brisbane. Perth and Darwin will stay up until China pulls back and the commodities boom falters. With the next cycle, I think Sydney and Melbourne will lead the boom. However, I think Sydney is still largely overvalued based on yield. There are a few spots in Sydney that look good (such as units in Parramatta, yielding 5%+) and SE Qld (especially the Brisbane / Gold Coast corridor) still look attractive.
What added difficulties does an expat encounter in their investing?
Banks are generally only willing to lend up to 80% LVR to expats. Hopefully by going overseas you are making and saving more money, so it should even out. There are more issues with mail, time differences, etc. Also Qld mortgages have to certified by a consular official if you are overseas, which is a bother. You might have to wait a full day for replies so you have to be more careful about the timetable.
If a budding property investor asked "what are the top 5 things I should do", you would say?
1) Write down your goals. Really flesh them out and ‘see’ it. What do you want to achieve, by when, how much money you’d need. Put in as much detail as you can. ‘I want to be rich’ is not enough. ‘I want a merc’ is not enough. How do you define rich? How will you pay for the merc? How much is the upkeep? How will you pay for its upkeep? You need to be able to visualise exactly what you would do if you had all the money you wanted. Create your own private reality show. This will keep you focused.
My own plan includes where I’ll live, what my typical day will be like, what I’ll do in my spare time, where the money will come from, how I’ll manage that money, etc.
2) Save money and budget. You can’t handle investing until you can control your own finances. My rule of thumb for savings is 70% of net income if you’re living at home and not paying rent, 40% if you’re single (or you both work) and rent with no kids, and at least 10% if you’re on a single income and/or have children.
3) Read every book you can find about property investing. Just go through your local library. Read the Somersoft forums. Read the business section of the main papers (all on line). In addition I also read the New York Times, Fortune, Forbes, Businessweek, Newsweek, Time, the Economist and cnnfn.com (all available for free on the net). World events affect the economy, and hence property. e.g. the oil industry, the Middle East, the Chinese and US economies, new developments like loan securitisation, etc. Many of these topics aren’t covered in much detail in the mainstream Australian press.
4) While doing (2) and (3), go look at properties and lay the groundwork. Research one suburb a week on the net. Talk to agents. Get a feel for prices, rents, talk to lawyers about what needs to be done, talk to mortgage brokers. Go to lots of free seminars because they will teach you the basics. Just don’t sign anything and don’t pay for anything.
5) Once you have your finances in order and have done some basic research, start. Buy a cheap, simple property that is well within your borrowing capacity. In Sydney you can find units for $150k. Don’t go for a unique property. Get a standard, entry level, below-median price property that almost everyone can afford to rent. Question everyone and learn everything that you can. You have to understand how the numbers work.
And if that same budding investor asked "what 5 things should I avoid", you would say?
1) Avoid off the plan with long settlements. Who knows what the market will do in 2 or more years? You want something you can evaluate and learn from now.
2) Avoid maxing out your borrowing capacity on your first IP. My own strategy is lots of cheaper properties instead of fewer expensive properties. Keep spare capacity in reserve just in case something goes wrong with the IP or you find a bargain.
3) Avoid taking property advice from those who don’t invest in property. Most people just repeat things they hear, instead of giving you informed, considered opinions. People who just own their own home are not property investors.
4) Avoid any deals where you’re being pressured to decide ‘now’. Even if it’s a good deal, you don’t have enough resources / experience to understand the risks immediately. There are lots of good deals out there.
5) Avoid becoming impatient. Property investing is a long term game. A typical month for me is just receiving mail, putting the numbers into spreadsheets and answering a few emails. However, that’s what is going to make me rich in the long term. It’s not exciting, and I don’t want it to be (if your buy and hold becomes exciting it means something is going wrong).
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?
Revisit your goals. What is your objective? Will your current strategy take you there? Your requirements might have changed. e.g. you now need more cashflow now that you’re approaching retirement. Start investigating other investments such as shares, bonds, LPTs, etc. Property certainly isn’t the only investment out there, though it’s great for building equity through leveraging.
How important is planning to being a successful investor?
Even before you take action, you need to plan. Before going on a journey, you need to know where you are, where you want to go and what you have to work with. People get into trouble (not just financially) when something ‘unexpected’ happens. In investing, a lot of these ‘unexpected’ events (interest rate rises, repairs, vacancies, damage, loss of one income, etc) CAN be planned for. Hope for the best, plan for the worst. Regular reading of business newspapers will give you a good background to predict interest rate rises, the economy, etc. You don’t need a formal education: just be diligent in your reading.
Do you consider having a team of professionals/advisers (eg: property managers, accountants etc) important to your investing?
Very important. With interstate properties and a tax return that gets more and more complex I need to delegate to experts. However, I have to know enough to determine whether the experts are competent. E.g. I need to know enough about tax, accounting and law to know the right questions to ask the accountants and lawyers, and to identify when an ‘expert’ is wrong.
Do you have any thoughts on the CF vs CG debate or on the issue of metro vs regional, units vs houses?
There are successful investors on both sides, so obviously all those strategies work. My personal strategy is CG (because I don’t need CF now, and compounding works better the more time you give it), capital cities (I’m not confident I can ‘read’ regional areas) and I like both units and houses (if the value is there, I’ll buy anything). That’s just what I feel will give the best result for me.
I think a big part of investing is whether you believe your plan will succeed. The more you believe in it, the more confident you will be, and the better your results. If you don’t believe in regional CF property but believe in metro CG property, go for what you believe in. The same with people who invest in shares, derivatives, multi-level marketing, franchises, businesses, etc. Regardless of which strategy is inherently ‘better’, you’re more likely to succeed with a strategy that you believe in.
What do you prefer, fixed or floating interest rates and why?
I try to read the markets a bit. In the current environment, I’ve fixed half my loans for 5 years, because I expect rates to rise in the short and maybe even the medium term. If there’s a recession and inflation is subdued (meaning rates are likely to fall), I’ll go for more variable loans. I’m likely to buy more IPs if there’s a recession.
Finally, where do you see the market at the moment and do you think the current environment is making it harder for newer investors than when you started?
I think we’ve had it too good for too long. There will be short term pain, especially in Sydney (and probably Perth, if you bought recently). But long term, demand will be from migrants and new households. As long as the population is still rising, values will also rise, just not smoothly. Oversupply doesn’t seem to be as big an issue this time around, putting a floor on rents.
In some ways the cycle doesn’t matter much for new investors. You don’t buy 10 properties in your first year. You buy one the first year, and maybe another one in a year or two’s time. When the market is booming, you can refinance your first IP but your second IP will be more expensive. If the market tanks, you can’t refinance your first IP but your second IP will be cheaper and you’ll probably get better gains from it long term. Just buy consistently and you’ll even out during the cycle. By the second cycle you don’t care because your whole portfolio will catch the whole cycle.
That’s why I emphasise savings as the basis of an investment plan. If the market tanks, it’s a great opportunity to buy, but if you can’t refinance you need cash savings. Just make sure you buy conservatively and keep a long term view.
We hope you enjoy hearing this time from alexlee………………
Interview with alexlee – 1st September 2006
How did you get involved in property?
I went to a free seminar held by a property marketing company in Sydney in 1999. I was about 2 years into my first real job (grad at an accounting firm), working and looking for ways to invest. I’d just started buying a few shares and knew nothing about property.
What is your property investment philosophy (CF, CG, renos, houses, flats, buy and hold, develop, flip, wrap, etc)?
So far, buy and hold for CG. Refinance and use the equity to buy more IPs.
I started buying units and townhouses because that was what the marketing company sold at the time, but I’ve since leaned towards houses (my last 2 IPs were houses). Higher land content, no body corp fees, and more potential for re-development. I’m limited by the fact that I’ve been working overseas for the last 5 years so I’m not ‘on the ground’. After I go back to Australia, though, I plan to develop experience with renos and small developments as well as more buy and holds.
What is your IP / property story so far?
I went to the property seminar in 1999. Everything clicked, and using savings I had (pretty much right from childhood, part time jobs, etc) I bought my first IP in Jan 2000. Standard 3 bedroom townhouse in Enoggera, Brisbane. Everything went very well: my own independent research (of agents not associated with the marketing company) confirmed that the price was fair, valuation came in at the purchase price, and the place was rented at a 6.6% yield from day one. So I bought another property in September 2000.
I left Sydney to work in London in 2001, and sort of forgot about property for 2 years (though I managed to save some good money in London: got a contract with lots of overtime, and the aussie dollar was around $2.80 to the pound). When I left London (eventually to work in Tokyo), I realised my properties had gone up a bit, so I started to really research property and started buying again from the same marketing company.
At the moment I have a few IPs, no PPOR, am renting and working in London and generally in a holding pattern because I think there will be more bargains once I’m on the ground in Australia and the market drops a bit. I’m saving money to buy my own PPOR when I go back to Sydney, and locking in some LOCs for future IP purchases.
Cashflow is still negative, but LVR is only around 65% and at my age (29) my priority is more equity growth.
Is there a story of a really good IP that you would be prepared to share with us?
A 4 bed old house in Cooloongup, Perth. I bought it in mid-2004 and ANZ just valued it (July 2006) at 80% above the purchase price . I had bought that property using equity from another IP, so it was no money down. I’ve never seen it myself (except for photos), didn’t know anything about the area except what the buyers agent told me. A very lucky buy, right in the middle of the boom.
Is there a story of a really bad (or not so good) IP that you would be prepared to share with us?
I bought a unit on the Gold Coast in early 2003. The waterproofing in the roof wasn’t done right and it leaks whenever it rains. It’s still under the standard 6 year warranty, but the builder went bust and I’m trying to get the BSA (Queensland Building Services Authority) to fix it. They supposedly fixed it in 2004, but the leaks started happening again this year. I’ve submitted another claim and am still waiting to hear from them. Lost a few thousand in rent when the unit was being repaired, and of course it’s now harder to rent out because it leaks.
Having said that, based on a valuation done last year, the value of the unit has gone up around 40% in 3 years, and it yields 6.9% on my purchase price, so I’m not complaining too much.
Also some of my later Brisbane purchases have been flat for 2-3 years. Yields are ok, though, and long term the IPs will be good. Even more importantly, had I not bought those flat ones and stopped altogether, I would never have bought the Perth property (see above). It all evens out.
Do you invest in other asset classes (shares, commodities, businesses, managed funds, cash, forex, etc)?
I’m saving cash for a deposit on my future PPOR and have some shares that I buy and hold (no gearing). I rarely trade and try to use dividend reinvestment schemes whenever I can. My Australian tax rate is zero right now so franked dividends are great for me. I don’t have any managed funds. I have a long pounds position as I’m keeping my London savings in pounds because I think the AUD will fall.
What criteria do you use when selecting a property to purchase and how do you manage the difficulties of long distance property acquisition?
After my Perth property experience, at a high level I select the states that aren’t doing very well and avoid states that aren’t affordable. Which means I’d avoid Perth and Darwin right now, and a lot of Sydney. I think buying at the right point in the cycle is easier than selecting the ‘right’ property, especially as I’m not that confident about my ‘property picking’ ability.
With specific properties, my first criterion is rental yield. I wouldn’t consider a property if I think the yield is too low (currently my general criterion is 5%+ rental yield). That might mean I miss out on some growth properties, but what I figure is with a 5%+ rental yield, I can hold onto a property more comfortably. Hold on and time will grow the property.
The second most important criterion for me is comparable values. I think property value is heavily influenced by the value of the place next door, so I don’t want to buy at above a comparable property.
Other than that, the usual proximity to transport (especially trains), schools, shops, etc, but if the numbers are right, location isn’t as important.
As for buying from overseas, make sure your mortgage broker and solicitor is aware of your situation, and find out the requirements early on (e.g. Qld contracts have to be witnessed at the consulate, and some consulates aren’t open every day). Make sure everyone has email.
Your thoughts on the next 12 months and the coming cycle?
I don’t think much will happen in the next 12 months with shares. The US economy is slowing and Australian rates are going up. I think Sydney will fall further: it is still far less affordable than Melbourne or Brisbane. Perth and Darwin will stay up until China pulls back and the commodities boom falters. With the next cycle, I think Sydney and Melbourne will lead the boom. However, I think Sydney is still largely overvalued based on yield. There are a few spots in Sydney that look good (such as units in Parramatta, yielding 5%+) and SE Qld (especially the Brisbane / Gold Coast corridor) still look attractive.
What added difficulties does an expat encounter in their investing?
Banks are generally only willing to lend up to 80% LVR to expats. Hopefully by going overseas you are making and saving more money, so it should even out. There are more issues with mail, time differences, etc. Also Qld mortgages have to certified by a consular official if you are overseas, which is a bother. You might have to wait a full day for replies so you have to be more careful about the timetable.
If a budding property investor asked "what are the top 5 things I should do", you would say?
1) Write down your goals. Really flesh them out and ‘see’ it. What do you want to achieve, by when, how much money you’d need. Put in as much detail as you can. ‘I want to be rich’ is not enough. ‘I want a merc’ is not enough. How do you define rich? How will you pay for the merc? How much is the upkeep? How will you pay for its upkeep? You need to be able to visualise exactly what you would do if you had all the money you wanted. Create your own private reality show. This will keep you focused.
My own plan includes where I’ll live, what my typical day will be like, what I’ll do in my spare time, where the money will come from, how I’ll manage that money, etc.
2) Save money and budget. You can’t handle investing until you can control your own finances. My rule of thumb for savings is 70% of net income if you’re living at home and not paying rent, 40% if you’re single (or you both work) and rent with no kids, and at least 10% if you’re on a single income and/or have children.
3) Read every book you can find about property investing. Just go through your local library. Read the Somersoft forums. Read the business section of the main papers (all on line). In addition I also read the New York Times, Fortune, Forbes, Businessweek, Newsweek, Time, the Economist and cnnfn.com (all available for free on the net). World events affect the economy, and hence property. e.g. the oil industry, the Middle East, the Chinese and US economies, new developments like loan securitisation, etc. Many of these topics aren’t covered in much detail in the mainstream Australian press.
4) While doing (2) and (3), go look at properties and lay the groundwork. Research one suburb a week on the net. Talk to agents. Get a feel for prices, rents, talk to lawyers about what needs to be done, talk to mortgage brokers. Go to lots of free seminars because they will teach you the basics. Just don’t sign anything and don’t pay for anything.
5) Once you have your finances in order and have done some basic research, start. Buy a cheap, simple property that is well within your borrowing capacity. In Sydney you can find units for $150k. Don’t go for a unique property. Get a standard, entry level, below-median price property that almost everyone can afford to rent. Question everyone and learn everything that you can. You have to understand how the numbers work.
And if that same budding investor asked "what 5 things should I avoid", you would say?
1) Avoid off the plan with long settlements. Who knows what the market will do in 2 or more years? You want something you can evaluate and learn from now.
2) Avoid maxing out your borrowing capacity on your first IP. My own strategy is lots of cheaper properties instead of fewer expensive properties. Keep spare capacity in reserve just in case something goes wrong with the IP or you find a bargain.
3) Avoid taking property advice from those who don’t invest in property. Most people just repeat things they hear, instead of giving you informed, considered opinions. People who just own their own home are not property investors.
4) Avoid any deals where you’re being pressured to decide ‘now’. Even if it’s a good deal, you don’t have enough resources / experience to understand the risks immediately. There are lots of good deals out there.
5) Avoid becoming impatient. Property investing is a long term game. A typical month for me is just receiving mail, putting the numbers into spreadsheets and answering a few emails. However, that’s what is going to make me rich in the long term. It’s not exciting, and I don’t want it to be (if your buy and hold becomes exciting it means something is going wrong).
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?
Revisit your goals. What is your objective? Will your current strategy take you there? Your requirements might have changed. e.g. you now need more cashflow now that you’re approaching retirement. Start investigating other investments such as shares, bonds, LPTs, etc. Property certainly isn’t the only investment out there, though it’s great for building equity through leveraging.
How important is planning to being a successful investor?
Even before you take action, you need to plan. Before going on a journey, you need to know where you are, where you want to go and what you have to work with. People get into trouble (not just financially) when something ‘unexpected’ happens. In investing, a lot of these ‘unexpected’ events (interest rate rises, repairs, vacancies, damage, loss of one income, etc) CAN be planned for. Hope for the best, plan for the worst. Regular reading of business newspapers will give you a good background to predict interest rate rises, the economy, etc. You don’t need a formal education: just be diligent in your reading.
Do you consider having a team of professionals/advisers (eg: property managers, accountants etc) important to your investing?
Very important. With interstate properties and a tax return that gets more and more complex I need to delegate to experts. However, I have to know enough to determine whether the experts are competent. E.g. I need to know enough about tax, accounting and law to know the right questions to ask the accountants and lawyers, and to identify when an ‘expert’ is wrong.
Do you have any thoughts on the CF vs CG debate or on the issue of metro vs regional, units vs houses?
There are successful investors on both sides, so obviously all those strategies work. My personal strategy is CG (because I don’t need CF now, and compounding works better the more time you give it), capital cities (I’m not confident I can ‘read’ regional areas) and I like both units and houses (if the value is there, I’ll buy anything). That’s just what I feel will give the best result for me.
I think a big part of investing is whether you believe your plan will succeed. The more you believe in it, the more confident you will be, and the better your results. If you don’t believe in regional CF property but believe in metro CG property, go for what you believe in. The same with people who invest in shares, derivatives, multi-level marketing, franchises, businesses, etc. Regardless of which strategy is inherently ‘better’, you’re more likely to succeed with a strategy that you believe in.
What do you prefer, fixed or floating interest rates and why?
I try to read the markets a bit. In the current environment, I’ve fixed half my loans for 5 years, because I expect rates to rise in the short and maybe even the medium term. If there’s a recession and inflation is subdued (meaning rates are likely to fall), I’ll go for more variable loans. I’m likely to buy more IPs if there’s a recession.
Finally, where do you see the market at the moment and do you think the current environment is making it harder for newer investors than when you started?
I think we’ve had it too good for too long. There will be short term pain, especially in Sydney (and probably Perth, if you bought recently). But long term, demand will be from migrants and new households. As long as the population is still rising, values will also rise, just not smoothly. Oversupply doesn’t seem to be as big an issue this time around, putting a floor on rents.
In some ways the cycle doesn’t matter much for new investors. You don’t buy 10 properties in your first year. You buy one the first year, and maybe another one in a year or two’s time. When the market is booming, you can refinance your first IP but your second IP will be more expensive. If the market tanks, you can’t refinance your first IP but your second IP will be cheaper and you’ll probably get better gains from it long term. Just buy consistently and you’ll even out during the cycle. By the second cycle you don’t care because your whole portfolio will catch the whole cycle.
That’s why I emphasise savings as the basis of an investment plan. If the market tanks, it’s a great opportunity to buy, but if you can’t refinance you need cash savings. Just make sure you buy conservatively and keep a long term view.
