Interview with Belu June 2012 1. How did you get involved in property? I had an interest in property from my teenage years whilst still in highschool. Following on from that I started researching it when I was doing my traineeship at KPMG. The income and deposit wasn’t there so I couldn’t buy but spent three years trying to pick the next area to go up. I found that I had a good ability for picking undervalued pockets. Over that 2005-2008 period I was able to pick large movements, about 3-6 months before they happened, in Ascot Vale, Footscray and Brunswick. I was effectively shadow-investing. This then gave me the confidence to buy something when I saw it come up in Glenroy – another area I thought was undervalued My first buy was in Glenroy, Victoria in 2008. 2. What is your property investment philosophy/strategy (CF, CG, renos, houses, flats, buy and hold, develop, flip, wrap, etc)? I have a two-fold strategy with property investment. Firstly I buy based on a location-price aspect. i.e. what is the price difference between two locations and do the fundamentals driving that difference stack up? For example a couple of years ago I started investing in Bendigo as the median house price was $280,000 compared to Melbourne then of over $600,000. For what is an hour and 10 minutes morning commute by train, or relocation, the more than double median house price was too much of a gap in my view. The theory with this is that I cannot control Macro-economic factors. If the market suffers a big down-swing then the higher priced property will most likely lose more faster, as it has more to lose. In converse if the market as a whole goes up then the lower one should grow faster, otherwise the gap becomes too great. i.e. if in 10 years all property has doubled then Melbourne median would be $1.2m and Bendigo would be $560,000. This is a very simple look at it but based on that, in my view, people would definitely relocate. Therefore either demand drops in Melbourne and the prices might be ~$1m, and/or demand increases in Bendigo and prices might be $700k. Either way Bendigo has out-performed Melbourne. This was my view two years ago and in the last two years Bendigo has risen ~10% in median whilst Melbourne has gone back about the same. The second part of my strategy, which is only a recent one, is creating value and not waiting for it. This can be done in a number of ways but my most recent ones have been adding plans and permits and maximizing the yield of a block, or doing physical sub-divisions. 3. What is your IP / property story so far? So far I have bought 5 IPs (one of which was a PPOR) and an additional PPOR. I currently hold two properties (PPOR in Melb and IP in Bendigo). As I started on a very low $ base my strategy has been to realize/grow value, sell, re-invest and keep the amount growing, so I am not one for buy and hold. I started out with a 2 bedroom unit, then a 700sqm block with an old house in Melbourne before moving my investment strategy to Bendigo. Up there I have owned a 20sq 4 bedder on 4,800sqm, a block ready for sub-division with permits for 13 lots which we sub-divided and sold into NRAS and currently a lovely 3 bedroom 1890’s Victorian on 3,700sqm that I have just had plans and permits put on for 8 units plus the house. In addition I have now got into the transaction side of Property and have opened a Barry Plant in Bendigo. This is because of my belief in the area in the medium-long term. 4. Is there a story of a really good IP that you would be prepared to share with us? My first IP was a good solid start and an example of why you don’t need to outlay huge amounts to get a gain. It was a 2 bedroom unit in Glenroy purchased in 2008 for $185k on a Monday night after it was passed-in at auction on the weekend. It was cluttered, had had one older owner for 20 years, and just needed a bit of sprucing up. We negotiated a 90 day settlement with access in 45 to clean and paint. Did this on the weekends and was rented within 5 days of settlement for $260/week. There was nothing special here, I didn’t buy below market or do a massive renovation – it was just being able to see that the area was under-valued by the market. A similar property in Essendon, 5 minutes down the road, had sold a few weeks earlier for $365k, so again a distance/area vs cost that didn’t stack up. I sold this property a year and 9 days later for $232k. Wasn’t a huge dollar gain, but was a good outcome for my first buy. 5. Is there a story of a really bad (or not so good) IP that you would be prepared to share with us? None so far – keeping fingers crossed! 6. Do you invest in other asset classes (shares, commodities, businesses, managed funds, cash, forex, etc)? I used to invest in shares but now only invest in asset classes I can control and have influence in. Therefore the new business and property is the way for me. 7. What criteria do you use when selecting a property to purchase and/or renovate? For me it is about development potential at the moment as I am willing to spend the time and take the risk of going through the planning process. This is in addition to the location strategy I use above – and based on this strategy I am still only looking in Bendigo. 8. What structure do you use for your investing? Family Trust/Company Trustee setup – thanks James! 9. What is your strategy to fund your lifestyle in the future (eg Live off Rent, Live off Equity, Live off something else….)? A combination of property/business investments that provide enough to live off along with growing equity. 10. If a budding property investor asked "what are the top 5 things I should do", you would say? 1. Research, but not too much 2. Don’t over-reach, get comfortable and learn off something smaller 3. Don’t be afraid to take a risk when you are young, starting out fresh is easier then. Once you have some backing you wont want to risk it! 4. Look to yourself and realize what your strengths and weaknesses are 5. Find a team you can rely on for those weaknesses and pay them well for their services. 11. And if that same budding investor asked "what things should I avoid", you would say? Avoid listening to nay-sayers. They will stop you from reaching your goals. 12. And in a slightly 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? What do you want to get out of this? Look to the end and work backwards, there is no point buying another 1,3,5,10 negative geared properties if you want to retire on cash-flow. 13. How important is planning to being a successful investor? This is a double edged sword I think. You need to plan enough to be confident with your decisions, but don’t get stuck in analysis paralysis. Sometimes you need to take a leap of faith! 14. 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, joint ventures, commercials) I think that you shouldn’t try and do too much too soon. My second property was a 700sqm block with a house in Glenroy that I was going to get plans on and develop but I realized I didn’t have the funds or the expertise (to get 3 on was a bit difficult due to block orientation), so sold it and made a small profit. So yes, I do think there is a progression. You can definitely skip that progression but at your own risk. I researched and read books, somersoft, etc for 3 years before I bought my first place, but the best experience is getting your hands dirty in property. 15. Do you have any thoughts on the CF vs CG debate or on the issue of metro vs regional, units vs houses? I try not to think of it as metro vs regional but as a value play. I think that in regional Vic you have a better value proposition at the moment than in metro Melbourne. There is a better cash-flow and, in my opinion, more potential for capital growth, with less potential downside. At Barry Plant in Bendigo we hold investor nights and I try and teach that each property suits a different type of investor. I like large blocks of land with a rentable/sellable house on them. Other people suit small high-yielding units, some work well on ~1,000 sqm development-potential blocks with a ~5% yield, giving them a bit of negative gearing but not a large weekly burden. Everyone’s investment goals are different so there isn’t one size fits all. 16. What do you prefer, fixed or floating interest rates and why? Floating, I like the flexibility and am young enough to run with the risk. 17. How important in your life is having a partner and other family members who are “into property”? I think it is important to have someone willing to listen, not overtly to have someone who agrees. The discussion will help you work out if it is the right decision, but you still need to believe in yourself to deliver. 18. 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? Your thoughts on the next 1 year, 5 years, 10 years? My view is to try and lock in decent cash-flow so your investment is low risk and then try and add value. Irrespective if the market is going up, down or stagnant, if you can add significant value then you will be in the box seat. The market is always hard to judge going forward. A lot of macro-economic factors that have had a large influence on prices in the past might be hard to replicate, such as families moving to a predominately dual income lifestyle, adding additional disposable income, the population boom of the baby boomers causing increased demand, interest rates falling from ~18% to ~7%, etc. There will be more large impacts like this in the future, but I cannot tell you what they are. My only recommendation is, as above, find something that has a higher than average potential upside, a lower than average potential downside and the ability to add value and you will, at least, be doing better than “the average”.