The Investor2009 Interview

Jez a.k.a. Investor2009 has kindly provided an interview for us in the hope it can help other aspiring investors. I am sure it will!

1. How did you get involved in property?

It was 2004 and I was a rather immature 23yo working in the Family business on a pretty extreme minimum wage while Dad built it up. I knew someday (asap) coming from a poor background I wanted to have money and my own place to call home and I knew it was up to me to somehow achieve that so I started out the only place I could, as a total penny pincher.

So, I saved all I could over a three year period while looking into housing finance. I remember being very angry and disheartened when an online mortgage calculator told me that the interest (which was then hovering at somewhere around 7.5%) would double the eventual purchase price and thus any repayments on anything I wanted to buy.

So those financial institutions really weren?t looking out for my best interests. How dare they! After saving hard for all those years, gaining such momentum for someone on such a small wage this was like rubbing salt into a wound. Somewhere around this point in time I found Somersoft, so I joined! My first post went a little something like this ?Please help! New to property, please tell me everything so I can get this right? (That first one didn?t go down so well.. Laughs) So, over a few months I had fun learning the basics.

Nervously bought a 2-bedroom unit up my street that I liked the look of. It was neither good, or bad value at the time and there was certainly no talk of any quick gains in the air anytime soon. It rented easily, the rent jumped every six months as did the value. That was it for me, I?d finally found something that made more money than I did working full time.. Hallelujah! I?d worked out that working (no matter how much you might earn) will not make anyone rich and that taxation laws in Australia reward investors with tax breaks, exponentially accelerating wealth. And that was the end of conventional Jez, I was a changed man, never to return

2. What is your property investment philosophy/strategy (CF, CG, renos, houses, flats, buy and hold, develop, flip, wrap, etc)?

I?ve always been a buy and hold man. In the beginning, positive cash-flow property was hard to come by so negative gearing was part of this strategy. Yep, even as a low income earner. It still made good sense and aided holding costs quite a bit. Now-days we (I say we because I?m married now and every decision is a joint one) don?t buy anything unless it?s cash-flow neutral at worst. We still stick to a capital growth strategy (because CGT play by different rules than earned income.

CGT has an absolute maximum of 23% tax if held for more than 1 year because of the 50% rule. Maximum earned income level is 47.5%, you seeing what I?m seeing here?) Would like to branch off into commercial property later in life for the benefits of more cash-flow once we have ample equity available to pay cash for these purchases but for now, residential property has allowed me freedom at age 34 and I?m not currently willing to change that. Time (as always) will do the work for us, and within 5-10 years we can afford to do this without having to rely on us working hard. Property works for us instead. Earning low wages should be no deterrent, if anything it helped spur me on.

3. What is your IP / property story so far?

I financed that first unit in 07 using a $30k or so deposit I?d saved over three years while renting a small room, I bought the unit because I never thought I?d never be able to afford my own home and this was the closest thing to it (the rest of the portfolio were financed using equity from the first unit)

So, bought a second property in the same complex in 08, a house interstate in 09, and another house locally in that same year. Rents were average. I held on by the seam of my pants working other low income jobs while we rented an average house with a cool little plunge pool. It was about the cheapest place in a live-able area we could find. Even then it was $440p/w. Life carried on as usual and in 2012 we sold one of the units to aid a deposit for a nice house on acreage which was and still is a lifestyle choice for us and still close to our workplaces which is handy.

Locked in an (unknowingly) high interest rate for three years which has just come off and aided cash-flow immensely. We sold another one of the units last financial year, paid it all onto the mortgage and just sold the interstate house we were holding this financial year. Did the same with the proceeds. Bought another house that rents easily and gives a small positive cash-flow each week. Our portfolio is now paying for itself and back up to its original gross value. So selling off has been a successful strategy for us and without doing so we?d be still working to support them. Since leaving work life has been absolutely great! I wasn?t sure if I?d get bored.

Luckily, I?m absolutely loving it. I?ve since started boxing like I used to which is a passion of mine, because I have time now. I?m lifting weights, eating well and starting to look good again which feels excellent. I have time to take the dogs for a walk, garden, fix the car, swim, whatever but the best thing is: I get to do what I want on my own terms. You can?t put a price on that. Life is precious and I think we need to live it how we want to. I?ve always known working for a boss was not quite for me, I needed something different.

4. Is there a story of a really good IP that you would be prepared to share with us?

Our best to date would be the very basic local house we bought in 09. We had a DHA lease that expired 11 months into purchase and we?d never had a home before so claimed back the FHOG that was on a ?boost? at the time which doubled the FHOG to $14,000. We then claimed back the stamp duty concession which was about $15,000. Moved in 11 months later to retain the FHOG and boost. Spent $60,000 on improvements over the two or three years we lived there and it now rents for twice as much as DHA were paying back in 09. Value hasn?t quite doubled but is a steady earner at around 7% growth per annum.

5. Is there a story of a really bad (or not so good) IP that you would be prepared to share with us?

The interstate house. Never did well with that one but luckily still walked away with a small profit. Stick with what you know we say. If we had bought here in Darwin instead we?d made a lot more.

6. Do you invest in other asset classes (shares, commodities, businesses, managed funds, cash, forex, etc)?

No. We looked into shares but they?re not for us at this point in time. Nothing seems to perform as well as property because it gives the ability to leverage. And you need that to create real wealth

7. What criteria do you use when selecting a property to purchase and/or renovate?

Must grow in value, must rent well and provide cash-flow. We look at everything in terms of positives and negatives. The more cash-flow and room for growth, the better.

8. What structure do you use for your investing?

We like to use other people?s money. We won?t use any of our own cash for one reason: It lowers investment returns. You could look at it this way: If you make 10% on $100,000 cash ($10,000 profit). Then 10% on 200,000 cash ($20,000 profit). It is still 10% profit on your own after tax money which probably took some time to earn. Make 10% on $0 of your own money at the same leveraged amount and the figure becomes infinite, which of-course is a much better return. It also saves the same amount in time as it would have taken to earn that particular amount in cash. As always, do the math. I like the idea of buying in joint names so CGT is less of an issue because the income is split so we?ll look further into that for next time.

9. What is your strategy to fund your lifestyle in the future (egLive off Rent, Live off Equity, Live off something else?.)?

I?ve just semi-retired. Actually, I call it ?Optional Financial Independence? because retirement makes it sound like we?re old.. The way we achieve this is simple: Expenses are less than the income we require to live our current lifestyle and we?re happy with our asset base? size. If we require more cash and a more extravagant lifestyle (extra holidays, cars etc) I get a job, or start my own business but right now I?m really enjoying not having to be anywhere and have sufficient cash reserves as well as the positive rental income we receive to live a good lifestyle. To date I find it much more enjoyable than it was at work, put it that way!

Our original goal was due to kick off in 2016 but in doing the math, we (by we, I mean me, the Wife doesn?t care much for this kinda? stuff) found that we could effectively retire now (in 2014) rather than waiting the extra 2-years, being 10 years from start to finish.

We found that by selling off some of our assets now would have the following effect:
1, Lower mortgage debt, freeing us from the majority of this debt means any cash we have buys a lot more than it did previously.
2, We could buy back into the same gross value of our assets without using any of our own money, and without affecting the LVR.

If we had not sold these assets then within those two years leading into 2016 we would have had to come up with an extra (insert $ amount here in mortgage interest) which meant we had to work for this income to achieve the same goal we have now in 2014. It made no sense but without those calcs we would have worked blindly for no financial reason. Operation 2016 was good, but we made it much better.

The second thing we needed was cash-flow. Which came about by finding a Property Manager (By chance. My Wife stumbled across her by accident) that works with interstate tenants who come to town and work for mining. This massive cash-flow boost (paired with very low mortgage debt) is what allowed us to cease work. We used a LOC to purchase a further asset (105% financed) that pays for itself before tax. Our portfolio is large enough to not have to worry about the future, it typically grows faster than the amount we can earn in wages and with another 30 years until traditional retirement age, I?m confident we don?t require much more, only to pick up more high yielding property as time goes on using none of our own funds.

10. If a budding property investor asked "what are the top 5 things I should do", you would say?

Provided you?re young and have time on your side, 1, Build your safety buffer, 2, Leverage to the hilt. Get your asset base as wide as you can, safely. 10% on 1 property is half of what it is on two. 3, Be confident in your asset selection. 4, Make financial independence a priority (Warning: this comes at a cost of being different to all your workmates. The closer you get, the harder work became for me) 5, Try to enjoy the journey! (I failed much of this part.. Home life was good, but work bared an uncanny resemblance to slavery)

11. And if that same budding investor asked "what things should I avoid", you would say?

Get rich quick schemes.

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?

As an investor, you should constantly analyse your portfolio and scenarios. Reading stories on how others in all different sorts of circumstances have achieved their goal(s) can offer some really good ideas you might not have thought of.

13. How important is planning to being a successful investor?

It?s everything. Without a plan you don?t know where you?re going, let alone when you?ve arrived. At work I often spent more time planning our personal investment journey than doing work. There?s a saying by Jim Rohn that goes as follows: Spend more time on yourself than you do in your job? I always lived this. And another ?If you don?t design your own life plan, chances are you?ll fall into someone else?s plan. And guess what they have planned for you? Not much? These quotes resonated right through me and I?ve never forgotten them.

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 people are motivated for different reasons. Without the poor upbringing I had, I don?t believe I?d have had the same desires I do today.

15. Do you have any thoughts on the CF vs CG debate or on the issue of metro vs regional, unitsvs houses?

Whatever works. Nathan Birch used to say to me ?The numbers don?t lie? Hey, he was right

16. What do you prefer, fixed or floating interest rates and why?

Floating because we?ve only ever been burned by fixed, big time. Fixed rates are just not flexible enough for many reasons and I?ll steer well clear of them into the future unless circumstances change. They?ve cost us a lot in unnecessary funds and in-turn wasted time. Our biggest investment mistake

17. How important in your life is having a partner and other family members who are ?into property??

Luckily my Wife loves property, although it hasn?t always been that way. She took a while to come around but since it makes us good money she?s cool with it. My Father started investing in property at the same time as I but was much more cautious. He saw the light and retired at 55 a few years ago. We talk all the time about it which is cool and he?s doing really well. I had concerns for him in retirement because he used to work 7 days a week and was a true ?workaholic? in every sense of the word. Miserable too. But when he retired he turned into a different person and has loads to do, which is really great to see because I didn?t expect it

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?

I think it?s just as easy as it?s ever been. Low rates, small deposits, good rents. So long as you have an income and deposit then you?re off. I think we?re set to see low rates for a very long time yet because housing seems ?expensive? and people are often re-mortgaged to the hilt. Upping rates would see lots of bad things happen. As a whole I see rates staying low, and median property prices averaging their long term percentages. Safe as houses as the saying goes.