Interview with Jingo 2nd April 2012 1. How did you get involved in property? My wife and I first became involved in property in 1997 when we purchased a block of land in Altona Meadows, Melbourne for $36,000 to build our first home on. At the time I was 26 and my wife 28. We had saved up enough cash to buy the land outright and had some money left over for the construction of the house. We took out a small loan of around $60,000 to complete the construction of the house and paid this off within 2 years. We still live in this humble home today, although we have contemplated moving many times! At the time, I was particularly reluctant to part with our hard earned cash to buy the land. I felt that it was a waste of money! Little did I know that we were on the cusp of a huge property boom. Soon after we bought, my wife and I watched the land appreciate, literally by $5000 each week for a long period of time! We have looked back and often wished we had bought more land. The reality though, was that we were on very low wages and would not have been eligible to borrow more money. I worked as an itinerant music teacher and made $31,000 per year and my wife worked part time in the bank, earning $12,000 per year. We even struggled to obtain the initial loan of $60,000. Therefore, for an outlay of around $100,000 (probably slightly more by the time we added extra things to the house like air conditioning, and an outdoor entertaining area) the house is now valued at $420,000. 2. What is your property investment philosophy/strategy (CF, CG, renos, houses, flats, buy and hold, develop, flip, wrap, etc)? Our property investment strategy so far has basically been buy and hold with a couple of cosmetic renovations thrown in along the way. We have bought all of our properties in Melbourne and they have been negatively geared. This strategy has worked well as the market has risen substantially over the course of our acquisition period, generating a significant amount of equity. Over the next couple of years we are intending to sell a couple of our residential IP's to move into commercial property which will give us a far higher yield and generate a stronger income stream. 3. What is your IP / property story so far? The move to purchase our first IP was not intended as part of an overarching investment strategy. Rather, we noticed that residential property prices in Melbourne were escalating, and observed that the gap in prices between where we lived in middle to outer Melbourne and the inner suburbs was growing substantially. We thought that if we ever wanted to move closer to the city in the future, we had better buy there before prices became prohibitive, eventually locking us out of the area. It was now 2001 and I had obtained a full time teaching position, with a better salary than I had been earning as an itinerant music teacher. My wife had also gone full time with the bank, so our incomes were substantially higher than when we had purchased our PPOR. Therefore, we bought an early 1980's style town house in North Melbourne for $227,000. We were very apprehensive about this purchase, as we had borrowed 100% plus costs to acquire the property. What worried us the most was that the loan was so much higher than our initial loan of $60,000 for the PPOR. Looking back though, the yield we purchased on at around 6.64% was actually quiet good for an inner city property. (Not that we knew anything about yield then - because we didn't!) We still own this property today and it is worth $630,000. The yield today is dismal at around 3.71%! In 2003 we thought we may be able to buy another IP. We still hadn't developed any type of strategy, and didn't know of anyone who owned IP's who we could ask for guidance. Once again, we were very worried! To reduce our risk, we decided to buy together with my wife's brother. The arrangement has worked well, however I probably wouldn't recommend this though as buying with others has implications for borrowing capacity. The problem is that instead of apportioning the debt according to the % of the property held by each person, the bank lumps the total debt for the property into the calculation. This can result in lowering a person's serviceability and may prevent them from obtaining finance for further IPs. The property we ended up purchasing is a villa unit in Heidelberg. It cost $250,000 and is now valued at $450,000. My wife and I have a third each, and my brother in law, the remaining third. The property is nearly neutrally geared. In 2004 we bought a house near us in Altona Meadows for $227,000. It is now valued at $380,000. We had this property renovated in 2010. The growth in this property has not been as spectacular as the Town House in North Melbourne! In 2005 we bought a house in Frankston for $227,000. It is now worth $330,000. It is not our favourite place as we experience tenant problems here. We are currently involved in an unfolding drama as our latest tenants have absconded. We think we will sell this one soon and use the proceeds as a deposit on a commercial property. In 2006 we bought again in Frankston. I hasten to mention that we had great tenants in our first Frankston IP before we bought this one! Unfortunately, we had problems with our first tenant in this newly acquired IP. We changed property managers and she evicted the troublesome tenant. Our new property manager then co-ordinated a cosmetic renovation of this property and we have had a reliable set of tenants in this property ever since. We think we will sell this property once the tenants leave to release funds for a deposit on a commercial property. We bought the property for $210,000 and today it is valued at $320,000. In 2007 we bought again in North Melbourne. This time we purchased a Terrace House - as it so happened just before the 'mini boom'. (See this thread - http://somersoft.com/forums/showthread.php?t=32049) We purchased the house for $447,000. It is now valued by the bank at $700,000. In 2007 we also bought a flat in North Melbourne for $391,000. It is now valued by the bank at $474,000. In 2010 we bought one more IP in North Melbourne. We purchased it for around $400,000. It is now worth $460,000. Our overall LVR is 47% as we are paying cash into offset accounts and have some shares as well. We are still moderately negatively geared due to me mistakenly fixing some of our loans at 8% at the height of the interest rate cycle. These will come off gradually over the next few years, meaning that the portfolio should become neutral during this time. 4. Is there a story of a really good IP that you would be prepared to share with us? On reflection, we bought the Town House in North Melbourne at a great time. There was a lull in the market - interest rates were on the rise, and it was predicted that the boom was over. A couple of months after our purchase, the property was valued at around $315,000. We felt great about that! Similarly, the timing of our purchase of the Terrace House in North Melbourne was good. A couple of months after we had purchased this in 2007, the market moved - quiet substantially. Before long the bank valued this property at $550,000 and then at the height of the market in 2009-2010 at $700,000. I know the days of rapid rises are over for a while (in Melbourne at least), but it certainly demonstrates the power of property. There is no way that my wife and I could make or save this amount of money in such a short space of time. 5. Is there a story of a really bad (or not so good) IP that you would be prepared to share with us? I'd have to say that we had a bad experience in the Town House in 2008. We had a tenant do a runner and that shocked us as this wasn't meant to happen in an inner city property! We are currently experiencing some problems with the first IP we purchased in Frankston. However, in the whole scheme of things, I am sure this will be a bump in the road. It is unrealistic to expect everything to progress smoothly all of the time. 6. Do you invest in other asset classes (shares, commodities, businesses, managed funds, cash, forex, etc)? My wife and I have some money in shares. We currently hold our super in an industry fund which is invested in Australian shares, International shares and some cash. We intend to set up a SMSF to purchase a residential property in. When we are able to access our super (in 20 years time) we will sell the property to help us pay down debt on our existing portfolio. I have dabbled in warrants and lost $25,000 investing in a gold warrant in 2007. Had I dabbled in this a year or two later, I probably would have made a lot of $. Since then, I have decided that the slow, steady way is the best for me! I am happy to invest in property, as it is a relatively safe asset class. 7. What criteria do you use when selecting a property to purchase and/or renovate? - I like to purchase close to shops, public transport, reasonable schools, parks and infrastructure that a tenant will appreciate. - I prefer to buy brick houses as I believe they require less maintenance than weatherboards. (Although this may be a perceived bias and I could be wrong!) - If purchasing a flat, I aim to buy top floor with a balcony and a car space on title. - If purchasing a flat/town house, I aim for at least 30% land content. This means that I target older style 1960's and 70's flats in smaller blocks. (Not more than 28 or so in a block, but the less, the better as you will have a greater share in the land that the block is sitting on). - Knowing values in the area is particularly important to me, hence my reluctance to date to buy interstate. - There is no such thing as the perfect property. It doesn't have to be 'perfect', just have enough desirable features and be in a reasonable location to attract decent tenants. - Identify what tenants in a particular location desire, and ensure that the property bought has these features. 8. What structure do you use for your investing? Most of our IP's are in our own names. One is in a company, which, in hindsight, was a mistake on my part - although it has saved us in land tax and also reduced some of the rental income we earn in our own names, meaning that we pay less tax. The big downside is that when/if we sell it, 100% rather than 50% of the capital gain will be taxed. I have set up a discretionary trust, and will use this when we purchase a commercial property. 9. What is your strategy to fund your lifestyle in the future (eg Live off Rent, Live off Equity, Live off something else….)? Over the past couple of years our strategy has been to invest any surplus cash into offset accounts. In the near future our intention is to sell a couple of IP's to release some cash to use as a deposit on a commercial property. As well as this, we will establish a SMSF and buy one resi property in this. Sell it when we reach retirement age (20 yrs time) to pay down debt on the portfolio. In order to pay down all of the debt, we may have to sell one or two more properties. I anticipate that we should be left with a fully paid off commercial property and 5 fully paid off residential properties. This will enable us to live on the rent generated from all of these properties. That's the general plan, anyway! 10. If a budding property investor asked "what are the top 5 things I should do", you would say? 1) Learn as much as you can and keep on learning. Read as many investment and property books as you can. My favourites are the Jan Somers books as well as Stuart Wemyss' book entitled 'The Property Puzzle'. Meet with like-minded people to discuss property investment and gain further ideas. Keep an open mind and listen carefully to successful investors. Take on board an idea or two from each of these investors and try to apply it to improve your own investing skills/situation. 2) Establish an idea as to what you are trying to achieve from investing in property. Is it to achieve a certain income by a certain age? Are you investing to enable you to leave an inheritance for your children? Are you investing to go on a trip, or buy a new car, buy a larger home etc. Then map out a strategy to help you reach your goal. 3) Save a deposit to put down on an affordable property. Stash cash into an offset account and wait until the property is neutrally geared. Then buy again when your cash flow allows. 4) Establish a buffer in the form of cash and/or a Line of Credit. Aim to build a buffer to cover your living and investment expenses for at least a year. The larger your buffer, the greater the SANF. (Sleep at night factor!) 5) Be organized with your finances. Keep track of the cash coming in and cash going out. This is particularly important when IP's are vacant, etc. I have a self imposed rule. My buffer must always increase each month (even if it is just by $1). This can be challenging when a number of the IP's are vacant at once! 11. And if that same budding investor asked "what things should I avoid", you would say? 1) Never over commit. It's not worth it as you are likely to give up if you face a problem, and like all property investors, you are bound to face one or several at some stage. If you are over committed, an unexpected set back could deter you from ever investing in property again. 2) Don't stray from your strategy. If you have worked out what you are expecting to gain from investing in property, stick with it. (Refining is fine!). 3) Avoid letting your properties run down. Keep them well maintained so that they attract decent tenants and their value. 4) Avoid panic! When there is a problem (and there will be at some stage) sit down and work out a solution to get back on track again. Adjust your expectations if need be. 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? Run some scenarios, using an excel spreadsheet. (I use this - please refer to the attached excel spreadsheet. Note that I am not an accountant, and this is just a rough work sheet based on an example I saw in 'The Property Puzzle' by Stuart Wemyss). Work out your current cash flow, and project the cashflow into the future by say, 10-20 yrs. Will your current investments provide you with the cash flow/capital growth that you are aiming to achieve in X years time? If your existing portfolio will give you the result you are looking for, then leave the portfolio as it is. If not, work out what you need to do to achieve your goal. You may need to sell some properties, and or invest in higher income producing asset classes such as shares and commercial property. It may also be wise to sit down with a property specialist or your accountant who may be able to help you with your projections. 13. How important is planning to being a successful investor? I think planning and setting goals is crucial. Although initially, my wife and I didn't have a strategy, we have built an excel spread sheet and gone through various scenarios, in a bid to work out the most desirable outcome for our situation. Our modelling suggests that it would be prudent for us to sell a couple of IP's and use the cash as a deposit for a commercial property. This will be our focus over the next couple of years. I would also add that basic organization is crucial to being a successful investor. As you add more properties to the portfolio, it is important to work out how they fit with your existing system. Keeping track of monthly incomings (rent, salary, dividends etc) and outgoings (loan payments, property expenses etc) is crucial. Otherwise, it can all become a great muddle, and the confusion could lead to the demise of a portfolio. 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 there probably is a natural progression. We started off with our PPOR. Then we added IP's. Now we are looking to invest in commercial real estate to strengthen our cash flow. Having said that, each person's situation is unique and investment decisions need to be structured accordingly. Many people are happy to keep investing in residential properties. Others, like ourselves who have begun with a negatively geared residential portfolio, may need to balance it with higher yielding asset classes such as commercial property and shares. 15. Do you have any thoughts on the CF vs CG debate or on the issue of metro vs regional, units vs houses? I used to have a preference for inner city, capital growth type properties and believed that these were superior investments. I was cured of this thought process after reading Jan's book, where she so brilliantly explained that residential investment properties essentially produce a return of around 15% p/a. Those closer to the city will produce a higher capital growth rate of around 10% per annum and a 5% yield. Whereas those further out will produce a higher yield and lower growth rate. In an ideal portfolio, you'd probably have a mixture of properties - some with higher growth rates and some with higher yields. In our case, we are planning to achieve higher yields by adding a commercial property to our portfolio. I think that there are a number of investors who have been successful with the capital growth strategy while others have been successful in creating high yield portfolios. Both types of investing are valid. Each has their strengths and weaknesses. A similar line of thought could be taken with regard to investing in units/flats/town houses as opposed to a house. Generally, units/flats and townhouses achieve lower rates of growth than a house. Over the past decade, though, and I think of Melbourne because this is where I invest, units/flats and townhouses close to the city have achieved outstanding growth rates - equal with, and sometimes superior to a house. Rather than worrying about whether you are buying in an inner or outer suburb, regional or metro, a flat or a house, I'd concentrate on identifying areas that are set to go ahead and will produce a reasonable yield, allowing an investor to hold for the long term. 16. What do you prefer, fixed or floating interest rates and why? I have made serious mistakes in mucking around with interest rates! I have a number of loans on fixed rates (staggered), and some on variable. Some of our loans will come off their fixed rates at the end of the year. Unfortunately, I fixed a number of our loans at 8% during the period of rising rates - only to watch the rates tumble not long after I had fixed them! This mistake has cost me a lot of money in interest each year. Our overall interest rate across the portfolio averages 7.5%. This will improve at the end of the year and I anticipate stronger cashflow over the next few years as other loans come off their fixed rates. As to my preference - I think if you require certainty of payments, fix. Stagger the loans and look for great deals that come up from time to time. Remaining on variable indefinitely is probably not a great idea for me, as there will come a time in the cycle when rates will rise, and I'd hate to have my whole debt portfolio exposed to significant rises at that point in time. I grew up when rates hit 20% and watched my parents and other relatives struggle with their loans, hence my caution to leave all loans on variable. 17. 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 see the market at the moment as being patchy. From the reading I have undertaken lately, it is apparent that Melbourne is cooling and seems likely to remain stagnant for a while. There are other places in Australia where the market is strong, as for example, in mining areas. Sydney has a housing shortage and rental properties are in short supply there. I think there are opportunities for newer and existing investors to buy into these areas. Unknowingly, my wife and I entered the property market at a very good time - there is no doubt about that. We managed to secure our land just before the boom, and that played a significant part in enabling us to move forward and create wealth through residential properties. So yes, in that respect a huge boom was a significant advantage compared with investors or first home buyers beginning today. However, when we started, we were both on very low wages. I think it would be fair to say that it was our ability to save a significant deposit that contributed to us being able to buy our first home and pay it off relatively quickly. This technique can still be undertaken today by first home buyers and investors. I would like to conclude by saying that without Jan's books and this forum, I probably would have given up investing in property years ago. I have been very grateful to Ian and Jan for their books and for this forum. I am also very grateful to the people on this forum that I have met and been able to make contact with to ask for guidance. They have been extremely generous in helping/assisting me with my questions. I hope they won't mind me mentioning them - Player, Alex Lee, Goanna, JIT, MTR, MIW, Propertunity, KeithJ, Kristine, Rolf and Y-Man. I have also been inspired by Dazz's generous posts and it is largely due to him and his amazing success that my wife and I are inspired to move into commercial real estate.