The Lizzie Interview

Interview with Lizzie
May 2012

How did you get involved in property?

Gosh, that's stretching the memory – and such a convoluted tale too. I guess I just fell into investing by meeting the right people (such as a person at a trade fair that told me about Somersoft) at the right time and learning some god-awful hard lessons. I had no plan.

What is your property investing philosophy/strategy (CF, CG, reno, houses, flats, buy and hold, develop, flip, wrap etc)?

After a long and tiring path, I finally found the strategy that suits us. Wish I'd discovered it 10+ years ago, but one has to learn what they have to learn first.

We are buying stock standard 1970's flats/units that are virtually indestructible and either cashflow neutral or positive. In a major population area, within walking distance of transport and shops. The plan is to purchase enough of these, to sell down a few and replace hubby's income within the next 5-10 years – although we did swerve off course this last month when a neighbour offered to cheaply sell us a block of units in a prime real estate position but are slightly cashflow negative (he needed the cash fast). We view this property as a potential building site for our final PPOR and, if not, the location is prime for resale profit.

We are buying units due to the low maintenance factor. None of our purchases have lifts or pools or BBQ areas or gyms or anything that costs extra.

The first two units we bought increased in value by 20% within the first year and are now cashflow positive – so we're happy with this path.

What is your IP story so far?

I had renovated and sold a couple of PPOR properties prior to meeting Mr Lizzie, taking the profits but not understanding about cashflow and passive income.

Mr Lizzie owned two houses on one block when I met him – one of which was rented. We were both starting over, in our 30's, after being taken to the cleaners by our respective ex's.

We renovated my wee, post-divorce cottage, sold for a small profit and moved in together. We then renovated the small cottage we were living in, subdivided the block and sold both it and the 5yr old rental for a good profit. We bought our new, flash PPOR. I didn't really take any notice of the rental down the back, or the income it produced. I just knew that it was a pest as the drainage flooded every time we had heavy rain.

My first eureka moment came when I read Rich Dad Poor Dad. Prior to that, I had no idea about passive income, cashflow or even how a basic balance sheet/profit and loss statement worked.

I had just completed another IP reno and sold for a large profit. I also bought two houses on a single block, subdivided and sold each and nearly doubled what I had paid for them. It was then that I learnt about capital gains tax.

My neighbour at the time was super enthusiastic about vendor finance/rent to own – and a real John Burley fanatic. She enticed me with the potential returns, and before I knew it I used my profits and had 7 vendors finance properties to my name. Unfortunately I bought during the early stages of the 2002-3 boom – which meant my purchasers were locked into a set capital gain they had to pay me, whilst the properties themselves outstripped that capital gain by many thousands. We were early wrappers so didn't have a twilight clause in the vendor finance loans – and I'm still waiting for one to finally pay out. In hindsight, I could have made mega-higher gains by buying as rentals and keeping the resale and profit control myself.

I then took the money made from the vendor financing and started developing in late 2003. I bought another two houses on one block – but got emotional and paid too much. I bought two knock-downs in “the next trendy suburb out” with the idea of rebuilding, and bought a house divided into two flats with the intention of building townhouses.

Prices were going crazy – and prices for new builds went wild in that suburb. Even now, some are worth less than what they were bought for in 2003. At the time all I could see was the prices going up, and the potential capital gain. I had no idea about bubbles bursting.

My accountant at the time recommended I purchase the properties in a trust to assist with capital gains on the potential profits. Little did I know that there is no land tax threshold on trusts or that losses couldn't be claimed against other income (negative gearing). They were very expensive lessons. Also, between the period of purchasing the townhouse site, and development application being submitted, the LEP changed and reduced my build from 3 to 2 townhouses – which meant no profit if I continued.

I knocked down one of the stand alone houses and built. Granted it wasn't the best style of house for the block but it was the best of what was available in those days of early spec home's for small/narrow sites. Two months before the build was finished, the market crashed.

Put the house on the market at what it would have been worth two months previous. Didn't sell. Dropped price. Didn't sell. Dropped price. By that stage consumers were running scared and nothing was selling. Put tenants in the property. Rent didn't cover the mortgage. They trashed the joint but I only got the a portion of the bond due to an unfavourable tribunal hearing. Massive land tax bill arrived. Credit cards maxed due to high mortgage payments on the development sites.

I didn't dare tell Mr Lizzie and ended up near a breakdown. All properties were on the market. I just needed one to sell to ease the pressure.

Just when all looked hopeless, one of the small development sites sold for a loss … then another for break-even … Mr Lizzie had a job transfer and payrise … then finally the rebuild sold for a large loss – but we could now manage the cashflow.

The lessons during that period were invaluable and I will never forget. We came so close to going under and, having to keep the information secret from my “very” risk adverse partner, took years off my life. I thank the universe every day that we managed to scrape out of the hole … although we are still carrying a debt nearly 8 years later caused by that period.

It was then that I reassessed and lost my cocky, know-it-all attitude. It was also then that I realised that true investing in not glamorous development and flipping.

Right after that period I went to a one day course by Michael Yardney. The saying of the teacher arriving when the pupil is ready, is so true. The one big lesson I learnt from Michael was to plan where you want to be in X years, and then work out how you are going to get there.

I sat down, worked out what passive income we would require to fund our retirement. Worked out how many fully paid IP's that equates to. Worked out how many IP's I would need to buy in what period, and the conservative growth on the those IP's, to be able to sell some down in the future and pay down the debt on the one's we were holding.

This was my second huge eureka moment – and it was then that I started buying my stock standard, non glamorous, indestructible, in demand IP's.

This lesson was reinforced by remembering, when I was first re-single, I had the option of buying two stock standard units in the block I was renting for $100,000 each, 80% lend. They were renting for $140/wk, so cashflow positive. Now, 14 years later, they are worth $340,000+ and renting for around $350/wk.

NB: In the future planning process, Michael also reinforces the need to write down where you want to be family, spiritually, health, home etc and state how you are going to achieve those goals too.

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

I guess I covered all my IP's above, but the best purchase was the early two houses on one corner block. Bought for $250,000. Did a major garden jungle slash and remove. Put in a dividing fence, driveways and carports. Subdivided and sold for $250,000 each.

They would be worth around $350,000 each if I'd held them – but when the Pasha Bulka floods went through, they would have been under water, so glad I'd sold.

Is there a really bad IP story you would be prepared to share with us?

Definitely the rebuild. Just got greedy and in to far over our heads. Bought the knockdown for $300,000. One block away from a major eat street and walking distance to the train station. Similar rebuilt houses were selling for in excess of $700,000. Build cost quote came in at around $250,000 … money for jam, or so I thought. We basically borrowed the lot against our PPOR.

After 18 months (from when we started the build) of large mortgage payments, a tenant trashing, high land tax bills, stamp duties, selling costs and a crashing market, we sold for $520,000. Lost around $270,000 on that property alone – and the losses were tied up in a trust so inaccessible against Mr Lizzie's good income.

Do you invest in other asset classes?

Shares and I don't really get along very well. Early on I snaffled an employee release of Telstra at $2.10/share – sold for $9+ - bought back at sub$7 - sold for $8+. Thought I knew what I was doing so bunged a heap of money in a high growth investment. The stock market crashed (1999).

Recently had some spare cash so bought into the GFC falling market. It fell even further and now the shares are still only worth half what I paid.

We have set up a self managed super fund, in which we will buy blue chip, well performing shares (see thread in coffee lounge). This will be enough shares for me.

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

In both categories of IP and PPOR we select properties that are structurally sound but we can value add. Even if, with the rental units, it just means replacing the 30yr old carpet and painting throughout. With the IP's, they have to be in small unit blocks, in desirable locations such as within walking distance of major transport and shops. They must have parking. They must not have any expensive strata costing amenities (pool, gym, lift etc). They have to be either cashflow positive, neutral or so damn close that a single rent increase will tip them over.

With the PPOR's we get a little braver. Not shy of gutting a property while still living in it, knocking down walls and rebuilding from the inside out. We make more money out of these properties, but also don't pay any capital gains/land tax when we sell and move on to the next one. They also wouldn't make good rentals, so we don't hold them.

Because we can renovate, we cannot bring ourselves to pay extra for an already renovated property. An example is the second to last PPOR we sold. Bought for $650,000 – all costs including reno/buy/sell/mortgage interest $100,000 – sold for $850,000. There is no way we could have bought ourselves to pay $850,000 for the house when we know how to create the money instead.

With our next PPOR (currently renting whilst it's being build), we figured we can build/landscape etc for around $300,000 less than comparable, already done, properties that are for sale. This also means we will be mortgage free.

What structure do you use for your investing?

After being so badly stung by both DT's and HDT's we invest purely in our own names. Except for the shares in the self managed super fund.

What is your strategy to fund your lifestyle in the future?

We plan to live off a combination of rental income from our privately owned, mortgage free IP's and share dividends from the super fund.

If a budding property investor asked “what are the top five things I should do” what would you say?

1. Plan where you want to be financially in 5 years – 10 years – 20 years
2. Work out what you will need to own, to provide the income, to be in that financial position
3. How are you going to get there? What asset class are you going to use?
4. How much do you need to buy, over what period of growth, to achieve that target?
5. You will make mistakes, you will learn lessons, there is no perfect IP from day one. Make a judgement and get started.

If a budding property investors asked “what things should you avoid” what would you say?

Do not get sidetracked by other people. Your investing path is your own, and if it is a sound strategy then stick to it. Revisit your strategy and tweak if required but don't get sucked in by the perception of glamour or a quick buck or other people's tales (you usually only hear the good stuff).

What would you advise the property investor who maybe has a portfolio of properties but is at a loss at how to proceed?

I'd revisit the initial plan (or draw one up if not already done so). If you have reached the initial goals – fantastic! Do yourself another plan and aim higher – really dream. It helps to also write down what you intend to spend your money on when you reach your end goal – travel, charity, philanthropy, lifestyle etc.

How important is planning to being a successful investor?

Having learnt the hard way – essential. Initially I flew by the seat of my pants, made some money, thought I knew it all and crashed hard. If I'd planned logically from day one, instead of getting caught up in the moment, we'd be basically retired on a darn good income by now.

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)

Long ago I would have said yes, but now I'm not so sure. I think every investor has to find the setting in which they are comfortable. Some progress along the food chain, some don't and are happy to play in their profitable sandpit forever. I don't believe moving from one type of investment to another is a given.

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

Again, investing is entirely what suits the plan and risk nature of the investor. I personally like CF due to our experience – but not at the expense of CG. I seek out properties that have both. I also like metro or large regional due to the diversity of employment and constant demand for IP's. I currently like units for IP's for reasons stated before – but maybe that is just me becoming lazy in my old age and wanting the set-and-forgets. This allows us to focus on other aspects of life (my business, the new PPOR build etc) … and it's bit hard to manage high maintenance IP's from a cafe in Tuscany.

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

I like both but watch the market carefully. When interest rates are below the long term average – generally with a 5 in the front – I lock for 3 years. Until then I float. I have noticed that, in recent history, the interest rate cycle seems to run in around 3 year period (top to top, or bottom to bottom). The last bottom was 3 years ago last month (4.99%), and it appears we are hovering around another bottoming out.

I also went through the late 1980's, watched interest rates rocket up to 18+%, and people desperately locking in at around 14-15%. Interest rates then plunged to below 10% and so many people were painfully trapped at the higher, locked in, rate. I have found that very high interest rates usually herald a plunge, and remain high for a very short period of time. This is when you need your buffer, to ride out this short, painful period and take advantage of the drop.

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

Partner – sort of. Family – not important. Friends – very important.

With the partner, Mr Lizzie is not really interested in the IP's. He just wants to know if it will make money. Other than that he just signs the loan docs. Great way to be – if you're not interested, then get out of the way and let me through!

Unfortunately, PPOR reno's are a different story and end up in some horrendous “debates” - of which I usually win (because I just go ahead and do it), followed by Mr Lizzie's then admiring the final product. Rinse – Repeat.

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? Thoughts on the next 1 - 5 – 10 years?

Wow, that's a hard question. There is no one market. Some are stagnant, some are booming, some are going backwards.

In my little world, we have had minimal growth recently but good properties are getting snapped up quick. There is money floating around and the savvy investors are on the hunt. I'm hoping the market stays flat for the next 12 months whilst I buy some more – but that is mere hope. I have no idea where the market will go in the near future as there are so many variables in play (elections, interest rates, international markets, industry growth, industry closure). I guess it just comes down to studying your market and being ready to pounce when you see a good deal.

Is it harder to invest now? I don't believe so. I just believe that nowadays there are so many additional demands on your money, so that it appears harder to get ahead. When we started there were no expensive mobile phones/plans, internet, cheap holidays, flash tv's, dinners out, takeaway coffee, CBD living or the other “essential” lifestyle standards of today. You just bought what you could, where you could afford it. The attitudes and expectations have changed so dramatically over the last 14 years … but the ability to invest, if you really want to, hasn't.

My thoughts on the next 1-5-10 years? I think the international market will limp along for at least the next 5 years before starting to make small recoveries. Humans have an amazing ability to adjust and adapt to circumstances, and yearn for betterment. I think this, combined with a new attitude towards government spending, will pull the economies out of the doldrums – just need to get over the lazy government-will-provide way of thinking hump first.

I believe the next twelve months will be steady to stagnant. Up and down fluctuations over the next 5 years as the rubbish is excreted and markets/economies realign themselves. I see another boom before the 10 year period draws to a close and plan to be ready this time around.