The ozperp Interview

Discussion in 'Interviews' started by Ruby, 11th Mar, 2008.

  1. Ruby

    Ruby Member

    5th Mar, 2001
    Interview with ozperp – 11th March 2008

    How did you get involved in property?

    We bought our own PPR as soon as we became engaged in late 1993. When we moved interstate for work 18 months later, that became an IP and that was pretty much a debacle. Bought for $111K, spent about $25K on improvements and repairs (total $136K), sold 5 years later for $85K. Doh!

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

    My favourite strategy is to buy properties with the ability to manufacture significant equity, that will be neutral to positively geared after renovation, then refinance, redraw equity for the next project, and wait for time to work its magic. I don’t say “never sell”, but I would refinance rather than sell whenever I could, unless I felt that the property was fundamentally a bad long-term investment (because I’d made a mistake, or market conditions had significantly changed).

    What is your IP / property story so far?

    After the debacle with our first property (above), I swore I’d never invest in property again, and was very anti-property for a couple of years.
    But then I realised that friends of ours – who I thought were totally insane for buying a property for over $300K in Sydney in about 1996 – made nearly as much from the capital growth of their home as my salary, in the first couple of years of ownership.

    In 1999 we bought our second PPR after 4 years of living as renters, which I loathed. It doesn’t matter to me that owning your own home is not the best investment decision, I will always make the lifestyle decision to live in a home that we own whenever I possibly can. I detest having PMs inspect my home. I resented having to get permission to paint a wall, or hang a picture. I’m a homebody, and I never feel like I’m “home” in a rental property.

    In 2000 we finally felt brave enough to buy an IP again, and got completely suckered in by a Gold Coast “financial management” company, who charged us $8K to refer us to a mortgage broker, accountant, and real estate agent, so far as I can tell. And then the real estate agent took us to the developer who I’m sure was paying him handsomely. I blame the pregnancy hormones (I was pregnant with our twin sons) for making me vulnerable, and we bought a “villa” in an ungated “gated estate”. Thankfully, despite how gullible we were, the property did OK in terms of CG, although we felt so stupid when we realised that we’d been suckered, and we were so sick of the cashflow drain, that we made a further mistake by selling it in mid-2003. We made a reasonable capital gain, but I think that if I’d known then what I know now, we would have refinanced instead. (Other than if I could go back another 3 years and not buy it through these predators at all.)

    In 2001 when the twins arrived, we upgraded to a much larger PPR where we still live now. We bought the biggest house we could afford, because we didn’t want to keep moving as we had more kids, so we bought a 6-bedroom home in Kenmore (western Brisbane) pre-boom for $243K. We have put a bit of money into it – maybe $50K – but it’s still done very well for us, now worth about $775K. The house is really two 3-bedroom homes with common facilities in-between, which works well for our unconventional living arrangement: we share our home with another family (Mum, Dad, son aged 9 daughter aged 3) who are very close friends. This arrangement works very well for all of us; they live much cheaper and better than they could independently (they are here studying, from Vietnam), and help us out with childcare and meals.

    In late 2003 I signed up to do the “Wildly Wealthy Women” program in 2004. I admit I participated pretty half-heartedly in 2004, and towards the end of the year felt pathetic for not having achieved much, when some women had built very substantial portfolios. So, based on analysis of Residex statistics (I love numbers and statistics) and some fundamental research, I had an “educated hunch” that Ayr (north QLD, near Bowen) was due to take off. So in late 2004 I flew up and bought two houses in a day. Then in 2005 I signed up to repeat the WWW program, this time really committing myself to it. Listening more carefully to Dymphna Boholt’s lectures (still skipped Sandy Forster’s “millionaire mindset” lectures, though!), I came to the realisation that I could have found a better investment than the Ayr properties. But I still hadn’t learnt not to act precipitously, and instead of refinancing, I sold both of these, too. At least I had made an approx 35% CG in 18 months, and this freed up equity and servicability for the project that took things to a whole new level – the student accommodation project that I found a few months later.

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

    My student accommodation was a real find. In late 2006 I was seeking a house in Spring Hill (Brisbane), because I felt the suburb was undervalued relative to other suburbs in the vicinity, such as New Farm. I was scanning the listings and saw a 15-bedroom house advertised for $700K. I wasn’t sure what I’d do with it at that stage, I just thought it sounded interesting, so I went and had a look. It had been a pretty low-end boarding house, but most recently had been vacant for 2 years. All the floors had lino and the place looked very neglected and unloved. The facilities were abysmal: two outdoor showers and two outdoor toilets, and the entire kitchen consisted of a single kitchen sink, and one camping-type gas burner sitting on a bench! I’m guessing the residents ate out a lot…

    I spent a year and a few hundred thousand dollars converting the property into a 16-bedroom (we put more rooms in the roof space), two kitchen, 6 toilet, 4 shower student accommodation. I wanted to provide something to fill the gap between “a room in a share house with no furniture provided” and “a fully serviced student dorm” (about double the cost). So my students have all new furnishings in their rooms, Foxtel, LCD TV/DVD, broadband, their own phone line, reverse-cycle air-conditioning, bar fridges, etc. They have a big plasma TV in the living room, and a couple of indoor/outdoor dining areas.

    The property cost me about $1.15M all up, and was immediately worth approximately $1.5M, creating $350K of equity. It yields $120K net. As I’m currently highly leveraged, I’m only cashflow positive approximately $20K pa, but I’ve refinanced and only have $100K of equity left in the property (which I hope to get back within the year). I feel this asset is a great foundation for our future retirement. Even if you assume that we’ll get no capital growth, and stay paying interest only indefinitely, if rental income and expenses grow in line with inflation (assume 3%), in 20 years this property will give us a positive cashflow of about $65K in today dollars. Not a bad foundation for our retirement; one year’s hard work has created a retirement income greater than many Australians will retire on.

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

    The same property caused us a year of hell, which makes the end result all the sweeter. The crux of the problem was that despite quite extensive due diligence – as this was a huge purchase for us – we discovered a big problem six weeks after settlement. My hydraulic consultant rang in a bit of a tizz and revealed that we were on a combined drain (shared drain, 5 properties with single connection to Council sewage), and that 1) it would cost us up to $150K to fix by splitting the drain into 5 separate connections, and 2) we needed every property owner’s permission to do the works, which we were unlikely to obtain. Without splitting the combine, Council said that we couldn’t add any toilets, and 15 bedrooms and 2 toilets was not going to work. We didn’t even have the option of selling the property for land value, because the building is character listed. Things were looking very grim.

    I couldn’t believe this had happened, and set about finding out how. I discovered that the combine drain had shown up on searches, but our solicitor hadn’t thought it was significant and hadn’t told us. (More on that later.)

    We approached the lender to ask if we could please borrow another $150K to pay for the drainage works. They responded no, you can’t have that, AND we don’t think the security property is worth as much as we did when we settled 6 weeks ago, and we’re thinking of calling in your loan. Eek! Thankfully, they didn’t move forward with that threat.

    We realised our only option was to push Council very hard for a dispensation, which is permission to add toilets without splitting the combine drain. Our hydraulic consultant, Carol (worth her weight in gold), advised that these are sometimes granted and sometimes not, and there didn’t appear to be any pattern that enabled prediction of which way each application would go.

    We waited anxiously for 5 months and then Council ultimately granted a dispensation – whew! It then took another 2 months to complete the remaining works. Then when we got the valuer out to confirm that works had been completed, so that the bank could release construction loan funds, the lender came back and said “based on the valuer’s report we no longer consider this a residential project, and we don’t fund commercial projects, so we’re not releasing the construction funds and you have to refinance”. So we owed our builder $100K and had no way of paying it. Without the project complete, it was difficult to obtain commercial finance; without additional funds, it was impossible to complete the project. We took out a $100K short-term loan @ 4.85% per MONTH interest, which enabled us to complete and after 3 months we were able to refinance with a commercial loan. We were able to refinance to $1.04M of a total project cost of $1.15M, so we got all but $100K of our equity back out of the property.

    After this was all over, we spent another $10K on legal advice regarding potential action against our solicitor for professional negligence in not providing us with the search results. The advice was that our solicitor had been professionally negligent, but we probably wouldn’t be awarded any damages under tort law because we still made a profit from the project. If the solicitor hadn’t been negligent and we’d known about the drain, we would have pulled out of the purchase, and therefore missed out on the profit that we managed to retrieve from the project.

    Another challenge was that instead of the rooms being available for occupation in March – a fabulous time for students to move into new places – we were done at the end of September – about the worst time of year. So we sat about 25% full for the rest of 2007 and beginning of 2008. We’ve finally filled up for the first time in Feb 2008.

    Going forward, we don’t anticipate problems with vacancies, as the leases are not just a standard 6 or 12 months – tenants must sign fixed-term agreements ending in mid-Jun or early February. Demand is strong enough that we can impose this requirement.

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

    We’ve dabbled in trading CFDs, forex, and some others, but with pretty tragic results thus far. But we haven’t given up, and hope to be able to take advantage of some bargain buying in the coming months.

    What criteria do you use when selecting a property to purchase?

    I seek properties:
    · requiring either no equity in, or able to retrieve my equity for use on other properties within a year (by using vendor finance, a 100%+ loan, an extended settlement etc).
    · that are cashflow positive, or at least not heavily cashflow negative unless it’s for a specific timeframe, eg while I’m waiting on permission to split the block and build a new house, after which it would be cashflow positive.
    · without a body corporate.
    · in an area that I assess has good long-term prospects – likely continued demand for rental properties, population growth, etc. The particular stage in the property cycle isn’t as important to me as the fundamentals of the area, and the deal that I’m able to negotiate on the particular property.
    · with an “angle” – eg the ability to change use, add income streams, subdivide, add substantial value by refurbishing, etc

    What structure do you use for your investing?

    We have a standard discretionary trust, which works for us now because we’re making a profit every year. I am currently investigating whether we can salary sacrifice some of the IP expenses from my hubby’s salary.

    What are your views regarding spreading your risk and investing interstate?

    I’m very aggressive, but I don’t feel that I take risks. I guess it depends how you define risk. I’m comfortable carrying high levels of debts when I’m cashflow neutral to positive. I feel comfortable buying properties interstate or even overseas, provided I’ve done enough research and asked the right questions. I would consider buying a property without seeing it, depending on the particulars of that deal, but I haven’t done that yet.

    My plan is to eventually build a portfolio containing a mix of residential and commercial properties, in a number of states. I’m also considering heading offshore; at the moment my eye’s on Egypt.

    Of course we also want to build a portfolio of shares, and I imagine 2008 will be the year that we’ll begin to do that. I feel there will be some good buying (and selling) opportunities. Up until this point we’ve simply felt more confident investing in property, but I certainly see the appeal of an investment that doesn’t ask for petty repairs! I have simply felt more comfortable investing in property up until this time, but I see the attraction of financial instruments.

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

    1) Sign up for as many free Australian property e-newsletters as you can handle. (See this thread: for some places to start.) Many will advertise seminars. Go to as many free or cheap ones as you can. They’ll nearly all be advertising something expensive, so as long as you’re aware of that and not susceptible to pressure marketing, I still think you can get quite a bit out of the free seminar. And it gives you an idea of just how many different strategies exist, and helps you decide which strategies best suit your situation and personality.
    2) Join Somersoft of course!
    3) Join a local property investors’ group, to network with other property investors. They’re usually very knowledgable and most generous in sharing their experiences. They can also provide recommendations for good professionals – mortgage brokers, solicitors, accountants, tradies, etc.
    4) Don’t be afraid to invest in education, expertise, and data. I believe that many investors engage in what I consider “false economy”. Examples that spring to mind: using a conveyancer rather than a solicitor, managing their own properties, not paying for building inspections, not having landlord insurance, selling privately rather than through a RE agent, not being willing to pay for data (eg Residex reports) that assist guide your investment decisions, etc.
    5) Be aware of what your situation is with regards to equity, cashflow, and borrowing capacity, and look for properties that put you in a situation where you have some of all three of these available for your next deal.

    And if that same budding investor asked "what 5 things should I avoid", you would say?

    1) Any business trying to set you up with an investment property, particularly those who primarily market new developments.
    2) Not setting up appropriate structures from the outset. “Start with the end in mind”. The property may one day be cashflow positive (heaven forbid!), you may want to buy more properties, you may want to pass it on to your children after you pass on – if you can, try and set up a structure for purchasing your very first IP that is most adaptable to all these circumstances.
    3) Buying a property that limits your ability to expand – eg a heavily negatively geared property that you struggle to afford. First buy a positively geared property – even if you get zero growth – and then use that cashflow to subsidise purchasing a high-growth, negatively geared property.
    4) Buying at the top of the market.
    5) Analysis paralysis – it’s important to do some research and be confident of your purchase, but not at the expense of being in the market!

    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?

    Gosh, I always know what I want to do, though sometimes not how. Somersoft is such an incredible resource; post your situation and your goals, and ask other SSers what they’d do.

    How important is planning to being a successful investor?

    Thankfully, not very ; ) Well, actually, that’s not true. I think that if you want to accumulate a portfolio of properties, you have to think how each purchase fits into your overall portfolio, and even more importantly, whether purchasing the next property still leaves you in a position to get into the property after that. It’s simple to say, but very intricate to manage, to ensure that at all times you have sufficient spare:

    1) accessible equity (ie cash in a LOC, or equity available for redraw)
    2) borrowing capacity (ie either have full-doc capacity remaining, or have set yourself up with ABNs etc to go lo/no doc)
    3) cashflow, so that you can consider a negatively geared property if the deal is good

    If you’re starting out and not sure what kind of property you should buy, consider where you stand on these three parameters, and find a property that helps improve your balance of all three. Good cashflow and borrowing capacity but little equity – then you need a property with the ability to manufacture growth, even if it’s negatively geared. Good cashflow and equity but no ability to borrow right now – then use what you’ve got to go about creating a situation that will enable you to borrow, eg by getting an ABN, and in the meanwhile using your cash and equity to get great deals by being able to pay cash.

    Has your positive outlook on life helped you with your investing?

    Immeasurably. The things that I’ve noticed most hold people back from investing are:
    1) fear of losing everything, often accompanied by analysis paralysis, because they only want to invest in a “dead certainty”
    2) fear that a catastrophic crash in rental demand or housing prices is just around the corner
    3) fear that capital growth won’t compensate for the noticeable, immediate loss of cashflow every week

    Optimism and confidence can counter all these fears – if you trust that you’ve done your research, that you can afford the property you’re investing in, and that the investment will have a long-term positive outcome, should all help overcome these obstacles.

    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)

    There seems to be a perception that this is the case, but I don’t think it should necessarily be the case. I used to think that developing was a “more advanced” strategy than investing. It is certainly more active, and requires different skills to investing, but I’ve realised that I’m actually far more interested in investing and generating (relatively) passive income. Developing (with the notable exception of “develop and hold”) is a property-based business, not property investing, and I don’t want a job. Not that I’d discourage anybody who loves developing and wants to pursue that; I’m just saying that I think many investors perceive that developing is a bit glamorous and a “logical next step”, when it aint necessarily so.

    I think follow the best evolution is to continue chasing deals that keep you balanced on the three aspects outlined - equity, borrowing capacity, and cashflow – wherever those deals are found (city or country, commercial or residential).

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

    I sure do – don’t we all? ; )

    I’ll deal with them backwards – can I do that?

    Units vs houses – I prefer residential and commercial property without a body corporate. I think units, townhouses, strata titled commercial properties etc can all be profitable investments, but they don’t suit my personality. I’m an independent-minded person, and I want to have as much control as possible over the land component of my property. I also think that body corporate fees are often exorbitant, and that freehold property has more opportunity to add value, eg by changing use, reconfiguring, changing the exterior appearance, etc.

    Metro vs regional – I don’t like to invest in single-industry towns (such as some mining towns), because despite the incredible yields – and some spectacular capital gains the past few years – I try to invest on a longer-term outlook, and I don’t think that many of these towns are a good bet long-term. On the other hand, I think that some investors are too city-focused. I think that well-located properties within strong regional cities are in many ways less risky than fringe suburban areas. I’ll look at anywhere that has good fundamentals – stable or increasing population, diverse local economy, infrastructure, etc.

    This does tend to mean within, say, 10km of the CBD, or within a smaller proximity of satellite cities (eg Ipswich, Gold Coast, etc), “activity centres” within larger cities (eg Frankston, Caboolture, Logan) and regional towns (eg Geelong, Mildura, Toowoomba, Newcastle, Wollongong). Basically I look at places where you can live, shop, and work in the area, and preferably get a tertiary education as well.

    Units vs houses – I tend to prefer houses because there’s more opportunity to add value and use a strategy to manufacture growth, and yields, after taking body corporate fees into account, tend to be better.

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

    I prefer variable, because I believe banks are generally more conservative than I am. So whatever they believe interest rates will actually go to, they have to “pad” a bit to allow for the risk to them in fixing rates. I’d rather just ride the interest rates and follow market conditions.

    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 it’s a sure thing that we’re not going to see the huge growth that we’ve had in the past 5 years, in the coming 5 years. But having said that, I’m not too concerned because 1) I buy based predominantly on the merits of the particular property over the long term, not based on the short-term outlook, and 2) I’m positively geared so can afford to ride out the bumps.

    For comments and questions........
    Last edited: 26th Mar, 2008