The Peastman Interview

Interview with Peastman
August 2012

1. How did you get involved in property?

I remember walking past Real Estate Agents windows on my way to school and thinking wouldn't it be great to own some property. I had read somewhere that most millionaires had made their money in property, so it's got to be worth a go, right? Wouldn't it be great to own a place in every capital city?

In 1977 at the age of 19 I bought my first investment property, a 2 bedroom flat on Princes Hwy in Dandenong. I think it was about $12k on vendors terms. From memory I was getting about $20-$30 PW rent which made it cash flow positive. Never really understood why the vendor sold it when he would have made more money by keeping it, but that's his problem. I managed it myself, being too stingy to use an agent, which taught me a lot. Nothing really bad happened, but at one stage I had to evict a friend of a friend for not paying the rent. These days I never self manage and never rent to anyone I have a connection with. I sold this flat in 1985 to raise money for a new PPOR. It didn't make a lot of money, but it was a good starting point into property investing.

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

Over a period of time I have developed my own strategy, I call it The Lazy Persons Guide to Property Investing. It's explained in detail here .
Basically it is a buy and hold strategy with a 15 year plan.
Buy a property every 3 years.
In 15 years you will have 5 properties.
Then buy and sell 1 every 3 years.
This gives 15 years growth every 3 years.

I take what I call a pro-active conservative approach to investing. This means doing something, but carefully. Having been almost bankrupt in the late 80's early 90's due to a failing business, my wife and I decided being careful was right for us. Looking back on the last decade, we could have gone much harder and would now be much better off, but I am very happy with how things have turned out.
From the outset, we decided the properties had to be cash flow equal or positive. The original idea was to build a portfolio of properties for no cash down and nothing per week. Sounds ambitious these days, but we have managed to do it.

We went to a property investment evening once, where they said “never sell”. I feel this is flawed because the older a building gets, it requires more maintenance and if you never sell, you can only get money out of it by borrowing against it. This means you are deferring paying tax, which accumulates, but spending the money now. Eventually the tax has to be paid, and it may take away most of the equity. I prefer to pay the tax as I get money out of a property.
Some people ask me “Why sell? CGT eats all the profits.” But I think CGT is a real bargain. It's only half the rate of income tax. I believe we all have a social responsibility to pay tax. The country needs infrastructure like roads, hospitals and schools and it is our responsibility to pay our share. I don't like tax wastage or mismanagement though.

Some say the days of capital growth has gone. Maybe, maybe not. Time will tell. But even if property only goes up at the rate of inflation, because of gearing there is still money to be made using my strategy of buy and hold for 15 years.

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

In the late 80's things got very tight for us. Despite me working up to 20 hours a day, my business was almost broke and the bank threatened to foreclose on our PPOR. I remember speaking to a bank manager who said “There is no way known the bank would ever lend me any money ever again” as he ushered me out of his office. Now that same manager works as a mortgage broker and he has been chasing me to get loans through him. He doesn't remember me, but I remember him and there is no way I will ever deal with him or that bank, so I guess he was right.
I did manage to sell that business for a modest sum and in 1994 took up an opportunity in another business. We were renting a garage in the back of a house for this business, but the owner of the house decided to sell in 1996, so doing some calculations, we decided to buy something to run the business from. A small factory in Boronia for $77500 was bought and I still run my photography business in it today. The factory is now worth about $240k and is owned outright. My business pays me rent which is used to help cash flow on the other properties.

In 2001 things were going rather well, so we decided to get a bit more serious about investing. After a lot of research and soul searching, we bought a refurbished one bedroom apartment in Mentone for $125k. Cash flow positive from day one and as we used the equity in our PPOR as the deposit, it was essentially no money down and nothing per week. It would now be worth about $300k.

It was about this time I started to realise my super was never going to be enough to retire on comfortably, and if we wanted more than the pension, we had better start doing something. It was about this time we decided on our strategy, so in 2003 started looking for the next property. I came across a modern one bedroom apartment in Braddon ACT which I paid $142k and rent was $200PW, again cash flow positive, again using equity as deposit. So once again, no money down and nothing per week. It now rents out for $400PW and is worth about $385K

Next in 2005 while searching for cash flow positive property around Australia, Kalgoorlie kept popping up in my searches. As a rural town, it did not fit my strategy but research showed me Kalgoorlie is the second largest city in WA, has national air, road and rail transport, a university and one of the largest gold mines in the world. So I ended up with a furnished near new 2br unit in the better part of town. Price $192k and renting for $285PW. It would now be worth about $270k but rents for just over $400PW.

By 2008 I was looking at Sydney. Prices had not moved for several years and it seemed right they would move soon. I found a place in Chippendale, a few hundred meters from Central Station. The agent had really bad photos online and the place seemed not to be selling. I put in an offer of $310k which was accepted. It's another one bedroom unit, no car space but actually really rather large at 72sq mtr. The agent tells us by putting up a partition wall and making it a 2br or 1br+ study, it would get another $50PW, worth considering It would now be worth about $420k and rents out for about $400PW. Not quite cash flow positive, but the other properties make it all work.

After reading about cross collateralisation on Somersoft, we decided to refinance some of the properties so that they could stand on their own merits. Our PPOR was taken off all other loans and equity in Braddon used for Chippendale. While I think I understand the problems with cross collateralisation, it has been a very useful tool for us to start off with and has allowed us to build some wealth.

Still looking at Sydney as the next to boom, in 2010 I decided to have a look at Penrith. Went up for a day and decided on a 3br 2 storey townhouse near the hospital. Price $320k renting for $340PW, again not cash flow positive, but the others again make it all work. Now worth about $350k and renting for $370PW.

I really should be considering another place now, but the current market scares me a bit so I think I will just wait and see what happens. With 6 IP's, a LVR of about 50% and total cash flow positive I think we are in a rather safe position if Australia goes pear shaped and I am looking forward to when we start the selling phase of our plan. Probably in 2016 we will look at selling Mentone hopefully for about $375k. That will give us $65k net per year for 3 years, far better than the pension.

So I am getting closer to my childhood dream of a property in every capital city.

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

I think my best purchase would be Braddon. It was 7 years old and only a few hundred metres from the Canberra CBD. It was a bank foreclosure sale and the tenant was ACT Housing with a further 8 year lease. This meant it could only be sold to an investor who liked the idea of the long lease to public housing. Narrowed the buyer base considerably. The bank only wanted the price it originally sold for in 1997 being $142k while similar located and size properties were selling for $175k. Since we were looking at keeping it a lot longer than the lease period, we realised it would shoot up in value once the lease expired. ACT Housing asked to terminate the lease early which we agreed to. Sure enough, the bank valued it at a much higher amount and the rent shot up.

We have come across a really good property manager for Chippendale in Sydney. The selling agent offered to manage the place at a reduced fee if we bought the apartment. His office was on the ground floor of the complex so it seemed to make sense. Adam has been very hands on, he does the inspections and fixes any small problems himself. A few months ago he noticed the toilet would not stop flushing, so rather than giving me the cost of a plumber to come out, he fixed it himself. He has suggested putting up a partition to make an extra bedroom or study to earn extra rent. He has sent a letter to the body corp threatening to sue them because they did not take action against a neighbour with a dog. He even takes me out to lunch whenever I get to Sydney.

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

Happily no real bad stories.
The worst thing to happen was in Kalgoorlie. The unit is furnished and was rented out to a Perth company who placed employees in it. When the employees left, they gave all our furniture to a neighbour. The company in Perth had to pay for new furniture, unsure what happened to the employee.
For some reason most of the dramas have been with Kalgoorlie. Like the time the nearby electricity sub station blew up taking out all of our appliances with it. And our property manager who had no idea what she was doing. She was totally unaware existed!!!

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

We have dabbled in shares and unit trusts over the years. But they just don't seem to work for us.

Shares were actually my first investment. At the age of 17 I decided I wanted a car, so went to a stock broker to see what I could do. Purchased some shares on his advice which immediately went from 42c down to 9c. Eventually sold them about 10 years later for $1.05, so I suppose not a total loss.
Another financial advisor told us we were too heavily into property and we should get into some unit trusts. So we bought his recommendation which then also kept on going down. Eventually got out of it last year at a loss after almost 10 years.
We now have a few shares in mainly blue chip companies, but really they don't seem to perform as well as property. I think gearing is the main difference. With property we have been able to gear up and get a much better capital growth with safety. I would not have the guts to do it with shares.

Our businesses have been very different. Originally I was sales manager for a health food manufacturer. The original owner had some problems and since I knew all the customers and suppliers, I bought the business. Big mistake. It very nearly sent me broke while working 20 hour days.
Currently I own an event photography business. This is mainly run on weekends giving me the weekdays to check up on Somersoft and look out for real estate deals. While the photography business has given me a reasonable income, it has not given me wealth. I look at property for that.

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

Early on I studied long and hard looking at all sorts of graphs and charts. Real analysis paralysis.
These days a lot of it comes with a gut instinct.

I first pick a city in Australia that seems a bit undervalued compared to other cities.
Then I narrow the search down to suburbs that give me something decent in my price bracket.
I then ask local property managers what sort of place is easy to rent out all the time and hardly ever gives any problems. What and where suits tenants.
I prefer a single or a couple with no kids, white collar working tenants. Is this area attractive to them?
Does this fit in with my objectives? If not, should I alter my objectives?
Then I start hunting down particular deals.
Do the numbers work for the return required?
If all answers and numbers work right, I put in an offer.

Most of the properties I had not actually seen inside before I put in an offer.
Boronia Outside only.
Mentone Inside and out.
Braddon Got a friend to have a look.
Kalgoorlie Had a building report done. I still have not actually seen the place though.
Chippendale Conveyancer inspected prior to signing. I saw the place just after settlement.
Penrith Inspected outside only.
Because it is an investment, It does not seem too important to see inside. As long as the property is sound, the figures work and it is what the tenants want, seeing it for me is not that important. That being said, maybe I should be more careful. I have come across several agents photos being not quite right. For instance one that showed a view from a window before the 20 storey building next door was built, or one of my apartments the property manager put up photos of another unit in the same complex as mine but it had a different kitchen and a backyard. Very dodgy practice.

8. What structure do you use for your investing?

All the properties are in my wife and my name. We have looked at setting up trusts and SMSF, but each time come up with the answer that the main person that profits from these structures is the accountant. So we just stay with a “Keep it simple” approach.

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

When it comes time to retire, we will sell one property and buy another. The money from the sale is to be put into an annuity which banks will accept as income. We will draw this money down over a period of 2 to 3 years to fund our retirement. When that money is spent, we will sell the next place and buy another. The cycle will continue.

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

1 Buy your first property when you can afford it.
2 Buy your second property when you can afford it.
3 Buy your third property when you can afford it.
4 Buy your fourth property when you can afford it.
5 Buy your fifth property when you can afford it.

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

1 Being greedy.
2 Live outside your means.

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?

I don't really understand the question.
If they have managed to get a portfolio of properties, they already know how to proceed, just keep going.

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

Once I would have come out with the old saying “Fail to plan, plan to fail” but really its all about taking action. You can have all sorts of plans but if you don't take action, nothing happens. If you take action without a plan you are far more likely to succeed than if you plan but don’t take action.

A good plan is always advisable though, but you can work it out as you go and change it as needs be.

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)

Well I suppose the more you get into it, the more you want to broaden your horizon and try new things. But there is nothing wrong with staying with just one strategy that works for you. I really can't see myself in joint ventures or becoming a developer, it's just not the sort of thing I want to do.

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

A lot of people say buy land content because that’s what appreciates, buildings don’t appreciate. I am not so sure. Assuming a building has about a 70 year life, when you look at its original cost to build, it has gone up in value too. A old house might only be worth $20k more than a vacant block, but it may have originally only cost $1k to build.
Given a choice of a 3br house on a 800sq mtr block in an outer suburb for $350k or a one bedroom apartment inner suburb for $350k, I would choose the apartment. I believe there are less problems with tenants in apartments compared to houses. And for the same money, you get a more desirable location.

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

We have always had floating interest rates. I have looked into fixing them, but a bank manager friend of mine once advised me that fixing them is always in the banks interest. The only reason they offer it as an alternative is because they believe they will make more money that way.

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?

As always some areas are going up while other areas are struggling. Overall I think it is a bit of a buyers market at the moment and a fair bit of uncertainty about the future. A friend of mine who studies the economy as a bit of a hobby is certain the world is about to collapse into a financial mess as never seen before. Time will tell. I am a bit of an optimist though and believe we may see a few years of not much happening, but it will get better long term. So business as usual.

It's probably a good time for new investors looking long term, but short term “lets make a quick buck” investors may struggle.