Interview with Player – 15th April 2009
How did you get involved in property?
Whilst I did have a small taste of investing in property from my parents and observing other friends and relatives, I always had a feeling that wealthy people acquired their wealth by investing in property or, at the very least, parked much of their wealth in it as an asset class.
I bought my first residential investment property at age 22 having just graduated from University and commenced working. Even though I had the intention of setting up a substantial property portfolio for my future, I deemed it necessary to reward my hard work (and play) at University and thus my aspirations at that time were to use my first year’s earnings to acquire a Porsche 911, albeit second hand. Talk about “Big Hat and No Cattle.” My father had other ideas. Being an only child and wanting to provide me with a head start, my parents provided me with a deposit and, my father accompanied me to the bank to get a loan for a property quick smart. I listened and, have never looked back.
I purchased a property around the corner from where I lived with my parents at the time, a southern Melbourne suburb around 10 km from the city. I did (even from that early stage) have an idea that land rich was the way to go for me, where I could add value by future sub-division and/or development. This house was paid off in a little under two years.
There was another thing that my parents taught me and that was to live beneath your means. I have never done a formal budget as such on paper aside from filling out statements of position for lenders, however there was always one constantly going on inside my head. Still to this day, this is what works best for me. I truly believe people’s greatest undoing is living beyond their means. Consumerism and instant gratification leads many people down the path of spending that which they don’t have and, then some. The purveyor’s of items of instant gratification, with 5 years interest free deals and a heavy reliance on credit card debt for depreciating items does not augur well in my opinion for a stable financial existence. In the US we are constantly told of folks that are spending 125 % of what they earn. I dare say those figures would be equally as applicable here in Australia. Whilst I doubt my dear late father had read The Richest Man in Babylon, he had his own way of telling stories and using analogies and metaphors from those around us who had achieved wealth or were well on their way.
What is your property investment philosophy (CF, CG, renos, houses, flats, buy and hold, develop, flip, wrap, etc)?
Initially it started out being strictly capital growth. I’m not sure why, however I did have some folk around me who purported that this was the way to go and also having very quickly escalated into the top tax bracket at that time (around 60 %), negative gearing was flavour of the moment and with accountants espousing the benefits of the pay-off of tax relief whilst controlling an appreciating asset, this was the road I started upon. Over the years I have now refined my philosophy as buy and hold with the ultimate view of developing everything that we own. Increasing the number of doors to optimise the streams of income coming in whilst we sleep, play and pursue other dreams, and having the luxury of choice as to whether or not we sell our time in a JOB. Indeed, I liken each tenant as a worker in the portfolio (property business). Sometimes you can lose employees (tenants), however overall the strategy is “the more the better”. We are playing a numbers game. Money is merely the means to keep score.
Furthermore, over the years due to a change in physical capacity and earning circumstances, I am now looking more at cash flow properties to soften the out of pocket commitment required for the portfolio. Any minor renovations that I’ve done along the way has always been to improve the rental income and tenant appeal; not necessarily for value adding and selling for profit.
Of the entire portfolio (now just into double figures), I still own two pre-capital gains tax (CGT) properties and they will definitely sell in the future to retire all debt and also fund contributions to our SMSF to develop our holdings in there as well. I may sacrifice them in a staggered manner, say one at the peak (or thereabouts) of the next up-cycle, and perhaps one at the same zenith of a subsequent cycle. I am currently 46 years young and so there is ample time to play with the timing of this strategy.
They are both well located development sites in good streets in the 10 km rim. They are also above median worth for that suburb. Whether or not I go for planning permits (DA) to on-sell for an even higher price to a builder or developer, will depend upon tax laws at that time and GST implications at that time also. I would not do anything to poison the CGT exemption. These two are “land gold” for us, as purchase price (even today) is trivial compared to their value now and in the future. The boxes on them are old however provide reasonable rental income. These are probably the only two that will be sacrificed as a fundamental way forward to the fund the bigger picture.
So, largely “buy and hold” is the strategy I ascribe to. I haven’t done any flips or wraps. As well as developing our own stock to add doors, I would like to undertake a mixed use development nearby to a Zone 1 (Melbourne train line) station with retail on the bottom, offices above and apartments above that.
In looking at cashflow moving forward and an asset with less tenancy headache, I would also like a shed or similar on a corner block where the GFA (gross floor area) is underutilised, at say up to 25-30 % site coverage. This would allow me to construct another tilt slab box (with or without subdividing) and another income stream for nominal costs, and nice depreciation. By way of holding costs it should wash its own face and actually leave more money in our pockets.
What is your IP / property story so far?
After promptly paying off the first purchase, I was quite aggressive into my mid twenties in buying similarly positioned properties with another four in a very short period of time. I was working for myself and had set up two businesses and was looking to acquire and leverage the portfolio as fast as possible. A bit young, naive and very much “no fear” in those late 80’s.
To achieve greater than 100 % lends back then, a broker was used. In those days the client paid the broker. Banks weren’t into such aggressiveness and so the broker was a key ingredient in my progress forward. All purchases were houses on decent land and one commercial IP. All loans were with the same lender. I did not know what cross collateralisation was in those days; however I doubt I could have achieved my funding for those acquisitions any other way. Another big take home lesson for me from this experience is to not have all your fixed loans due at the same time, especially if they are with the same, or one predominant, lender.
In the early 90’s at the mercy of the funders, I elected to sell off one (perhaps before they did) to reduce LVR’s. It was also at a time when I was getting married and didn’t wish to start our married life with the financial stress of excessive lending. Over the next few years, I actually diligently paid down debt to a nominal amount; so not all was lost.
Then I “parked.” Inertia set in. It was easier to do nothing than to do something, and anyway I already had a “decent portfolio of investment properties” or so I thought and, so the alibi’s and validation for parking went on. Now at that time, to be fair, I was re-inventing myself career wise and studying part time for a post graduate masters degree. Some physical health challenges saw me re-invent myself a few times along the way and with some uncertainty in earning capacity I did not want to jeopardise my family’s financial stability by borrowing again. As you can imagine, that saw me give away the tidal wave of property value growth of the late nineties and early noughties. My existing properties went up, however I did not purchase “zip, zero, diddly-squat”, at that time to ride the tide and sentiment. Whilst my reasons for avoiding debt were valid and well intended, I began to realise that they were just that; REASONS!
Further acquisitions began in 2004 and have continued to current day. Our portfolio is now strong and with conservative LVR’s. It is spread across three states, Victoria, New South Wales and Queensland, although mostly in Victoria. The post that describes this story of making lemonade from lemons and the lessons learnt is best viewed on the link below. I’m not known for being a man of few words, so for the sake of brevity, I have avoided pasting the entire post here:
http://www.somersoft.com/forums/showpost.php?p=463147&postcount=21
Is there a story of a really good IP that you would be prepared to share with us?
One of the more recent purchases in Parramatta. A group of four units that are cash-flow positive now even on a 107 % lend. Began on a 5.9 % initial yield which I found outstanding for middle Sydney at end of 2006. Initially, I hesitated thinking there was something wrong with them. Rents have increased considerably since purchase. There is value add potential to add another few doors on a third level and manufacture more growth (the land is free for any new units) and most importantly income $tream$. I have discussed these elsewhere in this interview and so will not replicate the information here
Is there a story of a really bad (or not so good) IP that you would be prepared to share with us?
There are none that relate to the IP itself, however in the spirit of learning, I’ll share how the process of a recent purchase could have turned ugly L (to my pockets), were I not to verify and reconcile statements in a timely manner.
I purchased interstate (Sydney) for land tax reasons primarily and also to have the added benefit of being exposed to a different market. The solicitor acting on my behalf knew my criterion on this score and that I would only purchase and settle on paying land tax on a single holdings basis as I own nothing else in NSW. Having her blessing to sign away, here is where it is important to check and double check everything. More fool me! I receive the statement of adjustments (post settlement) and I notice that my portion of land tax for approximately 10 months pro rata was just over $ 6,000, when I figure that based upon the valuation it should have been around $700. To cut a long story short, her firm eventually reimbursed me the error in their (her) ways as the figure was the cumulative apportionment to the vendor’s holdings in the entity from which he sold. I would have picked up the error perhaps in the following year when the true land tax bill came, however I wonder how many people just gloss over their settlement documents and statements of adjustments and disbursements. Read everything and reconcile. Verify, validate and double check everything that someone else tells you. That concludes this lesson.
Do you invest in other asset classes (shares, commodities, businesses, managed funds, cash, forex, etc)?
My business days are over. Sold out due to the gifts and learning’s that the universe delivered to me in the form of some health problems and challenges. I am grateful for the gift of these challenges as it has turned me into the person I am today, so I’m not disappointed. I was fortunate to exit the businesses with my skin intact. In my experience a business is worth most when you have no need for selling. I was approached by an organisation to sell both my businesses to them as they were franchising and wanted established vendors some five years before I bowed out. They offered me four times the figure I exited for. Ouch! I do have some cash at present, as I do not have off-sets as all my loans are fixed. Cash is not king at present, however it is safe. My cash is, however, always looking for a decent home. My radar is always on. I have held shares in the past in our SMSF and off-loaded portfolios twice to purchase properties cash in the super fund. I have dabbled in options with unfortunate timing. Those le$$on$ were most valuable. It will be a while before I entertain such options strategies again, although there are others who make good today. Not for my current temperament or risk profile. I have no knowledge about currency, forex or commodity trading, so I don’t play there.
Where to now? I've posted in other threads on this forum that I'm sitting on my hands at present. No share holdings whatsoever. I don't have off set accounts so my cash is in term deposits. Return not so great, however I'm loathe to borrow big now to develop or buy more just for the sake of it. The deal would have to be “super sweet”. I don't believe the next 6-12 months will be better; I think until the wash-up occurs with job losses levelling out, it is a case of watch this space.......eyes wide open, research well and if a positive cashflow opportunity comes along (with value add potential to increase doors), research it well and if it suits, strike fast. That's my bias on things. It isn't necessarily right, but that's where I'm at and where it has brought me to date. I am prognosticating that I will likely enter the stock market before I buy any more IP's, but who knows? I have certainly learnt my lessons to act unemotionally when executing stop losses and have been busy re-reading some of my trading and mindset texts to prepare me. My next foray into the stock market will be keeping it simple (buy a rising share and sell a falling one) and keeping positions long. I may entertain options again when the next tide rises all ships and we are in a true established bull market. I’ll wait and see.
What criteria do you use when selecting a property to purchase?
In the initial aggressive accumulation stages I describe earlier, I just kept buying around our suburb. All within a 10 km rim in Bayside areas south of Melbourne CBD. These days, with the advent of computers, internet, mapping tools, ABS data online, etc., etc., I am a little more methodical.
My recipe now is well located houses on development site sized/zoned dirt in an infill suburb that is at or below median for the capital city in question. That is, where they cannot manufacture anymore land. My tenants these days, all are able to walk to a train station and have a choice of bus routes even closer. Amenity such as schooling, shops, health care, etc., are usually givens in such locations anyway. They say never to get emotional about property, and to a very large degree I don’t. A property developer once told me: “Bottom line, not interior design.” I do not get emotional about the boxes on the said dirt; however I will not buy an IP in an area, that I could not live myself. I may not choose to live there, however if I had to.....I ask myself, could I? If the answer is Yes, then that is also the type of tenant I would like to attract to my property. It is by no means fool-proof, however it does hedge my risk for “nasty tenants.” It is something that works for me. These are also criteria I have used in sourcing and transacting investment properties for family members. I love the hunt, the thrill of the chase and, the art of the deal.
What structure do you use for your investing?
I wish I could say that everything is tightly wrapped up in entities that cannot be exposed, however the truth is otherwise. Overall the strategy is that eventually most if not all will be in trusts, and our SMSF and perhaps any straggler in personal name will eventually fall to trust by testament upon my departure from space-ship earth. Control from the grave!
I have investigated Hybrid Trusts over the years and have not been convinced of their effectiveness for direct property investing, without future ramifications on the basis of CGT for units redeemed and other complications. I did work through one method however the strategy would involve external equity being used in the unit trust phase and this was a sub-optimal use of the actual asset being purchased in the trust. It would involve creating preference income units with an income cap on these units within the trust deed, thereby preventing the CGT upon redemption. After reversion to a discretionary trust, the property in question could be used as security over the loan. The problems I saw were difficulty in working out when the property would become neutral to positive in cash flow in order to set the income cap, and as mentioned a non-optimal use of one’s equity. Right now I am learning about, and looking for, positive cashflow industrial property that would not entail any losses to be funded by me externally. Buying such in a traditional family discretionary trust is the way for me moving forward.
Also the SMSF we now have owns three properties. All have development potential. One is a three unit site, the other a two unit site and the commercial one will take a dwelling above, if not an office that may provide more rent. It is zoned appropriately for either. The more doors in our super fund, the merrier, as all income will be tax free when we are at the entitled age. I am about 12 or so years away from that. I hasten to add that we do not only aspire to have this structure working for us as we may elect to go LOE at some point anyway with assets external to the fund. However having a little bit here and a little bit there buffers the federal tax burden and entities for land tax. This flexibility allows for more choices to be entertained. To my wife and I, financial freedom is all about choice.
What do you feel has been your worst mistake during your time investing?
Parking! By parking I missed the boom (by way of further timed purchases) from 1998 onwards in that up-cycle, despite trivial borrowings at the time (in comparison to overall portfolio value), I was absorbed in my career, playing safe with some challenges that confronted me and I became comfortable in my lack of debt scenario. Did I get anywhere that way? As I’ve mentioned in another thread on SS, not even a dog gets excited enough to bark at a parked car. We all know what dogs do on parked cars. They say that if you find others are doing that on your dreams, chances are you're parked.
By parking, I missed opportunities and the cobwebs and shackles of complacency set in, until my wife and I re-evaluated where the portfolio was and where we envisaged it should be going. I was “jump started” so to speak, by a successful property investor/developer. This gave me the momentum to overcome my inertia and as they say, the rest is history. Use the past as a lesson, however focus on where you are going. The car analogy can be taken further. You cannot move forward by only looking in the rear view mirror and nor can you change direction in a parked car. You need to get moving first. I do not recommend parking......not for long anyway!
If a budding property investor asked "what are the top 5 things I should do", you would say?
1. Be “human.” Treat people with respect. Real estate is a relationship business and your success especially with negotiating and dealing with consultants, tradespeople, etc., is to be human. Listen more than you talk and be interested in the other party rather than being interesting and only talking yourself up. This also includes being humble. This does not imply being a push over. Be fair, be firm, be nice, but stand your ground where necessary. Do not be the loser in the negotiation process at the expense of the other party winning. Go for win:win, not win:lose. Realise that the most important person in most real estate negotiations is the real estate agent. Try to have them on side as once they’ve got the listing secured with the vendor, the agent is your (purchasers) greatest ally in making a sale. This may help establish the needs of the seller/vendor and assist you with your offer (amount and more importantly terms).
2. Network. Wow, I wish I took this on board when I was in my twenties. Don’t be an island. You never ever know who is able to help you achieve your goals. Approach every interaction from the perspective of what you can offer the other person rather than what you can get from them. This perspective will enhance rapport with many of the people you will meet. Do not discount anyone as being less than worthy of networking with. You never know what or who they know. Do not burn bridges, especially with people you pass on your way up the ladder. You never know who you may need one day on the potential way back down. Have a team to assist you along the way. Solicitors, accountants, town planners, property managers, and so on. These people will help you with your due diligence (DD). Too many people/investors seek advice solely from those who would benefit directly from the transaction.
3. Think Big. Don’t undermine your success by playing small to not offend or intimidate those around you. Start realistic to your pockets and serviceability, but don’t limit yourself. People usually over-estimate what they can achieve in one year however completely under-estimate what they can achieve in a decade. I look at where I was five years ago when I was jump started (after parking through the boom of the late 90’s and early 2000’s) and, where I am today and the momentum I have set up. I am tweaking and refining my modus operandi to achieve the goals I’ve set along with the informed consent, support and, blessing from Mrs. Player.
4. Spend less than you earn. Pay yourself first (set up an automated direct debit from your salary account to an online account if need be) and save this. DO NOT TOUCH this under any circumstances. It accrues to become a deposit for an IP or to enter the stock market (if that’s your thing to grow a deposit) and move forward. By learning to live on less than you earn you will re-program your internal money thermostat and your future rewards will compound and overwhelm you.
5. Keep learning. Educate yourself by reading. Books by Jan Somers, Steve McKnight, Margaret Lomas, all the Robert Kiyosaki books, Michael Yardney, John Fitzgerald, Craig Turnbull, etc., etc. There are many others that I haven’t mentioned; no disrespect intended. Search the forum for book/resource threads. I also like to learn from audio CD’s and DVD’s. Use this forum frequently. I am a relative new-comer here (just over a year), however the treasure trove of information, resources and support given here is absolutely mind blowing; a fantastic community. Be inquisitive and ask questions. If you never ask, the answer will always be NO!
In fostering the learning spirit also teach others. This has benefits over and above helping another fellow investor out. If you tell 10 different people about a strategy or property investing technique you’ve had success with, they hear it once, however you get to hear it 10 times. Repetition is the mother of all skill. You benefit ten-fold. Compounding at work again. There is some truth also to the saying that if you help enough other people achieve what they want, you will automatically get what you want by default.
Those five points above (and the five below) were intentionally not specifically directed only at property. I feel the bigger picture of addressing mindset will assist not only the property arena but also other areas of investing and richness and flavour of life. Much of the wealth creation process is all between the ears.
And if that same budding investor asked "what 5 things should I avoid", you would say?
1. Don’t Park. Procrastination is the thief of time and the master of alibis. Even though you do not know everything, do something. Don’t fry your brain with analysis paralysis. One of the biggest mistakes that people make is not something they do, but often something that they don't! Rather than be frivolous with actions just for the sake of appearing to do something, seek knowledge and then take informed action.
2. Don’t be narrow/closed minded. Your mind is like a parachute, it works best when it’s open. Be open and receptive to all new ideas, strategies, and techniques, however have your filters in place. Don’t dismiss what you hear, but verify and judge critically and objectively. Be sceptical, but don’t be a cynic as you may miss one vital “aha moment” that could catapult you forward.
3. Conquer FEAR (False Expectations/Evidence Appearing Real). Fear can take many forms. Fear of failure, fear of debt, fear of loss and whether we care to admit it or not.....Fear of Success. This has to do with deserving and not wanting to intimidate others, which leads me to the next point.
4. Avoid the nay-sayers and the easy crowd. Love your family and choose your peers. Limit your time with those on the comfy couch or else this will affect your mind-set and feed the failure tapes that we can sometimes run in our head. This impedes our self worth and deserving and leads to fear of success as we thwart our progress by the limitations of our peers. Hard yards to digest, but IMHO this is the cold reality. This does not mean you dispense with your old friends.....remember, be humble. Just acknowledge that you are on a different path and don’t share with them your grand plans and limit your time with them. Vaccinate yourself from any mind viruses you hear from those who are not on your path or where you are heading. As they say you cannot fly with the eagles if you scratch with the turkeys. You need to be astute enough to sort the wheat from the chaff. On this theme, the whingers will always complain because they have allowed themselves to be conditioned by the vendors of instant gratification.....purveyors of consume now, pay later, interest free for 40 months, etc. Solution is quite simple, as I’ve mentioned earlier.....pay yourself first by living beneath your means, invest and re-invest the returns to compound. When a deposit is achieved, buy what you can comfortably afford and trade up as salary and equity position allows. This requires a re-evaluation of priorities and expectations. Note, that I said the solution was simple however I did not say the solution was easy.....easy (to my mind) implies lazy and no effort. People are always free to choose between instant versus delayed (or at least moderated) gratification and consumption, which leads us, to the next no-no.
5. Don’t get a big hat before you accumulate some cattle. Don’t look rich before you are rich. Trinkets, trophy homes, flash cars, and high status artefacts will keep you poor when you begin your journey. As the typical millionaire next door, I am not what I drive. And for the record, there's nothing wrong with driving exotic vehicles, having toys, or nice home(s) as abundance should be about beautiful automobiles also.........just don't be caught looking rich, rather than being rich with a decent net worth. Some folk have it the wrong way round as they say in Texas, “Big Hat.....No Cattle.”
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?
Take a step back, pause and take a few breaths. Pull over, however keep the motor running. Just don’t park like I did. Seriously, find a person or people who you click with and are where you want to go or at least on a similar path and learn and exchange with them. You may need to read more widely about different techniques moving forward; perhaps adjust a negatively geared strategy to a cashflow strategy or mix up the asset classes and sectors.
Attend some seminars (be sceptical, not cynical) and explore new techniques. Be wary of super-slick presenters and have your manure-radar on high alert. Only follow any further home study or mentoring after undertaking thorough investigation of their own achievements and pick a strategy that resonates with you. I have had exposure to both camps: spruikers who are show and tell and also fair dinkum educators who walk their talk. It is imperative to be able to tell the difference. In summary, it is likely the strategy being used has reached a plateau and needs tweaking and fine tuning. To achieve this, further exposure to a wider range of tools and strategies would be needed in my opinion.
How important is planning to being a successful investor?
Whether it is articulated in a formal written down document or in one’s head as a progressive system of steps that are needed to get to the nominated goal, planning is vital. Begin with the end in mind and that includes a dollar amount, whether in net asset value or passive net rental income. Work backwards from there to identify what number, calibre and type (sector) of asset you require to achieve this.
Precision is key. Merely stating I want financial freedom is not enough. What does that life look like to you and what dollar amount do you need to live that dream. Don’t be daunted by the size of the task at hand. The way to eat an elephant is one bite at a time. Chunk down the tasks and set short (monthly), medium (yearly) and long term (5-10 year) goals. Educate yourself on the strategy needed and take action. As well as knowing what to do, you must actually do what you know. Have a plan, work the plan, and be flexible to change and modification along the way. The end goal should not change; that’s not negotiable, however the stepping stones may need tweaking here and there.
Do you feel joint ventures can be a beneficial way to grow your portfolio?
Not for me personally. I consider that JV’s are very useful tools to use when undertaking developing or value-add projects such as land subdivisions. I see them as something that is finite in time frame. Having a shelf life is therefore more relevant to development projects where two or three parties bring something different to the table. One may be a builder, the other may be a project manager and the other may stump up the cash for a deposit or equity for security. At the completion, the JV dissolves according to the agreement made and each party takes their profit or perhaps a dwelling or two from the proceeds of the project depending upon its magnitude, and then each party moves on. I haven’t done this to date, however would not be averse to such a limited medium term partnership.
Personally, I prefer to not have partners in my actual investment portfolio. Even when purchasing and owning units/apartments, I want the lot as I do not wish to answer to body corporate or other owner occupiers. That’s just me. Nothing wrong with buying one unit or town house out of a block of three or six or twenty for that matter. My preference is have the flexibility of making all my own decisions.
The only time I would consider involving others for investing, and it would be in the guise of a syndicate (unit trust arrangement), is to purchase a decent positive cashflow commercial or industrial asset, say high seven figures or into eight figures. Even then it would be limited to (say) 10 years or so with review at 5 years to ride a cycle and either sell out and take profit or refinance and go again on another.
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)
That would be a safe, logical and systematic progression to adopt. Doing it the other way around is possible, however, to be a successful developer often requires knowledge of the entire buying and selling process and, all associated steps in between, such as buyer demand, demographics, market forces, negotiation (buy and sell) just to name a few. It is probably safer to cut one’s teeth with a number of purchases under one’s belt and ideally lived thru a complete property cycle(s) to ensure that market forces are understood.
Also helps to have a decent equity position to fund the purchase of a development site. All of this is not absolutely necessary as there are success stories of people in their twenties doing it the other way around, however there is probably less risk following the natural progression alluded to. As well as eventually developing our own stock, I may also entertain doing the “build four, sell three and keep one” strategy. The one out of four that is kept is usually the profit (25 %) margin that would be taken if sold. This is IMO a nice strategy when we are in an up-trending market. It also reduces overall CGT and limits entry costs such as stamp duty on the full value of the end product. Caution is needed to not sell before five years to negate the GST component.
Do you have any thoughts on the CF vs CG debate or on the issue of metro vs regional, units vs houses?
Having owned enough negatively geared housing stock on decent parcels of dirt, two years ago, I purchased a four pack in Parramatta. Always wanted some units in the mix as I generally go for land rich subdivision potential properties with good amenity and that tick the right boxes as far as my criteria are concerned. However, with household demographics (dwelling occupants) reducing, some two bedders were on my shopping list. I wanted a six pack however bought four instead as the price range suited my pockets and the numbers stacked up.
Initial 5.9 % yield in middle Sydney with property very much on the nose at that time. They were underlet. Depreciation very juicy as they were renovated and had some building write-off left. Locked up 7.2 % fixed for five and with rent rises they are now cash flow positive.
Any regrets, considering how things have panned out. No! They are leaving money in my pocket and have seen some capital growth. Middle of the road rents with below median purchase prices, for me was a no brainer. They were strata approved, however I have not registered the strata as I'm not going to sell off one by one. Keeping them in one line reduces costs such as rates, council, land tax, etc. They are a few hundred metres from Parramatta campus of Uni of Western Sydney and the draft plan in Parramatta is potentially going to up zone them to high density residential. I also found precedent behind mine that currently has the same zoning and is actually three stories at present, so I will flip the lid and put another three doors on top of that in the future. Parramatta also has great amenity and infrastructure.
I believe that everyone should follow the strategy that resonates best with them at the time and suits their pockets and risk profile. Be flexible and realise that the bias that the investing philosophy takes can change over time. Do not compare yourself to others; use them as an example and emulate worthy role models where appropriate, but run your own race and, play your own game. My portfolio has focused on metropolitan areas, mostly Melbourne, then Sydney with one on the Gold Coast (hybrid metro-regional) and one in Ballarat. The latter is the only true regional (provincial city) property and it was just too tempting to pass up. Our cheapest ever purchase, 40 % below comparable sales and subsequent council valuation and only 800m from the central mall.
What do you prefer, fixed or floating interest rates and why?
Ostensibly, I have always fixed my interest rates, except for my initial principle and interest variable loan that I paid off in less than two years. I have done this primarily as it gives me certainty on my expected expenses for the term of the loan. Have I beaten the “market” overall? I do not know and do not care. It is all about sleeping at night for me. Horses for courses, really. Moving forward I have two coming off fixed term in a few months. Depending on sentiment, I may ride the variable train for a while and fix thereafter or dependent upon what fixed rates are on offer at that time, I may fix again. Less flexibility for sure, however for me certainty and risk management (on my terms) is more valuable in my current stage of life as is the peace of mind that I enjoy with my family.
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?
“Mr. Market” is a fragmented, schizophrenic, multi-faced personality. Amongst the doom and gloom that we are bombarded with by the media and those well intended friends, relatives and colleagues; most of whom have no significant wealth of their own, it is timely to reflect on where we're at and where we're heading with regards residential property.
Certainly, we are in interesting times and whilst not to trivialise the softening of the economy, I still focus on the full half of the glass. I'm not Pollyanna, however IMHO people who focus too much on the negative and trying to avoid what they don't want are by virtue of their attention on the imbedded command (avoiding loss/poverty/sickness/failure or whatever) likely to perpetuate (or at least add to) their unwanted situation. Don’t avoid what you don’t want, rather pursue what you do wish/want/desire.
My take on things moving forward from here, is that top shelf properties are likely to come off perhaps up to a further 5-10 % or track sideways from here having softened significantly over the last 12 months or so. This will depend on suburbs and how exposed the OO's (owner occupiers) still are to equities and business/commercial uncertainty. The middle shelf and this for simplicities sake would include suburbs where most properties are around the median price range (or slightly above) for the capital city in question, may soften slightly (I'll commit to 5 % or so) or also track sideways.
I feel the lower end may see some further rally due to affordability issues with FHOG although that may wane if it is scaled back come 30th June as one component but also due to reducing interest rates, making that sector more affordable to its intended purchasers. I feel investors may also push the bottom end up with falling interest rates. That lower end may, however fall off as job losses hit OO's who over-committed a couple of years ago and perhaps even locked in at nine's. This is the sector I find the most frustrating to prognosticate on. Perhaps some pull-back of the low shelf property rally due to unemployment (in family OO's) or no effect over the medium term.
The media also feeds the emotional roller coaster that determines the “sentiment of the herd” when it comes to buying, as real estate institute spokesperson’s are heard to report higher clearance rates to perpetuate a positive bull-style frenzy that the herd interpret as “I better hurry and buy or I’ll miss out.” Some investors also follow a similar credo. A higher clearance rate right now is due to shortage of stock. Anecdotally, I am noticing fewer for sale, in Melbourne at least, so what gets listed and has reasonable vendors, will sell.
We haven't bottomed as a market collectively, although there are sub-markets such as fringe FHB suburbs. The large development houses (Delfin Lend Lease, Devine, Stockland, etc) are laughing with the enhanced FHOG, encouraging young ones who haven't lived thru any economic slowdown or contraction to go full bore on instant gratification by buying an (affordable) brand new box on land in places with no (or little) amenity. Some have barely saved for the closing costs. I expect some future pain is likely to be delivered to them. These people fund the whole purchase with FHOG as deposit and whilst DSR may be OK for now, wait till they lose a job or take a pay cut from the culling of hours or, as will be inevitable, interest rates rise again......and they will.
Night follows day, contraction follows expansion, a slump follows a boom which follows a slump. A “market” will always correct to its median or average/mean trend line of sentiment. For me, some more pain to come IMO.........these are opportune times to be cashed up with folding stuff, offsets, LOC or equity (with skinny LVR's) and pounce when the deal is good. It is always darkest before the dawn.......I expect a little more nightfall and then the cycle will again begin with daylight. Let the games begin. I also liken the cycle to the digestion process. We have fed our faces (by eating too much during the last boom) and the slowdown has been necessary to digest the food. Now we are in the elimination phase where the excesses are dealt with as waste leading to recession. As the catharsis continues, this prepares the appetite for more feeding frenzy to resume.
With regards newer investors who are starting out, it is challenging to compare level of difficulty now with when I started out. I believe, with all the current technological advances that we have, such as online real estate portals, rp data, pds online, google earth, street view, demographics information, etc., etc., a level of comfort is reached where these tools are sometimes taken for granted. Don’t just rely on online research. “Feet on streets” is also a valid approach and talk to people. I mentioned earlier rapport with sellers, agents, and consultants is paramount. Also I do not know of any books that were written (with an Australian bias) on property investing in 1985 when I started out. Right now there is a plethora of resources available. My library has grown more over the last 5-10 years than any other time. How amazing that you can search property all over Australia (and globally for that matter) from your desk, before you even get into a car or onto a plane. When I started out in the mid eighties, one purchased Saturday’s edition of “The Age” (SMH, Courier, Bulletin, Advertiser, etc) and scoured the advertisements, made plenty of calls, and did drive by inspections to narrow down the list that one would even inspect formally at the open for inspection. Also there are far more lending products and flexibility with a larger variety of providers than when I started out, hence providing greater options for those wishing to enter the market.
Sometimes with all this efficiency and optimal use of our time with the fantastic tools we have, complacency sets in and inertia takes hold. Do not take for granted what we currently have by way of technology. This applies to young ‘uns as well as older investors, as “newer investors” does not necessarily only implicate young people. A new investor can be any age. I believe that there will be some nice purchasing opportunities for those who are cashed or have enough equity to borrow and fund an IP or site acquisition for future development. I'm sitting on my hands with eyes wide open and ready to pounce, especially for infill development land with a rental box on it for now. Also waiting for cap rates to rise some more on industrial properties as I would like such an asset to be added to the portfolio at some point for cash flow.
Haste makes waste however, only when no DD has been undertaken and people haven't researched properly. The well informed can make fast decisions, put their foot on deals and take properties off the market. My only caveat in all of this is that IMHO it is prudent to have very conservative LVR's in this climate. This may be sounding like a broken record, however over-gearing despite the lowering rates may catch some folk out. I've lived and survived the late 80's and early 90's. As Warren Buffet states, “it is only when the tide goes out that you find out who’s been swimming naked.” I feel this is as equally applicable to property cycles as to shares. History repeats. My LVR's are skinny (less than 50 %) and I will not allow my portfolio LVR to go above 65-70 %, to allow for any potential softening by bank (fire-sale) valuations. The time for max lends will come again and will be in the next bull run of the property cycle, allowing rising capital growth to buffer out LVR's in one's portfolio.
Of course we will all have the benefit of the retrospectoscope to assist our "told you so stories" in a couple of years or so. The market is presenting us with falling interest rates on the one hand enhancing affordability and softening economy and pending rising unemployment on the other hand. Like all things in nature, homeostasis will prevail and the market will find its own equilibrium.......This too shall pass as the dawn arrives and daylight will once again break.
Thank you to Ruby for inviting me to participate in this interview. I am grateful, indeed privileged to be able to share parts of my journey and thanks also for the people I’ve liaised, networked with on this board and actually the few (so far) that I’ve met. This is such a wonderful resource that we should all be grateful to be a part of it. Even though I’m a relative new comer here as I joined only some 14 months ago, I am grateful for this forum. It's true that we don't know what we've got until we lose it, but it's also true that we don't know what we've been missing until it arrives...... J
Finally, I trust this story hasn't laboured too many readers however, I am happy to share with likeminded(s) so we can all leverage our knowledge as we learn off each other; our wins and our mistakes. I’ve been as candid as possible with the latter, to prevent others from replicating them. If you’ve stuck with me and read this far, I trust that in some way it has offered inspiration and reassurance that even with the occasional hiatus from the investing pathway, success is still achievable. For those who have (or are) “parked” like I was and fear has set in, look at some of the conditioned beliefs that are being harboured and if they no longer serve you, then dispense with them. Beliefs are like a jacket, you can change them at will. Change happens in an instant, it’s deciding to change that takes time. Often it takes years and, regrettably sometimes decades. I wish everyone here every future $ucce$$ in their property investing and life journey.
I close with my favourite words from Goethe....................”Whatever you can do, or dream you can, begin it now. Boldness has Genius, Power and Magic in it.”
Questions and Comments…………………. http://www.somersoft.com/forums/showthread.php?p=536446#post536446
How did you get involved in property?
Whilst I did have a small taste of investing in property from my parents and observing other friends and relatives, I always had a feeling that wealthy people acquired their wealth by investing in property or, at the very least, parked much of their wealth in it as an asset class.
I bought my first residential investment property at age 22 having just graduated from University and commenced working. Even though I had the intention of setting up a substantial property portfolio for my future, I deemed it necessary to reward my hard work (and play) at University and thus my aspirations at that time were to use my first year’s earnings to acquire a Porsche 911, albeit second hand. Talk about “Big Hat and No Cattle.” My father had other ideas. Being an only child and wanting to provide me with a head start, my parents provided me with a deposit and, my father accompanied me to the bank to get a loan for a property quick smart. I listened and, have never looked back.
I purchased a property around the corner from where I lived with my parents at the time, a southern Melbourne suburb around 10 km from the city. I did (even from that early stage) have an idea that land rich was the way to go for me, where I could add value by future sub-division and/or development. This house was paid off in a little under two years.
There was another thing that my parents taught me and that was to live beneath your means. I have never done a formal budget as such on paper aside from filling out statements of position for lenders, however there was always one constantly going on inside my head. Still to this day, this is what works best for me. I truly believe people’s greatest undoing is living beyond their means. Consumerism and instant gratification leads many people down the path of spending that which they don’t have and, then some. The purveyor’s of items of instant gratification, with 5 years interest free deals and a heavy reliance on credit card debt for depreciating items does not augur well in my opinion for a stable financial existence. In the US we are constantly told of folks that are spending 125 % of what they earn. I dare say those figures would be equally as applicable here in Australia. Whilst I doubt my dear late father had read The Richest Man in Babylon, he had his own way of telling stories and using analogies and metaphors from those around us who had achieved wealth or were well on their way.
What is your property investment philosophy (CF, CG, renos, houses, flats, buy and hold, develop, flip, wrap, etc)?
Initially it started out being strictly capital growth. I’m not sure why, however I did have some folk around me who purported that this was the way to go and also having very quickly escalated into the top tax bracket at that time (around 60 %), negative gearing was flavour of the moment and with accountants espousing the benefits of the pay-off of tax relief whilst controlling an appreciating asset, this was the road I started upon. Over the years I have now refined my philosophy as buy and hold with the ultimate view of developing everything that we own. Increasing the number of doors to optimise the streams of income coming in whilst we sleep, play and pursue other dreams, and having the luxury of choice as to whether or not we sell our time in a JOB. Indeed, I liken each tenant as a worker in the portfolio (property business). Sometimes you can lose employees (tenants), however overall the strategy is “the more the better”. We are playing a numbers game. Money is merely the means to keep score.
Furthermore, over the years due to a change in physical capacity and earning circumstances, I am now looking more at cash flow properties to soften the out of pocket commitment required for the portfolio. Any minor renovations that I’ve done along the way has always been to improve the rental income and tenant appeal; not necessarily for value adding and selling for profit.
Of the entire portfolio (now just into double figures), I still own two pre-capital gains tax (CGT) properties and they will definitely sell in the future to retire all debt and also fund contributions to our SMSF to develop our holdings in there as well. I may sacrifice them in a staggered manner, say one at the peak (or thereabouts) of the next up-cycle, and perhaps one at the same zenith of a subsequent cycle. I am currently 46 years young and so there is ample time to play with the timing of this strategy.
They are both well located development sites in good streets in the 10 km rim. They are also above median worth for that suburb. Whether or not I go for planning permits (DA) to on-sell for an even higher price to a builder or developer, will depend upon tax laws at that time and GST implications at that time also. I would not do anything to poison the CGT exemption. These two are “land gold” for us, as purchase price (even today) is trivial compared to their value now and in the future. The boxes on them are old however provide reasonable rental income. These are probably the only two that will be sacrificed as a fundamental way forward to the fund the bigger picture.
So, largely “buy and hold” is the strategy I ascribe to. I haven’t done any flips or wraps. As well as developing our own stock to add doors, I would like to undertake a mixed use development nearby to a Zone 1 (Melbourne train line) station with retail on the bottom, offices above and apartments above that.
In looking at cashflow moving forward and an asset with less tenancy headache, I would also like a shed or similar on a corner block where the GFA (gross floor area) is underutilised, at say up to 25-30 % site coverage. This would allow me to construct another tilt slab box (with or without subdividing) and another income stream for nominal costs, and nice depreciation. By way of holding costs it should wash its own face and actually leave more money in our pockets.
What is your IP / property story so far?
After promptly paying off the first purchase, I was quite aggressive into my mid twenties in buying similarly positioned properties with another four in a very short period of time. I was working for myself and had set up two businesses and was looking to acquire and leverage the portfolio as fast as possible. A bit young, naive and very much “no fear” in those late 80’s.
To achieve greater than 100 % lends back then, a broker was used. In those days the client paid the broker. Banks weren’t into such aggressiveness and so the broker was a key ingredient in my progress forward. All purchases were houses on decent land and one commercial IP. All loans were with the same lender. I did not know what cross collateralisation was in those days; however I doubt I could have achieved my funding for those acquisitions any other way. Another big take home lesson for me from this experience is to not have all your fixed loans due at the same time, especially if they are with the same, or one predominant, lender.
In the early 90’s at the mercy of the funders, I elected to sell off one (perhaps before they did) to reduce LVR’s. It was also at a time when I was getting married and didn’t wish to start our married life with the financial stress of excessive lending. Over the next few years, I actually diligently paid down debt to a nominal amount; so not all was lost.
Then I “parked.” Inertia set in. It was easier to do nothing than to do something, and anyway I already had a “decent portfolio of investment properties” or so I thought and, so the alibi’s and validation for parking went on. Now at that time, to be fair, I was re-inventing myself career wise and studying part time for a post graduate masters degree. Some physical health challenges saw me re-invent myself a few times along the way and with some uncertainty in earning capacity I did not want to jeopardise my family’s financial stability by borrowing again. As you can imagine, that saw me give away the tidal wave of property value growth of the late nineties and early noughties. My existing properties went up, however I did not purchase “zip, zero, diddly-squat”, at that time to ride the tide and sentiment. Whilst my reasons for avoiding debt were valid and well intended, I began to realise that they were just that; REASONS!
Further acquisitions began in 2004 and have continued to current day. Our portfolio is now strong and with conservative LVR’s. It is spread across three states, Victoria, New South Wales and Queensland, although mostly in Victoria. The post that describes this story of making lemonade from lemons and the lessons learnt is best viewed on the link below. I’m not known for being a man of few words, so for the sake of brevity, I have avoided pasting the entire post here:
http://www.somersoft.com/forums/showpost.php?p=463147&postcount=21
Is there a story of a really good IP that you would be prepared to share with us?
One of the more recent purchases in Parramatta. A group of four units that are cash-flow positive now even on a 107 % lend. Began on a 5.9 % initial yield which I found outstanding for middle Sydney at end of 2006. Initially, I hesitated thinking there was something wrong with them. Rents have increased considerably since purchase. There is value add potential to add another few doors on a third level and manufacture more growth (the land is free for any new units) and most importantly income $tream$. I have discussed these elsewhere in this interview and so will not replicate the information here
Is there a story of a really bad (or not so good) IP that you would be prepared to share with us?
There are none that relate to the IP itself, however in the spirit of learning, I’ll share how the process of a recent purchase could have turned ugly L (to my pockets), were I not to verify and reconcile statements in a timely manner.
I purchased interstate (Sydney) for land tax reasons primarily and also to have the added benefit of being exposed to a different market. The solicitor acting on my behalf knew my criterion on this score and that I would only purchase and settle on paying land tax on a single holdings basis as I own nothing else in NSW. Having her blessing to sign away, here is where it is important to check and double check everything. More fool me! I receive the statement of adjustments (post settlement) and I notice that my portion of land tax for approximately 10 months pro rata was just over $ 6,000, when I figure that based upon the valuation it should have been around $700. To cut a long story short, her firm eventually reimbursed me the error in their (her) ways as the figure was the cumulative apportionment to the vendor’s holdings in the entity from which he sold. I would have picked up the error perhaps in the following year when the true land tax bill came, however I wonder how many people just gloss over their settlement documents and statements of adjustments and disbursements. Read everything and reconcile. Verify, validate and double check everything that someone else tells you. That concludes this lesson.
Do you invest in other asset classes (shares, commodities, businesses, managed funds, cash, forex, etc)?
My business days are over. Sold out due to the gifts and learning’s that the universe delivered to me in the form of some health problems and challenges. I am grateful for the gift of these challenges as it has turned me into the person I am today, so I’m not disappointed. I was fortunate to exit the businesses with my skin intact. In my experience a business is worth most when you have no need for selling. I was approached by an organisation to sell both my businesses to them as they were franchising and wanted established vendors some five years before I bowed out. They offered me four times the figure I exited for. Ouch! I do have some cash at present, as I do not have off-sets as all my loans are fixed. Cash is not king at present, however it is safe. My cash is, however, always looking for a decent home. My radar is always on. I have held shares in the past in our SMSF and off-loaded portfolios twice to purchase properties cash in the super fund. I have dabbled in options with unfortunate timing. Those le$$on$ were most valuable. It will be a while before I entertain such options strategies again, although there are others who make good today. Not for my current temperament or risk profile. I have no knowledge about currency, forex or commodity trading, so I don’t play there.
Where to now? I've posted in other threads on this forum that I'm sitting on my hands at present. No share holdings whatsoever. I don't have off set accounts so my cash is in term deposits. Return not so great, however I'm loathe to borrow big now to develop or buy more just for the sake of it. The deal would have to be “super sweet”. I don't believe the next 6-12 months will be better; I think until the wash-up occurs with job losses levelling out, it is a case of watch this space.......eyes wide open, research well and if a positive cashflow opportunity comes along (with value add potential to increase doors), research it well and if it suits, strike fast. That's my bias on things. It isn't necessarily right, but that's where I'm at and where it has brought me to date. I am prognosticating that I will likely enter the stock market before I buy any more IP's, but who knows? I have certainly learnt my lessons to act unemotionally when executing stop losses and have been busy re-reading some of my trading and mindset texts to prepare me. My next foray into the stock market will be keeping it simple (buy a rising share and sell a falling one) and keeping positions long. I may entertain options again when the next tide rises all ships and we are in a true established bull market. I’ll wait and see.
What criteria do you use when selecting a property to purchase?
In the initial aggressive accumulation stages I describe earlier, I just kept buying around our suburb. All within a 10 km rim in Bayside areas south of Melbourne CBD. These days, with the advent of computers, internet, mapping tools, ABS data online, etc., etc., I am a little more methodical.
My recipe now is well located houses on development site sized/zoned dirt in an infill suburb that is at or below median for the capital city in question. That is, where they cannot manufacture anymore land. My tenants these days, all are able to walk to a train station and have a choice of bus routes even closer. Amenity such as schooling, shops, health care, etc., are usually givens in such locations anyway. They say never to get emotional about property, and to a very large degree I don’t. A property developer once told me: “Bottom line, not interior design.” I do not get emotional about the boxes on the said dirt; however I will not buy an IP in an area, that I could not live myself. I may not choose to live there, however if I had to.....I ask myself, could I? If the answer is Yes, then that is also the type of tenant I would like to attract to my property. It is by no means fool-proof, however it does hedge my risk for “nasty tenants.” It is something that works for me. These are also criteria I have used in sourcing and transacting investment properties for family members. I love the hunt, the thrill of the chase and, the art of the deal.
What structure do you use for your investing?
I wish I could say that everything is tightly wrapped up in entities that cannot be exposed, however the truth is otherwise. Overall the strategy is that eventually most if not all will be in trusts, and our SMSF and perhaps any straggler in personal name will eventually fall to trust by testament upon my departure from space-ship earth. Control from the grave!
I have investigated Hybrid Trusts over the years and have not been convinced of their effectiveness for direct property investing, without future ramifications on the basis of CGT for units redeemed and other complications. I did work through one method however the strategy would involve external equity being used in the unit trust phase and this was a sub-optimal use of the actual asset being purchased in the trust. It would involve creating preference income units with an income cap on these units within the trust deed, thereby preventing the CGT upon redemption. After reversion to a discretionary trust, the property in question could be used as security over the loan. The problems I saw were difficulty in working out when the property would become neutral to positive in cash flow in order to set the income cap, and as mentioned a non-optimal use of one’s equity. Right now I am learning about, and looking for, positive cashflow industrial property that would not entail any losses to be funded by me externally. Buying such in a traditional family discretionary trust is the way for me moving forward.
Also the SMSF we now have owns three properties. All have development potential. One is a three unit site, the other a two unit site and the commercial one will take a dwelling above, if not an office that may provide more rent. It is zoned appropriately for either. The more doors in our super fund, the merrier, as all income will be tax free when we are at the entitled age. I am about 12 or so years away from that. I hasten to add that we do not only aspire to have this structure working for us as we may elect to go LOE at some point anyway with assets external to the fund. However having a little bit here and a little bit there buffers the federal tax burden and entities for land tax. This flexibility allows for more choices to be entertained. To my wife and I, financial freedom is all about choice.
What do you feel has been your worst mistake during your time investing?
Parking! By parking I missed the boom (by way of further timed purchases) from 1998 onwards in that up-cycle, despite trivial borrowings at the time (in comparison to overall portfolio value), I was absorbed in my career, playing safe with some challenges that confronted me and I became comfortable in my lack of debt scenario. Did I get anywhere that way? As I’ve mentioned in another thread on SS, not even a dog gets excited enough to bark at a parked car. We all know what dogs do on parked cars. They say that if you find others are doing that on your dreams, chances are you're parked.
By parking, I missed opportunities and the cobwebs and shackles of complacency set in, until my wife and I re-evaluated where the portfolio was and where we envisaged it should be going. I was “jump started” so to speak, by a successful property investor/developer. This gave me the momentum to overcome my inertia and as they say, the rest is history. Use the past as a lesson, however focus on where you are going. The car analogy can be taken further. You cannot move forward by only looking in the rear view mirror and nor can you change direction in a parked car. You need to get moving first. I do not recommend parking......not for long anyway!
If a budding property investor asked "what are the top 5 things I should do", you would say?
1. Be “human.” Treat people with respect. Real estate is a relationship business and your success especially with negotiating and dealing with consultants, tradespeople, etc., is to be human. Listen more than you talk and be interested in the other party rather than being interesting and only talking yourself up. This also includes being humble. This does not imply being a push over. Be fair, be firm, be nice, but stand your ground where necessary. Do not be the loser in the negotiation process at the expense of the other party winning. Go for win:win, not win:lose. Realise that the most important person in most real estate negotiations is the real estate agent. Try to have them on side as once they’ve got the listing secured with the vendor, the agent is your (purchasers) greatest ally in making a sale. This may help establish the needs of the seller/vendor and assist you with your offer (amount and more importantly terms).
2. Network. Wow, I wish I took this on board when I was in my twenties. Don’t be an island. You never ever know who is able to help you achieve your goals. Approach every interaction from the perspective of what you can offer the other person rather than what you can get from them. This perspective will enhance rapport with many of the people you will meet. Do not discount anyone as being less than worthy of networking with. You never know what or who they know. Do not burn bridges, especially with people you pass on your way up the ladder. You never know who you may need one day on the potential way back down. Have a team to assist you along the way. Solicitors, accountants, town planners, property managers, and so on. These people will help you with your due diligence (DD). Too many people/investors seek advice solely from those who would benefit directly from the transaction.
3. Think Big. Don’t undermine your success by playing small to not offend or intimidate those around you. Start realistic to your pockets and serviceability, but don’t limit yourself. People usually over-estimate what they can achieve in one year however completely under-estimate what they can achieve in a decade. I look at where I was five years ago when I was jump started (after parking through the boom of the late 90’s and early 2000’s) and, where I am today and the momentum I have set up. I am tweaking and refining my modus operandi to achieve the goals I’ve set along with the informed consent, support and, blessing from Mrs. Player.
4. Spend less than you earn. Pay yourself first (set up an automated direct debit from your salary account to an online account if need be) and save this. DO NOT TOUCH this under any circumstances. It accrues to become a deposit for an IP or to enter the stock market (if that’s your thing to grow a deposit) and move forward. By learning to live on less than you earn you will re-program your internal money thermostat and your future rewards will compound and overwhelm you.
5. Keep learning. Educate yourself by reading. Books by Jan Somers, Steve McKnight, Margaret Lomas, all the Robert Kiyosaki books, Michael Yardney, John Fitzgerald, Craig Turnbull, etc., etc. There are many others that I haven’t mentioned; no disrespect intended. Search the forum for book/resource threads. I also like to learn from audio CD’s and DVD’s. Use this forum frequently. I am a relative new-comer here (just over a year), however the treasure trove of information, resources and support given here is absolutely mind blowing; a fantastic community. Be inquisitive and ask questions. If you never ask, the answer will always be NO!
In fostering the learning spirit also teach others. This has benefits over and above helping another fellow investor out. If you tell 10 different people about a strategy or property investing technique you’ve had success with, they hear it once, however you get to hear it 10 times. Repetition is the mother of all skill. You benefit ten-fold. Compounding at work again. There is some truth also to the saying that if you help enough other people achieve what they want, you will automatically get what you want by default.
Those five points above (and the five below) were intentionally not specifically directed only at property. I feel the bigger picture of addressing mindset will assist not only the property arena but also other areas of investing and richness and flavour of life. Much of the wealth creation process is all between the ears.
And if that same budding investor asked "what 5 things should I avoid", you would say?
1. Don’t Park. Procrastination is the thief of time and the master of alibis. Even though you do not know everything, do something. Don’t fry your brain with analysis paralysis. One of the biggest mistakes that people make is not something they do, but often something that they don't! Rather than be frivolous with actions just for the sake of appearing to do something, seek knowledge and then take informed action.
2. Don’t be narrow/closed minded. Your mind is like a parachute, it works best when it’s open. Be open and receptive to all new ideas, strategies, and techniques, however have your filters in place. Don’t dismiss what you hear, but verify and judge critically and objectively. Be sceptical, but don’t be a cynic as you may miss one vital “aha moment” that could catapult you forward.
3. Conquer FEAR (False Expectations/Evidence Appearing Real). Fear can take many forms. Fear of failure, fear of debt, fear of loss and whether we care to admit it or not.....Fear of Success. This has to do with deserving and not wanting to intimidate others, which leads me to the next point.
4. Avoid the nay-sayers and the easy crowd. Love your family and choose your peers. Limit your time with those on the comfy couch or else this will affect your mind-set and feed the failure tapes that we can sometimes run in our head. This impedes our self worth and deserving and leads to fear of success as we thwart our progress by the limitations of our peers. Hard yards to digest, but IMHO this is the cold reality. This does not mean you dispense with your old friends.....remember, be humble. Just acknowledge that you are on a different path and don’t share with them your grand plans and limit your time with them. Vaccinate yourself from any mind viruses you hear from those who are not on your path or where you are heading. As they say you cannot fly with the eagles if you scratch with the turkeys. You need to be astute enough to sort the wheat from the chaff. On this theme, the whingers will always complain because they have allowed themselves to be conditioned by the vendors of instant gratification.....purveyors of consume now, pay later, interest free for 40 months, etc. Solution is quite simple, as I’ve mentioned earlier.....pay yourself first by living beneath your means, invest and re-invest the returns to compound. When a deposit is achieved, buy what you can comfortably afford and trade up as salary and equity position allows. This requires a re-evaluation of priorities and expectations. Note, that I said the solution was simple however I did not say the solution was easy.....easy (to my mind) implies lazy and no effort. People are always free to choose between instant versus delayed (or at least moderated) gratification and consumption, which leads us, to the next no-no.
5. Don’t get a big hat before you accumulate some cattle. Don’t look rich before you are rich. Trinkets, trophy homes, flash cars, and high status artefacts will keep you poor when you begin your journey. As the typical millionaire next door, I am not what I drive. And for the record, there's nothing wrong with driving exotic vehicles, having toys, or nice home(s) as abundance should be about beautiful automobiles also.........just don't be caught looking rich, rather than being rich with a decent net worth. Some folk have it the wrong way round as they say in Texas, “Big Hat.....No Cattle.”
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?
Take a step back, pause and take a few breaths. Pull over, however keep the motor running. Just don’t park like I did. Seriously, find a person or people who you click with and are where you want to go or at least on a similar path and learn and exchange with them. You may need to read more widely about different techniques moving forward; perhaps adjust a negatively geared strategy to a cashflow strategy or mix up the asset classes and sectors.
Attend some seminars (be sceptical, not cynical) and explore new techniques. Be wary of super-slick presenters and have your manure-radar on high alert. Only follow any further home study or mentoring after undertaking thorough investigation of their own achievements and pick a strategy that resonates with you. I have had exposure to both camps: spruikers who are show and tell and also fair dinkum educators who walk their talk. It is imperative to be able to tell the difference. In summary, it is likely the strategy being used has reached a plateau and needs tweaking and fine tuning. To achieve this, further exposure to a wider range of tools and strategies would be needed in my opinion.
How important is planning to being a successful investor?
Whether it is articulated in a formal written down document or in one’s head as a progressive system of steps that are needed to get to the nominated goal, planning is vital. Begin with the end in mind and that includes a dollar amount, whether in net asset value or passive net rental income. Work backwards from there to identify what number, calibre and type (sector) of asset you require to achieve this.
Precision is key. Merely stating I want financial freedom is not enough. What does that life look like to you and what dollar amount do you need to live that dream. Don’t be daunted by the size of the task at hand. The way to eat an elephant is one bite at a time. Chunk down the tasks and set short (monthly), medium (yearly) and long term (5-10 year) goals. Educate yourself on the strategy needed and take action. As well as knowing what to do, you must actually do what you know. Have a plan, work the plan, and be flexible to change and modification along the way. The end goal should not change; that’s not negotiable, however the stepping stones may need tweaking here and there.
Do you feel joint ventures can be a beneficial way to grow your portfolio?
Not for me personally. I consider that JV’s are very useful tools to use when undertaking developing or value-add projects such as land subdivisions. I see them as something that is finite in time frame. Having a shelf life is therefore more relevant to development projects where two or three parties bring something different to the table. One may be a builder, the other may be a project manager and the other may stump up the cash for a deposit or equity for security. At the completion, the JV dissolves according to the agreement made and each party takes their profit or perhaps a dwelling or two from the proceeds of the project depending upon its magnitude, and then each party moves on. I haven’t done this to date, however would not be averse to such a limited medium term partnership.
Personally, I prefer to not have partners in my actual investment portfolio. Even when purchasing and owning units/apartments, I want the lot as I do not wish to answer to body corporate or other owner occupiers. That’s just me. Nothing wrong with buying one unit or town house out of a block of three or six or twenty for that matter. My preference is have the flexibility of making all my own decisions.
The only time I would consider involving others for investing, and it would be in the guise of a syndicate (unit trust arrangement), is to purchase a decent positive cashflow commercial or industrial asset, say high seven figures or into eight figures. Even then it would be limited to (say) 10 years or so with review at 5 years to ride a cycle and either sell out and take profit or refinance and go again on another.
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)
That would be a safe, logical and systematic progression to adopt. Doing it the other way around is possible, however, to be a successful developer often requires knowledge of the entire buying and selling process and, all associated steps in between, such as buyer demand, demographics, market forces, negotiation (buy and sell) just to name a few. It is probably safer to cut one’s teeth with a number of purchases under one’s belt and ideally lived thru a complete property cycle(s) to ensure that market forces are understood.
Also helps to have a decent equity position to fund the purchase of a development site. All of this is not absolutely necessary as there are success stories of people in their twenties doing it the other way around, however there is probably less risk following the natural progression alluded to. As well as eventually developing our own stock, I may also entertain doing the “build four, sell three and keep one” strategy. The one out of four that is kept is usually the profit (25 %) margin that would be taken if sold. This is IMO a nice strategy when we are in an up-trending market. It also reduces overall CGT and limits entry costs such as stamp duty on the full value of the end product. Caution is needed to not sell before five years to negate the GST component.
Do you have any thoughts on the CF vs CG debate or on the issue of metro vs regional, units vs houses?
Having owned enough negatively geared housing stock on decent parcels of dirt, two years ago, I purchased a four pack in Parramatta. Always wanted some units in the mix as I generally go for land rich subdivision potential properties with good amenity and that tick the right boxes as far as my criteria are concerned. However, with household demographics (dwelling occupants) reducing, some two bedders were on my shopping list. I wanted a six pack however bought four instead as the price range suited my pockets and the numbers stacked up.
Initial 5.9 % yield in middle Sydney with property very much on the nose at that time. They were underlet. Depreciation very juicy as they were renovated and had some building write-off left. Locked up 7.2 % fixed for five and with rent rises they are now cash flow positive.
Any regrets, considering how things have panned out. No! They are leaving money in my pocket and have seen some capital growth. Middle of the road rents with below median purchase prices, for me was a no brainer. They were strata approved, however I have not registered the strata as I'm not going to sell off one by one. Keeping them in one line reduces costs such as rates, council, land tax, etc. They are a few hundred metres from Parramatta campus of Uni of Western Sydney and the draft plan in Parramatta is potentially going to up zone them to high density residential. I also found precedent behind mine that currently has the same zoning and is actually three stories at present, so I will flip the lid and put another three doors on top of that in the future. Parramatta also has great amenity and infrastructure.
I believe that everyone should follow the strategy that resonates best with them at the time and suits their pockets and risk profile. Be flexible and realise that the bias that the investing philosophy takes can change over time. Do not compare yourself to others; use them as an example and emulate worthy role models where appropriate, but run your own race and, play your own game. My portfolio has focused on metropolitan areas, mostly Melbourne, then Sydney with one on the Gold Coast (hybrid metro-regional) and one in Ballarat. The latter is the only true regional (provincial city) property and it was just too tempting to pass up. Our cheapest ever purchase, 40 % below comparable sales and subsequent council valuation and only 800m from the central mall.
What do you prefer, fixed or floating interest rates and why?
Ostensibly, I have always fixed my interest rates, except for my initial principle and interest variable loan that I paid off in less than two years. I have done this primarily as it gives me certainty on my expected expenses for the term of the loan. Have I beaten the “market” overall? I do not know and do not care. It is all about sleeping at night for me. Horses for courses, really. Moving forward I have two coming off fixed term in a few months. Depending on sentiment, I may ride the variable train for a while and fix thereafter or dependent upon what fixed rates are on offer at that time, I may fix again. Less flexibility for sure, however for me certainty and risk management (on my terms) is more valuable in my current stage of life as is the peace of mind that I enjoy with my family.
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?
“Mr. Market” is a fragmented, schizophrenic, multi-faced personality. Amongst the doom and gloom that we are bombarded with by the media and those well intended friends, relatives and colleagues; most of whom have no significant wealth of their own, it is timely to reflect on where we're at and where we're heading with regards residential property.
Certainly, we are in interesting times and whilst not to trivialise the softening of the economy, I still focus on the full half of the glass. I'm not Pollyanna, however IMHO people who focus too much on the negative and trying to avoid what they don't want are by virtue of their attention on the imbedded command (avoiding loss/poverty/sickness/failure or whatever) likely to perpetuate (or at least add to) their unwanted situation. Don’t avoid what you don’t want, rather pursue what you do wish/want/desire.
My take on things moving forward from here, is that top shelf properties are likely to come off perhaps up to a further 5-10 % or track sideways from here having softened significantly over the last 12 months or so. This will depend on suburbs and how exposed the OO's (owner occupiers) still are to equities and business/commercial uncertainty. The middle shelf and this for simplicities sake would include suburbs where most properties are around the median price range (or slightly above) for the capital city in question, may soften slightly (I'll commit to 5 % or so) or also track sideways.
I feel the lower end may see some further rally due to affordability issues with FHOG although that may wane if it is scaled back come 30th June as one component but also due to reducing interest rates, making that sector more affordable to its intended purchasers. I feel investors may also push the bottom end up with falling interest rates. That lower end may, however fall off as job losses hit OO's who over-committed a couple of years ago and perhaps even locked in at nine's. This is the sector I find the most frustrating to prognosticate on. Perhaps some pull-back of the low shelf property rally due to unemployment (in family OO's) or no effect over the medium term.
The media also feeds the emotional roller coaster that determines the “sentiment of the herd” when it comes to buying, as real estate institute spokesperson’s are heard to report higher clearance rates to perpetuate a positive bull-style frenzy that the herd interpret as “I better hurry and buy or I’ll miss out.” Some investors also follow a similar credo. A higher clearance rate right now is due to shortage of stock. Anecdotally, I am noticing fewer for sale, in Melbourne at least, so what gets listed and has reasonable vendors, will sell.
We haven't bottomed as a market collectively, although there are sub-markets such as fringe FHB suburbs. The large development houses (Delfin Lend Lease, Devine, Stockland, etc) are laughing with the enhanced FHOG, encouraging young ones who haven't lived thru any economic slowdown or contraction to go full bore on instant gratification by buying an (affordable) brand new box on land in places with no (or little) amenity. Some have barely saved for the closing costs. I expect some future pain is likely to be delivered to them. These people fund the whole purchase with FHOG as deposit and whilst DSR may be OK for now, wait till they lose a job or take a pay cut from the culling of hours or, as will be inevitable, interest rates rise again......and they will.
Night follows day, contraction follows expansion, a slump follows a boom which follows a slump. A “market” will always correct to its median or average/mean trend line of sentiment. For me, some more pain to come IMO.........these are opportune times to be cashed up with folding stuff, offsets, LOC or equity (with skinny LVR's) and pounce when the deal is good. It is always darkest before the dawn.......I expect a little more nightfall and then the cycle will again begin with daylight. Let the games begin. I also liken the cycle to the digestion process. We have fed our faces (by eating too much during the last boom) and the slowdown has been necessary to digest the food. Now we are in the elimination phase where the excesses are dealt with as waste leading to recession. As the catharsis continues, this prepares the appetite for more feeding frenzy to resume.
With regards newer investors who are starting out, it is challenging to compare level of difficulty now with when I started out. I believe, with all the current technological advances that we have, such as online real estate portals, rp data, pds online, google earth, street view, demographics information, etc., etc., a level of comfort is reached where these tools are sometimes taken for granted. Don’t just rely on online research. “Feet on streets” is also a valid approach and talk to people. I mentioned earlier rapport with sellers, agents, and consultants is paramount. Also I do not know of any books that were written (with an Australian bias) on property investing in 1985 when I started out. Right now there is a plethora of resources available. My library has grown more over the last 5-10 years than any other time. How amazing that you can search property all over Australia (and globally for that matter) from your desk, before you even get into a car or onto a plane. When I started out in the mid eighties, one purchased Saturday’s edition of “The Age” (SMH, Courier, Bulletin, Advertiser, etc) and scoured the advertisements, made plenty of calls, and did drive by inspections to narrow down the list that one would even inspect formally at the open for inspection. Also there are far more lending products and flexibility with a larger variety of providers than when I started out, hence providing greater options for those wishing to enter the market.
Sometimes with all this efficiency and optimal use of our time with the fantastic tools we have, complacency sets in and inertia takes hold. Do not take for granted what we currently have by way of technology. This applies to young ‘uns as well as older investors, as “newer investors” does not necessarily only implicate young people. A new investor can be any age. I believe that there will be some nice purchasing opportunities for those who are cashed or have enough equity to borrow and fund an IP or site acquisition for future development. I'm sitting on my hands with eyes wide open and ready to pounce, especially for infill development land with a rental box on it for now. Also waiting for cap rates to rise some more on industrial properties as I would like such an asset to be added to the portfolio at some point for cash flow.
Haste makes waste however, only when no DD has been undertaken and people haven't researched properly. The well informed can make fast decisions, put their foot on deals and take properties off the market. My only caveat in all of this is that IMHO it is prudent to have very conservative LVR's in this climate. This may be sounding like a broken record, however over-gearing despite the lowering rates may catch some folk out. I've lived and survived the late 80's and early 90's. As Warren Buffet states, “it is only when the tide goes out that you find out who’s been swimming naked.” I feel this is as equally applicable to property cycles as to shares. History repeats. My LVR's are skinny (less than 50 %) and I will not allow my portfolio LVR to go above 65-70 %, to allow for any potential softening by bank (fire-sale) valuations. The time for max lends will come again and will be in the next bull run of the property cycle, allowing rising capital growth to buffer out LVR's in one's portfolio.
Of course we will all have the benefit of the retrospectoscope to assist our "told you so stories" in a couple of years or so. The market is presenting us with falling interest rates on the one hand enhancing affordability and softening economy and pending rising unemployment on the other hand. Like all things in nature, homeostasis will prevail and the market will find its own equilibrium.......This too shall pass as the dawn arrives and daylight will once again break.
Thank you to Ruby for inviting me to participate in this interview. I am grateful, indeed privileged to be able to share parts of my journey and thanks also for the people I’ve liaised, networked with on this board and actually the few (so far) that I’ve met. This is such a wonderful resource that we should all be grateful to be a part of it. Even though I’m a relative new comer here as I joined only some 14 months ago, I am grateful for this forum. It's true that we don't know what we've got until we lose it, but it's also true that we don't know what we've been missing until it arrives...... J
Finally, I trust this story hasn't laboured too many readers however, I am happy to share with likeminded(s) so we can all leverage our knowledge as we learn off each other; our wins and our mistakes. I’ve been as candid as possible with the latter, to prevent others from replicating them. If you’ve stuck with me and read this far, I trust that in some way it has offered inspiration and reassurance that even with the occasional hiatus from the investing pathway, success is still achievable. For those who have (or are) “parked” like I was and fear has set in, look at some of the conditioned beliefs that are being harboured and if they no longer serve you, then dispense with them. Beliefs are like a jacket, you can change them at will. Change happens in an instant, it’s deciding to change that takes time. Often it takes years and, regrettably sometimes decades. I wish everyone here every future $ucce$$ in their property investing and life journey.
I close with my favourite words from Goethe....................”Whatever you can do, or dream you can, begin it now. Boldness has Genius, Power and Magic in it.”
Questions and Comments…………………. http://www.somersoft.com/forums/showthread.php?p=536446#post536446
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