The Propertunity Interview

A massive thanks to Propertunity for this interview!

How did you get involved in property?

I purchased my first PPOR not long after my wife and I were married (30 years ago last year!). I remember mortgage interest rates went from 13.25% to 13.5% during the course of the settlement period. I don’t remember feeling too bothered about it though, as we only paid $32,500 for the property – and repayments were virtually the same as rent anyway.

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

When I started out seriously buying a lot of property, I was a contractor in the IT field. Yes, I was making a lot of money which I used as deposits on IPs. BUT, contracts lasted sometimes 6 months, sometimes 18 months or 3 years. In between contracts, I was earning nothing, so I needed to develop a strategy that allowed me to buy IPs without the need to fund large cash-flow shortfalls, which I could not handle when I was in between contracts (before you ask, no, I wasn’t any good at saving). This is what birthed the purchase of many IPs that were house and granny flats which were mostly cash flow neutral at worst at purchase, but now of course, are cash flow positive.

To this, I added a strategy of doing cosmetic renos to increase valuations and rental returns. I would refinance at the end of a reno to get some cash out to go towards a deposit on my next IP.

After a few of these, and since I was really enjoying myself, I thought I might somehow make a career out of doing buy-reno-sells. I tried this on my next purchase, but when I crunched the numbers, after taking into account all the transaction (stamp duty going in and selling commissions going out) & holding costs, tax on profits etc., I ended up with exactly the same cash out, as if I just kept the IP (and its future capital gains) and just refinanced the manufactured equity out. I just can’t see how buy-reno-sells in a flat market actually make any money (or at least, enough money) for the time & trouble involved. Since then, I have become a “buy, reno, reval, refi the cash out & hold forever” kind of investor.

I am also a growth type of investor. I really don’t see the point of buying out in the sticks for a high rental yield with no / low / sporadic capital growth prospects. The transaction costs are too high to get into and out of the investment (if you need to). You still have maintenance to deal with and PMs & tenants. If I want high yield, I use the share market to write call options for premium income each month. Alternatively, I’d use term deposits for high(er) interest, over a house in the back of Woop Woop any day.

What is your IP / property story so far?

Around July 2001, I set a goal to buy 1 x property every year for a few years, until the banks would not lend to me anymore. Just a few short weeks later, the twin towers came down - on September 11, 2001. That turned the world on its head for a while, and made me rethink if I had picked the right timing or not. But, I decided in the face of adversity and global uncertainty, to press on.

Some years I bought 1 x IP and some years I managed to buy 2 x IPs and some years I did not manage to buy any IPs – but in those years I built a granny flat at the back of one of my failed attempts at making money from a buy-reno-sell that I ended up keeping. These were negative geared until the granny flat was constructed.

Then I reached a point where the banks would not lend to me any more  (at least for a little while). That’s when I thought, how do I turn all of this experience into a business to help others achieve what I’ve done and more?

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

Since I got an education and took some risks, I really have to say that I’m pretty happy with all of the IPs I’ve purchased. The worst case scenario that I’ve experienced was buying a property in 2005, after the peak of the boom in NSW in 2003/4, and thinking then that the worst was over. I spent $45K and 3 months on the reno and had the property revalued at only $45K more than I had paid for it. I did not make any money, but I did not lose any either – so I was reasonably happy with the outcome in a falling market.

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

The PPOR I purchased for $32,500 was turned into an IP when we moved. I sold it a few years later for a profit of around $6,000. Woo Hoo! Today it is probably worth 10 times the amount I sold it for AND it was a pre-CGT asset. But it is gone forever. Moral of the story: Never sell!

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

I did start up a SMSF (after watching fund managers lose money every year, yet still charge me fees for the privilege) which I used to do share investing. I also had about $½M of shares fully margin loaned up that I used to write covered calls on for premium income each month. I was semi-retired in those days (retirement lasted about 6 months before I got bored) and quite an enjoyable stage of my life. (I can’t recall if that was the 2nd or 3rd time I had retired from the work-force).

My days consisted of having an early breakfast, heading out to the beach for a 1 hour walk, coming back for a latte and cake at 10:00am and turning on my computer by 10:20am when the share market was fully opened. By 11:45am I’d done a couple of trades (or no trades) depending on what was happening. The rest of my time I renovated everything that I owned that stood still for longer than 10 minutes.

However, after about 6 months of this, I got bored because we still had kids at school and could not travel extensively without disrupting their education too much. Also I realised all of my friends still had jobs and could not come out to play. So I went back into IT for 18 months or so before finally setting up the Buyers Agency. Now I am in the happy position of doing my hobby as a full-time career and helping others who’ve been bitten by the property bug.

How did you get into your profession?

I was a real estate selling agent over 25 years ago. I started my career just a few months before the stock market crash of October 1987. They were interesting times. I remember the office phone went dead quiet for 2 weeks. No-one was buying or selling……nothing. It took people about 2 weeks to digest what was happening and for money to start being pulled out of the stock market and of course it came flooding into real estate. They were boom times back then.

However, one thing I did not like about selling real estate was that occasionally I knew I was selling the wrong property to the buyer, for his/her objectives. But that was what I was required to do. I was representing the seller, not the buyer.

In between being a selling agent and a buyer’s agent, I had a 15+ year career in IT (as already mentioned). I was actually acting as a buyer’s agent looking for a commercial property for the Director of an IT company. He was impressed with my efforts and offered me a job in IT, for more money and no week-end work, which I accepted

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

That’s now a trade secret :D
OK – just a few hints. I want to buy a property that:
1. I can make back $2 minimum for every $1 I spend on a reno.
2. Can easily have extra bedroom added by simply adding a dividing wall or using a formal dining as a bedroom.
3. Can possibly be developed either now or down the track. i.e
a. Sub-divided
b. Granny flatted (is there such a word?)
4. Has unique features that are in high sales / rental demand. i.e. has period features etc.
5. Is structurally sound.
6. Is not on a main road or in an undesirable location.
7. Has good CG prospects and has had demonstrated, good historical growth.

What structure do you use for your investing?

So far, I’ve just used personal names, my own name, my wife’s name, our names together and a few JV’s. My second eldest is a fully qualified accountant (CA) and has set up Trust structures for himself and his own investor group/s if I ever need to go down that path.

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

I really have no plans to retire at this stage. I’ve been there, done that. As long as I am healthy, and enjoy helping others (and mentoring some of the younger ones), which I do, then I will mostly live off business income. We do plan to build up a rent roll over the next few years and that has some real value as a business asset.

As for property, I can sell down a few to pay off the others and live off rent. Depending on the credit markets at the time, I may also live off equity. I suppose at this stage I have plenty of options. Speaking of which, I should go and do some options trading again – which I’ve had zero time to do lately.

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

1. Find the “WHY” first. The “HOW” is easy (OK easy for me but the information is out there for those who look). My own situation was typical case of “When the student is ready, the teacher will come”. So find out why you want to be wealthy. Why do you want to rise above the crowd and put up with the jeers and sneers?
2. When you’ve found the “why”, then decide on the “when”. Be realistic. You are not going to be an overnight millionaire (in all likelihood). OK – so now you have the long term goal.
3. Break the long term goal into manageable bite-sized bits. Pace yourself. It is not a race.
4. Build the team – you are going to need Mortgage Brokers, Accountants, Property Lawyer/Solicitor, Tradies, Property Managers etc to accomplish this. Seek recommendations. Take people out to lunch to see if you can work with them or not.
5. Hang around people smarter than you – even if you have to pay to do it (go to seminars and investor events). As they say, if you are the smartest person in your team, then you have a problem. Find people who have done what you want to achieve and emulate them.

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

1. When buying, avoid taking advice from selling agents who represent your contractual adversary (the vendor). Actually I’d say avoid taking advice from anyone that is not at least as far down the track that you want to go. This includes family, friends, bankers, etc.
2. Avoid Off The Plan sales in anything other than a confirmed rising market…..and even then……
3. Avoid buying property from seminar spruikers, mortgage brokers being paid by the developer, etc
4. Try to avoid buying property with family or friends – even in Trust structures – as situations can and do change. A great property may have to be sold too early and at a fire-sale price if a co-owner suffers a divorce, bankruptcy or gets sued and so on. Even if one party wants to get married, this can have a similar effect. (It can work but go into it with your eyes wide open and with a escape strategy in place).
5. Avoid hanging around negative people – they are just too draining. You are going to need to keep your regular job while doing this in your spare time. (You’ll need to turn off the TV).

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?

As a Buyers’ Agent, I am not licensed to give financial advice. So what I would recommend, is that the property investor seek some financial advice from a team of property-savvy professionals – like a Property Lawyer/Accountant/Mortgage Broker – I think you need all 3 in the same room at the same time.
Of course I’d also suggest that they may wish to talk to other property investors who have been in the same situation, and managed to move on. This forum for instance, is a great resource for that!

How important is planning to being a successful investor?

Planning is important obviously, as someone once said, “If you fail to plan then you plan to fail”. But even better, “If you don’t plan anything, then you’ll be sure to get there”.
For a newbie starting out, it is always difficult to plan because you don’t know enough to know how to plan thoroughly. (A case of you don’t know what you don’t know)… you just have to make a start and work out a plan on the journey. Some strategies will suit and others won’t – so it will be a case of trying things until you find a strategy that works for you.
However, just as important as planning, I think, is taking ACTION. We all know people who all they do is plan but they never take the next step and DO SOMETHING. I like what someone else said: “You can direct a moving vehicle but it is much harder to get one started and rolling in the first place”.

Do you consider that there is any natural progression for an investor? (eg. From owning a few properties, to owning many, to being a developer, joint ventures, commercials)

I think there is a ‘natural progression’, yes. But it will really depend on the investor’s personality and risk profile. For example, I see many people by a house. Then they buy a rundown house and renovate it. Then they might build a granny flat in the back of a house or do a dual occ. After that they buy a block of units and strata title them and finally they seem to end up doing commercial.
Lots of investors stop on the way, at a place they feel comfortable, and really carve out a niche for themselves.

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

CF vs CG – go for CG first and CF second. Of course, I and many others, are ‘greedy investors’ and want the best of both worlds. But if you had to pick only one, I’d pick CG.

metro vs regional – they both can and do work. If going for regional, I’d always suggest larger regional with more than 1 industry supporting the town.

units vs houses - they both can and do work. My personal preference is for a house on land – as you have more control and don’t have to deal with a Body Corporate etc. However, a BC would not be a reason for me not to invest in a unit. Recently, CG of units over a 10 year period exceeded for the very first time, CG of houses. This is probably due to affordability issues – it is cheaper to buy a unit than a house in metro areas.

If you only have enough money for a unit, then buy a unit. At least you are in the game and not sitting on the sidelines wishing it was you who was the person making money.

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

My preference is to let my own IRs go variable. I think over the long term it works out cheaper and if you need to sell there are no “break fees” (which can be horrendously expensive at times).
Additionally, I’m not good at trying to ‘time’ the best time to lock in rates.