The steveadl Interview

Interview with steveadl – 26th June 2008

How did you get involved in property?

When I was about 19 I started thinking about moving out of home so my parents advised me to start saving for a deposit for a house. After saving up enough money for the deposit, I bought my first a few months after turning 21. At that point in my life I didn’t have much interest in property other than knowing I wanted my own house, I was much more into the stockmarket for my investing. My interest in property developed a few years later.

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

I stick to houses as I like to have a higher land component and also don’t like the idea of dealing with a group of owners. It’s good to be the ‘king of the castle’ so to speak. If I were to look at purchasing units, I’d prefer it to be the entire group.

My philosophy has been buying for capital gains as I’m in this business to create as much gross value as possible, which will in turn translate to a higher net worth. I’ve used my business income to pay for the holding costs of my IP’s which have been negatively geared upon purchase.

I see a lot of merit in other methods and would never rule them out permanently, but for the moment what I’ve been doing suits me. I will look at getting into development down the track, but all in good time.

From what I’ve read and seen on TV shows and in magazines, reno’s require a lot of hard work (or pay to have it done) and in the big scheme of things, I’d rather buy in a market that’s expecting an upturn than try to manufacture growth on a small scale like this unless it’s a last resort. But I don’t rule it out as it’s worked well for many, but I’m just lazy, impatient and useless when it comes to tools and doing real work! It’s also not an easy option for people who need to be at their day job a lot. Reno’s can also be very limiting unless you clearly know you’re market, as if you make the wrong alterations or not enough you’ll be limiting what your buyers can do to the place and may be forcing your bad taste on them in which case your price will suffer, or the property will sit on the market.

What is your IP / property story so far?

I bought my first property at the age of 21 after looking around for a few months with the help of my parents. At first, I made the usual inexperienced decision to only look in/around the suburbs I grew up in and was only interested in newish properties. I did however decide that I wanted to buy a house not a unit as I’ve never liked the idea of sharing walls.

Once I resigned myself to the fact that I couldn’t buy in my area, after a couple months of searching I finally bought a 1yo 3/1/1 in the new greenfield suburb of Northgate in the north east of Adelaide about 9km from the CBD. This was rented out for the first year and then I moved in end of 2003.

Before buying Northgate there was one particular property that I was serious on, but at the time let it go to a higher bidder. The property was and older house that was reno’d inside and on a nice corner block. This would have been perfect to build at least two houses on, but of course hindsight is 20/20.

I slowly began to find my feet within the property market, although I was still heavily interested in shares through these years so property wasn’t the main focus. In 2005 I bought a 1yo 3/1/2 at Davoren Park in Adelaide’s outer northern suburbs. Both of my first two properties had solid, steady growth.

At this point I became very interested in property and started reading magazines and books including Jan’s ‘More Wealth’ which has to be one of the best books I’ve ever read, perfect for a beginner who needed his hand held! ;-D

At this point I was still interested in buying newer properties as I didn’t want maintenance hassle and also figured I’d get a better class of tenant at a higher rent. After figuring there was enough equity in my first two properties to start searching again, in mid 2006 I bought another 3/1/2 in a small new subdivision in Smithfield Plains – this time brand new and for slightly less than I paid at Davoren Park. With the help of a bigger deposit plus a depreciation schedule – it cost me very little to hold. By next year this one should be my first cashflow positive property.

In April 2007 I decided it was time to go shopping again as I had enough equity and was firmly in the belief that the general Adelaide market was going to experience solid growth. However by this time I had become more experienced in the different aspects of property investing and decided that at some point in the future, I’d like to try my hand at developing. With this in mind I bought an old fibro house on a big block in Elizabeth North for what I considered to be land value.

I signed the contract in April, and upon settlement (in my opinion) it was already worth 10% more. Now 14 months later its value is about 40% above what I paid, and the market rent has risen around 20%.

In October 2007, we also got my now fiancée into her first IP. In this case I wanted to get her basically the cheapest development block in the city to hold but didn’t require work. We bought her an old house in Davoren Park that is suitable for future development. Around the same time, I also helped her mother buy her first investment property in Salisbury; for her a low maintenance newer property.

At the end of 2007 I then sold Northgate and bought a development block in Enfield in Adelaide’s inner north. This was closely followed by selling Davoren Park and buying another development block in Enfield last month next door to my first.

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

Towards the end of 2007, I was still keen to set myself up for Adelaide’s growth over the coming years, so I decided to swap the first house I bought in Northgate (the shiny new one) which had no potential other than letting the market do its thing. At this point I was also joined by my now fiancée who was very supportive through the whole process, including making a move which would potentially see her moving from a nice new, aircon’d, tiles, new bathroom, new kitchen house into an old timber frame dump.

This time I wanted to buy as close to the CBD as possible. With this in mind the best growth area in my price range was in the suburbs of Clearview and Enfield. I also had an idea in the back of my mind for a while that I’d love to get a massive block that would be suitable for large scale development (what I dubbed a monster) – but first things first. It didn’t take us too long at all to find the perfect property – massive land, abnormally large frontage, and with a house that was beautifully kept by the same owners since 1950. Many people would have continued to search and not rush in but I believe in jumping in when a good opportunity presents itself.

I called up first thing Monday morning when I saw the listing but as it turned out, it had actually hit the net on the Saturday arvo before and had an offer accepted that same afternoon. Damn! However about two hours later the agent called back to tell me the first offer had fallen through and he was showing some people around the house that afternoon if I was still interested. When we rocked up to have a look there were already six other groups waiting. We went through and thought is was perfect place to live in, so I went to the agent’s office two hours later to make my offer.

Despite the market running hot and having multiple offers in, we gave it our all to make sure the vendor accepted ours. We had a great chat with him at the property which I knew would help since I knew we wanted it as soon as I saw it. I also ended up offering him what I consider to be about 3% over market. I was willing to do this as I knew it would be a stretch to get him to accept our offer without some sort of extra incentive as I was making it subject to finance and the sale of Northgate.

To sell Northgate I used the same agent that sold it to me. At the time I believed he got an extra $2k out of me than I needed to offer and though it would be nice to have a shark on my side. He sold it within two days at about $5-10k more than I was expecting.

Upon moving into Enfield I began sizing up the blocks around us in accordance with my dream of getting a monster block. We let the neighbour to our side know that if he was ever interested in selling, to let us know. The house behind had already been demolished, so I offered to buy a parcel at the rear of it to extend my block to fit 4 instead of the current 3. He was asking way too much (in my opinion), so I told him to get stuffed – although my accountant worded it much more politely than that!

Then low and behold six months later the neighbour to the side said he was ready to sell. Hmmmm bit sooner than I expected, but I wasn’t going to let the opportunity slip so we agreed on price and I put DP on the market.

I found a buyer and last month – I bagged my monster! The vendor is renting back currently and I now own the two biggest blocks and best kept houses on the street. I’m now well and truly stuffed, and will need a while to digest this one. It happened a little sooner than I would have liked – but when an opportunity like that presents itself you have to seize it. I now have a beautiful development block for 5-6 dwellings only 7km from the CBD and even closer to the expensive suburbs of Prospect, Nailsworth and North Adelaide. It’s also close to public transport, food outlets, supermarkets, schools and the public library.

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

I haven’t had a bad property yet, just a few nuisance tenants. I guess my closest to bad would be my Elizabeth North property. We’re currently in the process of having them evicted after they’ve continually fallen behind in their rent and water payments, even after multiple tribunal hearings and orders. All this despite being under market rent.

Having said that it’s not really an issue for me. My PM handles the tenant; all I had to do was say “enough, get rid of them!” The IP itself is fantastic as I mentioned with the growth it’s experienced above and the rent will be going up a further 11-14% once they’re out.

The properties I sold were not because they were bad, but because I saw better growth potential elsewhere.

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

I’ve dabbled in shares a lot over the years (since I was 16) and whilst I’ve had some great performers, overall I’m down on my investment. I’m currently out of the market but will get back into it one day using equity from property. The same goes for Managed Funds. I looked into getting back into the market in the middle of 2007 using leverage, but decided against it as I wasn’t comfortable with the prospects of margin calls.

Whilst I see these as valid investments and good alternative forms of income – at this point in time for me it’s about building critical mass, which means building the biggest asset (and debt) base as quickly as possible. I don’t think the best way to get big is to diversify too soon.

I don’t like investing where you can’t create a decent position (relative to your portfolio). There’s a lot of talk lately about direct investment in metals etc. – this may be great for big investors and institutions who can create large positions, but I don’t believe people who go out there and buy 4 ounces of gold and feel very proud of themselves for being quite “sophisticated” have a chance of making decent money there. I’d rather leverage up and use that $4k (?) as holding funds on a property for 1-3yrs. I think people do this more so they can talk about it and feel good about themselves, rather than actually make decent money off it. I’d rather keep my relatively small amount of cash more focused.

Whilst it’s a good idea to have a cash buffer, as investment cash is in my view one of the worst. Take into account taxation on the profit and inflation eating away at the rest and you’re not left with much. If possible, leave your cash buffer in an offset account.

I also own and run my own retail/services business, from which the cashflow has allowed me to aggressively expand into property.

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

This has changed as I’ve changed styles as an investor. At first it was low hassle properties. Now it’s changed to larger land holdings including land being the majority of the price component (i.e. 90%+), but still with a liveable dwelling – one day I’ll be big enough to land bank large tracts of land, but at the moment I still need those little houses on the blocks!

I also expect myself to have morphed again in the coming years as I grow further.

Cashflow positive isn’t a priority for me; I look for areas that I’m expecting to experience good capital growth in the following years and where possible try to minimize the outgoings with a depreciation report.

I’m a fan of control so units/apartments and all the associated body corporate etc. aren’t for me. I’d be more than likely to tell a strata manager/fellow owner to pi$$ off than play fun and games holding hands.

What structure do you use for your investing?

So far I haven’t used trusts or companies – but will be looking into it in the future, possibly to change PPOR’s whilst still retaining Enfield. I have however set up a Testamentary Trust Will, so if I die all my assets automatically get locked up into trusts for the benefit of my family. I would highly recommend people holding assets in personal names to look into these. Whilst you can’t benefit from them, they are brilliant wealth protecting tools for your beneficiaries both from taxation and other undesirables.

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

Although I’ve only invested in the Adelaide market, I do see investing interstate as a way of reducing your exposure to one region. I am however confident in the properties I’ve chosen and believe they will perform well in the coming years.

There may come a time when I feel that I need to look elsewhere but so far I’ve always been able to find great opportunities in lil ‘ol Adelaide. All you interstaters feel free to continue thinking we’re a sleepy backwater – suits me fine! :)

Now that I have switched focus towards possible development, I also prefer to buy in the same city that I could potentially be building in one day. I would view overseeing a development as a challenge and opportunity for growth as a person as opposed to a chore and way to keep costs down.

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

1) Research and educate yourself as much as you can, even when you know it all ;) This means research both into property and yourself as an investor. Read as many books as you can get your hands on, especially books by people who have done what you want to do eg. Jan Somers, Michael Yarndey, Donald Trump etc.
2) Believe in yourself. Listen to others and pick out information to further yourself, but don’t let them make you doubt yourself or your goals. Speak to like minded people - SS is a great place for this. Don’t talk to people about property that don’t take an active interest in it, chances are they’ll just be regurgitating what the mass media has fed them or passing on their personal prejudices and insecurities about areas and ideas.
3) Aim high! Why settle for one house when you could own two? Why settle for five houses when you could own a group of shops? Why settle for a group of shops when you could own an industrial complex? The bigger you think, the more you’ll achieve. Dream big!
4) Do it! Inaction is crippling! There are always reasons not to, people to tell you why not and many obstacles thrown in your path. You can choose to push through or get stuck. Life is too short, make the most of it!
5) Leverage is a wonderful thing, use it! Remember you don’t have to save forever to get into your first property. I’d favour using a smaller deposit and getting into the market sooner than saving for a bigger deposit. Timing the market is great, but time in the market is better.
6) Have a good finance guy! Whether it is a mortgage broker or a good relationship with your bank contact. I used a broker at the beginning that was useless, but now I have a friend in the bank that has helped me get a few of my deals across the line which would have run into trouble otherwise. I would assume a good broker would be the same. You want someone who is genuinely interested in you and looking out for your well being. Remember despite many people’s natural instinct, banks are your friend and partner in property – you won’t get very far without them.

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

1) Inaction and fear.
2) Buying a property before you’ve done your research into the area or perhaps because everyone else is. But don’t let analysis paralysis set in.
3) Find out who you are and what you want as an investor. A poorly chosen property because you change tactics 2yrs in could become very costly and limiting.
4) Property spruikers/seminars. They can be good for some people if it inspires them to act where they other wise would not, but a little bit of your own research could probably save you thousands of dollars in built in commissions.
5) The mass media – never listen to them. They may get it right on occasion but remember - they are there for ratings, not education.

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?

This relates to my point above of finding out your style as an investor. Has anything changed? Why is it you can’t proceed? If it’s servicing perhaps look into finding higher cashflow deals, or even exiting a poorly chosen property in favour of a better one; it’s not a bad thing to correct a poor decision that you’ve made and could be an even bigger mistake if you let it drag on because of pride.

If you’ve grown weary of residential as I fully expect to one day, start working out methods and plans to move to that next level. Inaction can just as easily effects a person with six properties as it can someone who doesn’t have any.
We need to grow as investors, and that means at some point taking that next step. Perhaps it’s time to look at a different avenue/method i.e. residential development, flipping instead of B&H, reno to manufacture growth, commercial, industrial etc. If you’re at a loss of how to proceed (assuming it’s not just time to wait for equity/income to build), it’s because you haven’t worked out what it is you want for the future. You need to set goals and not just 1-2yrs ahead. Set a goal you want to achieve in property 20yrs from now – I know I have. It’s one thing to be restricted by the banks by finance to get into that huge deal you want, but if you haven’t got that huge dream in the first place – how can you put into place now the steps you will need to achieve this?

How important is planning to being a successful investor?

Planning is definitely an important factor in property investing. You need to know what it is you want, how you plan to go about getting it and what you can do now.

Planning for the bigger picture is vitally important as well, some may fluke it and stumble their way through a very comfortable life. Heck! All you need to do is buy one house every few years and by retirement you’ll have ten of them! This is fine if that’s what suits yourself and lifestyle.

It’s a completely different story if you want to accomplish big things and aim higher than just a comfortable retirement - you’re going to need to plan for it! Put into place the goals and targets you wish to succeed in and work out how best to achieve this. If you’re going to retire by 40 instead of 60, you’re going to have to kick it up a gear.

In this area, I’ve found reading about the big guys helps a lot. I would highly recommend reading a few of Donald Trump’s books for an all round attitude.

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)

I think as the figures you’re able to deal with get bigger the more you naturally grow as an investor and there is a natural progression into larger deals. If you had $20M to kick around, you could obviously buy 50 smaller houses, but I’d say it’s much more likely that you’ll have more experience at that point and would be prepared to tackle bigger projects eg. Commercial office buildings, industrial complexes etc.

From a personal stand point I’ve already progressed from buying new houses, to buying old houses with large land. I haven’t fully decided whether I will develop myself yet or not. I am however already thinking of the next step into mid sized commercial/industrial and the even bigger next step from there. I think at some point I’ll probably become bored with residential. I’m not there yet as it’s doing really well for me and I know it’s providing a solid base for expansion, but I will be moving on from it at some point. It’s also a matter of what type of deals your finances allow at a given point in time.

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

Every person is different and different properties and strategies suit different people. There is no right or wrong.

Capital growth has been more important to me as it enabled me to build a larger base quicker through the increasing equity. Cashflow is great if you expect good capital growth as well, but I would never pick cashflow to the detriment of capital growth. But this is because I am in the position of being able to afford the contribute to the holding costs of these properties.

If I had the choice of 3 properties in regional towns each giving me $50pw in my pocket but expecting little cap growth or a capital city property that’s costing me $50pw but expected to experience good growth – I would choose CG. Remember that negative gearing costs you a bit at the start, but the rents increase and bring it to cash flow positive in a few years anyway.

Those who aren’t in a position to afford to support multiple properties would need to assess their own investment needs and take action accordingly.

For this capital growth reason I like to stock to metro properties, which is not to say regionals don’t perform well also, but I believe that metro is more consistent in it’s nature assuming the fundamentals don’t get out of whack.

As I mentioned earlier, I prefer to have a higher land content so stick to houses.

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

Generally speaking I prefer fixed rates. They allow you to plan ahead and not have any nasty surprises. I like as much as possible to be within my control. My most recent loan I’ve left on variable but that’s because I only see one rate rise left this year, but I am willing to take on that risk for the one loan.

One of my pet hates is the whingers in the media telling their story about how if interest rates rise two or three more times they’ll lose their house – THEN FIX THEM!!

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?

Which market are we talking about? There are hundreds if not thousands of them. Are we talking apartments, old houses, new houses, land, commercial, industrial, Melbourne, Syndey, Perth etc?

Sorry but another one of my pet hates is when people brand everything as one. As investors we’re only buying individual properties – not entire markets. If that property goes up 50% do you care that the wider market dropped 10% in that same period?

I will comment on Adelaide. I believe we still have some good growth ahead over the coming years with the amount of both defence and mining spending coming in (multiple billions), plus increasing population as well as our general supply of still affordable property. Having said that you still need to pick and choose – some areas will do well, others have already done well and may level off for a while. The key is to do your research and pick the right areas with strong fundamentals, for example they’re not making any more land next to the beach or CBD.

In general the Adelaide market has slowed down from its large growth rate of last year (20%) as interest rates and petrol etc. have risen and a general sense of caution seems to have crept in about the economy. I still expect prices to perform well again this year, around the 10% level if you care about the overall median price. Buyers are holding off currently and as such more stock is coming onto the market as less drops off on the other end, but people will be back in once they’re feeling more comfortable.

Questions and Comments........