Interview with Wobbycarly 29th Feb 2012 How did you get involved in property? Dad was given Building Wealth through Investment Property by an accountant. When he finished, he got me to read it. Dad bought a couple of cheapies in the Vic regional city nearby where we lived, and when I’d saved some money, encouraged me to purchase, too. I wouldn’t say I was passionate about money, investing, nor property specifically at this time – it was a slow burning fire that was lit, though. What is your property investment philosophy (CF, CG, renos, houses, flats, buy and hold, develop, flip, wrap, etc)? It’s taken me a long time to actual realize I firstly, NEEDED a strategy, and then secondly to try and create one. The evolution/story will come out in the next question, but our broad strategy is for renos, the idea being, of course, to create instant equity and improve yield. We aim for a close to neutral position. We also intend to purchase CG property if we see opportunities. What is your IP / property story so far? So after being encouraged to start looking at buying a property, I went out shopping at 22 years old with my $8,500 deposit. This was in 1996/1997 in regional Victoria, so there were really plenty of options. I ended up purchasing a block of 4 1BR units on a 13+% gross yield. ($84,000 purchase price, with each renting for $60-$65/week.) Being so wet behind the ears, I needed to rely on Dad to help. He was able to “talk to the bank manager” where his business had accounts, and I got commercial finance with a P&I loan, with a 13 year term and interest rate at about 8.5%. Back then, I had no idea about IO loans, and the credit conditions were not as easy as we saw during the last decade. Because this was a multiple dwelling, residential lending was not available. I also only had a 10% deposit, which was considered low at the time – 20% was expected. I ended up learning how to paint, and various small maintenance jobs, as I would do these myself to keep costs down. At this stage, I still wasn’t really motivated to invest, but thought it was pretty cool being a landlord. (I ended up selling these in 2007; they needed work to be done to attract tenants, and I couldn’t afford it.) Being a budget property, there were certainly some interesting tenant experiences! When I met my wife-to-be, she was renting in the outer of East of Melbourne having just sold and moved from the Adelaide Hills. Not long after, we decided that she should purchase, and we still have that house in the outer East of Melbourne. There was still no strategy at this time. Shortly after we were married, we attended a property seminar (will remain nameless) and ended up buying a new townhouse in Brisbane… I’m still not sure whether we were scammed here or not, but our (limited) due diligence at the time suggested that our purchase price was “about right”, and the proposed rent was easily achieved. This property has done nicely, with steady capital and rental growth, but has lost some value in the last 12-18 months or so (2011). We also attended some Peter Spann seminars in 2002, and finally felt like we had some education behind us, and I started reading a lot of books – both shares and property. However, our next purchase was our PPOR, in 2002. This, along with starting a family, certainly put a dent in the cashflow, so all the ideas that we’d learnt could not be applied for a while. Finally, in 2008, we embarked on our first reno. We really only got back $1.20 for $1 spent (including holding costs), but we learnt a LOT, and it was a relatively cheap education. Even though the reno did not return the equity we were hoping for, it is very close to CF neutral, and some natural growth since has helped. We have also recently (2010) purchased a townhouse in Upper Coomera. With the proposed Town Centre, we see this area as primed for growth once that kicks off. While this property is currently CF-, the holding costs are not significant. Right now (Summer 2012), we have sold our PPOR and bought an upgrade. We are prepared to sell when it “makes sense” and lifestyle choice is important, too. Is there a story of a really good IP that you would be prepared to share with us? We were very pleased with the results of our first reno. Although we didn’t get the instant equity we were seeking, we got the yield boost and turned the house from one of the worst in the street into a very presentable family home. However, the best result has come from the place my wife bought in Melbourne – it’s nearly trebled in value, and hasn’t had a day of vacancy in 12 years. Is there a story of a really bad (or not so good) IP that you would be prepared to share with us? Although it was within budget (just), the holding costs while doing a reno yourself, can add significant cost. Do you invest in other asset classes (shares, commodities, businesses, managed funds, cash, forex, etc)? I have managed to lose quite a bit of money in shares, but still believe that INVESTING in shares, rather than attempting to TRADE shares can still be profitable. We have <1% currently in the share market, with a combination of direct shares and managed funds. What criteria do you use when selecting a property to purchase and renovate? Firstly, as we want to do a lot of the work ourselves, it needs to be in (or very near) Geelong. Then we look for a suburb that is undergoing gentrification, or is adjacent to a “better” suburb. The property has to be structurally, electrically and plumbingly sound – we only want to do cosmetic works, such as painting, kitchen, flooring. What structure do you use for your investing? We use our own names. As I am the major income earner, most are in my name 99%. My wife’s property is still in 100% her name. What is your strategy to fund your lifestyle in the future (eg Live off Rent, Live off Equity, Live off something else….)? Living off rent will be difficult; the required level of unencumbered residential real estate assets to live off rent is substantial. We probably expect to Live of Equity, by selling down as required, and living off the proceeds. If a budding property investor asked "what are the top 5 things I should do", you would say? 1. Get educated. Read books, go to seminars, talk to other investors. 2. Just do something! Get started. Buy a cheapie and learn what being a landlord is all about. 3. Learn about finance and structuring. You need to know more than the bank. 4. Understand tax. Learn what is deductible and what gets depreciated. While your accountant will know how to complete your tax return, you have to give them the numbers. 5. Get a depreciation schedule. These are worth many times their cost. Bonus answer: Build a buffer. There is nothing more stressful than starting to run out of money when urgent repairs or health issues crop up. And if that same budding investor asked "what things should I avoid", you would say? Avoid cross-collateralisation!! You will possibly need it when you go for your 2nd property (assuming you use equity in the first as the deposit) but try and get it split as soon as possible. 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? Focus on your strengths, whether that be renos, buying well under value, sub-divs, or building new. How important is planning to being a successful investor? Luck may get you so far… as I can attest! But planning will ensure a higher level of success. 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) No, I don’t. Going from 1 to 2 to many RIPs is relatively straightforward, but I believe that developing or JVs requires specialized skills that a residential property investor may or may not develop. Progressing to commercial could make sense for some, as many of the principles appear to be similar, but it’s a different rule book in that world. Do you have any thoughts on the CF vs CG debate or on the issue of metro vs regional, units vs houses? They each have their place. Concentrating all on CF may be at the expense of some CG. Metro/regional and units/houses are, I think, similar to CF/CG. Ie, Metro/houses generally = CG, regional/units generally = CF. So a regional house or a metro unit could provide the same general outcome. In our experience, units/townhouses can work well for interstate purchases, especially with a (good) onsite manager. What do you prefer, fixed or floating interest rates and why? Variable interest rates are all the go here. Being married to an ex-bankie, who saw people locking in 15% interest rates in the late 80’s/early 90’s has a strong influence on this. The couple of times we have locked, it’s been a more expensive outcome. Finally, where do you see the market at the moment and do you think the current environment is making it harder for newer investors than when you started? Your thoughts on the next 1 year, 5 years, 10 years? I do think it’s harder for newer investors, in particular due to the higher entry price. Society in general also tends to encourage people to “aim for the best” so those starting out may think that nothing less than a 4BR/2 bath/2 car will do. But even though I bought what looks like a very cheap property when I started, it still took me about 3 years to save my first deposit. Speaking very generally, I think the next year will see little to no natural growth, as the issues in the US and Europe work themselves out. But I am positive about the next 5 to 10 years, but don’t expect to see house prices double; perhaps 50% growth in 10 years. For us personally, the next couple of years will be about reducing non-deductible debt, even if this means selling something.