Welcome to the Interview Number Two. We hope you enjoy hearing this time from The Y-man……………… Interview with The Y-man – 14th August 2006 How did you get involved in property? My wife is an accountant, and wanted to reduce our tax liability. She had heard property was very tax effective etc – I must say I did not comprehend most of it…. What is your property investment philosophy (CF, CG, renos, houses, flats, buy and hold, develop, flip, wrap, etc)? Buy and hold for CG (hoping that stands for Capital Gain ). Refinance, draw down, and reinvest. While we prefer land content these days (i.e. houses), we could only afford units and apartments in good suburbs early on, so that’s what we bought. It allowed us to enter the fray much more quickly than waiting to build up enough equity/deposit to buy a house. What is your IP / property story so far? In 1997, we had decided to get into property – but had no idea how. It was then that a radio ad came on about a company that would help you to get into property investing, and it wouldn’t cost you a cent. We were very green and naïve – so we rang the number, and some bloke dropped by, selling off the plan developments. He showed us the numbers with projected interest costs, rental income, depreciation, rates – and of course the tax benefits….. We signed up for the deal, our first venture into the world of property investing. It would turn out to be the worst IP deal we did (see below). While our first OTP deal was still on the drawing boards, we decided that it might be a good idea to buy our PPOR (no reason other than people said we should). We had saved up enough for a deposit, so we went looking around near where we were renting at the stage. It was April 2000, and we were paying a princely sum of $190 per week for a 3BR villa. We bought a similar villa unit nearby, thinking it would be a short distance to move. As fate would have it, on the day of settlement, we noticed that the unit next door to our new pride and joy had just been let. Out of curiosity, we enquired at the letting agent for the rental – and were told $210pw. The decision was easy – we would remain renting at $180pw, and we would rent out our new place at $210pw. Thus our second property became really our first functional IP. A few months later, we found that owning an IP was not that difficult, and that we could afford to buy another one – which we did in November 2000. Around this time, my wife had booked me into a Peter Spann seminar – and it opened up a whole new world on refinancing and cosmetic “rejuvenations”. Using some of those techniques, and a supersonic market in Melbourne at the time, we increased our portfolio to 11 by April of 2003 (all of these bar the last one were units or apartments). In 2004, we offloaded the property we had bought OTP (the first contract we ever signed) due to forecast increases in holding costs. We finally bought our PPOR in December of 2005. Is there a story of a really good IP that you would be prepared to share with us? A 2BR apartment in Thornbury, bought in March of 2001 for $150,000. It was refinanced 3 months later for $200,000 with no work done to it. A similar story in Prahran – a 1BR we bought for $160,000 rising to a stratospheric $250,000 bank valuation in 6 months. This was probably more a case of timing more than anything else, and is indicative of the sorts of market we were having at the time. Is there a story of a really bad (or not so good) IP that you would be prepared to share with us? Our first contract we ever signed in 1997 – an OTP in Melbourne’s Southbank. The man that came to us, selling the deal turned out to be a crook. Soon after we gave him a deposit of $30,000 (10% of $300,000) he did a runner, and disappeared. It had taken my wife 6 years of hard work and savings to build up that deposit (I had nothing – I was a hard spender) and it devastated her. Nevertheless, the contract we had signed was real and binding. This was the nightmare situation that would drive our investing ethos for the next 4 years – hard work, minimal spending, and the search for maximum returns – so that we could settle the contract. The property was eventually completed in May 2001 due to various delays. This was fortunate, as we had enough equity built up – in fact so much so that this became the 4th IP to settle. Further, our legal team had secured a 10% “discount” for the lost deposit from the developers, on the agreement from our side that there would be no adverse publicity regarding the matter. Unfortunately, the property itself was beset with many problems from day one – from incorrect cooking appliances (designed for the wrong gas pressure), no power to segments of the apartment, a faulty hot water system, faulty power board, faulty air conditioning, incorrect heating unit to the pool, vandalism, theft of ornaments from common areas, gym equipment that needed to be replaced every three months, an assault in the front foyer – necessitating 24 hour security…. The list went on and on. When the spectre of a very significant sinking fund for lift maintenance (4 lifts in a 27 storey building) was announced, we decided to cut our losses and exit. We sold for almost no profit in 2004 (actually, given the outgoings over the years, it was in fact a sizeable loss). Do you invest in other asset classes (shares, commodities, businesses, managed funds, cash, forex, etc)? About half of our gross portfolio value is in Residential IP’s. The rest is in direct shares, managed funds (including hedge funds), commercial property trusts, and gold. What criteria do you use when selecting a property to purchase? In Melbourne, we use a relatively simplistic approach. For us to consider, the property must meet all of these criteria: · In Zone 1 · In a suburb that has shown a relatively stable growth (preferably at a rate greater than 8%pa) · Price near or preferably below median for the suburb Your thoughts on the next 12 months and the coming cycle? We are concentrating on the share market at present, and believe that this will be where most of our capital gains will be for the next 12 months. Property may remain flat, however as each suburb has its own little bursts, we would hope to capture the movement through refinancing. What are your views regarding renting vs buying a PPOR? As I write this, we have only had a PPOR for 9 months. It’s a culture shock that one has to do all the repairs, does not have a landlord to complain about, and the costs are not tax deductible…. Still, I can understand for some families, especially those with kids, the need for the feeling of permanence without the fear of being asked to “move on”. Somewhat ironically, our PPOR is the only one of our portfolio that has shown any growth in the past months (considering it meets none of our selection criteria ). If a budding property investor asked “what are the top 5 things I should do”, you would say? 1. Show me you have an ability to control your spending (i.e. save and budget) 2. Read lots of books (and posts on Somersoft) on the subject 3. Attend as many (free) seminars as possible – preferably those serving food - including the real boring mundane “Retire on your Super” ones. You may not like what you have waiting for you at retirement age, and it may motivate you to take action! 4. Be aware that residential property may not be the most effective or efficient way of creating wealth in the coming decade 5. Nothing teaches like experience, so just go and do it - although do try to start small, and keep it simple (i.e. no conversion of an old run down house into a 30 unit development type thing) And if that same budding investor asked "what 5 things should I avoid", you would say? 1. Off the plan projects – for a budding investor, they are in my opinion simply too difficult to weed out the good from bad. 2. Brand new property – seems to have more costs and uncertainties associated with setting up than an existing property. 3. Companies offering to do everything for you – usually claiming at no cost to you. 4. People who talk much but have done little. 5. Jails and fines. Ok, a bit extreme, but keep whatever you do above board. No shady activity – it’s not worth it. And in a slighty 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? Investigate other avenues of creating wealth. Residential property is but one of many tools and methods. How important is planning to being a successful investor? I believe planning to be of paramount importance. You need to have a vision of your destination before you can choose the path you will take, and the correct vehicle for that path. No good buying a train ticket in Melbourne if you are going to Tasmania. 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 feel that there are too many diverging or alternate paths for a “natural progression” to be defined. Our own progression was that of starting in managed funds (as these required little capital, and was an “extension” in many ways of our corporate superannuation funds), building up enough equity to buy residential properties, and then essentially returning to managed funds (shares and property funds) to generate more income to service the shortfalls in our property portfolio. Do you have any thoughts on the CF vs CG debate or on the issue of metro vs regional, units vs houses? I understand all of the strategies can be made to work. We merely found that the least path of resistance for ourselves (in terms of our own understanding and our situation) was to aim for CG in our own city. While we are only now seeing the differences in growth between units and houses (with the strong preference to houses, or more accurately “land content”), we feel that the smaller outlay (and operational) requirements of getting into the market with units still a valid proposal for beginners. What do you prefer, fixed or floating interest rates and why? Both – fixed as a sleep at night factor (in case they scream up overnight), and variable to allow refinancing (and selling if need be, without penalties). As such, we tend to have our loans partially fixed. 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? I feel that the Melbourne property market has pretty much bottomed. Having said that, I am not sure if it is going to get back up any time soon in a big way. I don’t necessarily think it is harder for newer investors – just different. This view has me sending new investors away from the residential property market at present, and directing them towards managed funds and commercial property trusts (hmmm….. beginning to sound like one of those dreaded “off the shelf” Financial Planners). The main thing I ask myself is – if I could buy an IP right now, would I do it? The answer at present is “no” simply because there are other areas of investment with higher (projected) returns at present.