I’ve been asked many times over the past year or so to share my story, strategies and philosophies by various people who have become aware of what I do and how I do it. I’ve always taken what I’ve been doing for granted and it’s only recently that I’ve become aware that some people are actually interested and find some level of inspiration from what I’ve done. So, I’ll share my journey here in the hope that it might inspire others to either get started or think bigger than they have been.
March 2007 – my divorce and property settlement were finalised. It had been many years since the separation. During the marriage, I had no say in how money was spent or invested. My pay was totally controlled by my wife. As was I, I came to realise, later. So, when I left, I left with nothing.
The settlement left me with a very small unit in a 6 pack in the leafy Adelaide suburb of Leabrook and some cash. Of the cash component, some was used to fully pay down the mortgage on the Leabrook unit, around $12,000 was invested in another car as my crusty old Mitsubishi Magna just wasn’t floating my boat any longer and the balance was put aside as investment funds for the strategy I was yet to formulate.
From the time I was in high school, I’d been quite pro shares and anti property as an investment strategy. My Dad did commercial property, so maybe it was the rebel in me that steered me in the opposite direction. I also perceived shares as being cool and exciting, while property always seemed such a boring “Mum & Dad†type investment.
Having spent 18 years in a marriage in which I was constantly told that I wasn’t “good enough†to manage the finances and that I wasn’t “smart enough†to come up with nay good ideas, I knew that this was my time. Given my age, I knew that I had just one shot at making something good happen in my life and to achieve that I’d need a bold and decisive plan.
It was quite clear that the share market wasn’t the place to be putting all my eggs. The fact that so many of my friends were investing heavily in both shares and share trading software told me that the market was reaching a critical phase in the cycle. Sometimes the best investment is the one you don’t make.
So, residential property became my investment vehicle of choice, due to the timing of my entry into the investment market. While I was still formulating my grand plan, I started looking around at opportunities. There were quite a few small units close to the CBD coming up for sale as “renovator specialsâ€. These appealed to me as I had a strong skill set in renovating and a good imagination when it came to visualising the end result.
While looking at such opportunities, I checked out a fully renovated 2BR unit in a 10 pack at Dulwich. The idea was to see how they had done the reno and learn lessons I could apply to my own projects. I ended up buying it for less than I would have spent on some of the other deals I was looking at. The vendor was looking for a very quick sale to relieve her financial stress, so she accepted the first firm offer that came along after the first open. A short settlement and unconditional contract helped, in this case, too. She rented it back from day one so it’s been a win-win deal ever since.
As I wait for settlement day to approach, I start to look at the big picture and a strategy starts to take shape based on the following random thoughts, in no particular order:
1. Many home buyers and renters (empty nesters and Gen X & Y) are moving away from the traditional, larger family home on a quarter acre block. Seems a lot of them are over mowing lawns and maintaining gardens.
2. Many within this same demographic want to live nearby lifestyle facilities such as restaurants, cafes, cinemas, quality shopping precincts etc.
3. Smaller, strata properties offer an affordable entry point into well located suburbs which offer good quality schools, shopping, entertainment and efficient transport to the CBD and other transport hubs.
4. Fuel costs will continue to be an issue and proximity to the CBD and other major employment centres will be a major factor when choosing a home.
5. Suburbs which have consistently show high capital growth over a number of years should continue to perform well. I’m not prepared to punt on the next hot spot. I’d rather take the sure bet, to get steady and consistent growth.
The suburbs in which I have invested most heavily are suburbs which I have observed solid growth over a 20 year timeframe. Statistics can lie, but my first hand observations are reliable.
6. Buying smaller, cheaper strata properties offers (in the context of my strategy) many advantages over buying larger, more expensive houses.
These include, but are not limited to:
- In one particular suburb in which I invest, I can buy 4 strata properties for the cost of one house. This allows me to spread my cash flow risk. For example, if I have one vacancy, I still have 3 other rents coming in to pay the interest bill. Also, I’m going to find it easier & faster to get a tenant for a unit/villa at $250pw than someone looking for a $600-$700 house. The cheaper end of the market is less transient, too, so less downtime between tenants.
- Buying a greater number of cheaper properties is also a risk management strategy in terms of being at the effect of a changing market in any one area. If I only have 4 big houses, then my maximum spread is 4 suburbs. 8 smaller properties can allow me to spread my portfolio across a greater number of suburbs.
- Strata properties allow me to self manage a greater number of properties than would otherwise be the case with Torrens Title properties as many management issues are dealt with by the body corporate. Building insurance, leaky roof, fencing, garden maintenance etc are all issues for the body corporate. This allows me to leverage my time and benefit from self management.
- Land tax liability is another advantage of the types of properties I buy. The unimproved capital value of each property is very low relative to larger, Torrens Title properties so the aggregate value reduces my land tax liability. The same portfolio value in Torrens Title properties would significantly increase my land tax liability.
So based on all of the above, I started looking at strata villas and homettes within 7km of the CBD, close to quality shopping and schools with cafe and restaurant strips nearby. Nearby transport is a must and properties on a bus “Go Zone†(one every 15 minutes) get bonus points on the checklist. I focus on the eastern and north eastern suburbs as I have over 20 years experience watching price movements and demographic changes in these areas. I figured it was better to capitalise on this expertise rather than re invent the wheel by looking at new areas.
The types of properties of interest to me have always provided a healthy yield, but have, by and large, lagged in term of capital growth compared to traditional houses. There was some evidence, however that this trend was changing and will continue to do so. House and unit capital growth statistics on a state by state basis published by Your Investment Property magazine have provided strong evidence of this.
OK, so now IP (Investment Property) #2 has settled and with a strategy in mind, I’m on the hunt for another. By this time, I’m committed to residential real estate as the primary vehicle for my wealth creation and the “big plan†is to accumulate 5 properties in total over the next 5 years, although I’ve yet to formulate an exit strategy, I’m fully aware that I can put this together as I begin my accumulation phase. Right now it’s more important to start getting runs on the board.
IP #3 was a very run down homette (villa), purchased in June 2007. Major reno job. The owner has lived there for 30 years and has never painted the interior or performed any maintenance at all. Got to love those bright orange kitchen bench tops. They had to go, even though there’s a chance they will make a comeback one day! At $217,000 it was a great deal. Current value, 2.5 years later is around $320,000 with a total reno investment of $13,000. Most of the reno was complete well before settlement and I even had a tenant signed up by settlement day.
I’ve re-financed the property in the past 6 months to release equity for other investments. If not for that, It would be cash flow positive now. I’d rather be cash flow negative and have the equity build my asset base than cash flow positive, for the moment.
Anyway, back to 2007 - I’ve pretty much out of cash at this stage in the game, but have enough cash flow from my day job to fund another acquisition, having reduced my living expenses and sacrificing a few lifestyle choices (eating out too much, holidays etc). Given that the net rental income from IP #1 funds the shortfall on IP #2 and IP #3 only costs me, before tax, $225 out of my own pocket, I’m still in a situation in which I can leverage the tax advantages to fund more acquisitions.
I think it’s different in the U.S. Here is Oz, we can claim our negative gearing losses on rental properties as tax deductions. Essentially, the Federal Government is subsidising investors to provide rental housing so that the Government doesn’t have to.
Up to this point, my tiny freehold Leabrook unit has always been my Black Chip. The one I don’t bet. The backup plan. If something goes wrong with the investment strategy or I lose my job, I can either use the income to help keep me afloat or move in and live rent free. Either way, it was my safety net.
It’s September 2007 and I’m feeling encouraged by what I have done so far and the ease with which property can be purchased, financed, renovated and rented out in a very short space of time. I realise that many of my earlier fears have no foundation, so I make the decision to utilise the equity in the Leabrook property to help my buy IP #4 at an 80% LVR. No more Black Chips. If things go awry, then I just sell an IP and balance is restored. Besides, what could go wrong?
By now, I’ve lodged an Income Tax Withholding Variation (ITWV) with the Australian Taxation Office to improve my cash flow enough to enable me to purchase another property (or two). Instead of waiting until July to get a nice big tax return, each pay my tax gets reduced, effectively increasing my net pay. Nearly half of my monthly shortfall on my portfolio is covered by this tax benefit.
IP #5 is a 3BR homette in the same group as IP #4. It’s been on the market for many months due to a contract failure on a previous sale. That seems to have put buyers off. They were staying away in droves as there was a perception that there must be “something wrong with itâ€. I secured it at a rock bottom price from a very motivated and disheartened vendor. Once again, I tap into the ever increasing equity of the other IP’s to purchase of this one and the next.
IP #6 is in the same group as IP #3. Deceased estate and offered to me off market at way below market value. I slipped a note under the door of the property in the hope that the executor would read it. He did. 09:00 next morning h e called me and said he would love to do a deal with me. His deceased brother had spoken to him about me and he knew I was good to do business with. It had been freshly painted and needed very little work. I could have done a reno, but elected to rent it as is because I was running low on cash funds for a reno and my borrowing capacity with my one and only lender had reached its limit.
On that subject, keen observers will note that I’ve broken a couple of rules. I’ve not diversified lenders and I’ve cross collateralised. Yet I survived and the bank didn’t take all of my properties away, as some seminar spruikers would have us believe.
Up to this point, having a single lender was a huge bonus and helped me accumulate a portfolio I might not have been able to with another lender on board. I did look into spreading my loans but the reception I received had me continue the great relationship with my primary lender.
I couldn’t have purchased IP’s # 4, 5 or 6 without cross collateralisation. It’s not an inherently bad thing, although it’s often portrayed as such. It’s just another tool that can be used to move ahead in the game of property investment. Like any tool, it’s how it’s used that determines if it’s a good or bad thing.
Prior to buying IP #5, I considered myself at the limit of my capacity to make up the monthly shortfall on my IP’s. It was during a casual conversation with a fellow investor that I had one of those rare satori moments. My friend asked me when I was buying #5 and I told him that I wouldn’t be buying for 4 years, after number two daughter finished school and I wasn’t paying school fees any longer.
I was aware of the concept of capitalising interest, but had never considered using the strategy myself. I guess it was unfamiliar to me as nobody I knew was actually doing it. Only when my friend told me he utilised that strategy did I start to see how it could work for me. It suddenly moved from being an unknown quantity to being a safe way of growing the portfolio. Tried and tested by a successful fellow investor.
When I financed IP #5, I took out and extra $20,000 to act as a buffer and to fund part of the monthly shortfall. My projections were that this extra money would last about 2.5 years, according to my spreadsheet model. Of course, as interest rates dropped, over time, that timeframe grew. As rates dropped further, my spreadsheet model showed the buffer balance actually increasing over time as rates dropped and rents increased. Amazing to see in a spreadsheet. Even more amazing to see the impact on my bank balance.
Around this same time, I also discovered an Adelaide based property investment network group. The monthly meetings are a great place to meet likeminded investors and share ideas and strategies. Just knowing there are others out there giving it a go is encouraging and very supportive.
In February 2009, a national magazine, Your Investment Property, ran an award for Property Investor of the Year. I was awarded runner up. Not a bad effort, given I’d been at it for a couple of years and the winner had been in the game for 10 years. The recognition was important to me in that it gave me confidence that my strategies were working well enough to be recognised by some very high profile industry commentators.
At this point, I started to use words like âonsolidationâ€, “pay down some debt this year and maybe try to live of the equity in the portfolio†and “retirementâ€. Those sentiments lasted about 2 weeks.
And then I got the phone call …
March 2007 – my divorce and property settlement were finalised. It had been many years since the separation. During the marriage, I had no say in how money was spent or invested. My pay was totally controlled by my wife. As was I, I came to realise, later. So, when I left, I left with nothing.
The settlement left me with a very small unit in a 6 pack in the leafy Adelaide suburb of Leabrook and some cash. Of the cash component, some was used to fully pay down the mortgage on the Leabrook unit, around $12,000 was invested in another car as my crusty old Mitsubishi Magna just wasn’t floating my boat any longer and the balance was put aside as investment funds for the strategy I was yet to formulate.
From the time I was in high school, I’d been quite pro shares and anti property as an investment strategy. My Dad did commercial property, so maybe it was the rebel in me that steered me in the opposite direction. I also perceived shares as being cool and exciting, while property always seemed such a boring “Mum & Dad†type investment.
Having spent 18 years in a marriage in which I was constantly told that I wasn’t “good enough†to manage the finances and that I wasn’t “smart enough†to come up with nay good ideas, I knew that this was my time. Given my age, I knew that I had just one shot at making something good happen in my life and to achieve that I’d need a bold and decisive plan.
It was quite clear that the share market wasn’t the place to be putting all my eggs. The fact that so many of my friends were investing heavily in both shares and share trading software told me that the market was reaching a critical phase in the cycle. Sometimes the best investment is the one you don’t make.
So, residential property became my investment vehicle of choice, due to the timing of my entry into the investment market. While I was still formulating my grand plan, I started looking around at opportunities. There were quite a few small units close to the CBD coming up for sale as “renovator specialsâ€. These appealed to me as I had a strong skill set in renovating and a good imagination when it came to visualising the end result.
While looking at such opportunities, I checked out a fully renovated 2BR unit in a 10 pack at Dulwich. The idea was to see how they had done the reno and learn lessons I could apply to my own projects. I ended up buying it for less than I would have spent on some of the other deals I was looking at. The vendor was looking for a very quick sale to relieve her financial stress, so she accepted the first firm offer that came along after the first open. A short settlement and unconditional contract helped, in this case, too. She rented it back from day one so it’s been a win-win deal ever since.
As I wait for settlement day to approach, I start to look at the big picture and a strategy starts to take shape based on the following random thoughts, in no particular order:
1. Many home buyers and renters (empty nesters and Gen X & Y) are moving away from the traditional, larger family home on a quarter acre block. Seems a lot of them are over mowing lawns and maintaining gardens.
2. Many within this same demographic want to live nearby lifestyle facilities such as restaurants, cafes, cinemas, quality shopping precincts etc.
3. Smaller, strata properties offer an affordable entry point into well located suburbs which offer good quality schools, shopping, entertainment and efficient transport to the CBD and other transport hubs.
4. Fuel costs will continue to be an issue and proximity to the CBD and other major employment centres will be a major factor when choosing a home.
5. Suburbs which have consistently show high capital growth over a number of years should continue to perform well. I’m not prepared to punt on the next hot spot. I’d rather take the sure bet, to get steady and consistent growth.
The suburbs in which I have invested most heavily are suburbs which I have observed solid growth over a 20 year timeframe. Statistics can lie, but my first hand observations are reliable.
6. Buying smaller, cheaper strata properties offers (in the context of my strategy) many advantages over buying larger, more expensive houses.
These include, but are not limited to:
- In one particular suburb in which I invest, I can buy 4 strata properties for the cost of one house. This allows me to spread my cash flow risk. For example, if I have one vacancy, I still have 3 other rents coming in to pay the interest bill. Also, I’m going to find it easier & faster to get a tenant for a unit/villa at $250pw than someone looking for a $600-$700 house. The cheaper end of the market is less transient, too, so less downtime between tenants.
- Buying a greater number of cheaper properties is also a risk management strategy in terms of being at the effect of a changing market in any one area. If I only have 4 big houses, then my maximum spread is 4 suburbs. 8 smaller properties can allow me to spread my portfolio across a greater number of suburbs.
- Strata properties allow me to self manage a greater number of properties than would otherwise be the case with Torrens Title properties as many management issues are dealt with by the body corporate. Building insurance, leaky roof, fencing, garden maintenance etc are all issues for the body corporate. This allows me to leverage my time and benefit from self management.
- Land tax liability is another advantage of the types of properties I buy. The unimproved capital value of each property is very low relative to larger, Torrens Title properties so the aggregate value reduces my land tax liability. The same portfolio value in Torrens Title properties would significantly increase my land tax liability.
So based on all of the above, I started looking at strata villas and homettes within 7km of the CBD, close to quality shopping and schools with cafe and restaurant strips nearby. Nearby transport is a must and properties on a bus “Go Zone†(one every 15 minutes) get bonus points on the checklist. I focus on the eastern and north eastern suburbs as I have over 20 years experience watching price movements and demographic changes in these areas. I figured it was better to capitalise on this expertise rather than re invent the wheel by looking at new areas.
The types of properties of interest to me have always provided a healthy yield, but have, by and large, lagged in term of capital growth compared to traditional houses. There was some evidence, however that this trend was changing and will continue to do so. House and unit capital growth statistics on a state by state basis published by Your Investment Property magazine have provided strong evidence of this.
OK, so now IP (Investment Property) #2 has settled and with a strategy in mind, I’m on the hunt for another. By this time, I’m committed to residential real estate as the primary vehicle for my wealth creation and the “big plan†is to accumulate 5 properties in total over the next 5 years, although I’ve yet to formulate an exit strategy, I’m fully aware that I can put this together as I begin my accumulation phase. Right now it’s more important to start getting runs on the board.
IP #3 was a very run down homette (villa), purchased in June 2007. Major reno job. The owner has lived there for 30 years and has never painted the interior or performed any maintenance at all. Got to love those bright orange kitchen bench tops. They had to go, even though there’s a chance they will make a comeback one day! At $217,000 it was a great deal. Current value, 2.5 years later is around $320,000 with a total reno investment of $13,000. Most of the reno was complete well before settlement and I even had a tenant signed up by settlement day.
I’ve re-financed the property in the past 6 months to release equity for other investments. If not for that, It would be cash flow positive now. I’d rather be cash flow negative and have the equity build my asset base than cash flow positive, for the moment.
Anyway, back to 2007 - I’ve pretty much out of cash at this stage in the game, but have enough cash flow from my day job to fund another acquisition, having reduced my living expenses and sacrificing a few lifestyle choices (eating out too much, holidays etc). Given that the net rental income from IP #1 funds the shortfall on IP #2 and IP #3 only costs me, before tax, $225 out of my own pocket, I’m still in a situation in which I can leverage the tax advantages to fund more acquisitions.
I think it’s different in the U.S. Here is Oz, we can claim our negative gearing losses on rental properties as tax deductions. Essentially, the Federal Government is subsidising investors to provide rental housing so that the Government doesn’t have to.
Up to this point, my tiny freehold Leabrook unit has always been my Black Chip. The one I don’t bet. The backup plan. If something goes wrong with the investment strategy or I lose my job, I can either use the income to help keep me afloat or move in and live rent free. Either way, it was my safety net.
It’s September 2007 and I’m feeling encouraged by what I have done so far and the ease with which property can be purchased, financed, renovated and rented out in a very short space of time. I realise that many of my earlier fears have no foundation, so I make the decision to utilise the equity in the Leabrook property to help my buy IP #4 at an 80% LVR. No more Black Chips. If things go awry, then I just sell an IP and balance is restored. Besides, what could go wrong?
By now, I’ve lodged an Income Tax Withholding Variation (ITWV) with the Australian Taxation Office to improve my cash flow enough to enable me to purchase another property (or two). Instead of waiting until July to get a nice big tax return, each pay my tax gets reduced, effectively increasing my net pay. Nearly half of my monthly shortfall on my portfolio is covered by this tax benefit.
IP #5 is a 3BR homette in the same group as IP #4. It’s been on the market for many months due to a contract failure on a previous sale. That seems to have put buyers off. They were staying away in droves as there was a perception that there must be “something wrong with itâ€. I secured it at a rock bottom price from a very motivated and disheartened vendor. Once again, I tap into the ever increasing equity of the other IP’s to purchase of this one and the next.
IP #6 is in the same group as IP #3. Deceased estate and offered to me off market at way below market value. I slipped a note under the door of the property in the hope that the executor would read it. He did. 09:00 next morning h e called me and said he would love to do a deal with me. His deceased brother had spoken to him about me and he knew I was good to do business with. It had been freshly painted and needed very little work. I could have done a reno, but elected to rent it as is because I was running low on cash funds for a reno and my borrowing capacity with my one and only lender had reached its limit.
On that subject, keen observers will note that I’ve broken a couple of rules. I’ve not diversified lenders and I’ve cross collateralised. Yet I survived and the bank didn’t take all of my properties away, as some seminar spruikers would have us believe.
Up to this point, having a single lender was a huge bonus and helped me accumulate a portfolio I might not have been able to with another lender on board. I did look into spreading my loans but the reception I received had me continue the great relationship with my primary lender.
I couldn’t have purchased IP’s # 4, 5 or 6 without cross collateralisation. It’s not an inherently bad thing, although it’s often portrayed as such. It’s just another tool that can be used to move ahead in the game of property investment. Like any tool, it’s how it’s used that determines if it’s a good or bad thing.
Prior to buying IP #5, I considered myself at the limit of my capacity to make up the monthly shortfall on my IP’s. It was during a casual conversation with a fellow investor that I had one of those rare satori moments. My friend asked me when I was buying #5 and I told him that I wouldn’t be buying for 4 years, after number two daughter finished school and I wasn’t paying school fees any longer.
I was aware of the concept of capitalising interest, but had never considered using the strategy myself. I guess it was unfamiliar to me as nobody I knew was actually doing it. Only when my friend told me he utilised that strategy did I start to see how it could work for me. It suddenly moved from being an unknown quantity to being a safe way of growing the portfolio. Tried and tested by a successful fellow investor.
When I financed IP #5, I took out and extra $20,000 to act as a buffer and to fund part of the monthly shortfall. My projections were that this extra money would last about 2.5 years, according to my spreadsheet model. Of course, as interest rates dropped, over time, that timeframe grew. As rates dropped further, my spreadsheet model showed the buffer balance actually increasing over time as rates dropped and rents increased. Amazing to see in a spreadsheet. Even more amazing to see the impact on my bank balance.
Around this same time, I also discovered an Adelaide based property investment network group. The monthly meetings are a great place to meet likeminded investors and share ideas and strategies. Just knowing there are others out there giving it a go is encouraging and very supportive.
In February 2009, a national magazine, Your Investment Property, ran an award for Property Investor of the Year. I was awarded runner up. Not a bad effort, given I’d been at it for a couple of years and the winner had been in the game for 10 years. The recognition was important to me in that it gave me confidence that my strategies were working well enough to be recognised by some very high profile industry commentators.
At this point, I started to use words like âonsolidationâ€, “pay down some debt this year and maybe try to live of the equity in the portfolio†and “retirementâ€. Those sentiments lasted about 2 weeks.
And then I got the phone call …
Dislike ads? Remove them and support the forum:
Subscribe to Fastlane Insiders.
