This week a timely warning from Anna Porter at suburbanite.com.au to be very cautious of filling your portfolio with regional properties, or buying in tourism hubs if you are looking to buy a growth property. These markets are volatile she says.
This is week 2 of the 30 day flipping exercise with Nhan Nguyen. He is attempting to buy and sell a property in 30 days and make a big profit along the way. We will continue to follow his journey to see what we can learn. He gets some good news today.
A lot can happen in 10 years as you will hear today as Michael Yardney reflects back on the last decade. Michael outlines the 10 big factors that have impacted our property markets. A walk down memory lane.
We take a look at the abundance of free and often useful online tools designed to help homebuyers and investors make decisions about property purchases. But how good are they and how much can you rely on them? We get the good oil from president of the Real Estate Buyer’s Agents Association of Australia, Rich Harvey.
Sam Saggers from Positive Real Estate is our feature guest this week telling his investment story. His first investment, how he got hooked on positive cash flow property, how he works with agents and the drivers that he looks for before buying. Lots more too in this extended chat with Sam.
You will find us at iTunes under podcasts as Real Estate Talk. Listen there for free, leave a review which helps us grow and tells us what you like and how we can improve the show. Don’t forget to subscribe at the site as well –even if you do get the show through iTunes – so that we can tell you about the bonus offers we make to subscribers. Your questions are welcome through the site as well.
Transcripts:
Be careful what you include in your portfolio – Anna Porter
Kevin: You may recall recently I talked about some of the benefits of investing or looking as an investor at some of the regional markets around Australia. We’ve also sounded a note of caution about some of the tourism hubs, too. I’m going to pick up on that conversation and talk to Anna Porter. Anna is from Suburbanite.com.au.
Good day, Anna. Nice to have you on the show again.
Anna: It’s my pleasure to be here.
Kevin: You’re a little bit concerned about some of the regional areas and particularly tourism hubs. Tell me why.
Anna: Yes, certainly. We regularly research the 5-, 10-year, and beyond performance of markets. We often have people come to us after a regional growth property, and we say, look, regional investing is definitely one way to do it if you’re chasing yields or income properties, but having a growth property in a regional area is a little counterintuitive.
When we look at the stats, typically we see regional hubs over a 10-year cycle perform at about more like 4% per annum growth whereas your more metropolitan or satellite city areas tend to perform more at 6% to 8% per annum growth. To put that into real numbers, the difference between 2% per annum over 10 years if you buy a $450,000 property is $165,000 in capital growth. That’s a lot of money.
Kevin: Doesn’t it depend on some of these regional areas and what the drivers are, like if there’s good long-term industry, then it’s going to be okay?
Anna: There are some regional areas that have performed well, but there’s always risk. If you’re going into a regional area and you do get good performance, it’s often from being quite speculative, so you have to be a risk taker.
Take, for example, some areas like recently we had a new client come to us and they had just bought some properties in Lismore, which is a university town. They came to us and they had some problems with one long-term vacancy in the property, and also they had had problems with growth. The property hadn’t gone up much at all in about five years.
One of the factors that we identified early on is they were buying because they felt there was stability with the university being there, but we’ve actually been telling people for years to be careful of that because universities are putting on their own student accommodation, which is pulling people out of the private rental market.
There are these volatility factors. We like to believe investing is like a chair; you have to have four legs, and if one of those legs breaks, you’re still standing upright. If you go into regional towns or tourism hubs, you really only have one or two legs and you can very easily fall over.
Kevin: Yes, we saw that demonstrated quite sadly with some of the mining towns, didn’t we? Some of the mining speculation, then the mines stopped leasing private properties and started building their own, and of course, the markets crashed.
Anna: Yes. We’ve never gone into mining towns because our barrier to entry for investing is a single industry town – whether it’s a university, whether it be mining – and we’ve actually now had some of our clients bring properties that they already had in their portfolio to us and say, “What should we do?”
One of those locations is Dalby. Unfortunately other investment firms have recommended this to them in years gone by, and at the moment there are currently 668 properties for sale – houses – in Dalby, all quite similar, all of them are going backwards in value and these clients when we do that review have made a capital loss in the last five or six years.
In real terms, that’s someone’s livelihood. That’s someone’s life savings. That’s devastating.
Kevin: Let’s talk about ice cream lickers: people who go to some of these tourism hubs – Gold Coast, Sunshine Coast – lick the ice creams, they’re on holidays, “What a beautiful place. I think I’ll buy an investment property here.” It’s a cautionary note, isn’t it?
Anna: It certainly is. While tourism hubs are a great place to visit and spend a holiday, people often get drawn in by that. Some of the volatility we see in those markets is that there’s not long-term sustainable employment. Tourism does bring in employment, but it’s often quite finite in time, and often the biggest factor that sits in those areas is the high unemployment rates that we typically see, which again creates that speculative market.
We call them more “boom and bust” markets. In some tourism hubs – for example, Gold Coast with the Games and that sort of thing – you can see this little boom come through, but you can see it bust just as quickly, just as heavily, at the other end of that.
Kevin: Would you be investing in the Gold Coast right now?
Anna: No, we’re not. We’re actively avoiding that area.
Kevin: What about some of the areas that surround it that might benefit from the Games or even the long-term measures. Would you look at Brisbane as an example?
Anna: Yes, we certainly are investing in Brisbane at the moment. And when we say Brisbane, we’re not talking Ipswich. We have a lot of our clients who are from New South Wales or Victoria, and they say, “Oh, I’m investing in Brisbane; I’m buying in Ipswich or Toowoomba.” And it’s not quite the same drivers there.
When we talk about Brisbane, we’re talking within 20 minutes of the CBD. We’re not in flood zones. You have to be careful of that. You have to understand there are a lot of flood zones through that market, and your first insurance premium could be something you can’t even jump over if you’re in a flood zone. You also have to be mindful that the unit market is very oversupplied there.
While Brisbane will have a benefit, it’s not just what’s happening in the tourism space that’s going to benefit Brisbane. There is a lot of employment being driven through the area. A lot of infrastructure has gone in over the past five and six years. They’re the things that also create that longevity and sustainability and create more legs for the chair.
Kevin: Great talking to you, Anna. I’ll leave you with your four legs, but we’ll talk to you again real soon on the show.
Anna: Fantastic. Thanks for your time.
Flipping a property – Week 2 – Nhan Nguyen
Kevin: You might recall last week, I was talking to Nhan Nguyen from Advanced Property Strategies about his flipping exercise, where he secured last week a property that he intends to onsell within a 30-day period. He joins us again.
Good morning, Nhan.
Nhan: Good day, Kevin. How are you going?
Kevin: Tell me what’s happened since last weekend. You secured the property. I understood it was under contract, and you’ve said to me – if I remember correctly – that you’re planning not to do much work to it. Where are you at with that?
Nhan: We put the property on the market I think about three or four days after signing the contract. It had a little bit of response, but what happened is we have a buyer who’s missed out on a house in the street, and I thought the other house had sold for $418,000. We purchased ours for $320,000 and he’s coming in with an offer. I think in this last 24 hours, we’ve recently just signed a contract at $410,000 with him. Very keen on the property, because he’s missed out on the other property.
He then proceeded to tell me that the other property on the street, which is lower, he’d missed out and his offer was 440. So I’m thinking maybe I’ve sold the property too cheap, but we’d been out there doing a bit of marketing, and when you’re in the right place at the right time, it’s pretty uncanny. We’d just put it out there, put offers over $399,000 on the Internet to see what happens, and it looks like we have someone who’s really keen and can go on from there.
Kevin: I understand the process, but let’s talk it through, because a lot of people are probably scratching their head and saying “Hang on a minute. You haven’t even settled on this property yet. How can you onsell it?” Take me through that process. What are the legalities there?
Nhan: Really, once you’ve signed a contract, my understanding is that you have the right to do whatever you want with it. Obviously, I can’t move in without their permission, I can’t take position, but I can market it for rent and market it for sale. The only challenge is I can’t do the transaction from a transfer point of view until I have title.
I could do what’s called a transfer by direction, which is a simultaneous settlement on the same day, however I don’t have the authority to do that. We’d have to settle first, and then 24 or 48 hours, later do another settlement on selling the property.
Kevin: You could do what’s called a simultaneous and contemporaneous settlement, which is where you settle, then you settle the purchase the property, and then you settle to sell the property again in the same transaction. Is that what you’re planning to do?
Nhan: At this stage, it hasn’t worked out that way. I think the dates between the first contract and the second contract have been 13 days or so, so with the new buyer, he has 30 days to settle, so it’s going to be a bit of a lag of possibly up to two weeks between my settlement and his settlement.
Kevin: So you’ll have to fund the purchase and carry it for 13 days, but you’ve a profit in there of some $50,000 I think was the original projection. Is that right?
Nhan: Yes, that’s right. A purchase price of $320,000, on-purchase price of $410,000, so we’re looking at a gross profit of $90,000 after stamp duty and legals. Yes, we’re talking about somewhere between $70,000 and $75,000. It hasn’t been quite the 30-day challenge I’d planned, but once we settle and we settle again, it’s going to be 13, 14, maybe 15 days from settlement to settlement and I’m really happy with that, assuming it goes through.
Look, even if it doesn’t go through, at the moment, I’m working on a backup contract with someone else to sign a contract on it at a higher price, so basically, I’m leaving nothing to chance.
Kevin: This is a great response. Is it because you purchased well or purchased in an area that’s in high demand?
Nhan: I personally believe that I’m an area expert in this area. I have two other projects – one is finished and the other one is being finished – and I know that the property was worth at least $390,000 – so $390,000 to $410,000 – like I mentioned on our last interview. Median price is $384,000, so I just knew that the property is under market value. It has four bedrooms, tile roof, and 700-odd square meters.
With that 700-odd square meters zoned low-to-medium residential, there is a huge demand, especially at this price point. If you go into Sydney or Melbourne, anything like this within 15 kilometers, you’re talking at least $700,000, $800,000, $1 million even. There’s a lot of interest in this particular property, and we love it.
Kevin: You purchased this property on the south side of Brisbane. You are based in Brisbane. Would you do this in other parts of Australia if you were not living there?
Nhan: Mate, I’d do it wherever I could. I think it’s having a marketing strategy and finding properties off-market. Oftentimes, people go to RealEstate.com.au to find deals, and by the time it’s hit the Net, I believe it’s too late.
RealEstate.com.au is a really good tool for selling property, to get top dollar and get it out there because everybody is on the Net, but to get properties under market value or dealing with property owners direct, I think you do need to either door knock, send out letters, [5:06 inaudible], and deal directly with owners. That’s how real estate agents get leads.
Kevin: Yes. And what you’ve explained to us last week in the show, too, is how you actually secured that is that you have a marketing person who’s doing exactly that.
Nhan, we’re going to continue to follow this through. I want to follow it all the way through to the final settlement, if we may, to see what – if any – problems do emerge that we can learn from. Thanks for your time.
It’s an interesting journey that Nhan Nguyen is taking us on as he’s looking at flipping or turning over a property within 30 days. It’s probably going to be a little bit longer than that, but it will be successful by the looks of it. Nhan, of course, from Advanced Property Strategies.
Thanks for your time, mate.
Nhan: Thanks, Kevin. Thanks for having me.
Lessons from the last decade – Michael Yardney
Kevin: Gee, there are so many lessons we can learn by looking backwards. It’s always easy in hindsight – nothing truer, of course, than the property market. I want to ask Michael Yardney… And I’ve given Michael some notice on this.
Michael Yardney from Metropole Property Strategists. G’day, Michael.
Michael: Hello, Kevin.
Kevin: I set Michael the task of looking back over the last couple of years or even 10 years and looking at what have been the major changes that you’ve noticed, Michael, the big factors that affected the property market. What did you come up with?
Michael: Let’s see if we can come up with a top ten list like they do on the TV shows, Kevin. I think one of the big changes over the last decade has been technology. The way property is bought and sold is different to 10 years ago when the property portals were in their infancy. In those days, you used to look at the newspapers on the weekend or you used to go to an estate agent and look at the listings in his window. Today, the vast majority of property is marketed online.
And unfortunately, some people are even buying sight unseen – we discussed that before – incorrectly so, in my opinion because they think they can get a good indication of what’s happening online, Kevin.
Kevin: Yes, it is a big mistake. The 3D walk-throughs, they are all enhanced, and I think you need to remember that.
Apart from technology, information has been a big change, too. I’ve noticed as a real estate agent that the passage of information from the agent to the consumer has been a big shift.
Michael: Kevin, it has been. It’s created a generation of much better informed home buyers and property investors. That’s good, but the very many mixed messages and the clutter has also led some investors to I guess what’s called analysis paralysis. They just have too many bits of information and don’t have the perspective to decide what’s good and bad.
Others, unfortunately, have made disastrous investment decisions based on bad information. So it’s a good and a bad thing, this abundance of information, Kevin.
Kevin: That, Michael, has opened up an opportunity for more people to come in and help consumers understand all that information. They’ve set themselves up as gurus.
Michael: It happens all the time, and over the years, there have been people who have come and gone. There have also been some very good educational professionals who are stable and that have been around for a long time.
But every now and then with a couple of my professional colleagues, we play a little game of “Where are they now?” because people were very famous in their professional education space leaving many burned investors – uneducated investors – in their wake. It’s very easy today to look professional with a website but not have much substance behind you.
Kevin: Yes. It was only last week, Michael, we talked about the growing number of investors – particularly older people – who are now investing in property. That must have been a big change, as well.
Michael: Over the time, more Australians are wanting to secure their future, and it is related to the factor we just spoke about a moment ago – the availability of information. According to CoreLogic, there are now over two million property investors in Australia, yet most can’t last the distance because they sell up after a while and most never get past their second property, either, Kevin.
Kevin: We’re halfway through your top ten List, Michael, and I notice that number five you’ve put the Global Financial Crisis. I would have been disappointed if it wasn’t in there.
Michael: We’re talking about the ten things that affected property over the last decade, and clearly it did. And nobody saw it coming. I remember when I first heard about this sub-prime crisis across the ocean in America, I thought, “Oh, that’s not going to affect us here.” I was naïve about it, as well, but it did have a profound effect on the world’s economies and some countries are still not back to where they were before economically with that.
It has changed our nation, as well, in the short term and actually made us a bit different in the long term with regard to lending criteria because we could have gone down that route, as well. We were giving a lot of no-doc and low-doc loans. Banks were giving money to almost anybody who approached them. And there but for the grace of God go I; we could have had those problems in Australia, too.
Kevin: To follow on from that, Michael, the mining boom in Australia pulled us out of that Global Financial Crisis, didn’t it?
Michael: The resources boom did, and we were very lucky that China wanted anything that we could dig out of the ground. But with it, it led to a mining property boom fueled by those hot-spotting property researchers. This created droves of short-term property multi-millionaires who soon learned that investing in locations that lack multiple growth drivers is fraught with danger, and some of them today still have significant negative equity. But it was definitely one of the features of the last decade, Kevin.
Kevin: Indeed. What about the rise and rise and rise of Melbourne and particularly Sydney property?
Michael: That’s been one of the features over the last decade, as well. The gap between Melbourne and Sydney and the other capital cities, and then further the regional cities, has changed, too. So two big international cities are attracting significant economic growth, population growth, jobs growth, and this is pushing up the property prices. And Kevin, if I can predict into the future, I think the gap between those two big cities and the others is only going to widen.
Kevin: Michael, recently – just last week, in fact – you and I spoke about the HILDA Survey, and in that you identified that I think it was as soon as next year, more than 50% of people will probably be renting. That’s not a sudden change; that has been happening over the last few years, hasn’t it?
Michael: Our demographics are changing. The older people are getting wealthier because of the properties they own and the superannuation they have, and younger people are choosing not to buy properties as early in life or definitely not buying their homes but they’re becoming renting investors.
The demographic changes that have occurred are that more of us are moving to medium-density apartments and townhouses and more people are buying investments before they’re buying their homes. The other big demographic shift is to the Big Smoke from regional areas related to where the jobs are. And these demographics are what drive our property markets, Kevin.
Kevin: Of course, what does actually drive the property prices is supply and demand, and we’ve seen a huge amount of demand because we haven’t been able to keep up with supply. That is largely on the back of some population growth.
Michael: Population growth, which for a period of the time in the last decade, Kevin, was driven by the mining boom and people coming in to service our resources industry. Significant growth has definitely been one of the big drivers of our property markets and it’s going to continue because we’re having more babies, we’re living longer so there’s more natural population growth, and Kevin, there’s also more immigration. More people want to come into Australia than we can take at the moment.
Kevin: Michael, 10 years ago, what was the interest rate?
Michael: I think we were paying about 10%. Kevin, I remember that if your home loan was less than 10%, you used to be really happy with that. Today, rates are half that. I think one of the big differences in finance is finance is cheaper, but we’re finishing off this talk about the decade with the fact that we’re going through a credit squeeze.
In the last decade, even during the Global Financial Crisis, it was never as hard for property investors to get money because of the regulations that APRA has put on banks, tightening the screws and making serviceability difficult.
Kevin: Of course, Michael, all of this accumulation of knowledge… And I know you’re a great student of this and you document a lot of it and you’ve written a number of books. Your first book 10 years ago was How to Grow a Multi-Million Dollar Portfolio in Your Spare Time. You’ve just celebrated the launch of your new book, as well.
Michael: Yes. It’s the 10th anniversary of How to Grow a Multi-Million Dollar Property Portfolio in Your Spare Time, and I’m very proud of that book, but I’ve rewritten it because times have changed. I’ve actually looked at what’s happened in the past as we’ve just discussed now, and if we could come back next week I’d love to give you a hint of 10 things that could happen over the next 10 years in our show.
Kevin: I will look forward to that, Michael. Thank you. Have a great week, and we’ll talk to you next week in the show.
Michael: My pleasure, Kevin.
Has Sam always been ‘positive’ about property? – Sam Saggers
Kevin: Sam, I’ve spoken to you on many occasions but I don’t really know how you got started in property. When was your first personal purchase of a property?
Sam: I got introduced to property at a very young age. I grew up in a neighborhood where the family of a couple of my friends and peers actually ran property companies for a living. For me, I had an experience where a lot of my friends and family influenced me to get into the property industry.
I actually got into property at age 18, where I got involved and went through the process of becoming a licensed real estate agent. From there, I worked within the property industry itself for a good five years. I watched people sell real estate on behalf of the clientele of the day and, for me, I created a real passion at that point in my life for getting into the property market.
I bought my first property when I was in my mid-twenties – about 25. Basically, the first property I purchased, I didn’t use any rules of investment at all; I bought purely on emotion. I picked a unit in the area that I worked in. I thought the property was going to go up in value quite rapidly, but I ended up not doing the math correctly and chose a property that just didn’t perform.
So, my first property was actually an absolute dud. I ended up only owning the property for about 18 months, and I sold it after a brief ownership. The main reason I sold it was that at that point in time a few life commitments changed, and I actually couldn’t afford the property in the end.
The big lesson for me was to not buy on emotion, but to learn how to pick a property deal for mathematical reasons rather just because it was a cool place to live at the time.
Kevin: Sam, when you bought that property – and you obviously sold it 18 months later, and it wasn’t really as successful as you would like for it to have been – was that the temptation for you to stop investing in property or was that just the lessons that you learned from that experience that drove you further?
Sam: I’d saved $30,000 to get into that property deal, and it was my life savings at the time. Probably, a few people reading have lost money in one way, shape, or form over their lifetime. But when you lose money, you tend to ask yourself a few questions, and the first thing that I asked myself was “How did this happen to me?”
I think what it came down to for me was I was listening to the wrong people, and I had no great mentors to understand what I should be really doing when it comes to real estate. I was quite eager to get back into the market. Some people asked me what was the biggest lesson I’d learned out of that, and I think the biggest lesson was the ability to actually have a savings plan.
Though that experience cost me around $30,000 of my deposit, because I sold it at a loss, I saved another deposit within another 18 months time. I learned some invaluable lessons. I think probably that we all pay for education in one way, shape, or form, and for me it was a massive experience from an education point of view.
Kevin: What was the next property you purchased after that?
Sam: The next property I got into, I flirted with some positive cash-flow properties in regional market places. At that point in my life, I really started to work out there is a bit of a science to buying real estate and a little bit of an art form around creating offers on property that are quite discounted to what the market value of the property was.
My second property was quite an inexpensive property in regional Moree, where I bought the property for some $45,000. I had some money in my back pocket, and the reason I bought that property was to get a high return; at the time, it was renting for $110 a week.
Kevin: Just on that point, you said there that you learned the lesson to buy below market. Are you talking about being a good negotiator, or just looking around for the opportunity-type properties?
Sam: It’s looking for both. It’s looking for the opportunity properties, and also I think becoming a good negotiator is really important when it comes to understanding how to connect with people selling properties, how to work with agents in particular, working out how to condition vendors, and how to buy off them.
Kevin: Give us some examples of what you mean by how to condition sellers.
Sam: Yeah, sure. Conditioning sellers is a bit of an art form, but it just takes a little bit of practice. The whole concept of buying real estate is a bit of a game of bluff. It’s a game of understanding your adversary and just trying to counter punch. The way I look at it is you need to create objections, or counter objections with objections.
For example, if a real estate agent wanted you to pay X amount, say $20,000 more than your offer, your job as a property buyer is to work out what price points around the area or what are the reasons why you won’t do that. It’s creating constant objections to it.
Here’s the inside scoop: real estate agents are looking for you to give them a script and a dialogue that they can go and recondition the vendor. In real estate, we call that conditioning the vendor.
For example, when the real estate agent listed the property off the vendor, typically they won that business because they used a script and dialogue. They would have discussed price at some point, but quite often when they discussed the price they would have discussed things like owner/occupier, sales volumes in the area, open houses, marketing concepts, and things like that.
But if you can give that real estate agent a script as to why the property is worth less than the vendor wants for it – for example, a script could be “It’s a great property but the rental return is very low. Have you discussed the low rental return with the vendor?” – the agent, who quite probably has not discussed that with the vendor, now has actually a piece of information.
What the agent will typically do is then go to the vendor and say “Excuse me Mr. and Mrs. Vendor, we’ve quite an interested party but they did highlight something that I haven’t discussed with you. If we were to sell this property to an investor, the rental return is pretty low. Knowing that, an investor would actually offer a lot less for the property than, say, an owner/occupier.”
That creates a conversation, and that is what we call conditioning the vendor. The vendor is all of a sudden on the back foot, and the seed is planted for that property to get a price reduction.
Kevin: I want to pick up something on that point, if I could, Sam? When you’re talking to an agent there – bearing in mind that their job is to get the highest price for the seller, so they may not be all that disposed to taking the message back to the seller – do you try and work up a better rapport with the agent, so the agent feels they can work with you, as opposed to working against you?
Sam: Absolutely. I think you’ve got to establish rapport pretty quickly within the process and make sure the agent who is in the middle doesn’t get put in a position where they’re negotiating on nothing, or put in a position where they don’t really know who they’re dealing with.
You nailed it, Kevin. Rapport is a huge part of the process. But at the end of the day, if a property is on the market it’s the job of a real estate agent to get the best price, but also to report the facts. Under their fiduciary responsibilities to the process, they need to take information on buyer feedback to vendors.
Conditioning a vendor is all about gathering information. If you can find as much information on an area, a property, a street, a price range, or a rental return, and you present that to an agent to justify why you want the price at a certain price, or a reduction in price, the agent is going to use that information.
If you don’t have any information, if you’re just negotiating because you like the property, or you’re talking about it’s missing a door handle or something like that, that doesn’t really buy as much leverage. If you use real estate principles to negotiate, I think you’re going to get a lot further.
Kevin: As a successful property investor, and someone who is working with successful investors all the time, what is the most common question you get asked about the market, Sam, and how do you answer it?
Sam: The most common question I get in real estate is what makes a good growth asset or growth property. I think investors need to look at growth drivers. There are six key drivers for growth in real estate. If people start to learn them and understand a little bit about them as a driver, they can tend to start to work out where they should be investing.
Kevin: What are those drivers, Sam?
Sam: The Growth drivers are yield. If a yield is quite high compared to the market norm, it’s usually a good sign that capital growth is going to follow.
Economics is important; so, where are people going to work. For example, there’s a big correlation with wages; if wages are growing, generally house prices tend to grow in correlation to wage growth. It’s really good if you can find an area where the economics of that area are actually growing.
Supply and demand is one of the biggest. If you’re truly going to become an astute property investor, you’ve got to really start to understand what new supply of properties are coming into a market place and when they’re going to be delivered. There’s no use buying in a market where there is too much supply, because you’re going to be sitting there for quite a long time.
I think that most people I deal with are looking for a little bit of a return or profit on their investment within two or three years, as opposed to traditional property owners who are happy to wait a good ten or twelve years for a market cycle to do its thing.
Infrastructure is important, and we see a lot of people tend to focus on where new infrastructure is going to be built. There’s an old saying in real estate: just buy next to that infrastructure and reap the benefits.
One which I like studying is demographics. The reason I study it is consumer habits are very interesting. You can work out what, essentially, buyers are looking for and where they choose to live as a demographic. You see the demographic change happening in an area and you can find things like gentrification, or turbo-gentrification. Demographics, for me, are one of the best because if a new class of people move into an area, it really pushes property values quite high.
Beyond that, population growth is the final one. Population growth areas, high growth areas, sometimes also have a high supply of land. It’s looking for high population areas with low supply of land or building coming through. If you can pinpoint all of that activity, you tend to be able to find a good marketplace.
Kevin: You’ve outlined those very well, Sam. Is it possible to get all six, and if you did, is that almost a guarantee that you’ve got yourself a recession-proof property?
Sam: There are obviously one or two things you’ve got to take into consideration, but I think if you were to do it in a metropolitan area – a big capital city or a big secondary marketplace, leaving the small towns aside – I think you will get a pretty good return on your investment over a shorter period of time. I’ve done it for 20 years, so there’s no reason why other people can’t do it. Absolutely.
Kevin: What advice would you give to someone who is just thinking about getting into property investment? What should be the first step they take?
Sam: There is a couple of minor steps that people need to get in the habit of. I think people in today’s society don’t value the concept of going through – more or less – an apprenticeship in real estate, or in anything.
I think the current way the world behaves is there’s this instant gratification mindset out there, where people want to become a successful property investor overnight. People tend to frequent three-day courses and try to become an overnight success.
I actually think that, having done it the slow way – over virtually two decades – there is something to that. For people getting involved in real estate, the first things they need to consider are just staying in it for the long term and also on working on building a team of people around them who are going to help for the long term, and taking advice from people who have done it over a longer term period rather than any sort of fly-by-night activity.
I think people can buy a property a year for ten years – I know they can – and at the end of the day if you could get that result, you would end up in a really good position in your life.
Kevin: You’re talking there about building a team, and we’ll talk about the team in just a moment. Before we do, I just wanted to ask you about your first experience and how you were a failure at that. Do you think that made you a better investor? Is that what you’re hinting at when you’re talking about getting that experience yourself?
Sam: Without a doubt! When you lose something and you go through the pain process, you ask the universe, “Why did that happen?” For me, the first thing that I looked at was the team around me. I soon realized that I didn’t really have a team and I was taking advice from people who weren’t actually even successful in property. They were just my peers at work.
The interesting thing for me was I worked at a real estate agency and the ten people who worked there were giving me advice. I was listening to these people because they had been long time realtors, but only one of them owned an investment property. The others didn’t even own real estate. I really looked at who I was listening to, and I soon realized that one of the big furphies within the industry is that realtors don’t necessarily own real estate, so they’re not necessarily the best people to go and listen to.
Kevin: It’s not only real estate agents. You made a very good point there; it could be any advisor you may listen to who, if they haven’t had that practical experience or are not investors, are certainly not the sort of people you should be listening to.
Sam: Absolutely. One of the questions that I would encourage people to ask people they’re dealing with is where do they own property, or whatever they’re investing in? I think it provides a deeper level of empathy over how hard it is sometimes to go through a property transaction.
I think everyone needs to go through an apprenticeship; you need to listen and be coached, and actually work or associate with people who’ve had ups and downs in whatever experiences they’re going to share with you. It doesn’t have to be about real estate, but the concept of taking time to work with someone or learn from someone is, I think, important for investors.
Kevin: If you were putting a team of advisors together now, who would you have on that team?
Sam: Without question, it’s important to have a really good accountant, a really good advisor when it comes to self-managed superannuation. At the moment, it’s really important to take control of that when it comes to whatever you’re doing with your super.
I believe a good property strategist is important – someone you can talk to about property. For most of us, we actually grow up in an environment where people don’t talk about money or talk about wealth. Not a lot of us are brought up in that format. Quite often, our own internal peer group is quite dysfunctional in a way.
Above all, you need to find someone to talk to about your goals and about what you want in your life. If money is something that you want, you need to be able to talk to a mentor. However that looks to you, I don’t know, but find a mentor – someone who has been down the path and done it before.
Kevin: You’re talking there about an accountant and about getting a strategist to work with you as well. A solicitor? Just as important?
Sam: Absolutely. The more properties you buy, the closer a bond you need with a good solicitor, or even a conveyancer or settlement agent – just someone who can help you understand where you are at when it comes to contract law processes.
Kevin: What about a real estate agent? Would you put someone like that on your team too?
Sam: Look, there are great realtors out there, absolutely. If you’re pinpointed at a particular area that you’re focusing on, building relationships with real estate agents is imperative. I think you can do it yourself, certainly with the help of a team. For most people, it’s just getting connected with that team to start with.
Kevin: Sam, who do you turn to for inspiration? Who inspires you?
Sam: I think today it’s very easy to find inspiration. It’s going to sound a bit silly, but I actually get a lot of inspiration using the Internet. I value self-learning, and I find there is so much free education these days within the realms of the Internet that it’s an easy and simple way for people to get started.
For big picture inspiration, I’m still inspired by my dad, who is a great businessman and a great leader within our family structure. I also have a few other more inspirational people that I’m a big fan of – people like Margaret Lomas; she inspires me.
Kevin: You mentioned your dad there. Growing up, was he giving you some good lessons in saving money? Obviously, you started to save at a very young age, as you’d said you saved $30,000 for your first deposit, which is no mean feat! Was your father a great inspirer for you in that?
Sam: Yeah. My father is very much a realist. I think the blessing he instilled in me was to get ahead in life, you need a little bit of a high quality work ethic, and you need to think and plan. He is a great strategist. He imparted on me not worrying about the day-to-day stuff but engaging the world on big-picture stuff. What he taught me was you need to get out there and build your own life and your own nest egg. I think that was an awesome set of teachings that he imparted on me.
Kevin: You certainly started at a young age; you said you started at age 18. Did you start in real estate at age 18?
Sam: I started in real estate aged 18, yes.
Kevin: What does success mean to you?
Sam: Success for me is freeing people financially to live the life that they want to live.
Kevin: What about you personally? What does success mean to you? Not about giving to other people. How do you measure your success?
Sam: I know it’s probably a little bit similar to what you’re trying to say, but I actually do measure my success by how many people I can help along the way. I’m a big believer in sharing knowledge and information. I’m measuring my current success by building schools overseas. I’m a big believer in education. To date, I’ve been able to fund, through property investing, six schools: two in Nepal, two in Laos, and two in Vietnam.
For me, I don’t have a problem getting out of bed every day, because I know that what I do and what I get out of it is to free people financially to live the life they want; whether that be a young 25-year-old property investor who is buying their first investment property and just needs some technical expertise, a multimillion-dollar property investor who is looking to find an amazing subdivision somewhere, or a person who has grown up disadvantaged and looking for a break in a third world country. That’s why I exist.
Kevin: We’ve been through a pretty tough time in the last couple of years. The economy has not been too good, and there have been a lot of people who’ve actually failed not matter what they’ve tried.
When someone does have a failure or a setback, like you did in the early stages, what do you think people should do to turn that around and keep themselves motivated to keep going?
Sam: I think absolutely there’s going to be a point in our lives where something goes wrong – where someone we love passes away, where we get a divorce, where a business partner or a business fails, or something like that. I think for most of us, if we have a good relationship with our goals and our wealth, you can work through things quite easily.
At the end of the day, I don’t believe that anyone is getting involved in real estate to make themselves wealthy. Call this naiveté, but I think people buy real estate and fail, and also succeed, because they want to – generationally speaking – pass on a better life for someone else. For most people that’s their children.
I think if people do have a setback in real estate, you’ve got to just get back on the horse and give it another go. The fact remains you will have setbacks through your life. I think that’s why most people fail at real estate.
There’s an interesting statistic where of all the investors that are out there only one percent of them – I think the statistics from the Australian Bureau are around 11,000 people today – have more than six properties in Australia. That’s a pretty interesting statistic, and it tells me that out of all the investors that get out there, most people won’t go the distance because they will run in to some sort of adversity.
I think it’s about overcoming your adversities and becoming a good money manager, and just having clear goals – resetting your goals and going again.
Kevin: Sam, thank you very much for your time. It’s been great talking to you.
Sam: I appreciate being on board.
Sorting the good Apps from the not so good Apps – Rich Harvey
Kevin: In this digital world, there is an abundance of free and often useful online tools out there to help homebuyers and investors make decisions about property purchases. In fact, you might have a couple on your phone right now. I know I certainly do. But I have to say – and we’ve said this in the past – that you have to be careful about how much you rely on the information you get from some of these.
I want to find out a little bit more about this, because that’s not just my thought; that is also a sentiment that’s been expressed by probably Australia’s foremost authority when it comes to buyer’s agents, and that is the Real Estate Buyer’s Agents Association of Australia. The president of that organization – who has just been re-elected too, by the way – is Rich Harvey.
Good day, Rich.
Rich: Good day, Kevin. How are you?
Kevin: Good, mate, congratulations. How many nominations were there? Just you?
Rich: Yes, it was just me this year. I was elected again, so they’re happy with the job I’m doing.
Kevin: So you drew the short straw.
Rich: I put my hand up, so I volunteered. It’s a hard job, but someone has got to do it.
Kevin: It’s a great organization, and it’s been growing in importance all the time, too. Of course, buyer’s agents are very strong overseas, but they’re certainly getting a bit of a foothold in Australia. I think it was that thing that people had to get used to understanding that they needed to pay for professional advice like this, Rich.
Rich: That’s right, indeed, and a very worthwhile investment.
Kevin: Let’s talk about these apps. You’ve expressed some concern about them. Why is that?
Rich: I think you have to be very careful with these apps. They’re actually quite useful in some contexts, and they provide a wealth of information that can help buyers locate and compare properties, but the key thing is that you do need a human being to provide an interpretation of that data and to give an accurate valuation estimate of a property.
The thing is that these automatic valuation apps may not take into account the outlook, the privacy, or some really specific things about a location that can dramatically impact the actual valuation.
The other thing is if you have an app that’s a predictive app that says “Capital growth is going to be 7.6% in this particular suburb,” someone might rely totally on that one forecast to buy a property in that area, and then the train line doesn’t go through, the hospital doesn’t get built, the bypass is not built, and then that area might actually only perform at 1% or 2% a year. They’ve bought a property in completely the wrong area.
Kevin: Just on that point, too, not only just in suburbs, but we’re even talking about streets within suburbs that can vary. To say that a particular suburb is going to go up by a certain amount, it’ll vary around that particular suburb.
Rich: That’s right. There are a lot of local and very specific factors that can influence the value on a property. You can be one street away from a main road and it can be quite a reasonable value, but on the main road, it’s terrible value.
There are all those specific factors, and that’s where a buyer’s agent’s experience is invaluable, because they know that local market and they take into account all of those local factors. They can then recommend a specific strategy and type of property that’s going to suit that investor’s specific circumstances.
Kevin: A lot of these apps draw their information from data sources like CoreLogic RP Data or APM PriceFinder, but unfortunately with those, they don’t know when a property has been renovated unless it’s resold and then that is updated. This is one of the major flaws I see.
Rich: That’s right. I think it’s definitely a flaw. Some apps will have you believe that if you hold your phone up to the letterbox on the address, it’s going to spit out a number. But that number could be out by 20% or more.
There are two things here: let’s say you hold your phone up and it spits out a value of 800,000, that could actually underquote the current market value, and it makes the person who has that app really excited about buying that property. They then go and spend some money doing a [3:51 inaudible] getting the contract reviewed, and then they start making offers or turning up at auction, but they’re way below the price that that property is going to sell for.
On the flipside of that… That’s the underquote number. It could come out underquoted, or it could come out overquoted. It might actually spit out a number of, say, $1.2 million, in which case the buyer goes “Oh, I have no hope of buying this,” walk away from it and actually find that they could possibly get it for $1 million. There’s a lot of danger in just relying on one number that’s spat out by an app.
Kevin: I was deeply concerned several months ago when I saw an advertisement – a television ad – for a major bank, where they had obviously done… You probably know which one I’m talking about.
Rich: I know exactly which one.
Kevin: They had done a deal with one of these data providers to provide this sort of information, and here are a couple of buyers fronting up to an agent, the agent won’t disclose any value, they hold up the app, and the agent says “Oh, yes. Well, there you go.” It really concerns me that the banks are starting to endorse these, as well.
Rich: One of the key things in doing a valuation, you have to look at comparable properties. The problem with the apps is that it’s all automated, so a three-bedroom, two-bathroom, one-car home in one suburb in one street compared with another one in another street, it’s supposed to spit out a particular value. But it doesn’t take into account the size of the room, it doesn’t take into account the renovation, the quality of finishes, the land size, the aspect, the slope. All of those factors is what a human valuer or a human buyer’s agent will take into account.
I always say that when you look at these apps, you have to overlay a good dose of common sense when you’re looking at the numbers.
Kevin: How much notice do the banks take of these apps when they’re doing their valuations? Do they take into account desktop valuations?
Rich: That’s the thing. Some of the banks, under a certain price, will do desktop valuations or a drive-by. They don’t appoint a formal valuer to go and physically inspect the property. But that’s majorly flawed. A buyer’s agent – and that’s part of our constitution – must go through the property that they’re recommending to the client, to identify all the features and benefits and any drawbacks on the particular property and come up with a proper, comparable analysis.
Kevin: It may just come to the stage where as a buyer or a borrower, you could actually demand from a bank that they get a proper valuation done, because at the end of the day, that’s part of your application fee. That’s what you’re paying for, is a valuation.
Rich: Absolutely, and that’s the bank’s protection, as well. They don’t want to be lending 80% on an inflated value, because then they’ll find there’s no equity in the property, there’s no buffer in there.
Kevin: Okay, the bottom line, the message is “Be aware; don’t be alarmed,” something like that?
Rich: That’s right. Absolutely, and again, don’t be afraid to get help in interpreting these numbers. Don’t just take it as gospel what these actual figures are, because the figures quoted – as I said – are quite inaccurate. Take into account the local factors, and get a professional to help you.
Kevin: Before I let you go, I had heard somewhere that it’s been quoted that online apps are a great way for homebuyers to save money, because they’re not using a buyer’s agent or engaging other professionals. What’s your reaction to that?
Rich: There’s a saying that says there’s a high cost for free advice. If you have a medical problem and need medical attention, you want the best doctor to operate. If you’re going to go to court, you want the best barrister on your side. The same applies when you’re buying a property; you want the best buyer’s advocate on your side.
Sure, people can use these apps and they can get some numbers, but nothing is going to replace having a professional buyer’s agent representing that person throughout the process. One of the things that buyer’s agents do really well is negotiate. Having someone who’s independent in your corner working the agent hard to get it for the right price is really powerful.
The buyer’s agents charge generally a fixed free. It works out to around 2% for the full search or around 1% just to appraise and negotiate, but the full search will dig up both on-market and off-market properties.
It’s a false economy to think that just using an app is going to save you money, because you have to understand the interpretation of the numbers, do the comparable analysis, and really, those apps are a complement for the service, not a replacement for that service.
Kevin: Well said. Rich Harvey, president of REBAA, the Real Estate Buyer’s Agents Association of Australia. Thanks for your time, Rich.
Rich: My pleasure. Thanks, Kevin.