investor-q-a

Back from the brink

By Staff Reporter

An ambitious David McElveney had seven properties under his belt by the time he was 27, but a couple of bad business decisions saw him lose $1 million in just one year. He tells Kate Miller how he bounced back

David McElveney’s instincts have always told him one thing: bricks and mortar are the way to make money.

He did at one point contemplate another route to wealth but was proven well and truly wrong. Now, the 42 year-old Sydneysider is convinced more than ever that property is the best investment strategy you can have.

Mr McElveney started buying property at age 21, while working in a bank. On his way to work one day, staring out of the bus window, he began thinking about the people sitting in traffic all around him.

“I asked myself what all these people spend their money on,” he recalls. “Mortgages and real estate! I should probably be in that space – there must be a lot of money in it.”

Mr McElveney went on to dabble in a career as a real estate agent, but it was in buying real estate rather than selling it that he would really make his money.

His first purchase was in December 1989. The property was a small, 26 square metre studio in Darlinghurst in Sydney’s inner east, with a price tag of $75,000. The bank required him to stump up a $25,000 deposit.

By living at home and saving hard, Mr McElveney had accumulated $30,000, so he even had $5,000 to cover extra costs and provide a bit of a buffer.

While that property might sound cheap now, Mr McElveney said it was a decent sum back then, particularly given his $18,000 annual salary.

“The numbers are different but the process is the same today,” he says. “That property is worth approximately $300,000 today and wages are about three times higher as well.”

The studio would go on to provide the perfect foundation on which Mr McElveney would build a seven property-strong portfolio by the time he was 27.

The beauty of positive cash flow

Mr McElveney went on to study accounting for three years which meant his income took a hit. Fortunately, this had little impact on his new role as a property owner.

“The rent paid for the interest, so it was essentially self-funded,” he says. “It always had high yields.”

Getting that first purchase right really helped him build the portfolio, he adds: “The first property is important because it gets you into your second and third properties.

“When you start out, you have to work backwards from what your goal is. My goal was to have six or seven properties and have them go up in value, but I looked at the first one as to how it would help me get into the second and third ones.

“It had to pay for itself and it had to be able to go up in value reasonably quickly.”

Indeed it did, and by 25, Mr McElveney had purchased those second and third properties. “I re-leveraged and re-leveraged until I had seven properties by the time I was 27,” he says.

A spanner in the works

By the time he was nearing the Big 3-0, Mr McElveney’s real estate nest egg was delivering decent returns.

One day he went to a property investment seminar and was met with the question, ‘Who here doesn’t need to work if they don’t want to?’. Mr McElveney put his hand up, but then asked himself why he was working as a real estate agent, which he was far from enjoying.

He decided it was time for a career change.

Between 2001 and 2006, he successfully ran his own real estate agency before becoming an investor in small businesses.

Unfortunately, Mr McElveney lost a lot of money. “It was probably the worst year of my life,” he says. “Losing $1 million in a year destroys you when it takes over 10 years to make it!”

As a result, he had to sell off some of his properties but he also learned some important lessons from his experience, resolving to refocus on property.

“When you’re buying real estate you have a contract that’s really solid – it spells everything out,” he says. “When you’re investing in anything else, like businesses or shares, you’re really relying a lot more on people. That’s where you can really come undone.

“I put the same mentality from real estate into another form of investment and you just can’t do it.”

Mr McElveney went on to rebuild his property portfolio and now has a nest egg comprising 10 properties.

Two features had made property such an attractive investment for him: first, the compound rate of return it delivers and second, leverage. “These two things are probably the most powerful principles of investing,” he says.

Property also has relatively low holding costs, he adds, with rent and tax deductions covering much of the cost.

Eyeing opportunity

Mr McElveney’s property portfolio includes Victorian and Edwardian-style terrace houses built in the city’s inner suburbs, predominantly between the 1850s and 1890s.

His penchant for terraces was prompted by an acquaintance who had purchased around 40 across inner western Sydney’s suburbs of Newtown and Erskineville.

By the 1990s, terraces had become a unique property class but were still relatively affordable, while rising land values and zoning changes allowing for increased density made them even more enticing.

“I’ve bought about seven terraces,” Mr McElveney says, adding that they were the perfect asset description: “unique, desirable, well-priced and difficult to reproduce”.

“Like artwork, if they don’t make any more of it, it usually gets more expensive – and it did. We had the greatest boom in real estate in the ‘90s in over 100 years of real estate and they all increased in value quite significantly.”

Mr McElveney applies the same strategy to his investments today, not limiting his selection to terraces.

“You just have to look for properties that are unique, desirable and difficult to reproduce. That doesn’t have to be a terrace,” he explains.

“If you’ve got a unit with an outstanding view that can’t be built out that can lead to the same result.

“If you go and buy a land and house package in a greenfield site in a rural setting, and there are 500 of them right next door, now that’s not going to go up much in value.”

A good buy

One of Mr McElveney’s best deals highlights how important selecting the right property can be.

In November 2002, he purchased two terraces in Surry Hills (another regenerating suburb in the heart of Sydney) for a combined price of around $1.1 million.

The terraces were converted into office space but the tenant approached Mr McElveney just four months later to ask about purchasing the properties from him.

Mr McElveney wanted to hold on to the terraces because they were in such a prime position but when the tenant offered him $255,000 more than he’d paid just a few months earlier, it was an offer he couldn’t refuse.

“It was the right place, right time, but it was also a good sign that if you buy the right property there’s always going to be a buyer,” he says.

“That’s one thing I’ve always found: Before you go out and buy a property you’ve got to think, if everything goes to hell, who is going to pick this thing up from me? Know that you’re always going to have rental and that you’ll always have a buyer.”

Mr McElveney is therefore a big advocate of buying properties in the lower end price brackets.

“Your yields are going to be higher, plus when you’ve got a lower price point there are a lot more buyers to push the price up.”

Successful portfolio building, he believes, comes from identifying different properties with different purposes.

Some properties have been stepping stones that have helped him into other purchases which he has then let go, while those with the best long-term prospects, he has held on to.

Looking forward

More recently, Mr McElveney’s investment strategy has focused on buying new properties under market value, or at wholesale prices, from developers.

Developers will usually move on price at two key times within a sales period, he has found, and it is on these occasions that he makes his move.

“Developers are usually more likely to negotiate their prices if they are at the beginning of a development and they really want to get some pre-sales to qualify for finance,” he says, “or if they’re at the end of it and they just want to get out of the development and on to the next one.”

Most recently, Mr McElveney has been eyeing commercial and industrial property opportunities (although he still intends to maintain an interest in residential).

“The rental returns are just so much stronger in commercial property, but you really need to know you are doing,” he says.

When not buying property himself, Mr McElveney works as a buyer’s agent, helping other investors make smart, strategic purchases.

His long-term goal is to give his son a nest egg of properties for his 21st birthday – as his son is currently only eight months old, he’s got plenty of time to do just that.

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