Experts often say that the first purchase could make or break an investment portfolio, but Michael Xia did not let a terrible post-poker night purchase derail his wealth creation journey. More than 10 years later, he now holds a multimillion-dollar portfolio and works as a full-time mortgage broker. How did he learn to embrace property investment?
Mr Xia was 22 years old when he bought his first property – an off-the-plan development of a 50-square metre unit worth $340,000 located in the suburbs of Sydney.in
During that time he had no idea about the intricacies of property investment nor did he have a goal in mind or a plan of action set up. The only basis of his decision is a discussion he had with his friends during a poker night.
According to him: “We are all a bunch of 20-year-olds. One of the mates just told me, ‘There’s this new development opposite the station, reckons it will go really well.’ Around that time, I absolutely have no idea about property investment. I basically walked up to a showroom of a new development and just bought a studio off the plan.”
Ten years after he made the purchase, the property turned out to be a terrible investment. Aside from paying over $1,000 for strata, the property’s value went up from $340,000 to only around $400,000 and is still negatively geared.
Fortunately, he got a good tenant shortly after the development was finished. The good negative gearing from depreciation also acted as a ‘saving grace’.
Due to the bad purchase, he was held back from investing for a long time – long enough to discourage him to continue his investment journey.
“I thought, ‘Oh, property investing sucks. I’m just hemorrhaging in terms of the repayments and it hasn’t gone up in value,’” he said.
However, six years later, he found himself purchasing another property in Sydney's Macquarie Park. This time, he knew the fundamentals he should be looking for – the property was five minutes away from the university and near a major shopping centre. There is also a new train line going to the suburb.
Barely six years after he bought the asset for $420,000 in 2010, the property is now valued at around $700,000 to $750,000.
Mr Xia said: “It’s never vacant. There’s a little bit vacancy over the Christmas period when students go overseas, but as an investment property, that’s probably the one that really set me up,” Mr Xia said.
Since then, he has continuously purchased properties across Australia and most of them have gone up in value, particularly those located in Sydney and Brisbane.
Within six years since his second purchase, he was able to grow his portfolio to 13 properties. Two years later, in 2018, he proudly holds 20 properties worth $9.7 million to his name, with nearly $4 million in equity.
"It’s not too shabby considering that five years ago, in 2013, I started with only two properties," the investor highlighted.
In between his second and 14th purchase, Mr Xia decided to quit his job in market research and established his own mortgage broking business with the help of his own mortgage broker, who also served as his mentor.
Being self-employed hit his serviceability, so after his acquiring his 13th property, he opted to sit on his hands for two years and focused on growing his business.
“The passive income I had from my properties gave me the courage to quit work and focus on the business in the last two years. It also gave me the serviceability to pull out equity and use that equity to buy again. A lot of it comes down to buying properties that look after themselves,” according to Mr Xia.
His 14th and 15th purchase – deceased estates in Logan and Woodridge worth $245,000 and $220,000 – were made without taking out loans. Instead, he used the equity from his existing properties and the cash built up from his business.
When he finally built a good serviceability, Mr Xia started actively investing in more houses, “renovators” and 4,000-square metre blocks located in Marsden and , ultimately building up his 20-property portfolio. The prices of his recently bought assets range from $267,000 to $830,000.
One of the first lessons that Mr Xia learned throughout his investment journey, ironically, is the value of “property problems”.
His first property was a “brand new and shiny” finished product handed to him by the developer and the builder. In hindsight, these people that solved the problem for him stood to gain from the property.
“Moving down the track in terms of properties that I’ve done well in, there’s been problems in terms of a hole in the wall, bad carpet, bad paint. I’ve gone in and solve those problems, then I stand to gain from them," the investor said.
Since then, he has sought to buy properties where he could find problems and formulate the best way to solve them, such as homes with renovation potential or big blocks of land.
Aside from honing his skills as an investor, he also improves the potential returns that he could get through the value he adds on the property.
According to Mr Xia: “The more problems that you solve, the more that you stand to gain from the property.”
“Obviously, people have different risk profiles. Regardless of ambition, talent, and aptitude, you obviously need to do some work and learn from experience. Having a good team of professionals around you, whether it’s a mortgage broker or accountant, is probably the most important thing.”
Aside from the ability to add value to the property through renovations and other property improvements, Mr Xia also factors in the location of the property when choosing an asset to add to his portfolio.
In general, he tries to buy near central business districts and capital cities because they have great potential to do well in the long-term considering the presence of property investment fundamentals, including population growth and good infrastructure.
However, more importantly, the best areas for investment are those with the best cash flow potential, according to him.
Mr Xia said: “Just make sure that the rental payment goes to pay a big portion of the mortgage or your expenses. At least make sure that you’re close to breaking even so even if you lose a bit of income, you don’t lose your portfolio.”
“Unfortunately, that’s how a lot of people get unstuck in property investment – they leverage too hard, their income gets cut in some certain way, and they’re forced to sell those properties. If it’s at the wrong time, those people could get hurt badly.
“Make sure that your property cash flows.”
He also advised investors to get out of their comfort zones and invest outside their hometown, especially if it’s where their research leads them.
In his case, the risks of treading unfamiliar areas paid off because he studied the areas and their growth drivers and crunched the numbers that will influence the growth of his investments.
After taking a break from acquiring new properties for a couple of years, one of the new strategies he implemented was buying big blocks, which he plans to split to six or seven blocks of houses.
Mr Xia's 17th and 18th purchase are 4,000-square metre blocks in Kingston, which cost him $750,000 and $830,000, respectively.
According to him: “If you’re buying a house for $300,000, for $400,000 more, you’re getting almost six to seven times of land. The fact that I could hold it and I’ve got the serviceability down to hold the portfolio, it almost made it no-brainer.”
“I can get about six to seven blocks out of that one. The block next door has been split already and that one has a purchase price of $750,000.”
Despite the high purchase costs, the rarity of the assets and their potential for good yield and capital growth make them worth their weight in gold.
According to Mr Xia, a lot of investors miss out on great wealth creation opportunities simply due to the desire to save a small percentage on acquisition costs. Instead of taking this short-term approach, investors must learn to look at the bigger picture when investing in property.
"When you’re playing in that market and in terms of the longer term spectrum, around five to 10 years, if I overpay $20,000 for a 4,000-square metre block, in 10 years’ time, it’s not going to matter that much," the investor said.
At the moment, Mr Xia has decided the blocks and start building when the Brisbane property market starts to take off.
Considering the costs from development application to splitting the land and constructing properties, the profits he could get may not justify the time and effort that he’s going to spend on the blocks if he went on with the development process right now.
Even with a big portfolio, Mr Xia does not see himself concluding his investment journey any time soon. In fact, he plans to build up his portfolio to 40 properties.
As hard as it sounds, the investor will need only to tap into one of the most basic investment strategies – increasing serviceability or gaining equity.
According to him, serviceability and equity are the primary resources available to property investors. In most cases, if not all, they will not be equal.
He explained: “In reality, there’s only two resources you use in property investment – your borrowing capacity or how much the banks are willing to lend you and how much savings or equity you have. Those two resources are never equal.”
“One’s always more than the other. If you can figure out which one is your limiting resource, then spend all your time and energy targeting that.”
For example, if you have substantial equity on your properties but your serviceability is limited due to accumulated debts and you’re finding it hard to borrow from the banks, it would be best to buy in areas with better rental returns or buy properties with granny flats.
By doing so, you can boost up your serviceability. The added income can also add to your equity and allow you to move forward in terms of acquisition.
On the other hand, if you have good serviceability but limited equity to play around with, as in the case of most first-time investors, buying properties that will generate equity can help you grow your portfolio.
These “equity manufacturing” properties include homes with renovation potential and properties in areas with good potential for capital growth.
Mr Xia highlighted: “The key for investors trying to grow their portfolio is just focusing on whichever resource is limiting.”
As he continues his investment journey, Mr Xia also works hard as a mortgage broker to inspire and support budding investors in creating their own paths to success.
His choice to establish a full-time career in the property business was inspired by his own mortgage broker, who stood as his mentor in property investment. He wanted to guide other people who seek to create wealth the same way he has been guided through the years.
He said: “The main reason why I picked mortgage broking was my mortgage broker. He structured everything for me and help me go from two properties to 14 and quit work.”
Instead of simply helping investors negotiate loans with lenders or banks, Mr Xia goes beyond his mortgage broking duty to determine the best financial strategies to implement based on the individual’s specific goals and capabilities as an investor.
Unlike the “transactional method” that most brokers use, he makes sure that his services are goal oriented.
Mr Xia explained: “The property itself is the vehicle to help you get where you want to go. The difference with how we work is we actually find out where people want to go and then we help them get there.”
“If they have no idea what they want, we actually peel the onion and find out what their real goals are.
“The lending structure of someone who wants to pay off the mortgage is different from someone who wants to build a portfolio of 10 properties. There’s no right or wrong. It just depends on what someone wants to do and what someone wants to achieve.”
Having the guidance of experts and professionals throughout his journey has helped Mr Xia expand the opportunities available to him and ultimately achieve his investment goals.
He believes that by speaking to the right people who have used the right strategies and being backed by trusted professionals, where appropriate, anyone can navigate their way through the ever-changing property investment landscape.
"As property professionals, we can make them better investors, the properties that they are buying can be better investments and their long-term financial situation is going to be heaps better," Mr Xia concluded.