Powered by MOMENTUM MEDIA

Dealing with scar tissue from bad investments

buying
1 minute read

Dealing with scar tissue from bad investments

by Demii Kalavritinos 02 October 2017 1 minute read

Investor Eric Brown re-joins host Phil Tarrant in this episode of the Smart Property Investment Show to recap the growth, challenges and risks he faced over the last two years, as well as the lessons he has learnt through mistakes.

Phil Tarrant, Eric Brown, Andrew Scott
October 02, 2017

Eric explains the power buying at the right price has had on his portfolio and how his career as a commercial builder has given him an advantage as an investor. He also reveals details about his newest venture of converting a warehouse into a family home, the issues he has to overcome and the challenges he expects to face in the future.

You’ll also find out how to balance a high appetite for risk, tricks on how to stick to a budget and his advice to anyone looking down the path of development, that’d be great too.

All of this and much, much more!

 

Make sure you never miss an episode by subscribing to us now on iTunes! 

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn. If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

Suburbs mentioned in this episode:

Sydney
Monto
Bowen
Queensland
Shoal Bay
Nelsons Bay
New Castle
Botany
Lilyfield

 Speaker 1: Welcome to the Smart Property Investment show, with your host, Phil Tarrant.

Phil Tarrant: Good day everyone, it's Phil Tarrant here, I'm the host of the Smart Property Investment show. Thanks for joining us today. I've got someone back in to the studio who, if you've been a long time listener to the Smart Property Investment show, their name may strike a bell. A property investor who's gone down a journey to building wealth through property, who has a interesting story.

                We originally spoke to him back on the 28th of December 2015, so, go make yourself familiar with this, so you can listen to it straight away or you can wait until once you've listened to this particular podcast, 28th of December 2015, shared his investing story, good and bad. And by memory, there was a fair bit of bad in it, but there's a fair bit of good as well. But I think the experience that this investor had, leading up to that period, has really put them on a path to acceleration in the subsequent two years and I thought I'd ask Eric Brown back into the studio to share his journey since we'd last spoken to each other, which is at least 18 months ago. How's it going, Eric?

Eric Brown: Good, Phil. How're you doing?

Phil Tarrant: Alright. Are you a happy property investor or an angry property investor?

Eric Brown: I'm happy, I'm always a happy property investor. No point being angry, mate.

Phil Tarrant: So, are you in a better position now than what you were when we spoke late 2015?

Eric Brown: Oh, I think I am. I've probably got my ass hanging out a little bit more, if I can say that.

Phil Tarrant: Yeah.

Eric Brown: But, yeah.

Phil Tarrant: So, a little bit more risky?

Eric Brown: A little bit more risky, yeah.

Phil Tarrant: A little bit more sophisticated?

Eric Brown: A bit more sophisticated, but into the development side of things, so, with greater risk comes the potential for greater gains, so that's the avenue we're working on at the moment.

Phil Tarrant: Now, so let's recap your portfolio. So, when we spoke in 2015, by memory, you had a couple of dogs or lemons in your portfolio, which you've managed to-

Eric Brown: I did, I've got rid of-

Phil Tarrant: At least remove one of them.

Eric Brown: I've got rid of one of them and I've held on to the other.

Phil Tarrant: So, let's have a chat about those. So, your portfolio now, how's it looking?

Eric Brown: Good, it's about 11 properties including my principal place of residence.

Phil Tarrant: Okay. And what's your total value now of your portfolio?

Eric Brown: It's eight mil.

Phil Tarrant: Okay. Your debt position?

Eric Brown: Debt position is 5.25. That sits me about 65%.

Phil Tarrant: Okay, it's pretty good. And you've got some more interesting properties, now, in your portfolio from when we first spoke. You've recently acquired a warehouse that you hope to transform into some luxury apartments, is that the latest ...

Eric Brown: Correct.

Phil Tarrant: Okay, so-

Eric Brown: Yes, it's been-

Phil Tarrant: So, I don't want to give too much away because I want to get you back in once you go down this path of developing this and I think at the moment you're in sort of a DA planning phase, so you can't yet start doing anything.

Eric Brown: That's correct.

Phil Tarrant: But you have an asset there that you could get some substantial gains with.

Eric Brown: Yeah. Got a lot of potential.

Phil Tarrant: Lot of potential. So, let's really quickly touch on this. So, you've bought a place that you're going to convert into apartments, that was once a industrial type of ...

Eric Brown: A window manufacturer, yeah.

Phil Tarrant: A window manufacturer. What are you trying to achieve with this latest play?

Eric Brown: In a larger picture type of scenario, we're actually doing it for a yield play, really, it's not really capital growth or ... We're going to try and hold it if we can in the end and make it a yield play, to ... Our objective is to replace my wife's income with passive income from residential property investments, so this is going to add to that portfolio. If we can afford it. If we can't, then we'll sell one of them and hold the other but ideally, in a good ... If things go well, we'll hold both of them.

Phil Tarrant: Okay. So, what makes you think ... And we'll go back and have a chat about your portfolio and what is made up of it, but what's given you the confidence to go about entering this most recent play within the property market that is buying something which, let's be fair, needs a lot of work done to it before you can realise the potential value of that and the value is, good yield, but also, as a property investor you want capital growth as well. That makes you confident to go about doing this stuff?

Eric Brown: Development is a funny little word that people throw out and my first point is that it's not easy and it's very difficult and there's a lot of hurdles and there's a lot of risk involved, so I'm not here telling everyone to go and do developments, I'm here telling about my experience with it. I guess the reason that I've become a little bit more confident to take on a bigger type project like this is I've done two in the past that have worked out quite well for me and doing them myself. And I'm in the commercial industry, so I'm in the game, so I've got a bit of an advantage over other people. But having the experience of having done a couple successfully, I think that gives you a bit of confidence to have a crack at the next one.

Phil Tarrant: So, you're ready to back yourself and get this done?

Eric Brown: Yeah.

Phil Tarrant: How long's it going to take you to do this particular development?

Eric Brown: It's kind of hard to know how long it's going to sit in council for, but I'm hoping to get a result within two months from council. It'll probably have to go to a planning panel because of the floor to space ratios, but after that comes out, I'm thinking 15 months for a construction period.

Phil Tarrant: So, potentially two years?

Eric Brown: Two years, yeah.

Phil Tarrant: Of effort, time, cash tied up, all that sort of stuff. But let's get on to that in a moment. So, your portfolio. Let's do a quick recap. The first property that you acquired and let's move forward. So, what do you got?

Eric Brown: 77 Nelson Street.

Phil Tarrant: Okay. Let's not give away too many address details, you'll have people come and egg your house, but ...

Eric Brown: True, true. That was my first one. I remember, I talked about this on the last podcast, that I was arguing with the vendor over the last 10,000. We bought that for 480 grand and I only wanted to pay 470 for it. It's a small block, it's only 154 square metres, so, at the time I was thinking half a million dollars for 154 square metres was ridiculously expensive. But you know, looking back on that ten years later, oh my god, I would've paid a hundred grand more than that and it still would've been a valuable investment for me.

                So, that set me up and going back to what you say often, Phil, the power of buying at the right price is very, very important. If you stay in the market for long enough, then that matters a little bit less because you can go over a couple of cycles and, particularly in the Sydney market, what it's done in the last few years, it's been a very valuable investment. But at the time, that $10,000 seemed so important to me and now, looking back on that I'm like, "Wow, I'm so glad I went through with that and didn't get scared by that."

Phil Tarrant: And you still hold this property?

Eric Brown: I still hold that property.

Phil Tarrant: Okay.

Eric Brown: We've spent some money on it, we probably spent ... This is a long time ago, we probably spent 300 grand on it and it's valued about 1.55 at the moment but we're due for another evaluation, it'll probably get another 200 on top of that, so ... A lot of that gain wasn't due to the renovation. It was partially due to the renovations, but the capital growth of the area and the natural appreciation of the asset probably drove that growth more than anything else, more than any money I spent on it.

Phil Tarrant: Okay. So, after you purchased that property, which was in the Sydney area, inner city, what did you do after that?

Eric Brown: So, then I rolled into a self-managed super fund, which has been very, very successful for me, actually. I'm very happy the way that's gone. I believe it's a lot harder now to go through that process and I probably would like to chat to you on a different podcast and we can talk about that, but that's been one property in Minto and three properties in the Logan area of Queensland. The Minto property's done exceptionally well and the Queensland properties, they're probably two years old now, so they're just starting to ... The rents have been pushed up a little bit, and still tough up there but they're starting to get to a neutral position, which is good. I love having neutral positions.

Phil Tarrant: Okay. And so, that's four properties with your ...

Eric Brown: Within my self-managed super fund, yeah.

Phil Tarrant: SMSF. Okay.

Eric Brown: We've got one in a family trust. I initially started that family trust structure thinking that it was the answer to all my problems. The complications, of course, I have heard you talk about this as well, the complications have led to a lot of costs I didn't quite imagine would occur, particularly in relation to stamp duty and I owned a commercial property in that property trust in Sydney and I had to pay my full stamp duty, which ended up being about eight ... My land tax, sorry, which ended up having to be about 8 grand a year. So, it kind of was burning a hole in my pocket.

                Looking back on it, I probably could've not bought that in the family trust, but it sits there, it's going to be there, and once I hit the ceiling personally, then we'll jump back into that trust and buy again through that vehicle.

Phil Tarrant: So, what Eric's chatting about here, for our listeners, is buying within New South Wales, which is where this property is that you're talking about, that's in your family trust, and obviously go and speak to your accountant about this if you're unclear or want further advice, this is just general information, but buying within New South Wales, in a trust you don't get any land tax exemptions.

Eric Brown: Exemptions, yeah.

Phil Tarrant: Whereas you do if you buy in your personal name up to a particular point and then you start paying land tax after that. What Eric's saying is when he gets to the point where he was over that threshold personally, he'll start putting assets into his family trust, because the benefits of land tax, once you hit that threshold, doesn't exist. So, then it makes sense to put it into the ...

Eric Brown: And in different states, there's different rules as well, so I'll probably purchase more in Queensland or different states where that threshold does exist in a trust structure.

Phil Tarrant: Yeah, in Queensland for example, you get exemptions investing within a trust structure and then if you set up a new trust, you get the same exemptions with that trust structure as well. But again, go and speak to your accountant, because it can get very, very complicated. Okay, so you put that property in your family trust, sorry, that was in Sydney?

Eric Brown: Yeah. There was two in there. I've since sold the warehouse, so there's a warehouse in the family trust and there's a property in Queensland, in Bowen, that was one of my mistakes.

Phil Tarrant: That's right.

Eric Brown: If you go back to that other podcast, you'll hear about that.

Phil Tarrant: You've still got it?

Eric Brown: I've still got it, yeah.

Phil Tarrant: How's it done for you?

Eric Brown: It's probably a hundred grand less than I purchased it for.

Phil Tarrant: Really? When did you buy it.

Eric Brown: I think it was 2007, right at the peak.

Phil Tarrant: So, nearly 10 years ago, or 10 years ago.

Eric Brown: And it's a hundred grand less.

Phil Tarrant: So, the logic of buying up in Bowen, I thought you probably saw benefits from mining was going to flow into the Bowen basin or around that area and-

Eric Brown: The Port Abbott expansion. Adani, interestingly, Adani's just been granted permission to start that coal mine up there, so, not a very green ... I'm sure I'm going to get shot down by your green listeners, but potentially for my property up there, it could be a good thing.

Phil Tarrant: So, you benefit while the environment doesn't?

                No, but so-

Eric Brown: That's fair.

Phil Tarrant: So, let's talk about the logic of that particular investment. So, you thought, like a lot of people did, a lot of Australians thought investing in, particularly, regional areas on the basis of planned investment in mining that doesn't eventuate. It obviously has quite a flow on effect.

Eric Brown: Yeah, there was supposed to be ... All the workers were supposed to be fly-in, fly-out, they were supposed to use Bowen as their base. That didn't happen and they are building camps on the mine, so that all the workers actually worked out there and the selling agent sold me all these dreams and promises and the upgrades, and none of that actually eventuated. It was a lesson learned, a valuable lesson learned, but I'd lose too much to sell that now. It's still got the potential to put 11 units on that block up there, so once that does get going a little bit, there will be some upside in that. But I've just got to make sure I can handle the pain.

Phil Tarrant: Is it costing you much to hold that property?

Eric Brown: 12 grand a year.

Phil Tarrant: Actually costing you 12 grand a year to hold it? Okay. And it's gone backwards, a hundred grand?

Eric Brown: It's gone backwards a hundred grand.

Phil Tarrant: That's got to hurt a bit, actually.

Eric Brown: Yeah.

Phil Tarrant: Yeah. Anyway, you've got a-

Eric Brown:  Not a good done, but anyway.

Phil Tarrant: Okay, let's not talk about it.

Eric Brown:  We've already done the problems with the property.

Phil Tarrant: We have, and make sure you go and check it out, 28th of December 2015 is when we spoke about that. But I do speak to some people that reckon, they tell me that they like to keep a property like that in their portfolio to remind them they're not bulletproof, so ...

Eric Brown: Yep, just to remind yourself. Well, you learn a lot of lessons from your mistakes.

Phil Tarrant: You do, you do.

Eric Brown: I keep looking back at that one. The other one up at Shore Bay was the other dud that I ended up selling for 2,500, less-

Phil Tarrant: So, Shore Bay, up near Nelson Bay-

Eric Brown: Nelson Bay.

Phil Tarrant: Just north of Newcastle?

Eric Brown: Yep.

Phil Tarrant: Yep.

Eric Brown: And I'm selling that for $2,500 more than I paid for it after about a period of 8 years, so, that one was the dream. The battle-ax split the block and battle-ax block can have some holiday letting up there and we found that as we tried to holiday let it it was booked every time we wanted to get up there, so the whole theory about having a place that you can holiday let and then go up there and spend some time yourself doesn't quite work that way because anytime you want to use the property, there's a hundred other people trying to use the property at the same time.

                So, then we went back to a long-term tenant and I sort of ... The socioeconomics of the area weren't that good and they skipped a bit of rent and then I had a few arguments and they wouldn't pay their rent and had to take them to the tribunal and problem after problem, basically. And old house, lot of maintenance, and the rental terms weren't very good. I didn't see any growth at all and it was no yield, wasn't much yield at all. So, basically, no yield, no growth, no good.

Phil Tarrant: So, since we last spoke to now, you've actually moved that property on during that period of time.

Eric Brown: I've sold it.

Phil Tarrant: You said you sold it for pretty much what you bought it for.

Eric Brown: And that doesn't take into consideration all the costs that I had to maintain that property over time.

Phil Tarrant: So, what was the catalyst for you to say ... You know, you've got this Bowen property and you have this Shore Bay property, you've gone, I've got to get rid of one of these." What was the-

Eric Brown: I probably would've got both of them. I probably would've got rid of both of them if I could've. But I think the hundred grand loss for Bowen is probably ... I can leave that in the back pocket and as long as I can fund that cash flow deficit, then that eventually, one day, will come good. But if I sell it right now I lose my hundred grand, so, plus everything else. So, I'm happy to sit on that one, but the thing with Shore Bay was, if I can unlock my deposit money, so even if I sell it for the same price I've made it for, what ... And I had a hundred grand deposit down on that. What could that money have done for me over 10 years in a different market? And it's embarrassing to look back and think, "Wow, it could've been amazing for me."

                So, the decision was, let's unlock that, cut my losses, walk away and then reinvest that money somewhere where it will make a bit of a growth [inaudible 00:13:44].

Phil Tarrant: So, that's the really important that Eric's making there, for our listeners. Having an asset that isn't performing, what are the missed opportunity costs of holding that asset versus putting that same amount investment into another property in another market, at a different place or time? So, you're talk about unlocking the money you have but then ... So, I imagine you originally financed it at 80%?

Eric Brown: Yep.

Phil Tarrant: So, you've got that money back out, cash money.

Eric Brown: Yep.

Phil Tarrant: Paid off the debt associated with it, had some cash to use, invest it in somewhere else. So, what did you do with that money?

Eric Brown: That went into the development of Ainsworth Street, which we've changed from ... This is our principal place of residence, which was converted from a one bedroom into a four bedroom. Eventually the plan will be to move out of that and then to use that as another investment tool for us which will yield really well, too. So, that's where that money went.

Phil Tarrant: So, what you're talking about there is a strategy of ... Which a lot of people do, they live in a particular property over a period of time and renovate it and then keep it as an investment, or sell it and move on to the next one, so. Interesting.

                So, what else have you acquired since that property?

Eric Brown: So, we also sold the Botany property. I think I talked to you guys about the warehouse in Botany.

Phil Tarrant: Very briefly, yeah.

Eric Brown: Did pretty well out of that, and we've used that money to purchase a commercial property which I'm sure we're going to go in to in further detail which is in Lilyfield. It's zoned residential but current use is commercial and it was zoned multi-unit residential.

Phil Tarrant: So, this is the property we originally talked about, the one you want to transformed into a residential development?

Eric Brown: Yeah.

Phil Tarrant: So, you've gone full circle, from your initial investment in 2007, I think you mentioned, within the Sydney market and you've moved up into Queensland. It sounds like you've got some great assets within your super fund. Some other ones sitting outside of your super funds, which are travelling quite well. You're still holding the property that you have in Bowen, which is northern Queensland, as a reminder.

Eric Brown: A scar.

Phil Tarrant: It's this scar that you can reflect back to and understand,. So, I speak to a lot of investors and some investors, myself included, have up until this point just acquired quite simple, I call it simple, inverted commas, assets. So, under market value properties that I've done, occasionally, a renovation on that have ... In areas that show all the indicators for growth and also upwards pressure on yields to help me cover these properties. And it's a very traditional portfolio and I mentioned in a very recent podcast, I think it was the one previous to this, that we're now getting a little bit more sophisticated in the stuff we're doing, buying blocks and stuff and things, which could've been an X factor that we can do stuff with.

                You, on the other hand, you've got a story of some major innovations. You said you dropped 300,000 backs on a reno. That's a big reno in anyone's language, that's a major structural renovation. It's not a cosmetic renovation of paint and a new bathroom. You've developed the property that you're currently talking about right now, your principal place of residence, which is a major renovation and now you're moving into something which is, even, next-generation. This conversion of this warehouse. So, you've got some scar tissue which probably helps you ... Able to go into this with all eyes opening, understanding that it's not always easy and, I'm the first to say it on this podcast is that if you hear these stories about people who are becoming bazillionaires overnight through property, it's either highly risky or it's just not true.

                So, this next step for you sounds like it can be, potentially, a big accelerator, if you get it right. It's all about if you get it right.

Eric Brown: I do have quite a high appetite for risks, so I'm trying to my ... My thing to make me a better investor is to try and minimise that a little bit and try and pull myself back and lucky enough, my wife, my partner, sits on the other side of the risk profile. So, we sort of balance each other out, which is quite good. But I'm quite aggressive and I want to add value. I'm in the game, I'm in commercial building, so it's a little bit easier for me than the average Joe, I guess, because I've got access to trades and skilled people that can help me with this process. But, yeah, if you let ... I'm sort of on reins at the moment. You let me go, I'd be right, like a dog at a bone, but my wife's kind of holding those reins back and-

Phil Tarrant: It's good to have that balance.

Eric Brown: The voice of reason and the balance, yeah.

Phil Tarrant: It's good that ... And you see this a lot in people that invest in partnership, whether it's husband and wife or mates or whatever it is. And typically you have two different ends of the spectrum, someone who's very risk averse and someone who's quite happy with a certain element of risk. And you typically get a nice, neutral playing field where you get the benefits of both, but sometimes one can outweigh the other and that's when you find that people find themselves in a bit of trouble.

                So, this development you're going to do in this place in Lilyfield, what is it that really worries you about it? What is it that keeps you awake at night, thinking, to use your term, I've got my ass on the line? So, how can it all go wrong?

Eric Brown: Contamination's probably a big issue for me, because it's got to be converted from ... The usage has got to be converted from to commercial to residential, I need a full stage one and stage two contamination report. If I happen to find any contaminants in the soil, then the remediation action plan can be upwards of 100, 150, 200,000 dollars. So, we're not talking about pocket money.

Phil Tarrant: No small potatoes, no.

Eric Brown: It's quite substantial. The building element itself is risky. The previous owner had attempted to convert it to residential without council approval. So, they put balconies on, they put windows in. Council put a stop work order on this project and we had to negotiate with council that if we are intending on buying this, they're not going to take action on us. So, there's a external governing body that potentially could take action because we've purchased a property that has a standing order on it because works have been done illegally. So, that's kind of a risky strategy.

                The other things that we're going through the process of are acoustics. We're under a flight path, and when you have to follow through with some acoustic consultant reports there's massive costs that could be associated with it. The property's built on the boundary on three sides, so, potential huge risk in attempting to fire-rate those walls. I believe we'll come up with a pretty good strategy. I've got a mate that works in CSR and we're bouncing off a few ideas here and I reckon we'll come up with a pretty good idea about that and then, natural light, I guess, is also a problem for a property that is built on the boundary on three sides because you can't just whack a window in an external wall. So, our light into the habitable space is going to have to be through skylights and opening roofs. Sort of kind of interesting stuff, really, it's not inside your box, it's outside the box and you've got to get your mind out there and think of different ways of doing it, which I love doing and which excites me, so it's not all bad news. It's kind of exciting.

Phil Tarrant: It sounds like a potential project for a Grand Designs or something or other, you know, the level of complexity. When you talk about all these factors, I'm quite interested in your psyche, where you balance all the what-ifs with what the upside is. And what can the upside be? If you built these and sold them, is it worthwhile? Like ...

Eric Brown: Yeah, so, the upside for me is I've had a fascination with warehouse conversions and commercial property developments and I love natural materials and it's an opportunity for me to express the big, six inch lumps of timber in there and the stone and the old brick walls and to me, that's the opportunity for me, to be able to come up with some pretty cool ideas to make these things work and make them pop out and using something that someone else might look at and say, "Oh, that's a bit ugly. That's a bit industrial." You can make that pop and house and in a conversion, and people will actually spend more money because they love what ideas you've come up and what solutions you've come up with that problem and how you've expressed those materials that might, in its existing state, look quite ugly but you can bring them out and highlight them and make them look quite cool.

Phil Tarrant: So, how do you make sure you don't over-capitalize those? So, you're talking like an artist who likes the final product and it's something you get satisfaction out of and enjoyment out of, but who really gives a shit if it's not going to give you the potential dollar upside? So, how do you work that out?

Eric Brown: Yeah, that's right. You've got to stick to a budget, so we have a budget. And there are ways you can cut corners design-wise. So, having a very clever architect that will design within a budget, I think, is very important and I rely on them. You don't need to put marble down, you can get some awesome ceramic tiles at the moment that look exactly like a piece of marble. So, there are heaps of ways you can get around ... You can get a look that you want for a cost-effective price. There's loads of them. And they're fun trying to find them, right? You can spend hours trawling through the internet, finding all these cool, funky, cheap solutions to problems that ... I'm aware of, I've got a price, I've got a figure I need to keep underneath. I want to try and spend under one and a half million on it.

Phil Tarrant: Okay.

Eric Brown: That's my budget at the moment. And if it'll go to that, I'll be kind of pretty successful.

Phil Tarrant: Okay. Well, it sounds like a good project.

Eric Brown: I'm excited.

Phil Tarrant: Two years of your life, though.

Eric Brown: Yeah.

Phil Tarrant: How're you going to keep motivated? Is the motivation the interesting, cool accomplishment component of it? Or is the motivation like, how much money are you going to make by doing this? If you sold this property, because I know you said you were going to hold it, but what would be your equity gain if you do it right?

Eric Brown: So, currently, purchase price was 1.73. Got to add some costs on that. If we spend one and half on it, we're looking about three and a half and we'd probably get about, in the current market, 4.2 on that, so, 700k?

Phil Tarrant: Okay. That's not bad for two years work.

Eric Brown: Two years, pretty good.

Phil Tarrant: Yeah.

Eric Brown: And we can squeeze that and play with that a little bit if we need to. I think I will get some growth over that. I never, never do my numbers based on what I perceive the growth is going to be, but even if it stayed where it is right now ... And it's a great area, across from a park. Got great schools, great public transport. It's an area where I would love to live and I don't normally say buy in areas you'd love to live, because it's not the smartest strategy-

Phil Tarrant: But it's a marketable area.

Eric Brown: It's a, yeah.

Phil Tarrant: It's a very marketable area, Lilyfield. The light rail's in there now, it's all very cool.

Eric Brown: Yeah, and had massive growth, so.

Phil Tarrant: So, does that concern you, though? Because everyone's talking about the Sydney market is overvalued, it's going to come off X%, depending on who you listen to. Does that worry you?

Eric Brown: No. I think there's pockets ... I think it's very easy to generalise that Sydney might come off X%, but I think there's ... It's micro-climatic, if that's the right word. There's pockets within the area that ... If you know you're in a good area, I don't think Lilyfield will come off. I think it might stabilise and sit where it does and if it sits where it does for another couple of years, which I don't think it will, but if it does, I still stand to make 700 grand.

Phil Tarrant: 700 if the market stays.

Eric Brown: If the market stays as it is.

Phil Tarrant: With no growth. So, but you said this was a yield place, so what sort of yield are you going to be hunting on this?

Eric Brown: I'll be getting ...

Phil Tarrant: He's picking up a pen right now, trying to ...

Eric Brown: Picking up a pen, yeah.

Phil Tarrant: To run a really quick calculation, but ...

Eric Brown: It'd be 2,800 a week.

Phil Tarrant: Okay.

Eric Brown: For both of them.

Phil Tarrant: Okay. That's not bad. That's not bad.

Eric Brown: Well, we've got talk about two or three now, whether we get three through or two through. But ... Do you want to talk about that now?

Phil Tarrant: Let's leave it, let's get you back ... We're starting to run about half an hour there, which is pretty good for our listeners. That's good commuting time, that, it's a ride to work on the train. So, I hope everyone's enjoyed this bit. I-

Eric Brown: I'm just going to say, Phil.

Phil Tarrant: Yeah?

Eric Brown: There's some massive lessons I've learned out of this-

Phil Tarrant: Already.

Eric Brown: Like huge stuff, huge stuff, so I'm quite excited about telling you about these.

Phil Tarrant: Well, what lessons so far, from where you are right now? So, you haven't started doing anything yet, you're still ...

Eric Brown: Yep. So, finance was a huge lesson for me. We had pre-approval for 80% of land value, so, very hard to value a commercial property. We had to go through a few different lenders to find the ... Few different brokers, sorry, to find the right person that thought they could help us. For a lot of people, this was too hard. We found someone who gave us pre-approval for 80% of the land value. So, I had to pay for a commercial valuator to come through. They valued the land at 1.5, which meant that we would have 1.24 and we'd have to top the rest up whenever the ... Went through. We were successful at auction, but there's a whole story I want to talk to you about with the conveyancer and how she fought for me pre-auction and all the value she added to that transaction, but that's a whole different story.

                But anyway, we had a 12 week settlement and about three weeks before the loan was due to settle, they worked out, this broker worked out that this loan was impossible as a commercial lone. So, the shit hit the fan and we had to work out how we're going to ... We purchased it, we put down a 5% deposit on a 1.73 million dollar property and it's a lot of money to lose if you don't have your loan. So, we had to go through some drastic measures to try and secure the money to buy that place. The interest rate was massive, we had to pay a 1.1% lending fee and a 2.2% broking fee, so you add 30 grand on the transaction. And it's like, this is the risky part of development, right? If something goes wrong, you-

Phil Tarrant: But you've factored this into your build cost, though? All these-

Eric Brown: Well, I hadn't at the time, because I had pre-approval for the 1.24. So, at the time it was all smooth sailing, everything was going well, we had our pre-approval. We purchased on the basis of that and after we purchased, prior to settlement, we worked out that it wasn't going to ... The lender actually went back on his ... The broker went back on his pre-approval and said, "No, I can't get you that money but I'll give you someone else who can sort it out for you." Who did, but the conditions were vastly different. 10% interest, plus my broking and lending fees, but at the risk of losing my 5% deposit on a substantial purchase, it was-

Phil Tarrant: This is the risk you're talking about.

Eric Brown: Yeah, this is the risk.

Phil Tarrant: So, with risk comes reward, though. So, by dedicating two years to this, you're thinking that you're going to generate 700 grand in equity increase, which is ... It's not bad.

Eric Brown: Yeah. I think we'll probably do a little bit better than that, but that's my baseline figure at the moment.

Phil Tarrant: And any other major lessons so far, with this? Outside of finance?

Eric Brown: So, the finance was a big one. If you want to talk about the conveyancing, we had a contract that was given to us prior to the auction and there were nine or ten conditions in that contract, which didn't make the transaction seem as good as it could be without those conditions, and luckily I had a very aggressive conveyancer on my side and she fought every single one of those and we're talking ... I think I was the only one that got the deposit from 10% down to 5% prior auction. I got early access. I got a 12 week settlement period. I got GST exemptions on the sale because it was a commercial property. I got the ability to submit a DA prior to exchange, so, in the settlement period. And all these things just made it so much more an attractive deal.

                But, if my conveyancer hadn't have fought for that I wouldn't have got that and sometimes, you've just got to do your research and have good people around you and trust in what they say and that stuff made a world of difference to me.

Phil Tarrant: But I guess that's the nature of the deal as well, because a deal like this probably would've turned off most investors because of the element of the unknown associated with it. So, if you understand the vendor situation and potentially their vulnerabilities and obviously, there's a lot there, they want it outright. So, you've got some scope to negotiate hard and negotiating hard doesn't mean negotiating on price, it's just one of the many ways that you can negotiate. So, you've had a lot of benefits by engaging a good conveyancer who's gone out there and negotiated on the other stuff and the other stuff has helped you out considerably.

Eric Brown: Absolutely.

Phil Tarrant: It's good. Yeah. Okay. Well, let's leave it there for the moment. We'll get you back in as you go down this path. So, DA's lodged, is it?

Eric Brown: Not yet.

Phil Tarrant: Not yet, okay. To be lodged soon?

Eric Brown: To be lodged soon, yeah.

Phil Tarrant: Okay, alright. So, you've got two years, then, to get this ...

Eric Brown: Should we book in the next podcast?

Phil Tarrant: I think we should.

Eric Brown: Two years time?

Phil Tarrant: Let's get you in earlier than that, I want to watch you sort of fail along the way. No, I'm only kidding, mate. No, I think it's a good project and you can see you've got a lot of passion for ... On one hand, making money, and that's obviously important, but on doing a good job as well. And it's good that you get a lot of enjoyment out of it, investing in property and getting hands on, you know? Helping to be part of the sweat equity, and I'll borrow that term from my buyer's agent, if you're listening. I know you are. To make stuff happen.

                So, we'll get you back in once you're a little bit more advanced, when you get your DA lodged, your development application lodged and we'll see how that stacks up. Whether you got two in or three in and if any other concerns you had about the contamination, [inaudible 00:29:58] any findings there and any other issues that we need to address on this particular development. But if you had a chance to speak to the Eric Brown in two years time, what's your story going to end up like?

Eric Brown: Well, I think I'm going to tell myself, pat myself on the back and say, "Happy you took those risks and it's all worked out worthwhile." I think you've got to be positive. You've got to be positive in life.

Phil Tarrant: You can't go into things expecting to fail, right?

Eric Brown: Yeah.

Phil Tarrant: You know? It's pretty negative.

Eric Brown: Yeah.

Phil Tarrant: Alright, Eric. Appreciate your honesty and frankness. It's a good story. It's ... As I mentioned beforehand, you have a portfolio there, which is probably a little bit different than most peoples, and as a product of you doing what you do for a living in commercial building and having, I guess the fortitude to go out there and step into the unknown because you've got a lot of experience working the building game. So, if things don't work out, you've probably got the mechanisms to get them back on track and that's something that a lot of people that move into this space don't have. They're a victim of tradespeople who are often very busy and very expensive and ... But you've got a lot of control over that, so that's good for you.

Eric Brown: Yeah, I would say, sink your teeth into something small. If you're going to go down the development path, just test the waters with something small and cosmetic. And it's easy to get burnt, and surround yourself with people that know what they're doing. Start small.

Phil Tarrant: And even this ... This is not a traditional development, either. Like, a lot of people, development would be, "Oh, I'm going to develop two townhouses." Or a couple of duplexes or a row of three or four townhouses. That's a little bit more straightforward because you're building stuff new and obviously you've got to negotiate building contracts and all the associated development applications, whatever, but you're building something new, this here is ... Has a lot more to it. But we'll see how it goes out. Thanks for sharing your story, mate.

Eric Brown: Thanks, Phil.

Phil Tarrant: I do enjoy it.

Eric Brown: See you next time.

Phil Tarrant: Yeah. Great, mate. Remember to check out SmartPropertyInvestment.com.au. If you're not subscribing to our daily news around everything to do with property investment and keep you educated, informed and in the game, SmartPropertyInvestment.com.au/subscribe. Please keep those reviews coming on iTunes. I do appreciate them and those comments are great, we enjoy that you like what we're trying to. Remember to social media, to search Smart Property Investment, you can get everything there first. Until next time we see you, bye.

Speaker 1: The information featured in this podcast is general in nature and does not take into consideration your financial situation or individual needs and should not be relied upon. Before making any investment, insurance, tax, property or financial planning decision, you should consult a licenced professional who can advise whether your decision is appropriate for you. Guests appearing on this podcast may have a commercial relationship with the companies mentioned.

 

 

Dealing with scar tissue from bad investments
Phil Tarrant, Eric Brown, Andrew Scott
spi logo

About the author

Demii Kalavritinos

... Read more

From the web

Website Notifications

Get notifications in real-time for staying up to date with content that matters to you.