Where are prices on the way back? What’s the future for mining towns? Are we all in a ponzi scheme?

Join the team and special guest as we speculate, meditate and pontificate on all things property investment. Listen now!

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Where are investment property prices set to bounce back in 2016? We look at the latest data to find out if there's anything exciting.

The latest predictions for mining town property prices make for some fearful reading if you bought an investment property when the market was at its peak. What are the options open to investors in this situation?

The latest doom sayers are predicting that property investment in Australia is a giant ponzi scheme and we're all destined to lose our money, but are their predictions correct?

Special guest Steve Waters of Right Property Group talks us through the first investment property he bought, the worst investment property he bought, the life lessons it taught him and what he'd tell his past self if he could go back with one nugget of wisdom.

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The Smart Property Investment Show gives you insight, strategies and tactics that every property investor can use.

In each episode, the Smart Property Investment team and its special guests will break down what's happening in the world of property investment, how it affects everyday property investors and how they can take advantage of it.

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Andy Scott: Hello. It's the Smart Property Investment show. Coming up in this episode, hold onto your hardhats, the mining town collapse hasn't even begun. Ponzi's back and promising us happy days with his investing scheme. Turn that frown upside down as we look at some depressed markets that are on their way back. All this and more in this episode of The Smart Property Investment Show.

Hello and welcome to The Smart Property Investment Show where we speculate, meditate and pontificate all things property investment. My name is Andy Scott. I am an investor and the publisher with Smart Property investment. I'm joined as always by fellow investor and managing editor of the title Phil Tarrant. Hello Phil.

Phil Tarrant: Hello.

Andy Scott: How are you this week?

Phil Tarrant: I'm really good mate, you?

Andy Scott: I'm alright mate. What have you been up to? Anything exciting?

Phil Tarrant: Getting around town talking property. Doing stuff as I normally do.

Andy Scott: Good. Good to hear it. Our special guest this week is buyer's agent Steve Waters from the Right Property Group. Hello Steve.

Steve Waters: Hey mate. Hey Phil.

Phil Tarrant: How's it going?

Steve Waters: Well.

Andy Scott: Good. Thanks for joining us today. Have you travelled far to get to us today?

Steve Waters: Just from the Hills district.

Andy Scott: Just from the Hills. Was the traffic okay?

Steve Waters: Traffic was awesome, thanks for asking.

Andy Scott: Good. Obviously, you're a buyer’s agent there at Right Property Group, how long you guys been in business Steve?

Steve Waters: It'll be coming up on eight years now.

Andy Scott: How many properties do you think you've bought?

Steve Waters: We'd have to be somewhere around about that 3,000 and 3,500 now.

Phil Tarrant: Is it that many?

Steve Waters: Yeah. It's been a few.

Andy Scott: That's a lot.

Phil Tarrant: How many of those have you bought for us, me and Andy?

Steve Waters: It'd be 13, maybe 14 now.

Phil Tarrant: Yeah. That's over about a four-year period right?

Steve Waters: Yeah. You've done well.

Phil Tarrant: Yeah, it's good.

Andy Scott: That's right. Steve is the buyer's agent for myself and Phil as well. We know him pretty well. He's also a guy that knows his onions so that is why we've got him on. Without any further ado gentleman, let's get cracking and look at the first story and see where it gets to.

Mining towns’ collapse hasn't even begun. Mining is dead for a long time. That is according to BIS Shrapnel's chief economist and director Frank Gelber. No one should be waiting for the next boom. He goes on to suggest that prime minister Malcolm Turnbull cannot wave the magic wand to fix it. He used some technical terms to describe investors. My favourite being is that they're stuffed. His advice was cut your losses and run.

Steve , any of your clients ever been attracted to mining towns?

Steve Waters: They have but not via us that’s for sure. I love that little comment, cut your loss and run. It's a pretty broad statement. A lot of these properties won't be able to get sold. It's not going to be as easy as that I don't think.

Andy Scott: Is there a way out for an investor? Look, the idea is that we buy property and it does what we need it to do either in yield or capital growth and everything's happy days. Obviously things happen. Properties sometimes go backwards. You can make a poor purchase. Things out of your control can happen that can depress an area. Do you have options if you're in something like this? This is an extreme example, I know, in mining towns. Do you have options if you find yourself in that position?

Steve Waters: Very few.

Andy Scott: Are you literally stuffed?

Steve Waters: Yeah. I don't think you're literally stuffed. You've got a few options. You've got to really drill down to which part of the mining sector we're looking at. Are we looking at the one-trick pony towns with the humpies or we're talking about, I don't know, Perth which is really feeding off the mining sector?

Andy Scott: Yeah. I'm guessing, specifically mining towns, what you would expect to find mining towns, one town, there's the mine and nothing else. It goes onto my comments about flying fly-in fly-out workers and suggestions that people should lobby for that. I don't think he's talking about your towns that are influenced by mining. Your Perth, your Gladstones, that sort of thing. He's really talking about your Port Hedlands and that sort of stuff.

Steve Waters: Yeah. I don't think there's a hell of a lot you can do, other than bunker down, look after your cash flow, look for exit strategies. If you can, sell, make that decision after doing your figures. A lot of these areas you're not going to be able to sell. The debts going to be far more than what it's worth. You've got to look to other avenues to perhaps supplement the income for the mortgage and hopefully the rest of your portfolio can help sustain that.

Andy Scott: Phil, does this illustrate a wider point about all investments? We talked about the mining towns, they were the big thing four or five years ago. Everyone was going to be a millionaire if they bought in mining towns with those incredible potential upsides. Does that mean the risk is high if you suddenly put all your eggs in one basket like this, in an area that's not diversified? You’re just asking to take greater risks to do that sort of stuff.

Phil Tarrant: Yeah absolutely. You know this as well as anyone Andy, for the last four/five years we've always had a particular line when it comes to mining investments. We’re in an impartial publication. We talk about the opportunities with property investment and how to be more effective as a property investor but we've always encouraged people to show caution when it comes to mining towns. By mining towns we're talking about what you just mentioned, those areas of Australia where the economy is 100 per cent focused on mining. Obviously these mining towns go through peaks and troughs in line with the resources that they extract from the ground and the needs or demands of those resources on a macro-economic level.

A lot of these mining towns were big during a period when the initial exploration and investment was placed in the infrastructure to get that stuff out of the ground. A lot of these towns have done well out of it.

When these mines start hitting maturity, it just turns into a process of extraction, extraction, extraction. What happens is that the need for as many workers isn't as great. What's happened here, in terms of mining towns collapsing, is that those people that bought during that peak period when all that investment was going in, those guys absolutely smashed it. You were getting rents, you probably know this better than me Steve, 1,500 bucks a week for a fibro shack without any running water. People absolutely killed it. They made a lot of money out of it. Good luck to them. If they were able to flip those at the right time, great.

There was some sophisticated investors that do that. Guys who are happy to take risk. Go and do that if that's what suits your strategy or goals. You've got mum and dad investors who have purchased their first investment property in a mining town and those guys are in a lot of trouble. They've been burned.

Who was responsible for those guys getting burned? Well, I'd say themselves. Everyone makes their own decision. A lot of these people may have been victims to some smart talking, fancy suit wearing, spruikers who sold them this great opportunity and dream. People need to be responsible for their own investments. What that comes back down to is the need for education.

Everyone's got a story. Everyone's got some great way to make money through property. Making money in property is not difficult. It's the fundamentals. It needs to be simple. It needs to be easy. You need to be able to understand it. If you can't understand it, stay away from it. That's my position on it.

Andy Scott: You touched on a point there Phil. There's going to be a lot of people feeling a lot of heat and pain in some of those markets. I know when we were talking last week and we were looking at the APRA stuff and loans coming onboard. You said when you see opportunities like that, you see a potential to get a better deal than the next person.

Steve, looking at these sort of markets, is there any point where it becomes, you know what, it's probably worth going in there now? It's never going to be spectacular. You're never going to see the glory that it was again. These properties now, some of them are 40/50/60 per cent they've gone down from their peaks. Does there become a point where it's like, you know what, it's not a bad little thing to give a punt at again?

Steve Waters: Yeah, good question. It wouldn't suit my risk profile, personally speaking. I just don't see any magnificent upturn in the short- to medium-term future for those types of properties. At the end of the day, I think the investor's really got to invest where their risk profile allows them to and what their financial situation allows them to. These mining towns with the high cash flow and perhaps the instant high growth that was, but certainly not now, is really nothing more than feeding the greed.

Phil Tarrant: Let's move on to the next topic. But the way I would summarise this is that you need to look at diversification of your portfolio, you don't put all your eggs in one basket.

Steve Waters: Absolutely.

Phil Tarrant: That's obviously an absolute no-brainer. It goes back to the fundamentals of property investment. Capital growth, yield, if you can get both of them, absolutely brilliant. That's what I look for. That's what Steve looks for. Andy, you also look for the same holy grail in investment. You don't always get it. Sometimes it fluctuates. Sometimes one's over the other but that's what you need to be looking for. Investing in mining towns isn't a bad thing to do but it goes to the fundamentals of any investment, anywhere: what are the drivers that are going to influence prices going up in value? Now, there's some great mining towns that have a multitude of different economic forces which encourage employment, encourage business growth, encourage wage growth. Hunter Valley, for example, it's gone through some periods of – Muswellbrook way and around that way where I know you bought some properties Steve.

Steve Waters: Yep.

Phil Tarrant: That was really hot. Not as hot right now but you've got diversified economy in those areas. The wine industry. You've got Newcastle close by. You've got multiple reasons that are going to attract people to the area which is going to encourage economic growth and it makes a good investment decision.

Steve Waters: What people have really got to remember is that, just like any other sector, mining has a cycle. If you can pick the cycle, you'll do well. If you're buying somewhere in the top quarter of a cycle, you’re not going to do well at all. Once again, coming back to education which you mentioned earlier on, that's the key.

Andy Scott: Well gentlemen. It's interesting for you to say that. It doesn't matter anyway because we're all stuffed. We're all part of a giant Ponzi scheme. I don't know who's at the top but it's generally the person that got in first and that means that's not us.

As always, not my opinion, I'm just being sensationalist for the sake of it. This has come from a recent book report, Parental Guidance Not Recommended. This is from LF Economics. These are the guys put a submission up into the parliamentary inquiry in home ownership in June and predicted that they would be a bloodbath in the housing market. “A near certainty” is what they said this would be because of falls of housing prices and stuff like this. They went on to say that Australia is in the largest housing bubble on record.

Phil is he right? Are we asleep at the wheel here? Are we about to drive off catastrophe cliff and all burn in a financial doom or what?

Phil Tarrant: I don't know how many times I've heard over the last few years this property bubble analogy. You've got some very very smart people in places outside of Australia who are economic geniuses. They know how to crunch data. They can look at global trends. Rightfully, perhaps, if you look at the Australian property market, in particular the capital cities, in comparison to some of the other markets on the world, is our property overpriced comparatively? Maybe yes. You need to look at the indicators or the drivers or the metrics used to determine whether or not a market is overpriced. I know these guys here have based it off the difference between what someone earns and what the value of property is. There's a metric there that they filter with.

I keep hearing about this property bubble. They've been talking about it for ages. You have certain people come in, every now and then, and dramatise and push it out. I just get annoyed by these type of things. I hear about it all the time. It's great for the media. It gives us plenty of stuff to write about. Doom and gloom and blood on the streets and all this type of things, gets people to pick up magazines or gets people to click on stories on websites.

What I think needs to happen, where the dialogue needs to happen and where the debate needs to happen, is that – this story is about parents who about to hit retirement age or in retirement age, they're helping their kids into the property market and therefore they're at risk when property goes bust that they're going to lose their family home, their retirement, all this sort of stuff. It's a big complicated issue. It's obviously important to the government to make sure Australians are healthy in their retirement. There's no solution to this in this particular article or the commentary or rhetoric around it, it's about poor parents are going to get stuffed.

The question or the issue is around people who are buying their first home whether it's for owner occupier or investment. It comes back to, every single, young, 20 something, early 30s something person I know or couple I know, all want to live with five kilometres of CBD, next to restaurants. They want to have a fancy car that they drive around. They need the biggest flat screen TV. They need all the great and wonderful things. The reality of the situation is that not everyone can live within five to 10 kilometres of CBD. First home owners need to be realistic in their expectations. They need to understand that properties that are close to the city centre or close to where the cool stuff, is expensive. Maybe you don't have to live there. Maybe you can live further out of town where it's a bit cheaper, where you can get yourself onto the property ladder, where you can make a smart investment and hope and based on strategy that it goes up in value. Then you can trade up to the next property. Then you can trade up to the next property. Then you can trade up to the next property.

That's a bigger issue, it's about expectations for people buying property. It's about the reality that property in Sydney, property in Melbourne is expensive. It's because they're global cities. They're big places. They're in demand to live here. You have migration coming in which is obviously influential on property prices which is a good thing for property investors. Set the agenda around educating people to be happy with property which isn't fancy. Maybe not a new build. Maybe a little further out of town. Might have to commute a little bit longer to go to work. Get on the ladder and do it smartly. That's where I sit on it. I just get frustrated with this stuff.

Andy Scott: I can see you were getting your grumpy man face.

Phil Tarrant: Oh yes.

Andy Scott: Steve what about yourself? This is something that you're very used to hearing from people who aren't involved in anything. From the outside looking in, it's really easy to go, ‘It's a Ponzi scheme, it's going to go wrong, it's this, it's that’.

Look at the previous story, when we run stories about mines in towns having trouble, people absolutely love it. There's a group of people who want to sit there and vicariously go, ‘Good. I didn't make that choice and now I've been vindicated’.

Do you find that that's something that happens a lot? Do you find push back from people telling you, ‘You're just lucky. You don't really know what you're doing?’ Is it something that happens a lot? Is it something you're worried about? You've probably got more skin in this game than myself or Phil sitting here, you've got an entire business based on it.

Steve Waters: Yeah.

Andy Scott: Is it something that you ever worry about?

Steve Waters: I don't worry about this sort stuff to be honest with you. I love it. To call something a Ponzi scheme, that's way over the top. I suppose it will sell magazines. It'll get people reading it and listening.

Andy Scott: It did.

Steve Waters: Exactly. Here we are talking about it, right? I'm agreeing with Phil.

Phil Tarrant: Is that the first time ever you've done that?

Steve Waters: What, agree with you?

Phil Tarrant: Yep.

Steve Waters: We agree daily.

The ‘want it now society’ is really going to hurt people in the future. I kind of agree with a little bit of what they're saying. I'm not a fan of people going guarantor for their kids. That's a dangerous path, generally speaking. There's always an opportunity anywhere. Are some parts of the market perhaps a little overheated? Absolutely. Do I thinks there's growth left in other corridors? Absolutely.

Andy Scott: If you're a parent and you've built property over the last 5/10/15 years or whatever. You've got children who are at the age where they want to get their own place and you've got a portfolio, does that – cause you said, you're not really in to parents lending their kids money for deposits – but if I've suddenly got this 15/20 property portfolio and I've got equity, is that still your position? Like ‘No, let the kids do it on their own’? Or is it something that you would go, ‘Well in that instance it's different’?

Steve Waters: Yeah. I suppose I'm more really talking about the guarantor, going guarantor for somebody. I think that's a dangerous path. I'm not saying that all kids are bad. Most are good. If I had a portfolio 15/20/1/2/4 properties that had plenty of equity in them, then I'd probably be suggesting to go down the path of extracting some of that equity and giving it to the kids. As opposed to going guarantor for them. They can live and die by their own sword from there. That's easier said than done. I've got four kids and everything I do is for them. If they hit me up for a loan I'd probably go guarantor for them.

Phil Tarrant: Let's talk some numbers here. Buying a house to live in and raise a family, let’s put that aside. Let's talk about young people wanting to invest in property.

If I wanted to buy an off-the-plan apartment in Bondi Beach, I'm up for over a million bucks for a little studio even without a car space.

Say I'm intent on investing in property and I love property and it's all I wanted to do since I was kid. I'm a 23/24 year old making $50,000 a year. There is opportunities in this market. Good markets in Australia that show all the indicators for successful property investment, where I can get into those markets for about $40,000 all up, all costs, right?

Steve Waters: Yep.

Phil Tarrant: Let's just talk about that for a second. Woodridge way or Logan way, up in Brissie, right?

Steve Waters: Yeah.

Phil Tarrant: I've picked up stuff there for $149,000, right?

Steve Waters: Yeah.

Phil Tarrant: Little two-bedroom, what do you call them, townhouses. You borrow 90 per cent, you've got some legals, you've got your stamp duty, you've got your other stuff. You're in for $30,000 - $40,000. That's not a bridge too far for a lot of people. Yes, you need to save up that deposit. Yes, it's going to take time if you're earning $50,000 - $60,000 a year.

You see within your client base, young, hungry, smart investors who are happy to live at home with mum and dad. Eat your mom's home cooking and not, hopefully, pay any rent and invest in property instead. These opportunities are available. It's just the mindset shift, isn't it?

Steve Waters: Absolutely. I can think, straight off the top of my head, half a dozen client that are actually straight in to that category. They still live at home. They work hard. They're not on hundreds of thousands of dollars a year. They take overtime when they can get it. They are focused on where they want to go. They still live life. They're not living on 2-minute noodles. They still go out. They have a disposable income which they then save or put towards an investment asset that in our case happens to be property. It's attainable. This whole affordability issue which people bang on about saying property’s becoming unaffordable, well then just move further out. You don't need the half a million dollar property. Go three suburbs further out. It's only unaffordable if you make it that way and you convince yourself to buy it. No one's holding a gun to your head to do it.

Phil Tarrant: We just sound like miserable old guys these days about the sense of entitlement of young people today. It wasn't like that in our time, was it?

Steve Waters: No. We’re not that old really.

Andy Scott: You're sounding like it. I tell you that. I've never heard two more grumpy old men in all my time.

Phil Tarrant: Steve left his Zimmer frame out the front.

Andy Scott: I blame myself for the agenda. I start with mining towns, we've gone to Ponzi, the pair of you sitting there with frowns and misery. Don't worry gentlemen. I have something to warm the cockles of your heart.

Phil Tarrant: Bring it on.

Steve Waters: Here we go.

Andy Scott: You know I love hot spots. You know I love areas turning up.

Phil Tarrant: Andy ‘Hot Spot’ Scott

Andy Scott: There are two markets

Steve Waters: Captain Hot Spot.

Andy Scott: They've been depressed. They're going to turn round in 2016. Pick. Steve, where? Where am I thinking?

Steve Waters: Two markets? Where are you thinking? I think your probably thinking Perth and, I don't know let's just throw a curve ball in there, Hobart.

Andy Scott: Phil?

Phil Tarrant: Well, as I property investor I should really choose the spot where I just got my most recent property – try and bang up some interest in it.

Steve Waters: By the way, the suburbs I mentioned doesn't mean I think they're good. I'm just thinking what you're thinking, right?

Phil Tarrant: I'm hearing a lot these days, Queensland's the flavour of the month or flavour of the year and there's a lot of good reasons for that, but I reckon it will be up there somewhere. Somewhere there's a new crazy idea about something being great.

Andy Scott: That was brave of you Phil. You picked an entire state.

Phil Tarrant: I know.

Andy Scott: It's somewhere around there.

Phil Tarrant: Mate, I'm a vague man.

Andy Scott: Incisive. I like it.

Phil Tarrant: Thank you mate.

Andy Scott: No, there is a new wave of predictions coming through. Steve, you were closest on the money. Perth is included on that list. The other one is the Gold Coast.

Phil, there is no way I'm giving that to you because you said Queensland. Unlucky mate.

This news has come – this is triggered by release of new apartment sales figures for the September quarter by consulting firm Urbis. Love that name. Look, it's not a huge volume but it's experienced 150 per cent increase on sales from the same, year-on-year, last year. Gold Coast apartments have already broken – we're almost at the tail end of 2015 but these figures will go back a few months, but we have already broken the sales records for apartments that were sold in 2014, which is all good.

We go looking across to Perth where we're looking at opportunities with apartments as well. Part of the issue there is, of course, people talking about the yields that you can get because of the way that prices have flattened out over here.

We had Craig Abbott, the general manager at Raine & Horne in WA, talking about East Perth/Perth saying yields can be above 6.5 per cent – says you’re not going to find that over on the Eastern Seaboard. With got Peter Vetten who's a principle at Raine & Horne Mandurah, he's saying he's already getting calls from interstate investors that have been priced out of the Sydney market. Steve, you said Perth?

Steve Waters: Yep.

Andy Scott: Have you been phoning up Peter and trying to buy a property from him?

Phil Tarrant: I left a few messages. No, I haven't.

There's no better way to drum up business than tell people how it's going to be, I suppose. I'm not saying Perth's a bad place, I just don't think it's yet the place to go to. That's just my opinion. I might be right or I might be wrong.

I think there's better places to put your money.

Ultimately, there's still too much negative consumer confidence that's there and that is a governing factor of any market. Resources are obviously tanking. Look, there's an opportunity in any market. It's just not something that I would go to first off.

Andy Scott: Yeah, okay. Phil, a lot of the comments in that report were all based around unit sales and stuff, are you a unit man?

Phil Tarrant: I've got a lot in my portfolio, if that's what you're asking me?

Andy Scott: I think I might be.

Phil Tarrant: Yeah. Absolutely. I'm not hung up on units or houses. For me, it just comes down to the quality of the investment. Why I'm investing in there. What sort of yield it's going to provide me. What's the long-term strategy in holding that property? I look at my portfolio and I reckon I'm probably 60/40, units over houses.

Andy Scott: Really?

Phil Tarrant: Yeah, I think so. Maybe it's like 50/50. It's changing a little bit. I've got a couple of townhouses in there, I don't know how you classify them. Traditionally, a lot of people have thought houses are better because they're on land and land is scarce and all this type of stuff.

Andy Scott: They're not making any more of it. That's the line.

Phil Tarrant: It's shrinking actually. I hear that sea levels are rising.

Andy Scott: We're making less of it.

Phil Tarrant: We're making less.

Traditionally, I'm not going to call that an uneducated view, but people who aren't involved in the property game, your mum and dad suburban property owner, would think houses are better because you've got land and land is scarce and that sort of stuff. Over the last number of years there's been a real shift towards the value of units and that's reflective of an evolving population and the way we choose to live. People are getting married later in life. People are staying single forever. The type of migrants coming in to our capital cities these days are from locations and countries with very high density of living and they're happy to live in units.

There's even a good case and I know some very senior property figures think studios are a great investment because of the need for single people to live in studio apartments and they're happy to pay for that. The investment stock and perception towards studios, over the years, has gained quite a lot. Even lenders have changed their lending criteria against units because they're deemed to be, not a negative asset hold but a good investment hold.

Steve Waters: That'll change, yeah.

I had similar trains of thought. I think people are going for units, more so investors, this time round because cash-flow is king. They're still feeling the GFC and beforehand where everything was equity based and not really taking care of cash flow. The units, townhouses, villas, usually do give a better yield. Yes, there's some higher cost to operate with them if you buy at the wrong complexes and so on. It's a balancing act. I used to be the same. I used to think house and land, house and land. I used to walk past units in Mount Druitt that we purchased for you at $170,000. I used to walk past those very same units at $65,000. Everything goes up comparatively speaking.

The Gold Coast though, on the other hand, that's an interesting one. It's just history repeating itself, the Gold Coast, for sure. Do I think there's some opportunity in there? Yeah. It wouldn't be something that I'd hang my whole portfolio on. I'd get in, snake around the edges, take one or two and then probably get out. When I said get out I meant stop buying.

It's going to be an oversupply situation, again, whether it's next year, three years, whatever it may be. It'll just repeat itself again. Those figures are skewed slightly with the 150 per cent increase on sales. That's construction coming to completion and settling and so on and so forth. It’s a riskier area. The people that buy in there, need to know that. It's not your bread and butter area. I don't think that you could rely upon stability, in terms of cash flow and growth.

Phil Tarrant: It's hard to have a point of difference with a unit as well. I was up near the Gold Coast last weekend and you've got so much construction going on in the market. You might buy a new apartment and you get a good yield on it for a little while. Then 2/3/4 years later, it's an old apartment. People want to live in a new apartment.

Steve Waters: They've got so much choice.

Phil Tarrant: There's a lot of choice.

Steve Waters: The other thing about the Gold Coast is that there's this transient population. We've bought a few there but not in the Gold Coast but just on the peripherals where the stable populations, the people that live there and have lived there for 20/30 years and will continue to – rather than the people that come in there for six months, eight months, one year, whatever it is and then move on. With the higher cost to operate such as the elevators and the swimming pools and the spas and the restaurants and all that sort of lovely stuff which the Gold Coast offers.

Phil Tarrant: It's big strata.

Steve Waters: Huge. Huge. In fact. We've got one client, as a negative story, we didn't buy it for them, but they bought one unencumbered, like a $100,000 unit up there with body corporate, $100,000, no loan, so unencumbered and it was still negative cash flow after 12 months.

Phil Tarrant: Really?

Wow. That's just madness.

Steve Waters: Crazy.

Phil Tarrant: Good investment.

Steve Waters: Great.

Phil Tarrant: You deal with a lot of property investors and you have a different relationship to them than what me and Andy have as media guys. What's the perception that’s coming though? Obviously, you get some clients which are a bit more sophisticated. Some which are new to property investment. Do new guys come to the table, thinking, I need a house, I need a house, I need a house or are they quite open to the idea of units as an investment?

Steve Waters: It’s probably about 80 per cent of people don't really mind, 20 per cent need to be educated. It's just based purely around the figures. The whole decision on whether it's a house or a unit to begin with is more emotionally based on what you've been told from years and years and years and years. I'm not saying you should have one or the other, it's just as you build your portfolio it needs to be balanced. There's some really good reasons for that. Cash flow, land tax, maintenance. Think about it, units are always on the best infrastructure as opposed to the houses which are out on the ‘burbs.

Phil Tarrant: Sorry Andy, I know you want to move on, but how do you work out whether or not a unit represents a good investment or not? I know it's a very broad question. What's your radar say? What's those instincts that you've developed over time buying all these properties that you've bought, where you can sniff out a really good unit deal quickly?

Steve Waters: Numbers, at the end of the day. It's not just what it produces in terms of cash flow but what it costs in terms of its outgoings. Once again, your body corporates or your strata fees. How healthy are the strata funds in terms of the admin and the sinking fund? What's the maintenance look like it's going to be? To be honest with you, I like the older blocks because they were better built and they seem to stand the test of time. They're really on the better infrastructure, again. Opposite the shopping centres, near the stations and what have you. It's just got to have a really clean cost to operate. Now and potentially.

Phil Tarrant: Good takeaway.

Andy Scott: They say you never forget your first time. Ironically, I can't remember the first time I used that cliché. A question I do always hear a lot and Phil you’ll hear it as well is, people will ask us a lot, how do I get started? What do I need to do? What should my first property be? Steve, obviously, you bought over 3,000 properties, tell us about the first one you bought and what you learned form it?

Steve Waters: Just to clarify that wasn't 3,000 for myself.

Andy Scott: No.

Steve Waters: By the way.

Phil Tarrant: No. With your clients.

Steve Waters: The first one I ever bought, I really didn't buy. My then girlfriend, now wife did. She's really the brains of the whole scenario.

Andy Scott: Where was it?

Steve Waters: It was on Carlisle Avenue, Hebersham. I hadn't invested before, my wife had already – I don't know, I think she had three or four – then girlfriend – she said ‘This investing's a really good thing, you need to look at the figures’ and so on and so forth. So I did. I thought the figures were awesome and being pretty brave I said, "Yeah. You go out and find me one" just off the cusp. She rang me up the next day and she said, "I've found you one." I died a thousand deaths and everything that could go wrong, did go wrong. My finance was approved then it wasn't approved so I had to chip in more money. Then I took possession of the property. I started to paint it. Then someone broke in and poured the paint everywhere.

Then when I finished it, I thought this is my property, Steve Waters’, it's got to be worth more for rent than anyone else's in the suburbs so I asked for too much rent and I tried to find the tenant myself. Privately managing it because I was too tight to pay anybody. It sat there for about two months, I think it was. Once I gave it to an agent, a bit of the greed went away and I lowered the rent to where the market was. It was rented within a week. Those tenants stayed for about eight years. I bought the property for $105,000. 12 months later, it valued at $210,000.

Andy Scott: Gravy.

Steve Waters: Today it's worth nearly half a million.

Phil Tarrant: You've still got it?

Steve Waters: Yeah, nearly half a million dollars. I can't take any credit for it, to be honest with you, it was all my wife. I was the scared person. Everybody I sit in front of now who procrastinates and who's terrified, I actually relate to that. To this day I'm still probably the biggest procrastinator.

Phil Tarrant: What do you say to those people though when you've got a client, based on your experience, sitting in front of you who can't make a decision? They're scared to make a decision. Everyone makes their decisions based on a whole bunch of different things. Some people need more information. Some people need more time. Some need to be encouraged. Some people need to be motivated. What do you say to these people to get them to say, ‘Let's just get it done’?

Steve Waters: The same thing that actually got me going. What is the worst case scenario? You're buying at this. You know your expenses are this. You know that your income, worst case, is this. Everything is worst case. Can you handle that worst case scenario? Yes or no? Then once you actually take that leap of faith and purchase, in this case a property, but it could be shares, it could be a banana, whatever it may be. Once you actually have skin in the game, you'll never learn as quick. Everything seems to stand out clearly to you, whether it's good, bad or ugly. Once you've educated yourself enough, once you've had enough confidence but, more importantly, once you've got the risk mitigation and your buffers around you to cover worst case scenarios, then just have a crack.

Phil Tarrant: I'm going to introduce new sections to the podcast Andy Scott. We haven't spoken about this, I just thought about it. Sorry. Tell me about your property lemon? What's the worst?

Steve Waters: My property lemon?

Phil Tarrant: Yep, property lemon. What's the worst property you've bought? Do you still have it? If you don't, how did you get out of it?

Steve Waters: It was actually one of the ones I bought for you.

Phil Tarrant: Okay.

Steve Waters: I'm just joking. You still have it. The worst I bought was ...

Phil Tarrant: This for you and not for a client?

Steve Waters: Yeah. This is for me.

Phil Tarrant: Brilliant.

Steve Waters: This was about three years later. After I bought the first one, I just went sort of ...

Phil Tarrant: ‘I'm the man’.

Steve Waters: I knew it all. I bought a lot of property very quickly. I just sold everything that I had in terms of the toys and bits and pieces. By about year two and a half, I knew it all and this investing is easy. There was no other education around at the time. There wasn't advisers or buyer's agents or anything, so it was all learn as you go. But I knew it all, remember? I went and bought a – I got introduced to a developer and the brochure was really good.

Andy Scott: Shiny.

Steve Waters: The site was better. The suit was awesome. It had water views. It was just going to be this big cash-flow producing thing. I thought ‘You know what, let's not buy one of these, let's buy two’. So we did. It was an off-the-plan, on the harbor, serviced apartment. Everything that you shouldn't do, it was there. Anyway, we bought it. We bought it for, I don't know what it was, $360,000-odd. It settled and it valued much much higher. It validated how awesome I was. I think there's some dodginess there, somewhere along the line with the valuers. This is going back, I don't know, 13 years or something like that. To this day the property is worth less than I paid for it.

Andy Scott: Really?

Steve Waters: Really. How's this? It gets worse. The gross rent that I get because it's a services apartment is awesome but over 51 cents of every dollar goes to property management for them to put the bums in beds. That doesn't include my strata. Doesn't include my rates. Doesn't include my insurances. In fact, I was talking to my wife on the way in ...

Phil Tarrant: We're shaking our heads here, by the way guys.

Steve Waters: Sorry?

Phil Tarrant: We're shaking our heads.

Steve Waters: Yeah. You know what, in hindsight, I'm really glad that I did that because it taught me so much. I don't think I could've ever learnt as much as I've done without actually going through that sort of pain. I suppose I'm trying to sugar coat it, make myself feel better, in a sick kind of way. We also bought it because we thought we were going to go up there, probably, two dozen times a year. I have been there four times in 13 years.

Phil Tarrant: There you go. Just to wrap up this section, what would the Steve Waters of today, if he's got one tip for Steve Waters when he's buying his first property way back when. I'm not going to say a time because I don't really know it and I don't know how old you are. What would be the one gem of information that you would tell yourself when you were starting out, if you had your time again?

Steve Waters: Risk. Cover it all and give yourself buffers. That really spreads throughout everywhere. That means, make sure your numbers are right, everything like that. Risk.

Phil Tarrant: Good.

Andy Scott: I think Steve, you really hit the nail on the head there. It's something that we talk about. We joke about and we talk about it as well – that all education has a price, at the end of the day.

Steve Waters: Absolutely.

Andy Scott: And some lessons are much more expensive to learn than others, unfortunately.

Steve Waters: Absolutely.

Andy Scott: The only thing, something that me and Phil would say, find the people who've already done it. Find the people who've made the mistakes. Find out where they stuffed up. Do everything you can to make sure you don't stuff up the same.

Steve Waters: Absolutely.

Andy Scott: That's all we've got for you today guys on The Smart Property Investment Show. We hope you enjoyed listening. Make sure you get yourself to the website www.smartpropertyinvestment.com.au. You'll find all the stories we talk about plus a whole lot more. We've got comments sections. We've got an active Facebook page as well. We're all over the social medias. Get involved. Get in touch with us. Anything you want to know about we will endeavour to cover it. Steve, say goodbye.

Steve Waters: Thanks for having me guys. Awesome.

Andy Scott: Phil, say goodbye.

Phil Tarrant: Thank you. Thank you Andrew.

Andy Scott: That was it. Goodbye. See you next week guys.

Phil Tarrant: Bye.

Andy Scott: See you later.


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