SPECIAL EPISODE: SPI team reveals all the financial details of its portfolio

By Reporter 21 November 2016 | 1 minute read

In this special extended episode of The Smart Property Investment Show, the team delves into the nitty-gritty details of Phil’s 11-property portfolio. How much has it really cost him? What is its actual cash flow position? Is there anything to worry about before the team purchases again?

Smart Property Investment's Berkley Vale property

Host Phil Tarrant is joined by his accounting and finance team to go through the real-world numbers of the portfolio – warts and all. The team also looks at the realities of managing a large portfolio and looks at some worst-case ‘what if?’ scenarios.

All this and much much more on this episode of The Smart Property Investment Show.

Tune in now.



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Intro: Welcome to The Smart Property Investment show with your host Phil Tarrant.

Phil Tarrant: Good day everyone. Welcome to The Smart Property Investment Show. Thanks for tuning in. Phil Tarrant here. I'm the editor of Smart Property Investment, also host of the show. Bit of a treat for everyone today I think, well for a lot of our listeners I think it's a treat, some people may find some themselves snoring asleep at the wheel because it's going to be so boring because we're going to be talking about accounting. I've set all this up in a really good way to introduce my accountant, Munzurul Khan from Keshab who's looked after my property portfolio since the day dot and I've already given him a hard time by calling him boring because he's an accountant, which I do not believe in – accountants are the most interesting people in the world – but I have fortified myself with a very large coffee here because while I get and understand accounting, sometimes the nitty gritty of it means I need to be alert and on guard. Munzurul welcome to the show. Thanks for finally coming on.

Munzurul Khan: Thank you very much Phil. It's an absolute, absolute, absolute privilege to be here. Thank you.

Phil Tarrant: That's good mate. Look, I lean on Munzurul pretty hard. We've got an interesting working relationship and we'll talk about that over the next half hour or so, but I have confidence in Munzurul to get this part of my portfolio sorted, so I sleep easy at night knowing I have good people on my team and Munzurul was critical to that, so I probably never said thank you for what you do. I pay you money, right? But I do really appreciate the work you do.

Munzurul Khan: Thank you.

Phil Tarrant: And how you've helped me grow a really nice portfolio and we'll discuss that today.

Munzurul Khan: Sure.

Phil Tarrant: And I've also asked someone else to come on the show, also big part of the team as well. Michael Johnson. Michael, how you going?

Michael Johnson: Hey not too bad Phil, how are you mate?

Phil Tarrant: Good mate, so this is the first time you've ever been on a podcast Michael?

Michael Johnson: It is the first time I've been on a podcast, yes.

Phil Tarrant: Good. Okay, so Michael works with us here. He works within our finance team and as well as doing all the stuff we do as a business, Michael really supports me as my eyes and ears and go-to guy for everything sort of portfolio related. So his role here is a bit diverse because you do the business stuff, but then you also have to deal with me yelling and screaming about getting me stuff for my portfolio because my broker or my accountant needs it.

Michael Johnson: Yeah, there's always plenty to do. There's always plenty to do here.

Phil Tarrant: There's plenty to do. I was just trying to paint a picture here I guess. Michael interfaces with Munzurul's team, to help deliver Munzurul the information we need in terms of tax time, but also as we go through sort of financing a property, so the objective today, Munzurul, and it's probably going to change to how we start out with, but a lot of the questions we get around our portfolio is geared towards its financial performance. Why do you invest in property? Why do I invest property? Why do most people invest in property? It's a wealth creation tool. I do it for a bit of fun, but you don't do it only for the fun. You do it because you're actually trying to achieve something and that's wealth creation.

A lot of the questions we get is around the path we've embarked upon in terms of wealth creation and how the different stakeholders we have to help us do that and the role they play, but a lot of the questions are always around accounting.

I've given Munzurul the brief to talk completely open and transparently about our portfolio. He knows it as well what we do. We're just going to explore some of the drivers of this portfolio. Some of the successes, the position, how we've been able to realise wealth creation through leverage, how we've been able to realise wealth creation through buying really good properties and I'll preface that also with the fact that, and we've spoken about this before on the show, that an accountant is essential to any property investor, but not all accountants are created equal.

Now Munzurul is ex-PWC I think, so you have a very good pedigree as an accountant from a business sense, very good. From a property sense you're also a property investor, and that was important to us when choosing an accountant that it was actually someone who understood property.

Munzurul Khan: That's right, mate. The privilege that I have is that I started back in 1999 and that's when I sort of bought my very first property and I still look back and I sort of say, "Why did I buy the very first property?" My father sort of said, "Oh you got to buy the property." I still remember at that sort of mid-20s, I suppose one sort of says, "Why would you buy investment properties?" It's shares. They buy the shares, shares are exciting, right? So you can check it on a daily basis, it goes up and as such. My father said, "No, no, no. Go with brick and mortar." It's the safety. It's the security. It's the tangibility, it's the asset that you can see. And that's where I started and the journey began.

Phil Tarrant: That's good. I know a little about Munzurul's portfolio, so I won't disclose just how big it is, but for our readers, Munzurul has a significant property portfolio. He's been at for 15, 16?

Munzurul Khan: 17 years.

Phil Tarrant: 17 years or so. I'm not going to call Munzurul aggressive in terms of his drive to build a portfolio, but I'd say you're more on the proactive side. Is that fair?

Munzurul Khan: It's about being consistent performance over a period of time, right? So it's about being time, and it's about being time in the market as opposed to so much timing. Now, I see many investors as an example that in the first year they buy three, four, five investment property or at a point of time they do. Somehow the life takes priority instead of other sort of priority instead of coming as such, it just doesn't seem to happen for another three, four, five years. Then you sort of look back and you say, "Three, four, five years of the opportunity gains so to speak, has been lost."

It's about consistent performance every year. It's not about any level of, I suppose, race, with anyone. It's about having your own goals, own smart goals and how do you track with that sort of own smart goals and how do you keep yourself accountable?

Phil Tarrant: That's very good point. One of the things I like about working with Munzurul is the fact that he has a property portfolio that I would like to emulate, and I think we're sort of on that path now. Our portfolios, size wise, are different, but probably, the make-up of them are probably quite similar. It's something we talk about on the show a lot is to find people who and associate yourself with people who are doing something that is something to try and emulate, particularly in property investing – and your portfolio, Munzurul, and your guidance and expertise is good, and it's something we get a lot of value.

Munzurul Khan: Thank you.

Phil Tarrant: Outside of the client sort of accountant relationship in terms of the building side. What I think is probably the best way for us to start, Munz, and just for our listeners, this is completely unscripted. We've got a bit of a spreadsheet here, that Michael works on quite a lot, which paints the picture of our portfolio at any given time, equity position, debt position, LVR position, yield position, this sort of stuff. But think what I might do, Munz, and you deal with a lot of property investors, most of your clients, a lot of your clients are property investors, tell me about my portfolio from an external perspective.

Munzurul Khan: Phil, if I go back on day one. So, we've been with yourself, in terms of the property investment for last good four years now. So, what I did is, that I've done a little bit of a spreadsheet in terms of to go back with the financial accounts to understand more from the financial perspective that, how is the portfolio performing, right?

So we do very often, the due diligence, I suppose, at the time on his sort of purchase, we'd say well that's the expected return and these are the expected expenses and we expect the property to break even, give or take, right? So that's sort of little bit of a hypothetical in advance that you do the due diligence, that's important, that’s good. Along the way you need to do sort of consistent and continuous sort of a due diligence. "Yes that is what we expected, how we're performing as such."

So I look back into your portfolio mate, and I look back and sort of say that you started around five years ago, roughly, just a touch bit over five years, in terms of your business portfolio as such, so we looked into a whole lot of things. We looked into structure, we looked into diversification, we looked into what types of properties we buy, we looked into selection of properties, we looked into the tax side of it. We looked into tax in terms of, not only the immediate tax opportunities or tax minimisation – we looked into longer term sort of a tax perspective as well. We looked into more sort of, I suppose, a strategy planning, right?

So, what's the succession planning? Perhaps prior to that, what's the retirement planning? All of those things being considered, right? At a high level if one sort of considers your portfolio is that you started around October-ish, 2011 and initially we had our trust one and trust one that in the first year, you purchased about four investment properties.

Then we look into the next financial year, which is 2013 financial year, and then you bought another three investment properties in that financial year. We looked into the subsequent financial year, you bought another investment property. We look into 2015, June financial year, there's another four or so investment properties being bought. There's about 11 investment properties that you have. Those 11 investment properties are in between two different trusts.

So if I look through the performance of those properties, if I look through purely from the financial side of it, right? It started about $250,000-odd cash and that $250,000-odd cash that you started, that's your own capital. You went to a buyer's agent saying, "Guys this 250 is what we have, let's build that portfolio as such." So, you build that portfolio. When we look back into this sort of portfolio as today's value, depending on how the valuation is, you're easily looking over $5.2 million as sort of the gross value, if not even higher than 5.2, based on what the valuation is, right?

Then if I look through, that what was the purchase price. The purchase price for all that $5.2 million was about, give or take, $3 million, and then you had a whole lot of incidental costs, right? The general sort of 5 per cent that we sort of add away, the stamp duty, and solicitor's cost and so forth. You had a whole bunch of repairs and maintenance, and renovations so to speak, right? So, when we add away all that initial cost, the incidental costs, the renovation costs, roughly it's about $3.4 million.

So, $3.4 million was the overall purchase price with $250,000 as initial capital. The market value as of today, let's say $5.2 million, so there is about $1.8 million of net equity pre-tax, pre-selling cost as such. So, I take a step back and I say that well, Phil, at a very high level, I suppose, $250,000-odd over a period time achieved about $1.8 million gross pre-tax, and pre-selling cost.

And if I try to do the return on it, on $250,000-odd, the compounding return, believe it or not, is 49 per cent. 49 per cent.

Phil Tarrant: Is that good?

Munzurul Khan: That's brilliant, Michael?

Michael Johnson: Oh, that's amazing.

Munzurul Khan: 49 per cent. And how many times that we go into the open world and we hear from a whole lot of fund managers that you know, "We had a double-digit growth and then we did really exceptionally well. We beat the stock market by that sort of margin as such." 49 per cent, and it's not 49 per cent in one year, it's 49 per cent of compounding return, return on return over five years. Brilliant.

Phil Tarrant: If I was going to play devil's advocate, just say if I was going to pick apart this portfolio, I'd say, "Number one, that sounds like bull shit. It's not possible." Or I'd say, "You must be doing something so risky to get those returns, because it's just not possible."

Munzurul Khan: And you know what's funny, that is exactly how it sounds. That is exactly, exactly how it sounds, but as it is that the listener sort of knows your portfolio, that all of your properties, the 11 properties, none of them are really any sort of a waterfront, sort of fantastic blue chip. You've got a blue-chip property as such, but most of your properties are sort of a little bit, with all due respect, a little bit of lower socio-economic, sort of an area you've got quite a bit of population, quite a bit of infrastructure instead of the rental return, demand and the immigration demand as such.

You haven't really done anything extraordinary other than saying that you have taken action at the right point of time in the right cycle as such. There's no question that if I look back into your portfolio, the first few properties when you bought, that you bought them back in New South Wales, and there was a market at that stage that New South Wales and Sydney market in particular was quite expanding, so you bought it. You've taken that sort of growth as such, then you knew when to stop in New South Wales, which you did.

Then you moved outside New South Wales because you said, "Well, you know, there's not so much value in New South Wales anymore, so you moved outside of New South Wales." You moved into Queensland at that stage, right? And you've seen the value on the Queensland and then the Queensland market's sort of done really well. So, I suppose when we say 49 per cent compounding growth and using your term, is it really bullshit?

Phil Tarrant: I know you don't swear Munzurul.

Munzurul Khan: There is a one-off gain, because you bought it at the right time at the right market, but was it just a pure luck Phil or was it because a whole lot of due diligence that you've done? I would dare suggest that it is the due diligence. That's when the team comes in, your buyer's agents comes in and he buys the other one, so he sort of bought it with yourself. But the market has increased.

Phil Tarrant: So any luck? Is there any luck at all?

Munzurul Khan: I think luck is to some extent is what we make.

Phil Tarrant: You manufacture luck, just like equity.

Munzurul Khan: The manufactured luck is that you make the decision. It's the opportunity that you have taken. You know, I sit down with investors all the time and the investors ask, I ask, "What is the risk?" And we go through a ‘What if?’ calculation. We say, "What if there is no rent? What if the property sort have been damaged? What if there is malicious damage? What if – f this happens, that happens. What if the interest rate finally does go up? What if we go back to 15, 17 per cent?" I doubt it.

So we look through many what ifs. We look through overseas, we look through the international what if. Then I sort of ask a very last question, "What if you do nothing?" The answer is that nothing will happen, right?

So any action arguably is better than no action, provided that we have our level of due diligence and care as such. So, based on the numbers that you've given, assuming that it is $5.2 million, which sure, obviously is subjective, but it is reasonably conservative of the evaluation.

Phil Tarrant: Well it's a bank evaluation, so ...

Munzurul Khan: Yeah, so $5.2 million. You started with $3.4 million, so your $3.4 million over $5.2 million with your $250,000-odd over a period of five years, that's the return.

Then we look through from the cash flow side of it, right? So the cash flow is also important. So we've looked into the growth and we sort of say, well, how does it perform from a cash flow? The way we did the cash flow is that we've accounted for all of your cost. All costs are being accounted including all of your borrowing cost, all of your buyer's agency cost, all of your incidental cost and so forth, and I'll see that in the first year, that when you had four investment property overall, your negative cash flow was about $33,000 to $34,000. So it cost you a bit to hold it.

Phil Tarrant: Yeah.

Munzurul Khan: Then I say move forward into the next year is your overall negative cash flow is about $41,000, but you bought few additional properties, so a negative cash flow increased a bit. Then we move into the third year, and we say that, "Hang on, your overall negative cash flow seems to drop a bit. That's about $31,000."

Then we look forward to the fourth year. Which is 30th of June 2015 and your negative cash flow is about $28,000. So the trend that we're seeing is that while it was initially quite a bit high, then it sort of seems to have increased a bit more because he had more properties being embedded as such, then it started to reduce a bit because as the rents started to increase, and to some extent, I suppose the interest rate is stabilising, right?

So, when I add away all of those four years, your pure cash loss was about a $134,000. And that's an important point, right? That's a $134,000 of pure cash flow and they sit around in here and say how many people can afford it? How many people wish to afford it, that $134,000? But when one sort of analyse that a little bit more, one sort of says, "Well there is a bit of tax benefit." What is the tax benefit? Many people do their tax benefit at the highest marginal right, but even if we have conservatively, let's say we that we take it at a pure corporate rate of 30 per cent. We get a whole bunch of tax benefits – roughly give or take $40,000-odd.

And there is a whole lot of depreciation that you had with all of those properties as well, which also provides us a tax benefit of $26,000. So if I take away that tax benefits attached to it, your $134,000, which was lost, comes down to about $68,000 loss, right? The two important numbers I suppose in here is that it cost you over four years, give or take about $134,000 pre-tax and it cost you about $68,000 post-tax over four years. Now 30th of June 2016 numbers, we're still doing it and then I suppose from July to November.

So if one sort of argues that $68,000 will increase a bit – what's the number? We don't know. Let's say about $85,000. Let's say about $90,000. So, $250,000-odd as your initial capital, to bring in to about $1.8 million is the equity, pre-tax, pre-selling cost. Cost you roughly about $68,000 – let's say about $85,000, when we add away that 2016, 2017. My view, brilliant.

Phil Tarrant: It's good. Good summary. And I guess, if we stopped buying properties and just sat on this portfolio for 10 years, 15 years, didn't add any new properties into it, that position in terms of in the red would move up into the black as the property portfolio matures, that's correct?

Munzurul Khan: Absolutely. Two points in here, right? One is that in terms of your cash-flow side of it, is that it is expected that the rents are sort of consistently increase over a period of time. And rents do. I look back into my very first investment property that I bought back in 1999, the return at that stage was good. It was about 7 per cent to 7.5 per cent. It was just a standard sort of three-bedroom house.

I look into that particular property now and if I compare that with the original purchase price, the return is about 32 per cent. Right? Simply because that it is the period that I've given. It's the time of that 17 years that I've given, that the rent consistently increased over a period of time. When I bought it, the rent as of today, it's above market rent and nothing sort of extraordinary, so rent sort of increases. That's one point and definitely your holding cost, I suppose will decrease over a period of time assuming that the interest rates sort of stays more or less within some level of range as such. The second point, which I want to say is that while the number seems brilliant of 49 per cent that we suggested, but 49 per cent is over five years, right? Because it is a compounding return, we sort of expect that over a period of time, that 49 per cent progressively will drop. But it's still 49 per cent, I'll take it.

Phil Tarrant: It's pretty good. An important point here Munzurul, and I think it's probably worth chatting about is that, this is the real world, right? This is no, "Let's not count that because it doesn't really matter”. This is real. Right? This no bullshit. This is what it is right?

Munzurul Khan: Mate, your Excel is one of the most detailed Excel worksheet that I've seen and this is what I see on a day-in and day-out basis. I see all sort of Excel on day-in and day-out basis. You've counted absolutely everything in there and having Michael with you as well is quite a bit of privilege as well because Michael sort of ensures that absolutely every single deductions are there. You count everything. Absolutely everything in there, so this is your true figures.

Phil Tarrant: Let's do a what if. Okay, so some people would say, “Okay a $134,000 over four, five years is a lot of money.

Munzurul Khan: Yeah.

Phil Tarrant: How do you afford it? Well, let's break it down. How much is that over a five year period, it's, what's that? Twenty-something grand a year, right?

Munzurul Khan: That's right.

Phil Tarrant: Not a lot. It's a lot of money, but I'm able to cover that.

Munzurul Khan: Absolutely.

Phil Tarrant: I'm confident in my ability to earn income to cover that plus meet all my other expenses, so that's okay, but we invest in the trust structure.

Munzurul Khan: That's right.

Phil Tarrant: Which means we're paying land tax. And because we're very New South Wales-centric we were paying land tax on every single one of those properties. If we were investing outside of a trust, we wouldn't have that land tax in there.

Munzurul Khan: That's a very important point. That's a very important point because as part of that calculation of that $130-odd grand, I've taken the land tax as a cost. I haven't added back the land tax because I said, "This is your true cost," and your land tax is quite a bit. In one of the year that land tax-

Phil Tarrant: It's high. Yeah.

Munzurul Khan: It's quite a bit.

Phil Tarrant: The privilege of investing in a trust has a negative consequence in terms of cash flow, so I need to weigh up the benefits of investing in trust versus what it's going to cost me to invest in that trust. There is tax compliance, statutory stuff, associated with it, and I've got to pay you more money to do my returns because it's within a trust, right? That's just a reality of – I'm not asking for a discount, mate, don’t worry . But that's a cost, right? That's a cost, because I invest in a trust structure, and secondly, I pay land tax.

If you took that out of that, and this is what if, the numbers would start even looking even better, right? Because there's less costs in the portfolio.

Munzurul Khan: Absolutely because, say, where the trust cost comes in in terms of the compliance side of it is that, from an accountant's perspective, I suppose, accounts to be prepared in addition to your tax returns, so naturally the cost is a little bit higher. Even from other sort of an admin point of view, as well, you've got a bunch of fees, the annual fees, so costs are definitely higher. And the land tax is higher as well because as he said that in New South Wales that there is no land tax threshold in trust.

In Queensland there is a bit of threshold, 350 but it doesn't go a long way, but it is for each trust, mind you, and in Victoria that there is a little bit of threshold, $25,000 or so, but after that you pay surcharge. So there are costs but I suppose the decision why we made it, we take a step back and we look through what's the structure, why we have done that bit of a structure, what are the benefit as such? Asset protection first comes into mind and asset protection is quite important. Trust is, as it is, that you really don't own it, you control it.

You are the ultimate controller but so much as the owner as such. The second thing where it comes in is that in the longer-term tax planning. Any investment, any business one has to take an exit plan, and if we consider what is the exit plan at a particular point of time, that's where one sees the benefit of a trust that you can distribute the profit on a discretionary manner on the basis of the trustee, sort of a representation as such, and you receive that 50 per cent CGT discount, so there are some significant tax benefit in the longer period of time.

Phil Tarrant: So, I'm paying it forward, pretty much.

Munzurul Khan: That's right.

Phil Tarrant: And that's the important point for our listeners is to, when you're looking at property investment, one of the critical things is structure and getting the structure right from the get go because a lot of people make the mistake of setting up the wrong structure initially and then they get stuck in the future and that's a bad place to be, so the point here is to speak to your accountant.

So, going back, Munzurul, I'm looking at the numbers here and it's cost me, essentially, $1,000 a month in cash, money out of my pocket, to hold this portfolio over a period of four to five years. That's $1,000 I have to find every month –

Munzurul Khan: That's right.

Phil Tarrant: Put into it. Okay, there's 11 properties. Obviously it didn't start with 11 properties, so it's grown over time. A lot of people will say, "Wow, it cost you $1,000 a month to hold an investment property." I go, "Yes, that's true. $12,000 a year, give or take, but, for the $1,000 I've given out every single month to service this portfolio, I've created $1.8 million."

Munzurul Khan: That's right.

Phil Tarrant: That's the summary of this, right?

Munzurul Khan: That's right.

Phil Tarrant: So, what picture does that paint to you? Is that the power of leverage or is that the power of buying the right properties? Is that the power of the right strategy? Is that the power of the right structure? What is it?

Munzurul Khan: Brilliant question. I think the answer is a combination of all of the above, and perhaps a couple more as well. So, definitely it's the power of leverage. It's the compounding effect and I'll probably dare suggest, Phil, that even though the compounding rate of 49 per cent, if we look forward now, in about say five years, 10 years’ time, I would strongly argue that that will drop, definitely will drop just how the numbers work. But, you would still say because you would have growth on growth and growth and growth as well, you would have that snowball effect and with that snowball effect you would see the compounding effect, so one would probably dare suggest that a portfolio, in no shape or form being matured as such, it's just reached at that stage.

It's definitely is a combination of your leverage, because you've effectively utilised $250-odd-thousand to own an asset base of $5.2 million, right? And those $5.2 million is because of that $250-odd-thousand. Even if we look at $3.4 million purchase incidental cost, that's coming in from $250,000 as such. Definitely that, but it also comes back with the strategy as well, right? The strategy in the sense that, I suppose, is that when you bought it, as you bought it, in the right market in the right cycle as such, and I say that very often – you don't need to buy, I'd love to buy, but you don't need to buy once in a lifetime sort of property every other week as such.

You just consistently purchase the market value of the property at the market price and let the market do its things over a period of time, as long as you buy it right in the first place.

What are some of these selection criteria that I suppose you had in the first place? Correct me, because you had your selection criteria. You looked into an area where there is a little bit of café culture, suburban area but not too far, so it's not a regional area as such. Infrastructure was there, the population was there, the growth was there.

The demand was there as well, and more importantly, the rental return was there of the demand. So, your couple initial properties that you bought, initially what were the return? What was on the gross return? 6, 6.5, 7 per cent?

Phil Tarrant: Yeah, they're up there.

Munzurul Khan: 6, 6.5, 7 per cent right? So, exactly the same property if you consider it now, under the current market value, I'd probably dare suggest they would be hardly about 4 per cent or below then 4 per cent of the gross return. So, exactly same property, if you were to buy it today, and if you look for it in about, say, 5, 7 years, your growth is not going to be in the same pro rata as the growth you achieved in New South Wales, and that's exactly the reason why you bought it for a period of time, and then you moved outside New South Wales as well, because you replicated that process in the right market.

By doing that, Phil, what you have also achieved in longer period of time, is that you've also achieved this diversification in the longer period of time, because as it is that while you have the cycle of the market, each estate arguably a little bit on a different cycle, one argues that as New South Wales matured, one argues that as Queensland is still growing a bit, one argues that Melbourne is probably in the middle, but if you have a combination of all of those you would see that at some point of time some market is moving, so while you have New South Wales, while you have Queensland, while you have Victoria as well now, you're reaching into that bit of diversification, so quite a bit of strategy, right?

And then the structure of course it comes in as well, quite a bit of the structure as well, because of your protection. It's also good of saying that having all of those investments and everything else, but if we can't protect it then there is no use, and it's also good saying that, "Yes, we have all these investment properties and down the track when we sell it, and if we need to pay 46.5 per cent tax, with absolutely no level of discount, then that also doesn't help as well."

So, it's the shorter period of time as well as longer term that you've considered.

Phil Tarrant: That's very good. Very good response, Munzurul. You look at a lot of portfolios of investors, Munzurul. What is it that concerns you the most about my portfolio?

Munzurul Khan: When you say, "Concerns the most," I'd probably dare say –

Phil Tarrant: From a taxation, compliance, growth perspective, any way you want to frame it?

Munzurul Khan: Excellent. I'd probably dare suggest that your portfolio is yet to be matured in many different ways. You've got a whole bunch of properties in New South Wales. You've got a whole bunch of properties in Queensland, as well, and then one sort of suggests that, "Well, we can diversify it a little bit more," and one doesn't need to diversify for the sake of diversification, but in an ideal world, if you have New South Wales, Queensland and quite a bit in Victoria, you do have one property in Victoria but quite a bit more in Victoria, then you're sort of taking that cycle as such. That's one.

The second thing is that you do have it, but I would like to have it a little bit more, is that you have your natural growth. So, what we spoke of, that 49 per cent is fundamentally is a natural growth with a little bit of renovation and capital improvements that you've done along the way, but I'm a big fan of saying that if we also have the second driver which is the manufactured growth, so bigger land that we can subdivide, bigger land that one can have a little bit of investment at the end, or you can have a granny flat and those sort of things, right?

Those are the ones that, we do have it, but I would like to have a little bit more, I suppose, if I may.

Phil Tarrant: We're working on that right now and we'll chat about that in another podcast. What we're up to in terms of our buying and on our show recently I committed to buying a few more properties this year, and I can let all our listeners know that it is happening and pre-approvals are nearly there, so yeah, I'm really excited about the prospects moving forward and working with you to help realise that.

Maybe a question for Michael, you've played a key role in helping us manage this portfolio for about a year or so now. You're a young bloke, what are you, 20?

Michael Johnson: 21.

Phil Tarrant: 21 years old, right? Just finished accounting degree. He's a smart bloke, Michael, who I think, as an accountant, has a lot of prospects in that he gets the numbers and gets the mechanics of being an accountant but he's able to think strategically and that's one of the reasons why it's good to have you on this portfolio.

Your perceptions about property investment before you started working on this, whenever that was, let's call it a year ago, compared to today, and actually seeing this. You've done most of the work on this from a liaising perspective with our financials and working with Munzurul's team. What do you think about this portfolio? What do you think about property investment?

Michael Johnson: For me, before I joined working for you, Phil, I had no real exposure to property investment. I didn't really see it as an investment decision moving forward, that sort of thing. I didn't really have that future-planning thought process. Once I got thrust into the portfolio life working with you through this portfolio and seeing the growth and seeing the changes in the portfolio and the interesting things that happen, and the thought process that goes into it, working with you, Munzurul, and going through some quite complex things that are happening, and looking at some really interesting facts in some really interesting ways to look at it, to actually see the performance.

For me, property investment now, I see it as a really great tool for young people to get into. I think this is really going to help me. As a prospective property investor myself now, looking towards buying my first property, it's interesting to hear everything that Munzurul has to say because it's really helping me form my views about how I'm going to approach my portfolio because I know there's a lot of talking heads of, "You should do this or you should do this," and I think it's really important for prospectives out there to really look at a combination of views and to really see what will work for them and what they feel is right.

Phil Tarrant: Would you say that it's been hard for us to build this portfolio?

Michael Johnson: I wouldn't say it's been hard. I think it's really important to have a team around you that can really assist you with that. I think you need clear perspective of what's happening in your portfolio, and that's what this worksheet helps us do. We can really see a good bird's eye view of what's happening. If we don't have that we're sort of just running in the dark, but if we've got this clear view of what's happening, as Munzurul was saying, this is performing, this is not performing as well, those indicators – then we can take action or that sort of thing, so I think it's really important.

Phil Tarrant: That's good. I think it's an important point that Munzurul made to me probably a couple of years ago, now – I was involved in the operational components of running this portfolio. I was dealing with state agents, I was having to advise on, "Yes, go and fix that garage door," or, "Yeah, get a new hot water system," or whatever. Munzurul said, "Phil, mate, you shouldn't be doing that sort of stuff. You've got a portfolio now that someone needs to own that particular component of it." It was really good advice and I was fortunate that Michael was able to pick it up, someone who had the aptitude from an accounting perspective but also understood the long-term goals, where I now am not involved in having to make those decisions or we've got parametres for when I need to be involved in a decision-making process.

What that meant is that I have a lot more time and my time is more valuable doing other things which are more income-generating orientated. That's the number one point. Number two point: things get slowed down if I was involved with it, so now a lot more things happen faster because I've got someone looking after this component for me. And number three: opportunities are now able to be realised quickly because we actually have great, better capabilities to deliver to banks and lenders or my broker the information they need in order to secure me finance, so that is a really good point.

Michael Johnson: Yeah, and I think it's really important that, with this portfolio, we do work as a bit of a team. It's really important to recognise the work that our property managers actually do as well. We work as a team with them as well, and they'll say, "Okay, we have X, Y, Z, this needs to happen," and then we can just boom get it done. I think that's really important to have really good property managers as well.

Phil Tarrant: What's your tips, Munzurul? This is the way we've chosen to manage our portfolio and, on your advice, and I know you probably have someone similar within your business that looks after your portfolio and does all that absolutely essential stuff. When do people need to start thinking about the complexity of managing a multiple-property portfolio? And people probably get stuck quite a lot and things are going wrong. What's your recommendations on how to manage a portfolio like this?

Munzurul Khan: Fantastic. Very good question. I'll still suggest that Phil, on day one, when you were managing absolutely everything on your own, and all the day-to-day decision making that the door is broken down and the curtains have flown away, all this decision making, I think there is still a strong merit to it. It's about being hands-on involved, and it's about really feeling the game as well as understanding the game through feeling the game as such. I would say that any new investor who comes in that initially it’s rather important.

Stay involved. Stay involved with absolutely ever single step along the way and you would learn quite a bit, and then what it does is that as the portfolio starts to become bigger and bigger and bigger and complexities start to increase over a period of time, you would feel it. You would feel it at a point of time that you say that, "Well, it's the time that I'm spending" – not that it's not valuable, it is valuable but there is a better value – “that if I take a step back I get to view the macro view because I have that micro view as such”.

My recommendation quite strongly with the investors is that, start with yourself so that you get involved with absolutely every single step and you learn it, and along the way the delegation will naturally come in.

Phil Tarrant: So, you need to do your apprenticeship. You need to get your hands dirty.

Munzurul Khan: That's right.

Phil Tarrant: What decisions would you get involved in now in your portfolio?

Munzurul Khan: Yeah, good question, because I look back, in 17 years, right? I was started exactly the way you were doing. I was an absolutely control maniac, if I may, that I used to control every single decision. "Do this, do this, no, it needs to be my way."

Phil Tarrant: Michael's nodding his head, yeah.

Michael Johnson: Yep. 100 per cent yep.

Munzurul Khan: "My way's the only way," right? "There is no other way. That is the way," right? And, "I know everything." That's how I started but then I very quickly realised that, "Hang on, that's a little bit immature and not as wise as it should be so I started to relax a bit. I started to see the bigger picture. I started to see that, "Well I may have given away $100 here and there as such, but it's the longer period of time as such," so I started to do it, and I was still investing on my own. I was still managing everything. I was still buying everything. I was doing it, I was doing it, I was doing it, and I reached at a level of saying that the time has become such a demand, that because I don't get around to it is the opportunity cost has become far too high, and the opportunity cost is not so much in terms of the day-to-day repairs that I should be doing, and rather than having one cost indication, we should be really getting about three indication, and we only get one because we don't have time.

It's the opportunity cost that I don't have the time to take a step back, look into from a strategy perspective that, "How do I expand? How do I do the BD, so to speak, as opposed to becoming just the general manager as such?" In my case, that happened after a good about 10, 12 years later.

Phil Tarrant: Okay.

Munzurul Khan: This is where I've sort of brought in someone initially, sort of a day or two, and then that became more of a part-time and then became more of a full-time basis, as such.

Phil Tarrant: Interesting. It's a good point. We've run out of time, that's a long time, is it? Little bit longer than normal, but I really enjoyed the chat, Munzurul, thanks. It's really good. Appreciate you coming. Let’s get you back in. I want to keep talking about just some of your tips about how our listeners can be better property investors on the financial side, taxation side, compliance side, so let's get you back in couple weeks' time and let's go through that.

Munzurul Khan: Sure. Love to.

Phil Tarrant: Michael, thanks. You did well, mate.

Michael Johnson: Thanks for having me.

Munzurul Khan: Thank you, Phil.

Phil Tarrant: Just to summarise this podcast, and I know there will be a lot of questions so make sure you email them through to me, [email protected]. We're throwing a lot of numbers at you and hopefully they make sense. I've tried to keep it pretty simple as possible. I guess the summary is that it costs us a little bit of money to hold this portfolio but the portfolio is growing at a rate which far outweighs any of that, and I have the confidence and comfortable position to be able to meet that cash flow.

Just a slight cash flow short fall in the big scheme of things. If you do it as a percentage it's absolutely nothing, but it's about knowing your limitations, so you need to be comfortable as a property investor with your cash position and be able to manage different times in different markets at different levels of maturity your portfolio to meet the cash flow needs, but all in all, 49 per cent compounding growth, consistent compounding growth, average compounding growth year on year, it's pretty good. I challenge anyone to try and get that anywhere else without betting the farm on it, so we're quite happy with it. Munzurul works with a lot of investors. There's other people getting the same stuff and what they're doing, they've got good strategy, they've got good people behind them, they're not taking risks. My portfolio is boring, to be fair, there's nothing really exciting about it and that's one of the interesting things.

In summary, know your cash position, use your real numbers, don't try to fabricate it or paint a picture that isn't true. You need to actually know the ground truth of your portfolio. You need to actually know your actual situation at any point in time because that's going to empower you to make the investment decisions that you need to make. Going on what Munzurul was saying, good management is absolutely key and you need to think about the opportunity cost, so if you need to spend a little bit of money to underpin your ability to manage your portfolio so you can capitalise on those opportunities when they arise, I'd be looking to invest in that, so, thanks everyone for tuning in. I know we'll get a lot of comments and people wanting more from Munzurul so we'll make sure we do that. Remember to go to smartpropertyinvestment.com.au. You can go to all the Twitter and Facebook stuff. You can follow me @philliptarrant. Any questions, just get in touch. Thanks for tuning. We'll see you next week, bye bye.


SPECIAL EPISODE: SPI team reveals all the financial details of its portfolio
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