Special Episode: Phil and Munzurul talk steering the growth and development of portfolios by managing cash flow

Special Episode: Phil and Munzurul talk steering the growth and development of portfolios by managing cash flow

By Demii Kalavritinos

Property portfolio accountant Munzurul Khan returns to talk about how your accountant can help with the growth of your portfolio. Tune in as he and host Phil Tarrant provide an in depth understanding of how to measure the value of your portfolio and how to avoid mistakes by getting the “simple things right”.

In this episode, you’ll find out how to measure the success of your portfolio, the best ways to reach your retirement goal, and the many stages of successful property investment.

You'll hear all of this and much, much more in this episode of The Smart Property Investment Show!


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

If you liked 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:

New South Wales

Related articles on interest:

McGrath says Sydney won’t be subject to 40% correction
Perth’s rental yields falling, capital growth outlook still strong
Things to consider before investing in a regional town 
Median prices or values – which is more important?

Listen to other instalments of The Smart Property Investment Show:
Episode 114: Why property is ‘literally’ this investor’s life
Episode 113: Portfolio update: Why we bought five properties in one go
Episode 112: How this ex-banker supercharged her portfolio with knowledge from the inside track
Episode 111: The tips this ex-camera man uses to snap up properties
Episode 110: Top 5 questions to ask your accountant
Episode 109: From selling 10-cent golf balls to a $1.8m portfolio
Episode 108: Dealing with scar tissue from bad investments
Episode 107: How property styling can boost your portfolio’s worth
Episode 106: How ice addicts potentially ruined an investment
Episode 105: New podcast: Investor reveals the opportunities for migrants in Australia

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

Phil: Okay everyone, it's Phil Tarrant here. Welcome to the Smart Property Investment Show. A special issue today, something which I really enjoy doing and we've done a number of times over the last year or so and that's bringing in my accountant who looks after my property portfolio, Munzurul Khan from Keshab Chartered Accountants. Munzurul is a talented accountant. I'd given him credits to that. He's very accomplished out of one of the major accounting firms. Set up his own practise many years ago and specialises in investment property.

            Someone I chose a number of years ago to help me, to support me as I grow this portfolio moving forward. I've been very happy with the outcomes of it. What I'd like to do, I'd like to get Munzurul: in and really allow you guys to be a bit of a fly on the wall on how we view our portfolio, how we look at its growth. We look at the challenges and some of the frustrations it has, but also measure its success as well.

            For those of you who haven't listened to a podcast where we've done this before, the accounting side of our portfolio. The last time we got together with Munzurul was back in 21st of November, 2016. Go and check it out. Even stop the podcast right now and go on to listen to that one first. You'll get a good feel for what our portfolio looked like about 10 or so months ago. It's not exactly a year since, but it's pretty close to it.

            I thought I'd get Munzurul back in the studio just to reflect on our portfolio growth over the last period of time and potentially also give me a bit of a hard time about where he thinks our portfolio can improve. Some constructive criticism which I do like, but also hopefully give me a bit of a pat on the back and tell me that I'm doing the right things. Munzurul, how are you going?

Munzurul: Very good Phil. Very good thank you.

Phil: The last time we did this, it was immensely popular. I think it's probably one of the highest listened to podcast we've done and I think one of the reasons why is that, it really emulates exactly what we're trying to achieve with Smart Property Investment. When we first set up Smart Property Investment, for those of you who are familiar with it, it was a magazine for a number of years, quite some period of time. The rationale then is exactly the same as the rationale today. We wanted to show property investors how you can invest in property the right way.

            There's a lot of myths around property investment. There's a lot of sharks that circle this particular area and there's a lot of noise around how people would become a bazillionnaire overnight through investing in properties. For us, as well as delivering market insights and intelligence and daily news and information for property investors across Australia, and we've been very successful at that, the really important thing for us was for us to share our story and we've done that very openly over the years. You've obviously been a big part of that bit.

            The last time we got together, the 21st of November, 2016, go and check out the podcast. It was immensely popular because people liked to see what's under the hood of something. You know what? Everyone likes to see growth in property portfolio, and you sir you're an investor yourself. You have a portfolio which is considerably larger than mine but you love the game don't you?

Munzurul: I absolutely love it.

Phil: It's very good so, 10 months on since we last got together Munzurul have I done a good job?

Munzurul: Phil, first of all, thank you very much. Thank you very much for having been here and absolutely very generous as you always are, so thank you very much. I think when you suggested last time the audience was quite attracted. I suppose it's about knowing yourself as well, because you've been very, very, very open over that period of time. Your story is what you say is what you do on an ongoing basis. We've spoken around that November and we've said that, "Well, perhaps we'll go back in day one and perhaps we'll say that how we started."

            We started about 250-odd grand cash, and we build a certain level of portfolio over a period of time with that 250-odd grand cash. Over a period of time, we suggested and said, "Well, we take our cash out." Which you did. The portfolio, while it just started with a little bit of cash, there was no capital contribution so to speak because everything was being drawn.

            I think where some of the statistics that we discussed in the last time is that, in five years of your portfolio which was running at that stage is that, we looked into the initial capital of 250-odd grand and we say that at that stage, you had a net market value of about 1.86 mil. With that, a net market value of 1.86 mil, we reached into this statistics of compounding return of some 49% or so.

            I remember that I raised that 49% and he asked that question, "Munzurul, is it really believable that 49%? Did we really do that well?" That's what we did. What was interesting is to, take that from there as of today to say that, "Well, how did we perform from November up until now?" We've already had that 49%, so what happened in the last year or so.

            What you did in the last year or so is that, you had one additional purchase and you started your next trust just from a diversification point of view. If we look through some of the top-line numbers, your market value of your investment portfolio at the moment is about 6.15 mil. Your net asset is about 2.235 mil. That net I said which is about 2.235 mil, it's a pre-selling cost as well as pre-capital gain tax and such.

            I do a little bit of maths on my own. I say that, "Well, 1.86 is what we started with in one year ago, and we reached into 2.236." What's our growth within that period of time? Because that's the net return. What's our growth? We still reached into about 20%. You had literally about 20% growth, again, within that period of time based on the initial 1.86 mil. It's done well.

            The compounding return though, as it is, that over period of time the compounding return arguably reduced us a bit because 49% compounding over a period of time isn't really practical. If I go back into day one now and I redo that calculation all the way to six years, your compounding return seems to be sitting at 44%. Which is still brilliant.

Phil: It's come off 2%?

Munzurul: It's come off a couple of percent yeah.

Phil: Just for our listeners Munzurul, there's a couple of different concepts you just spoke about there. One was the compounding return on the cash investment and then you've spoken about the annualised growth of the portfolio from an equity perspective.

Munzurul: That's right.

Phil: Let's just deal with the first one, this compounding return. When we started this portfolio, we tipped in 250K and that was across a number of properties and we bought really quickly. You can go and check out all the stories around that on smartpropertyinvestment.com.au. That 250 thousand dollars has been turned into an equity position which you've just outlined then over 2.234 million bucks. Plus, it was also a bit of an offset cash as well, which you went and turned into it. Our complete equity position is about 2.394.

            What you're talking about then is that, you've turned that much money, 250 thousand dollars into, let's call it 2.4 million dollars. That's the compounding return. Every year, 250, 49%, next number, 49%, next number, next number, number. That shows the benefit of time in the market and buying well.

Munzurul: Absolutely. Absolutely. Even if you do the average of it, say if you say about 2.3, 2.4-ish, let's say 2.4-ish, just for the calculation point of view, over a period of six years. You divide that on average, that's about 400 thousand dollar’s worth of equity on the asset that you built.

Phil: Interesting. I did a podcast recently and you can go and check it out. It's on the 31st of August. It was with Steve Waters who, as you all know, is from Right Property Group. He's a guy I use as my buyers' agent that helps me acquire these assets and help manage them as part of a team of people I have including Munzurul and my mortgage broker Ross Le Quesne. I went through the numbers. We stayed because I outlined that we'd just signed the contracts on a new purchase. With exchange of contracts, I'm in the period right now, the arranging of finance for that and we'll unveil exactly what that is. As you all know, if you listen too, it was an asset we acquired which was a number of townhouses on my block so we control the whole thing.

            I haven't yet given away the location yet. I'm just waiting for the settlement to take place so they're actually in our hands. The top-line numbers we spoke about and Munzurul just referred to it, 6.15 million dollars total property valuation, total debt on that 3.915 million dollars. It gives you an equity position 2.2 million dollars, plus a little bit of cash, so we're looking at about 2.4 million dollars total equity position. LVR, 64%. Now, LVR for our listeners who might not be familiar with the term, that's the Loan to Value Ratio. Of the total asset that we owned, how much of it is currently under debt? That's 64%.

            This is a portfolio positioned for us. We spoke really early about how do we measure the success of this portfolio and how confident we are with the growth of it over time. We spoke about this compounding growth, 250-odd thousand dollars, which we've now taken back anyway. The portfolio is just nothing. Then we talk about the growth that we had over the last 12 months and this 20-odd percent, how else could we measure that? We're doing what was 64% LVR. It's not at the bottom end of some people's confidence with debt, but it's definitely not the top end in terms of people's confidence with debt. How else can we measure that? We're doing quite well with this Munzurul.

Munzurul: Yeah, no absolutely. Say, how is the portfolio? If we look through any portfolio I suppose Phil, we look through a whole lot of things. Number one is that, we look through exactly from the LVR perspective, so what's our loan to value ratio? What's our overall, the asset value? What's the value increases over a period of time? We look into the cash flow side of it. How we're looking at from the cash flow side of it. Then we take a step back and we say that there is a whole lot of non-quantum sort of a mechanism that we look through as well.

            I think such as that what's the diversification of the portfolio. We tried to have a little bit outside of the future in our mind and we say that, "Well, how is that portfolio in longer period of time is going to perform? Not only from a diversification point of view, but more in terms of the location, more in terms of the future side of the zoning and future side of the capital increases as such.

            There's many different ways that we look through. The cash flow side of it, if I may just touch it, from day one, if we go back into the last six years or so, the overall, your portfolio cost a bit. We looked through and we say that, "Well, if I just add back all of your different entities, how much was your tax loss so to speak?" The tax loss seems to be about 190-odd thousand over six years.

            190-odd thousand, so that seems quite a bit. Then we say, "Well, a 190-odd thousand is really not your out-of-pocket, because that includes a whole lot of a non-cash expenses such as your depreciation expense, your one-off potential renovation so to speak. A one-off different level of cost as such or more of an extraordinary sort of a cost." When we take away some of those extraordinary cost when we take away those one-off costs, when we take away the depreciation and so forth. We take a little bit of tax benefits that we received along the way as well. We adjust all of those. Once we adjust all of those, we reach into a dollar value of about 180 thousand. 180 thousand for all true intents and purpose, is what it cost you over a period of six years.

Phil: To create 2.4 million dollars in equity.

Munzurul: That's right.

Phil: A lot of people will think that's quite a lot of money and we need to frame this conversation in that we are in an acquisition growth phase rather than a maturation paying down our portfolio effect. It's expensive to do that. You see portfolios over time should move towards a neutral to a positive position should you slow down a little bit, let the portfolio mature. How much is it costing us a year to hold this portfolio? It's about 18 thousand dollars.

Munzurul: That's right. We divert that 180 by say, six years on average. It's about 18 thousand. Some of the years, a little bit higher, some of the years a little bit lower, but on average it's about 18 thousand.

Phil: Is that on the high side when you, you work with a lot of investors, is that on the high side or is that pretty average?

Munzurul: No, it is when you say that whether it's a high side, say, the first comment which comes into my mind is that, what is really the cash deposit that you had? The answer is zero, because we've absolutely counted for every single cash. When we costed your portfolio so to speak, we costed literally 105%. We costed the entire purchase price. We also costed your purchase relative cost, all the incidental cost, all the cost that we included. We're being the most conservative of the conservative so to speak.

            In the most conservative on the conservative, you've got a portfolio which has got about a number of investment properties in between three different estates that you have. Those 12 properties that you have in different estates costing you about 18 grand, divide that by 12, it's costing you about $1500 per property per year, pretty all right.

Phil: I just divided that as well. It's costing us $346 a week in real money to hold this portfolio. You break it down, so it's $346 a week to hold an asset base of 6.1 million dollars with the equity position at 2.4 million dollars. That's pretty good. By the way, that's 115 $3 coffees. I should start drinking less coffee maybe.

Munzurul: If I may, that when you're saying 340-odd dollars that it cost you, I suppose the question at the same time is that, what is that making you at the same time. You've got a portfolio which is about 6.15. 6.15-million-dollar asset value, asset now, and some of the valuation which we went through our bank's valuation is a rather conservative valuation. Whether it's really market value, market value arguably a little bit higher, but let's go with the bank valuation with most of it and conservative value of 6.15. What would be the return in the future? Of course, we don't know. Of course, it would differ on a year by year basis. Even if you use the most conservative, let's say about 6% or so. On 6.15 million, at 6% it reaches about 370-odd thousand ...

Phil: Pretty good calculations, in terms of six to nine months old, not bad off the top of your head. You're obviously a numbers man.

Munzurul: You divide that by your week right?

Phil: Yeah.

Munzurul: With the same calculation, divide that by 52 and what do you reach?

Phil: Just over seven thousand dollars.

Munzurul: We're making about seven thousand dollars per week with the cost of 300-odd dollars.

Phil: These are live calculations, there you go. Because a lot of people's aspiration when they invest in properties to have the holy grail, that is a portfolio that's going rapidly up in value and it delivers a positive cash return rather than a negative cash return. That's a positive cash return after tax. That's what everyone wants right?

Munzurul: Sure.

Phil: Because then over time, if you stop aggressively growing your portfolio and just let the properties go up in value and keep the deposition the same, you start creating passive income. For us, we're not yet at that phase because we're in the process of building. How happy are you that we are doing this the right way? For our listeners, Munzurul gives me a hard time sometimes and he'll give me plenty of positives but he'll also give me plenty of negatives. Let's have a chat about what we're not doing very well and what makes you concerned about portfolio based on where we are today and what our goals are. Now, our goal is quite aggressive, grow this portfolio. What do you reckon?

Munzurul: Brilliant. When you're saying positive and negative, I suppose constructive. It's a little bit more…

Phil: Call it negative Munzurul, let's call it what it is.

Munzurul: No, constructive feedback, it is negative. Negative it is. It is the ultimate side of the holy grail, and the ultimate side of the holy grail is that, I as an investor, I would like, we as an investor would like our portfolio to be positive cash flow, would like our portfolio to be positive cash flow without even taking the tax into our account as well. Why would we like to do that? Because we would like to see that as our retirement goal. That's our passive income which subsidises our retirement objective is what we are after.

            Have we reached down that level? Well, it's costing us about 18 grand if I'm just purely looking through it from a cash flow side of it. The reason why it is costing us 18 grand and the reason why we are comfortable that it is costing us 18 grand is because we still are arguably at the beginning of our investment cycle. Our own property investment, your own property investment is that, it's not a matured investment as yet. You being into that investment for six years, so you are in a concept so to speak is the acquisition stage, where you're buying properties more and more, and more. It's the capital growth of the asset that is purchasing as such.

            Now, there would be a point of time that we say that, "Well, we take a little bit of a step back." We say that, "Well, how do we utilise some of the potential of the existing properties that we already have?" That's always been your plan and your plan is that, we will go into the game first and then once we are into the game and we've got lots of toys so to speak with the game, then we will find out, how do we better utilise a particular toy?

            We look back into your portfolio and we say, "Well, it's costing us about 18 grand so what's our approach?" There's no one answer. The approach could be that perhaps the acquisition is still continuous to some extent and to a great extent. The reason why that's continuous that, well the portfolio has done very, very, very well but it's still, there is plenty of equity. There's plenty of possible idea and I suppose age bracket is with you as well.

            Acquisition continues, but at the same time, what, perhaps, would be worthwhile is to visit some of the properties that you purchased in day one and in the early years and say, "What are the additional possibilities that we have?" We discussed some of the properties that perhaps, we can potentially subdivide, considered to subdivide. We discussed that whether there is any property that perhaps we can consider to have a potential a granny flat as such. We discussed one or two of the properties that you've got potential to demolition build, multiple dwelling and such.

            That's the consolidation and stage that all investors grew into. We aren't getting into that consolidation stage. Now, each one of those calculation, we need to do it rather carefully, so we need to do it from both angle. Number one is that, it's not purely building a granny flat for the sake of building a granny flat. Do you have a market for it in that particular area?

            Whether the asset value justifies, say if you're spending about 125 grand as an example, is your overall asset increasing by, give or take, 125 thousand? Or are you looking at more from a cash flow side? If it is cash flow side, if we did helves. Granny flat on that example is more of a cash flow, but subdivision or potentially construction after demolition of some properties are capital growth. That's our next step, and that is the step that perhaps we would be encouraged to consider.

Phil: The opportunity that we have with this portfolio is that, because of the assets we're buying, we're keeping our powder dry in terms of having the flexibility to improve our cost position at a point on when we're ready to do it. You've got to look at that within the prism of, we want to keep growing this portfolio as well and keep acquiring properties.

            There will be a point in time when we say, "The acquisition in part is now okay, let's concentrate on the cash flow component of it." That's based on service ability, how much we can afford to tip into this portfolio. There's a whole bunch of moving parts. That's going to be very different for every single investor out there and you should be speaking to your accountant having these very frank conversations with it.

            The point I would make Munzurul before I touch on that a little bit further is that, when we talk about this 18K that this portfolio is costing us, this is the real money that is costing us that I've got to find from somewhere to keep this portfolio and keep doing what with this portfolio. Now, I'm able to find that money from, I make a pretty reasonable salary, it's not a problem. It's not a problem for me.

            However, the point I'm going to make on that Munzurul is that, we include every single cost on this, so when we look at this costing, we're talking about land tax. Now, we invest in a trust structure and therefore we get no land tax thresholds because of it. This is a price to play for us because of, we want to hold these assets in a trust structure and we'll do a podcast on that at some point. That's a real cost.

            If we weren't investing in the trust structure, that 18 thousand dollars would probably go away pretty quickly because we'd be within land tax thresholds and therefore wouldn't be paying that. We also include your fees and it costs good money to have good advice, to build a portfolio. We include absolutely everything as well, but do you think a lot of investors, and I know you deal with many, many of them. The point I want to make here is that, you've got to be true about yourself. Do you think most of your investors actually look at all the real costs? Or that doesn't really matter because of this reason or this, or can't, for this particular thing?

Munzurul: Very, very good question. I want to just add a couple of things if I may that, not only you include absolutely every single cost, we're also being rather conservative as well. When we suggested that it cost us about 18 grand after tax, we've taken a tax rate which is a very conservative tax rate. We've taken a corporate tax rate which is 30% and being even more conservative of taking the new rate which is 27.5%.

            The reality of it is that if one is at a certain level of income, our marginal tax rate are a lot higher, so that means arguably our tax benefit would be even more. That means after tax, our cost would be even lower. We set aside that point. The point I suppose is that, we're being very very conservative. We've taken absolutely every single cost into account including the land tax, including the running cost, including the administration cost, including the holding cost, including some minor level of tax benefits as such, we have. That is the true way of looking through.

            To answer a question that does all investors look through that way? They should look through that way. Do we look through that way? All investors? I would say that there is a fallacy at times, perhaps we don't. We purchase a particular property and we say that, "Well, how much is that property costing us?" We very often say that, "Well, we borrowed about 80% so we bought a 400-thousand-dollar property so 80% is about 320-odd thousand. My interest cost is that much on 320-odd thousand. These are my running costs. This is what it is costing."

            Some investors do it that way, but arguably it should not be done that way. You should be taking that additional, that 80-odd grand on that example, the deposit, you should be taking all of your holding cost into account, even if you paid cash. Let's say you've got cash savings as such, and I'm just paying cash of that 80-odd grand. I'm paying that 5% as incidental cost as cash. I should still be counting it because that cash also has a cost or a cash that has cost savings so to speak. One should definitely look into it.

            A common area which I find Phil that over a period of time, people fall into a little bit of fallacy for me, is that people buy a particular project where they say that, and not that you are doing it, other investors as such. People say that, it's more of a flip of a project. We buy a particular property. We do a little bit of renovation. We sell it, we make quite a bit of profit. On high-level, the number looks very good. Let's say I bought that particular property for 400 grand and I spend 50 grand, and I sold it for 600 thousand. I made 150 thousand dollar profit on that example. 400 plus, 50 as our cost, 600 is the selling.

            Now again, that's a fallacy. Why is that a fallacy? Because you've got purchase cost you need to add away. You've got selling cost that you need to add away. You've got a holding cost that you need to add away while you are doing that renovation and construction and so forth. The numbers on that example is not 150, it's still could be quite profitable but it's not 150. The point I suppose in there is that, you as an investor, or anyone as an investor, you need to do the numbers on an all-inclusive numbers, where you include absolutely every single cost and the cost receded.

Phil: This goes to recognising some of the things you could've done better, and then when I look at this 80-thousand-dollar deficit on the portfolio, 300 and whatever bucks it is a week, a big part of that is poor administration on my behalf in that, we were paying an interest rate on one particular property, the most expensive property on our portfolio, at a much higher rate than all the other properties in the portfolio.

            The reason why was that, I didn't pay a $200 fee to the bank and I'll say, this is Commonwealth Bank, a $200 fee to allow me to have the mortgage advantage package, because I didn't have a Commonwealth Bank bank account. The only way they could take that money was if I had a bank account. That mistake alone cost me 10 thousand dollars in additional interest for that period of time. That's not a forgivable mistake and it's my mistake, but that's a lot of money. It's a lot of money.

Munzurul: Life is a journey of continuous learning. We are all learning, we are all developing, we are all building and we are all setting up some system and procedures so we're becoming more and more, and more, and more efficient. Naturally, what you would find is that, because you are busy, and yes we don't want to pay that 10 grand, but you are busy running around with a whole lot of different things.

            Property is definitely at the forefront of your mind, but it is one of the things which is at the forefront of your mind. One thing which we discussed quite a bit is that, over a period of time, how do we improve our reporting system back to yourself so you don't necessarily need to spend that amount of the time on a hands-on, but you still are across to absolutely everything.

Phil: It's good, and if you go back to the podcast we did 21st of November, 2016, when we spoke, we actually had someone join us in the studio. Michael Johnson who work closely with you at work within our finance team and is integral to the management administration of this portfolio. Subsequent to the last time we spoke, we've put a lot of measures and checks and balances, and processes in place to give us greater bandwidth to more effectively manage this portfolio and hopefully not make mistakes.

            Simple mistakes like that for not paying a fee because of some complex banking rule. Yeah, I'm a bit annoyed about it, but I'm not going to go into it too much. Which cost me 10 thousand dollars in additional interest. Anyway, I'll take that one on the chin and it's an expensive lesson to learn, but my message to our listeners is that, get the simple things right. It doesn't need to be hard, and concentrate on the exciting stuff. The dollar-productive stuff. The things that most investors like working within, that is steering the growth and development of their portfolio.

            This gets us back to the point of managing cash flow with growth. We're in acquisition phase, so we've got levers that we can pull to accelerate our growth of our portfolio quickly. As I mentioned beforehand, the podcast we did 31st of August with Steve Waters, we then vowed to, our latest purchase that we exchanged then from five townhouses, five flats on a row, we control the whole asset.

            We can grow quickly and that's going to help with our yield play over time and we'll explore that a little bit further. We've got our powder dry to fix the cash position on our portfolio by doing some granny flats, so knock down rebuilds. Realising the value of the assets that we've acquired and we can turn our attention to that in line with keep growing as well by buying new stuff. How do I get that balance right Munzurul? Because it's hard.

Munzurul: Good question, and the answer to that question is that, time resolves many of the matters naturally by itself. How does time resolve so many of the matters by itself is that, as you expect is that, over a period of time, probably simply a rent increases. Even if it increases with some level of CPI, adjusted CPI so to speak, so your rent increases over a period of time. The interest rate seems to be more or less similar as we have for over a period of time, whether it will stay similar as such, but interest rate seems to be more less similar.

            As the rent increases, you would see naturally your portfolio becomes a bit more, bit more, bit more positive cash flow over a period of time. That's your natural progression. Along the way, we bring in some of the constructive, whether it's that granny flat. Granny flat is an example is that, one suggests is that, if you're consider in New South Wales, if you consider in Queensland, whether it's 125, 135 and the rent, depending on which area that you're considering, anywhere between say, 300, 317. Some of the better suburbs or maybe even 400, 450 as such.

            Whatever way you do the calculation, each granny flat seems to be anywhere between 710 or even a little bit higher of the positive cash flow. That's a bit of, not so much as a quick fix, but that is a potential a fix as well. I think it's the time. I look back into many of the investors and many of those I suppose, many of the most of the seasonal investors over a period of time, and the natural trend that what I see is that, initially it's very much positive. Very much cash flow outflow as such. There is quite a bit of cash requirement as such, but over a period of time, it gets better and better, and better, and better along the way. Then you inject with one of those things along the way.

Phil: For us, we'll do two things in parallel and that is keep buying good assets, but looking to improve our yield perspective by doing some smart stuff to the assets we currently have.

Munzurul: Also in the longer period of time, 100% agree, and also in the longer period of time is that, what is our goal in about say, five-years' time? What's our goal in about 10-years' time? What's our exit strategy in about 10-years' time? It's more about visualising that where do I see myself in five years, 10-years' time with our entire portfolio? Take a step back as such. One comment I suppose comes in is a little bit on the diversification.

            I look into your portfolio as an example is that, and I say that, "Well, you've got about eight properties in New South Wales. You've got about three properties in Queensland and you've got about one property in Victoria as such." That to me makes sense, because of the time when you started investing, is that New South Wales was good value at that point of time. You bought a whole bunch of properties in New South Wales at that point of time as such

            The three Queensland properties are some of your recent purchases as such, and the block of units that you raised as well. Arguably over a period of time, once I've looked into that entire portfolio and say that, "If we could, in the best of the world, that if we could balance all of those in between different estates, then what we do is that we pass the test of the time." What that means is that if I look back into the cycle of the, say last, say 20 years, 30 years, longer period of time as such, not necessarily each estate grows at the same time at the same rate.

            You would have, over the history period of time, that New South Wales did very well and Queensland perhaps hasn't done that well. Victoria perhaps hasn't done that well or maybe Victoria did. There would be a period of time that you would see that Queensland did brilliant and New South Wales was probably overpriced at that stage.

            In an ideal world is that, if we have portfolio into a few different estates, then you write the cycle of growth of each portfolio. One of the portfolio, let's say New South Wales, at a particular point of time it doesn't grow that much, and that's fine. We hold it for the longer period of time, you will come across. We take the growth on the Queensland on that example. That's common that you'd see that we work through quite a bit over time.

Phil: Let's do a real quick scenario now, and I know the listeners will enjoy this. You talk about the long term, so the long-term goals and aspirations. Now, why do you invest in property? Invest in property, I invest in property and most people I know, to great wealth. Have a bit of fun and all this stuff that's a nice byproduct, but we do it because we're looking at great wealth. For people, wealth means different thing and wealth may provide opportunities for people. It may give them other pursuits in life or whatever. Whatever your thing is that, that's what I want to get into a bit about wealth-creation.

            Now, if we said, "That's it, let's stop now. Let's stop right now investing in property with this portfolio of 11, 12 properties," what would happen? Now, the total valuation is six million dollars, so 6.15 million dollars. Let's say we hold off for two market cycles. Property, and I don't really like this saying, but probably doubles the value between every eighth and 12 years, whatever it is. Let's say we hold it for two cycles, so one cycle double in growth. Two cycles four times growth.

            It's currently just over six million dollars. If we hold it for two cycles, 20 to 25 years, it's going to be a 24-million-dollar valuation. Let's say, because we've stopped, we don't need to do any more refinancing. We don't need to do anything, the debt position will stay the same. Just south of four million dollars. You've got 20 million dollars in equity sitting there, which will generate you quite a comfortable lifestyle.

Munzurul: Absolutely. I did a very simple math and I'll say that, on that example of 20 million, and again, how we reached on the 20 million. We say six times two, that's our 12 million in the first cycle. The second cycle 12 becomes 24. Let's say whatever the time period as they said. Take away our mortgage which is four, is our 20 mil. That 20 mil, if I just do a very simple 5% return on that 20 mil, that's a lot of funding. That's a lot of, lot of, lot of, lot of funding in terms of the retirement side of it.

            Yes, there are many things we need to take into account. We need to take the time value into account. 20 mil as of today is very different to 20 mil in say two-cycle time. In two-cycle time, 20 mil perhaps is not 20 mil of today's value. Perhaps it's about 15. Perhaps it's about 18. Still it's very good. We also take into account that perhaps there are some selling costs. We take into account that there would be some tax that we need to pay along the way as well.

            All of those clip away a little bit, but the end result is still the numbers are so astronomical. The numbers are so large as such, and if you just do 5% return that you're expecting, that is more than what, many times more than what's the medium level of income of Australia.

Phil: Munzurul: 20 million, what's 5% of that mate?

Munzurul: That's a one-million-dollar return and one million of passive income every year.

Phil: You can live quite well on that. I think so.

Munzurul: Definitely.

Phil: Yeah. That's just a bit of a scenario. If we were to stop now with the portfolio that we've built, do nothing else, obviously there's holding costs. We're going to have to maintain the portfolio and there will be a point in time where it would turn from a negative to a positive cash flow asset. It probably wouldn't take too long to be honest with you. If you're not refinancing debt or anything, that will organically move into a positive territory. That's what property does if you hold property over time. Buy good assets, and they're going to go up in value. I don't want to go into how you do that, because we talk about it all the time. That is the scenario. Properties that go up in value over time will generate this income.

Munzurul: If we look through your portfolio, there's nothing really ... You've done well. You've done very, very well. You've done absolutely, absolutely very, very well, but at the same time, you haven't done really extraordinary in the sense that we didn't buy the century, buy of the century and buy of the many century as such, but you did lots of, lots of, lots of actions. You did buy well. You hold them over a period of time, and you look through the longer period of time in terms of the potential of each property, and you stayed within the market.

Phil: That's good. Munzurul, we're going to have to wind up there, but I've enjoyed that chat. I'd like getting together, it's good. For our listeners, if you avoid your accountant, you should be seeing them as a trusted ally and confidante who can help support you as you get on this path of wealth-creation through properties. If you haven't spoken to your accountant for a little while, I suggest you get on the telephone and you speak to them.

            We've spoken about beforehand, how you choose which accountant is right for you and go back and you can check all those out on another podcast. If you have a prickly relationship with your accountant, find an accountant who actually loves talking about properties. That's my two bits, but if you want to get back and have a listen to the podcast we did most recently with Munzurul, 21st of November, 2016.

            There's also the podcast we did 31st of August, 2017 where we spoke about our portfolio from a perspective of my buyers' agent. I think I probably have a due also to get our mortgage broker back in the studio. Who at the moment, I don't think, particularly likes me Munzurul. I've gotten through some challenges getting the financing sorted out on this five-unit deal. I'll share all that with you guys as well. It's all very entertaining. It's a little bit complicated but we'll get it sorted. Thanks mate.

Munzurul: Thank you very much. Thank you.

Phil: We'll get you back. Let's make sure it's a lot closer than this one. We should really be doing this every couple of months or again.

Munzurul: I'd love to.

Phil: Teach me on the game. Remember, check out smartpropertyinvestment.com.au. Our latest news in market intelligence for property investors. If you're not getting the newsletter, make sure you do. It comes out every morning. You'll be the first to know what's happening in property investing space. Smartpropertyinvestment.com.au/subscribe. One thing you can do for me, and I don't ask favours very often, but please keep those reviews coming on iTunes. I do appreciate them. It's good to know that we're doing some good stuff and acknowledge what the team is doing here in providing this information for property investors across Australia.

            For more social stuff, you can follow us as well. Just search for Smart Property Investment and that's pretty much it for me. If you got any questions about the portfolio, any questions for Munzurul around it as well, please send them through and the team will get back to you, [email protected] We'll be back again soon. Until then, bye-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.


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