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Before buying a property, it’s always essential to gather information about every aspect of the property market, which includes demographics, council zones, interest rates and auction rates.
Host Phil Tarrant is joined once again by investor Eric Brown to discuss how his most recent purchase of a warehouse is performing two months on. Eric reveals the challenges he has faced from council and how he has overcome these challenges. He explains why being overprepared could influence the outcome of the decision by a local council’s planning panel to kick start renovations.
They also discuss the most recent summary of this weekend’s auction rates, including a comparison between this years’ and last years’ results as well as how they expect it to impact the market in the year ahead.
You will also find out how to interpret the information you have to be a smart investor, what decreasing auction rates mean for investors, why time is a huge part of property investment and renovation as well as, the skills to be a good project manager versus the skill to being a good builder.
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: Facebook, Twitter 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!
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Announcer: Welcome to the Smart Property Investment Show, with your host, Phil Tarrant.
Phil Tarrant: G’Day everyone, this is Phil Tarrant here. I'm the host of the Smart Property Investment Show. Thanks for joining us. I've been burying my head in some numbers this morning. Just having a look at auction rates. If you watch the TV or listen to the radio, or even read it on Smart Property Investment Show, auction rates are always a factor that come into account when you're looking at performance of markets.
What I've done, I'm going to share with you a summary of this weekend's auctions rates, so we're talking about Saturday and Sunday, today is Monday, and I'll read this out. This is from CoreLogic property market indicator summary. Just bear with me, let me read it. There were 3400 homes taken to auction across the combined capital cities this week, returning a preliminary auction clearance rate of 66.9%, overtaking last week as the third busiest week for auctions so far this year. Last week, based on the final results, 60.9% of the 3390 auctions held, recorded their successful result, the lowest clearance rate since late 2015, early 2016.
Once final results are collected, the combined capital city clearance rate tends to revise down, so at this stage, it's looking like the final clearance rate on Thursday will be in the mid to low 60% range for the sixth week in a row. Sydney and Melbourne, the two largest auction markets, have clearance rates increase week on week, after last week saw both cities recording their lowest clearance rates for the year so far. However, as usual, these clearance rates revise lower over the week. Over the same week last year, a total of 3398 homes were taken to auction across the combined capital cities. A clearance rate of 73% was recorded.
Eric Brown, my guest on today's show, welcome back.
Eric Brown: Thanks Phil. Doesn't really affect me mate, because if you're building quality property, the buyers will come.
Phil Tarrant: Is that what you reckon is it?
Eric Brown: That's what I reckon, yeah.
Phil Tarrant: CoreLogic does a good job, and I get this stuff every week and I read it, and just it makes my head hurt right?
Eric Brown: Hmm.
Phil Tarrant: I go okay, that's important, yes. What does it tell us? It tells us some trends, but what does it mean to me? How is it going to help me do what I need to do better as an investor? You've got to be pretty careful, the information you need to be able to make those decisions right?
Eric Brown: Yeah, and it can confuse you a lot. If you listen to all the data out there, your head just spins around.
Phil Tarrant: It does.
Eric Brown: In the end, I think it leads to procrastination, which is not a good thing if you want to be a smart property investor.
Phil Tarrant: That's good. I'm going to tell you a few things. Sydney and Melbourne, the two lowest auction markets, have seen clearance rates increase week on week, after last week saw both cities recording their lowest clearance rate for the year so far. I'm going to take that as Sydney and Melbourne are a little bit higher this week, but last week was the lowest it's been this year, so auctions are quite soft in the Sydney and Melbourne market. Collectively, auctions are coming off quite a lot.
Eric Brown: I'd probably say there's more stock in the market though, coming in the spring. Wouldn't you? This is a busy time of year.
Phil Tarrant: Well I think the problem is that there's not enough stock on the market to shift properties, and the properties that are going up for auction aren't moving as much as what they used to. It shows that properties aren't turning over, which means either reserves are too high or there's no buyers in the market buying these properties. Obviously, there's a million reasons why, but I take from this that the market is not as hot as what it used to be, so what does that mean for property investors Eric?
Eric Brown: Do your research. There's always pockets within pockets, so the Sydney, they're talking numbers across the whole of Sydney. There's so many different microclimates within that data, that I don't really worry about the numbers in Sydney as a whole. I like to worry about the suburbs that I'm buying or developing in, and focus on them because they're completely different, and the quality of stock within those microclimates has a massive effect on whether you're successful in selling or buying.
Phil Tarrant: You've got to work out what it means for you. What data you need to make more informed investment decisions. I'll just quickly go around the grounds, just while I'm on auction rates. This weekend last year, was 73%. This weekend, as in yesterday, was 66.9%, so it's off quite a lot. They're a lot slower than what it was last year.
But I'll quickly go around the grounds, comparing last weekend from the weekend prior. Sydney, last weekend was 66.2%. Last year was 77. Melbourne was 69%, last year was 76%. This is clearance rates. Brisbane was 57% versus last year, 43%, so Brisbane's up considerably. Adelaide, 67% compared to 63% last year, so up. Perth, 38% versus last year, 27%. Up. Tasmania, 33% versus 80% last year, and Canberra, 68% versus 72% last year. In summary, Sydney, Melbourne and Canberra, down. Tasmania, really down. Perth, Adelaide and Brisbane, up.
Eric Brown: You know what that down means though? It's opportunities to buy.
Phil Tarrant: Is that what you reckon?
Eric Brown:I think I've heard you say it before, the best time to buy is when you're financially able to buy, and with the market flattening off, I think there'll be a few more bargains in the mix. If you've got cash, if you're cashed up and you're ready to invest, now might be the time to start looking.
Phil Tarrant: Maybe. I'd go and have a chat with your mortgage broker. It's a lot harder to get money at the moment than what it was a year or so ago.
Eric Brown: True. Tell me about it.
Phil Tarrant: We'll chat about that today Eric, but every market presents opportunities, so if you're ready to buy and you can buy, make sure your finance ready and go for it.
Anyway, that's enough of auction results. I just thought I'd share that with you. The summary to make is that don't get too confused with all the data out there. Make yourself informed, know what data you need to know about. Auction results are just one of many factors which can give you an insight into how a market is operating. Go and check it out, just Google CoreLogic auction results. You can do that every weekend and make your own assessments, but there should a whole bunch of other things you should be considering.
Eric, you're back on the show. The last time you were on the show was 27th of September this year. It's about two months ago. We spoke about, and the podcast we did was called Dealing With Scar Tissue From Bad Investments. We spoke about some of your history as in investor, the good bits and the bad bits, and I'll highly recommend to our listeners, go and listen to that. Eric, one of the reasons why I like having him on the show is that he's very open and honest and frank about how he sees the world. From an investor who's been in the game for a little while and has done good things and bad things, and he's mature enough to be able to reflect on those bad things to use them for good things in the future. Eric is someone that you should be listening to.
But during that podcast, we had a quick chat around your latest investment, your latest purchase, and this was a warehouse that you secured in Lilyfield in New South Wales. What I wanted to do was just take 15 or 20 minutes today mate, just get a bit of an update on where you are with that. Two months on, when we first spoke, you'd spoken about the buy, why you bought it, how you bought it, what you're going to do with it, and some of the challenges you had around contamination in the soil and dealing with council, and getting DAs in and all this sort of stuff. Go and listen to it, 29th of September, Dealing With Scar Tissue From Bad Investments is what it's called. Maybe you can switch off now, go and listen to that so you know where we're at, but Eric, what's going on two months on?
Eric Brown: We're back. It's been submitted, so we're in council. We're just waiting-
Phil Tarrant: The DA's been submitted?
Eric Brown: DAs are submitted.
Phil Tarrant: What is a DA? Some people don't know.
Eric Brown: Development application.
Phil Tarrant: Okay. What does that mean?
Eric Brown: It's a set of plans and specifications that you submit to council, that has to be within the LEP, which is the Local Environmental Plan. Has to be within guidelines set by the LEP, and if you are within those guidelines, and the council then chooses to, so you can go ahead and build what you want to build, or they knock you back and then the process continues.
Phil Tarrant: The LEP are the rules.
Eric Brown: Yep.
Phil Tarrant: Then what you do is you submit to council saying, "This is what I propose to do to develop my site, and they fit with the rules set by you."
Eric Brown: Yep.
Phil Tarrant: Then there's a bit of a ...
Eric Brown: Now, you can bend the rules slightly and you can go over the rules, and sometimes, well most of the time, council will let you get away with one or two things that are outside the scope or pushing the rules or the boundaries a little bit. That's where fantastic architects come into play, because they can fight for you on certain things that you want to get through, like your floor to space ratios perhaps, or other items like that.
Phil Tarrant: The rules are the rules, but there is a bit of flexibility if you are able to make some compromises. A good town planner, is that who assesses it, the town planner?
Eric Brown: Yeah. The town planner at the council will assess it. With my latest development, I have engaged a town planner to back up the architect, and it's been very good.
Phil Tarrant: You've got your own town planner that's coming in?
Eric Brown: I have my own town planner, yeah.
Phil Tarrant: To support your application to steer it through council?
Eric Brown: Yeah. Part of that submission was a town planning report, and my town planner engaged by me, submitted to try and head off at the pass, an of the objections that we saw that council might throw up at us.
Phil Tarrant: The DA's lodged?
Eric Brown: The DA's lodged.
Phil Tarrant: With council?
Eric Brown: Yeah. We had a pre-DA meeting in the last two months.
Phil Tarrant: A pre-DA meeting. Is that like a off the record chat is it?
Eric Brown: Off the record chat, yeah.
Phil Tarrant: Okay.
Eric Brown: Which is actually on the record, but they can't give you a definitive answer whether you can go ahead or not. They make suggestions based on that pre-DA meeting, and then council tries to get you to change your plans to suit whatever advice they give you. Hopefully for the developer, if you do match what they say, it passes through smoothly, but which is not always the case, which I'm sure we're going to talk about in a few minutes.
Phil Tarrant: Okay. The DA's with the council?
Eric Brown: The DA's with the council.
Phil Tarrant: You've gone about strengthening your proposition with your development application, with very good architectural drawings, engineering plans, all this sort of stuff, and you've appointed your own town planner to give you even more documentation and more clout, to try and steer this through council as quickly and easily as possible.
Eric Brown: Plus a engineer like we said, plus an acoustic consultant, plus a traffic management consultant, plus a contamination consultant. We threw the book at this thing.
Phil Tarrant: Is that all required, or you've over and above do you reckon?
Eric Brown: No, that's above and beyond.
Phil Tarrant: Okay. You've done that why?
Eric Brown: To try and make council look on the development as favourably as possible I guess. We're on the boundary three sides, we're well over the floor to space ratio, so there's no way that council are going to approve it straight away. It'll have to go to a planning panel meeting, but you want that report that they put out to be as favourable as possible, so when it goes to the planning panel meeting, the planning panel looks on your development favourably.
Phil Tarrant: Being over prepared, over planned, over documentated, should support a smoother transition to get the DA approved?
Eric Brown: You would think so.
Phil Tarrant: Okay, but it's not always the case right?
Eric Brown: No. Councils are councils.
Phil Tarrant: Okay. It's with the DAs there. When will you know whether or not it's going to get approved?
Eric Brown: I just got off the phone to my council officer. I won't name him, but shout out to him if he's listening to this podcast. Very soon. We're hoping to get it into the December planning panel, but they did come back to us, council, and ask for some further information, so another structural engineer's report, they asked for additional shadow diagrams through every hour on the hour through the winter solstice, and they asked for some storm water management reporting, which we had to go back to our consultants, get that all up to what they wanted, and then resubmit again. They only gave us 14 days by the way, so if your team's not switched on ready to roll, they wouldn't give us any extensions on that. I don't know if that's typical across all councils, but I felt that was a little bit unfair because some of these things took two weeks worth of work basically, to get it up to what they wanted.
In terms, you know, every hour on the hour through the winter solstice, I thought was ridiculous because it's an existing form, and we're not changing the existing form, but I don't know, I think sometimes you've got to realise that there's boxes that have to be ticked, and it's not the planner's fault for wanting to get those boxes ticked. There was just, perhaps I would have appreciated a little bit more rational thinking in relation to the DA, but anyway, it is what it is.
Phil Tarrant: Yeah, there's a level of bureaucracy with this, and obviously our councils have a responsibility to ensure the character of areas where people are building, and therefor they want building to be consistent with what's going on. I know Lilyfield is an area which has a lot of heritage appeal and they want to make sure it's okay, so I can understand there is a bit of bureaucracy from the councils to do this, but it comes down to your expertise and skills, and experience developing stuff beforehand.
We always speak on the Smart Property Investment Show, about having an A team. We talk about a buyer's agent, and accountant, a mortgage broker et cetera, but if you're in the game of development as an investor, it's a different sort of a A team, and you've spoke about them already.
Eric Brown: Yeah. Well finance, I got caught on finance, I think I mentioned that to you. We're paying 10% interest on that through a private equity funder. I'm trying to come off that as quick as I can. 10% in this day and age is ...
Phil Tarrant: It's high.
Eric Brown: Double what you would expect to pay. That's hurting a little bit, and potential for someone who wasn't aware of that, or you ran into it on a fine line in terms of funding, it could really trip you up. I would want to try and resell a property that had a council stop work order on it and was incomplete, a commercial property that you're trying to change into residential, so you really want to have your funding in line first. I'll probably, hopefully have some good news for you in the next podcast, because I'm very close to getting someone to across the line for that, which will be good. We'll generally incorporate a construction loan on top of that.
Phil Tarrant: Okay. A construction will probably be cheaper than 10% right?
Eric Brown: Well, hoping 4.2, yeah.
Phil Tarrant: That's pretty good.
Eric Brown: Yeah, that's awesome.
Phil Tarrant: Would you say that the development that you're working on right now, it's a bit of a hybrid isn't it? It's not like here's a block of land, I'll build a house on it. You're trying to transform an existing warehouse, which is industrial, into a set of residential properties.
Eric Brown: Yeah. That comes with myriad of problems that are associated with a commercial block. How do you value it? The residential valuers we sent through had no idea how to value a commercial property. The commercial valuers, because you were changing back to residential, couldn't really see the vision of what we were turning it into, and didn't know how to value a residential at the end of the completion, so it was a real juggling act to try and get the values right. Of course, finance was difficult as well.
Finance, back to the architect, very important to have a great architect. Don't just pick the cheapest architect, pick someone that's going to fight with you, because these processes can get held up in council. Going to planning panel meetings, I've learnt through experience to have someone by your side, that stands up and actually fights for your cause, and can articulate in architectural language, what the council wants to hear. It made a massive difference to the things I've done in the past, so really good architect.
Then I think you can add on a town planner on the top, and then there's so many other things you can add. Like we're under a R20 to 25 flight path, so we needed an acoustic consultant. We engaged a very good one with that. I've had some interesting stories, I'll tell you off air, about my acoustic consultant's experiences. But shop around definitely. There's such a different level of expertise for these consultants, and it pays to do your research and it pays to get someone you trust, or someone who's worked for somebody else and done a really good job. Having them beside me, next to me when we fight this through council, is really reassuring. I think I'd have a few sleepless nights if I didn't have this team behind me to help me.
Phil Tarrant: I'm hoping from this podcast, a lot of listeners out there who are thinking oh yeah, I could give development a go, and yeah, I'm experienced so I can go out and do it, and watch me, what would be your recommendation around development?
Eric Brown: Oh man. Have balls of steel I reckon.
Phil Tarrant: Yeah. It fortunes the brave does it?
Eric Brown: Yeah.
Phil Tarrant: Development?
Eric Brown: But without great risk, potentially you don't get the great rewards, so it's all about your appetite for risk really. Development's not for the faint hearted and it's not for everyone.
Phil Tarrant: A lot of people go broke.
Eric Brown: Yeah.
Phil Tarrant: As a developer.
Eric Brown: Even developers that have done a couple before and then jump into something a lot bigger, you find a lot of them go under because there's just so much that can wrong. If you don't really have a particularly high risk appetite, I would just say no way, leave it alone. Stay to something safe. If you do want to do things a little bit more risky, then start small.
Phil Tarrant: Try a reno first at least.
Eric Brown: Yeah. Don't jump into something big, and then talk to people who've done it before and ask for their honest opinion. Don't listen to all that gold bling watch flash Ferrari driving, this is the story, development's easy, it's far from that. It's very stressful, particularly with money. Now that the lending market's tightening up, here's another element on top you've got to add.
Phil Tarrant: Yeah. How much of your physical time is this development taking up? Not counting your family time, when you're working, how much of your time is it?
Eric Brown: Well now it's in council, not much. Probably maybe 10 hours last week when we had to hurry around and just follow up the consultants, because it's just following up the consultants, making sure they're going to get their submissions in on time, and their resubmissions. There's a lot of phone calls and just making sure you hit those deadlines, because if you went over that two weeks that council gave us to resubmit some information, you miss your opportunity, your proposal gets rejected, and then it's a whole other fight on tip of your hand.
You've got to make things as easy as you can, and in terms of what physically, my time, it's not massive amount, but it's just being organised and making sure my suppliers and my contractors are organised enough to hit those deadlines.
Phil Tarrant: How much of your mental energy is it taking up?
Eric Brown: A fair bit, yeah.
Phil Tarrant: Yeah. There's two things there really, it's the time taken to do stuff associated with it, but then that's the thinking time. If you think about your brain and what you can think about over a course of a day, it's a big part of it right?
Eric Brown: Yeah. I probably six hours a day I reckon, I spend pondering and tossing up things in my head, and worrying.
Phil Tarrant: Is it more worries or more excitement, or is it a bit of both?
Eric Brown: It's a bit of worry at the moment because we haven't gone through council, and council's come back asking for a lot of other things. It is an unusual development, I'd admit that, but that's where I see the beauty in it. It's going to be a warehouse style conversion, and some of them on the market have had amazing success lately, but they're not every day…
Phil Tarrant: It's hard to get there though right?
Eric Brown: Yeah.
Phil Tarrant: What did you pay for the site?
Eric Brown: 1.73.
Phil Tarrant: Okay. All said and done, when you've got it finished and it's looking brilliant, what are you going to have?
Eric Brown: 2 or 2.2, 2.3.
Phil Tarrant: Okay. Each?
Eric Brown: Each.
Phil Tarrant: Okay, so 4.4, 4.5 million. Okay. On a 1.7 purchase, and your build costs will be what do you reckon? All said and done, including holding costs?
Eric Brown: Holding costs will be pretty, you know.
Phil Tarrant: Pretty high.
Eric Brown: Like I'd said last episode, the broking fee was 2.2 and the lending fee was 1.1, so there's 30 grand, 36 grand straight away, just in lending fees. Instant, right up front, then you've got to add the interest at 10%, that's 10,000 bucks a month. It depends, and this is where the tricky part comes in because your holding costs will all depend on how long it takes to get through council. The longer that takes, the more holding costs we've got. When you're talking about 10,000 bucks a month, if council pushes it back for six months, there's $60,000, so it can knock you out really.
Yeah, our cash position has been going backwards over the last couple of months, and that's also scary because you've got to have those reserves to be able to accommodate that backward movement until we can refinance and get it on a more reasonable rate. Then build costs, probably, I'd like to say under 1,000,000, and I'm pretty confident I'll get it under 1,000,000.
Phil Tarrant: Okay. You work as a builder, which will help.
Eric Brown: I'm a commercial builder, yeah.
Phil Tarrant: Yeah, okay.
Eric Brown: I can't do it myself.
Phil Tarrant: Yeah, but that's a big tick in terms of knowledge and understanding of how the building game works.
Eric Brown: Yeah.
Phil Tarrant: Yeah. How do you weigh up then, that, you say, well if it takes another six months that I've got to hold this property, that means you're going to look to probably sell one or two of them six months later. You could argue that, well that six months is going to be brilliant because hopefully the market's gone up by another how long during that right?
Eric Brown: Can I borrow your crystal ball?
Phil Tarrant: Well this is it isn't it? Are you confident that a point in time when you can realise the investment you've put into these assets in terms of your time and energy, and human capital and all this sort of stuff, and that it's going to be a good time to sell one of the ... Are you going to sell them, or are you going to keep them?
Eric Brown: Well no, we're not going to sell them.
Phil Tarrant: It's irrelevant…
Eric Brown: This is part of our strategy yeah, is buy and hold, and we want a passive income through property. We want to replace my wife's income, so yeah, we're going to do as much as we can to buy and hold. It'll be great rental returns there anyway. I'm pretty confident to getting pretty close to ... We'll be slightly negative to start with, but we're pretty confident.
Phil Tarrant: As in absolute?
Eric Brown: Yeah.
Phil Tarrant: Purchase price, build?
Eric Brown: Purchase and construction.
Phil Tarrant: Construction, okay, and all the costs associated with DAs and town planners and everything. You're pricing up everything right?
Eric Brown: Yeah.
Phil Tarrant: When you do take it to market, it will be just slightly off neutrally geared.
Eric Brown: Yeah, it'll be negative.
Phil Tarrant: Negative.
Eric Brown: But not a massive negative hold.
Phil Tarrant: But then over time, it'll go positive.
Eric Brown: In two years’ time. We're hoping that, well the rents don't have to go up, but if they did, that would be a bonus of course.
Phil Tarrant: That sort of product that you're creating is quite popular in the Lilyfield area.
Eric Brown: Yeah.
Phil Tarrant: That's an important point right?
Eric Brown: Yes.
Phil Tarrant: You're not creating something that no one wants.
Eric Brown: Absolutely.
Phil Tarrant: Okay.
Eric Brown: That was the reason we went from three smaller two bedrooms into two bigger three/four bedrooms. On face value, you would think you'd make more money selling three two bedrooms rather than two three bedrooms. That's what I thought to start with, and we ran through the numbers and that's what we were crunching on. The pre-DA meeting with council actually suggested we go back to two because of just population usage of the current infrastructure, but when we went back to the property managers and the selling agents, it actually worked out pretty much even or probably a little bit higher to have the two bigger three bedroom. Definitely easy to sell, definitely easy to lease, but then you've got one less kitchen to…
Phil Tarrant: It's cheaper to build?
Eric Brown: Cheaper to build, yeah. Less bathrooms
Phil Tarrant: By, as a percentage?
Eric Brown: I couldn't tell you, but maybe 60.
Phil Tarrant: Considerable?
Eric Brown: Maybe 60, 70 grand cheaper.
Phil Tarrant: Okay. That matters right?
Eric Brown: Yeah.
Phil Tarrant: For you then, because of your goals with this development as in you're going to hold onto these properties as a generative income, you want to build these things as quickly as possible, so you want to get your DA as quickly as possible, build them as quickly as possible for as cheap as possible, but not so cheap that it effects the actual value of the property, what it's worth, and what you can rent it for.
Eric Brown: Yeah.
Phil Tarrant: There's four different variables there that you've got to balance to try and get right.
Eric Brown: Yeah.
Phil Tarrant: What's your number one priority then? Is it making this thing worth as much as ... You can't have the fastest, the cheapest and the best all at the same time right?
Eric Brown: That's right.
Phil Tarrant: What's your priority?
Eric Brown: Priority one at the moment is to get this funding in order because that's what's keeping me up at night, the watching my surplus cash get closer and closer to zero, and eventually we'll hit zero and we'll have to make a pretty tough decision if this doesn't get through within the timeframe we're hoping for. That's my main worry that's keeping me up at night, and I have had a few sleepless nights because of that.
Then, I do have an option with Yellow Brick Road Commercial to capitalise the interest, and what that means is, if I take them up on that, I won't be paying, the interest gets added after the properties are finished being built, which means I won't be paying the interest on the build costs until after they're ready and I've got them leased out, or I've got them sold.
Phil Tarrant: They capitalise that holding cost into the loan, so you just have a bigger loan at the end of it?
Eric Brown: Bigger loan at the end of it, yeah. They add the 120 grand, whatever it is, on top at the end, so that's an option. I think you'd probably pay in points, percentage in points on top, if you took an option up like that, but we're still at the negotiating table with the funder.
Phil Tarrant: But that's it, if cashflow's a problem, that will be a good solution.
Eric Brown: Yes.
Phil Tarrant: Priories is just get the DA in?
Eric Brown: My main priority is my funding.
Phil Tarrant: Funding?
Eric Brown: Yeah.
Phil Tarrant: Okay.
Eric Brown: Get me off that 10% is my finding.
Phil Tarrant: You can do that prior to DA?
Eric Brown: I can do that prior to the DA, yeah. It's been a struggle and I've had to go through a couple of, well two brokers basically, and a lot of different products. We were pretty close with Adelaide and Bendigo Bank, but they pulled the pin in the last minute.
Phil Tarrant: Okay.
Eric Brown: Because they saw a Google Earth photo of the property four years ago, and tightened up a little bit.
Phil Tarrant: Yeah. Do you reckon that's the reason why?
Eric Brown: Yeah, that's what they told me, yeah.
Phil Tarrant: Okay.
Eric Brown: They said the head of risk saw it and said no. Being in Adelaide, I guess maybe they didn't understand. Sometimes the Sydney market is very different to the Adelaide market, and anyway. That's what I'm telling myself.
Phil Tarrant: You rationalise it however you want. Okay, so get the funding sorted out.
Eric Brown: Funding sorted, DA approved.
Phil Tarrant: Get the DA approved, and that's your green light.
Eric Brown: That's my green light, yeah.
Phil Tarrant: Okay. That's where you can start doing stuff.
Eric Brown: Yeah. Then until I start the construction, the extra pressure of the construction loans won't come on, so there's not such a rush to get it finished as quick as possible, particularly if I can get off that 10% and back down to a more like a 4.2 or something like that.
Phil Tarrant: Yeah. It gives you some breathing space.
Eric Brown: Yeah. Then I can sit and recover and make sure I've got it right, and then get all my ducks in line and then go. When I start the build, I want it to go quickly, so it's more important to start and finish, to not start quickly, but once it started, to finish quick, because that's when you start adding on all those construction loan costs and ...
Phil Tarrant: Is there anything that's going to stop you moving quickly when you get the green light?
Eric Brown: No. I think builders are busy at the moment.
Phil Tarrant: You've got a builder sorted out though?
Eric Brown: Yeah, I've got a builder lined up, yeah, but the funny thing is, because we haven't got the green light from council yet, or been through the planning panel, I can't give them start dates. Saying they're lined up, if another job comes in in the meantime, they'll take that and move on with that.
Phil Tarrant: What sort of contract will you do with the builder?
Eric Brown: Fixed price lump sum.
Phil Tarrant: Okay. What does that mean?
Eric Brown: I think I have to for the funding.
Phil Tarrant: Yeah. Okay.
Eric Brown: I don't mind the principle and interest, I don't mind percentage or cost plus contracts with a builder I can trust, and I can't do it owner builder because we've already done one within the last five years as an owner builder, so that rules that out. It just makes the funding a lot easier if you have a proper lump sum fixed price contract.
Phil Tarrant: It's a fixed price.
Eric Brown: Lump sum.
Phil Tarrant: Plus a lump sum?
Eric Brown: No, fixed price lump sum, so it is a lump sum and you can't go over it. That's the costs that you pay the builder to build the structure.
Phil Tarrant: Okay. You need to be really clear about what your expectations are because if you start doing variations of, and using building term, during the period of that, he's going to just go no.
Eric Brown: Yeah. Well no. Well he'll tell you know. The problem is the funder won't fund that because the funder will only fund it based on the specifications at the time when you fund that. That's part of the construction loan, and they'll want to know when the milestones are, when the payments are coming out, that's all preplanned so you can't deviate from that plan or the funder starts getting nervous. It's all about funding at the moment.
Phil Tarrant: Yeah. What sort of flexibility do you have to change a design when you start going? You know when you stand in the building, you go, "Oh, I didn't realise that, but wouldn't that be good if you just shifted that to that?"
Eric Brown: Well I think if you fund it yourself, you can… You've got a bit more flexibility. If you have to go through the funder for that and they're big changes, then you might have difficulty. In terms of changing walls around, you've got a DA approved for a certain design so you can't really change that, but in terms of changing colour of tiles or ...
Phil Tarrant: That's easy.
Eric Brown: Toilet, if it's easy, you just do it on the hop, and hopefully you're not adding a whole heap of cost to it that then you have to go back to the funder and ask them for more money.
Phil Tarrant: As someone who runs commercial building projects for a living, how do you get the balance between being right involved and being part of the process to get this thing built? Or are you going to try and disconnect yourself with it and just let the builder be the builder?
Eric Brown: Yeah. I've done a bit of personal work over the years, and I think one thing I've learnt, to be successful, you have to be able to delegate with trust. I have a builder that I trust, and when I give him the job, I'm going to try and not micromanage him because I think I don't appreciate being micromanaged myself, so if I can give him the green light ... But the thing that I'll have to get right is right at the start with the architect, is making sure that I'm comfortable with what they're specifying and the fixtures and the fittings.
Phil Tarrant: Is that the architect's job, to be the guy that does that?
Eric Brown: Yeah.
Phil Tarrant: Okay. Does it need a project manager, the job, or is that the job of the builder, to project manage it?
Eric Brown: Well you can have external project managers if you want to engage one.
Phil Tarrant: But will that be you will it?
Eric Brown: That will be me in this instance, yeah.
Phil Tarrant: Okay. Is that something you can fit within your typical bust day?
Eric Brown: Yeah. Because I trust the builder so much, then yeah, that's not an issue.
Phil Tarrant: Okay. The level of flexibility?
Eric Brown: Yeah. I wouldn't say it's not a good thing to engage a independent project manager though. I'd say definitely check it out if you're interested in doing it, particularly if you haven't done one before. I think it's a great option, and someone just manages it for you. Yeah, I wouldn't write it off.
Phil Tarrant: Because there's a skill to being a good project manager versus the skill to being a good builder right? Two very different things.
Eric Brown: Absolutely, yeah.
Phil Tarrant: A project manager needs to have good processes, systems, planning procedures, delivery, communication skills, time management skills. This is project management. It gets hard, whereas building, once you get started, how often is there problems though? There's whether stuff doesn't arrive on time. A lot of things you can manage with good project management.
Eric Brown: Yeah. The other good thing about a project manager, an external project manager is that you're taking away the emotional connection to the build. Building your own house, and you're standing there, it's always more difficult doing something when you've got an emotional connection. You can't make a rational decision based on some other factors like cost or time when you're emotionally attached to the process. It is always a lot harder to make those decision. I think in an instance where you did want to detach yourself emotionally from the build, that'd be a great opportunity, but project management's what I do with I do with my job, so I'm comfortable doing that.
Phil Tarrant: With this particular, and I know that you're a craftsman and you like everything you do on a commercial sense, it's a quality product and it's important to you, so for you, are you emotionally connected with the deal, i.e. making money and realising your strategy to creating an asset which will help you generate income? But you've got to connect that with are you emotionally connected with making a cool building that looks great? That you can stand up and go, "I visualised that, and I made that happen." Where's your connection going to be?
Eric Brown: I'm more connected to the building actually, because I know if I create a quality product, people will come and they'll spend top dollar for, in the area that I'm building, people will spend top dollar for a quality product. But, sitting on my other shoulder, you can't over capitalise, like anything, so you have to be realistic.
That's where an architect comes in as well, so they will design things and design specifications to suit your budget. You may not want a six and a half thousand-dollar piece of marble in your kitchen, there's options that you can go to get a different piece of marble that might be $1500. There's lots of options you can play with at the specification stage, that can keep your costs under control.
Phil Tarrant: But you’ve got to sort that out then.
Eric Brown: Yeah. Right from the start, and then stick to it.
Phil Tarrant: For people who aren't able to visualise what something will look like, being able to translate a drawing on a bit of paper to what a final result is, it's quite a hard thing for a lot of people to connect with sometimes right? You do 3D rendering and all this sort of stuff, but-
Eric Brown: I'd say real life, touch and feel. My architect, with our last project, took myself and my wife shopping three Saturdays in a row, took us through Danks Street, through Alexandria, and so many different shops. Just places-
Phil Tarrant: Did you enjoy doing that?
Eric Brown: I loved it.
Phil Tarrant: Really? I would have hated it.
Eric Brown: There were places I'd been that I didn't even know. I was thinking in my commercial head, oh shivers, I can use that for this project. I can use that product for this job. It was amazing and it was lots of fun. There was no pressure to buy. I wouldn't have enjoyed it if he had have said, "Right, now you've got to spend the money and buy it." It was just looking, and when he came back and-
Phil Tarrant: It's not like a Moroccan rug seller who takes you to a place and says, "Look at this thing," and you feel obliged to buy?
Eric Brown: "Drink some of my tea," no.
Phil Tarrant: "Drink some of my tea." Your architect wasn't aligned with any of the places that he took you?
Eric Brown: No.
Phil Tarrant: He was completely non-connected?
Eric Brown: Yeah.
Phil Tarrant: It's not him going, "Hey, come to this shop, buy that," so everybody's getting their little kickback?
Eric Brown: Yeah. Antique rug, no.
Phil Tarrant: Yeah. But that's the important thing right? You've got to make sure that you're A team, so your development team is 100% trusted and operating in your best interests.
Eric Brown: Yeah. Back to the architect, I definitely would go with an architect that has a fixed fee service, so usually architects sometimes work on a cost-plus basis, so the more expensive the build cost is, the more money they get from their fees. If you can find an architect that has a fixed fee, happy days.
Phil Tarrant: It’s a raught the other way, right? They go, "Oh, you do need that marble rather than this other compressed stone."
Eric Brown: "This is going to look amazing," then they just sell you on the aesthetics of the thing. I think architects, good architects also have skills with knowing what works practically, because that's the beauty of it, when a practical solution is aesthetically beautiful.
Phil Tarrant: That's the architect's job right?
Eric Brown: Yeah.
Phil Tarrant: To be the creative and thoughtful, and a little bit, not cut corners, but to get the best result for the minimum amount of money spent.
Eric Brown: Yeah.
Phil Tarrant: That's what you want right?
Eric Brown: Our bathrooms in the last one we did, we couldn't afford marble stone for the tiling, and he took us to a ceramic tile shop that had tiles that looked exactly like marble and we stuck them up on the wall. The job is phenomenal, it's beautiful, and most people that walk in there don't realise that it's faux marble.
Phil Tarrant: There's nothing wrong with faux marble. Farble.
Eric Brown: Farble.
Phil Tarrant: Farbel.com today, there you go. That was good Eric. Are you happy with where it is at the moment?
Eric Brown: I'm nervously excited.
Phil Tarrant: Yeah.
Eric Brown: Yeah, I'll say that.
Phil Tarrant: Will you get it done before December, all this stuff do you reckon?
Eric Brown: Well, that wasn't a positive conversation I just had with the planner before I jumped on here with you, but I'll put some more pressure on him and we'll see how we go.
Phil Tarrant: Just on that note, so you want him to be an advocate rather than you don't want to be a nuisance to him right?
Eric Brown: That's why I mentioned I was coming onto the Smart Property Investment Show.
Phil Tarrant: I think it's going to give some… But how do ... Because I overheard the conversation, I wasn't really listening, but it's an important relationship, to make sure that you've connected in. You understand and you appreciate the needs of his job, what he's trying to do. He's trying to operate within the LEP and the rules, or the direction of the council, and that's all cool. He's got a job to play. How can you be a better, in inverted commas, customer to them to make his job easier? Because you both want the same thing right? The council want to create really good housing that people want to live in and make the place livable and continued investment and all that sort of stuff. You're there providing or creating this housing for them, so you've got the same essential goal, but you're doing different things about it. How do you work better with council do you think?
Eric Brown: I think the more prepared you can be and the more questions you can answer for them before they have to think about asking you those questions, it helps them. The more detailed your submission can be and actually, it's just the more detailed you can be when you submit that, I think the less pressure they feel to realise that maybe you do know what you're talking about, and there's less are left up in the air.
Phil Tarrant: You want to reduce the ambiguity and try and deal with facts as much as possible?
Eric Brown: Yeah. I think, like you said, they've got a job to do and you've got to realise that, and always try and put yourself in someone else's shoes and realise that they're just getting paid to do a job. Try never to burn your bridges because you never know where they're going to pop up next for your next development, and try and control your emotions when you're talking to them, but be frank and open I think is the other kicker.
Phil Tarrant: And be fair, yeah.
Eric Brown: You've just to, if you feel something's not right, you've got to tell them that you feel it's not right, in a nice, friendly, but frank and open way.
Phil Tarrant: Transparency in all this.
Eric Brown: Yeah. Any negotiation is absolutely critical, so ...
Phil Tarrant: Okay, so you're waiting for a DA and you're trying to get your funding sorted out.
Eric Brown: Yeah.
Phil Tarrant: Okay, they're the two points.
Eric Brown: The two points.
Phil Tarrant: Hen are you going to come back and tell us about it? Is it a next year thing?
Eric Brown: I reckon it'll be January when I can tell you that we've made it into the January planning panel meeting, and we've had a success at the planning panel meeting, we've got our funding sorted, and now we're ready to start building.
Phil Tarrant: There you go. There's your goals. The short-term goals. It's good goal setting isn't it? Short-term goals, get that done, medium-term goals, get this thing built, long-term goals, create really good income off it.
Eric Brown: Yeah.
Phil Tarrant: There you go.
Eric Brown: Easy.
Phil Tarrant: Too easy.
Eric Brown: Easy peasy.
Phil Tarrant: Well hope it goes well mate.
Eric Brown: Thanks Phil.
Phil Tarrant: I appreciate your frankness and your honesty, and your ability to share this because a lot of investors are in the same boat, or they have been or they will be at some point in time. If you're going to go down this path, you need to make sure you know what you're getting yourself into. You need good rigour and you've got to be quite robust, and resilient I think is the most important thing with this, as well as making sure you've got your funding sorted out as much as possible.
Eric Brown: And some good support networks.
Phil Tarrant: Good support networks as well.
Eric Brown: Thanks Phil.
Phil Tarrant: That's handy, so keep it up. Thanks mate. I do enjoy it, and if you've got any questions for Eric, if you're to develop or start developing are developing, or if you've had some bad experiences developing, or good ones, we want to hear them. Email the team, [email protected], and we'll try to answer them on air. Maybe we could do a Q and A?
Eric Brown: Yeah, sure.
Phil Tarrant: Anything you've every wanted to do about building, and maybe next time around, I don't know who they are, but this architect you've got, maybe we can get him in here as well.
Eric Brown: Yeah. I'm sure he'd love it.
Phil Tarrant: Share his insights as well. I think it'd good for our listeners to actually understand these people who are batting on your side, and helping you get through this. Anyway, we'll recap in two months time, which will be the end of January.
Eric Brown: Yeah. Merry Christmas.
Phil Tarrant: Merry Christmas. Yeah, Eric will be back. Let's see how he's going now. I think he'll be alright. Remember to check out smartpropertyinvestment.com.au. If you're not subscribing to our daily market intelligence, you need to be if you want to be informed and educated about what's going on in property. Smartpropertyinvestment.com.au/subscribe. Remember, on all the social channels. Just search smart property HQ, you'll find us, and those reviews on iTunes, please keep them coming. We'd love five stars if you like what we're doing, and please leave a note there as well. The team really do enjoy it. You might just hear me banging on all the time behind the microphone, but there is a big team of people behind here who are very talented, who make this thing happen. They do appreciate knowing what they're doing is making a difference, and we want to keep building and growing this community.
Until next time, we'll be back then, and we'll see you then. Bye bye.
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