What are the pros and cons of investing in a commercial property?
What are the pros and cons of investing in a commercial property? Read on to learn more. ...
Mistakes are one of the foundations for learning, and none of us would be where we are today without having made a number of them.
The differentiating factor between investors who are successful and those who are not is their ability to understand their mistakes and to learn from them.
Positive Real Estate’s Sam Saggers is one of the most successful investors on the Australian property circuit. Having made his millions in property and from leading an educational empire for aspiring investors, he explains he would never have got here had he not made a number of important real estate mistakes.
He began his portfolio in his 20s, new to property investing and with a long learning curve to follow.
“I’m glad these mistakes happened, as they put me on a pathway to learn more about property and to get to the position I’m in today,” Mr Saggers says.
“Property booms can happen, and many people can make money out of them. I know several people who have made money out of real estate, but they really don’t know how. They simply bought a property and it went up in value, but every subsequent property hasn’t done well because they just don’t understand it.
“Really, booms are few and far between. You need to have drive and tenacity to do well when it comes to investing.”
In fact, when he talks about his initial purchases he says, while laughing, “I was naïve when I started out. I was a young real estate agent and I saw a lot of people buying and being successful around me, and I really just wanted to join in.”
Looking back to the 1990s, Mr Saggers made his first jump into buying with a property that underperformed. This, he says, was a major learning curve.
First purchase: unit, Putney, NSW
Bought: $250,000 in 1996
Sold: $230,000 in 1997
Loss: $30,000 (including stamp duty and holding costs)
“I was actually a real estate agent in the area [my first purchase was in]. A few of my friends and family had got into the property market prior to that and they had made a bit of money,” Mr Saggers says of his initial thoughts about purchasing.
Being proactive in his approach to purchasing, he letter dropped in the suburb saying he was a buyer looking for a property in the area.
“I actually got a call from the specific street I wanted to buy in,” he says. At the time, this seemed like a dream, and he jumped at the opportunity.
However, his first mistake is one that many investors can relate to.
“It was emotion, emotion, emotion,” he says.
“I just picked a property I liked. The reasons I liked it were that it was close to my family, I could afford it, and I thought it would go up in value.”
Why did he think it would grow in value? “Because it had an outlook over a park,” he laughs.
In retrospect, he says that this is largely what his friends and family had done.
“I watched them buy and, to be honest, mainly because of the timing, they had just picked any sort of property and it went up in value,” he says. He had expected his property to do the same.
“Following this idea, I bought at the wrong time of the market cycle, I didn’t do my research properly and I probably ended up paying too much for it.
“I offered $20,000 less than the asking price, and the offer was declined. I ended up paying the asking price.”
In reality, this property wasn’t due to increase in value for another five years. A fact that, for a young real estate agent on a low salary, was going to be a problem, he says.
“My business decision was fairly simple, wait for five years to get $30,000 or lose $30,000 and go and make that money back in 12 or 18 months by trying again,” he says.
“Bitterly disappointed, I had to let the property go.”
He made a $30,000 loss, but doing this allowed him to propel himself into his next purchases.
Lesson: Base your decision on the market, not your own personal taste
Part of the reason for Mr Saggers’ initial mistake, and for some of his own thoughts about property, was a lack of education. He explains that this was due to networking and listening to people without the experience or mindset of investing.
“[After the first purchase] I went away and saved, and I took a look at where I was working and the people I was around,” he says.
What he discovered was a shock. “I was a real estate agent and I realised that I was working in an environment where people didn’t know all that much about investing,” he says.
It quickly dawned on him that he was surrounding himself with experts at selling, not buying.
Advice for his first purchase came from a successful real estate agent and principal at the agency for which he worked.
“When you’re in an environment like real estate, the assumption is that realtors are involved themselves [with investing], but often they are not. Maybe one in 10 in an office actually owns and invests in real estate, and as a result, often the advice you get is terrible. A senior franchise owner told me to buy that first deal.”
He understood that following the advice of his current peers was not going to help him make his fortune in real estate.
“I ended up doing some self-study and attending some programs and seminars where I started meeting more people who knew a lot more about property. I met property developers, for instance, who understood real estate and I started to hang around them,” he says.
Back in the 1990s there were a much smaller number of networking outlets for property investors than there are in 2013. Despite that, any that were available at the time, he made sure he attended.
“I used to go through the Property Council of Australia and a number of other meet ups,” he says.
“I think investing in conversation will lead you to exploring new opportunities.”
His approach was relatively straightforward. Having met savvy investors, developers and other real estate professionals at networking events, he’d go up to them and ask if he could “hang out with them a bit”.
“Most people said ‘Sure!’ and it was informal but useful,” he says. “Be enthusiastic. Now advice is even easier to get as it’s packaged everywhere. Never underestimate what you can learn from other people. Ask questions.”
He even used to do what he calls “work experience” with developers. He spent time with experts, such as leader in investment and property options Jason Whitton, learning from them and training himself.
“The elders of real estate, who invested in a different bygone era, might not be the best to speak to,” he warns when explaining his personal choice of experts to shadow and learn from.
This may include well-meaning friends and family who, unless they are investing actively, often bought their property in very different environments from the current market.
Nowadays, it can require a number of strategies to be financially successful.
“My parents, for instance, made money on their home. But they never looked at the strategy of leveraging, trying to get a good rent and domino to another house, or tax reduction, or anything like that.”
Lesson: Take responsibility for whom you take advice from, and look for the viewpoints of those who show evidence they know what they're talking about
As a new investor, Mr Saggers was of the understanding that property helped grow wealth. His first purchase, however, was a clear example of someone who was unsure of the reasons to purchase.
Mr Saggers was a young sales agent on commission at a time when the market in the area wasn’t strong, and his income wasn’t particularly high. He simply thought his first deal would grow in value.
“And, really, it would have gone up in value eventually, but at that point in time I needed something with a faster rate of return,” he admits.
Not understanding what he needed in his portfolio in its early stages was a wake-up call.
“[Looking back] That’s where I really learned about return on investment – to have an asset that you know you’ve either bought well or you can add some value to, where you know you’re going to get your money back out of it,” he says.
For investors to learn this lesson without taking on a ‘dud’ he recommends going through a self-created “property apprenticeship”.
“Read all the magazines, buy the useful data and immerse yourself in property,” he says. “Go to seminars, and do some actual learning.”
He says this is often something investors who only consider positive or negative properties have yet to understand.
“If you look only to buy cash-flow positive properties, they can be good but they’re linked to the turbulence of the market, and any vacancies can really affect you.
“Balancing your properties with some cash flow is a good thing to do,” he says, “as it does soften your loss from negative properties. Your serviceability moves up and you look better on paper.”
For every property it should be clear why you’re purchasing and what role it has within your portfolio.
Lesson: Understand the reasons you are looking at buying, and the role each property will play in your portfolio
Most Australians buy in a very specific way. “They go to the bank, get their pre-approval, make an offer – often the first is rejected – and they re-offer and eventually make the purchase, or look elsewhere,” Mr Saggers says.
This was his initial approach to buying property.
“There are much better, and more efficient, ways to buy,” he claims. “Many people get tunnel vision when they first get involved with real estate. They have in their mind what they want to buy and do with that property, and this makes them shut out other opportunities or things they can do with their investments.”
Considering multiple properties and always being open to new deals is absolutely crucial.
His first approach, when he letter dropped in one suburb and had his heart set on a specific street, “was stupid from the get go”.
“No matter how much money you have, real estate throws out some fairly interesting opportunities if you take the time to look, research and make offers. If you’re not constantly watching the market, you’ll miss out or you won’t buy the best thing,” he explains.
“There were other markets growing at that time [in the mid-1990s] that I didn’t get to explore, or even consider, because I was so set on that one suburb and that one property."
“On my second deal I really learnt that the more tenacious and cunning you are with investing, the more you’ll learn and get back from it,” Mr Saggers says.
An agent he was speaking to gave him a hot tip on ex-housing commission properties in Western Australia’s Katanning.
He put in an offer of $5,000 on each. They were accepted.
It surprised him that he managed to purchase this land – something he thinks may be a result of an oversight by the seller – and he thought that he may be up for a loss.
“So, I immediately put the houses on the internet for sale for $15,000 each. I was inundated. I ended up selling the houses for $60,000,” he says.
“If you’re not in it then you won’t know what you can achieve.”
For every 20 agents you call, just one is likely to have a good investment available that hasn’t been publicly released, he says.
“I was up in Toowoomba not long ago looking at a deal and when I saw it, it wasn’t what I thought it would be,” he says. He was then told that there was another property around the corner.
As it turns out, the property hadn’t even hit the market yet.
Lesson: Make your own opportunities, and don't wait for the deals to arrive on your doorstep
New investors often have a firm belief that time heals all real estate wounds, and that the market never drops.
In 2006, he put down deposits for two off-the-plan deals, tying up a lot of his available capital.
“The deposits were stuck in the deals, which was all fine if the deals got built, but they didn’t. The global financial crisis and collapse of the finance markets saw to that. My money was sitting in a trust account doing nothing for almost three years, and my opportunity loss was huge,” he explains.
“I estimate having that capital tied up cost me half a million in opportunity cost,” he says.
This made him far more aware of the importance of timing purchases correctly.
“The real estate market is not your friend – it’s not going to call you up and say I’m about to grow by 20 per cent every year for four years,” he warns. “You need to study markets and the economics of property areas and buy at the bottom.”
Lesson: If you are going to buy, especially with off-the-plan, then only buy in strategic areas, and never assume that every investment will grow eventually
AT a certain point in every investor’s career, there are what Mr Saggers calls ‘pivotal deals’. These are deals that grow in value enough to allow the portfolio to build substantially.
These threepurchases grew substantially over a period of four years, and, despite having been involved in even more lucrative deals, he considers them the “fundamental best buys” of his portfolio that allowed him to get to the position he is in today.
“Every investor has a pivotal time when they go from scrounging about to actually having equity,” he says.
“The big lesson for me was that these deals are out there. They are game changers. These deals changed my life.”
Perth was an interesting choice at the time.
“I had made a conscious decision to go to Perth, despite a number of people asking me, ‘Why are you looking at Perth?’. I was starting to appreciate the mechanics of the market and had spent a lot of time researching what was happening,” he says.
His cousin had told him that she had put her rents up by 15 per cent, and he was listening carefully.
“Things were definitely starting to expand,” he says. “For me, it seemed like really good value when I did the maths. I was far more in-tune with the idea of return on investment, understanding finance, rental returns and economic drivers. It was really the first time I started seeing the idea of the Chinese and the Australian economies being interlinked.”
There are plenty of successes like these still out there.
One investor at Positive Real Estate, who bought in 2011 for $470,000 is now selling for $675,000.
“For that person, that is his tipping point, his ‘Perth’. I think you just need to have one moment like that and it will revolutionise the way you look at real estate,” Mr Saggers says.
Bentley Estate: house and land
East Cannington: villa off-the-plan
Cannington: vila new (built)
Not every investor will make these mistakes, but as long as they understand the reasons behind what is happening to their investments, they have a good chance of working through any problems they do encounter.
“Learning the skill of property takes time, and these were my tipping points,” says Mr Saggers. “Every seasoned investor will be able to relate to a tipping point that made them want to know more about investing and to do it properly.”
Since these initial mistakes, Mr Saggers has come a long way. One of his most recent purchases – a luxury waterfront mansion in Sydney – is just a small testament to his success.
However, he won’t forget the lessons and deals that got him to where he is today.
“There’s this interesting statistic that of people who buy real estate, only 10,000 get to six or more properties. That’s about one per cent of all investors,” he says.
“It’s the ability to manage debt, among other lessons, that investors need to learn. Most people get to a million and they just don’t want any more debt. I think the trick to it is to give yourself time, allow your properties to mature, and understand you will get there if you keep learning and trying.”
The investors who reach success don’t necessarily need to make these same mistakes, or so many, he explains.
“I think it’s important just to listen. Listen to people who have been down that road themselves.
“Investors need to take on debt, so speak to people who have already taken on debt. Speak to people who have done what you’re trying to do,” he says.
Never forget that getting it wrong can be a natural part of investing. At the end of the day, he says, “it’s what you do with the mistakes that counts.”