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. ...
In this special episode of The Smart Property Investment Show, we finally answer the listener questions which have been flooding in.
The team has an inbox full of property investment questions from keen listeners, so this week the team and special guest Rich Harvey tackle everything from off-the-plan risks, to identifying the best real estate agents to sell your property.
Plus, @philliptarrant reveals more about how he got started in property investment and how he secured four properties in four months.
The team also answers listener questions about buying the wrong property, getting back on track, creating equity and the financial backing you need to get started.
All this and so much more in this episode of The Smart Property Investment Show. Tune in now!
The Smart Property Investment Show gives you insight, strategies and tactics that every property investor can use.
In each episode, the Smart Property Investment team and its special guests will break down what’s happening in the world of property investment, how it affects everyday property investors and how they can take advantage of it.
Property refers to either a tangible or intangible item that an individual or business has legal rights or ownership of, such as houses, cars, stocks or bond certificates.
Introduction: Welcome to the Smart Property Investment Show with your host Phil Tarrant.
Phil Tarrant: Good day, everyone. Welcome to the show. Thanks for tuning. Phil Tarrant, here, editor of Smart Property Investment. Interesting show today. Evolution. We love this podcast, we love recording it, and as we've gone through this over nearly a year now, the level of engagement we've had is absolutely outstanding, so thank you very much for everyone for tuning in.
This week, what we're going to do is essentially a bit of a new subject for the show, a Q&A. We've been banging on for ages now about getting in touch with us and sending in all your questions and now we've got an inbox full of them. So, what we decided to is just do a Q&A episode of the podcast. So, I've got Vivienne Kelly here, my regular co-host, she's joining me. She's going to run us through all the Q&A. Viv, how are you going?
Vivienne Kelly: I'm good, Phil. I'm excited to finally answer all of these budding investors’ questions.
Phil Tarrant: I know. Some of them are pretty tricky. I think, Viv, you've probably got a good preamble or disclaimer for us that we probably by law need to read out. We're not able to offer actual any advice to anyone. It's not the scope and focus of this show. We’re just here to share some information and our views on stuff. Anything that we do chat about today make sure that it's not taking into consideration in any of your particular circumstances and I highly recommend chatting with an accountant or a professional adviser. Viv, that's probably good enough. Is it?
Vivienne Kelly: Yes, so we do get some really specific requests from listeners who obviously really love hearing your insights and what you've done, so they write in wanting to know your opinions, so I guess what we'll be doing today is giving them your opinion and your thoughts based on an e-mail, but it's definitely not property investment advice.
Phil Tarrant: No.
Vivienne Kelly: He’s not going to tell you where and what to buy because that's definitely not what he's here for.
Phil Tarrant: No, it's not. I don't proclaim to be a property investment expert. I know a fair bit about it and I talk about it all day and I'm quite fortunate as a journalist that I get to pick up the phone and speak to people and I think everyone has that opportunity as a property investor. If you don't know, ask questions and to help us out through this episode of The Smart Property Investment Show, I've asked a good friend of the show along, Rich Harvey from Propertybuyer to join us to lend his insights. Rich, how are you going, mate?
Rich Harvey: Good, Phil. Great to be here today.
Phil Tarrant: Yes, it's good to have you on, mate. So, Rich is a buyer’s agent. We've known Rich for quite some time. You see him in all the different property shows and he's been helping Australians into property for quite some time as a buyer’s agent. Rich is one of the guys who along with a handful of really good operators in this space have being the driving force, I feel, behind buyer’s agent industry, which is relatively new, isn't it?
Rich Harvey: It is, relatively new. There are more and more buyer’s agents. We've been going for 15 years this year and I'm also the president of the Real Estate Buyers’ Association of Australia and we've seen our membership grow as well.
Phil Tarrant: That's good.
Rich Harvey: It's definitely a growing field as people realise that they can't do it on their own and they can get a leverage and a leg-up to access properties they wouldn't otherwise see.
Phil Tarrant: This is, if you've been listening to the show for quite some time, I'm a journo. That's my job, I write stuff, I do podcasting, I run a media business and I'm extremely pro-advice, so anyone that's heard my story in terms of building my portfolio, we speak about it a lot, Viv. I'm very much, I don't claim much of the success in our portfolio at all because I've been smart enough – and the good thing that I've done is I've gone to people who are a hell of a lot smarter than I am to help me do what I want to do.
I guess sort of within that context, a lot of the stuff that we'll talk about today will be how I've used advice in order to get the right results in our property portfolio. So, I guess on that basis, Viv, you want to kick us off and get us going on the first question?
Vivienne Kelly: Yes, so, Phil, you know this huge listener interest in your property portfolio and how you built it quite quickly all while overseeing a booming media business and starting a family, so, here we have a question from Rebecca about how it all began.
She wrote in and said, 'Hi. I love the SPI podcast and learning about what Phil Tarrant has achieved in his personal portfolio. I think it's amazing that he has managed to build $2 million dollars in equity in five years and was curious as to how large his initial deposit was when he started out. Thanks in advance, Rebecca.'
So, Phil, can you even remember? How did you get started? And how much of a financial backing did you have?
Phil Tarrant: So, savings is what I used. Fortunately, I had some squirreled away which I'd been sort of building up over time. Essentially, when we started up our portfolio, we went really hard really quickly, so over a four-, five-month period we probably bought four properties. Just banged them out. The western suburbs of Sydney, Rich, Mount Druitt, St. Mary's, Penrith. Back in the good old days.
Rich Harvey: Back in those days when it was a lot cheaper. Absolutely.
Phil Tarrant: Sort of five years ago. It was a lot cheaper back then and we identified that market.
Rich Harvey: You know what's interesting, Phil, those areas are really out of favour at the time. People thought there's a stigma attached to Mount Druitt, Penrith, why would you buy out there – that's Westyville? But, hey, all those people are you sitting pretty today.
Phil Tarrant: We did really well out of it and I'm not going to claim that ... Our buyer’s agent said, 'Get out there. This is the place to be.' So, we went hard really quickly, picked up, I think it was four properties over five months. I just didn't throw out $250,000 straight way in terms of cash. It was over that period of time and I just went bang, bang, bang, bang, bang, bang, and then I got to a point and we waited for these properties to raise up in value a little bit and then we extracted that money and moved on to the next place.
Vivienne Kelly: So, what about you, Rich? Do you have a number that you tell prospective investors they need before they get started? Is there a dollar value, a secret formula, a minimum amount, or is it a case-by-case basis thing?
Rich Harvey: Look, Vivienne, it is a case-by-case basis thing because it's an individual thing. It's not so much about a number, but it's about getting started. I think you've obviously got to qualify for a loan and have some money behind you. You can't buy property with nothing; you don't want to leverage 100 per cent.
You can beg, borrow, but don't steal. You can borrow off your parents or certainly use OPM, use other people's money, but you do need to get started as quickly as possible. The thing I'd also say to a lot of people, they often go to an investor course or hear seminar and get really motivated to buy. They rush out of that course and buy the first property they see, and that's where a lot of people make mistakes. They're so ultra-motivated, but they haven't done enough due diligence, enough research. My advice to the listeners is research thoroughly. Build a team of support. Get started early.
I mean, I started myself doing a subdivision, that's how I got started in investment property. We bought our first time and we did a subdivision on it. We made fantastic equity by building on the back and then we leveraged off that.
That's the first key to investing is getting some equity behind you, leveraging off that. That enables you leapfrog into the next property.
Phil Tarrant: A lot of people do go into these seminars or they get excited about it which is great. They get educated. They go out and buy something. What we bought first, our first property which was in North St. Marys area. It was either North St. Marys or Mount Druitt, I can't remember exactly, but either way, the Mount Druitt property was $190,000. The one in North St. Marys was like just over a couple hundred grand. We're not talking massive numbers. It wasn't a $700,000 off-the-plan apartment in Bondi Junction.
With the money that I had in the kitty, ready to roll and start buying property, when you look at the outlay of $190,000 on a two-bedroom property in Mount Druitt, I think I financed it at 90 per cent at the time. It wasn't that much cash that I needed to put down, but I bought well, bought smartly and it wasn't too risky.
Vivienne Kelly: So, you've both mentioned your first purchase there, so that's something that is obviously quite important and one thing that I have noticed with the barrage of e-mails that we get is there are a lot of people out there who worry they've made the wrong decisions and they write in looking for reassurance or guidance on how to get things back on track.
Phil, I know you always openly admit that you've made mistakes and missed some opportunities and that property investment isn't always the glitz and the glamour that people imagine and Colin Finch has been listening to that, but is still a little worried that he's made a wrong turn.
He wrote in to the show a few weeks ago and said, 'Hey, Phillip. Not sure if you're able to answer this one at all, but I'm really keen on building a strong portfolio over a long time and the first thing that people always say, including yourself, is don't buy the wrong property first.'
Colin goes on to say, 'In July 2015, we bought a two-bedroom, two-bathroom, two-level townhouse off-the-plan in Maidstone, Victoria, completed in April 2016. There's four on the section, two in front, two in the back. We've got the front north-facing property purchased for $500,000.
‘We chose Maidstone based on strong growth over the past four years and bought new because we were moving from Perth to Melbourne and needed the time to relocate. Being a first time, we also got the $10,000 First Home Buyers, and reduction in stamp duty, which was even better since we purchased before the slab went down.
‘In hindsight, we would have loved an established property with renovation potential as we see them continue to rise. Just trying to figure out if our new townhouse purchase was the wrong first property. Thoughts are much appreciated. Cheers, Colin.'
Look, we obviously can't offer Colin specific advice, not knowing his personal financial circumstances, goals and the ins and outs of his life, but any advice here, guys? Thoughts on what Colin has done, what he could do next or how he can realise his investment aspirations now that he's got a sort of tentative foot on the ladder?
Phil Tarrant: This whole sort of buying the wrong property first and in Colin's situation, what is the wrong property? The wrong property as a property investor, if you buy your wrong property first, I think is that ... Rich, you probably see a lot of this in your client base, but when someone buys a property and they're just hamstrung for 10 years because they've thrown everything into it. It's ruined their capacity to service a loan, the cash flow and stuff. And that could be wrong property for someone. For another person, wrong property might be, 'Yes, it's a great yielding property, but it's not going up in value’. So why invest in property?
In Colin's situation, I don't know why it would be the wrong property for him, but I'm assuming if that's the only investment property he's bought, he probably considers it's a wrong property because his goal is to build a large portfolio over time.
So what would you say, Rich, are the mistakes that first-time property investors make when they're buying property? And here, you might say it's off-the-plan or it's whatever else.
Rich Harvey: Yes, I think a couple of things come up.
This is a good question that Colin's raised, here, but I think buying off-the-plan, firstly, let's just address that first. It is a riskier way to buy properties and I've got say probably in about 97 per cent of cases, buying off-the-plan is not the right approach to buying property because you're paying retail price. You're paying the developer's margin and you're generally funding their pockets, not your own pockets. Look, over time, it will perform, but you are sort of going to see pretty low growth generally in off-the-plan purchases.
However, the 3 per cent or maybe 5 per cent of purchases that do work, you've got to buy in areas and get into pre-sales very early in the process. Sometimes the developer's quite keen to sell it at a cheaper price. So we've had some clients where we're very strict in the due diligence that we do on these properties and we have got clients and they've done very, very well. Particularly, we've done that in Newcastle, for example, where we found some really, really well-located properties in high-demand areas and where they've got some equity.
Off-the-plan is riskier. I would say definitely buying an established property is the other thing, but buying something that he can add some value to, that's where you make that equity. If you can create the value then that's going to leverage you into your next property. That's really key.
The other thing here, he mentions about he chose the area based on past growth over the last four years. Well, my question to Colin is, what about the next four years? What about the next 10 years for that area? Has it had its growth and is going to flat line for a while? Or are there enough fundamental drivers in terms of population, investment and infrastructure that's really going to drive the growth forward in that area? That's really key for him to know.
Another point I'd make is in regard to the First Time Buyers Grant, look, it's great to get that, but $10,000? Look, in the scheme of a property investment, it may not be the main, it shouldn't be driving factor for them making a decision on a property investment. Certainly, it's the icing on the cake, but consider the fundamentals of the property and the area that he's buying in first.
Vivienne Kelly: There's been a lot of sort of evidence anyway with First Home Owners Grants and things like that, that if everyone has access to that money, it just ends up pushing up the prices, because if every first time buyer has an extra $10,000, then everyone can afford an extra $10,000 and it's not always the sort of carrot that people think it is.
Rich Harvey: I mean, look what happened in Sydney. I can't remember the year that it was introduced, 2011 or 2012. There was, what I call, huge pull-forward demand in that low end of the market. It just ignited that bottom end of the market, but properties between $400,000 to $600,000 just went crazy. It was just a bunfight to get properties in that bracket.
Phil Tarrant: Yes, the point I'd like to make on this one is I'd like to know, Colin, and I'm happy for you to write in again, how you bought this property? How did you hear about it? Did someone recommend this property for you? Were you at a seminar and someone said, 'Oh, I've got this great off-the-plan purchase which is going to have all these magical growth numbers'? I'd just be conscious and careful about buying off-the-plan, who's actually selling you that property. Make sure that you are getting absolutely everything disclosed in terms of the commissions that are paid, how they're getting paid, and what you're up for – because someone needs to get paid at some point and typically it's the buyer who is shelling out the cash. Just put a red flag up if you're getting sold a property and just be careful of those property spruikers out there and there's plenty of them.
Vivienne Kelly: What about just sort of general thoughts on what people can do if they do feel like they've made a wrong purchase? We get lots of people just write-in generally and say, 'I made a wrong purchase and now I feel like I'm going to be stuck with it for five years. I'm not getting equity, I don't know what to do.'
You obviously had great success with your equity and your good buying, Phil, but what if you hadn't? What would you have done if you bought a property and it didn't go so well? What's your sort of advice to those people?
Phil Tarrant: It just depends on the impact of the wrong property.
If you buy the wrong property first, it might mean that you can't buy another property for quite some time. If you buy the wrong property first, it could put you in dire financial situation.
Rich, I'm sure you see it all the time where people go into negative equity. They've got to either sell the family home to pay off the debt or worst case, go bankrupt.
I've seen some horror stories. So there is different levels of what is the wrong property. If someone is in trouble, if they feel as though they're financially stretched because of the property that they have, I'd be looking for help pretty quickly and I'd probably start with an accountant.
Rich Harvey: One thing I'd say, there's card game, I think it's called, 'When to Fold 'Em and When to Hold 'Em,' and you've got to know in property terms, you've got to know how long. If you hold on to a loss-producing asset for five years, add up the opportunity cost. It's the economics in me speaking here, but add up the opportunity cost of a five-year period. Let's say a property is costing you $10,000 a year to hold it and it's down in value. It's going to cost you $50,000 or higher in present-value terms to hold that property over five years and then at the five-year point, exit the property.
You might actually be better in some cases just to cut your losses, exit out, but some markets you can't even do that. Talk about property spruikers. Some of those guys at the shows Phil we saw spruiking properties at Newman or Karratha or Port Hedland. I mean, those properties went from $1.1 million in value down to $500,000 now. And the rents are absolutely terrible, so I feel really sorry for investors that bought in those major mining towns that are really actually stuck with a property. And it's going to take a long while for those markets even to be able to have a sale of those properties.
Phil Tarrant: There's a lot of people hurting in that regard – and that is really the wrong property. That is like dire financial, wrecking family situations, it's not good at all.
Rich Harvey: Just on that, there's also a point in which some markets – a lot of people talk about the Gold Coast and it has a lot of booms and busts, but that's a market that's just starting to move into a more upward market now and there's a point at which you should consider exiting that market or even getting in and out quickly to make some gains in those markets. So you really got to watch all of the market movements, days on market, volume of sales, median prices. Look at all the indicators to work out whether it's good to sell or to hold.
Vivienne Kelly: Yes, speaking of investors who are hurting, I had one contact me the other day. Their rent had gone from $2,800 a week down to about $520 a week, and I guess what I would say to that is if you were getting rent on such a boring, basic property that was that high, it was possibly inevitable that it was going to come down. That's a lot of money to be paying.
Phil Tarrant: People don’t see it, Viv. I say it all the time, people get attracted to the property. It's this get-rich-quick way to create wealth immediately. If it's too good to be true, it's too good to be true. You've got to keep your bullshit radar out.
Some people did really well in the mining towns, they got in and out in the right time. Let's be fair, they're speculators. Property should be a long-term play.
But anyway, we've got to move on. Viv?
Vivienne Kelly: We do. So our next question is from Jodie Pyke, who wants to know more about working with real estate agents.
When investors are buying property, they're often told to remember that the selling agent is working for the vendor, but what about when the investor is the vendor. How can they find the right partner to sell?
Jodie wrote in and said, 'Hi, Phil. Loving the podcasts. I'm in the process of selling an investment property and I would be really interested in a podcast on how to choose your agent for sale of the property. One item specifically, how do I work out whether my agent will be a good negotiator when the listing starts getting offers? In my case, I asked questions about how they would handle scenarios and went with the one I liked the most. Not very scientific – but I wonder for future sales what the best techniques would be for them to negotiate the best price. Thanks, Jodie.'
Rich, you must work with a lot of agents in your work as a buyer’s agent. What have you learned about how to identify the best ones?
Rich Harvey: Yes, great question from Jodie, here.
We actually offer our service in this area. We don't advertise it a lot. It's called a vendor advocacy service where we actually, because we work with agents in local areas, we get to know the good ones and the not-so-good ones and the good ones are really tough negotiators. They're actually really hard to buy through and they do represent the vendor really well.
The things I would look for in an agent, Jodie, would be someone who is a tough negotiator, got really good exposure, good local reputation, got a good marketing expertise and someone who's not a robot. Someone who actually has empathy. I think a lot of agents sort of, they run this process really in a regimented way and they don't connect with the buyer, so you want someone that can actually have empathy with the buyers and have really consistent communication.
In terms of their personality, you've got to have an agent that's very, very confident, but not arrogant. You see a lot of arrogant agents that are up themselves. You've got to have agents that are really confident about their ability and prove that with their best results. They might have some street records or some suburb records, so ask them, how they handle offers? What if you've given them an instruction not to take an offer, what do they do with that? They've got to have a certain way that they communicate with the buyers around those offers.
Vivienne Kelly: Phil, what about you? If you had to pick an agent to sell off your portfolio today, what would you be looking for?
Phil Tarrant: Well, not all agents are created equal. We do a lot of work with agents across some of our other stuff, like you know Viv, Real Estate Business, for example, and we do a big ranking a called, the ‘Top 100 Agents.' These are the best agents in the country based on the sale price they get, how many properties they're selling, the sort of size and stuff.
In dealing with agents and understanding how they work from a property investor perspective, a lot of people when they're selling a property, all they care about is the commission. They want to pay as little as possible and therefore they'll choose the agent that has the lowest commission payable and they'll negotiate with those agents on whoever can give them the lowest commission. That's not always the best way to go and I'd probably argue that if you're going down a path of just haggling with agents to try and screw them down on commission, you're probably not going to get a very good job out of them, and Rich, you've seen this time and time again.
Rich Harvey: Absolutely.
Phil Tarrant: So, don't be commission focused, be process focused and be outcome focused. If I was shopping for an agent, I'd get sort of three or four of them to come in and give me a listing presentation. I'd be asking questions about, like Rich said, and I completely agree, what sort of records sales they've had. I'd be looking to get a really good idea on what they think the value of the property's worth. When a lot of people are selling property, they'll say, 'I think my property's worth this much. Do you think that it's worth that much, Mr. Agent?' The agent will say, 'Yes, it is.' Obviously, a lot of times it's over inflated because they just want to win the work and if they think that the vendor is going to choose them because they're going to give them the highest prices.
Rich Harvey: You call that buying the listing.
Phil Tarrant: Buying the listing and that's not the way to go. An agent is a professional, so I'd be choosing someone who is an expert in a local area that you're selling and I would get them to do their job to tell you how much is this property worth and how are you going to sell it?
A lot of the times agents will look to give any listing a lot of boost through advertising, so vendor paid advertising, so many times an agent will say to you, 'I think you should spend this money on X, Y, Z, might be print advertising or on a platform-based advertising.' A lot of investors in particular who are trying to make as much money as possible go, 'No, I don't want to spend any money on marketing or you need to pay, Mr. Agent. You need to take it out of your commission.'
The good agents, and there are some exceptionally good agents, will be able to control the process with you very well, have confidence and control in that process with you very well and they'll tell you ‘no’ as well. The good agent will say, 'You're not going to get that. You're not going to sell it for that. If you put it up there, it's not going to sell. It's going to be sitting there languishing on the market for ages and ages and ages.' If your property doesn't get sold in the first month or so, you're probably in trouble, aren't you, Rich?
Rich Harvey: That's right. Well, it's all about pricing, positioning, and presentation. The three Ps that they talk about. Price it right, be realistic. I mean, in New South Wales there’s also underquoting laws, so the agent must give you comparable sales that justify the price that's being advertised at and quote within a 10 per cent range and then give you constant feedback on the offers that are coming, so bear that in mind, too.
Phil Tarrant: Jodie's question is very much about challenging the agent on how they would negotiate with a buyer or haggling with a particular scenario. I think that's the wrong way to think about it, Jodie. They're a professional, that's what they do for a living, every single day. That's why you're paying them; you're paying them for that skill.
Just because you think they might handle something differently than you would be handling yourself, don't go down that path because you're paying them a fee for them to do what they do. You need to be comfortable with them, you need to be confident they can get the job done, but don't question them on how they'll deal with particular stuff, you've got to let them do what they do.
Vivienne Kelly: All right, great answers, guys. Look, we are running out of time and I've still got pages and pages of questions here, so might have to call it a day here and get Rich back in in a few weeks to answer more of the listeners’ questions.
Guys, if you're listening in, and you have a question for Phil Tarrant or for an expert that we speak to, please shoot us an e-mail: [email protected]. I will eventually get back to you, we will eventually get your question on the show, so, Phil and Rich, thanks so much for answering those questions.
Phil Tarrant: Absolutely. Yes, I like doing this. It's good, I enjoy it.
It's real-world stuff and it's the reason why we do this podcast is all about education, so the fact that you're tuning in means that you're investing in property already and that's making sure that you're armed and knowledgeable to make the right decisions, so to use one of our first questions, so you don't buy the wrong property first.
Keep them coming in, [email protected]. Also, guys, keep the reviews on iTunes coming. We're tracking really well. We're always up the top of the list in terms of business podcasts, so that's really exciting for us and it's nice to know that what we're doing here is resonating with you all, but keep them coming. Write us a review, leave it there and that way we can get more and more people listening and tuning in to the podcast moving forward. We just relaunched the website which is really good, Viv.
Vivienne Kelly: Yes, it looks amazing.
Phil Tarrant: Yes, go and check it out. It's a big focus on the Small Property Investment Portfolio, so you can really dig down and look into a lot of the stuff that we've done and we talk about specific properties on the podcast and you go in there and lift the hood up and have a look at them. Check it out, smartpropertyinvestment.com.au. We're on all the Twitters and Facebooks and stuff. You can follow me.
Vivienne Kelly: All of the social medias.
Rich Harvey: Yes, @RichHarvey.
Phil Tarrant: @RichHarvey, cool. You can check out Rich's business propertybuyer.com.au, as well. Yes, we'll get Rich back in in a couple weeks’ time and iron out the rest of these questions. Tune in, next week. See you soon.