Why being 'pedantic' about property will enable this investor to be debt-free by 45

Tune in as he and host Phil Tarrant explore the diversity of his portfolio – from a small unit in Kingsgrove, to NRAS assets, to off-the-plan apartments and the positives and negatives of each, as well as reflect on what he’d do differently if he had his time again. 

Tune in now to hear all of this and much, much more in this episode of The Smart Property Investment Show!

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Suburbs mentioned in this episode:

Kingsgrove
Hurstville
Melbourne
Sydney 

Related articles of interest: 

Don’t blame high prices on housing shortfall 
Why were 1 million properties vacant on census night?
Sydney property buyers want expert opinions on development decisions
What’s the rate tipping point to stop investors? 

Full transcript

Phil Tarrant: G’day everyone, it's Phil Tarrant here. Thanks for joining us on The Smart Property Investment Show, always good to have you on board. I'm the host of the show. If this is the first time that you have found us, welcome, if you're a regular listener it's good to have you back. I'm quite enjoying the rapid rise of the Smart Property Investment Show with investors across Australia, so I like to know that we're resonating, I like the fact that you enjoy, people come to the show to share their stories. I do request though that if you like what we're doing that you keep those reviews coming on iTunes, because gets more people listening and it helps us build the collective mind set I think of property investors across Australia.

Speaking of storytelling I think I've got someone in the studio today who is going to be interesting, in that a very diversified journey, I had a real quick chat with him just before we come on air and it sounds like he's done everything, but the quick point I would make about our guest whose John Martinovic is that his wife reckons that property investment is the best hobby he's ever had because it's actually got a good upside. John what do you reckon about all that? Welcome to the show.

John: Thank you, thank you everyone. Yeah look, she likes it to one degree, and then the other degree she sees the flip side when it's all happening and she's a bit, is this all worth it sometimes? But nah, it is.

Phil Tarrant: It is all worth it. So couple of things we'll chat about today, and this whole is it worth it thing, so we'll have a little bit about why invest in property. But you're a passionate property investor, which is good, I think you found your niche. I remember back in the day, and anyone sort of over probably 35 would remember this, there was an advert on TV, I think it was the Sydney Morning Herald advert, it had an undertaker on it, remember he was at a party and he'd go up people and get his tape measure out and stuff, pretty much going, all that guy could talk about in a social setting was being an undertaker right? In a social setting all you do is talk about his property, are you that guy?

John: It's something I like to ask a question and then try coax them into, well something you should get into, and this is what we've got and this is what we do, it's hard to steer away from, no doubt.

Phil Tarrant: So just chatting with people just in general socially, or with your friends, or dinner parties or barbecues or stuff, where most probably conversations happen by the way. Are most people you think, most Australians and me and you are probably about the same sort of vintage in terms of age, are either thinking about property or in property? Or some of them are just going, yeah not interested, not something I think about?

John: I think like a lot of things, if they had a better understanding of it, they would probably get into it, and I think that's a thing. That's what we learn in terms of having the right accountant, a good broker team around you, it certainly helps you. But I guess understanding all the highs and lows that are involved, and you've got to be comfortable with what you're doing too. So not everyone's comfortable with debt, and that's one of the first things our…

Phil Tarrant: What's your thoughts of debt? When you think of debt, what are you thinking?

John: I think of good debt, and bad debt. Right, so providing its good debt, I'm not too phased. I've always said the bank will lend you money for a property, but they won't lend you money to buy shares, so what does that tell you? It's a fairly safe gamble, so providing you’re not over-capitalising, you're not stretching yourself too, you've got a buff there, you got back up plans, that's what I think one of the keys.

Phil Tarrant: Yeah I'm personally quite sort of ... I don't particularly like debt. Outside of property debt I don't have any debt. I've got a credit card but I pay it off every single month. But a lot of people ... Their views or impressions toward debt is shaped by their upbringing and what their parents did, and all sorts. As a household we never had a lot of money and there was never any debt in the house, we just didn't have any money. So I think I've sort of grown up with a very similar view towards debt. Property debt I'm okay with, leverage. How do you think your perception towards debt and money has been shaped by your life story? How that's sort of happened?

John: The upbringing, I guess we had both my wife and I, when you have that dollar, that's when you go spend it. I think in terms of property that's changed now, we're seeing now, you can't save enough to be able to then go and either buy property or invest in a property, it's just very hard in terms of growth that markets going into. So you hear a lot more owners saying, "I wish we did what you guys are doing today, you know, utilising other people’s money to grow your own wealth." That's just relative today, and monies cheap, let's face it, it's getting harder to get from the banks but it's, er…

Phil Tarrant: So what you're talking about there is the concept of leverage, right? Using someone else's money and a bit of yours to go out and purchase an asset, which goes up in value, leverage. I think the older generations, my mum's generation back from there, they didn't really have that educational, or they didn't have the visibility to it, like today you listen to a podcast like this, or you read a paper or whatever. Back in those days, to get that information was a lot more difficult. That said though, when people, I speak to a lot of property investors they have that light bulb moment when they actually understand it, and it's like a completely different head space, they go, "Oh hang on a second yeah that really makes a lot of sense." So did you ever sort of have that light bulb moment, was there a point in your sort of property investment journey that you went, "Actually I'm starting to get this now."?

John: So a bit of a background, we originally bought our first investment property knowing nothing about investing.

Phil Tarrant: So this is you and your wife?

John: Wife and I right, the idea was, let's go buy a boat. Well that was going to be on the plus side of $100k, next thing we go, "Why would we want to buy something that's going to down in value? Let's buy an investment property." We knew nothing, had very little money to our names, didn't even have money for a 10 per cent deposit at the time. So we learned all about that, we secured that, and then our accountant sort of, he went further into how to leverage and how to grow from there. So we sort have been coached by our accountant, he's certainly been one of the keys to getting us to where we are today.

Phil Tarrant: So how old were you when you guys bought your first investment property?

John: First investment property we were mid 30's.

Phil Tarrant: Okay, and up until that point you were just sort of spending money and...

John: Basically living month to month sort of thing.

Phil Tarrant: What do you do for a living? What's your job?

John: I'm a business development manager.

Phil Tarrant: Okay.

John: So in sales.

Phil Tarrant: Yeah, okay, so at least you can ... And I imagine you get paid a bigger salary if you sell more stuff? Is that how it works? You get sort of bonus based and all this sort of thing?

John: It is, I mean there's a little bit about that but you know back down again, the wages we're on then to today...

Phil Tarrant: Different.

John: Completely different.

Phil Tarrant: Yeah, okay so let's talk about this journey, so you bought your first investment property and you've subsequently bought additional properties from there and you now have a reasonably sized portfolio. What was the first property you bought? What did you get?

John: It's still, you know they say you shouldn't buy property with your heart, but this one was, and we're glad we did, it's a two bedroom unit in Kingsgrove, in Sydney. I think it was just before the Sydney boom kicked in, so that's what...

Phil Tarrant: What'd you pay for it?

John: At the time?

Phil Tarrant: Yeah.

John: They were asking $420k, we noticed little inquiry on it, sitting there, the agent was out of the area so he certainly wasn't putting any effort into moving it. We ended picking it up for $380k.

Phil Tarrant: Okay, alright, so that's not bad, so $40 under the asking price. Have you had that valued recently?

John: Recently, yes.

Phil Tarrant: Yeah, what's the value at now?

John: $540k now.

Phil Tarrant: Okay, $540k, so bought at $380k, now $540k. Over what period of time?

John: So that's four years ago.

Phil Tarrant: Four years ago, alright. You're not going to complain too much about that result.

John: Absolutely not.

Phil Tarrant: Not a bad asset. So that's was just a, what sort of, was it a big block or is it a smaller bit more boutique block that you bought it then?

John: Our sale, our portfolio consists primarily of units, and we look at the smaller boutique blocks, we don't like these 50 story multiple hundred units, high strata and OC, and all the rest. We try and keep it 50 and under. This particular block I think has got under 30 units.

Phil Tarrant: Under 30 blocks. Yeah okay so out Hurstville way, right?

John: Correct.

Phil Tarrant: So transport hubs, everything's there, right?

John: Correct.

Phil Tarrant: Yeah okay cool, so a standard apartment, good buy in, and you bought subsequently. Can you tell me a little about some of the other properties that you've bought?

John: We've got everything from NRAS properties, we've got multiple NRAS properties which to us work for us very well. I know there's...

Phil Tarrant: Okay, can you explain that for our listeners that aren't familiar with inter house properties.

John: So NRAS stands for National Rental Affordability Scheme, it's basically where it's a government scheme where you have to rent out the property at 20 per cent below market value. Then come tax time you get between $10 and $12,000 tax offset.

Phil Tarrant: Okay.

John: So that's certainly helps when it comes to cash flow and so on.

Phil Tarrant: Where are your NRAS properties located?

John: Sydney and Melbourne.

Phil Tarrant: Okay, and how did you find out about NRAS? Is that something that your accountant sort of suggested?

John: Our accountants heavily involved with NRAS properties, again he's a firm believer in them, and it took us a while to grasp the idea but we dived into one and it's worked, and we've since bought many under that scheme.

Phil Tarrant: How have you found the, because you're renting out the property under market value, so it's affordable housing, how have you found the tenant turnover in these properties? Are they pretty good? So they're pretty sticky tenants?

John: Yeah absolutely, they've been very good, and have been quality tenants, which has been really good. Obviously they need to meet a certain criteria, and thankfully I think they've all been in the right areas, where they've been. They've been very good, so there certainly hasn't been a high turnover of tenants and the qualities been really good.

Phil Tarrant: Do you like the idea also of providing housing for people who traditionally might not be able to afford housing in that particular area?

John: To us to, I mean even that first property that we bought, there's a young couple in it, and we've said to them, "As long as you're in here and you're looking after the property like it's your own, we won't up the rent on you."

Phil Tarrant: Okay.

John: That's the way it's been, because as long as we're doing alright out of it, obviously other people can't afford what you've got, and you go, well yes you want your rent to increase over time, and so on, but I'd rather have good tenants in all of our properties that look after it. If someone moves out, you've got to find someone – better the devil you know sometimes. In terms of marketing fees, and so on with agents, you're just going to lose that, you know that increase that they put five per cent or whatever, it's just going to go back into their marketing and you're going to lose a couple of weeks here, to me I'd rather just have somebody there...

Phil Tarrant: It's really a good point that because I speak to a lot of investors, and they'll penny pinch over trying to lift their rent up.

John: Ten bucks.

Phil Tarrant: Ten bucks a week or whatever, and then when you extrapolate that over the course of ... It's not a lot of money to be honest with you, and there's a lot to be said about stable tenants, and just, you get one or two weeks without someone in there you've already lost benefits of that so. For our listeners who, you should always look to review the market value of your properties, every six or 12 months. So make sure that it's about on the money, but if you've got a long standing tenant, just don't try and gouge him 10 bucks a week, you're better off leaving him there ... We've got some great tenants in our property, some older couples who, they see it as their own, I give them a little bit of money to sort of buy some plants, and they really look after the garden, it's their own property. I think it's got to be said, and that's a good way to think John. So you've got some NRAS properties, you've bought your first property we spoke about. Have you ever sort of dabbled in the off-the-plan space at all?

John: We have.

Phil Tarrant: Yeah, good experience, bad experience?

John: To us it was frustrating because you can't see, touch or feel anything, and it's out of your hands, right? So you know you're outlaying a great chunk of cash, and when has ever a development been finished when they said it was going to be done? We were quite fortunate, our first one off the plan, we settled right on the whole APRA changes. So what we initially committed to and signed off in terms of financing, that all went out the window.

Phil Tarrant: 'Cause the rules changed.

John: The rules changed, smack bang when we were supposed to settle. But we were still fortunate enough with our broker’s assistance, he said, "Look this was committed to quite some time ago, we can't go changing the rules now." So we were quite fortunate to that degree, but it was quite stressful, and I guess it holds your ability to grow your portfolio, for us it was nearly 12 months, and you go, "Well what could I have done in that time?" Again in that 12 months, I basically put our, all of our investments on hold because you know this one had to go through and look it's great, it's in South Yarra in Victoria, it's in a boutique block.

Phil Tarrant: What did you, what was the sort of contract amount for the property when you signed up?

John: High fives.

Phil Tarrant: High fives, okay, how long did you ... Took a year for the process to go through to settlement?

John: Pretty much.

Phil Tarrant: At settlement did you value it up okay?

John: Again, thankfully yes, it valued up okay. We look back now and we go there's no way we would have what we have today if we started this maybe two years ago because we're seeing every day in the media, banks are tightening, LVR's are changing, it's just basically…every day something’s changing with the whole investor segment. But it's making it harder, I always say to people, don't expect this, but you can certainly have this, it's doable. But you've just got to get your foot in the door too.

Phil Tarrant: While we talk about for our listeners here who aren't familiar with how off plan apartments work. So essentially you commit to purchasing a property, typically before it's even started building, and you place a small deposit down. The idea is that you buy it at today's prices, and when the property is built, which might be one year, 18 months, two years, sometimes three years away, the market should have changed so that it's going to be worth more at that point in time. The issue that a lot of people find themselves in is that what they commit to purchase the property for, and then what the properties actually worth are two very different things, often it's negative. So they're committed to buying a property, which the bank will only lend them less money on, point number one. Point number two is that should they need to get out the market place, they're selling it for less than what they've paid for it.

So typically off the plan apartments overtime become attractive. You know, five, ten years down the path, but a lot of investors get burned buying off the plan. A lot of it can be caused by oversupply in the market, when you see a 1000 or 2000 units coming online in a particular area, a lot of the times their supply and demand cycle means that you're not going to price up. It can be dangerous, I know a lot of people who've done well out of buying off the plan. John, your story’s not a bad story.

John: We're one of the lucky ones and you know one of the other things people got to think about too buying off the plan, if you're buying these high rise buildings, all of a sudden it could be 100, 150, 200 new units available for rent. So there's competition there to try to get someone in there so all these things you've got to be mindful of. You don't really know when you're buying off the plan, it all sort of, the blinkers are on, you're going, "Oh, I've got this brand new..."

Phil Tarrant: You see the brochures, it looks good.

John: It looks good, yeah, but then you go, "Oh hang on, there's two ..." Let's just say 50 per cent are investor apartments, and then all of a sudden there's 100 new units...

Phil Tarrant: It's a double whammy you know, in terms of valuation your property might not stack up and you find yourself in negative equity. The other side is that you can't get a tenant in there, because everyone else is looking for tenants at the same time. What that does is that supply and demand again, if there's more people, if there's more properties than what there is people, rents going to come down, it's going to affecting your yield and your property as well. Lots of moving parts, you've only bought the one off the plan apartment?

John: One off the plan.

Phil Tarrant: Would you do it again?

John: Probably not, knowing what we do, knowing what we know now in terms of it's a big handbrake in the whole strategy thing.

Phil Tarrant: So for you it's not by in large the risk associated with it, it's the loss, it's a missed opportunity cost by chucking all your money into off the plan play and tying up a deposit where you could be using that money elsewhere to keep doing other stuff?

John: Correct, because I'm always looking for more investment properties. If you find something good, you go, oh I can't do any because I know in three months or six months or whatever, I've got to sit on this first. That's your first priority, so I think it just ties you up if you've got that long term commitment.

Phil Tarrant: So what's your strategy then? We touched on this when we started our conversation today. What's the goal investing in property?

John: So originally our plan was, we just wanted to be debt free at the age of 50. In terms of no mortgage, no nothing, and sitting down with our accountant he goes, "Okay this is how we can do it, this is what you need to do etc." Look that was our plan, and I think we can safely say now, we'll probably achieve that by 45.

Phil Tarrant: Okay, is that including your ... So do you have a principal place of residence, so you own a home that you live in?

John: Correct, we just wanted that to be debt free. Having your own home, the Australian dream, being debt free by the time of 50 – that was our plan. Not having to think, moving forward, in terms of repayments and jobs, I guess...

Phil Tarrant: A little bit of security and peace of mind.

John: Correct.

Phil Tarrant: But that's changed obviously once you've got the property investment bug.

John: Correct, still now we're going, yeah you do use your PPI's as leverage, you know the collateral’s there but that can be made up in other ways when it's done right in terms of repaying that sale.

Phil Tarrant: So originally it was a peace of a mind factor, security factor, but now are you looking to generate income over time through your property investments?

John: Yeah, so that's the plan, have a healthy income stream, which we're now achieving. I'm quite pedantic, I've got a spreadsheet there on each property, and I know all the in goings and outgoings, what it's costing us, what it costs us per annum for the whole portfolio. There's obviously the tax component come tax time, which you've got to be able to I think utilise that too, in this day and age. While it's around too, that's on shaky grounds.

Phil Tarrant: Yeah you never know -

John: Correct.

Phil Tarrant: So did you have a number in mind that you would like to be generating as a passive income in the future through property?

John: Yeah so we're generating a passive income now, I had a figure in mind in terms of how many properties we want to get to, and that's now changed ... Not that it's changed – my goal now, our next one, will probably be a block of units somewhere. So that's my thing, and then probably from there we want to look at land in terms of developing, whether it be a duplex, whether it be some townhouse, whatever it may be.

Phil Tarrant: So you feel like you've got the confidence now to start looking at these more sophisticated investment strategies?

John: Correct.

Phil Tarrant: Property investment strategies, because of where you are in your portfolio.

John: Yeah, and the cash flow’s there now.

Phil Tarrant: So you've got a number, so you want to be able to stop work and still get paid, right?

John: Well that's what we're talking about now, we said if we get to this sort of figure here, we could probably do it now, either my wife or I could stop working now. But while you can, and we both...

Phil Tarrant: Make hay, you're still young, you've got the energy.

John: That's right, while we can let's just make the most out of it now, rather than ... Yeah we're young, what are we going to do? The whole property thing, it's all baby steps, so to get to a real solid figure.

Phil Tarrant: So how are you financing the growth of your property portfolio? Are you just extracting equity, or you chucking cash in?

John: No, we are chucking a little bit of our own cash in, and then yeah obviously extracting some equity at the same time.

Phil Tarrant: But you're not touching the principle place of residence? You're not sort of milking that to finance a property?

John: We've stopped that.

Phil Tarrant: You've stopped it now.

John: We did originally, but that's all stopped now. Now yeah, it's obviously now that the portfolio’s grown, the properties are growing and we can leverage those, that's right.

Phil Tarrant: You can start, those guys, yeah. So your principal place of residence, then your LVR, so you loan to value ratio, so the value of it versus the debt on it, what does that sit at now?

John: So our LVR across the whole portfolio is about 70 per cent.

Phil Tarrant: Okay.

John: We're comfortable – we always want to be comfortable.

Phil Tarrant: We spoke about risk beforehand, so that's a level of risk that you're comfortable with.

John: Yeah and we've got back up plan, A, B and C there too, from the smallest sort of bump to absolute worst case scenario.

Phil Tarrant: Catastrophic sort of issues.

John: That's right.

Phil Tarrant: Yeah, and have you got kids and stuff?

John: Got two kids.

Phil Tarrant: Okay, how old are they?

John: Twin girls, they just turned six.

Phil Tarrant: Just turned six, that's cool. Is part of this property investment strategy play got anything to do with those guys in the future? Are you thinking about sort of continuity of your portfolio? Is that something that they'll get, do you think?

John: The reality is we don't believe our kids are going to be able to afford a home one day. If we can leave them at least one property to say, "Okay well here's a bit of income." Or "here's unit, do what you want with it," at some stage – all well and good. We said, if the kids turn out right and at this stage they're looking pretty good. Doing and saying all the right things, we'll let them know about what we've got. What happens in 10 years’ time we don't know, and 20 years’ time...

Phil Tarrant: You get to have a choice though right?

John: That's right, we'll go "Well darling guess what, we'll be doing a lot of cruising."

Phil Tarrant: If Dad doesn't wreck things, yeah we can have a good life cruising around the world.

John: Correct, yeah so we're not going to divulge them to what we have, when times right, and if they're right we'll judge it from there.

Phil Tarrant: In terms of structure, we can keep chatting about it, we're going to have to wind up, but what structure do you hold all the properties in? Are they in personal names, are they in trusts? How do you work that?

John: No, majority in personal names, we have purchased one in soft managed super fund. So that's obviously in a trust, that was an experience in itself too.

Phil Tarrant: Everyone says that when they set up a super fund, the idea it sounds good but the reality of getting it done is actually quite painful.

John: You have to be, and I guess talk to people that have done it, so they can put you in contact, because again the criteria have changed these days. Certain hurdles you just need help to get over.

Phil Tarrant: Yeah, so would you say by in large you're happy with the journey thus far?

John: Oh absolutely.

Phil Tarrant: Yeah.

John: Absolutely.

Phil Tarrant: What would you change though if you could go back to that first property you purchased in Kingwood?

John: Kingsgrove.

Phil Tarrant: Kingsgrove, which sounds like it's been a good buy, right? But what would you do differently?

John: It's easy to say now, I would have started earlier. But then you've got to look at in perspective, what was your salary like then, all these things.

Phil Tarrant: Everyone says that by the way.

John: I look at other things too, probably other properties that we've lived in growing up, I wouldn't have sold that 'cause that'd be worth this much now. So I guess we made the most out of it at the time, and I'd say to anybody just get into it, and do the best you can for the position you're in currently, and develop from there.

Phil Tarrant: Yeah, but you'd have long term objective with your property portfolio. Is that something that you, so did you just start going, "Oh we'll get an investment property." As you said, when did you actually start thinking about, "I need a plan and some goals, and some structure and strategy here"?

John: Oh straight after the first one.

Phil Tarrant: Yeah.

John: As soon as the bug bit I was like, "No, okay, we need to put all these things in place."

Phil Tarrant: In terms of securing financing right now, you finding that challenging or is it...

John: Challenging, definitely, and I guess that's something of concern to the whole investment market. You do have to line yourself up with people that are on your side, and that understand you and your position in life, and where you are and that understand that market.

Phil Tarrant: Yeah.

John: That's for sure.

Phil Tarrant: John, I've enjoyed your chat mate. I want to get you back on. I'm going to have a real quick chat to you about how you manage these properties. But we'll do that so guys check out on the feed listening to this in a couple of days’ time, and we'll have that chat with John. What would be one sort of piece of advice for all investors in Australia? If they could learn one thing, or take one thing about this chat, what would it be from your experience?

John: Associate with people that understand this journey. Because there's a lot of people they don't understand it and it's all too hard and it's too scary. But definitely that old thing, be around people that are on the same path as you.

Phil Tarrant: Yeah, it's good advice, John mate I appreciate your time.

John: Thank you.

Phil Tarrant: Thanks for coming in, thanks for joining everyone. Enjoy the chat with John, it's quite an interesting journey in terms of the type of properties that he has secured within his portfolio, but also the evolution of mindset over time. Every single investor I speak to says they wish they started earlier, and that's not a bad thing. You don't know what you don't know. But as soon as you start looking at the property investment and immersing yourself in that as John has done, is one of the keys to success in this game. Be confident, be educated and that's one thing you can control is your knowledge of the market place and another thing you can control is what you choose to do about it. Keep on it, keep at it, John mate you'll do well mate I'm sure of that.

But remember to check out SmartPropertyInvestment.com.au heaps of podcasts there from all walks of life in property investing. Remember to check us out on all the social stuff, Facebook, Twitter, LinkedIn, you can follow me if you like @PhillipTarrant on Twitter. As I mentioned beforehand please do keep those reviews coming in, I do appreciate them. If you want to come on the show, or if you've got any questions for me, we regularly do Q&A type stuff. Contact the team, [email protected] John actually contacted us via Facebook to come on, so do that as well, just send us a note and we'll see you on there. We'll be back next week, until then, see you later bye, bye.

Disclaimer: The information featured in this podcast is general in nature, and does not take into consideration your financial situation, or individual needs, and should not be relied upon. Before making any investment, insurance, tax, property, or financial planning decision you should consult a licenced professional who can advise whether your decision is appropriate for you. Guests appearing on this podcast may have a commercial relationship with the companies mentioned.