We check back with investor Eric Wu to see how he’s tracking with his investment goal, as well as find out where in Sydney and Melbourne offer yields reaching between 5 per cent to 6 per cent.
In this episode, host Phil is joined once again by Eric as they discuss how his portfolio is performing, and how the change in the current investing environment has altered the speed of his investing, requiring him to be “careful and wiser”.
Eric also talks about his perspective as a mortgage broker, why it’s hard to get a loan today and the common struggles first time investors are currently facing.
In this episode, you will also find out what investing assets are worth expanding into, how he spends only one to two hours a month managing his portfolio, and what separates good property managers from bad ones.
You’ll hear all of this and much, much more in this episode of The Smart Property Investment Show!
If you like 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: Phil Tarrant here, I'm the host of the Smart Property Investment Show. Thanks for joining us today.
Relatively new start for 2018, if you've been tuning in over the last couple of days, weeks, we've been reflecting a lot on the year past and the year ahead. My goals, ambitions for investing in property 2018, sentiments towards the market, the headwinds facing investors, the tailwinds as well. There's many positives about investing in the current market, there's also challenges. I'd like to explore all those types of dynamics and bring people into the studio to help me through that today.
Considering 2017-2018 I've got someone back in the studio who joined us in April 2017. You can check it out if you look through the feed, we released it on the 27th of April. It's Eric Wu.
At that point in time, Eric spoke about his ambitions as a property investor. Eric is also a mortgage broker so I'll tap into some of his mindset there today.
I'll read you the description of the podcast on the 27th of April 2017, just so you get a bit of context about Eric. Eric has a background, Chinese background. It says "Investor Eric Wu says the biggest mistake he's made on his investment journey is not investing ambitiously enough, and this episode of the Smart Property Investment Show he joins me, Phil Tarrant, to discuss the opportunities he's found within the Australian property market, how he's accumulated and manages nine strong portfolio, and his three-stage plan for how he'll double his assets in under 10 years".
Couple of things there, but what I'm going to pick up first and foremost is this three stage plan for doubling his portfolio in 10 years. Eric, how you going? You good?
Eric Wu: I'm good, thanks Phil. Thanks for giving me the opportunity to come back to talk to you and your listeners. I really appreciate the opportunity.
Phil Tarrant: No, it's great to have you here. In the nine months since we last spoke, any more assets to portfolio? You down the path to double this asset base, is that happening at all?
Eric Wu: I'm still on the path, but the speed needed to be altered, it needed to be amended. With the current environment, I think it needs to be a little bit careful, be wiser about what asset to choose, and the speed of accumulating.
It's been an interesting nine months, lots of Chinese market, not only including myself, my clients as well, have seen lots of different strategies all play out at different stages. Off shores, produce different outcomes.
Phil Tarrant: How would you explain the market today, then what it was when we last spoke in April?
Eric Wu: I think the market, in terms of two biggest ones, this is my view, I'm not a professional, just seeing my view from my experience and from experience of my client, I think Sydney and Melbourne reached the peak or passed peak for a little while. Some area has come down a little bit, but it's not a ... I don't think alarming, it's just a correction or stagnant after the crazy booming for the past five years. Some area of Sydney is still going really well, like Badgerys Creek area. Lots of new development, but I'm not sure whether there'll be good investment or not. I think lots of people buying Geelong area as well, it's kind of Wollongong onto Sydney, Geelong to Moorabbin and to Melbourne. I would assume lots of opportunities there as well, from what I can see, if you rental you can reach five to six percent close to major cities, still not bad choice.
Phil Tarrant: So, your plan when we spoke was to double your asset base so 9 properties back when we spoke in April, in ten years time, so you're a year in and you haven't done anything, and you're saying that there's good reason for that, I.e., you're not identifying the right assets to invest in. You're saying that Sydney and Melbourne, in terms of capital value, has plateaued, and I think sentiment is shared by a lot of people.
Are you actively investing right now, if you find the right property will you buy it, or are you in a holding pattern?
Eric Wu: Now you give me pressure now, my time's running out, I only have nine years to go. Look, the challenge is ahead. The biggest challenge is financing, it's getting money, because balancing money is the biggest thing for most investors.
I have the balancing from the last time we spoke, but I'm still actually looking. May not be in here, I'm thinking ... like last time, I said I still want to do some small development, and some small commercial property as well.
Phil Tarrant: Okay.
Eric Wu: Also, some of my friends opened my eyes for the U.S. market, it's just amazing. I can't really believe the figures they show me, roughly 15-20% window yield.
Phil Tarrant: Yeah, that's huge.
Eric Wu: Yeah, huge. I was thinking "Gee, you can't financing here really."
Phil Tarrant: I've been watching, for our listeners that might have heard, and I know listen to the show, so "hello", Todd Hunter from the Weir group, and he's been on the show beforehand, chat with me on the market. He's been very active over in the U.S., I've seen some of the information coming out from him and there's some pretty attractive rental yields coming out of the U.S. right now. Are you exploring that market, are you?
Eric Wu: Yeah, I'm just starting.
Phil Tarrant: What really attracts you about investing in the U.S.?
Eric Wu: First of all, I met up with a few friends. The capital growth and the rental yield is just amazing. I have some friends, they bought in Atlanta a few years ago, at the time the Australian Dollar permute 1.1 to 1 U.S. Dollars. U.S. dollar was really cheap, so they bought there around 50k-60k each, I think roughly figure, so now it tripled.
Phil Tarrant: My question to people who invest in the U.S., and I'm not particularly knowledgeable about the U.S. market, I'm familiar with it and I watch what's happening there, question is "if you do invest in the U.S.", and maybe this is a shout-out to you Todd if you want to come on and chat through this, "how do you realise that growth?". You got to extract the money from the market, and get it back in Australia to realise any true benefit from it.
If you invest in the U.S., the friends that you have out there, what are they gonna do with this increased equity? Are they gonna keep it in America or are they gonna pull back out. Yeah
Eric Wu: We have not explored this question yet. I think they haven't mentioned anything about a sell, because maybe that's just the only option you can realise the growth, really. I don't know.
Phil Tarrant: Yeah.
Eric Wu: They're just in at a really really early stage of looking at the lots of area, need to explore bit more and also learn more from it.
Phil Tarrant: Yeah. It's very difficult to get lending in the U.S. You need to go out there with cash in your pocket, so 50-60 thousand following the GFC you could pick up property for next to nothing, and there's quite a few people active in that market trying to introduce Australian investors into it, and some were very good, some were not so good or indifferent.
I think some people did their dough, but it's interesting that you're expanding your investment mindset outside of just residential property and you were thinking about commercial here in Australia and also opportunities in the U.S., what is it that's driven you to evolve the way you think about investing in the property? Is it the lending, is it mainly the lending situation? It's too hard to get cash right now?
Eric Wu: It is actually quite a few factors, the lending is definitely the big one, the cash flow is a big one as well. Let's give you a simple example: if you accumulate lots of residential properties, the ongoing cost is quite high, so your maintenance counterweight, all the bills quite high, so you will not get much cash flow from residentials. You need something, bit stronger cash flow to sustain the existing portfolio, make it last longer.
From what I've seen, with my ... what I can see is, I was thinking that three big group of investments, some of it really tall above three million portfolio right now, is very difficult for them to expand any further, if they have every income, unless they have really high income that's fine, but for normal people it's very hard for them to expand.
I would think for them it's probably good idea to look at how to reduce the debt. Activate debt reduction. The people in the middle tier, like just started or 1-2 million tier, they still have an opportunity to do, to hold onto it.
Currently I'm working with lots of first time investors, because they have a home in major cities, lots of equity. It come to the point, they have kids, job is very stable, they realise their stipend is not strong enough, the pension may or may not exist in 20 years time when they retire, so have to do something. They probably come to me first, I pretty much help them to set up probably, extra activity for them to use, and also set up a structure for them to debt recycle, reduce home debt. That's what I'm doing at this point in time.
Phil Tarrant: These are the people you are working with, providing services to them as a mortgage broker? Is that correct?
Eric Wu: Yes. I will say I'm a mortgage broker, but I do a lot more than that. I share my experience, what I think, and also what I have done. What may be the best choice for them, and a holistic way of helping the, family of mine.
Phil Tarrant: Are these people, first time investors, are they leveraging their principle place of residence to finance their deposit, are they getting another loan, or are they taking all the debt within their principle place of residence and not having any debt on the investment property, how are they working it?
Eric Wu: Quite often, homeowners use their home as extra equity as a deposit to purchase the next investment.
Phil Tarrant: So they'll just increase the loan on their principle place of residence to finance a deposit, and then they'll take another loan against the investment property?
Eric Wu: Yeah
Phil Tarrant: Are they doing that principle interest, or mainly just interest only?
Eric Wu: They're doing a combination. Some on principle interest, some on interest only.
Phil Tarrant: What sort of factors determine these first time investors going principal interest or interest only on their investment properties?
Eric Wu: It's mainly about the stability, and also the cash flow. So with the principal interest, the rate is pretty low compared to interest only, and also easier to get. That's why we split in part of principal interest, part of interest only. Keep the security and the flexiblity.
Phil Tarrant: You're saying that it's harder to get debt at the moment, from both a personal perspective, but also helping your clients out. Is it more difficult to get financing now because people have hit their serviceability ceiling because lenders have changed their mind in which they assess mortgages, or is it bank appetite towards lending? Do you think banks are more hesitant to lend, or are they just working within a frameworks, restrictions provided to them from APRA at the moment?
Eric Wu: I think you summarise very well, its different factors you already summarised it. It's the changing of the lending policy, it's getting harder to get a loan and also savings is getting tighter and tighter. The income has not increased much compared to a few years ago, if you want to borrow more it's comparatively difficult.
Phil Tarrant: You mention that a lot of people who are on average incomes are tapped out in terms of their ability to service mortgage debt. What would you, just to give context to our listeners, what would you deem to be an average income, because we have a lot of listeners here who have not yet invested or are considering investing, and investors like to benchmark themselves against other people.
You work with a lot of clients, what's an average income, or average household income that you see for people looking to invest in property?
Eric Wu: I want to say average is a really relative term, I haven't seen a thousand clients, I won't say relative, I won't say every, I will say "compared with my client".
Phil Tarrant: Yeah, and your clients.
Eric Wu: I will say less than average, I will say combined income for family, wife and a husband, two kids, one home, 150 grand? A year? Average?
Phil Tarrant: Before tax?
Eric Wu: Before tax, yeah.
Phil Tarrant: Okay.
Eric Wu: 150 grand, that's it.
Phil Tarrant: 150. These people have their principal place of residence, their own home, and if they're in Sydney, probably got some equity in there if they've been in the market for quite some time.
Eric Wu: Yep.
Phil Tarrant: They're able to carry one if not a number of investment properties quite comfortably?
Eric Wu: Yep. I won't say "quite comfortably", it depends on their asset selection. At this point in time I would think, the first one you go for capital gross, the second cash flow. You have to do a combination, you can't just go for one.
Phil Tarrant: Yeah, because service really is a lot tighter, lenders ... I'm not an expert on this by any means or a credit policy person, but lenders will take into consideration your serviceability, the rent you achieve on the property that's an investment property but they don't take all of it right?
Eric Wu: Yeah
Phil Tarrant: They take a part of it.
Eric Wu: Most of them take 80%, and some lenders cap six percent.
Phil Tarrant: 60%?
Eric Wu: No, six percent.
Phil Tarrant: Oh, six percent.
Eric Wu: Window yield, six percent. They cap it.
Phil Tarrant: Okay.
Eric Wu: Say you're lucky, find a property at really high window yield, let's say nine percent, but some lender will cap it at six percent. You'll not take more than six percent.
Phil Tarrant: And that's just being conservative.
Eric Wu: Yeah.
Phil Tarrant: Yeah. Back to your portfolio Eric, when do you think you'll make your next acquisition?
Eric Wu: Soon now.
Phil Tarrant: Soon? Where's it gonna be, is it gonna be in Australia or is it gonna be in the U.S.?
Eric Wu: I really don't know. There's so many moving parts, it's really hard to predict
Phil Tarrant: Yeah. You're still confident with your plan to double your asset base in 10 years, from when we first spoke?
Eric Wu: Yes. The plan's still in place, it's the speed of accumulation.
Phil Tarrant: Yeah. You think you'll just be responsive to the market, based on the forced restrictions by lenders and changing recommendations around the speed of lending? Do you think you'll just take a hiatus for a year and then maybe jump back in the market and acquire quickly? What will you do?
Eric Wu: This just my view, I think with the market moving that lots of factors affecting the asset's accreditation. The finance part of it, the market as well, personal, you need to put it in place, it's like putting the jigsaw puzzle together. There's lots of moving parts, like I said before, but don't give up, just look at opportunities. You find a strategy to reduce the debt. Lots of strategy going to reduce the debt.
Phil Tarrant: I'm trying to remember your portfolio, which has 9 properties, you've got your principle place of residence as Epping Way?
Eric Wu: Yeah
Phil Tarrant: Did I get that right?
Eric Wu: Yeah.
Phil Tarrant: Did I remember that right?
Eric Wu: Yes.
Phil Tarrant: Where's your investment properties?
Eric Wu: I have a few in Sydney, a few in Brisbane. One in Queensland, one in regional Queensland as well.
Phil Tarrant: So if you had to deposit right now and if you had a pre-approval or an assurance that a bank would lend you the money, where would you be buying right now?
Eric Wu: Depends on price range.
Phil Tarrant: If you're looking at the 4-500 thousand dollar amount, where would you be?
Eric Wu: That's actually quite a tough question, this is my view, this is just my thinking. I'm just thinking I might buy one in Geelong area, and still catch the growth, little bit, because I already have a few in Brisbane, I don't want to buy there anymore. The next one would be ... Hobart, hold for two, three years and sell it.
Phil Tarrant: Okay, interesting. Let's have a quick chat about how you manage your portfolio, setting on properties, it's a sizable portfolio. How much time, a week, do you spend on managing your portfolio?
Eric Wu: I will say, months? One or two hours. It just goes through the rental statement, also bank statement, and some repair bills, that kind of stuff. Put into a spreadsheet, like you did with yours.
Phil Tarrant: Yeah, I got a big spreadsheet. So, it's not that intensive then, for you to manage the portfolio?
Eric Wu: Not very demanding.
Phil Tarrant: Yeah. How often do you think about it though? All the time?
Eric Wu: Every day, of course. It's something in the back of your mind, you don't intentionally think about it. Something pops up, you say "Oh, yes, it's there, it's mine, I have something I have to think about it."
Phil Tarrant: Yeah. You have property managers for all of your properties?
Eric Wu: Yeah.
Phil Tarrant: Okay. How do you go about choosing your property managers?
Eric Wu: My message is simple, and I would say a lazy way. I just go for it with a referral. Once I get a feel of them, after being referred, I will talk to them, see how they go. There's some questions you can ask as well, like "How many property you manage?", "How many years you've been in the industry?", "How do you deal with a tenant runaway on an insurance claim?" Kind of stuff. Once you talk to them you will know, roughly, whether you are on track or not.
Phil Tarrant: In hierarchy of importance of features that your property manager provides, where would the rate be? Such as the percentages they take of your rent? Is that the top of your list, or is that important but it's not the most important thing?
Eric Wu: No, it's not the most important thing. It's more, the percent you commission, it is important but it's not critical, very likely they're only being one percent or one and a half percent, that's only a few dollars away. Doesn't really matter much, because not only can they manage your property well, keep everything in order, keep the tenant happy, they pay on time, all the issues should be addressed on time. I'm happy to pay the person more, there's no problem at all.
The thing is, for me, I want somebody who managed to put the portfolio ... ideally I want it to be trouble free.
Phil Tarrant: You don't want the headache.
Eric Wu: No.
Phil Tarrant: So you're paying your property manager to take the headaches away from you?
Eric Wu: Yes.
Phil Tarrant: What would it take for you to change property managers? What would your current property, whatever property we're talking about that you have, what would it take for your current property manager to lose your business, if you look for someone else?
Eric Wu: I think the business is reciprocal. I give the managers business, he or she looks after mine, it's kind of managing my business as well.
I don't want to change property managers easy or often. I just want to keep them, but if something goes really bad, like something being left for a few months, the tenant complains, the tenants not happy and leave, that's a big warning sign. That problem has been ignored, has not been looked after. That's not something I want.
Phil Tarrant: By and large, do you think your property manager's service you well, or you're just another landlord that they provide a service to.
Eric Wu: I think, on average, the quality of service of my property are above average, I won't say they are often exceptional, I think it's above average, also I get in touch with them on a regular basis as well.
Phil Tarrant: What would it take for you, and I'm punctuating on property managers because I'm intrigued by it, what would it take from you to shift ... What would your current property manager have to do that's so bad to make you change, what would you see as an alternative option in terms of property manager that would proactively make you shift property managers, if it was a much cheaper rate, if it was greater clarity and transparency around maintenance bills, if it was better inspection management, if it was better reporting. What would it take for you to actively go out there and say "Oh, that sounds okay. I'm gonna take on that".
Eric Wu: I think that they key word to pick out from your sentence about a proactive, I really like the proactive managers. They can look at opportunities, whether they can increase rent or not. If the markets not good they should tell me rent should be kept at where it is, or they can say "This is what you can do to your property to increase the potential of increased rent. You can add air con', you can change the carpet, then you can have ten or fifteen dollars per renter increase".
Phil Tarrant: So you like it when your property managers says "Hey, I think we can increase your rent by x by doing this or I feel the market has changed and therefore we should be looking to increase or decrease your rent". That's important for you?
Eric Wu: That's one important factor for me. Primarily, it's like they are running their own business, but they are running it for my own benefit and they also think like I think. Putting their foot in my shoes, for my interest, not theirs only.
I understand they are running business, have to get paid. That's fine. There's always ways you can find a win-win situation, mutual benefit. It's not only for them, it's for boss.
Phil Tarrant: When we get you back on the Smart Property Investment Show in a years time, I believe you bought a property or more than one properties
Eric Wu: I don't know.
Phil Tarrant: You don't know.
Eric Wu: I don't know.
Phil Tarrant: Does that frustrate you, or are you okay with that, as in you might not be growing the number of properties in your portfolio, but you're hoping they're going up in value.
Eric Wu: They will. Matter of time. (laughs)
Phil Tarrant: So you're okay if you don't purchase anything for a year or two? Do you think you can still achieve your goal of doubling your asset base in ten years?
Eric Wu: I think accumulation is not a straight line, sometimes you accumulate a lot within a shorter period of time. Sometimes you have to wait and see what the market says. It's hard to predict, it's hard to say what it will definitely do and definitely will not do.
Phil Tarrant: We spoke about beforehand, your three stage plan to do that. Can you crystallise that again for our listeners?
Eric Wu: I think it's not my concept, lots of people have used it and I just borrowed the concept. The accumulation, second one is consolidation, then debt reduction.
In terms of rendition, I would say I'm in consolidation stage. I'm trying to find a way to reduce the debt.
With my client, but what happened now, most of my money for my clients is at the accumulation stage. They are on the way to the to create the wealth. They have not reached the stage of consolidation or reduce the debt as well. They are different people doing different things, they are different stage.
Phil Tarrant: You, shifting, you're talking about debt reduction, are you shifting your loans to principal interest so you're paying off the debt?
Eric Wu: Not at this stage.
Phil Tarrant: Will you do that as a strategy at some point?
Eric Wu: I think I will consider that.
Phil Tarrant: Interesting. Eric, we've run out of time. It's gone really fast. Always enjoy chatting to you.
Eric Wu: Thank you.
Phil Tarrant: To your point "Accumulation, not a straight line", you might go really hard at one year, then not doing anything for a number of years. Sounds like you're in that sort of consolidation phase at the moment as you wait until the environment suits your particular needs and circumstance so you can get back into the markets. Let's get you back in a year's time, touch base and see how you're tracking.
Eric Wu: Thanks Phil, really appreciate it.
Phil Tarrant: Yeah, thank you. Remember to check out smartpropertyinvestment.com if you don't yet subscribe to our morning market intelligence news bulletin. Be the first to know what's happening in property.
Please keep those reviews coming on iTunes. We're doing well, we're moving ahead. Please keep those comments coming as well, the team here do appreciate your feedback and what we can do to improve the show. On that basis, you can email us at [email protected]
If you want to come on the show as well you are more than welcome. Whether you are thinking about investing, first time investor, or you've got a portfolio with a couple hundred properties in it, all walks of life are welcome on the Smart Property Investment Show. We'd like to share everyone's stories.
We'll be back again next time, until then, bye bye.
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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.
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