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Get up close and personal with PETE WARGENT

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In our personality profile this week we get up close and personal with Pete Wargent. Pete reveals some of the great lessons he has learnt along the way.

 

Transcript:

Kevin:  Pete, how did you first get involved in property investment?

Pete:  It’s quite a long story. My wife got into property way back in 1997. She bought her first house as a 21-year-old. I was still a renter myself. She had retained her property as an investment property.  We met in 2004, so it was around that time that she explained to me the incredible growth that she had experienced over the seven years of ownership. Obviously, compared to my own experiences of being a renter, we then looked at getting into property investment. At first we just started out by using a deposit that we had saved and then after that we actually refinanced the existing property. That’s where we started out.

Kevin:  It’s amazing that your wife was actually the one that took you on the journey that’s become almost a life mission for you. Tell me, how did you get into your second property from there when you were together with your wife?

Pete:  The first place I bought I actually bought in my own name. I think back at that stage it was a fairly new relationship, and I think both of us felt that it was probably a good idea for me to get my own foot on the ladder, so the first property was using my own funds. If you remember back at that time, pre financial crisis, it was actually relatively small deposits needed in any case. In fact, it’s funny looking back because I remember the mortgage broker saying I could borrow up to seven or eight times my salary, which was more than I could even contemplate borrowing. I capped myself to a reasonable limit and I bought myself my first investment property in Bondi.

Kevin:  That was your first one in Bondi. Tell me about it. Was it a unit? A house?

Pete:  It was a unit. 100 square meters. A nice easy walk to the train station at Bondi Junction, and also a reasonable walk down to the beach.

Kevin:  Do you still own that property?

Pete:  Yes, I do. In fact, we’ve never sold any of the properties we’ve bought. One of the things I learnt from reading other property investment books is that the biggest regret that people often have is selling properties for a seemingly tempting profit, but then down the track only discovering that they were worth more. So we’ve actually, to date, not sold a single one.

Kevin:  That is part of your strategy. That was going to be my next question. Just expand on your strategy for me, if you could.

Pete:  In terms of what I do for my business, we actually work for investment funds. They obviously have a lot a capital available, so their strategy tends to be much more focused around large scale renovations and quite premium end property. With the individual property investor, obviously funds tend to be less abundant, so on a smaller scale we tend to buy somewhere with the potential for a little bit of value to be added – potentially a new bathroom, new kitchen, repainting and carpeting. We tend to buy somewhere that can be let immediately, so over the forthcoming couple of years we can do a slow renovation and add a bit of value that way.

The most important part of the whole strategy is to make sure you buy the right property in the first place for long term growth, and then there shouldn’t be any need to sell down the track.

Kevin:  That was going to be my next question. Have you ever sold anything out your portfolio? Have you ever had the need to?

Pete:  No, not to date. We own a number of properties in the UK, and a lot of people were saying in 2008 that the bottom would fall out of the market. But that’s where buying well comes into the equation. We have properties in London. In fact, all of the properties found in Britain are within an easy commute of the city, so there was no real downturn to speak of. In fact, in London prices have just kept increasing, so I have no need to sell in the UK.

Over in Australia we have a number of properties around Sydney, and likewise prices just continued to increase through 2013. We do actually have one property outside of Sydney, but that is a relatively recent purchase. There has been no need to sell on any of those.

Kevin:  Where is that one outside of Sydney?

Pete:  Down in Geelong.

Kevin:  What is the best property deal you have ever done?

Pete:  Given the strategy that we take, which is very much focused around long-term buy-and-hold, by default the properties that we’ve owned for the longest have been the ones that have shown the greatest growth. The fastest growth was a property that my wife bought back in England. I remember she tells me that she only paid around £72,000 for it. She had it revalued after seven or eight years at around £250,000. Some pretty unbelievable growth in the UK around that time period.

Over in Australia, back in 2007 at a time when there was panic related to the financial crisis, we bought just close to the Sydney harbor side down at Piermont. We paid $582,000 for a 100 square meter unit down on the harbor there. The current value of that is around $880,000, so some pretty good capital growth there, too.

Kevin:  What’s the most important thing, or things, that you’ve learnt about successful property investment over the years?

Pete:  In terms of successful property investing I think it’s important, especially in Australia where we have got high transaction costs, to take a long term view. A lot of people who look towards property investment are looking to sell in the first two to three years. Given that when you acquire you’ve got stamp duty, potentially sizable legal fees to deal with and other transaction costs, I think the shorter the time horizon the harder it is to make a success of property investment. Therefore I think a longer term view is quite important.

Kevin:  Do you have anyone that you network with, or used to in the early days who helped you, apart from your wife? Is there anyone you network with? Is there a group?

Pete:  Not a specific group, but I spend as much time as I can trying to network with people both within property and also in share investing. That means I have a very large range of contacts across both industries. I try to network as frequently as I can because you can always learn more.

Kevin:  Pete, as a successful property investor yourself, what is the most common question you get asked?

Pete:  The most common question I’ve experienced in property throughout the last decade is almost always “Will there be a property price crash?” First-time investors often are very nervous about that, of buying at the wrong time. Even experienced investors can frequently get spooked by the media running reports talking about potentially very large crashes. Famously, back in Sydney in 2008 there was talk about a 40% crash and so on. I think what people need to understand is there is always the potential for a correction. Indeed, we’ve had three downturns in Sydney since 2003.

Ultimately, wages are continuing to grow, household incomes are growing. So while there will always be downturns, if you buy well then you can hold for the long term and come out ahead over the longer term.

Kevin:  Would you say that one of the most common mistakes that investors make is that they don’t take a long term view?

Pete:  I think short-term thinking is one of the key mistakes that people make. Also a lack of research. Property investment is a bit different to the share markets where you might be buying and selling quite frequently. You don’t get that many rolls of the dice in property, or most people don’t. I think a lack of research is a common mistake for people in the early days. I think a third thing is just not crunching the numbers. Ultimately an investment has to make sense from a financial point of view, both in terms of the cash flow on an annual basis and also the long term capital growth. I think those are the three most common mistakes I come across.

Kevin:  When it comes to cash flow and capital growth, have you got a preference or do you try and achieve both in your properties?

Pete:  When I was starting out both my wife and I were full-time employees, and we were higher income tax payers. I think due to that we were very much focused on capital growth. I think it is commonly understood by people that it is capital growth that tends to create the greater wealth because the capital value can compound and grow in a tax deferred manner.

I think as we shifted away from full-time work, first to contract work and then later to owning a business, we did come to understand that cash flow has a role to play. Investing in too many properties with a negative cash flow can become a burden. Certainly when we look to buy today, the last three or four properties have either been cash flow neutral or positive.

Kevin:  Pete, apart from your own book, what books would you recommend someone should pick up if they want to know a bit more about property investing?

Pete:  I get asked this question very often and, as you say, the answer I usually give is to recommend my own! But if I was to pick one book that gives a broad overview for beginners and also for advanced investors, it would be Michael Yardney’s book, which is called “How to Grow a Multi-Million Dollar Property Portfolio – in your spare time.”

Kevin:  Going back to one of your earlier comments about how you got started with your wife being a guiding light, did that require a change in mindset for you surrounding wealth and setting up a portfolio?

Pete:  Yes, 100%. When I first came into the workforce as a trainee chartered accountant I’d always worked on the assumption that a high salary was the most generally accepted route to wealth. It’s an easy trap to fall into, but over in London we had a period of 50% income tax. Australia was a not a million miles away at 46.5%.

It was a change in mindset that enabled me to understand that ultimately although a salary income is useful in terms of building an investment portfolio, it’s ultimately the investment portfolio itself that helps you to create wealth. I think also over time I came to understand that it is possible to replace a salary income with a business income, but it’s just something that takes a bit of time. It takes a bit of a leap of faith, as well, to make that move away from reliance on a paycheck.

Kevin:  One thing I’ve noticed about property investors like yourself is you’re very motivated and you stay extremely focused. There are times there are lots of knocks that we get no matter what we do in life. How do you stay motivated? How do you stay focused on your end goal?

Pete:  Probably 95% of the time I’m a very motivated person. But just like anyone else I have moments where I lose focus or become demotivated. The secret to being a successful investor – and probably the most important character trait out of all the character traits – is being able to get back on the horse. Most successful investors have one common strand and that is that they will always learn from mistakes and move forward.

The good news for property investors is that property tends to be quite a forgiving asset class over the long term. Even through periods where you may be demotivated, the property you own doesn’t know that. That’s why there was an old saying, you make more from property while you’re asleep because you’re not sitting around worrying how the market is performing; it just gets on and does its own thing.

Kevin:  Pete, have you got a mentor or someone you turn to for inspiration?

Pete:  Yes, I do. I wouldn’t say I have any one individual mentor. In the last ten years I’ve read hundreds of books on investment. But also from a slightly wider perspective I’ve read books by Anthony Robbins. I’ve always found those incredibly motivating. No matter how despondent or negative you might feel when you pick up his books, you can always come away feeling more positive.

As I mentioned, in the property sphere I tend to look towards Michael Yardney’s books. I’ve read a vast array of books. Probably the best book on the Australian share market I’ve read was by Peter Thornhill, a guy that I’ve met with personally as well. I tend to find that even with the worst books I tend learn something from. One of the things I’ve committed to is a never ending learning curve.

Kevin:  Just following on from that, do you practice personal development? Is that a program that you have?

Pete:  I don’t subscribe to any one individual program, but certainly one of the things that I’ve done that has become almost an obsession for me over the last ten years is just a commitment to reading. Every week I’ll read at least one or two books. It’s something which I’ve found that has become a passion for me, and I hope that it’s something that I never lose. There’s always more to learn out there. I think that although the basics of investing remain the same and the fundamentals do, over time the specifics do change to some extent. Therefore, it’s always important to keep learning.

Kevin:  Do you read to learn or read to relax? What are you reading right now?

Pete:  A bit of both. I’m currently reading three books. It might not be everyone’s cup of tea, but I’m reading about the economics of planning and housing.

Kevin:  You’re right, Peter. That probably isn’t everyone’s classic reading!

Pete:  I know, but these are things that I’ve found interesting over time. They don’t represent books that are trying to sell a particular message, as such. They seem to be more on the academic level. It’s something that I find interesting as Australia expands from a population of only 23 million or so today. We’re looking to expand to 40 million in population over the next few decades. The Australia of tomorrow is going to look very different to the one that we are used to today. I think it’s important for people to try and understand how we can best plan for that and also how it’s going to impact the way we live, because it will have a huge difference.

Kevin:  Is there a significant quote or mission statement that you live by?

Pete:  There probably should be. I think for me there was definitely something missing in my life when I was working full-time. I’ve come to realize that the key it should all come back to is to try and be happy and fulfilled, and find some value in living.  There’s no point in chasing a higher salary if you’re doing a job that doesn’t inspire you.

Kevin:  Well said. What does success mean to you?

Pete:  As I alluded to, I think the only real measurement of success is happiness. Obviously finance and investments play a part in that, but ultimately if you aren’t happy there’s only a limited value in wealth. I think there was a famous quote by John Paul Getty who said he would give away all of his billions if he could only hold onto one happy marriage. I think there’s a lot to be said for that. Ultimately, a lot of people spend a lot of time worrying about money and finances, but if they’re not happy there is not much point.

Kevin:  On that point, I think most people aspire to achieve something or to be successful. What do you think actually holds them back from that success, or the success that they desire?

Pete:  It’s the old saying that people tend to massively overestimate what they can achieve in a year, but they chronically underestimate what they can achieve in a lifetime. It’s compounding growth and people underestimate what they can achieve over the longer term.

I’ll give you a good example. Very often I hear people say today that Sydney is far too expensive and therefore there is no point in trying to save a deposit, because they’ll never be able to and so on; and therefore would be much better served living for today. This overlooks the point that there’s more investment in the world than simply property in Sydney. For one thing, you can invest in real estate in other states or regional Australia, but also the share markets. If it’s your thing. There’s gold and silver. There’s any number of places that people can invest. I think people quite often take too shortsighted a view.

Kevin:  Do you think that it is that most people want success but they try to find excuses not to achieve it?

Pete:  I think there’s an element of that. When you’re looking towards the qualities or attributes that people need if they want to achieve success, there are probably some common attributes that you would find in all successful investors. They tend to always work hard at what they do. They tend to be very eager to learn. They will tend to also find like minds and network with similarly minded people.

There are a couple more things too. People who are successful tend to take responsibility for results rather than let life happen to them; and they will resolve, therefore, to always take action and never give up.

Kevin:  What can people do to stay on track, especially when times get tough? We’ve been through a pretty tough time now and a lot of people would have lost focus, maybe lost a bit of motivation. What can you do to stay on track at a tough time like that?

Pete:  I think we touched on some of the ideas before and motivational books can be great. This is where, potentially, support groups can help. Some clubs are obviously better than others, but just being able to network with like-minded people can be a very big plus for people through times of adversity. If there’s one think you can be certain of as an investor, you’ll have some good times and you’ll have some tough times. I think when things aren’t going so well, then a support group can be something worth looking at.

Kevin:  To finish off, Pete, what’s the most important piece of property advice you’ve ever been given?

Pete:  The best advice I’ve ever been given, without question, is to buy well and never sell. The number of times over the years when we’ve been through various property booms in Britain and Sydney, people say, “You should cash in and sell.” Then three or four years down the track we’re back in another boom period. So I think without question that has been the best advice I’ve received.

Kevin:  Peter, I want thank you for giving us your time.

Pete:  Pleasure, Kevin.

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