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If not ‘hot spots’ then what? + A formulae for small development success + Why buyers hate auction

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Highlights from this week:

  • Why buyers are terrified about auction
  • What can be done to make property more affordable?
  • It looks easy to make money from property developing – but is it really?
  • How to find the best deal
  • Making a good living from property in both the long and short term
  • Why ‘hot spots’ are not worth chasing

Transcripts:

Why buyers are terrified about auction – Cate Bakos

Kevin:  An interesting survey released this week actually from REBAA, which stands for Real Estate Buyers Agents Association of Australia. Buyer’s agents all around Australia are members of that organization and they monitor and help buyer’s agents work better with their clients.

An interesting part about the survey was it said that 60% of respondents cited overpaying as their number one hurdle facing them when they bid at an auction. I’m not surprised by that. In fact, I would have thought it might have been a little bit higher, but that would come largely from people who are actively bidding at an auction.

Cate Bakos is a buyer’s agent. She works in the Melbourne market and has her own company called Cate Bakos Buyer’s Agency. She joins me to talk about this.

Good morning, Cate. Thank you for your time.

Cate:  Thanks for having me, Kevin. Nice to be back.

Kevin:  I’m talking to you because Melbourne is the home of auction in Australia. That’s the place almost where it was born and where it continues to flourish, and that’s the most popular way for people to buy and sell property.

That 60% figure: what should people be doing, if that’s their biggest concern, to make sure they don’t overpay, Cate?

Cate:  It’s a great question. People often wait until they’re in the heat of the moment and they have a guy yelling at them with a gavel in his hand and a hundred onlookers standing at them, and that’s when they make their critical decisions.

Facing an auction can be quite a nerve-wracking thing for a lot of people, but when you’re there and you have a critical couple of seconds to make a decision, that’s when things can go pear-shaped.

Obviously, people who have been in the market and looking for property have probably attended quite a few auctions and they’ve seen those results where two emotional buyers fight it out. And it’s the auctioneer who’s in control of that situation, not those buyers. They’re the occasions where you see a really strong, crazy result that gets talked about by the neighbors for a long time.

People are terrified of doing that. You do want to buy, and under competitive competitions, you need to be strong, but nobody wants to set the land speed record for a house sale under pressure like that, so it’s a very, very significant fear for plenty of people.

And it’s not just relating to paying too much and doing so in front of a sea of people, it also is all about how they pay for their property if they’ve gone over their designated budget, and also being concerned about what the bank might say, because it is unusual, but there are occurrences where lenders will decide that the buyers have paid too much and the valuation can come in short. So, it’s a serious issue and there are ways to try and mitigate that happening to you.

Kevin:  Overpaying at auction is, as you say, a very real situation – so much so that agents who when they’re selling the auction concept to a seller will say, “Look, if there’s any chance of us getting a premium price, we should take the price offer then take it to auction,” because that competitive bidding brings out that premium price.

Have you got a rough feeling as to how many properties you think would actually achieve a premium because they went to auction, Cate?

Cate:  Absolutely. In the seller’s market where we have auction clearance rates around 80% in Melbourne at the moment, most properties that are mainstream and don’t have issues that are putting off mainstream buyers are going above and beyond where expectations are set. We’re seeing records being set every weekend in this moving market, and even agents are quite surprised by some of those results.

But the houses that typically achieve really strong results are the ones that are crowd-pleasers and particularly if they’re on the market without other similar houses threatening the success of their sale.

In other words, if it’s a bit of a scarce diamond for its genre, you’ll find the number of buyers on that property will be higher than normal, and you might have ten competing bidders fighting it out. That’s a lot of bidders for a successful campaign.

Kevin:  When you’re in the heat of the moment and you have people watching you, it almost becomes a bit of an ego thing as well, and you have maybe your wife or your husband sort of digging in the ribs and saying, “Come on, just another $1000 is not going to make all that much difference; let’s make sure we get this house now.”

Especially the fear of missing out, that’s heightened in the market right now, Cate, isn’t it?

Cate:  Yes, it’s huge. I know as a buyer’s agent when I go into an auction scenario, I’ll quiz the agent about who I might be up against, and when the agent says, “Oh, we have this couple; they’ve missed out on quite a few,” that’s a warning bell for me because they might have that fear of missing out motivating them to go above and beyond.

Often, those crazy prices and that squeal of elation is from someone who has missed out a few times and they have paid a crazy price but they’re just pleased the job is done. We are seeing a lot of that out there.

But as I said earlier, there are things that a sensible buyer can do to avoid being in that situation where they are overstretching themselves or getting competitive or just bidding to get the job done as opposed to bidding sensibly to buy the right house.

Kevin:  Yes, you have to do your research. But I’d like to take you just in another direction, if I may, in terms of bidding strategy. When you’re bidding on behalf of someone, could you tell me about the strategy?

How many prices do you have in your head? Is there a price that you know that if you secure that, you’re doing really well? Is there a market price, and is there a price that you’re probably prepared to pay a premium for? Do you structure it that way?

Cate:  I actually do. I call it our X-Y-Z pricing, and I came up with that concept a while ago when I had two buyers tell me that they had given me the uncomfortable stretch. That was the stretch price at which they are happy to see it sell to someone else for a dollar more. And in fact, that wasn’t their stretch price, because I was bidding and my phone was going off with texts saying, “Go another five, go another five.” That’s not how I like to roll, because they’re not in control then and they’re potentially emotional.

My X-Y-Z relates to obviously three sets of prices, and X is the price that we’d like to get it for that’s within the realms of possibility if competition is low and the vendor is motivated. That would be a thrill for me to come in at X, particularly in this market.

The Y price is where we think it is probably going to land based on the scarcity of the property in the market that we’re in, the number of buyers who are showing interest, the comparable sales, and where we think it really sits. If we come in at Y, then there shouldn’t be any surprises. I’ll feel that I’ve read the market well and the job is well done.

The Z price is where it could get to with strong competition, and it’s that price tag that the client really is prepared to stretch to – with a bit of discomfort, but not a price tag that will throw them into an awkward situation or an upsetting situation. So, it’s the price at which for a dollar more, they really are okay to see someone else secure the asset.

Kevin:  Yes, it’s a really difficult situation. I had a young chap call me just the other day who was preparing to buy a property for himself, and he said, “Look, I’m not prepared to pay any more than $650,000 for it,” and I said, “Okay, so that means if it sold for $660,000, you wouldn’t be upset.”

He said, “Yes, I probably would be,” and I said, “Well, therefore you are prepared to pay more than $650,000.”

I think that that question, “How would you feel if you found out the next day that it sold for $1000 more,” and if your answer to that is “Well, I couldn’t care less,” then you’re at that limit.

Cate:  That’s the right price, that’s exactly right. I often say to people if you come second – you have the silver medal; obviously, there’s only one prize – someone else will buy that property probably for $500 or $1000 more than you, because that’s how auctions work. It doesn’t mean that you missed it by $1000; they might have had another $50,000 up their sleeve.

But you have to draw a line in the sand and have a figure at which you’re okay to say, “At a higher price, I could get a better asset, or at that figure, I’m in financial discomfort and it’s not appropriate, or I don’t think that house is worth a cent more to me.”

Kevin:  Yes, it’s a great question to ask yourself.

Cate, it’s been fantastic talking to you. Cate Bakos, a buyer’s agent out of Melbourne, and that report coming out of the Real Estate Agents Buyers Association of Australia. We thank them for providing that to us as well.

Cate, thanks for your time.

Cate:  Thank you, Kevin.

 

Why I don’t chase hot spots – Chris Gray

Kevin:  A question I’m asked all the time is, “Is there really a hotspot?” I guess this comes about because people love to think they’re going to get there before the rest of the crowd. I’m interested to know about this, and it’s a conversation I’ve had a number on a number of occasions with Chris Gray, who is a buyer’s agent from Your Property Empire and also a host of the Sky TV show of the same name, Your Property Empire.

I wonder, Chris, does this come up in your dialogue with people, as well?

Chris:  You’ve hit the nail on the head there. Everyone wants a bargain, everyone reckons they got it for the cheapest price, and everyone thinks they got into the right area – the next up-and-coming one – at the right time.

Definitely, there are hotspots around Australia and around the world, but it’s like picking stocks; if you really are a genius and you can pick the lows and highs, you can make a fortune probably even if the market is going down if you pick the right kind of properties. But even the experts at Residex, RP Data, and SQM Research, most of those guys say they can understand trends but they can’t pick the peaks and the troughs.

I’ve been buying property for 20 years – we buy maybe 50 or 100 per year – but we don’t try and do that. Most of our clients are generally higher income. They’re not trying to get rich overnight. They know that slow and steady wins the race, so more they’re going for the classic Bondi Beach in Sydney or St. Kilda down in Melbourne, and they’re trying to say, “I want nice consistent growth. If a GFC comes up, I don’t want it to halve in value. I don’t expect it to double, but a nice 5% or 10% forever suits me.”

Kevin:  I remember back, and I’m sure you would too, several years ago when one of the major hotspots was anything around a mining town, and I guess you only have to look at some of those now to realize that while they may have been hotspots in their time, they can also crash as fast as they can go up.

Chris:  That’s the problem. We’ve had lots of clients who have gone to the seminars and gone to the various property expos – you can always tell what the flavor of the month is by the property expos, whether it’s U.S. property or mining or whatever else – and they’re saying, “I’ve got 25% yield and X percent growth,” and all the rest of it, but now they’re potentially getting zero yield and suddenly their $800,000 property is only worth $400,000.

That’s the thing. A lot of the seminar people have all the knowledge and they know what they’re doing and they’re getting in and out at the right time, but unfortunately the average punter on the street quite often is getting in a few years too late and they’re going to miss the boat.

Kevin:  Generally, I find people who are looking for hotspots are really looking to get in and out quickly, as opposed to the strategy you’re talking about there, which is blue-chip, which I guess is buy and hold. Chris, is it?

Chris:  It is. You do a regular radio program, and I do a regular TV program. The hardest thing for me is to try to talk about something new, because in my mind, in my book, nothing has changed for 10 or 20 years, because those suburbs haven’t really changed. We just buy when we have the cash to buy and we hold on.

It’s not sensationalism; there’s nothing newsy about it. It’s kind of boring. They’re not the most beautiful properties. They’re the ones a block back that are kind of dirty and old, but they’re in the best locations and we can improve them.

It’s not newsworthy type stuff; it’s the old hare and the tortoise. The tortoise just keeps going, but at the end of the day, it reaches the end. Whereas if you’re the hare, maybe it works out one decade, maybe it doesn’t work the next.

Kevin:  Chris, with blue-chip types of properties that you’re talking about there, are they all necessarily inner-city properties, or do they vary in their location?

Chris:  My philosophy from going to lots of seminars and reading lots of books is that I typically avoid the CBD because there’s no limit of supply – generally, you can keep building these massive towers – and there’s limited demand, because not everyone wants to work in the heart of the city, especially when they have families and they want fresh air and everything like that.

I’m an advocate of going the 5 K to 15K – or 2K to 15 K in certain suburbs – to get the area where there are three-story-high limits, so there’s no more supply of property. All the properties are built up next to each other, so you can’t physically build another property. There’s lots of demand from the young professionals, the 25- to 35-year-old suits who will always have jobs because they’re young and adaptable. They probably have wealthy parents, as well.

They might be earning $75,000 to $100,000 each, so you get two people in a unit and they’re earning $200,000 or $300,000. That’s why these young people can afford million-dollar properties and million-dollar rents – because they’re earning a lot of cash.

From what I’ve heard from Residex, who has come my show for donkey’s years, he says affordability is a problem around Australia and around the world, but it’s not in these suburbs because these young kids have cash and they have cash to spend.

Kevin:  It’s always good talking to you, Chris Gray. You can catch Chris, of course, on Sky TV.

Chris:  Fridays at 6:30.

Kevin:  It’s called Your Property Empire, Fridays at 6:30. Chris, great talking to you. Talk to you soon.

Chris:  My pleasure.

 

Stop playing at making property affordable – Michael Yardney

Kevin:  There’s a lot of talk about how we can make housing more affordable in Australia, and with it, comes a lot of tinkering around the edges. And we wonder – well, I wonder anyway – just how helpful that really is going to be in achieving what everyone wants to try to achieve, and that is making housing more affordable.

But is it going to be possible? And what will be the likely impacts of that? Michael Yardney joins me to talk about that from Metropole Property Strategists.

Hi, Michael.

Michael:  Hello, Kevin.

Kevin:  This is a conversation you and I have had on many occasions, and no doubt, you’ve had it with other people as well. What’s your view on this, Michael, this tinkering around the edges? Are we going to be able to make housing more affordable?

Michael:  Well, first of all, let me explain my position. I have in my blended family, six kids and nine grandkids and one on the way. So, I’m definitely aware of the challenges that young people have, and I have a number of generations below me that I want to be able to live in good housing, in a fantastic country, in big capital cities.

But having said that, I think we have to change our expectations, Kevin, because if you lived in London, if you lived in Paris, if you lived in New York, you wouldn’t really expect your children to be able to buy a house as their first house, and even you wouldn’t necessarily be able to expect them to buy an apartment first off either, Kevin.

Kevin:  So, what are you saying? That it has become unaffordable for first-home buyers?

Michael:  If you talk about our big capital cities of Melbourne and Sydney – which are international cities, coming up to five million people in them, situated on a harbor, commerce hubs, employment hubs – it is getting more and more unaffordable, and it’s likely that there will be generations of people who will never be able to own a home and who will be renters.

Many of the things that the government are doing are exactly what you said a moment ago, Kevin – tinkering around the edges – but in general, every time the government or Treasury gets involved, it actually has the wrong effect; it pushes houses up.

Kevin:  What about the first-home owner’s grant? What does that actually achieve?

Michael:  Kevin, in the beginning of July this year, Victoria has new first-home owner’s grants and getting rid of stamp duty. And what it’s doing is that currently, first-home owners are not buying. They’re holding off because all of a sudden, they’re going to be given an extra $10,000. And similarly, I know a number of sellers who have decided, “I’m not going to sell, because I know property values are going to shoot up in July.”

The problem is we have to look at the past, and politicians have forgotten to do that. In 2010–2011 when the first-home owner grants were given in New South Wales and there were stamp duties abolished, what it did was it gave first-home owners an extra $10,000, $15,000, $20,000.

What they were able to do was use that for leverage when they went to the banks, because they had more deposit because they didn’t have to put it aside for stamp duty, and they had another $70,000 or $80,000, which they paid for houses. And in general, first-home owners want to live where the action is, so they buy established properties. Somebody has to sell those, and those owners upgraded.

So, the first-home owner grant became a second homeowner or established homeowner boost, and what it did was give a fantastic boost to the established property market in the inner and middle ring suburbs, and I predict the same is going to happen in Victoria this year.

It’s not going to make properties more affordable; it’s going to keep this good, strong property market in Victoria even stronger.

Kevin:  Just a comment on negative gearing for a moment. I would say it’s probably one of the most unpopular taxes, but we really do rely heavily on private investors, and without it, you’d have to say that private investors probably wouldn’t be as attracted to the market and therefore rent would likely go up. And that’s certainly not going to achieve the outcome anyone wants, Michael.

Michael:  The outcome people are wanting is more affordable housing, but when 70% of Australians own their own home or are paying it off, the only way to make your and my house affordable to other people is to decrease the value of your and my house, Kevin – and nobody likes that or wants that.

So how do you make housing more affordable without decreasing the value of that $6.9 trillion worth of residential real estate in Australia? One way people say is get rid of the ugly, greedy investors who are pushing up the prices because of negative gearing. That’s fiddling at the edges, and as you say, we still have to provide rental accommodation for a third of our population.

The other thing is they say, “Let’s get more supply. Let’s go to regional Australia. Let’s have fast trains. Let’s have more employment out in the regional areas.” But that’s not where first-home owners want to live. In general, they want to live close to all the amenities, close to all the action, and close to where their friends are. And we’re not building enough of the right sort of properties for them, Kevin.

Kevin:  So bottom line, Michael, what do you think is the answer? What do you think is likely going to be the outcome?

Michael:  It’s a cliché, but it’s a First-World problem. It’s one of the prices you pay for living in the best cities in the world. Melbourne for six years in a row has been voted the most livable city in the world. Sydney and Perth and Brisbane have been high up on those lists as well.

It’s one of the costs that comes with the pleasure and enjoyment and comfort and safety of living in Australia, Kevin.

Kevin:  So, your advice to young people?

Michael:  Save, consider rent-vesting, consider borrowing from the bank of mom and dad. Don’t give up. Maybe you should just lower your expectations of what your first home could look like.

Kevin:  Yes, I think that’s probably the message, isn’t it – lower those expectations and do whatever you have to do to get into the market.

Michael:  You have to get in the market because if you don’t, it’s going to run away from you. You’re right, Kevin. Thanks.

Kevin:  Absolutely. Great talking to you, Michael Yardney. Thank you so much for your time.

Michael:  My pleasure.

 

Small property development 101 – Nhan Nguyen

Kevin:  My featured guest this week is Nhan Nguyen. While studying a bachelor of science at university, Nhan read Rich Dad, Poor Dad by Robert Kiyosaki – I guess a lot of people can trace their early starts back to that book as well – and from that moment, his grades started to decline as his passion for property really started to emerge. His biggest learning from the book was don’t work for money; have money work for you.

After university, Nhan took a role with a property education company, where he received a real education, learning how to do deals, qualify leads, and look for opportunities. Nhan also learned how to tie up opportunities with little money – and you’re going to be fascinated when we talk about some of the ways that he does that – and then on-sell the properties at significant profit.

Then at the age of 23, Nhan quit working for someone else, and in December 2003, he moved into full-time investing, which is when he established Advanced Property Strategies. He’s now done more than 100 deals worth $30 million in total in the past 24 months alone. He’s done 29 property transactions just over the last two years using none of his own money. He tells us how he does that. Nhan is also the founder of Green Mint Property Group, focusing on property investment and development. He is my guest and joins us.

Nhan, lovely to have you in the studio.

Nhan:  Thanks, Kevin. Appreciate you giving me the opportunity to be here and join you.

Kevin:  There’s so much we can learn from you and your experiences over the years, and I have interviewed you on a few occasions. The first question I want to ask you, Nhan, we all know that property is cyclical, but is this the time to hold property, or can you actually make good money out of buying it, doing something with it, and then flicking it over?

Nhan:  Absolutely. That’s a question I get all the time. I suppose it really depends on what city you’re in, because every city has a different time in the market. We talk about the property clock. I’ve been reading recent valuer’s reports and some cities are about to peak, some cities are about to come out of the doldrums there.

I was reading about Perth. They were talking about how the market is close to the bottom and potentially coming up. Townsville is another place that’s really, really flat and with the potential to come up as well.

I believe that buying and holding versus developing has two parts to it. Holding is if you think there’s a bright future in the marketplace, definitely. In the Brisbane marketplace – which I’m very, very heavily invested in – I know that we’ve had a good run for three to four years now. I’m looking at selling a few of my properties just to take my money in so that I can do other things with it. Sometimes other people look at selling if they want to get the capital back and reuse the debt, because one of the things that people get stuck on is serviceability and they can’t borrow more.

So, considerations are threefold. One is where are you in the marketplace and the timing? Two, can you use that capital for other things? And three, do you have a serviceability issue, or can you borrow some more or not? Potentially thinking about it that way.

Development is always prolific. There are always times and opportunities to make money through development.

Kevin:  You said reusing your debt; is that what you look at? Do you look at pulling the debt out of one part of your portfolio and looking at another area where you may be able to gear it a lot higher? Is that what you’re talking about?

Nhan:  Yes, what I mean by that is let’s say you own a property and it’s worth $800,000, and you owe $500,000 on that and you have $300,000 in equity. If you sell that property down, it allows you to go back to the bank and borrow another $500,000. Most people might have a limit of $1.5 to $2 million worth of borrowing. So what I mean is being able to use that leverage into another property that may give you a better return because you’re buying in at a better price.

Kevin:  But there are times when I guess you’d hold on to that property and use the equity – you have that $300,000 – and gear against that. How are the banks looking at that, and what sort of gearing can you get out of, say, a $300,000 lump of equity?

Nhan:  That’s right. Generally the banks at the moment, on an investment level, they’re looking around about the 80% loan-to-value ratio, or LVR as they call it. With that, let’s say the property is once again worth $800,000, you go 80% against that, which is $640,000, and you already owe $500,000; you can pull out roughly $140,000 on that to buy another property.

I do believe, however, in not always gearing up in refinancing, simply because that $140,000 is still debt, as opposed to selling some of your portfolio down and keeping some. So I’d talk about selling some, keeping some, and not necessarily selling everything and not necessarily holding everything.

They talk about buy and hold which is a strategy, but some people apply that as the only strategy, which I think can be dangerous, simply because the more property you buy and hold, you have an exposure to debt. If interest rates go up – which they have been, especially for investors in the last three to six months with some of the interest rate rises – you can be exposed.

Yes, it’s a balancing act, and it depends on what your outcomes are as well.

Kevin:  Yes, because if you are gearing that high, of course, you’re going to be relying a lot on negative gearing, and with so much talk about the possibility of some changes to negative gearing, you’re going to be highly exposed, I would have thought.

Nhan:  Yes, exactly. One of the things Warren Buffett often talks about is buying, holding, and never selling. I believe that in an environment where you have debt… Berkshire Hathaway, they don’t have debt; they basically have investors, and it’s all capital, it’s all cash.

In a business or in a project where you have debt, it’s a balance between selling some and holding some, and using that money to make it work for you and not just gearing up, because property is capital-intensive and you will run out of either serviceability at one stage or you’ll run out of capital at another stage because you’re just all in. Every time you buy a property, property is very capital intensive.

Kevin:  Have you got a benchmark for your loan-to-value ratio in your portfolio? Is there a level you like to maybe not exceed?

Nhan:  Yes, absolutely. When I was starting out and I bought my first property, I didn’t have a lot of cash, a lot of equity, so I borrowed as much as I could – 95%, 97%. These days when I’m buying property, I’ll go to the bank and we might borrow 80% just to get into the deal and we’re not paying lenders’ mortgage insurance. It’s not because of anything other than it’s an expense that I believe that if you have enough capital, it’s unnecessary.

In my portfolio, sometimes we’ll push 50% or 60%. As your wealth grows and you have more equity and more cash and more cash flow, it’ll pay itself down. Sometimes it’s lower, sometimes it’s higher, just depending on the project.

I did a land subdivision in 2015 where the bank was going to lend us $1.8 million. The valuation came in, I think, $3.4 million for the total project. That was just a little bit over 54% on the loan-to-value ratio.

So it depends on the project and it depends on individual circumstances, but I prefer to keep my LVRs – or loan-to-value ratios – down, just because I don’t want to be at the whim of interest rates when they go up.

Kevin:  Do you think this is the time to drive your LVRs lower?

Nhan:  Like I mentioned before, I personally think those three things are critical. The fourth thing might be in the time of your life. Some of you might be wanting to go into a retirement phase and want to capitalize and get your cash back so that you can spend that capital. I think LVRs are one of those things that is dynamic. I’m not going to say definitely bring It down; I’m just saying to manage your interest rates, because if they go up…

Basically a big topic everyone like Malcolm Turnbull and Scott Morrison are talking about is housing affordability and how they can bring that back and they banter back the negative gearing. If they basically hand-brake the negative gearing, that can affect the market terribly as it had in America. I think it was the late 1990s when they did that. They basically scrapped negative gearing, and the market just went into freefall.

Kevin:  How do you go about finding the properties?

Nhan:  One of the key sayings I use in my training is “You make your money when you buy, not when you sell.” That can relate to when you’re buying a house to live in, or an investment, or a development site. A key part of this is knowing what the market values are.

If you’re looking at buying a car and you know it’s worth $20,000, how can you get that car for $12,000 or $15,000? People trade in their cars all the time at a wholesale value and then it gets sold at a retail value.

It’s the same thing with houses, and so if you’re looking at buying a house and it might be worth $350,000, how can you get it for $300,000 to $320,000 so that you make your money when you buy?

There are a handful of strategies that I use there. Firstly, I look for a motivated seller. I look for someone who’s genuinely looking to sell quickly and might want to settle in 30 days, and I can help them move on that transaction but the house might need a bit of work. It might need a paint job or it might have some termites in it. So I’m definitely looking for motivated sellers.

The other thing is if I have to pay retail I look for what we call a free block of land. So it might have a big back yard, it might be on a corner block. One of the sites that I bought recently on the south side, about 16 kilometers out, is zoned for units and townhouses and the owner wasn’t aware of that and he didn’t really care. He just wanted to sell the property.

I bought the property and I cut it from a one into a two on a corner block. It’s about a 600-square-meter block and you might think this is crazy, but I cut a 184-square-meter block off the corner there and I found a buyer for it.

My point there is looking for either a motivated seller who wants to sell now and you can get it at a low price or you’re looking for another upside, which is what we call the free block of land to add value – like a big back yard or cutting a block off.

Kevin:  How do you find these people?

Nhan:  There are a handful of ways to do that. One is you can talk to a real estate agent and tell them, “I’m looking for a deal. I’m looking for an opportunity to develop. I’m looking for a motivated seller.” That’s definitely one way. The other ways that we use are off-market, where you can door-knock, you can send flyers out, you can send letters out, to property owners directly. That is my preferred option, especially if the marketplace is hot.

I have clients in Sydney where you go to auctions and you get outbid all the time, but if you’re approaching owners directly, you’re not being outbid, you’re not being out-negotiated or competing with other buyers. Those are a handful of ways.

Kevin:   I imagine in that scenario, being a real estate agent and knowing that that’s how they prospect, there are a lot of dry gullies, aren’t there? You put a lot of flyers out there, send a lot of letters, you’ll get some calls, people who are just interested in knowing what their house is worth. You obviously have to go down those dry gullies.

Have you ever thought about how many people you have to contact to actually get a deal?

Nhan:  Yes, absolutely. As an example – and I’ll give you some statistics here – in the last 12 months alone we sent out roughly a thousand letters and we’ve purchased three properties, and we’ve sold one of them. I made a quick $60,000 on that. The last two projects, we’ve projected around about $250,000 to $290,000.

Kevin:  It’s a very good return on a thousand letters. Would that be because you really target the areas that you go to?

Nhan:  Absolutely. This is not just a blanket approach, because you’d be sending out brochures or flyers to any Tom, Dick, or Harry, but really this is a targeted approach into targeted areas that we are experts on.

That’s the other part of it: when you’re buying any property or any item, you need to become an area expert. You need to know your item or your zonings, you need to know whether there’s flooding, is it too close to the train line, the noise corridors? There are so many aspects of it that you need to consider.

For example, if you’re looking to do renovations, you wouldn’t go into a new suburb; you’d go into an older suburb with a lot of Queenslanders or a lot of timber houses that potentially need a lot of work.

We generally focus on a zoning called a low-to-medium residential, which has a lot more potential for unit and townhouse developments, and there’s a lot of upside there, whereas there are a lot of people looking for double blocks out there – which is great – but I’m looking for a different angle where I can add a duplex at the back, I can subdivide the blocks off smaller, I can potentially build a block of five to ten apartments in the future.

Kevin:  It’s very important what you say about becoming an expert in your local area – not only that but also understanding what those zonings are. That zoning you mentioned there may be applicable in one area, but if you’re looking at even a different council area somewhere else in Australia, a different state, they’re all very different. You have to become an expert in that area.

Nhan:  Exactly. Like I mentioned before, I have a client in Sydney. She’s looking at a zoning called R3, which is a multi-unit dwelling as well, and there are limitations there.

So you need to become an area expert wherever you are – whichever city, whichever state.

Kevin:  When you get a call from someone who receives one of your letters and they show some interest, what sort of conversation do you have with the owner? You mentioned there that you’re trying to find out their motivation. Tell me about some of the conversations.

Nhan:  Some of the conversations start with “Have you tried to sell your house recently? Why are you returning my call? Have you tried to sell your house previously in the last 6 to 12 months? Is it rented?” just to find out more about the owners themselves. Are they working? Are they looking to sell now? And then we slowly broach the aspect of price: “How much are you looking for?”

One of the things that we aim to do is test their motivation. We need to be able to see if it’s worthwhile having a further conversation with them, and we ask “Why are you looking at selling? Are you looking at selling sooner rather than later?” One of the other key questions we ask them is “What‘s the least that you’d consider?” Basically it’s a negotiation just like buying a car or selling anything else: “What’s the least that you would take?”

And like you said before there, Kevin, 99% of the time they are dry gullies and we’re not concerned about that; we’re just looking for the diamond in the rough.

Kevin:  I imagine some of those dry gullies, too, would come to something at a future time. Do you keep in touch with some people?

Nhan:  Yes. I think it’s very, very important not to think that just because you’ve sent out a letter or had a door-knock and you’re having a conversation with an owner that they’ve said no. You have to get that it’s just no for now and eventually, they have to sell. Like it or not like it, eventually we have to sell our properties because you’ll move on at some stage – whether it’s the next 10, 20, 30, or 50, years, the property is going to be transacted on.

We had a recent transaction where we’d spoken to them in February and they said, “Yes, we’re keen to sell but we’re not keen to sell now.” It’s very important that you ask the sellers that before they list with an agent and before they sell, just to give you a chance to have another go, have another quick conversation before they list on the market. You just want that first dibs. Once it hits the Internet or once it hits a real estate agent, it can be gone forever. All you want is the first dibs.

Kevin:  Nhan Nguyen is my guest from Advanced Property Strategies. We’ll take a break and come back after that, and we’ll talk more about becoming a property developer.

 

How to find the best deal – Nhan Nguyen

Kevin:  We’re back with Nhan Nguyen from Advanced Property Strategies. Nhan is giving us some tips on becoming a small property developer.

I wonder if you could just share with us a couple of stories, Nhan, about people you’ve worked with and what you’ve seen them accomplish.

Nhan:  Yes, absolutely. A couple of clients who’ve worked with me who have applied the strategies: a guy named Graham, who’s out in the Ormiston area, bought a splitter – which is a site already on two titles – and knocked down the house. He made a quick $60,000 in a period of 10 weeks.

Because it’s already on two titles – we called it a splitter – you can get in, you can get out, and get paid. Because it’s already on two titles, it allowed him to get in and get out quite quickly there.

I had another client recently in Kenmore, Kate, who bought a house that had a lot of termite damage in the property. She bought it in the high $400,000s, spent a good chunk of change on the renovations, and sold it in the low $700,000s to make about $80,000 or $90,000.

It’s about having a clear exit strategy in mind and with a mindset of getting in and getting out and getting paid.

Kevin:  Just because it’s on two lots doesn’t necessarily mean you can get two houses on it, either. It depends on the type of house that’s on there and whether or not it can be removed or shifted sideways.

Nhan:  Exactly. And there are a few things with the splitter as we talk about. One is the house might be under a demolition control or character precinct – you may not be able to remove the house – or the blocks themselves might be what we call widow blocks, which may be on two triangular blocks as opposed to two rectangular blocks.

Kevin:  Are there many of those around anymore, the widow blocks? That’s where it goes diagonally across. You’d need to get a realignment for that?

Nhan:  Yes, exactly. So imagine a 20-meter wide block with a 40-meter depth and from one corner to the other corner you have two triangular blocks. That’s what we call a widow block.

Kevin:  You know why they’re called widow blocks, don’t you?

Nhan:  I’ve heard, but I’m not sure if I believe that story.

Kevin:  What is it? What did you hear?

Nhan:  They said that before people went to war, they changed the lines or the dimensions of it so that the widows wouldn’t sell the blocks while their husbands were away.

Kevin:  That’s exactly what I heard, too. And I don’t know whether it’s true, but it’s a fascinating story.

How hard is it to become a property developer? You and I were just talking about the fact that you have a course that runs for about two years. So it’s all about education, Nhan?

Nhan:  Absolutely. We teach people how to do it themselves. We call it the Fast-Track Mentoring Program. It’s about small developments being made easy.

There are so many different ways that you can do development. You can do townhouses, you can do removal homes, you can do subdivisions, you can do splitters, structural renovations. We break it down. And the majority of our clients like to start small. They might do a cosmetic renovation, they might do a one-into-two subdivision. That’s what we teach people how to do.

Kevin:  If I decided to do it now, the process of education, how long would it be before I could start putting deals together?

Nhan:  If you get the education right, you could be in the marketplace in two to four months really, really quickly. That’s assuming a couple of things. One is obviously getting the right education, but secondly, you have to be deal-ready and market-ready, as we call it. You have to get your finances ready. Maybe you have to get your pre-approval with a finance broker so that you’re able to purchase.

In two to four months, you could be in a deal, and two to four months later, you could be out of the deal if you knew what you were doing. We encourage people to think big but start small. Just start with something small – a sub-$600,000 purchase ideally.

Kevin:  What sort of research tools do you recommend people should use? There are lots of excellent online tools. Are there any that you recommend?

Nhan:  Yes, sure. The basic ones that a lot of people use already are, for example, Google maps. That’s really great. Google Earth is another good tool. A handful of other paid subscription tools: ones like Price Finder or RP Data, are good databases with actual data of property ownership, property sizes, dimensions, sales history, and things like that. Those are important as well.

Going to another level of getting more specific information are the local property development tools that are online. What I mean by that is that Brisbane City Council has a PD online as part of their website. New South Wales has a planning portal. It’s called New South Wales Planning Portal. And you need to use those tools there.

Those are a suite of tools. Obviously you have to learn how to use them.

Kevin:  You mentioned there about understanding how they work. Does someone who buys into those tools get the same sort of information that a real estate agent would in terms of zoning and ownership and when they purchased and so on?

Nhan:  Absolutely. Those are the same tools pretty much that real estate agents use. However, you have to learn how to interpret that information. But if you don’t know how to use it – looking up the interactive mapping, looking up the flood maps, looking up the biodiversity – there’s not just the information, it’s learning how to interpret the information and use it.

Why should a property be disregarded? Because it might have this overlay or a noise corridor in it. Why should it be disregarded as opposed to why is there an opportunity there?

Kevin:  You mentioned earlier that it’s logical if you’re going to get the education, in maybe two to four months, you could be inside your first deal, and in another two to four months, you’re coming out of your first deal. In other words, you’ve made some cash flow. You’re looking there at anything from four to eight months before you can actually start to pull some cash out of what you’re doing. I know you do this full time. This is what you do.

How many people would be able to support themselves in this type of lifestyle, and how long does it take?

Nhan:  I say to people, I’d be wanting you to do that for ideally 12 to 24 months when you can make six figures before you can, for example, replace your job, because there are a couple of times there you might get started and you do a deal and you make $50,000 to $100,000, which is great. However, was it beginner’s luck?

Sometimes we have what we call Superman Syndrome where they might do a first deal and think they know everything and they go into another deal that is a little bit different and has a few different things that they are unaware of or they neglected to check because their ego got a bit inflated. So I do suggest between 12 and 24 months after you’ve done it consistently, made six figures consistently, then look at transitioning from your job.

That’s what a lot of our clients want to do. They want to transition away from their job. It might be because they just don’t like the hours or they like what they do but they just want to be able to do it because they want to do it and not because they have to do it and have other sources of income.

That’s what we help people generally do: replace their income doing property development.

Kevin:  Thanks, Nhan.

My guest has been Nhan Nguyen from Advanced Property Strategies.

 

 

1 Comment

  1. John c Reply

    Great interview with nhan ,I plan to print this off and give to my 4 children to read, as he points out the profit is in your buying not the selling anyone can buy a dollar for a dollar but if you buy a dollar for 80c you are already in front ,whilst I also apply this principle to my own real estate buying I also apply it to my business buying antiques and use the same principles of buying privately sourced as I do with real estate , sure it more time consuming but you don’t have to complete with other buyers and as nhan does I listen to the client as find a solution to their problem ,these principles can be used in many small businesses
    Thanks for re-enforcing the principles I use

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