05 Jun How would Warren Buffet invest in property? | Best buys in Brisbane | Property development tips | House vs apartment plus more
If Warren Buffett were to invest in property in Australia what would he do? How would he approach it? Michael Yardney thinks he knows and he tells us today. Success leaves clues and there will be lots in this chat with Michael.
Also in today’s show Shannon Davis of Metropole Property Strategists in Brisbane reveals the areas for best buys under $500,000 in Brisbane.
Nhan Nguyen tells us some tips and traps to completing a profitable property development and Patrick Bright answers a question from Monica about whether houses make better investments than apartment.
Zaki Ameer is a young property investor who at the age of 22 built a portfolio of 10 properties worth $10M on a very low income. Zaki shares his 7 tips for entering the investment property market on a modest salary.
And this week we talk to Eliza Owen from onthehouse.com.au about the feature article in the latest API magazine that reveals the top rental return suburbs in Australia.
Kevin: We had a question sent in to us from Monica. Thank you for this. Monica is simply asking whether or not houses make better investments than apartments?
I’m going to ask that question of Patrick Bright, who is a buyer’s agent from EPS Property Search. What’s your advice to Monica?
Patrick: It’s a good question, Kevin. I would say that yes and no would be the answer there, and in certain circumstances – because it depends on the market that you’re buying in, and it also depends on what the public and the buyers are demanding in those markets.
Kevin: Does it depend on not the type of market, but the market – as in the suburb – as to what type of buyer or tenant you’re going to be appealing to?
Patrick: Yes, exactly. If you’re looking in, say, a capital city, for instance – I know this because I know Sydney pretty well, I’ve been working in it for over 15 years – the market in the inner ring over a third of the suburbs, the capital growth, for instance, is better with apartments than it is with houses. If you go back 30 years ago, that was not the case. The market has changed, and it’s what the public and the demand is for, so you have got to have that aspect to it.
If you go out of a capital city, the majority of the stock out there is housing on larger land blocks. You’ll find – because I’ve looked at it – that those will do better than the apartments in a regional area.
Kevin: Those inner-city suburbs you’re talking about and some of the cap cities, we see they’re changing them as they want more density into some of these. They’re pulling down those houses and putting up apartment blocks. Obviously, that has contributed to that change as well, Patrick.
Patrick: It would have had to contribute. Yes, for sure. It’s the demand. It’s what people want. They want to live closer in. If you’ve traveled a bit and you’ve seen places like, for instance, Hong Kong and Singapore, it’s 90% apartments. People want the lock-and-leave lifestyle, they want views, they want all of that happening, and so if that’s where the demand is, that’s where the price pressure will be, and that’s where the growth will be, and that’s where the rents will be.
You have to have an awareness of the market you’re buying into, and where that market is going and where the future is of that market.
Kevin: Just to help Monica a little bit, is there a tipping point with the amount of stock? If you look at a particular suburb, for instance, and maybe it’s got 40% units and 60% houses, but there tend to be more units coming up, would that be an indicator for you that maybe it’s time to look at apartments, that that might be shifting a little bit?
Patrick: Maybe. Again, I would look at it carefully. Let’s pick on a suburb, for instance, Dee Why, which is on Sydney’s northern beaches. Now, apartments in that market, about 85% of that market is apartments, and about 15% houses. In that market, houses do better than apartments because there are too many apartments for the demand that you really want to be there.
There really isn’t a blanket rule that you can put to it. You have to really study the market, the type of people who want to be in that market, the demographics of it now and where it’s likely to go, and then make your decision based on that.
Is it like the Inner West? There are a lot of apartments being built in the Inner West, but still, terraces tend to outperform. Where you’re going to generally get better performance with an apartment is in an area often with views and some uniquenesses about it, and so that’s something you have to weigh in.
Kevin: Yes, history, of course, leaves great clues – doesn’t it – if you go back and look at the history of an area and analyze it. Over what period should you go back, do you think? Is it good enough to go back, say, three to five years?
Patrick: At least. Look, when I’m buying a property, I look at it this way. I look back even 20, 30, 40, or 50 years, and I say, “What was the prime real estate 30 or 40 years ago?” It’s generally the prime stuff today, and – guess what – it’s probably going to be the prime stuff in the next 30 or 40 years. That’s how I like to make my investment decision.
Yes, history leaves clues, but you also have to factor in where the future is going. If the future is going towards that type of product – say, a more apartment-style product – and you’re in the right location, you should do very well. Particularly, if you’re in a land-locked location, and you have something unique about it – you have got water views – that sort of thing is very appealing to the market.
Kevin: Yes, very interesting, mate. Thank you, and that’s certainly answered Monica’s question. Once again, Monica, thank you very much for your question.
Patrick, to you, thank you for joining us today.
Patrick: Pleasure, thanks, as always, Kevin.
Kevin: One of the big challenges for anyone wanting to get into property, of course, is how do you do it on a low income? My next guest is a man who did exactly that. Real estate expert, author, and Dream Design Property founder Zaki Ameer found himself in a foreign country with very little income and some quite hefty international university fee debts, yet he still went about building a ten-property portfolio totaling over $10 million. How did he do that at such a young age? He joins me.
Hi, Zaki. Thank you very much for your time.
Zaki: Hi, Kevin. Good to be here.
Kevin: Based on your experiences, you’re going to have some great tips for people wanting to do exactly what you did. I’ve read a little bit about what you did. One of the tips you say is go soul-searching. What do you mean by that?
Zaki: It’s important that everyone starting a journey – and that could be a property investor – needs to know exactly why they’re getting into property investing and be clear that they’re going to work through it during the tough times. It’s important to know exactly why. That could be simply to get out of debt.
Kevin: You mention also about having a mentor, and you mention a quote from Richard Branson, which is the link between average people and really successful people is that they’re those who have a mentor. Who has been the great mentor for you?
Zaki: I’d been introduced to a few around the age of 25, where they had very large property investing portfolios. When I looked at them, they didn’t have much of a background, so I thought, “If they can do it, so can I.” I learned from them, and that included an accountant and a property-investing developer who had large portfolios.
Kevin: You developed these people into a team. Do you still have a team?
Zaki: Yes. Our accountant is definitely on our team, and he advises all our clients on tax planning.
Kevin: I notice, too — and we’ve done a number of stories on this in recent times — about Gen-Ys and how they’re continuing to live at home, save up, and get into a property that way. Do you believe in that as a good way for young people to get into property?
Zaki: Yes. There is the aura out there that Gen-Ys might not ever be able to buy their first home because of the rising prices. Staying at home and avoiding rent and other expenses while you live off the family money is definitely one way to get into the property market.
Kevin: What do you think about partnering up with a friend or relation and going into a partnership in a property? Is that a good idea?
Zaki: In my personal view, Kevin, I would tend to stay away from it in terms of any partnerships, only because I see property investing as a long-term partnership. If you’re doing something to flip in the sense that you’re going to buy, renovate, and sell, which is a short-term arrangement, I’d have a strict, legal business agreement. However, in the long run, I would tend to avoid it, because there are so many changes and variables that could happen that will involve multiple people having to agree to make a decision on it.
Kevin: That’s very good advice. Just to round us out, I wonder if you’d tell me about your 50/30/20 rule, please.
Zaki: What I’m trying to say there is that from your salaried income, 50% needs to go into your essentials – and that could be your living expenses and day-to-day compulsory living expenses – and 30% should be little luxuries. It’s important that you spoil yourself and not go into living below the poverty line, so you want to have little luxuries. However, 20% of your income should be separated and going to a separate bank account that you don’t really have access to. That 20% is what you’re going to use in the future to start your investing journey.
Kevin: Zaki, I want to thank you for spending some time with us today. You certainly are an inspiration. I wish you success in the future. We look forward to talking with you again soon. Thank you for your time.
Zaki: Thank you, Kevin.
Kevin: There is an old saying that success leaves clues, and there’s no greater successful person in the world when it comes to investing than Warren Buffett. He’s 84-years-old, he’s consistently ranked amongst the world’s richest people, so let’s have a hypothetical look. If Warren Buffett were to become involved in investment in Australian property, what would he do? How would he go about it?
Interesting question. I’m going to pose that of Michael Yardney from Metropole Property Strategists. Michael, I know this must be something you’ve thought about, as well.
Michael: It’s a hypothetical question, and Warren Buffett clearly is one of my mentors. Nobody I’ve met personally, but I’ve followed his systems, I’ve followed his strategies. I think he would invest a little bit like I do. I know that’s being vain, but I’d like to explain why, Kevin.
Kevin: Please do.
Michael: Kevin, he has his own investment philosophy, which is very clearly defined. He tells people there’s no secret. He has a set of strict selection criteria:
- Rather than investing in the latest fad, he invests in tried-and-proven industries. That’s why he didn’t get burned in the tech wreck when everyone else did in the 2000s.
- Warren Buffett understands the importance of timing and counter-cyclical investing. He knows that patience is important.
- He doesn’t buy cheap companies; he buys great companies with strong values and strong brands.
- He buys companies cheaply, below their intrinsic value. He bought Gillette at a really good price. He bought Coca-Cola. He’s buying good brands, blue-chip properties and blue-chip companies.
- He buys companies with a strong upside potential.
- He invests for the long term. Kevin, he says something along the lines of if you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.
Can you see some common threads there, Kevin?
Kevin: Yes, I can. In fact, I’ve listened to you on a number of occasions talk about your strategy, so let’s apply what his investment philosophy is to Australian property.
Michael: This is, again, a hypothetical exercise, as you say, but I’m guessing what he’d do if he was to buy properties in Australia is he’s likely to look for five things:
- He’d buy properties in areas with strong capital growth prospects.
- He’d buy properties that he can buy for less than true market value, just like he does with shares, because he only wants to buy with a margin of safety there.
- He’d buy properties that are unique, that are special, that are different, something that creates a level of scarcity. You’ve heard me talk about the concept of property with a twist. Just like Buffett bought Coca-Cola because its brand makes it difficult for competitors to compete, you want to have something that makes your property stand out.
- Kevin, I don’t think he’d chase the latest hot spot. He’s not into fads.
- He’d also buy properties to hold in the long term and not consider trading or flipping.
Interestingly, there are some similarities between what Warren Buffett would probably do and what a lot of the successful people you have on Real Estate Talk do, Kevin.
Kevin: Yes. One of the things that stands out, for me, Michael, is that he doesn’t take a short-term view to it. You talked there about not flipping properties quickly, not looking for the latest hot spots, so therefore, not chasing the latest fads.
Michael: Right. Now, he also is a counter-cyclical investor, and that’s definitely one of my philosophies also. But once you become a substantial investor like he does, he doesn’t only wait for the counter-cyclical opportunities; what he actually waits for is the right opportunity, realizing that he makes his money not by buying a property or a share cheaply, but by buying the right ones.
Some really good lessons there for property investors, Kevin.
Kevin: One underlying lesson, Michael, is that you need to develop a strategy, and then you need to stick with it.
Michael: Can I finish with a good quote from Warren Buffett?
Michael: He said, “I’m a better investor because I’m a businessman, and a better businessman because I’m an investor.” I think that shows that a strategic approach that property investors should take – as I’ve often said – is treat your properties like a business.
Kevin: Indeed. Wonderful talking to you, Michael.
Michael, thank you so much for your time.
Michael: My pleasure, Kevin.
Kevin: About four or five weeks ago, we were talking to Nhan Nguyen from Advanced Property Strategies about what you need to know when you get started out as a developer. Many people want to move from just being a property investor with a portfolio to maybe developing your own stock. A great move, but there are some things that you need to be aware of.
Nhan Nguyen joins us again. Nhan, one of the things you said last time we spoke was think big but start small. Assuming we’ve done that and we’re now into it, what are some of the complications that we’re going to come up against and how do we make sure that we actually are on track to do a profitable property development?
Nhan: Thanks, Kevin. Thanks for having me.
Look, the word property development and being a property developer is a very widely used word, and there are so many ways that we could cover, whether we’re talking about a block of five units, three townhouses, or just building five new houses.
I’m going to just use an example of, let’s say, we’re going to build one house and sell it – what we call a spec home or a speculative home. In that instance, some of the examples of complications that you’re going to have to deal with is choosing what kind of design that you’re going to build. Is it going to be three bedrooms, four bedrooms, single story, two story?
Part of that is really going to come down to your market research on the local area, because if the area is a less expensive area, most people may probably only be able to afford a single-story home, which is cheaper, versus a two-story executive home. That’s the first thing.
Part of that is there are some many layers to consider, one of which is what is the layout? Do you do open plan? Do you put an office at the front? Is it single garage, double garage? What kind of tiles do you use? What kind of materials do you use on the roof? Is it corrugated iron or tile. Firstly, you have to consider the end target market and the product that you’re going to supply.
Moving on from that, one of the other things you’re going to deal with is choosing a builder. There are many display homes out there and many display villages, and going and investigating and getting referrals from your colleagues who may have built before is a very important step to find out which builder would be most suitable for you. There are a lot of builders out there, and some of them are shonky and some of them are great. It’s up to your due diligence to choose that.
Then the step after that is getting a build contract, getting finance, and making sure that you have enough funding for the project. Also, things go wrong – because being a developer, I know there’s a lot of upside, but there’s also downside if you get things wrong – so during the construction process, you do need to manage that, even though you may have never been on site before. You need to check out the builder, make sure he’s doing the project and on time.
Kevin: Nhan, a couple of excellent points you’ve made so far, and I think the one I want to pick up on is the selection of the builder. In fact, we’ve had some time put aside in this show to talk about what happens when you get a bad builder. That builder selection is absolutely critical to make sure that the development is going to come in on time and actually make you some money.
Nhan: Yes, it’s so critical. There are many builders every year who go broke, and the reason that they do go broke is that construction is not an easy process. I say it’s a 10,000-piece puzzle put together by 20 different people with blindfolds on, because oftentimes, they don’t talk to each other. They don’t communicate with each other.
They turn up. The tiler might turn up, and then this thing’s not ready. The electrician turns up, and the previous tradespeople didn’t tell him that they’re behind, and then they come back a week later. It’s a puzzle that’s put together, and you really need to look for a builder who’s been around five, 10, 20 years and has those teams and systems in place.
Kevin: And not accept, too, that the builder is going to be able to project manage the whole thing. I’ve seen many, many TV shows where people think, “Oh. I’m just going to project manage this myself. It can’t be all that difficult,” and within a matter of weeks, it comes unstuck because you don’t really understand what’s involved in managing a project of that size.
Nhan: Exactly. Part of it is that with working with a builder, you cannot control what is happening in the background. I’ve worked with a builder before, and he went bankrupt because he was spending the money on other frivolous things. He had money coming in, and in the first year, I think he signed up 20 to 30 build contracts, and he just got greedy and he misspent the money internally. His tradespeople were fine, his plans were fine, and his business ideas were fine. However, he mismanaged his cash flow.
When you’re choosing a builder, you cannot control what happens internally or behind closed doors and with his other projects. He might be a developer, and the bank might foreclose on his other projects.
I’m not saying this to scare people. I’ve just seen the dark side, and I’ve nearly been caught myself being involved with builders. For example, with the extension of our house, I watched the builder for ten years, literally, one suburb over to see how they would go through the GFC. Did they make it? Did they go broke? They’ve done well. Especially, because we’re extending our own place, I wanted to make sure that my wife was happy, and I wouldn’t get any long-term complaints.
Kevin: I guess one of the things is knowing what questions to ask or knowing what to look for. Perhaps that’s a subject for another conversation, I would think. We are out of time now, Nhan.
I guess the bottom line here is I know we’re sounding a note of caution, but it is something that you have to be experienced at, it’s not something you should take for granted, and make sure you do your homework.
Nhan: Yes. It’s very critical that you do your homework. I’ll write down a couple of points that we can go through maybe next week on how to choose a great builder.
Kevin: Okay, Mate. If you do that, we’ll come back next week with Nhan Nguyen from Advanced Property Strategies, and we will give you his tips on how you select a good builder.
Thanks, Nhan. Talk to you next week.
Nhan: Thanks for having me, Kevin. Talk to you next time.
Kevin: A regular feature in the show and – I know – one that’s very popular is where we look at different suburbs around Australia that are moving or where you can get the best buys. We’re going to look at SouthEast Queensland, specifically, into Brisbane. Where are the best buys under $500,000?
Joining us is Shannon Davis from Metropole Properties in Brisbane. Okay, our shopping list, Shannon, what can you recommend we look at buying under $500,000 in Brisbane?
Shannon: Kevin, the first one I’d say is just a New Farm apartment. I think if you can get a New Farm, say, a special one bedder, or you might sneak a two bedder still, there’s a really high owner-occupier demand. The market share always has more people wanting to buy than sell, and for people moving interstate, New Farm is always one at the top of their lists as a suburb to move into. It matches their type of living [0:47 inaudible].
For that reason, our investors have enjoyed great capital growth in those areas, and it’s still amazing to see its run this year, as well.
Kevin: What sort of profile are we looking at in that area for a tenant?
Shannon: You have young professionals, some empty-nesters that don’t want to move away, and you have lots of people in shares. They’re either walking to the CBD or driving and perhaps catching a ferry. But more importantly, it has everything that they want in recreation, such as green space, restaurants, pubs, and even clubs not far, as well.
Kevin: Okay, New Farm apartments. Where’s another area in Brisbane for under $500,000?
Shannon: I would move a little bit further out. If we wanted to get a house, a suburb such as Aspley, you can get something perhaps with renovation potential and a slightly larger block – 607. There’s still really great capital growth in that suburb. It’s well located to the airport, the freeway, and good schools, as well.
Kevin: Anything in townhouses?
Shannon: Townhouses: we have a really good track on it right now. They’re capturing people upsizing and capturing people downsizing. You can get a three-bedroom, two-bathroom, one-car park. A suburb like Coorparoo offers great value, has the upgrade from the Eastern Busway and the old Myer Center there. Really popular, again, with the demographics without kids. You have a strong lineup of tenants.
Kevin: Anything a little bit closer in, Shannon?
Shannon: Likewise, on the north side, Wooloowin is a suburb with plenty of upside. It’s a train station suburb. It halves the distance between the airport and the CBD, and that’s really popular. It has a good school catchment and some excellent green spaces around the Melrose vicinity in Kalinga Park there.
Kevin: Okay, a New Farm apartment, a Wooloowin townhouse, also a Coorparoo townhouse, and an Aspley house – good buying under $500,000 in Brisbane. Our man on the ground there has been Shannon Davis from Metropole Properties.
Thanks, Shannon. Thanks for your time.
Shannon: No worries, Kevin. Any time.
Kevin: The June issue of Australian Property Investor magazine is out now, and the cover story features Australia’s hottest rental suburbs. In his opening paragraph, Kieran Clair makes the point that smart investors understand serviceability of a loan could be the difference between securing the bank’s favor and getting a knock back.
OnTheHouse.com.au has actually run the numbers, and they’ve come up with the best opportunities around Australia. It appears there are almost 300 suburbs offering potential.
Eliza Owen from OnTheHouse.com.au joins me. Eliza, thank you so much for your time.
Eliza: Thank you for having me.
Kevin: Armed with the kind of results that are in this report – and it’s actually very, very comprehensive – how best can an investor use the data?
Eliza: What you have there is some one-shot data that displays the rental yields and median values for these suburbs. You can use those rental yields to understand affordability of a property purchase, and you’re using it to understand how much of a mortgage a tenant can help you to pay off.
It’s also a really good indication of the returns that are available from the property, as opposed to other types of investments. It really depends on the individual investor’s strategy, and they can use that data to aid them. Then the median values are important for knowing what areas you can typically afford to invest in, as well.
Kevin: In broad terms, though, what were the results when you looked at say cap cities compared to the regions?
Eliza: We found that in that list of suburbs, you’ll find that the amount of regional areas are somewhat less. But when you rank them in terms of their capital-growth performance and their rental-yield performance, you’ll find that regional areas tend to be concentrated at the top of that list. Regional areas perform particularly well in terms of rental yield because of their level of affordability.
Kevin: You mentioned affordability, Eliza. Just picking up on that for a moment, what were the other benchmarks that you used to determine whether an area is hot?
Eliza: You have to look at a combination of the numbers and also some qualitative data, so that you can gauge the story behind the numbers. We mentioned before historical performance. We want to look at long-term performance strength in terms of capital growth and watch out for volatility.
Another interesting one is population growth, to confirm that there’s a consistent demand in the area. Population growth is a proxy for things like employment, good facilities in an area, good access to transport.
The level of development and density: if an area has high density and is still in high demand, then you can probably expect good rental returns for a while, whereas if big developments go in, renters have more options and the opportunity to pay less.
Kevin: Just in closing, what would you class as an outstanding gross return, and how many areas actually met that criteria?
Eliza: A fairly good growth return in the current market, when you consider both capital growth and rental yield, is 8% for 2015.
Kevin: There you go. That great report is out now. It’s in the Australian Property Investor magazine, the current issue that’s out, presented by On The House.
This interview is just a small portion of the extended interview I did with Eliza. You can see that now on the Real Estate Talk website in the Australian Property Investor feature channel, and it was also an interview that was sent out by API in their latest newsletter.
But in the meantime, Eliza, thank you so much for your time.
Eliza: Thanks for having me, Kevin.