21 Jan Small is the new BIG – Ian Ugarte
A new property investing strategy that focuses on an overlooked segment of the market is attracting attention for the high rental yields it provides, while also helping to ease the housing affordability crisis. We talk to Ian Ugarte about ‘micro apartments’.
Kevin: A new property investing strategy that focuses on a very much overlooked segment of the market is attracting attention for the high rental yields that it provides while also helping to ease the housing affordability crisis.
The High Income Real Estate System, otherwise known as HI-RES, which is what we’ll refer to it as in this interview, involves the conversion of an ordinary house into multiple micro-apartments, which can then be individually rented to tenants at rates much lower than they would pay to rent their own house or apartment. The creator of HI-RES is Ian Ugarte, and he joins me.
Ian, welcome to the show and thanks for your time.
Ian: Thank you for having me.
Kevin: It’s a great concept. A number of things that I want to ask you about. Firstly, tell me a little bit more about HI-RES and how it has been developed.
Ian: Essentially, I was in a position where I had a new boss walk into my paid-and-loved job about ten years ago, and I was negatively geared and I realized that I couldn’t leave work, so I quickly turned that around by getting educated and going and becoming a positive cash flow person. I was out of paid employment within 13 months and became a full-time property developer.
Then I woke up one morning in 2014 with money in the bank and realized that I was unhappy. Interesting enough, I thought money was going to make me happy and it didn’t. It actually made me sadder.
So, we work towards making everything that we do… A catchphrase in our company is “It needs to make sense before it makes dollars.” It has to affect the community in a positive way, and secondly, it has to affect our dollars budget in a positive way as well. If it doesn’t do both, we don’t do the project.
Kevin: That’s a wonderful topic, and I do want to actually talk to you a little bit more about that. Can I just ask you before we do that, though, Ian, tell me a little bit more about micro-apartments. What do they look like and how are they made up?
Ian: A perfect size micro-apartment is somewhere between 22 to 35 square meters. There are policies across the country that allow you to convert an existing property and build new to have these micro-apartments in it.
Essentially, the major requirement of a micro-apartment set-up is that you have a communal residential area where people who have their own separate rooms – with their own en suite, with their own kitchenette – also have a main living area where if they choose to socialize with everyone else, they can. If not, they just go back into their own space and sit in their own space and enjoy their life.
Kevin: Is it a bit like a boarding house?
Ian: Yes, it’s exactly that. What we’ve done is we’ve taken boarding houses, rooming houses, communal residences – they’re named differently across the country – and we’ve taken them out of 1917 and we’ve put them into 2017/2018. They have high-end finishes, we have granite bench tops, we have wall beds that fold up into walls. And we’ve found a really great demand. The perception issue is a big thing around boarding houses, and I can tell you that that’s far from the truth.
Kevin: What about things like insurance? Anyone who owns a property and then converts it into micro-apartments, how are they covered for insurance?
Ian: It’s a definite thing that you have to have specialized insurance. We provide, through HI-RES, a specialist broker who looks after this area. Interestingly enough, I thought when I first started investing that it was going to be a really high insurance cost. It’s actually not much more than a standard residential insurance policy. It protects you and it’s multiple protection.
Plus, you’re generally furnishing those style of properties, so you have multiple covers in different areas as well as the liability cover because obviously you have more people, an increased possibility of being sued or someone tripping over and hurting themselves. But we do have that policy and it’s not that much more expensive.
Kevin: I’m just going to mention a website, which is smallisthenewbig.com.au if you want to get a bit more information about this concept. We’ll continue to talk about it.
I’m interested to know from your research and your experience, Ian, is there any one particular property owner who would be attracted to this type of investment? And if so, why?
Ian: I think that those people who are negatively geared and have worked out that their property is not the greatest investment that they thought it was going to be because of the cash flow every week actually costing them is something that they can look at really closely and really simply.
In most areas of Australia – and I’m working to change that with the advocacy work that I do – they can convert their existing properties into positive cash flow pretty quickly. In most areas, we can usually more than double the rent of a rental property in a low density area as soon as you do the conversion.
Kevin: How bad is the affordability problem in Australia?
Ian: It’s absolutely huge. We build the largest houses in the world in Australia at 246 square meters. We have two and a half people per household. We have 12 million empty bedrooms tonight. And we have an affordability issue because we have women over the age of 55 who are the biggest growing demographic of homelessness in the country – that’s what we call white collared homelessness –through no fault of their own.
We started building these and we got knocks on the door and they said, “We like the property that you’re providing because it’s much cheaper than the nearest rent, that you’re including utilities, and I feel safe in this house.”
The affordability of renting a smaller component of a house is much better for a resident and it’s much better for a tenant because it doesn’t act as a ratio. If I took a four-bedroom house median house rental in Melbourne of a four-bedroom is about $420.
As an investor setting those properties up as four separate micro-apartments, you’re probably going to get somewhere between $800 to $1000 a week. So, you’re providing a better outcome for a resident and you’re actually getting a great return on your investment.
Kevin: How much structural work is required in your average three- or four-bedroom home to convert it?
Ian: Around the country, it’s going to change slightly depending on the exemptions they have. You will require disability access requirements in most parts of the country to upgrade. Essentially, you may be talking as little as $8000 to $10,000 and up to $20,000 to $25,000, depending on what you require to maneuver – you need to do wheelchair ramps and a few things like that.
But somewhere between the $10,000 to $25,000 mark is what it costs, and your return on investment on that is just crazy as far as the percentage return is concerned.
Kevin: It sounds fantastic and I’m sure it is. You can get a lot more information. I’m going to tell you about some tour dates in a moment too, but smallisthenewbig.com.au is the website. It does sound fantastic, Ian.
Tell me about some of the down sides. Are there any difficulties in dealing with local councils?
Ian: Councils are usually pretty good if the policy is in place. Like I said, I’m advocating to making that change. We do have brilliant policies in Victoria, Brisbane City Council, the state government in New South Wales, the Tasmanian government. The South Australians are great. The Western Australians are great. The Northern Territory and ACT, we’re working at the moment. They don’t really actually have a policy around it, which is what we’re creating.
There is one downside, and the downside is at the moment, the lenders see this as a high-risk property. It’s actually a lower risk property because if you have no one in your investment property, you usually have zero rent coming in. If you have your occupancy at 60%, you’re normally cash flow neutral. The banks are, at the moment, lending at 60% to 70%. We have one lender who will do 75%.
We’re essentially talking to the banks as well, and the lenders as well, and we’re saying, “Give us an 80% lend at a slightly higher interest rate, so it’s actually a mixture between a residential loan and a commercial loan, and then everyone’s happy.” We’re getting closer on that. We do presume that we’re going to have that very soon.
Kevin: For someone who wants to move into this area, to have it managed, is it something you can manage yourself – or do you recommend that they go to a specialist property manager?
Ian: Again, part of the HI-RES team is that we have managers across the country in that specialty area who look after this. We actually don’t even manage our own, even though we have an in-house real estate agent.
We suggest that you do get property managers who are specifically trained and look after, firstly, choosing the people, secondly, knowing how the people cooperate within the same household, and thirdly, making sure that they’re always there under control, because it’s a high level of management.
You will pay them a slightly higher percentage. Although, in a slightly higher percentage you’re paying an agent, you’re actually making really great cash flow anyway. They will send someone every couple of weeks to look after and clean, do the gardens, and do everything that’s required in the house.
Kevin: I’ll mention that website again. The website is smallisthenewbig.com.au. There are a couple of other questions I want to ask you about HI-RES, but before I do, can I just take you into another direction? That is, you’re doing some tours around Australia between the 29th of January and the 8th of February.
Tell me where you’ll be and what we can expect to see at those seminars.
Ian: I normally run a two- to two-and-a-half-hour seminar. I touch on the issue we have on affordability in Australia and how the property investors of Australia are the solution. The government is not the solution. The government is about creating policy and then getting out of the way.
Investors are actually waiting on the sidelines. We have a huge number of investors already started who have been with us for about a year to 18 months and are doing great things in the area.
We start on the 29th in Brisbane. It’s a night-time thing. We’ll have the 29th in Brisbane, 30th in Newcastle, 31st in Parramatta, Sydney on the 1st. We have Perth on the 5th, Glen Waverly and Melbourne on the 6th, Melbourne on the 7th, and Gold Coast on the 8th to finish the tour.
Kevin: Wow, that’s a lot of flying around. Those tour dates, you’ll find them all on that website, smallisthenewbig.com.au. Can I just ask you what can we expect to see at that seminar in that two hours? Will you be talking about this type of investment and who it best suits?
Ian: Absolutely. We’ll talk about all the positives that come out of being able to invest in the rooming houses and the communal residences around the country. I’ll be showing some success stories of students who have already gone through and joined us and had some really great cash flow. Some of our own deals that I’ll show up there too.
I’ll be taking you through all the different policies around the country, so after leaving there, you’ll be able to actually understand there are policies there. I’m about full compliance, and I’m going to give you a snapshot of those policies and how you can use them in your existing rental properties.
Kevin: Fantastic. Those dates, again, from the 29th of January to the 8th of February, and all the details at the website, smallisthenewbig.com.au. You’ll be finding out more about HI-RES.
Ian Ugarte has been my guest. Ian, thank you very much. Congratulations on the great work that you’re doing, and I look forward to seeing you at one of those seminars.
Ian: Thank you, Kevin.