Thoughts on real estate investment

Someone asked me the other day on what I thought were some important things I've found over the years in real estate. Thought I'll share some of my thoughts here. Some of these are probably more useful for experienced investors

Cashflow vs CG
- Ideally both, obviously
- But if I had to take one it would be CG
- Getting a few hundred dollars a week is not going to compensate for the millions you'll leave on the table by picking the wrong suburban trend
- One of the early properties I bought at a young age - many years ago, and a dismal investment - was a resi. I ended up selling it for a small profit. It had fairly decent cashflow, but that by no means compensated for the capital growth. I could've bought in the Chinese suburbs in Syd or Melb at the same time, and probably sold 3x more, despite those Chinese properties renting for barely anything (ah hindsight is bliss)
- As a CG example on the other end of the spectrum, an investment that went up nearly 3x just in the last 24 months. It was on sale for around 3.5% yield at the time
- Leads me to my second point, not all properties grow equally
- There comes a point when you probably want cashflow. But before that, capital growth is by far much more important. The difference between 4% on your $300k equity and 6% is $6k.

Location?
- Yes!!! Worst house on best street
- Have held main road properties before. Probably up 50-70% when a street around the corner is up 100-150%. The only lucky break you might get with a main road is rezoning, and ability to suddenly build high rises (yes got lucky on one of them)
- Same rule with commercial. Slightly quieter locations (think your King Sts of Melbourne or Bent Sts in Sydney) can sit vacant for 12-18 months if you're not careful. If you hold your Swanston Sts or Pitt Sts, 5-6 credible groups fighting for the site every time it comes vacant is common. Luckily, in CBD, even the quiet locations get significant capital growth during times like this

Timing or Time?
- Timing
- The best example was when I bought at the last peak (early 2010). Maybe up 50-70% now
- I also bought in in 2012-early 2015, these have all doubled and more easily

Partnerships
- I've been in a few partnerships, and growing up have also seen my parents in multiple partnerships. So certainly have some experience in this regard
- Only get into partnerships if you're a very good judge of character. If your wife/husband/family tell you you're not but you think you are, you're probably not. Try to do it yourself, and if you can't afford it, give it a miss because it's obviously too big for you
- Sometimes partnerships fail despite everyone acting in good faith, because people may have different objectives or different goals, or see things differently. So set rules early on, and document them
- Don't get into a partnership thinking if your partner is well-to-do, things will be easier and capital will be more forthcoming. Sometimes the nastiest and greediest are found in this cohort. Remember the old saying? Money only amplifies a person's true character - perhaps the writing was long on the wall with these people, but it's easy to be blinded when you convince yourself to only see the positives. Certainly met a few in my journey
- Control is very important. Either pay a premium and get control, or take such a small stake it doesn't matter. Worst thing is you can do is take a 50% stake (ie you've pretty much paid for control) but don't actually have control (ie you don't have 50% + 1 share). I've been/am in all 3 situations. Nothing worst than the third. In my best partnerships, I either have 50%+, or below 20%
- Despite all this, we're all bound to get blindsided, so don't kick yourself too hard if you end in a bad/toxic situation

Brokers
- I don't have a strong view on using one. I find them convenient, and they have good intel, but you also have to be very careful. Some are quite self-serving too. Are they really giving you the best product or going for the one with the biggest commission? Some guys here seem quite level headed so that's good
- When you're in the game long enough, banks are happy to pay you the broker commissions anyway, even if you're not a broker

Borrowing
- When you're trying to grow, you obviously want leverage (and hopefully you're not taking it out right before a recession)
- But banks are a funny creature. If they 'perceive' you to not be desperate, you can bluff them. The number of times I've told a bank I'm going to settle in cash if I don't get what I want (whether it's term, LVR, rate etc), and then the issue being escalated and me getting the outcome I want, will surprise you

Legals
- Don't skimp on legal advice. Obviously spend according to the size of the purchase. I used to use $500 conveyancers. These days I can spend up to ten(s) of thousands on important purchases to get documentation right. How much is your SANF and legal indemnity worth?

Real Estate vs Other
- Don't be afraid of exploring other things. Google with words 'lithium asx' and you'll find they've all done 3-10 baggers in the last 12 months. Keep an open mind.
- The world's a big place. Did you know Singapore is tanking now? Did you know the Chinese's number 1 target is actually not Sydney/Melb/Vancouver, but Tokyo?

 

Agree regarding CG or cashflow, especially if someone is in the position to pick anything due to strong financials. I know ppl who are on 300k plus incomes with good deposits and were convinced to buy in areas that were $40 cf positive a week with very minimal growth for years to come. Absolute waste of capital as there were many other areas showing a good chance of some stellar growth. waste, waste, waste.

 

I was going to ask what is the best way to invest for relatively high incomes..
middle ring suburbs would be the safe bet in my opinion
whats your best bet suburbs

 

I don't know what the 'best' way is.

I probably have a pretty unique focus on this forum - retail or development sites in CBD or next to them. These areas are obviously benefitting from apartments being built (more people live there means more people in city means more business for my tenants), from tourism, from increased employment importance in the city centre, infrastructure (think Syd Crown or Melb underground metro), and increased demand from Asian buyers competing for sites.

I'm not a big investor in middle rings, but know people who've done very well for slightly similar reasons. Some middle ring remain cheap - question I have is how much more developments can these areas absorb. Again also depends what you're buying - resi, warehouses, retail shops, factories?

 

@Omnidragon - great post!

 

only for resi. aiming for CG but in this market, buying at peak would go side way for long time... watching and learning... thanks for great post

 

Any suburb that I can buy super BMV and or buy deals where I can add value and then extract to move to the next deal. I never factor in market movement, I want to be able to make my money from day one.

 

Thanks. BMV is unheard of in syd or mel

 

That is the great advice rather than relying on booms

 

Well my Syd deals and in other states were all BMV.

Just depends on the timing and aggressive deal making imo.

 

I agree about not relying on booms mate. I just see 'booms' as a nice bonus.

 

Agree with all these good points.

Curious how much you made on the highway highrise approval?

 

Actually I am the opposite. I rely on busts and then invest accordingly.

 

how to time the market, that I am trying to learn!

could you explain me a bit more? thx

 

Yes. I learned that lesson too ...

 

Sure. Basically the best and easiest way to make big money is to buy right after a bust, where essentially the market has under corrected. Macro economic and cyclical factors are your biggest single determinant of how much capital gain you will make.

In a hot market. eg Sydney now, you might buy in now and possibly get 10% upside but face say 30% downside on a correction.

Compare that say to a place that has recently busted - perth for example. Or Gold Coast. You might face another 10% downside or be flat for a while but assuming you have bought in close to the bottom your down side is almost eliminated and upside is close to a certainty. Ideally you would also buy where some kind of known factor makes you confident of significant upside. (Eg a massive infrastructure project, population dynamics, gwowth of a certain industry etc).

If you buy low it's pretty hard to to wrong. If you buy high there's plenty that can go wrong. (Same applies to shares by the way).

So how do you know when a market is at a high or a low? Your best incidator is yield. In property, asically look at whether in a market a property is cheaper to rent, or to own/buy. If it's cheaper to rent, then it's an absolute buy. These ratios, by the way, all point to Sydney being overvalued.

Gold Coast is a great example, both of how you can make lots of money buying in down cycles, and also of a market where it's cheaper to buy than to rent. Perth probably also approaching this ratio I would think.

Make sense?

Very simply buy low sell high. It's so fundamental yet amazing how many people screw it up and do the reverse (again Gold Coast is a perfect example of when at its peak you get idiots losing big money).

 

I dont think its that hard to time most markets, especually the RE market whiich is slower movinh than thr share or currency markets for instance. Over here in Australia, these markets are transparent, and access to all kinds of information is readilly available ( well...easier to access than prior years for instance )...

 

I am not really sure if we are the opposite as buying in 'bust' markets is also a kind of timing which I think is quite important too. However where we may differ may be in the buying time. You seem to prefer to buy right at the bottom or close to the bottom whereas I prefer to buy after some market confirmation of rising prices. Still great 'add value' deals to be had then with the bonus of buying in a confirmed rising market.

 

Some of the tell tale signs include:

1. Media starts to stop the doom and gloom and their tone changes. Overall property markets sentiments seem to be more positive and upbeat in more and more places.
2. ACR increase and more For Sales being sold, SOM goes down, Discounting goes down,
3. Average DOM falls
4. Falling vacancy rate
5. Quarterly growth rates start increasing higher comparted to previous quarters.