What I learnt out of buying 7 properties

No it's not legal height downstairs so I won't be renting downstairs separate. It'll be one lease for a big family.

Cheers,
David

 

Also be aware that if the downstairs is not approved as a "habitable" space ie (wasn't on the original plans as a rumpus room, bedroom etc and has been converted but not certified) insurance won't cover you for any incidents... not advice but DYOR in this area...

 

Very very good point - thank you for raising this @Closet. I may not have mentioned this before but you're spot on, with the downstairs conversions I'm noticing a lot of them have not been approved by council and that may have implications down the track. Personally I would always seek PM's thoughts on this as they would be able to guide you on the balance of risk (both tenant and insurance) & compliance.

Cheers,
David

 

8. Eighth Lesson - How to select a Property Manager

When it comes to investing property interstate, most people are concerned about not able to “pop by” the property when issues arise. For this or whatever other reasons, what I tend to find is the new investors will always find an excuse to rationalize why they shouldn’t invest interstate and decided to purchase in the local neighbourhood instead because they are more familiar with the area.

But the reality is, unless you are managing the IP yourself without a PM you really don’t need the IP to be close by. Well, if you do manage yourself, then yes you may want to be close to the IP so that you can respond to tenant requests in a timely fashion as required. But I believe most investors would not be doing this themselves (if you do then it’s a complete separate story). Instead majority would be willing to engage a PM to manage the property to save them from the tenant headaches.

Once an investor understands this, then the challenge comes down to finding the right PM who can be your eyes and ears on the ground (both interstate or local).

So how would you identify a good, or “gun” PM? There are a number of ways but usually word of mouth from fellow investors is the better approach I’ve found so far. If an investor is recommending PM’s service then he/she would be doing something right, and therefore are comfortable referring such PM’s service to others.

The referral is really just the first step. As a next step I personally would get in touch with the PM, preferably organize a face to face meeting where possible to get to know them personally and establish rapport. If the PM is interstate, organize a day to fly there and invite them out for a coffee – you’ll be surprised how much information they will be willing to share with you.

Get to know them well personally is important simply because PM is one of the most crucial team members in your Property Investing journey. As I have written previously in my personal blog (The importance of having a trusted team around you – Part 2), you need to be able to trust the PM to run and manage your property on a day-to-day basis. And to do that you will need to gain an understand of their personality, integrity, communication style and how they manage your (and tenant’s) expectations. No better way to do this than meeting them and understand them at a personal level!

On top of getting to know them personally, I would also run through a couple of questions to get an understand how they will look after your property. Here are some of the questions that I use during my coffee with them (nowhere near comprehensive, but I hope it gives everyone some guide):

1. How many properties does your PM manage on average?
The preferred guideline here is about 100 properties per PM (max!). If it’s over 100 the load on a PM is starting to get too much on hand so may not be able to be as attentive as they would like to.

2. Do you have experience in assessing repairs or renovations that a property might require?
The intention of this question is to understand whether the PM has any basic handyman skills or they just collect rents. A PM with basic handyman experience can help spot potential issues which investors are not trained to be aware of, and provide proactive advice on what should be done to mitigate any further risk/issues. Some PMs can also give some idea on a ballpark figure for repairs depending on their experience.

3. What separates your services from those of other property managers in the area?
This is a lead up question for them to show you where their real value-add is. Each PM agency will have a different expertise and you want to know whether this is in-line with what you are seeking. Most have the local area knowledge but they may also have other differentiator which they can demonstrate.

4. Do you have a Service Level Agreement in place if a mistake is made by your team members?
We are all humans so inevitably people do make mistakes, in particular in the rental statement area. There’s nothing wrong with making mistakes, however the important aspect here is to understand how the PM will address your issue/concerns and in what kind of time frame. You would not want a small mistake dragging out for 6 months not fixed!

5. How do you screen and process potential tenants?
This is a bread and butter PM question in understanding their tenant selection process. As a PM agency, what do they focus on during this process and is that aligned to what you are expecting as an investor? This question give them an opportunity to demonstrate whether they truly understand a local social demographics of the area and what checks are in place to filter out the crappy tenants.

6. How do you ensure repair requests and maintenance needs are dealt with promptly?
This is to uncover whether the PM agency have a backbone system in place to deal with various maintenance requests or whether it’s a purely manual process. A good, established PM agency would have a software/online system in place to be able to manage each requests effectively and to be able to show the history/lifecycle of such maintenance request. If it needs to be manually tracked then guaranteed there will be prone to human errors.

7. What experience do you have with the specific area in terms of rental appraisal and possible increases?
This is to understand whether the PM actually has expertise knowledge of the specified area. Do they know what are the “good” and “bad” streets, and which area have better tenants? What are the elements which affects the rent and possible increases?

8. Would you be managing my property, or would there be another PM who does this?
Most of the time PM agency owners (who you meet) will not be the one getting their hands dirty and managing your property on a day-to-day basis. It is therefore paramount for any investor to confirm this, as you do not want a trainee PM to be looking after your property and causing you frustrations!

It would also be wise to verify the PM’s history/experience/credentials, as you want to ensure your property is in safe and comfortable hands. Overall, that’s the number 1 reason why we are using PM services, right?

 

Wow very interesting read, thanks for sharing David!! The lesson about the pool was something I hadn’t really considered too much before so good to know

 

btw how do we know if part(s) of a house is illegal or not following the standard? Can we order a cert or docs with this info from the council? thank you.

 

Yep, and I've just been told that other components looks like may also require cleaning/replacing in a couple years time. So prepare for more $$$ when it hits....

In the past I've asked my conveyancer to check this out for me but I also believe you can give council a ring to find out. Depending on what record you're trying to access, council may request you to fill in a search form (+ search fee) and will take some time to turn around.

The easiest way I find is during purchase ask the sales agent/seller to provide proof on any structures that you suspect is unapproved. If they're already approved then they would've got the certified docs ready, if not this question will most likely reveal the naked truth.

If the sales agent/seller refuses to provide an answer then perhaps you can put in a special conditions clause to be able to pull out should the search outcomes shows that "extension" turns out to be unapproved.

Cheers,
David

 

That is a great post David - I've been running through these items in my head. Good to see someone with more experience than me putting it into words.

Cheers,
Grant.

 

Hi David,
Much like you i learn't the hard way like buying properties in Ipswich that go no where in value as the years pass like you say due to the abundance of land available. I got out back in 2016 and purchased in high demand areas and have already made more money in 12 months than i did in 6 years in Ipswich. Most people take years to figure out that chasing yield is not the way to go. Oddly enough i have said the same things on this forum but been met with criticisim time and time again. Thank you for sharing your story.
Lawrence

 

Thanks for sharing mate. Out of curiosity, if you kept your Ipswich property till today, would you say you've made the same money as where you invested today? If not how much different?

Personally I think we all need to target a balance portfolio of yield & CG. Too much of each side just increases more risk which is why I think it's important to define what role the next property will play in our portfolio, and only we know what our own risk appetite is like.

Cheers,
David

 

Hi David,
That's a difficult one to answer as i'm not sure what the property in Ipswich would be worth today. Not to mention this was a property that cost me a lot of money in repairs. The area suffered from highly reactive soil and as such the patio on the back of the house moved away from the main house and cost me about $8,000 to fix up. So this property cost me on both fronts with lots of costly repairs and no capital growth. Not to mention I bought in 2010 and then was very unlikely as Ipswich got flooded in 2011 as well. Although I did not buy In a flood plain and the house was not affected at all by the floods, but this killed the capital growth for the next 4 years before Ipswich started to recover. The average growth rates in Ipswich for this area are about 3.5% over a 10 year period. The new area I am now invested in is more like 6% so long term this area will outperform Ipswich.

I agree it's good to have a balance, although when given the choice would always target high growth over cash flow. The trick is being able to hold those high growth properties so they can realise their full potential. You can also turn a high growth property into a high yield property with some strategic renovations so you can have the best of both worlds. You cannot turn a high yield property into a high growth property as they are usually in the wrong locations.

Lawrence

 

Just to pick a suburb, Newtown in Ipswich, has done 8% / year in the last 20 years. It doesn`t sound bad to me. I am sure other suburbs close to the city centre have done similar.

 

@Luca that sounds good to me over a 19-20 year time frame, however going by that chart you wouldn't want to miss the period between 2002 and 2008.

@Lawrence Barnes purchased in 2010, so if you calculate the growth average from that chart since then it's not as impressive. That's not to say that the growth in this area won't pick up in the future though.

 

For everyone's benefit, I've asked the moderator who has kindly added an index/link on the first post so to make it easier for people to link straight to lessons & navigate around, especially as I continue to post more lessons later down the track.

The goal is to make this a living and breathing thread so as I learn new lessons I'll continue to post them up

Cheers,
David

 

9. Ninth Lesson – why you should be extra cautious working with cash job tradies

Let’s admit it, investing in property is not all rosy when you have maintenance issues. This is usually the biggest expense and it’s unavoidable. So as smart investors we all want to find ways to minimize outgoing expense.

And tradies understand that. Investors are not looking for top notch jobs. They just want someone who can get the job done, fast and at a relatively cheap price.

So how do they come up with a win-win? You guessed it – cash job!

What is Cash job?

Cash job is when customer pays the tradie cash for the service performed. As the customer will not get an invoice for the services carried out, tradie essentially won’t charge you the GST (and usually they may also avoid income tax) and therefore can quote a lower price.

The pros of doing cash job:
1. Cheap cheap la
2. Sometimes you get the job done faster as some tradies prefers cash job over official quote but not all the time

The cons of doing cash job:
1. As there will be no tax invoice provided, therefore you cannot guarantee quality of the work carried out. Tradie also takes no responsibility after work is completed should there be any defects
2. No Tax Invoice provided, so you won’t be able to claim as tax deductions expense

So as you can see there are a number of risks associated with this approach. What I’ve learnt is, if it’s a minor handyman job (couple of hundred dollars) then you may be able to get away with it. Anything other than that then cash job risk may outweigh the actual benefits.

My Experience

In my investment journey I have been burnt by cash jobs once and since then I’m not a big fan.

This happened to my Slacks Creek property. Prior to settling I was looking to get downstairs cleaned up a bit. Also couple of things needs tidying up before I can get the place tenanted.

The scope of works were:

Upstairs
1. Remove wallpaper in bedrooms
2. Paint upstairs walls, ceiling, doors – 2 coats
3. Replace carpet for 3 bedrooms plus study

Downstairs
4. Paint downstairs walls, ceiling, bathroom, stairs – 2 coats
5. Downstairs bathroom small reno – replace shower screen, shower heads, knobs, floor tiles
6. Install small kitchenette including a hot plate, small sink and storage cupboard (to turn downstairs into a single studio style)

Hindsight is always a beautiful thing. This is by all means no small work. My budget was 5K all up and the tradie I got referred to was happy to do all the work but it has to be a cash job. Alarm bells did rang at that time but I still went ahead with it due to budget constraint. That was mistake #1 – for this type of reno it should never have been a cash job. I was still relatively green in engaging tradies for reno at that time so did no check on the guy, and I didn’t consider any compliance issues.

Once the property settled the tradie and I agreed on the project duration and when the work will commence. I’ve paid the deposit and requested photo updates daily so I can check the progress remotely. Everything looks promising at that stage.

Week 1 went by and I was catching up with the tradie every two days over the phone. The only problem is I didn’t get any photo updates as he was just “starting the work”.

Towards mid of week 2, after a number of calls he reluctantly sent me a number of photos. I can see the downstairs bathroom was being worked on, and the small kitchenette sourced and installed. All looks fine so far, and I was busy liaising with PM to get a tenant so I’ve left it with the tradie.

Come week 3 which is meant to be the final week, I’ve got a call from the tradie to say he’ll need a couple more days to get the work completed as he’s still got a bit to do. I’ve told him I have the tenant moving in at end of week 3 so hurry up please as there is no room to move in the timeline. He said he’ll get one of his mates in to speed up the process, but it’ll cost me a bit more.

At that time alarm bells start to ring at that time but I wish it ranged earlier! I realized that he’s behind on his schedule and want to get paid more! Also we all know human are much more prone to making mistake when pressure is on and deadline is really close.

When my Property Manager attended the place on Friday evening for status check-up, he’s still madly getting the old carpet replaced and walls painted. The mess was everywhere and he’s nowhere completing his work, let alone starting to tidy up the place! PM gave me a call, briefed me what’s happening and sent a couple of photos to me on the works being completed. Here’s a couple that I’ll share:


The carpet was “nailed” down, with nail head still sticking out! Imaging my tenant stepping onto it…


Have you ever seen carpet laid this way like a jigsaw puzzle? Well, now you do


Seriusly poor edging…

As you can imagine – all in all I was not impressed about the quality after seeing these photos. I gave him a call straight away to fix these up, but apparently he had a big fight with the PM and never came back to fix things in the end. And because I didn’t have an invoice I can’t hold him responsible for the crappy quality work he’s done…

The tiling was also done very poorly to the point where my PM could’ve done a better job than this!

In the end I had to spent more money to get another tradie to tidy things up and making it compliant, and it costed me more…but hey, it certainly taught me some good lessons about tradie and cash jobs!

So here are a couple of my personal takeaways:
1. Try avoid cash job for any semi-serious reno. Personally anything over $500 I would now request a proper invoice to ensure work is carried out to a good quality.

2. Anything less than $500 (i.e. relatively minor, low risk jobs) may consider using a cash job tradie. Although with such low value you may not get much savings anyway, so after this experience I just go with a proper handyman or someone who provides an invoice.

3. Ask your PM to commit to do regular check-ups for you as work is progressing. If I’m able to do this again, even if I have to pay them to do this, I would engage the PM to physically be there every couple of days to check-in on the quality of work to ensure the work is on track as per the agreed schedule. I would do this disregard whether it's cash tradie or any sort of renovation really, as PM is your trusted eyes on the ground.

4. Bottom line for me - that little extra saving is not worth all the potential risk and headaches that comes along with cash job tradies.

 

Anothe valuable lesson @David Shih . Thanks for sharing your stories. In the particular case, was $5000 for labour cost or it also includes material (carpet, paint buckets, kitchenette, etc.)?

 

Includes all material as well as I bargained hard

Well the "kitchenette" is really just one unit like this which I think he got from gumtree for a couple hundred dollars:


Not sure where he sourced the carpet but it was solid, industrial grade carpet, but unfortunately the execution let it down.

Cheers,
David

 

$5000 is really cheap then. A lot of tradies will charge you $3k-4k for a new paint to your house (18-20sq home) easily. The cheapest carpet installation I have heard is $25/sqm all included. And then there was bathroom work which can cost you $1k-1.5k easily too.

 

Yea it sounded cheap, but I ended up spending an additional $2.5K to tidy up the loose ends so total cost ended up at around $7.5K. So not much savings from hindsight not to mention all the frustrations that comes with it.

It was a risk that I took at that time but I don't think I'll want to do it again (and I hope nobody would go through such experience like I did). Too many uncertainties which impacts the outcome that I simply do not have control of, especially having a full time job and being interstate. Now I learnt my lesson and always get PM involved to coordinate and manage on my behalf - a much better way to get the result I wanted, even if it means I need to pay a bit extra

Cheers,
David

 

This is a great article David. Well done for taking the time to pull together (esp the property manager one as I can relate).