What I learnt out of buying 7 properties

Discussion in 'Investor Stories & Showcase' started by David Shih, 3rd Jul, 2018.

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  1. Ross 355

    Ross 355 Well-Known Member

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    Thanks for the insight buddy.
     
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  2. David Shih

    David Shih Mortgage Broker Business Member

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    10. Tenth Lesson – How to effectively buy site unseen

    Note: below is based on my personal experience and are not advice, please seek specific advice from qualified trades/professionals in their respective areas.

    A question that I get asked a lot by fellow investors is - "when you buy in SEQ, do you visit every property before you buy?"

    Very valid question, so I thought I'll share my strategy on how I've done this when I was acquiring properties up at SEQ.

    In short - my answer is "no I don't, I only fly up and visit when I have the property under contract. Otherwise it's a waste of my time and money."

    A bit about QLD Contract Process

    To be able to rely on this strategy of mine we need to understand how the QLD Contract process works. Different to NSW, QLD buying process has much better protection for the buyer!

    Here is how it works - once a contract is signed and exchanged, buyer will be protected by:
    1. Standard 5 days cooling off period
    2. Standard 7-14 days (or longer) Building & Pest Clause
    3. Standard 7-14 days (or longer) Finance Clause

    Until all 3 points are passed and satisfied by the buyer then and only then the contract goes “unconditional”.

    In other words, B&P and Finance clause are two additional clause that allows buyer to potentially terminate the contract on a reasonable basis, which is why this is great news for investors looking to buy in QLD :)

    So you might ask: this is all good information, but how does that help me in buying site unseen?

    Let’s walk through how I’ve done it by splitting the overall purchase process into 2 sections - before contract is exchanged and after contract exchanged.

    Prior to Contract Exchange - Inspections and submitting Offer

    The two key milestones prior to contract exchange are arranging inspections and submitting offers.

    For inspections, the trick is you get someone to act as your eye on the ground. This can be someone you trust, your Property Manager or your Builder if you have a reliable contact. Discuss with them about whether they offer pre-purchase inspection as part of their service offerings. Some of them are open to do this for you for free while others may charge a small fee. For me personally I've used my PM for this.

    My guidelines for PM on pre-purchase inspections are:
    1. Liaise directly with selling agent to check out the property
    2. Report back to me on property condition, any major work required to be done that can be identified at time of inspection (such as house has been attacked by Termite), any “good to have” work to be done (such as replacing carpet), estimated rent as well as lots and lots of photos.

    Based on the above information I will then be able to paint a picture on whether the property is worth pursuing or not. By working out how much additional reno cost I need to put aside, I can then work backwards to determine my offer price and evaluate the yield.

    Once I have my offer price I can then submit the offer to agent (wait and pray!). If it's accepted, then and only then I'll start to arrange the travel to visit the property myself. That's when you have a deal! If the offer is not accepted, then simply move on to the next deal.

    Post Contract Exchange - B&P and Finance

    After contract is signed and exchanged, then isn't it the exciting time of paying a visit to check out your new little IP!? Well, before you book your travel ticket there are two more steps to do - organize Finance and B&P immediately.

    Finance can be the one that is risky in terms of going over the standard 14 days period. So the first step should be inform your Mortgage Broker or the lending institution asap so they can start putting the application together for Finance approval. Banks do and will take their time!

    Once you've initiated Finance Approval then next up is B&P. What worked for me previously is to book the B&P service and confirm date & time it will get carried out. Then book the ticket and fly up on the same day to meet up with the B&P guy so he can run you through his findings in person. That way you get to see the B&P findings first hand, and at the same time you get to inspect the new IP yourself! I like killing two birds with one stone :D

    At that time if you found there are B&P issues, you can also use this opportunity to ask negotiate with the vendor for a discount on the purchase price (depending on severity of the issues) based on B&P Report, or ask the vendor to fix some of the items for you. Note though vendors are not legally obligated to do anything, but it doesn't hurt to try.

    In the extreme case of structural issues or severe termite damage you can discuss with the solicitor based on B&P Report in order to terminate the contract (on a reasonable basis) based on the B&P clause. But if they are small defects then you are most likely unable to. For more details on how you can terminate the contract based on B&P clause, seek specific legal advice.

    By the time you got your B&P report you would likely have heard back from your broker about finance approval too. If 14 day is fast approaching and you and your broker feel there is a risk you will not get finance approval within the time limit, ask your solicitor to request vendor's solicitor for additional extension on Finance clause. It's somewhat common in QLD that Finance can take anywhere between 14 to 21 days to approve so most of the time vendor should be able to accept this extension on good grounds.

    So in summary my personal strategy for buying site unseen effectively are:
    1. Contact ideally a PM or Builder who you trust to inspect the property and report back based on your guidelines
    2. Work out any cost required to tidy up the IP, determine the Offer Price
    3. Request the solicitor to review, sign the contract and submit the offer
    4. If offer is accepted and contract exchanged, then
    - Organize Finance with broker/lender
    - Organize B&P date and time
    - Organize flight ticket to meet the B&P inspector on the agreed date and time to go through B&P results in person and inspect the property at same time
    5. Negotiate with vendor on purchase price based on the B&P findings
    6. If required, ask solicitor to request additional finance extension with vendor should the finance or B&P approval is struggling to meet the deadline as per contract
    7. Once Finance and B&P are approved, then congrats - contract now goes unconditional! Get ready for settlement :)
     
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  3. Jane Ridder

    Jane Ridder Well-Known Member

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  4. Beano

    Beano Well-Known Member

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    What do you call a high yield property ? (Over 10%)
    What do you call a high growth property ? (Based on past growth ? Based on central location? )
     
  5. Closet

    Closet Well-Known Member

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    Nice post David - one other valuable addition is to add in a "due dilligence clause" into the contract which is in the favour of the buyer. I normally put this in for 12 - 14 days and allows me to get out of the contract if I later discover issues that can't be used to trigger the building and pest clause. It's got me out of a dicey purchase on a few occasions - standard practice for most solicitors and works even in hot markets...
    Also worth considering is to get the building plans from council as part of the dd period before you purchase - to pick up any unapproved alterations that don't get picked up in the solicitors searches (approx $200 for the building file). All good things to discuss with the solicitors
     
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  6. David Shih

    David Shih Mortgage Broker Business Member

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    Thanks for your valuable input! Yes I think having a DD clause definitely helps as another layer of protection, but I'm really interested in your comment that it works even in hot markets.

    My clients have used that before during purchase, and what we are seeing is that even in warm markets it makes the buyers offer so much less appealing, because from seller's perspective they're seeing it as a "get out of jail" card. Seller like buyers who are willing to commit, in particular there are already enough clauses that buyers can terminate on, the last thing they want to see is another clause to exit.

    In my opinion it's a great approach but people may need to find a balance - in particular when the deal is competitive and vendors have multiple offers on the table, then your offer may continuously lose out due to this clause.

    Cheers,
    David
     
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  7. Closet

    Closet Well-Known Member

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    I've always treated the offer as a package and sometimes a combination of a quicker settlement, certainty over finance (pre-approval - cash deposit etc) will get you across the line with or without a DD clause. Understanding what the vendor wants (on top of money) is a powerful tool. Getting the agent on board with a sales pitch on your credentials is also key - the agent is often more interested in the shortest path to their commission and as long as the offer is in the ball park they will push for a lower risk offer if it is less effort for them :). Relationships are everything!

    However as you say if the market is that hot then it may be more challenging but the flip side I guess is that as investors we should ideally be buying at the bottom of the cycle which is usually in a buyers market. Interestingly using the approach above I've never been knocked back using a DD in my purchases but could just be luck :)
     
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  8. David Shih

    David Shih Mortgage Broker Business Member

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    11. Eleventh Lesson - how to develop optimal offer price and cashflow forecast via cashflow calculator

    I think as an investor a cashflow calculator is an absolute minimum tool to have. At the end of the day investing is all about using money to make money – but before you can make any equity you should understand how much the holding costs are per week, month or year in order to determine whether this is an investment property you can hold onto long term! This is especially important for people who are looking to buy and hold in Sydney as the average yield is very low across the board.

    The cashflow calculator allows me to achieve the following:
    1. Determine the gross rental yield of a potential deal (to see if it ticks my yield box)
    2. Determine pre-tax cashflow forecast of the deal
    3. Risk assessment – how much the property will cost to hold at a higher interest rate
    4. Determine the acceptable offer price

    Let’s cover each topic one-by-one.

    ---------------------------------------------------------------

    1. Determine the gross rental yield of a potential deal

    Gross rental yield as a percentage can be calculated very easily. The formula is:

    Annual Rent (Weekly Rent x 52 weeks)
    ———————————————————– x 100
    Purchase Price of Property

    In the cashflow calculator, this is determined by putting in the purchase price and the lower & upper rent (all highlighted in yellow) as part of the process. Then the Yield on purchase (highlighted in green) will be calculated automatically.
    [​IMG]

    For my deals in Logan to-date I have been focusing on yield that are over 6% at a minimum. Using the cashflow calculator it provides a clear vision for me on how much lower, upper rent and purchase price combination I need in order to achieve the yield I wanted.

    2. Determine the pre-tax cashflow forecast of the deal

    This is where the cashflow calulcator really comes in handy – allows a projection of the pre-tax cashflow once the property has settled.

    The factors that affect the estimated cashflow are:
    1. Loan Amount
    2. Estimated Expenses such as Council Rates, Water Rates, Insurance etc
    3. Estimated Rent

    These fields are highlighted in yellow, with output in grey:
    [​IMG]

    For me, it’s easier to calculate Annual expenses that’s why I input the figures in annually instead of monthly or weekly. For example water rates are around $150 a quarter, so times that by 4 and I’ll just put in $600 as the annual amount. Same thing with Building and Landlord Insurance as you’re usually quoted on annual rate basis.

    Once these figures have been put in you won’t need to change/update unless you’re moving into a new state or different council which may have different rules. Also as these are indicative only it doesn’t have to be exact to the dollar. The idea is to be able to quickly determine the projected cashflow by entering the Purchase Price (which determines the loan amount) and the estimated rent.

    If the forecast cashflow is positive then the number will be black, otherwise it’s shown as red. In this example as you can see a $550K property at 80% LVR, IO repayment and 5% interest rate will need to be rented at approx $540 a week in order to break even. (which is around 5% gross)

    3. Risk assessment – how much the property will cost to hold at a higher interest rate

    Related to 2 above – from risk assessment perspective an investor may want to know how much will this property cost to hold if interest rate goes up. Again this is where the cashflow calculator comes in handy.

    This can be done by updating the Interest Rates field (highlighted in green) and change the percentage from 5% to say, 6.5% or even 7%. Below is what happens when I change the formula simulate 7% interest rate, with no change to existing rent:

    [​IMG]

    As you can see the weekly, monthly and annually cashflow is now affected and yearly repayment can be severely impact the cashflow especially if the loan amount is closer to the 1 million mark!

    Usually if interest rate goes up there will also be an upward pressure on the rent as landlords will be passing some of the interest rate rises onto the tenant. However to be conservative (worst case scenario) I usually leave the rent as is to see how much annual repayment it will be and this figure helps forming as a portion of the the total cashflow impact when you have a property portfolio.

    In this example it illustrates the point that when interest rate goes up to 7%, for a $440,000 loan and a $380 weekly rent, you’ll need to fork out approx $16,469 a year (before tax) as your holding cost.

    4. Determine the optimal offer price

    If we put all these information together, it forms as part of the due diligence I use to work out the optimal offer price. The detailed steps are:
    1. Research all recurring expenses, such as council and water rates, strata fees, insurance, etc. You can usually get these from Sales Agents, Property Managers or sometimes from the Sales Listing.
    2. Call several property managers to confirm the achievable rent of the target property. This will feed into your Lower Rent and Upper Rent.
    3. Input all the data collected into the cashflow calculator
    4. Add in the asking price (and confirm loan amount) to get the yield on purchase
    5. Tweak the purchase price until you hit the optimal yield you want to achieve. This will be your optimal offer price for the agent
    6. Assess the estimated weekly, monthly and yearly cashflow position (before tax) for the proposed property and perform risk assessment at a higher rate if required
    7. Submit the offer price you've worked out to the sales agent and if the offer is rejected, don’t be disheartened – you can still negotiate or simply move on to the next opportunity! Otherwise congratulations, the property is now under contract you. Time to move onto organizing Finance and Building & Pest (if applicable)!

    A copy of the cashflow calculator that I use is attached for everyone. If you need any help with using the calculator just drop me a message.

    Cheers,
    David
     

    Attached Files:

  9. Dark Phoenix

    Dark Phoenix Well-Known Member

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    Hi David and folks,

    Never before have I been so excited that I had to sign up immediately to take part in this forum. Why? Because I see my older self in most of your lessons. Here is my story guys.

    Lesson 1:

    I started my property investment journey back in Sai Gon, Viet Nam when I was 25 . My father approached me and said "look at these beautiful OTP serviced apartments with 9%p.a. guaranteed in rental yield in the first year plus further 10% discount of the original price if you pay in full ", which was much better than the bank rate at 6%p.a. at the time. Two years later, straight after the settlement day, it came to my attention that there was damp on internal walls. The developer was quick at blaming the rainy season but we are firm believers it had something to do with building's plumbing system. To add insult to injury, my grandmother bought a small free standing house in a surrounding suburb with lower socioeconomic status at the same price and only few months after I had bought my OTP. She then sold it after 2 years for a good profit of $100k whilst my OTP in the inner west of Sai Gon (equivalent to Burwood in Sydney) was still waiting for the settlement day.

    -> This is a valid point that I strongly agree to. Regardless of whatever capital city you live in across the globe, properties will appreciate over time like magic (don't forget to factor in inflation everyone). As it is almost 3 years now and our OTP can be realised for a profit of $100k including the rental income it has generated. Nonetheless, had I bought a free standing house like my grandmother did, the opportunity cost would have been immaterial. So to me OTP is now a big NO NO! My mistake was not detrimental to my financial position as the property price was only 180k already deducted further 10% discount.

    Lesson 2:


    One of our IPs in Sydney has a spa tub. Guess what? It is treated under our current government policies as if it were a swimming pool where you have to spend extra money on expenses including these safety assessment certificates. Annual repairs and maintenance costs are expensive.

    Lesson 3:

    In recent years, all of my friends have rushed to purchase properties in Brisbane due to its lucrative rental yields. To me, Logan Central is totally spot on! Even my former housemates working as engineers bought one in Slacks Creek. I was aiming at Woodridge as it appears to have good public transport, is well-established with excellent local amenities such as Logan Central Plaza and IKEA and not too far from Brisbane CBD either. However, when I tested the rental market by quickly searching on realestate.com.au, there were, no joke, over a hundred vacant properties in the suburb plus the days on market, in general, exceed 45 days. I made my trip to the suburb last year. Ladies and gentlemen, I hereby confirmed what David said before: The Struggle Is Real! Before that trip, I had always thought south western Sydney could never be worse. Joke on me!

    That happened more than a year ago. Till today, the median vacancy rate of Brisbane in Jun 2018 is only 3.0% compared to 3.6% of that of Woodridge. The suburb obviously 'beats' the local market benchmark. As of this morning, there were still over 100 properties sitting vacant in Woodridge!

    -> I was so close signing a contract buying this property for $159k which has a renewed one year lease in place returning 8.5%p.a. gross without any inspection. Even taking into account of other costs, the net rental yield is 6.5% p.a. Jesus Christ, that was like double the banks deposit rates. Luckily, my solicitor pulled me out of that deal since there was something fishy. Always do your homework - DUE DILIGENCE: inspect the property, the street, the suburb etc. and get a good lawyer to review the contract too!

    There is so much more that I can go on and on for days. However, I would love to say thank you to David for putting lots of his efforts into this thread. Your experience and insight inspire me so much. I used to blame myself for all of these stupid mistakes I had made and there was time I thought to myself maybe properties were not for me! Not until few months ago when I found this forum did I learn there are several people out there on the same boat as mine. So I am not back on track and ready for my next property purchase!

    Have a lovely weekend everyone!
     
  10. Dark Phoenix

    Dark Phoenix Well-Known Member

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    I am now* back on track ^
     
  11. Layla

    Layla Member

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    That’s a great story and advice. Thanks for sharing!
     
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  12. Big Daddy

    Big Daddy Well-Known Member

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    Do most people calculate gross yield as (Weekly Rent *52 / total purchase price incl stamps, legals, renovation) ? instead of (Weekly Rent *52 / purchase price) ?
     
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  13. David Shih

    David Shih Mortgage Broker Business Member

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    Oh wow! It's amazing you had so many resembling experiences....you must be my missing doppelganger!! :eek::eek::D

    Thanks for sharing your story @Dark Phoenix, I'm sure your lessons will be able to benefit the PC community and also glad that you're now back on track! As you correctly pointed out, mindset plays a critical part of success in anyone's investment journey as there are heaps of ups and downs. Typical investors usually make mistakes and then they simply throw their hands up, complain "it doesn't work and property is just not for me" and stops trying. Which is a shame because they're usually so close to success, all they need to do is consolidate and learn from past mistakes :)

    Great question! I think technically speaking it should be the former i.e. weekly rent * 52 / total purchase price inclusive of stamps + all purchase cost. But I'm a lazy investor so for quick calculation I just use the simple formula instead :oops:

    Cheers,
    David
     
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  14. Dark Phoenix

    Dark Phoenix Well-Known Member

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    Hi Big Daddy,

    Investment banker here. They are different measures being used by investors vs accountants.

    They are called Cash on Cash Return (CoCR) and Return on Investment (ROI) respectively. In our industry, we would prefer CoCR to ROI. It all boils down to the most important aspect in property investments - Leverage.The reason being ROI only uses cost thus doesn't reflect cash outflows or the majority of debt you will be borrowing.

    Here is an example:

    For the sake of simplicity, we are going to ignore taxes

    1. First Scenario

      I purchase a property at a cost of $1M (closing costs - stamp duty, legal fees etc. included) having put down a deposit of $100k. After one year, the property value increases to $1.1M
      • CoCR: ($ 1.1M - $1M)/$100K (being my deposit) = 100% ($100K increases to $100K + $100K = $200K)
      • ROI: ($1.1M - $1M)/$1M = 10%
    2. Second scenario
    Same things, only difference is I put down $200K.
    • CoCR: ($1.1M - $1M)/$200K = 50%
    • ROI: ($1.1M - $1M)/$1M = 10% (same as above)
    Once again, ROI is only for accountants (no pun intended) whilst CoCR will be more efficient in measuring accurately how much your initial cash deposit, hence your investment amount, is performing.

    Third scenario will be you buy property with 100% equity (no debt). ROI equals CoCR.

    Good night everyone!
     
  15. Leeroy93

    Leeroy93 Well-Known Member

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    One of the key draw cards in property investing is the ability to leverage and accept a lower degree of growth for similar CoCR to other asset classes. Obviously one still needs to consider the type of asset, market conditions and ongoing holding costs. Despite the doom and gloom in the media for younger generations it remains an risk vs return opportunity.
    Most people do not have the diligence to consistently invest their savings into shares or other investments. The very act of paying one's mortgage each month aligns with the forced savings approach that for most is key to overcoming the mental/behavioural barriers to building wealth.

    Fantastic thread by the way David! Truly gold for those who would rather not have to learn from their own mistakes and draw upon the experience of others.
     
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  16. David Shih

    David Shih Mortgage Broker Business Member

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    Thanks @Leeroy93 - I certainly hope other investors would prefer to learn from these lessons so they can avoid it rather than having to pay the tuition fee :)

    I totally agree with you in regards to the concept of consistently paying off mortgage each month is an excellent way to force people to put away those "savings", in particular those who don't do budgeting. In a sense it's like a piggybank except disguised in the form of a property :p (plus have it's own way to grow in value too!)

    Cheers,
    David
     
  17. ShireBoy

    ShireBoy Well-Known Member

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    Thanks for doing this. It's nice when people share their calcs. There's nothing too advanced about the calcs used, but the PMT function can be a tricky one to get right.
     
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  18. natedawgg

    natedawgg Member

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    Thanks David! These lessons are priceless to me as I'm currently purchasing my first investment.
     
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  19. David Shih

    David Shih Mortgage Broker Business Member

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    I got some help from an Excel guru on that function so hopefully it looks legit enough for all the other Excel gurus out there :p

    Cheers,
    David
     
  20. David Shih

    David Shih Mortgage Broker Business Member

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    I got some help from an Excel guru on that function so hopefully it looks legit enough for everyone :p

    Cheers,
    David