Hi there. My name is Ben Everingham and I’m the director here at Pumped on Property. Today’s video we’re going to talk about what property investment strategy is right for you.
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Today’s video we’re really going to focus on three different strategies and we’re going to talk about the positives and negatives of each of those strategies, some examples of those strategies working, and some of the things that I’ve seen work from buying over 120 million dollars worth of property in the last three years for myself and my clients.
The first strategy or the three strategies we’re going to talk about is capital growth, cash flow, and manufacturing value. They’re the three ways that most Australians think about property investing, and they’re the three things that I personally like to achieve on every single property I buy, bust most people decide to sort of settle for one or maybe two of those ideas in their portfolio.
The first strategy or when sitting down and considering what property investment strategy is actually right for me, or for you, is to think about capital growth. Now, capital growth is where you buy a property for $400,000 today, and in 20 years time if that property grows by four or five percent per annum, it’s worth somewhere between one and a half and two million dollars. That is the power of property and that is the power of compound growth. That is the power of capital growth now.
For me as an investor, capital growth is extremely important, which means targeting suburbs and markets at the right time, which have great long term potential or indicators for capital growth. Some of those things mean buying metro properties, like your Sydney’s, your Melbourne’s, your Brisbane’s. It also means buying high quality suburbs with large numbers of owner occupies with quality jobs, with quality infrastructure, with good employment options, with good education options, with good infrastructure options, with good job prospects for the future and good population prospects for the future. It also means buying at the right time of the cycle, where there’s strong demand for property and strong demand for that product or buying in a suburb where there’s always going to be that strong demand because owner occupies and people like you and me want to live there.
Now, capital growth is the way that 80% of Australians that have become millionaires, have become millionaires and there’s no secret to capital growth. It is literally buying quality property and holding it for the longer term. That is really all you need to do. There’s some people like myself that like to buy as close to the bottom of the market as possible and sell just before the top. Again, if you’re not that active or you don’t want to be transitioning in and out of marketplaces, then just buying and holding for the next 15 to 20 years is a strategy. That is a more passive strategy. It’s active in the sense that you need to identify the right market, suburb, type of property and do your due diligence, but once you’ve made that decision, you hold it and let’s say that you buy three or four properties over the next 10 years and then hold them for the 20 years after that. In an ideal world, you would either work to pay off some of those properties outright or you might sell a couple of those properties to pay a couple of the others outright in 15, 20 years after you bought them all.
That’s a strategy that’s worked for a lot of Australians to help them replace their income. It’s a strategy if you know your history in Australia and know that property prices in Sydney and Melbourne in the last 10 years grew by 7.9%. In Brisbane, they grew buy under 5%. In the last 20 years in Sydney, Melbourne, and Brisbane, property prices all grew by over 8.7% per year. Then looking forward in the long term future, there’s going to be years where it obviously booms. There’s going to be years where it sits flat for a long time. There’s going to be years where it loses lots of value as well, but the average or the aggregate is what you’re working for in a capital growth strategy. I’ll come back to an example of that working for you in a minute.
The second strategy is cash flow and there’s a lot of people that think you need to just chase capital growth or just chase cash flow or just flip properties but the reality is I’ll show you how to link these three strategies together at the end of the video and achieve all of them at once, which is what I personally like to do these days, now that I know how to do that.
Cash flow is where you buy properties with very strong rental returns and again, you either pay off those properties outright using your own savings over a long term period of time, or maybe you sell a couple of properties to pay some of them off, to own them outright.
Now, cash flow for me means a property that covers itself and all of the expenses on the property before tax, or hopefully even provide you with a surplus income and in Sydney and Melbourne, it’s very difficult to find meaningful cash flow properties with rental returns in between sort of six plus percent. In other markets, like Brisbane for example, there are those opportunities around. You might just have to be a little bit more active as an investor. You might just not walk off the street and find it. You might have a house in Sydney that you could add a granny flat to in the future or the same in Brisbane and that would dramatically help increase the cash flow position.
Now, depending on where you’re at in your accumulation phase of your property investment journey, which is the first phase where you buy the properties you need now, so that longer term you can achieve the financial independence piece for your family that you are looking for. It’s really important for my perspective to buy capital growth in the early stages with good cash flow that’s going to continue to enable you to move forward. Capital growth being the major focus at least for the first couple of foundational properties, because they’re probably going to be the two that you sell first longer term to pay off other properties outright.
Now, the third strategy when considering what’s right for you or beginning to piece together a property investment strategy for yourself is manufacturing value and that simply means buying a property or buying a piece of land and adding some value to it in the attempt to manufacture or create a short term return. That might mean buying an un-renovated house, giving it a paint, adding some carpets, doing a kitchen or something, and manufacturing value that way. It could mean buying a piece of land at a good price, and building at a good price, and making some money that way. It could be more complicated like buying a subdivision site or a town house site, et cetera, et cetera. Manufacturing value can be a great way if you’re a savvy investor to get stronger returns in the short term. When I buy a property, I always try and make between a 10 and 20% return on the first 12 months. I’m also a very active investor that doesn’t mind doing a renovation or adding a bedroom or a bathroom or building from scratch. If you’re not that type of investor, and you’re more passive, that’s completely fine. You just need to time the market, buy high quality property, and hold it for a little bit longer because you’re not getting that short term kicker to start the portfolio rolling.
For those of you who are in a position where you’re finding it difficult to save deposits, because your income is capped for example, then manufacturing value can be a really nice way of creating equity over a couple year period and then being able to borrow that money back and redeploying that in another investment property in the future.
There are the three types of strategies. Again, they each have different levels of risk versus reward and positives and negatives. They’re the three simplest ways that the average person can do great stuff through property in Australia at the moment.
An example of capital growth was a property that my mom actually bought for herself in Sydney. She bought this property in Sydney in 2013. It was a three bedroom, two bathroom unit in Cronulla Beach in the south side of the city and she bought this property for $600,000. She did a $120,000 renovation, which at the time I thought was completely over capitalising. Then she sold that unit in late 2016, so three years later for 1.2 million dollars. Now, you kind of go, holy shit and so do I, because I was completely wrong about her over capitalising on that property for example, but that is the power of capital growth and that is the power of buying at the right time in the market and riding the growth.
Now, another example of this is a young engineer from Sydney that I helped who I’ve become good friends with, Luke. He had about $410,000 to play with so two and a half years ago, we went to a suburb nine kilometres from the CBD in Brisbane. We went to the state government who were looking to sell some property in the suburb at the time. We bought a property directly off those guys for $405,000. Now, Luke has done nothing to that property in the last two years, but that marketplace has increased. At the time of buying, the average time on market or days on market was about 70 days to sell. Now, the average days in that suburb is nine days and property is literally flying out the door with like 15 offers in the first weekend. His property has just been reevaluated over $550,000 so again, the power of compound growth over time.
Now, another example of the cash flow option. I worked with an investor named Daniel a couple of years ago in Brisbane. He came to me. He’d been working on the super yachts for about the last five years around the world, had saved some good money, and he wanted to buy an investment property. I found out about developer on the Sunshine Coast. It was going bankrupt at the time. I bought an 850 square metre block for $180,000, which was about 70 grand below market value off this developer. I then put Daniel in touch with the builder and helped him manage the construction process where we built a dual income property, a three bedroom home with a two bedroom attached granny flat. Now, Daniel completed the entire project for $445,000 and then found a tenant for $680 per week. The cool thing about that example was that he was getting over 7% or 7.5% rental return from day one, which meant that before tax, the property was covering itself and giving him some extra income, after tax with the depreciation it was giving him even more benefit. The other cool part about that particular strategy is that property just got reevaluated for 570 grand, meaning that he’s made about 135 grand of manufactured growth in the last two years as well.
Again, this is what I say. If you know how to buy well, and you time the market correctly, it doesn’t have to be just capital growth or cash flow or manufacturing both. It can be a combination thing, which I’ll talk about more in a moment.
A third example is a property that I recently bought for myself. This is the manufactured growth example. This is a property that I bought. I’ll give you two examples actually. I’ll give you another example of a client that we recently bought for too, who wanted to be more active and manufactured some value. I bought a piece of land from Stocklands on the Sunshine Coast. It was a waterfront piece of land for $415,000. Sorry for everyone in Sydney and Melbourne who is paying a million dollars to live 20 or 30 K away from the city right now. Everywhere else in Australia is still very affordable right now.
This piece of land was $415,000 for a beautiful water view, less than a kilometre to the beach on a canal. I built a house for $350,000 so $415,000 plus 350 for the land is about 765K. I thought that that was about market value at the time but a couple of my neighbours were builders and they did the same thing. Then they put their properties on the market and a couple of them have just sold for over a million dollars. That’s an example of manufacturing value in the sense that Stocklands didn’t increase the price of the land at all. I just thought it was a good price. I thought the build was extremely good price. I probably saved myself 50K on the build by shopping the market and getting the right partner who would build the right quality product at the right price for me. Again, that’s an easy, again easy in the sense that it’s taken me eight years of trial and error and 120 million dollars worth of property to actually find those types of opportunities for myself. It was an easy example.
I bought the same thing for one of my clients. He’s made about $200,000 before he’s even moved into the house. Again, I’ve just shucked a tenant in there for about 750 bucks a week so the rental return isn’t amazing but it was pretty close to 5%, which for a waterfront block that close to the beach is a pretty good return.
That’s an example of this stuff working well, manufactured growth wise. Another example was I helped a client buy a property about a year and a half ago in Brisbane in a suburb called Manly West. The property was very, very run down. He had to do about a $45,000 renovation, which was stressful for him because he was living in Melbourne. We basically, again straight off the state government bought a house. I think it was $415,000. He put his $45,000 into the renovation. The property is reevaluated at $600,000. The market has moved by about 6% over that period of time and that suburb, but most of the value was from just buying well. Him being strong enough to manage a renovation interstate and go through all of that pain and do the right thing as well.
There’s some examples of how these things can work. In terms of liking the strategy back, I like to do all three of these things every time I buy. That means when I target capital growth buying metro areas like Sydney, Melbourne and Brisbane, buying as close to the city or as close to the beach as I can possibly afford always houses. I like to buy suburbs in markets with, as I mentioned before, a great history of long term growth. I like to buy for capital growth so the worst return I’ll take personally on a place is about 5%. If it’s a 5% return I hope the property is brand new so there’s some depreciation benefits for me. I’m generally looking for that six to seven percent plus return when I buy, which has meant that I’ve started to go more towards, for the properties that I’m holding long term either very close to the CBU, great long term capital growth potential, plus good ability to add value in the short term, or high quality housing in good areas with very, very strong renal returns through either buying a house and adding a granny flat or building a dual income property.
Manufacturing growth is very important and you can do that though a number of ways. One of the ways is from just buying at the right price at the right market, at the right time. Also, adding a bedroom or a bathroom, doing a cosmetic renovation, or building at the right price.
Thank you for the opportunity to share today, or share this video with you today. Thank you for your time and attention. Until next time, have a great week. Thank you.