Property Hub - Investment Insights & Inspiration - Get Invested: Scott O’Neill on investing beyond your backyard

Starting point is 00:00:00 I was at a pretty large portfolio level, I thought, relatively at the time. And then this is where it all started hitting walls. There was walls in yields with residential. There was walls with lending. There was also a lot of touch points for the properties I own. I had a lot of tenants and we were self-managing about nine or about nine of them at once. You got a second job right there, mate.

Starting point is 00:00:23 Yeah, it was just full on and it started becoming like a hassle to deal with And now the banks were saying, yeah, we can't lend more in residential and the yields weren't even worth it. So everything was getting tighter and I guess this is where we started looking at commercial. And this is where it opened us up to a whole other level. Like what I found with commercial is there was just a certain scalability that you couldn't get with residential.

Starting point is 00:00:51 Like the tenants were larger, the yields were better, the leases were longer. um really attractive to to me at the time was the fact that tenants paid all your outgoings like yeah they paid your your insurance your your land tax even like in some cases they'll even pay your management fees to manage them like it was yeah it was just a different ball game and it was about three times better from a net perspective welcome to the get invested podcast where we share great conversations with experts from all walks of life to uncover their secret know-how where they invest their time, their skills, and their money, and the benefits that this has created. You see,

Starting point is 00:01:30 the truth is that everyone invests. Every minute of every day, we're investing our time, our skills, our energy, and our money in something. Some of us are investing consciously, some unconsciously, sometimes for good, sometimes for bad, sometimes for no impact. Get Invested will help you to start living by design, not by default. I'm going to help you to make it happen, not let it happen. You'll hear the top tips on how you can live with conscious intent so that you can live more, work less, and leave a living legacy by investing now. Listen to the show to discover the top tips on how to get started, make the most of your investment journey, and ultimately to be living your dream, not someone else's. More episodes can

Starting point is 00:02:15 be found on iTunes or at bussymartin.com.au forward slash getinvested. Thanks for listening and now let's get invested. Welcome Freedom Fighters. Now with most normal investment asset values at or near all-time highs and FOMO or fear of missing out running absolutely rampant, Where else are you looking to invest? Are you looking to invest beyond your own backyard? Beyond your comfort zone and beyond the limits of your current knowledge and thinking? Well, what if you could invest in an asset with average yields between 7 to 9% with the potential to be cash flow positive by tens of thousands of dollars a year

Starting point is 00:03:03 and enjoy strong capital growth potential that you can also influence and manufacture? Would you be interested? If so, you're going to absolutely love this week's episode and you're in for a big surprise. Because the big issue for most potential and existing investors at the moment is where is the best safe and affordable place to put your money when most asset classes are at best frothy

Starting point is 00:03:33 and at worst, near the peak of a bubble with the risk of market corrections threatening. We're currently in one of the most rare windows of time when leaving your hard-earned savings in a bank account is seeing you actually lose money to the churn of over 2% a year when inflation's factored in. And with interest rates at their lowest levels on record and very little likelihood of them rising over the next few years because of the federal government's debt burden being so high

Starting point is 00:04:05 and many Australians already having high levels of debt. Investors in all shapes and sizes have been flocking their war-chested savings, property equity increases and their access to cheap borrowings to flood share markets, residential property, cryptocurrencies, just to name a few, with massive FOMO-driven demand. The result? Asset values have risen exponentially in recent times and there's a lot of talk of potential bubbles and bursts.

Starting point is 00:04:37 So if leaving your money under the bed is going backwards, stock markets at all-time highs threatening to burst and residential property values rising across the board and good properties becoming harder to find and even harder to secure given the rampant competition, where else can you invest? what if there was a little known asset class that gives you positive cash flow that is double to treble that of residential property and also gives you much longer leases

Starting point is 00:05:07 with tenants paying most of the costs along with the ability to manufacture equity increases and enjoy capital growth what am i talking about you ask why haven't i heard of this Come on, Bushy, don't keep us in suspense. What are you talking about? Well, surprise, surprise, I'm actually talking about commercial property. What, I hear you say? And I can also hear you thinking that you keep seeing in the mainstream media at the moment that commercial properties like office buildings and retail premises are in big trouble with vacancies and other issues given the impact of COVID

Starting point is 00:05:48 and the shift to decentralisation and working from home. And with those types of commercial properties, on many occasions you'd be right. But like most things, you need to dig deeper than the surface-level scaremongering that the media likes to keep us either greedy or fearful about so you can sniff out where the real opportunities. Because, like any investment,

Starting point is 00:06:15 the devil's in the detail and good opportunities abound if you know what you're looking for. We need to look beyond the media noise and the commonly held myths to look beyond the boundaries of our own backyards and our often inbuilt prejudices and biases to test assumptions in order to uncover nuggets of gold

Starting point is 00:06:36 that the rest of the stampeding herd are missing and overlooking in their haste and their waste. And the right type of commercial property falls into this category. And it's fair to say that I've actually suffered some of these preconceptions about commercial property myself. As I've detailed in recent episodes with Arjun Palliwell, I've always put commercial property into the cash flow stage of the capital growth to cash flow curve component of our wealth by stealth strategy that I detail in my book,

Starting point is 00:07:09 the Freedom Formula. For a long time, I've adhered to the belief that the lowest risk and highest capital growth potential that is both safe and affordable lies in good quality residential homes in tightly held high-demand locations with strong and growing income demographics. And for the most part, and over the long term, this still holds to be true. But I've also always seen commercial property as assets that you secure later in your portfolio to achieve superior cash flow as well as for self-employed business owners to secure their own commercial premises via a self-managed super fund or a SMSF to take advantage of the significantly reduced tax treatments and the complete waiver of capital gains tax on the sale of commercial assets held in an SMSF

Starting point is 00:08:00 post-retirement. But in overheated asset markets where investors and others are falling over themselves to pay ever-increasing prices at the drop of a hat, you need to fish in quieter, less known locations at deeper depths where the big fish actually lie, away from the fishing fleets that are depleting supply closer to the surface. And this is where good quality commercial property comes in. Providing that you charter a commercial fishing boat with an expert skipper who can guide you through unknown waters safely, affordably and easily. Now this is just another way of saying that you need to invest in your knowledge of commercial property first and learn the language as well as surround yourself with commercial property

Starting point is 00:08:49 experts who can act on your behalf to guide and protect you on the journey to commercial property success. So before we get into it, let's revisit the question of how the coronavirus has affected the commercial market. The truth is that the effect has varied greatly. For example, CBD office space has struggled and will continue to do so. Fuel people will commute to our capital city centres on public transport in order to sit in an air-conditioned office tower where the risk of infections greater. Retail is also another property type that is going to continue to face hard times. Forced closures have made it difficult for customers to visit their favourite stores which has led to much more online purchasing. This leads though to the opportunity part

Starting point is 00:09:41 because as more people purchase goods online there's a greater need for logistics and storage. This has meant that warehouses in many areas have been more in demand from tenants and owners alike. Medical properties and other essential service type businesses have also powered through the COVID-19 environment with greater ease compared with the discretionary spending retail type businesses. And there are many reasons why each type of business will perform better or worse in continued uncertainty of this post-COVID world that we're living in. but we've always said that property is a long game. So you need to see the bigger picture and understand how businesses work in general before you buy property. So in relation to COVID-19, here's what we're seeing. Interest rates for commercial loans are at all time lows and they don't look like they're going to rise anytime soon. This means that the

Starting point is 00:10:40 net cash flow you receive on your commercial property has never been better. Secondly, Due diligence on commercial properties has never been easier to complete. Before COVID, it was much harder to distinguish a strong business from a weak one. This is because a key marker when assessing a property purchase is how a tenant will perform, which is easy to determine now after the pandemic. And this provides a lot of confidence in the business prior to purchase. And lastly, growth. Commercial property is growing in value off the back of falling interest rates and increased

Starting point is 00:11:18 buyer demand. There's also a severe shortage of stock. In some areas, stock levels have fallen by as much as 50%, with many owners reluctant to sell their assets while they see no better options out there for making a good return on their money. Increased demand but lower supply is fuelling the growth equation. And of course, some sectors are suffering. like, as I've already said, the CBD office market

Starting point is 00:11:43 but others have never seen such great demand and increased demand over limited supply equals capital growth. I also like the fact that unlike residential property in commercial property you have a much greater opportunity to influence and manufacture capital growth because values of commercial properties are largely driven by the rental returns.

Starting point is 00:12:09 For example, to estimate the value of a 100 square metre warehouse, which is leased for $40,000 net per annum, the general rule of thumb is to divide the rental by a yield acceptable to the market at the time. So working on a 7.5% yield, the following formula would apply. So $40,000 divided by the 7.5% equals a property value of approximately $530,000. Now, if you're going to negotiate the rent up to $50,000 a year

Starting point is 00:12:40 by improving the property or the lease terms or by adding a leaseable mezzanine floor to all other improvement, then using the same formula, the market value of the property can be increased quickly using the same 7.5% rental yield up to $660,000, which is a 25% increase in market value. Now, of course, it's not quite as simple as this, but the approach is relevant and it allows you to manufacture growth if you're smart about buying

Starting point is 00:13:10 a property where you can improve the property or enhance the rent and the lease terms. This is particularly exciting and manufacturing value is much tougher in the residential property world. Now we touched on commercial property investment with Ben Fitzsimmons way back in episode 44 of Get Invested. So make sure you have a listen to that episode as well if commercial property is of any interest. And today, we take it to an entirely new level with our guest, Scott O'Neill, who has achieved amazing things in this space, along with his partner in all things, and his wife, Mina. Scott and Mina are the founders and directors of Rethink Investing. They're experienced, sophisticated, and active investors who are able to actually

Starting point is 00:14:00 retire from their day jobs at the tender age of just 28. Yep, you heard right, 28. So the results are extremely impressive. And they did it by investing in both residential property initially and then evolved into commercial property. With a property portfolio that boasts in the order of 32 properties with a value over $22 million, releasing just under half a million dollars a year in passive income, Scott's and Mina's passion, commitment and hard work has paid off in spades. So much so that they were actually able to take a six month sabbatical from working life and do nothing but travel Europe on the strength of their property portfolio passive income until strangely enough they got bored of the good life because it had no purpose or

Starting point is 00:14:54 fulfillment and they decided to teach others how to reach the same property success which is where their business Rethink Investing was born a few years back and not just content with their own success Scott and Mina and the Rethink Investing team have now helped over 1800 clients purchase in excess of $1 billion in real estate since 2015. Rethink Investing has also been recognised as a BRW Fast 100 company and has become Australia's number one buyers agency for commercial property investors. Scott's also the host of top rating podcast Inside Commercial Property,

Starting point is 00:15:36 which you can find at www.RethinkInvesting. dot com dot au forward slash podcast. So you can start immersing yourself in the intricacies of all things commercial and learning this new language before you start to invest. Now Scott and Mina are also the authors of the great book on commercial property investing, Rethink Property Investing, strangely enough. So to whet your appetite, grab yourself a free introductory chapter at www.rethinkinvesting.com.au forward slash book and insert the code Bushy in brackets alongside your name along with your email address. Now, the books are very easy to read format and they demonstrate how anything from corner

Starting point is 00:16:32 stores to medical properties to warehouses and a host of other niches in that commercial space can lead to considerable financial success if you do it right. The book's filled with real life examples and expert advice. And Rethink Property Investing was written to help you earn enough passive income to retire early and enjoy your life. Very similar to my own book, The Freedom Formula. Now this invaluable guide demystifies commercial property and shows you how to achieve success using the very same techniques that Scott and Meena used to build their massive cash flow positive portfolio. So whether you're a sophisticated investor or just starting out, now's a great time to create wealth in the long term by adding commercial property to

Starting point is 00:17:16 your portfolio. And to whet your appetite even further, before we get into the guts of our very interesting and highly informative discussion today, let me whet your appetite with some of Scott's wisdom in the commercial property arena that I've drawn from their excellent book on the subject that I've already mentioned, rethink investing. Let's start with these thoughts on what is actually commercial property. Commercial property is real estate used specifically by investors for purposes intended to generate a profit. And in Australia, it usually takes a form of building within four asset classes, office space, retail, industrial, or specialty. However, There are also many other subcategories like medical, hotels, short-term accommodation, etc.

Starting point is 00:18:04 So, why choose commercial property? Well, in short, commercial property offers the highest cash flow you'll find in any Australian real estate. In our post-COVID climate in Australia, where interest rates are at an all-time low and high-quality commercial property scarce, This tightening of the market has resulted in yield compression for commercial property which is effectively capital growth with returns currently far outweighing what residential property can deliver. exceptionally high yields the option to negotiate long leases with some commercial properties boasting three five and upwards of 10 year leases and the opportunity to build annual rental increases into the contract make commercial property an incredibly appealing investment for many but the most significant reason why you should consider commercial property is the quality

Starting point is 00:19:02 of the tenants. Apart from them being responsible for all outgoings, a well-known branded tenant for example, like Coles or Australia Post or BWS or an IGA supermarket or a bank branch, they all have their reputations to uphold and will guarantee security and therefore strong returns. Your reward will be a secure long-term investment which produces a high cash flow, and after you've paid your loan in full, with some commercial property being able to be paid off in as little as 10 years' time, all of a sudden you've created a passive income that goes straight into your back pocket. So let's briefly break down the pros and cons of commercial property as I see it.

Starting point is 00:19:48 Starting with the pros, when we compare it to residential property, they run a bit like this. Firstly, you can pay your investment off faster and start generating a passive income. As I already mentioned, high quality commercial property has the potential to pay itself off in 10 years compared to the traditional 30 years a residential property might take. That means that all of that money that is usually going to the bank after debt's paid is going straight into your cash flow and straight into your pocket. Secondly, you can achieve much higher yields.

Starting point is 00:20:24 Commercial property has traditionally offered higher yields compared with their residential counterparts and with the tightening of the commercial market along with commercial becoming more mainstream and interest rates at an all-time low, yields in commercial property are being achieved that we just can't access in residential. In this post-COVID climate,

Starting point is 00:20:45 yields of between 6% to 9% and upwards are being achieved in commercial properties compared with half of that. in most residential. Thirdly, there's negotiable lease terms. Because contracts with tenants are incredibly flawed, if you know what you're doing, you can use this to your advantage and secure a great deal. Fourthly, the tenant pays all of the outgoings. Unlike residential property where the landlord often pays for water usage in apartments, council rates or repairs and maintenance to the premises. Most commercial tenants sign what are called net leases, which require them to pay

Starting point is 00:21:27 all outgoings, or at least most of the time. Number five is longer leases. Commercial leases can span anywhere from three years, which is usually the minimum, to as long as 15. Number six, you gain a well-looked-after property. Tenants have a vested interest in the property because it's their livelihood, which means that they're more likely to look after it. Number seven, annual rent increases. Most commercial property contracts have annual rent increases built into the leases, which are fixed, often at around 3% to 4%, all linked to CPI. And given recent changes in residential tenancy legislation, it's now very difficult to build in rent increases into residential leases. Next is diversification. Holding

Starting point is 00:22:18 both commercial and residential properties in your portfolio, place you in the best position should either of these markets be going through a downturn. Number nine is increased depreciation. Commercial investors have the opportunity to claim thousands of dollars in depreciation that are not available to the same extent in residential properties anymore. And lastly, higher quality tenants. As I've already mentioned, you're often dealing with businesses that have a reputation to uphold. This means they're going to look after the property to maintain their branding presence. They'll also pay their rent on time as it's not a good look to the public if a large company doesn't pay their rent accordingly. Now to balance this let's consider

Starting point is 00:23:04 the cons of commercial property compared to residential. The first of those is that you need higher deposits. Now the maximum loan you would usually receive when buying commercial property would be around 60% to 70% of the property purchase price, although there are still a couple of banks that will let you go up to 80%. Now, this compares with 90% to 95% that's available for residential property. This is because commercial property is deemed by the lenders as being more risky and their loan-to-valuation ratio, or LVR, is therefore lower. residential property can be purchased with as little as fifty thousand dollars as a deposit

Starting point is 00:23:46 to cover all necessary costs commercial on the other hand to get into a six hundred thousand dollar property is more like a two hundred thousand dollar minimum so unless you've got a big savings war chest you may be better to start in residential property and once you've grown that available equity then you have the deposit to leverage into commercial Secondly, it has complicated lease terms. When you purchase a commercial property, unlike residential, you're entering into an agreement with the tenant and their business. Every term can be up for negotiation

Starting point is 00:24:22 and you'll need a seasoned lawyer and a negotiator in your corner to make sure you understand exactly what you're signing up for. Thirdly, they're more sensitive to economic conditions. Commercial property is directly linked to what's happening in the economy. For instance, as we've already discussed during COVID, there's been a decline in demand for certain office assets and some retail assets. This has been due to people working from home and also shopping more online. However, where demand for these assets has fallen, others have fared incredibly well. As I've also mentioned, industrial assets such as

Starting point is 00:25:01 warehouses have flourished, with growing demand for online companies needing storage to park their goods. At the same time, smaller offices, coffee shops and local retail supermarkets in suburban areas have done incredibly well as people are staying closer to home. Next is the con associated with the reduced potential for capital growth. Now capital growth is tied to a few different variables here. Business confidence, the strength of the lease and the state of the economy are just a few examples. Fifth is the potential for longer vacancies. Now signing a commercial lease is a huge financial commitment for most tenants and this coupled with commercial property having increased exposure to economic cycles

Starting point is 00:25:48 and managing the end of a lease where you may be required to make repairs or undertake maintenance all mean that you need to be prepared for longer vacancies. Number six is that commercial properties are potentially harder to sell. This is because commercial property is traditionally seen as riskier and it requires a deeper understanding of economics and business compared with residential. The best time to sell a commercial property is at the beginning of a lease with a tenant who's doing very well. so while there are certainly differences between residential and commercial property investment

Starting point is 00:26:27 the pros outweigh the cons in the context of adding high cash flow assets into your portfolio mix especially in the latter stages when you build up significant accessible equity in your residential portfolio like Scott and Mina did and Scott and I are also of the same belief that investing now is one of the greatest opportunities that we're ever going to see. With Scott's Commercial Properties, they're seeing net yields of 7% plus with commercial lending rates under 3%. Now that's a massive 4% gap because historically you normally see a gap of only 2%. This means that right now there's the opportunity of a lifetime to get the best cash flow returns ever in commercial property. This, in turn, should result in strong capital

Starting point is 00:27:18 growth as the gap between these two metrics starts to narrow. So given all of this, Scott's message is really simple. Don't think of commercial property as a risk investment just because we're in a pandemic. Scott's team target the most resilient types of businesses. And as you'll hear during our great chat today, Scott's strategy of buying medical, logistics and other essential service type investments with strong tenants has proven to be very resilient. Now, in recognition of their outstanding achievements in both residential and commercial property investment, in 2019, Your Investment Property awarded Scott the Strategic Property Investor of the Year. so today we're going to traverse the full ins and outs of scott and mina's full journey through residential to commercial property and we pick up some absolute gems learnings tips and tricks for you along the way where we do deep dive discussions on the impacts of a forever deadline the leverage

Starting point is 00:28:21 benefit of property over shares how rent vesting was critical to establishing their property portfolio, how to avoid red line stress when investing, how to transition from residential to commercial property. Scott dispels the common myths that are held around a commercial. We talk about how you can access syndicates to secure commercial property. Scott outlines the benefits of a two-speed portfolio. He also talks about their transition to retirement strategy, which is really worth listening to. He gives you a great run around the country on which areas he thinks are best to invest in at the moment, so make sure you listen out for that. And he highlights why now is actually a good time to get rid of any dud

Starting point is 00:29:09 properties by selling them for those properties if they're holding you back. So keep an ear out for that as well. Now the only challenge that I can see that Scott and Mina currently have is that they currently manage their entire portfolio themselves. So this has created more than a full-time job managing them and as you'll hear me suggest during our discussion at some point they may need to consider getting an independent property manager and or asset manager to free up their time because as you know in my view you're not truly wealthy until you have time on your hands to do what you like, when you like, how you like. Now, creating a full-time job when you invest is just not my idea of lifestyle freedom. For me, it's about being the owner

Starting point is 00:29:59 and manager of your independent property team, where your only role for a few hours a month is to manage your managers. But I digress here because in every other aspect, Scott and Mina O'Neill have demonstrated that commercial property has turbocharged and fast-forwarded their journey to financial independence. And much of Scotland's success is owed to the fact that they've always looked beyond their own backyard, beyond their familiar territory in Sydney, and even beyond the traditional investment focus of residential property to commercial property. They like to do things differently. They like to challenge the status quo. They like to take calculated risks and they soon realised that you can invest more

Starting point is 00:30:49 successfully outside of where you live. By looking beyond your own backyard, you can look to different asset classes to get you there and discover that the local residential market is not the only way. Their fast track success has come from their transition to invest in the commercial property market as well as the residential property market. It has held the key to their future wealth and underpinned why they set up their Rethink Investing business. As a result, they're part of a new generation of investors. They invest very differently from their parents and most others, finding a different path

Starting point is 00:31:28 from the one they followed to create their wealth. They've chosen to focus on higher cash flow investments rather than the outdated negative gearing model. Why? Because it works. there's no doubt that today's conversation is going to inspire you to go to the next level in your property investment so no matter where you're at i'd love to invite you to join me personally on our unique know-how property freedom flight program where i'll personally

Starting point is 00:31:56 guide you through my proven process for property investment success to book your ticket or to find out more just jump on knowhowproperty.com.au forward slash freedom fighters or just click the link in the show notes and if you want to hear more about scott and some of his tips along with all of australia's leading property investors and independent professionals join me and the other 120 000 plus regular listeners every week as i now anchor the country's most popular and longest running property show, Realty Talk for Kevin Turner. So I look forward to seeing you on channels.realty.com.au forward slash Realty Talk, where we share short and sharp take-home tips and tricks on all things property. Now it's time for you to start looking beyond your backyard

Starting point is 00:32:51 and your investment comfort zone by enjoying this extremely informative and awesome chat with Scott O'Neill. Welcome Freedom Fighters. Now it's fair to say that COVID has changed the face of many businesses and we've seen entire companies that are now working from home, retail shops have switched to online selling and many cafes and restaurants have simply shut up shop. And as a result it's fair to say that commercial property has taken an absolute bollocksing from the mainstream media in recent times. So it begs the question, is investing in commercial property still a good idea? Well, like most things, not all commercial properties are the same. And just because

Starting point is 00:33:36 CBD office buildings and retail shopping might be doing it a bit tough in certain areas, this doesn't mean that this applies to other types of commercial properties. So to do a deep dive on all things commercial, and to open your ears to the opportunity that the right type of commercial property offers, we're joined by highly acclaimed commercial property expert and active investor, Scott O'Neill. So welcome and let's get invested, Scott. Thanks for having me, Bushy. Mate, I've been looking forward to this chat for a while. You've been very visible in the commercial space for quite some time now. But for those listeners who haven't heard of you before,

Starting point is 00:34:14 can you start by giving us a rundown on who you are, what you do, and most importantly, why you do what you do, mate? Yeah, sure. So Scott O'Neill, Well, I run a company called Rethink Investing. So we're actually a specialist commercial buyers agency. So we're full-time commercial investors and we started the company in 2014. So we've been around for a little while and, you know, relative to this new industry at least. And we're literally just finding properties representing the buyers all day, every day. And so, we target things like industrial assets, retail properties, medical assets, all these

Starting point is 00:34:52 types of things. And how I got into this business, it was almost a bit of luck, really. Like, I was an engineer prior to this and started investing, did pretty well out of it on a personal level and, you know, I heard some people needed help and they started asking for help and out of nowhere just started helping people invest in the same properties I was buying at the time and fast forward you know many years we've helped over 20 it's up to 2200 clients roughly um about 1.25 billion in property so it's sort of you know i didn't even know what a buyer's agency was back then and and now it's sort of uh yeah here we are and it's yeah been a

Starting point is 00:35:35 really interesting few years to be honest yeah brilliant well uh you've certainly done having done my homework you've personally done very well out of property and i'd like to unpack some of that so that the listeners really appreciate the success that you personally had and and how that then puts you in such a great position to help others to do the same so let's let's wind it back if we can and i'd like to sort of dig in a little bit of detail to take us right back to the point when you decided that – the point where you decided that you would start to invest in things other than work. Can you take us back to what was happening at the time

Starting point is 00:36:18 and what led you to that decision? Yeah, so I was – so I came out of uni with an engineering degree and really I guess I sort of chose engineering because I like the idea of sort of being outside and not just being stuck behind a desk. It was more construction side and a bit of desk work. And that variety sounded quite exciting at the time. But when I started the career, it just didn't really match what I thought it was going to be. You know, it was quite granular, a lot of the work and huge hours, especially when you're chasing, you know, forever deadlines.

Starting point is 00:36:52 And that's sort of what most project managers or, you know, anyone involved in construction would know that also well. It's a forever deadline that's, and there's always, you're just pushing stuff uphill all the time. And I just thought, you know what, maybe that's not what I want to do for the next 40 years. And I was following the career path. I moved into the building material industry, so sort of, you know, companies like they were called Wholesome at the time. That was the old ready mix stuff.

Starting point is 00:37:22 So there's all mines and concrete plants involved in that. And I like that a bit better because it was a bit more business orientated. So I didn't even know I liked business at the time. But, yeah, just sort of managing a company's P&L, even a small portion of that company, it was good fun. But I've found, I've just found the career path quite restrictive, especially for myself. I progressed quite quickly in these companies

Starting point is 00:37:49 and I was sort of 26 managing about 130 or 40 people from memory across mines and logistics businesses and stuff. And then I hit a ceiling and they told me I needed to get an MBA to progress to the next job. And that was – and then, you know, halfway through that degree, it made it pretty clear that they didn't really want anyone under about 45 in that next level role. So that was nearly 20 years at the time and I thought I'm literally going

Starting point is 00:38:20 to be stuck doing this same exact role for 26 years if they follow that trajectory. so it just made me just put all my energy outside of work or you know even a little bit in work to make property investing a serious thing and i bought my first property at 23 just a little house in granny flat in sutherland in sydney can we can we just before we start to really drill down on that uh yeah why decide to invest and then why property so investing was a way of somehow how bringing retirement forward and it didn't need to be instant like I was I was quite conservative how I used to think I thought you know if I brought retirement five years earlier

Starting point is 00:39:03 that's a big win or even 10 years that's a huge win so that that was why I thought well how do I make more money than my job's going to pay me and it was like creating another little side business and property was a good way of doing that passively and leveraging what little money I had at the time and you know it allows you to control a larger asset base and obviously the younger you are the more time you've got left in the market to have the compounding effects work for you and that was why I was just hooked with property I had goes at shares and you know had some wins had some losses but just the non-leveraging factor of shares meant no matter what I did in it it was never going to be that impactful with the dollars I had and property it just felt like I was just

Starting point is 00:39:47 doing a lot more with it. And I never looked back. Property was my full-time investing method. And yeah, it's pretty much how it is today. Yeah. Well, let's really sort of unpack that journey then. So, you decided on property. And were there any books you read or anything that sort of really excited you and inspired you to go, right, this is it. Property is going to be the vehicle um it was it's probably that rich dad poor dad one that everyone read at the time it's such a simple book but um it really just showed the difference of only working for a salary versus creating passive income you know the book was not written for australian real estate it was it was really the theory of it and it was such basic but very understandable theory that

Starting point is 00:40:39 really hit home like you it's going to be hard to get ahead if you don't try something on the side if you rely on your your job only um you can do well you can chase the career ladder and get paid very good but uh even if you're doing well it's good to do things on the side you're just going to amplify the results and that's that's what that book really i guess made me think from an early age and um yeah it was i've probably those old property magazines when i when there was two or three of them in circulation though i used to get all three of them every month and just reading investor stories was really inspiring for me at the time you got to see you know i remember reading about some farmer that you know at the time he bought you know built about a 10 million dollar

Starting point is 00:41:25 portfolio and this was you know 10 12 years ago and uh yeah it was it was great i thought you know look good on him he did that and um yeah he set his family up because of it yeah brilliant okay so so you got all excited uh what was the next step uh you started delving into property what did you decide to do and why uh so i i was i remember i was about 17 and i i was working in part-time jobs and as naive as I was, I went to a mate to the bank and said, look, we've got, I don't know, I think it was like 15 grand total at the time and I thought, how can we get a bank loan? Because we heard one of our tradie mates who had started working,

Starting point is 00:42:11 he was a couple of years older than us and he was 19 and he had about three properties because he started working really young and did well and we were in uni just working bar jobs and it was, yeah, we wanted to do what he was doing and the bank quickly said, you don't have enough deposit, your job's a part-time, you've got, there's nothing going for you, basically, so we got politely showed out the door but the lesson was it was just, yes, get a good full-time job

Starting point is 00:42:41 and we couldn't do that until we finished uni so we parked that idea up and didn't really do too much with it But, yeah, it was just a good lesson, like, to show at least we knew what we had to do and, you know, we were restricted because we were studying and forced to do that half the time. But as soon as I got a job as an engineer, it was just a matter of saving a bit more of a deposit and we were ready to go.

Starting point is 00:43:09 Like, we were pre-empting it, to be honest. It was ready. It was just a matter of just trying to make the bank work with us. Yeah, okay. So how old were you when you bought your first? 23. So I looked for about 12 months to buy the first property too. So I nearly went down the owner-occupier route,

Starting point is 00:43:28 which I'm so thankful I didn't at the time. I was down in the Sutherland Shire. We were looking at two-bedroom units in Miranda from memory. They were about 400K at the time. Yeah. And then, yeah, I just saw this house a little bit further out in Sutherland and it was 480, but it was a five-bedroom house on 600-plus square metres of land.

Starting point is 00:43:49 And, yeah, just it clicked. I went, why would I want a unit that's going to pay strata for the rest of my life? And let's be honest, a two-bedroom unit, if I was ever to have a family, I'll probably grow out of that quicker. So it's not a forever home. So, yeah, it just got lucky, went with the house,

Starting point is 00:44:11 And that was one of those moments. If we went to the unit, it would have made, in today's terms, probably a million dollars difference in wealth. Yeah, massive. So you were almost an accidental rent fester as a consequence or it was like, no, I can see the merit in continuing to rent but put more horsepower into a higher asset with much stronger potential? Yeah, yeah.

Starting point is 00:44:38 And look, the only risk, you're right. Like I was probably, I was always comfortable with rent vesting and I was lucky enough to have a partner that was too because I know that's, I've got a lot of clients and one of the partners is always more keen on a house than the other and if you don't have the same goals, that always makes life harder too. If you want to build a self-sustaining portfolio, you almost need to go all in in this market and really focus on it.

Starting point is 00:45:08 if you go load up on a you know million multiple million dollar sydney house or melbourne house or brisbane yeah now is your first property that's probably you done you know you're going to have to just pay that off and that's yes you haven't got the tax man or the tenant helping you either so you're pretty much locking away your potential to do anything else for at least 20 years exactly that's a pretty smart observation early on and and and few people smart enough to make that decision because they've sort of been brought up to believe that you've got to own your own home first and then then start considering something after you've paid off the home loan in many cases unfortunately but so you bought that property in Sutherland uh I'm assuming that went went fairly

Starting point is 00:45:55 well uh yeah so they get you to what was the next step from there so 2010 was the year that all happened and you may remember that was a pretty rubbish year for property it actually declined for a bit and yeah i remember reading all those forums like typical forums where you're just getting all these people that are you know saying the world's falling over and and i was scared you know shitless at the time that i was buying a house for 480 and it was going to be worth 300 pretty quickly um but but what saved me was the fact it had two rentals on it so i was actually renting for 660 a week so there was a you know it was just a classic dual income and it was positively geared with the debt about sort of 200 a week you know 250 a week clear so that that just

Starting point is 00:46:44 meant i wasn't really fearful of the i guess dropping in value because time would heal that you know i wouldn't sell at a low point and i figured if the a recession hit a really bad one and there'd be more renters trying to go for those cheaper rentals anyway. I guess that's what I thought when I was at that age. Yeah, makes sense. But look, to answer your question, not much really happened for two years. We didn't buy again until 2012, and we bought a unit in Maroubra. That was really just a life – that was kind of an owner-occupied purchase.

Starting point is 00:47:20 um but okay we bought it we bought it because at the time it was still cheaper to purchase them rent in that location eastern suburb of sydney um and and we basically made the call to to do that it was um you know we're getting married or not far off getting engaged sorry at the time so it was sort of that we did go down that route reluctantly uh we bought the house but But it was really just because we couldn't find another property in Sydney that produced the same results with cash flow as the first one. So we, you know, that was in a way potentially one of my mistakes. I didn't look beyond our own backyard.

Starting point is 00:48:01 We were too fixated on just only buying where we lived. And, yeah, look, that property we bought for about $620,000-odd. And then, yeah, we didn't buy again for about a year and a half after that. But this is when Sydney started ramping up in value at this time. How leveraged were you into those first two properties? So what was the level of borrowings on the first one and the second one? First one was 90%. Second one, we went to A&Z and they did an 85% lend over both of them.

Starting point is 00:48:32 They crossed them, did they? No, it's two separate 85% loans. So it was just product they had at the time, which made life easier from a lending point of view. So we're really just going off our savings. at the time and hence why, you know, my wife and I worked for about six years to save the deposit for that first house and, you know, that was pretty much part-time jobs

Starting point is 00:48:58 and, you know, and then we got our full-time jobs out of uni so we scrounged up about $60,000 to get that Sutherland property so there was a stamp duty concession at the time as well, which was helpful. Yeah. And then, yeah, we basically saved again over a couple of years. Our incomes were going up a bit as our jobs got a little bit better. And then, yeah, the rest was I then moved to Port Macquarie after that.

Starting point is 00:49:26 And this was our third purchase, which was four units on one title. So that was a – you were chasing career to go to Port Macquarie or what led you to go there? So it was career, exactly. So I had two job offers at the time. One was with One Steel in Perth, and the other was in a company called Adelaide Brighton. I know them very well.

Starting point is 00:49:50 Yep. I'm an Adelaidean. It was a great company to work for. I really enjoyed working for them, and we picked that job because it was a bit closer to home. My wife's mother had terminal cancer at the time as well, so it was a bit of a bad time personal-wise and then moving from home and driving back and forward

Starting point is 00:50:13 from Port Macquarie every weekend, literally. It was a lot of time on the road, but I guess it was a means to an end and my wife was very supportive of that. She left her job to, you know, come up into Port Macquarie and, yeah, we did it because we knew it would speed up retirement. Like, it was a well-paying job for my age and it allowed us to then pretty much accelerate what we're doing with the properties. And that's pretty much where things started happening a lot quicker for us.

Starting point is 00:50:42 Okay. So you mentioned that you – units next. Why units? I'm just keen to unpack your thinking around the time as to why you went down that route and so the listeners can sort of gain the learnings from that. So for me, it's all about building a passive income. There was a hundred – as I said before, our first property was about 200, 250. a week clear in our pocket so that yeah that 10 000 or you know it was about 15 000 at the time

Starting point is 00:51:11 was uh quite attractive you know i thought that wow that pays for a holiday you know you know i can literally go to europe for a couple weeks and that's that property paid for that so it was it was nice as a secondary income and then i always wanted to replicate that and we then stumbled on this one in port macquarie it was renting for about 810 a week and it was 425 000 it's a huge the income it was it was over 10 percent and um it was it was a strange property like there was four unit like there was two there's one three bedroom a couple of two bedrooms and a one a one bedroom so it all totaled up to 810 and uh it was another sort of 20 20 000 plus income we created so bought that and uh then we found the properties in sydney were growing and i guess we wanted to

Starting point is 00:52:04 buy another unit block so i literally spent every night googling unit blocks you know and i just wanted another one of these because what if we could create another 25 grand income all of a sudden we're up to about 60 at the time because there were rental increases happening back in sutherland and we're now renting our marubi unit as well so everywhere we looked the rent was growing and yeah it was starting to be like a proper little side business and And now that we had sort of better paying jobs, we could feed more into it quicker. And, yeah, it became very addictive.

Starting point is 00:52:37 It was just how do we speed this up? And we looked at ways of strata titling units. And this is how we created a lot of equities to build our large portfolio. It was not just about cash flow. It was how do we get cash flow and equity and also buy in a growth corridor, you know, or somewhere where there's upside in capital growth.

Starting point is 00:52:56 and it was just replicating that again and again and we bought three units on one title in Gold Coast. We actually bought two unit blocks in the Gold Coast and they were, again, 10% yielders at the time. Again, reason for focusing on the Gold Coast as the location? What drew you there? It was almost as simple as we just couldn't find them in New South Wales. where was the next most comfortable place, the Gold Coast.

Starting point is 00:53:30 Yeah, so it was very, very basic. And I actually spent a summer up in the Gold Coast too when I was in uni and I lived in Broadbeach and it was, yeah, I knew all the areas because we were working up there as well at the time. Yeah. Yeah, it just made sense to go there because we were familiar. So, yeah, and it was just really good numbers on the properties

Starting point is 00:53:54 and knew the suburb and, yeah, the way we went. So, again, one in four or one in three, did you say, in the Gold Coast? What did you pick up there? So, we bought two three-unit blocks. So, two of them and both had three units on the one title and then we split one of them and just kept – well, we couldn't really split the other one because there were firewall issues and stuff like that on the other.

Starting point is 00:54:19 So, we just left it as a cash flow. Yeah, just while we're drilling in on that, For those listeners who haven't been exposed to this, the key here with strata titling is that immediately you can do that. You effectively increase the value of that property significantly because you can effectively sell it as a standalone. Do you want to add a little bit more to that? Because I'm very keen to educate the listeners on the benefit of doing that.

Starting point is 00:54:46 So just talk us through that a little bit if you can. so the real basic analogy for that is think about a cake you buy it as a you're getting it for wholesale price um there was it's more difficult to finance as well so as a property that had you know difficulty getting finance let's say you got five units on one title there's less buyers for that compared to the individual unit so if you can chop it up you can actually value it at a higher square metre rate because it's more accessible to more buyers and they're happy to pay a slight premium for it because it's in their range.

Starting point is 00:55:20 So you can chop up the cake and sell the slices for a premium and that's what we were doing but we weren't selling it, we were revaluing it and that was freeing up, you know, normally about 20% equity at the time. Nice. And I guess one point of disclosure, I still look for these type of opportunities today but I don't think that, I haven't seen one work for about four or five years now.

Starting point is 00:55:44 It's – they dried up because what happened in those sort of 2014, 15 periods is I noticed there was a lot of people with super funds now buying them and they pushed the prices up very quickly. So you actually didn't even need to strata title them at one point because those 10% yields that were once on offer were now being sold at 6% yield. So there was, you know, massive yield compression in the unit blocks, similar to what we're seeing in commercial now which we can go into later but yeah um yeah the

Starting point is 00:56:14 opportunity of the unit blocks were great back then and that's why i was obsessed with them like we bought a second one in port macquarie that was five units on type one title and it was just like every time we bought the numbers were working very well and uh and that's that's why we stuck to it and then then it's sort of by the end of 2015 i never saw one worth buying again because The yield's compressed. Yep, yep, great. So if we just sort of total up by that stage, when you get to that point, what's the value of the portfolio

Starting point is 00:56:47 and the amount of debt that you've got against us just so I've got a sense of what the free equity position is? Do you know roughly? So, look, without perfectly timestamping it, it was sort of around sort of 18, 19 properties at the time. So we bought a few houses in Brisbane and, yeah, With the strata title, that turned one into three properties a couple of times. So at about sort of 18, 19, value was around 10 or 11.

Starting point is 00:57:16 And we were running at about, at the time, 65% debt. And that was around sort of the age of 26, 27. So that's pretty low LVR given the size of the portfolio. Were you relying on equity growth in existing properties to then access that to fund the deposits on the next? Is that you were using that capital growth and accessing it to keep growing the portfolio? Is that how you know to do that so quickly?

Starting point is 00:57:47 Yes, but we were only doing equity releases one at a time. So you could have met, like, let's say our first house in Sutherland, which all of a sudden we hadn't revalued for a number of years. That would have been sitting at very low LVRs because the equity build-up. So we didn't just go revalue every property because it wasn't about just trying to go redline. And there was some properties where we had to redline

Starting point is 00:58:10 to get it over the line, like, you know, it was to the last five grand buffer and things like that. And that was stressful every time we did that. And, yeah, every time I did that, I almost regretted it, to be honest, because it wasn't worth the stress. But there was a couple of examples where the redlining really paid off as well just by getting into an asset that I otherwise wouldn't have.

Starting point is 00:58:34 Talk to us about that. Can you give us an example where it's like, oh, this is pretty tight but the opportunity is too good to miss it? Talk us through what it was and what your thinking was at the time. So the second unit block we bought in Port Macquarie, we paid $710,000 for it. This is five units right in the middle of town. So nowadays, like I haven't even checked,

Starting point is 00:58:54 units are probably $350,000 minimum and there's five of them. So it's gone up. it's it's more it's probably worth over two million dollars and that was five years ago so I'm very thankful we we redlined to get it but the bank was causing us problems because it was not a standard loan this was five units on one title and it was the first five unit block I ever bought all the rest were four or less on one title yeah and um yeah basically the bank wouldn't lend us enough and I was short I was short about 50 grand and I had to get this horrible personal loan from nab at the time which is it was like a 16 interest rate uh where we drew it out

Starting point is 00:59:37 and i was literally just pulled all of it out at once to fund the deposit on it through another bank um it was just playing around with all this bank's money that you know i didn't really have at the time so i i just ran the numbers and said yeah it would take us about four months to get back into the black yeah and if everything went right and if all the rent came in and all that kind of stuff so there were no major hiccups but it was just it wasn't fun living like that for that period and um if something went wrong maybe it things could have been worse but look it did pay off because like i said that property is now worth you know a lot more than what we paid and and that helped us like leapfrog into other assets at the time but but uh yeah it's just i think if

Starting point is 01:00:22 you can just plan to be better finance wise uh which which that was what i was i was just impatient because i knew this stuff was working and i i just saw the property and i knew i had to make it work it wasn't a matter of plan the finance and then buy the property and that's probably what i should have done because you could have lost the deposit in the in the mix of all this totally totally it's it's something that we do a lot with our clients let's build it on paper first and then go and find the property not the other way around because uh yeah once you become sort of you become emotionally attached once you've found this great opportunity it's like i can't let this slide and then it's like how am i going to make it work and then if you're sort of

Starting point is 01:00:58 staring at the ceiling for for nights for months on end because you're that close to the line then that isn't a lot of fun no and that's a good i remember staring at the ceiling literally it was like you know this things had to go right every day to sort of make you know and it looked a lot of people do that and i just think in this lending market now it's it's slower and and there's less I guess things are tougher now that that has sort of been through the mix. So, yeah, you've got to be careful doing what effectively I was doing back then. But you can still do it. It's just a matter of probably planning a bit more thoroughly than I was.

Starting point is 01:01:39 I knew the property side of things. I just wasn't perfectly suited with the finance side yet. Yeah, yeah. Good learning, Zai, because that's when I've got – There's a lot of my memory bells going off as you're talking through this because I was exactly the same. I focused very heavily on the property side and then sort of shoehorned to get the finance to work

Starting point is 01:02:01 and then suddenly realised, hold on, this is a game of finance. If I don't have my finance in order, then I'm not going to be able to secure the asset base that I need. So a pretty important lesson to learn early on. No, that's awesome, mate. So we've got to – up to the – where were we? We've got about 19 properties and the portfolio at the time was around the sort of 10, 11 mark.

Starting point is 01:02:28 The unit properties weren't working. The numbers weren't stacking up. Where did that lead you to in your thinking and what did you do next? Yeah, so this is where like to get like – I was at a pretty large portfolio level I thought relatively at the time And then this is where it all started hitting walls. There was walls in yields with residential. There was walls with lending.

Starting point is 01:02:51 There was also a lot of touch points with the properties I own. I had a lot of tenants and we were self-managing about nine or about nine of them at once. You got a second job right there, mate. Yeah, it was just full on and it started becoming like a hassle to deal with and now the banks were saying, yeah, we can't lend more in residential. and the yields weren't even worth it, to be honest,

Starting point is 01:03:15 because remember I said those unit blocks were compressing in yields. So there was no house and granny flats worth buying that I could see that were in decent areas. So everything was getting tighter and I guess this is where we started looking at commercial. And this is where it opened us up to a whole other level. Like what I found with commercial is there was just a certain scalability that you couldn't get with residential.

Starting point is 01:03:40 Like the tenants were larger, the yields were better, the leases were longer um really attractive to to me at the time was the fact that tenants paid all your outgoings like yeah they paid your your insurance your your land tax even like in some cases they'll even pay your management fees to manage them like it was it was just a different ball game and and i didn't really know the full extent i was just attracted by the yields at the time you know i just once i was you know completely through realestate.com.au domain there was nothing left to look at so you go all right let's look at what's commercial got on offer and just started plugging numbers in spreadsheets and it was just it was about three times better from a net

Starting point is 01:04:23 perspective and uh and that was without even getting deep into it and i thought all this this is has legs so now i've got to understand it and we i remember just probably i didn't make any moods for about 18 months in it i was just looking looking you know putting a bunch of offers in things getting rejected thinking i wanted to buy a property but then i found problems with it so there was no good literature on it there was no it's it was like a big dark world of no info on it and that was the tricky bit um there's plenty on resi there's plenty of books out there on resi there's plenty of um you know daily news stories on residential but commercial uh it's out of sight out of mind but it was generally a place where fund managers were just buying big properties and

Starting point is 01:05:08 you know and then there's just a few people in the know buying the smaller stuff that and i wasn't one of them at the time um so how did you educate yourself because that would have been quite challenging i would imagine at the time yeah it was just time like that's what i said it was about 18 months of just mucking around and talking to agents and just trying to trying to sort of work out what i was comfortable with and i finally finally found one that i was comfortable with and it was it was like a little mini supermarket this was in perth at the time and the business had been operating for 20 years perth was doing terribly at that time too so i liked that i thought it was counter cyclical or if this business can survive that market and they've been through the

Starting point is 01:05:49 last 20 years then then that should be good and then it actually i bought uh there's two titles two leases so the other one was like a fish and chip shop he'd been there for 30 years so it was just the fact that we've been in business for so long and the yield was you know up over eight percent net as well and yeah just just went it i bought the property and this was after looking at many others and um and the big light bulb moment was one of the leases so the lease was nine months left on the supermarket to run out, and that was a risk. The bank didn't like it either. They gave me a higher interest rate because of that shorter lease,

Starting point is 01:06:31 but they were happy on the other lease. Valuation came in fine, but when we got the lease renewed on a new five-by-five-year lease, the valuation went up. It went up over 10% at the time, and so it just created 10% with a stroke of a pen, and that was something I've never experienced with residential. There was always manual work you had to do, even with a strata title, which is quite non-intrusive on the property. There's still a lot of work to do.

Starting point is 01:07:00 All we did was change the lease on the property and the bank loved it and traded equity because of it. So, that's it. Yeah, let's just unpack that for a minute because this is a really important differentiator between resi and commercial and something that I really want the audience to get their head around. Because in really simple terms, the way the banks in particular and others look at commercial property is they'll look at the – and jump in here to expand on this, please, because this is your core expertise, Scott. But my understanding is that they'll look at the annual rent, they'll divide it by the yield, and that'll give you a rough indication of what the current value is in those terms. So, using that formula merely by extending the lease, one gives the banks more comfort because that's less risk to them and potentially increasing the rental amount, you've automatically created that extra 10% value that you've just spoken about. Yeah, exactly. So commercial is all about lease value or how to value it, lease value.

Starting point is 01:08:13 So that could be as simple as just exactly how much net rent you collect. The other way to improve the value is to increase the security on it because, remember, the longer the lease, the more attractive it is to more investors. Like if I show you a warehouse with a one-year lease on it versus one with a 10-year lease on it, you're going to pay more for the 10-year lease because a lease is a legal requirement to pay rent. So it's not like residential where the tenants can pretty much bail on you and there's nothing you can do with it.

Starting point is 01:08:44 You can go to the tribunal, but you've got no chance. It's tenant-friendly. But with commercial, the lease is the lease. The only way to get out of that is to sublease the property. But they just can't run away from a lease because you can go through a litigation process, sue them and put a black mark on their credit. Like, it's a messy process for the tenant.

Starting point is 01:09:08 They would not want to do that. So, yeah, leases are actually a value uplift. If you've locked in future revenue, the bank or the valuers will actually value that into the equation. So, that's all we did. We increased the weighted average lease expiry, WAIL. That's just an acronym and commercial. yeah um the whale went from nine months to five years so that increased the value because the

Starting point is 01:09:34 security was better yeah and that meant more people would like it so the valuer would increase the value on it yeah of course yeah brilliant brilliant so that's great so uh secure that first one in perth and i'm probably guessing that was sight unseen giving you in the eastern states yep so um we're actually on holidays in i think japan at the time as well so we're sort of doing all these little uh print offs in a lobby at you know two in the morning just trying to get it in time because um yeah like i wanted it and i just saw it as a as an income producer and it was producing after all costs i'm sort of just trying to remember it was like it was a it was producing about about sort of 80,000 gross on it minus the cost you know and by the time it all washed out

Starting point is 01:10:23 it was about 35 40 grand income again on top of it so it was just every time we were buying it was like another 20 30 40 and it yeah it was really helping and just took the pressure off work and that's that's after that that's where we stepped away from work we literally we had about 150 000 passive income at the time uh we stepped away for two reasons like my mum sorry my wife's mother actually passed away that year and we're living in port macquarie and we're doing that drive back and it was just a whole you know life's too short moment type of thing yeah um yeah and we just pulled the pin on work and and then just went to europe for six months after that yeah okay And again, I know I'm getting granular, but I think this is really important for the audience to get their head around.

Starting point is 01:11:16 Normally, with commercial, you've got to stump up a much bigger deposit, so LVR, 60% to 70%. I'm assuming that without knowing how much you borrowed against that property in Perth, that you probably need to kick in equity potentially from the residential properties at that stage to make that happen. Is that how you brought that together? Yeah, so we were always sort of buying at the time. It would always be like one was an equity purchase, the next was savings, and then back to equity. So it was basically in that kind of line.

Starting point is 01:11:52 But what we were doing over time was reducing our overall LVR. Like from a lending point of view, you can't get, you know, say 12, 15 million in commercial property in an 80% loan. it just won't happen um yeah so we found like we were restricted by banks a lot um so going in with 30 deposits uh it was and higher cash flow properties was a way of just keeping the uh you know leverage quite healthy and the rents were more than covering all the interest two times over type of thing so it was yeah yeah it meant that we could have the conversation with the bank and and yeah as long as we were planning the residential side of things well um it it did

Starting point is 01:12:37 help us keep going essentially so yeah the commercials were always 70 loans so yeah we generally had to have the 30 cash or or refinance cash sitting in an offset account that we then contributed to the next property it was yeah it was always about just trying to get that deposit available and that was almost the goal and then once we did we'd then buy got it got it awesome so you picked up the one in perth uh did you add to the commercial uh side of the portfolio from there yeah bought a warehouse in in newcastle that was just a sort of about 410 000 from memory seven percent yield you know three by three year lease and that was a a great little addition because it was almost there was like it was just a

Starting point is 01:13:25 four walls a real simple build just good area in um mayfield in newcastle and it was yeah prices were growing too you know we saw very rapid growth in that market just without we didn't do anything to that we just kept renting it to the same tenant and we found the equity grew about 15 in 12 months because yield for compressing in that area like seven percent was very tight for that market and we did buy well i felt at the start which which kind of helped us get a bit of that um shoot off in the growth and uh and then basically yeah we bought what else did we buy we bought um i started it bought a warehouse in rockhampton that was like a dulux store we bought some retail shops in brisbane sort of three in a row that had development upside um we bought

Starting point is 01:14:16 What else did we buy? Sort of a year or two, in 2018, we bought a house where we live now, like a principal place of residence and this kind of changed our tack because that was a bit of a showstopper for lending for a couple of years on that one because it was a high-value house and lending with high-value properties, it's almost like a commercial loan in itself. It's low LVRs. It's tough. They punish you from a lending point of view.

Starting point is 01:14:49 So this is probably over $3 million then, I'm guessing? Yeah. So in Bellevue Hill in Sydney, and you look at the average house price there, it's pretty steep. So that just knocked us out for a while. Did that mean, and again, based on what you've told me already, I'm guessing you might have had to rationalize some of the other portfolio to help fund that yeah so we actually sold that my least favorite property always was that one in marubra remember that one second property i said that was a bit of a mistake we sold that because it was just negative cash flow believe it or not it had the worst tenants out of all of them like it was renting for about seven eight hundred a

Starting point is 01:15:32 week so it wasn't a cheap rental but they were fussy and they were i don't know we just had problems with it all the time and and there was um yeah it was just an absolute headache that so it was good to get rid of that um we got out of that in in the black too that that worked quite well but um yeah it freed up a deposit and um it was reluctant and this is one of those kind of redlining moments to buy that one in belvey hill it it was a good price at the time and we knew we had to go it as well and i didn't know how restrictive the banks were going to be and this was right in the middle of APRA at the time like what was that Royal Commission back in 2018 yeah yeah so they literally removed the people that approved the loan and we had to get it all I did

Starting point is 01:16:18 a four-month settlement on it and that was probably the worst four months I ever had with property because we're just yeah the amount of things we had to move and shift around to come up with an extra deposit because they offered a lower LVR on it it was yeah I thought I'd get an 80% loan and but it was either 70% or 65% from memory. I can't quite remember. Ouch. And, of course, the policy was almost changing on a daily basis. Yeah.

Starting point is 01:16:44 I remember it extremely well because we've got a broking business and good grief. It was very difficult for any purchaser to have any confidence around, you know, pre-approval wasn't what the paper was written on because they'd tell you one thing and then tomorrow the thing completely changed. So how did you deal with that? That would have been a pretty stressful time, I'd imagine,

Starting point is 01:17:04 scott well it was stressful because um we're going to lose uh a deposit of circa four to five hundred thousand dollars as well like so and we knew the owners were going to take it they wouldn't they were going to be ruthless if they could because um yeah i do believe they they worked out halfway through the process that they shouldn't like it was sort of they sold it pre-auction and all that kind of stuff so they they didn't let it go to the market properly right and it was probably at the low point in the cycle as well so yeah things were improving in the four months after that so they were going to take the money they wouldn't have given us grace to settle and that added to the stress but we ended up selling i think it was three properties from

Starting point is 01:17:45 memory so i had to sell uh the one in maruba i had to sell that mayfield commercial property which the only reason we sold that is because i went through my portfolio quickly called up agents and worked out who would sell it quickest. And the agent said, I could sell this in seven days, and he did. He sold it for 100 grand more than we paid, which was about 25% more than what we paid for it in 12 months. So we obviously bought well, and that, again, because that was a 70% loan.

Starting point is 01:18:18 So that freed up a couple of hundred K there, and then selling the Anzac, sorry, the one in Maroubra was one that freed up another couple of hundred and then we had this development site in Gold Coast, which I didn't mention before. That was one we were going to build some townhouses on it before we really dug into our strategy properly. We sold that at a loss to free up cash, but we got through it.

Starting point is 01:18:46 It was just selling a bunch quickly and, you know, we had sort of 32 properties at the time and went back to 29 mine um but there was that big house instead and we we ended up making it by about two days so in four months we made it by two days and yeah that was stressful and i definitely would never recommend it to anyone well and i guess the the other exercise there is that there would have been a very strong emotional pull to that property for both yourself and your partner given that was the place you're going to live in. So that adds, you know, that turns up the volume.

Starting point is 01:19:25 Yeah, quite significantly because it's not about the numbers anymore. It's about what it means to your family's future, basically. So I can imagine that would have been quite challenging. And as you say, this is always the trade-off. If you're going to put a lot of money into the Taj Mahal for the place you live in, it comes at a cost and that cost is uh hamstringing you effectively from investing elsewhere so i'd imagine at that sort of a spend and with the rationalization that that then created it was probably a while before you could dip back into the market was it yeah and you're right so we

Starting point is 01:20:06 pretty much didn't do anything for a year or so and then um and this is sort of the next it was almost a temporary strategy i started going with uh i started investing in syndicates so we were creating commercial syndicates because all our commercial properties were going perfectly at the time like they were super high cash flow they were creating equity the tenants were fantastic and quiet to deal with like it was you know it was like a two-speed portfolio we had the all the houses and the unit blocks which were they kind of did their thing to get the equity but they were sort of idling away but then the commercial side was it was just a lot freer there was a lot more there's just more wealth getting created in that side and you could see

Starting point is 01:20:49 it because even just viewing the rental statements that was just significantly larger and yeah so a way of continually investing was through syndicates so what we were doing is creating unit trusts finding things like shopping centers so I bought into two shopping centers one into ACT one up in into queensland and these were like very high yielding sort of eight percent type you know one was a six and a half million dollar property one was a four and a half million dollar property so we just had about four four people in each of them um so i was actually investing with clients at the time and uh yeah it's just like a family and friends call it syndicate so So we just shared the profits and the properties would lend

Starting point is 01:21:35 on themselves so that they, it was like a lease stock loan where the property would be strong enough to support itself so you didn't need anyone guaranteeing the loan. And that meant that, you know, we could sort of just quickly invest without having to go through the hassles of revalue in the portfolio or refinancing. So it was sort of like an arm's length purchase but we were part owners of, you know, very good quality assets.

Starting point is 01:22:01 Yeah, I'd love to just sort of on a very slight tangent there just talk about syndicates for a minute because, again, syndicates quite often get badly spoken about and the challenge with them, and I'd love you to expand on this a little bit, is getting very clear on what the – not the entry strategy but the exit strategy becomes very clear because, as we all know, the more parties that are involved, the more dynamics, the more changes in needs that start to emerge over time and then the wheels can fall off if one party tries to pull the trigger and others don't want to. So how have you, for the benefit of those listening to this and may have had an interest in syndicates in the past,

Starting point is 01:22:50 can you sort of talk us through how you've managed through that to protect the interests of the parties once you're actually into those properties? Yeah, so look, like you said, people have different goals and different circumstances in life. Like I actually find that part not too difficult because you can just set it all up very clearly with a good lawyer who's experienced in it. So you do handball a lot of that to the lawyer,

Starting point is 01:23:13 but obviously you're all going to be agreeing to certain things. Like you might say there's a minimum hold period of five or seven years. You might say you've got first right of refusals to buy the other parties out. But like there's got to be a lot of those terms and conditions in it just so you can avoid someone just saying, oh, I don't want to be part of it this year, you know, I'm out, let's force the sale. Like you don't want that because you'll be forcing the sale at a bad time and everyone needs to agree and voting process,

Starting point is 01:23:42 all that kind of stuff has to come into it. I found the hardest part was just getting everyone together at the exact right time to want to put the deposit to buy the property. it's like herding cats because everyone might say yeah i'm going to put let's say half a million dollars cash into this investment settlement three months away but imagine you're relying on five people to put 500 000 in to buy a large asset large ish asset and and then all of a sudden one of them's not there you know that's that's the tricky bit you've really got to get everyone fully committed and and and that's like you've got to do all the due diligence on the property

Starting point is 01:24:21 Like it all has to stack up perfectly and, you know, one out of the five might change their mind. So I found that the most difficult part, the syndicate. How did you overcome that? Did you end up having a trust account that you all put your funds in before you then found a property or how did you sort of, because that is a big risk factor if it takes a while to find the property and then someone says, oh, no, I've stuck the money,

Starting point is 01:24:41 I've bought a whole day house, I'm out. Yeah, so my strategy was we just over-raised by 5%. So we allowed a 5%, you know, buffer for someone to, you know, oh, I can't put that amount in. I'm going to put $100,000 less in. Like, we're ready for that. Smart. But, yeah, that was all we did.

Starting point is 01:25:00 And, man, we missed it. Like, we still missed out on a couple, you know. But, yeah, I think in this market, like, everyone's, like, there's such a fear of missing out. It depends on the market you're investing in. Like, back 2019-ish, it was not as gung-ho as it is right now so people had reservations and certain things so yeah i'm sure doing a syndicate right now would be a bit easier than it was back then because right now you can't keep people away from

Starting point is 01:25:29 property you gotta bat them off of the stick exactly right that's spot on no that's great so obviously then leveraging that additional using other people's money effectively without without the banks and then avoiding those the guarantors under that unit trust structure uh would have enable you to leverage into significant property. So there's a couple that you spoke about. There's, you know, a good 11 mil there that you spoke about and those. Did you continue beyond those or where's the portfolio currently sitting at? Yeah, so currently, so my strategy now is I'm slowly deleveraging out of some

Starting point is 01:26:11 of my cheapest properties. So I've currently got a property of circa $10 million under contract, so I'm going large assets but less of them. So if you ask me this in probably a year's time, there'll be a whole lot different. Basically, it's decluttering, going for higher value, higher quality assets but keeping the best of them. So this is a good market, and I say this to clients,

Starting point is 01:26:37 if you've got dud properties in your portfolio, it's actually not a bad time to potentially get rid of them because you're going to actually probably have a buyer for them. If the market's weak, it's sometimes impossible to move a property that isn't any good. So I'm using this hot market very slowly. Like I'm probably only going to sell one or two, you know, each year. But, yeah, it's just about sort of getting rid of the ones

Starting point is 01:27:03 that have probably done their thing and just getting into better quality assets. and that's probably what I'll be doing for the next few years for the foreseeable future. So are you – and I'm guessing here that you've got the size of the nest egg effectively is where you need it. The important thing for you now, I guess, is so it's not so focused on growth anymore.

Starting point is 01:27:27 It's probably more about debt reduction and freeing up the cash flow. Is that the transition that you're making? Yeah, yeah. So it's just increasing in the income, increasing the length of leases and, yeah, just having those less touchpoint tenants. So, you know, some sort of larger warehouses or branded type tenants, they're the ones that I think – look, I've got a lot of clients in similar positions to myself and it just depends on what stage

Starting point is 01:27:59 of the journey you're at. Like you need that foundation property. Like you don't just jump into a big commercial property unless you've got a lot behind you and um yeah it's it's just about sort of buying quality over quantity for me and um when i was younger it was more about quantity and and that was probably something i you know probably i wouldn't call it a mistake but i could have been more efficient that's for sure but it was more just buying as soon as i could and you know just not really looking at quality as much so yeah that that's that's how i've changed from 10 years ago i guess

Starting point is 01:28:36 to now so the let's let's paint a picture of your absolute ideal lifestyle for yourself and your partner and i'm assuming there's there's probably some some little o'neils running around as well what does that look like yeah what does that look like and and what does that lifestyle cost and where are you at in relation to your portfolio funding that without you needing to have to work to service the debt? Yeah, look, currently without these new acquisitions, we're sitting sort of just under half a mil passive income from them. So we are very comfortable.

Starting point is 01:29:17 And that's probably people that work with us in our business, they really notice we're not, we're very casual with how we sort of buy properties like it's not we don't need you to buy them it's really just where we're just sort of helping buy things um because we like being involved in it and um and that's that's because i guess you know i remember when covid first hit you know it was i thought the business would wrap up like i'm selling or buying commercial properties in a pandemic like it couldn't get worse than that um but like we were comfortable because there was a portfolio behind it like that was it that's about the biggest difference it makes it just makes you more comfortable that you've got

Starting point is 01:29:56 something behind you if everything else goes to crap um the nest egg will be the the safety net and um and that's why it's not about just a dollar amount anymore it's not about it's it's more just decluttering and trying to get a bit more time back and my my wife does cop a lot of emails and calls from this portfolio like she manages it mina and um she's very good at it but like if it's just time consuming and it's not fun dealing with the same little problems all the time like you know even a couple of months ago like in one weekend we had a sixteen thousand dollar cost for a replacement of a balcony because it rotted through there was some termite issues in another one there was a fight and cops came into another property so these little houses that were

Starting point is 01:30:43 bought over the years having all these problems and they all kind of add up to it really doing you a favor and um and that's probably where our heads at it's not about sort of how much money is this property making it so how do we just get rid of the painful ones and just redeploy it into quality stuff that you don't have to hear from it and then because we'd like pre-covid we were going overseas at least three months every year as well so managing things overseas in a different time zone is also another element of problems and we actually found because we were slow responding to something we're letting vacancies drag out like this is and like it if you really run the numbers like the the portfolio was sort of in a like wasn't well managed as well so

Starting point is 01:31:30 like just having yeah that's sort of where our head's at to fix it so our ideal portfolio is um is just yeah probably higher get reduce the percentage of residential increase the percentage of commercial again and just higher value, bigger tenants. Now, I think you've mentioned a really important point there because what's your other half's name, Mina, did you say? Yeah, Mina. So Mina would have a full-time job managing that portfolio. In fact, she's basically a property manager extraordinaire

Starting point is 01:32:07 if she's managing that whole exercise. and I know that because we've obviously tried on very similar paths. We actually had a property management business because we were so dissatisfied with the quality of property managers that we were experiencing and that's a very grunty exercise, there's no question about it. Is part of the strategy and by reducing the number and higher quality and getting into commercial

Starting point is 01:32:34 where there's less of those sort of tenant headaches attached to it, that's obviously going to free up time but is is Mina keen to continue to manage it that hands-on or is is it at some stage are you going to be looking at getting uh independent professionals to be managing on your behalf so you've actually got more time to put into the things that are important to you both yeah and that that's a potential and I guess one of the good things with some of the commercials we've got you actually don't even need managers like because their direct debit set up from an accounts repayable department that who's the tenant so it's a whole different ball game like if you're dealing with the right businesses so

Starting point is 01:33:14 you know we're looking one of the properties we're looking to buy is a kfc you know like who's is kfc not going to pay you probably not you know it's so do you need a manager for that i don't know probably not like it's it they're the types of um things you can sort of i guess yeah put zero time into like compared to managing 10 properties that would equate to half the rent of that one tenant it's it's chalk and cheese like you can actually own a lot of this commercial stuff and very little work for it and and you still you can still have a rental manager in between you as well but um if we kept going down the residential route we would 100 probably have to look at a bookkeeper full-time just on the on the portfolio and that's that's a cost and that would hurt your

Starting point is 01:34:00 cash flow for the properties and make that business less viable. So, yeah, look, it's just a different direction through investing in both residential and commercial. For me, it's an absolute no-brainer. Once you know which properties, once you're comfortable with the commercial property world, yeah, it's quite liberating because you know what types of properties are going to do well in most economies.

Starting point is 01:34:28 And there are recession-proof tenants out there, and that's the ones you can look for. Spot on. Well, that's a great segue into that subject because what I'd love to do now very quickly, if we can, is dispel some of the myths that people and the media have helped to promulgate, by the way, around commercial property, particularly in the post-COVID world where the commercial space has copped an absolute flogging in the press.

Starting point is 01:34:56 talk to us about one of the main myths that's attached to it is that well you know with great yields yes but we're not going to get the capital growth what what do you say to punters who come up with that theory yeah so it's it's a myth and i think it's spread between people who are i think it's spread by residential real estate agents maybe i don't even know where this whole we came from because if you go look at any commercial property like you know let's go look at western sydney go look at what you go on rp data and check out what you know your local warehouse sold for in 2000 and look at it now like they've they've tripled in value and um and some areas have tripled even in the last sort of 15 years as well it's it's crazy growth like

Starting point is 01:35:46 you don't get growth and only residential and commercial stays at the same dollar amount like Imagine you've got 1,000 square metres of industrial space next to a suburb and you look at the value of the residential property. One does just not stay at the same value while the other goes up. There is a flow over. Commercial is driven by yields as well. So as the rents grow, so does your capital value. There's a lot of the properties that you can buy,

Starting point is 01:36:16 They're gaining in popularity now in terms of like the types of investors buying into it. So there's actually more demand flowing into commercial than there ever has been. There's more, you know, I quote mums and dads, you know, the inexperienced investors now going into commercial because the banks are allowing them to. They're seeing the yields in residential are at record lows

Starting point is 01:36:39 so it doesn't make much sense to keep investing in residential. But I moved out of residential for a reason. I hit walls. I think there's people hitting walls a lot quicker now because of lending and the yields are lower. So, you know, you've got to look at alternatives. In commercials, this beacon of light of massive cash flow is still out there even in 2021.

Starting point is 01:37:02 Like the numbers work. We're averaging about a 6.5% net yield for our clients and like they're good yields when you're getting interest rates into the low 2% so that the gap between your interest rate and the yield on offer is nearly 4% in some cases. So you're making money just on debt and on top of that, you still get rental growth and, yeah, we're seeing double-digit growth rates right now.

Starting point is 01:37:29 That will not last forever. We're going through a boom in most industries at the moment it seems but commercial is super undersupplied and there's a lot of buyers and that's causing growth. Let's break that down a bit because I think the big issue here is that a lot of people put the commercial hat on office buildings you talk commercial and their head goes straight to CBD office buildings and yes they've been clobbered and will continue to be clobbered and our superannuation those have got institutional super that'll be clobbered

Starting point is 01:38:03 because there's a fair slanting beyond equities into commercial CBD office buildings as part of their portfolios. But the world of commercial runs a lot further than CBD office buildings. So talk us through where you think the opportunities are in the commercial space. And we're talking here essentially about retail mum and dad investors who might be going, well, let's have a look at this. Are you happy to break down where you think the opportunities are both in terms of the type of property, but even let's go around the grounds quickly based on your national view of what they should be looking at and where? So I'll be super direct.

Starting point is 01:38:46 I'll tell you where we're investing, breathing investing, my company. So there is – and the reason I'm comfortable saying this is we buy most of our properties off-market. So it's not like we're shooting ourselves in the foot telling you where we're investing. But, yeah, we are buying probably about 70%, 75% off-market. So where we're buying a lot of stuff is Brisbane, industrial. Industrial is super undersupplied.

Starting point is 01:39:13 It's hitting record low vacancy rates. COVID has pushed more retail businesses into industrial space. That is causing rapid growth. Leasing periods of now, you know, it only takes, I'm generalising, two to three months to find a tenant. There's some cases where, like, you know, there was a shed in an area of Brisbane that was vacant. It was 1,700 square metres.

Starting point is 01:39:39 It went vacant in COVID because the business actually grew, but it was only vacant for six days before another tenant came in. So long vacancies are very possible and very real and will happen in commercial, but they don't always happen. If you buy a good quality asset in a good area, the vacancy will be quite shortened. And remember, you're dealing with longer leases, so hopefully you're not looking for a tenant.

Starting point is 01:40:03 hopefully it's only every fifth year or every tenth year like it's it's not a regular thing it's not annually yeah that's the difference so yeah you get a vacancy expect it to be a bit longer because there's i guess a more specialist nature to to the business but we're seeing opportunity there yields are actually almost getting a little bit tighter now so opportunities also exist in adelaide and perth i think you just got to be slightly more careful in perth because It's more up and down that market, but I really like medical assets in all the capital cities, so anything from pharmacies to GPs to dentists to, like, even just specialists, any type of specialist,

Starting point is 01:40:48 especially when they've got an expensive fit-out. Like, I'll always bring up the dentist model, you know, like the fit-out for a dentist can be half a million dollars for a relatively small place. So would they move next door because the rent's 10% cheaper? No chance. They're in for good. Gold handcuffs basically as a result of that.

Starting point is 01:41:08 Yeah, put their heart and soul on it. They're not going to walk away from that in a big hurry. Yeah, exactly. And I like Canberra as well, like big master plan community. There's places where retail works very well in Canberra because there's just simply not acres of supply like there can be in other parts of the world. Like, you wouldn't go buy, you know, a high-rise office space

Starting point is 01:41:32 in the Gold Coast. You know, there's just too much supply of that. But look, office space is the one that catches the media's attention because it's easy to relate for people who don't know this space. So that's why your headlines drive towards that. The other one is the Folletti signs in front of a retail shop. A poor-quality retail shop will go vacant regularly, and this is the difference.

Starting point is 01:41:54 If it's in a really good area, maybe a corner block, you know, in an affluent area or it doesn't have to be affluent. It might be just in a regional town but it's in the centre of town and, you know, you've got the real estate agent who wants to rent that out forever. Like there is very good retail out there. Retail is not all bad. There's just I wouldn't be going to buy high-end fashion right now.

Starting point is 01:42:17 Like stuff like that, there's a weakness. And, you know, just think about whatever you can sell online cheaper than in a shop that's where you just got to think maybe is that business model going to be there forever um yeah you know like fuel stations another one is that going to be in here in 15 years maybe not i don't know you know how quickly are we going to adapt to electricity these are the things you've got to think about when you invest in commercial yeah smart well it's no different resi you're looking at you're buying a property with a view of what's this going to look like in 10 years' time, not what it does look like today.

Starting point is 01:42:51 Yeah. So, yeah, that's brilliant. So you've covered both locations and the styles of property there. Painting the picture out, because everyone's an expert when it comes to property, Scott, as you know, and there's a thousand different opinions around where we're at, where we're heading, and, you know, is the current boom going to last, and if not, what's likely to roll out? What's your read of what's likely to happen in property generally

Starting point is 01:43:21 and then in commercial in particular over the next couple of years and beyond? So on the coal face, like because we're actively negotiating on properties for clients like, you know, every day and I'm seeing competition still rising. So the price is actually building momentum still, like residential, like we're not as active in that space but you can still see record price after record price.

Starting point is 01:43:48 So there's a lot of, there's tank in the gas still there, like gas in the tank rather in that. So how long will it go for? I worry a little bit more for residential than I do with commercial because I'm quite conservative. I find, I just think it seems top heavy. Like you look at people's incomes, you look at the prices things are going for, there's a lot of aggression

Starting point is 01:44:12 aggression when people are buying like could it cope with a one percent interest rate hike like no there'll be a lot of people in pain and that's um i'm sure that and this is the the thing i'll never one that'll think it'll drop 40 because what all the doomsday mergers don't realize is there's hundreds of triggers the government will plot you know pull out to stop those crashes happening because it's for the greater good you don't want the market to crash it might they might think that some people who you know can now afford the market will be good for it but the reality is it will be worse for everyone if it crashes so there'll be stimulus measures you know forever that's just my opinion i've totally agreed we've seen it in covid you know look what

Starting point is 01:44:53 they did and what the rba governor said we will do what it takes yeah so when you hear those sort of that commentary and given that you know over 55 percent of the wealth of the average australian families in the home homes means votes so anything that's going to drop in value is going to put a government uh into opposition so it ain't going to happen so exactly you know 100 agree with you in that regard but but you know i also see where uh it is getting top heavy uh there are going to be some thresholds that uh that people reach in certain particularly in certain locations where So good locations will always perform well and will continue to. But the tide won't float all ships moving forward.

Starting point is 01:45:40 What about on the commercial side then? What's your predictions on where that's likely to go in the short to medium term? Look, I actually think there's a lot more to go for commercial, and there's two main reasons. One, the yields are still so much more attractive. It's a good way just to park money up and make money. Even without the growth, you're going to make very good yields,

Starting point is 01:46:01 It's like 6%, 7%. If you buy a million-dollar property, you've got a $30,000 mortgage on that. If you've got a 7% yield on that, that means you're clearing $70,000 net income minus your mortgage, which was $30,000. That leaves you $40,000 in your pocket just for buying a property. You'd need a $300,000 deposit to buy that. So you're making a very good return on your money just through cash flow alone.

Starting point is 01:46:27 So as an investment class, the numbers stack, And that's why I think there is room to move. The second reason is because residential, which is now worth $8 trillion in value, I think they said the other day, is at record levels, there's a lot of people with equity that have the ability to use that. Are they going to go and buy more residential and keep feeding the beast? I don't think it makes sense because there's no margin in it for developers right now. There's no margin in it for second-time investors or third-time or fourth-time investors. they need alternative investments and a higher cash flow model is is more attractive again so i think it'll push a lot more investors that were never going to consider this as a commercial

Starting point is 01:47:09 into it because they got the means to and and it stacks up like that's why my job's very easy i'm not i don't need to sell these properties i just show the numbers and it it does the job yeah exactly you don't have to talk about airy fairy things about look they're going to build a station here in five years' time or, you know, there's a bloody gentrification comment. Like, you don't need any of that. The numbers stack in today's terms and that's why I think it'll grow on itself.

Starting point is 01:47:37 Yeah, and particularly for those investors who are at the cash flow end of their journey, that's where the key is. And there's a lot of people in that, just under the baby boomers, who, you know, how can I now convert my nest egg into a tax-effective income stream to fund my ongoing lifestyle, well, given the sorts of yields you're talking about, plus the capital growth's almost a bonus in that regard for those that are looking for that, based on the work you're doing, you're able to identify properties that right from the get-go, they're putting a substantial income return in their pocket, and a yield

Starting point is 01:48:17 level they're not likely to get anywhere else either in the next decade, given there would likely to be in a very low interest rate environment yeah interesting now that's brilliant mate well we've only just touched the and scratched the surface and uh really enjoyed our conversation and i've loved the way you've sort of taken us through the evolution of your thinking around that uh i'm going to get you back we'll drill drill down deeper into some of these subjects because i think there's a lot of learnings that um we can take away and you've been very generous in sharing that but to sort of uh bring our discussion today uh close to a close i'd love to jump into what i call the the ambush uh lightning round mate where it's just five quick

Starting point is 01:49:02 questions that the listeners always love to enjoy your words of wisdom on so first of those mate is what's your favorite quote and why oh good question um i it's probably it's probably that you know typical investor picking a warren buffett one but that that quote where you he says oh you when the tide goes out you know he's swimming naked and and i like that because it in good times everyone thinks they're a hero with investing you know the you know it's almost like the you know the bitcoin bubble you know everyone's buying a lamborghini and all that kind of stuff and have they really built fundamental wealth have they really planned for the for the rainy days and um and that quote just captures that you know when the tide goes out because

Starting point is 01:49:49 you need to understand what happened in previous busts and that's something i've always studied like you know you've got to know what you know how other crashes have occurred and how people got out of it and if you don't do that and you're trying to scale an investment and you think it's going to be like it is today forever then you can get hurt and you don't want that i don't want that for anyone you just got to keep your buffers and invest safely and sustainably yeah spot on great advice there uh on the rating front uh what's the top book that you'd recommend listeners have a read of scott um it's probably almost on that topic like i haven't this is how terrible it's just busy lately but i haven't read a book for about two years but um i'd probably

Starting point is 01:50:37 look recommend that i think it's called the secret life of real estate and banking it's uh philip anderson is is the author it literally goes through the last 300 years of boom and bust in the us like from from when the cotton fields and the train line booms and all that have caused catastrophe in the economy and and it really just paints a picture how interest rates and, you know, the over-exuberance of investors of kind of this has always happened and there's actually quite an accurate 18-year cycle that it seems to follow, you know, mysteriously

Starting point is 01:51:09 and, you know, if you read that book, it'll tell you when the next potential crash could be and, yeah, that's a good one and I'll give a, you know, shameless self-plug for our own book. We've got a Rethink Property Investing. It's literally just a book about almost what we're talking about but in a lot more detail. We talk about all the different commercial asset classes, you know, the different strategies to play, you know, what types of investments are safer than others, you know, how to do all your calculations and that.

Starting point is 01:51:39 And, you know, if you are interested in looking over the fence into commercial, you know, that's a book I wish I had when I was starting out. It would have sped up my learnings because in Australia, there was quite literally zero books on commercial real estate. There's hundreds in residential. So, yeah, I guess there's two books there. Yeah, and we'll slot in the plug there. I was going to mention it at the end, but you've beaten me to the punch, so that's perfect. Most Australians believe they pay too much tax.

Starting point is 01:52:10 So what's the top legal thing that you've done to minimise the tax that you pay? Look, buying properties in family unit trusts have worked quite well. Commercial is a way of reducing tax as well because you can claim the full amount on the building and the fit-outs as well. So it's basically more tax-effective because you get larger

Starting point is 01:52:31 depreciation benefits. So that's been a good key. And, yeah, that's basically it. It's sort of hard to do much else. They'll get you at every corner, but I found commercial was a way of at least enjoying a larger income but not having to pay exactly half of it back. Yeah, yeah, exactly right, which is a hidden benefit there in terms of that ongoing affordability piece as well.

Starting point is 01:53:00 Final question in this then, well, no, not quite the final question. What's both the worst and the best piece of investment advice that you've ever received to date, Scott? Probably the worst is only buy where you live, you know, and that's just so common. And that was almost like the old-school investment way, you know, because you know that area better than you do other areas. It was easier to invest in your local area only. Yeah. And that, in a way, like it wasn't a terrible mistake,

Starting point is 01:53:35 but it meant we slowed ourselves down to a degree and we had to offload an asset that we probably wouldn't have otherwise bought. And it was a substantial asset for us at the time as well. So if only we, like, because I'm a borderline, this investor like i'd i'd invest internationally if the opportunities were there but luckily for us australia represents such good value and opportunity we don't need to look abroad um but yeah i think you've got to treat things like you would in the share market you don't only invest in a in a bank because you know the head office is down the corner like you invest because it's

Starting point is 01:54:11 good value you know and totally understand it oh great great with you we are actually internationally borderless as well we the first thing that happened when the gfc we jumped on a plane and went to the states for three months and picked up properties at just unbelievable prices and all they needed to do was return to their long-term average and we tripled tripled our equity position so uh so i totally agree with you mate just just looking beyond the backyard uh what else is out there not only in terms of location and property but as you say looking beyond resi into into commercial other avenues it's just a just got to get your knowledge up get your knowledge up to where it needs to be have a read of your book rethink property

Starting point is 01:54:56 investing to get your head around it and then um then surround yourself with the right professionals that can help you make it happen now i love that uh what what's the best piece of investment advice you've ever received um probably probably just treat every investment like you would if you were running a business um and that's probably like so whenever you buy a property think about as as a business if you were buying a business would you want to buy one that's negative cash flow just to claim tax back or are you looking only for the depreciation benefit or you're only looking for the business to grow in value and not worry about anything else like they're false economies like if you look at it to produce proper income and it's doing very well it's profitable and

Starting point is 01:55:44 treat it just like you would growing a business i find you'll do better overall as an investor you'll be able to scale larger you're producing an income that will help you lend easier and scale and and yeah basically there's there's more money coming in and um but you don't neglect the other angles too so i guess you just got to look like a portfolio as as a business and that i don't know who told me that but um yeah that's what uh a lot of people don't do and It's almost a part-time hobby that they occasionally get around to and then they wonder why it doesn't perform. So that's brilliant advice.

Starting point is 01:56:24 In conjunction with that then, what's a personal habit that you've developed that you believe has contributed most to your investment success to date, Scott? Look, it's probably just persistence and the fact I enjoy it, which helps the persistent side of things. So if you don't enjoy investing, and I've met many people who've tried investing that they couldn't cope when there was a bad news story like a tenant left and things like that, if you're not a problem solver

Starting point is 01:56:52 and you don't enjoy this, yeah, it's definitely not for you because you won't have the stamina to keep doing it for decades. But if you do, latch onto that and own it and you'll go further with it. Yeah, beautifully said. mate to wrap it all up uh the the big final question that gives you a chance to sort of bring the keys together if i gave you a microphone that spoke to every single one of the 7.8 odd billion people that are currently alive in the world and i gave you 60 seconds to talk

Starting point is 01:57:25 what would you say oh good question no i would uh just do what you want to you know you've got to enjoy what you do um think long term if if you don't have a long-term mindset with with business uh you're not going to be ethical and um if you are ethical business will probably be better for you anyway um because you need it to be better because it will give you the freedom and i think uh that's that's how i've lived my life as well and um you know think long term but uh you know It's not all about business either, which I need to listen to my own advice a bit too because you get trapped into the business and the next minute you're working 15-hour days. But it's enjoyable.

Starting point is 01:58:10 And if I didn't enjoy it, I wouldn't even get past the eighth hour. Yeah, yeah. I hear exactly what you're saying on that front. Mate, you've been very generous in unpacking the nitty-gritty details of your own journey. I really appreciate you doing that because there'll be a lot that the listeners take away from the learnings there. And you really have opened our eyes to the opportunity that commercial brings into the equation. So there's just another bow in the armory there for investors to start considering seriously, particularly in the current situation that we're likely to be in in the short to medium term.

Starting point is 01:58:55 so really appreciate you doing that for those that uh you've really pricked up their ears and they're keen to hear more and potentially do more with you what's the best way for them to get in touch um so yeah probably two ways just either just google rethink investing um or you know rethinkinvesting.com.au there's a website there uh with uh all the contact details and um And the other option is if you want to slowly get into this, and we do like people, the more they know, the better it is. If you are looking to get into this space, even just start by, you know, purchasing the book

Starting point is 01:59:33 because you'll learn a hell of a lot on every, you know, you'll literally be up to speed with all of this and then you can decide if you would like to reach out from there. Yeah, brilliant idea. What we might do, Scott, and we'll talk about this afterwards, is set a challenge for the listeners and get them to send something into us and then you and I can decide on the best submission and potentially perhaps give away a copy or two of your book

Starting point is 02:00:01 if you're happy to do so. Too easy. No problem. Fantastic, mate. Look, really enjoyed the chat. It's been really good to connect at long last. I look forward to getting you back on the show sometime soon. But in the meantime, look after yourself.

Starting point is 02:00:17 No, you too. Thanks, mate. Thanks, mate. To get a summary of all this investment gold in the show notes, just email me on hello at khgroup.com.au. That's H-E-L-L-O at khgroup.com.au. Or check us out at www.bushymartin.com.au forward slash GetInvested. I look forward to joining you next week for another episode

Starting point is 02:00:44 of the Get Invested podcast. So thanks for listening. And as always, dream as if you live forever and live as if you die tomorrow.

Property Hub - Investment Insights & Inspiration - Get Invested: Scott O’Neill on investing beyond your backyard

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.