Nhan Nguyen

Australian Property Money Rules: Good Debt vs Bad Debt Difference

Nhan Nguyen is a successful property developer with years and years of experience in the property industry. With over 100 deals throughout his property career, there is no one better to talk to that can give us the best property advice on how to make money through Australian property. 

Come with us as we delve into the topic of Money Rules and what some of the rules are and how they help you invest your money in the best possible way, the difference between good debt and bad debt, what your worst-case scenario should be going into any deal, and much much more!

“There is no right answer because everybody’s circumstances are different. And you’ll find in the marketplace there are varying answers.”
– Nhan Nguyen

In this episode, Nhan and I discuss money rules, which is a key foundational principle to enable you to set boundaries and manage your money in the best way possible.  

I love money rules cause it’s what I live in breathe by. And I know that some people don’t even know what money rules are and I know that’s going to be our intention today to explain to people what the two words, money rules mean. But I live and breathe it and it makes my life work well. 

Let’s share with the audience what are the money rules because these are kind of the foundations of what we look at as property developers. 

What makes a good developer and a person who can make money continuously when we’re talking about money rules is first, why do we have money rules? Where do they come from? Why aren’t we taught them at school? I actually got this concept from a guy named John Burley. John Burley is an educator from America. He came I think in the late 1990s and early 2000s with Robert Kiyosaki, with the power hour guys. And he brought this concept of it. He’s got some really good frameworks and I don’t know what he’s up to now, but he’s got a little really good frameworks on how to think about money and how to think about how they integrate it into the property. So oftentimes, you know, if we’re playing a sport, whether it’s tennis, soccer, football at this particular weekend, there is a lot of football on. If we don’t have rules, one, how do you know that you’re winning? How do you know that you’re losing? How do you know where the boundaries are? You know, when you’ve got kids when you’ve got businesses when you’ve got relationships, you need boundaries.

And money rules is not something that’s taught in school. So when people make a lot of money, they don’t necessarily know where the boundaries are, how to spend it, how to manage things like tax, how to manage things like saving, how to manage things like future opportunities, compound interest. So is that your understanding of money rules Tyrone? 

Yeah, I mean, it’s a good example when you think about it. People who win the lottery is a good example. You know you hear stories about people winning millions of dollars. And then later in life, maybe 5, 10 years down the track, they’ve lost everything and you go, wow, they’ve got so much money and they had all the opportunity to do whatever they want to do with it. But then they come back to the starting point of where they won that money.

And I’ve read stories online where this young girl at the age of 20 something, she was in the windfall of like 12 or $15 million and she said it was the worst thing ever in her life to actually be given that much money because she didn’t know what to do with it. And two, people around her just thought, Oh yeah, she doesn’t know what to do, so let’s just come and ask her for the money. She ended up just giving it away. And then it got to a point where she just lost everything. And I don’t think she had any money rules because, at that young age, no one teaches her those things. So it’s actually really, really important to look at it because just as you said in life…    

Not just for money but in relationships, in work, in whatever you do, there are actually boundaries and rules that are involved. And I think this is really, really important. Why we should be talking about it today and just really, really helps us. Another great example is fast cars and I know how much you love your cars, maybe you want to share with us the example of why having money rules or money management is so important. Just like a fast car.

Creating wealth, and I know that this podcast is primarily about property investing in property development and creating wealth. I think it’s very important that we talk about money rules because I can teach people how to make money. It’s actually not difficult, you know, going from $50,000, $100,000, $500,000. If you think about it like a vehicle or a car, you’re going faster and faster and faster. And essentially like a motorbike. You know, I often see motorbikes on the road and motorbikes with the power-to-weight ratio, which means that they’re very, very light and they’ve got a fair bit of power on them. They can go very, very fast. But the motorbike is one of the most dangerous vehicles on the road. I’d love to have a motorbike. I’ve actually got a helmet.

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I bought up the license, but the fear of dying is the reality check of why I don’t have a motorbike. And I agree that my wife wouldn’t approve it either. Obviously we don’t want to put ourselves at risk. Not to say that I’m negative on motorbikes, it’s just a risk I’m not willing to take. But my point is that property wealth creation, we have leverage and we go faster. We can go faster and faster. And if you don’t do it right, you can essentially hurt yourself by going bankrupt or losing money. And that’s why I believe in money rules. Looking at our money rules, how should you set them up? What are a couple of considerations because it is such a big topic and where I’ve gone to learn from there is I’ve studied very, very wealthy people in my book ‘From Broke to Billionaire’. I’ve studied wealthy people and gone, okay, what are their principles? Or how have they made money in good markets? Have they made money in bad markets? Because essentially at the end of the day you are leveraging yourself and money rules keep you safe, it keeps you sane, it keeps you financially healthy in good times and in bad times and that’s really what you want to do.

Let’s talk a little bit about perhaps maybe what is probably the money rules that you have in place or you would recommend taking a look at?

We’ve got a handful of principles about money rules and we can go through, a few of them for those listeners there. Obviously, if you’re driving and you won’t be able to write this down, but if you’re on the train or you’re listening to this and you’re sitting in front of your computer, you might want to write down a couple of these answers to these questions to help you on your journey. If you can’t, you can always listen a little bit later and participate in these questions. And look, don’t be too concerned if you don’t have the answers to these questions. There is no right answer and everything is a process. So your rules will change as some of the answers to these questions. We’ll definitely change over time as you build more confidence, build your skillset, encounter different situations, whether it’s a one into two subdivision or a buy/reno/sell.

There are so many nuances in this and everybody’s got their personal risk profile as well. So one of the questions I often ask my clients is, how much money are you willing to invest? How much money are you willing to invest in that? And there might be, the capital that you have or the self-managed super fund that you’ve got or the capital that you have just right now as part of your resources. So some people might have little, some people might have a lot. Some people might be able to invest $50,000 right now. Some people might have to wait until their super turns over and they can invest $200,000. So the amount of money is an important one. And then this next question is how much time? How much time are you willing to invest?

Some people want to quit their jobs straight away, but they’re too time-poor. They might be a dentist or for their work, they have to travel two hours each way. And they cannot just invest any time whatsoever. They’ve got busy lifestyles, look after the kids as well. So I think it’s just also a reality check. Looking at that, how much time you’re willing to invest. Then people often ask me, what is a good amount of time? What is enough? And I say to people, look, when I started, I was doing probably, one Saturday a week. I was single at the time, no kids, very little responsibilities. One Saturday a week was my ideal scenario at work before, during, so before work, at lunchtime and after work I jump on the phone and ring agents as well. So we do have nooks and crannies of time. So Tyrone, anything you want to add to a couple of those topics that we’ve talked about so far?

So far it’s really, really important to understand that these are sort of the main key components that I think, for anyone who’s actually working full time. And also I guess time-poor and also money poor. Then they need to ask how much time can you actually put into this? And then as we talked about in one of our last episodes is about raising funds. You don’t necessarily need to have your own money, but you can figure out how can you actually work with people to bring money in. So I think we’re on a really, really good track here. But let’s keep going onto the next questions that you might have or ask.

And then that’s the thing, it’s just a start just to not stop you but get some facts. Like how much money you’re willing to invest. That’s just a start. If you are saying, look, I’ve got no money and I need to find investors I can call. That’s where you’re at. And then your education and your journey will basically go from there in time. You know, you need to find ways to leverage time because that’s where I started. I was working a full-time job for the first three years before I was able to quit my job. But I use my time wisely. Oftentimes we lose a lot of time-wasting our time doing things that are frivolous when you can do things more efficiently. You know, I remember every time I jumped in the car, one of my principles was when I jumped in the car, I need to get on the phone and ring somebody and use that travel time or commuting time, the best possible outcome.

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So the other question we have or I like to think about is what’s the minimum return on investment? So what’s the middle return on investment? If you’re throwing money in the bank and it’s just general bank interests, we’re talking 2% per annum or less, which is very, very low. And I think we’ve talked about it in the last podcast. You got $1 million at 2%, it’s barely $20,000 a year and that’s less than $2000 a month. And that money, in my personal circumstances, I can make money work very, very hard. We’re talking a minimum 20, 50, maybe even 100% cash on cash return. But that comes with skill and experience as well. So with people I know who invested in potentially with you there, Tyrone, now you offer an interest rate and it’s a balance between return on investment as well as the return of investment and timeframe and risks and things like that.

It’s really, really interesting that we look at it that way because I guess it depends on your mindset as well to what you think you could actually do as well. And it depends on your risk profile because as you said, it’s a skill that you’ve developed and when you’re first starting off, everyone has the dream to getting like 100% return, 200% return, but what are the risks involved to achieve that kind of return and also how to structure that safely so that when you do get that kind of return because it’s definitely possible. There are so many deals out there that I’ve seen and I’m pretty sure you’ve seen as well too that offered those kinds of high returns, but how much time, how much money and how much skill will you need to actually put into it? To structure this deal to get that kind of return.

That’s why I love development because it allows you to leverage instead of doing just a 1 into 2, you could do a 1 into 10, 1 into 30 but it takes organic growth and it takes that skill and experience. I’m very much an active investor in terms of, I’m not necessarily on the tools, painting or using the Gerni on the ground or the concrete. I mean active as in I’m very much aggressive in my strategies. I want the best return possible in the shortest period of time because it not only protects me, protects my investors and secures the exit paying the banks back as well. So return on investment is very much something that you need to consider and look at, okay, what are the parameters of the deal, not just the return on the investment, but also the return of the investment and exit strategies.

Because oftentimes people can paint a very, very glossy or beautiful photo of what is possible. But it’s part of you understanding the deal and assessment of the deal and execution of the deal in the current market as well.   

I totally agree! So let’s look at the other types of deals.        

So I know a lot of people when they start out and it’s a great place to start is doing renos.

Growing up I was involved quite a lot heavier with my father’s properties that he was renovating, he’d always get me to do hands-on. And this is the difference, being a property developer doesn’t necessarily mean that you are hands-on with the tools as you mentioned, which is getting the paintbrush and painting the walls, drilling holes in the walls, putting stuff up there. I have learned at a very young age not to necessarily want to do that again, it’s quite labour intensive. I used to have to lift up all the soil from the front that would get delivered and put it into the gardens. In those days I was much younger. Luckily that was when I was a teenager and doing that and I had a lot more energy. But now at my age, I’m not saying that I’m too old.

Those like very, very little minor things which won’t cost too much and won’t take too much time and hopefully will increase the value of your property in a very, very short space of time. And on top of that, when buyers come through like potentially owner occupies, it has a better, stronger appeal because they’re wanting to move into something that’s already been done for them. All they have to do is move and put the furniture and start living rather than have to spend their own time and effort to actually renovate themselves. And that can add quite a substantial value if done correctly as well too.

And look, that’s this question here. What kind of deals are you comfortable doing as part of the money rules? It’s just a bit of self-awareness of what you’re up to, what your skillset is that you have. And we’ve got clients who do renos full time. And what I mean by that is they might turn over, you know, 5, 8 properties a year buy/reno/sell or buy under market value, do a cosmetic or a structural reno on it and flip it and make 50,000, 80,000, or $100,000. And a good start with cosmetic renos or structural renos, if you’re doing that, it’s a very, very good platform to get into small developments. So you might do a 1 into 2 where the house might be on a corner, keep the house, subdivide the back block off and renovate the house and get what you call a free block of land.

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So my point is that these questions are just about awareness. Some people like more complicated deals like our strata titling, bigger subdivisions, commercial property lifting houses structural renovations. There are so many different types of deals and we’re not going to go into it. But over the course of the next few weeks and months of the podcast, we’ll look at different strategies and reveal the strengths and weaknesses of each. Every one of them has a different opportunity depending on the resources that you have, the energy that you have and the skillset and passion as well. I know some people, they love their innovative concept of making things look pretty right. When some of our other clients, their creativity comes in a 20-ton excavator which comes in and just knocks it down and they’ve got two rectangles. So, and I don’t exaggerate, but people have different forms of creativity and depends on what you’re looking for. You’re looking for a creative outlet or are you just looking to make money through property? It’s a balance of both and I have a creative outlet as well. It’s probably more squeezing the most out of a smaller block of land, get the most bang for the buck, but at the same time having a product that the market really wants as well.

I think the good thing about property development, and that’s what I think a lot of people don’t realise is that there is that creative aspect that you can put input into it. It’s not necessarily just looking for the money and getting a profit out of each deal. It’s actually problem-solving as we’ve kind of discussed in the last episode. And using your creative output to be able to generate something that’s going to be value for everyone, especially for the buyers that are looking in the market, in your last example that you shared with us, about a duplex on the back of a block of 600, which is phenomenal to squeeze that much in, I mean, in Sydney where I live, to get a duplex on a 600 square metre block is almost impossible because they don’t usually do that very much around here. Even the biggest block that we’ve seen around here is about 400 square metres. So that is just problem solving to its max to be able to get that. And also make a profit from that too.

That’s the thing I love to do on free blocks of land and create opportunities where other people don’t see it. And that’s where the opportunities, one financially for people to be able to create extra sources of income. I’m a big believer in free blocks of land but also multiple sources of income. So keeping that house and adding an extra two dwellings at the back, that’s a 1 into 3 in terms of rental income as well. So rather than just having one tenancy, you’ve got three. And that creates a massive reduction in risk because if let’s say from a rental point of view if one of the tenants move out, I’ve still got two rents coming in and that’s a big part of what I learnt, you know, pre-GFC and post-GFC as well as multiple sources of income is very, very powerful.

And it’s important when you’re doing deals and growing because the next question we’re talking about is debt and then how much you are okay with. And it’s all well and good to say, you can get a 5, $10 million loan, but there are responsibilities with that. And I think that’s one thing that people need to get clear on is how much debt are you okay with? How much debt are you comfortable in handling? And not just getting the loan but making the repayments on a weekly, monthly basis. I remember one stage during the GFC or pre-GFC, I had some house and land packages or properties that we’ve actually built and the repayments, cumulatively amongst a handful of properties, that was about $20,000 a month. And so this was, you know, 10 years ago and it was a very, very stressful time. So even though these days I can handle that is stronger and bigger, it’s just one of those things is getting a reality check on how much leverage are you comfortable with because it’s not about, you know, bigger is better. Like we said previously, it’s about thinking big, start small and grow organically. 

It’s really interesting that you mentioned that, especially when you’re talking about the example pre and also after GFC as well. I think what’s important is as you said, if you were having debt like $20,000 per month, you’ve got to be able to make sure that, one, the income that you’ve got there and usually with property development, there’s usually not much income come there. You’ve gotta be able to cover that expense because at the end of the day if you can’t repay that then the banks come knocking on your door and say, look, what’s going on here? So it’s also that aspect as well. I think it comes back down to mindset as well that we’re talking about that if you’re not comfortable with debt, you’ve got to actually work on that aspect first. And that’s why as we sort of said, 70% of it is psychology and the mindset behind all this.

And you’ve got to work on that aspect to be comfortable with it. If you’re going to take your step from thinking big to start small. I think it’s important definitely to also take considerations about what type of debt you want to be taking on. Because obviously if you’re going to take on debt that’s going to be good debt, good versus bad debt, which ‘Rich Dad, Poor Dad’ talks about. You’ve got to understand which is good debt and which is bad as well. Maybe we could elaborate on that and share with the audience what the differences are between the two.

Essentially at the end of the day, debt is debt. You owe people money. You know, if you’re buying and you’re using debt to pay for it, you’re borrowing money and you’ve got to pay the interest plus the money-back versus let’s say buying an investment property that’s positively geared or negatively geared. So I suppose the principles that Robert Kiyosaki talks about in terms of good debt and bad debt is that debt that’s costing you money versus good debt that’s making you money. So if you’ve got a property that is making your positive cash flow or it’s a development that you’re able to capitalise, sell the land down or sell the townhouses down and make a profit from it, you’re using that debt to your advantage. So versus buying a big fat TV or a boat with debt, I bought cars in the past.

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I remember that. My first Mercedes that I bought, I bought it on debt and it was very, very challenging because my point is that it depreciated in value and then the debtor what I owed on it was more than what it was worth. So post-GFC, I had trouble selling the car. I couldn’t sell the car because it owed more than what the car was worth. So these days I don’t pay. So I pay cash for cars and boats and things like that because we’re able to. But sometimes when you’re young and I wouldn’t say stupid but maybe a bit more aggressive or you just want instant gratification. And so I know you can potentially use that as a tax deduction in some circumstances. However, my point is that you won’t really want to be using debt ideally to generate income.

Sometimes it’s not possible when you’re buying your first house to live in. What I like to do in the house, even the one we’re living in now, we extended it, we had a granny flat put in as well, and we had a tenant in there to pay or fund that debtor to pay for that extension. And my wife was more than agreeable. That took us probably two years of negotiating to get that through. But the tenant was there for four years and it was really, really good during that time. He’s moved out and now we’re taking that space back. But coming back to the question is, use debt to grow income versus using debt on depreciable items, which don’t generate you any money.

Thinking about this further, we all should be asking ourselves what’s the worst-case scenario that you’d be willing to take?

With the finance market the way it deals generally taking longer because people are taking longer to get the finance approved. Doesn’t mean that people aren’t keen to buy necessarily. It depends on the marketplace of course. But people need more time to be able to get finance approved. Then you need to factor that in. So the worst-case scenario needs to be at least the investors get their money back, the interest paid, the bank paid back, and you’re breaking even.

I really don’t even like to consider that. I remember when I started, that’s the worst-case scenario, everybody breaking even. But these days I really want to focus on my deals. Worst case scenario, I’m making at least 10, 15% profit even in a potential GFC scenario. Because you really don’t want to be practising these things. I know when people start out, they go, I just want the experience. I want to build some houses to learn what it feels like. Well, I get it and I’ve been there as well. I build a lot of houses as a developer. And it’s good. Good for your ego. You know, you build some stuff, it looks pretty, it looks big. You show it off to your friends, Oh, this is my new house that I’m building. You’re living in it now? No, it’s just an investment property. So because of that, in some ways, it inflates your ego and shows how much money you have or don’t have. But worst-case scenario needs to be breaking even. But I’ve set my benchmarks to at least make 10% profit on my deals. In a worst-case, the world falls over type scenario.

It’s a really important point I think you’ve raised there because if you actually went through and did the whole exercise, developments can take anywhere between 12 to 18 to 24 months and at the end of that development and you come back and break even, you’ve wasted pretty much 18-24 months of your life putting together a deal that is not profitable. And I don’t think I’d be happy with myself to do that because the thing is is that you’ve also lost an opportunity to when you could actually just purchase a property, that it could be a buy and hold and would have gotten maybe even a 5% return. So it’s actually, as you said, at a minimum should be at least 10 to 15% which I think is a great result to start off with a worst-case. Then when you’re going for the best-case scenario, you obviously want to be looking at anything between 25 to 40 to 50% if you can get more, that’s even better, you know, that’d be the cream on top. So there’s gotta be some, I guess a point where you’ve just got to ask yourself, is it really worth doing it? If it isn’t, that’s a good money rule to have in place and then move on to the next one because otherwise, it’s too easy to see all the shiny objects and go, okay, that deal looks amazing but is it actually going to return the kind of return that we’re looking for? And I think what we’ve covered on this aspect, this worst-case scenario is so, so important.

If we’re going to delve into it a little bit more and coming back to even the minimum return on investment, oftentimes people confuse the minimum return on investment to what I call like absolute value. And this is kind of showing my maths and wording or terminology. I’m doing a bit of tutoring for my daughter at the moment. And for those of you who may not understand the word absolute value in short, it’s like rather than a percentage, it’s an amount. So people, oftentimes all the mistakes they’ll make is, I’m doing a deal and they’ll make $50,000 and they’re earning a $100,000 at their job, I buy/reno/sell this property and I’ll make $50,000 or I’ll subdivide and make $50,000 and six months wages that I’m doing part-time.

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Really happy with it. But here’s the thing is you really got to compare it to the amount of risk that you’re taking on as well. If it’s taking you $800,000 to make that $50,000 return, that that’s a fair amount of risk. So I think, you know, maybe down the track we’ll talk about in our podcasts, weighing risks, assessing risks, why making $50,000 on a deal just may not be enough, depending on how big the deal is, how long it takes, what kind of risk factors are involved.

And that’s the interesting part that you’ve kind of raised is that say for example, on average properties across Queensland and so forth, it could be around about said 500,000-$600,000 at least. And because of that, if you make $50,000 that’s something like a 10% return. So you’ve got to actually, as you said, weigh up the risks on how much you’re willing to put into the property, but also too, at the same time, how much you’re going to return back on the property as well too. And that’s really, really important, which I think we definitely should be covering in the future topic too.

And I know for some of these questions you might think, well, what is the right answer? I’m sorry, but there is no right answer because everybody’s circumstances are different. And you’ll find in the marketplace there are varying answers. If you put your money into a real estate investment trust, the return might be 4%, it might be 6% and that might be a top return of a secure commercial building. In this instance, every deal is different, cosmetic renos, the rules are different. Structural renos, the rules are different. Small subdivisions, large subdivisions, each of those have their different nuances and boundaries and variations on return on investments. So it is a journey and I think if people are going to do this and they’re going to get joint venture partners, the other tip I’m going to put in there is definitely get written agreements, whether you’re doing unit trusts or joint ventures or profit shares or first mortgages.

Is that, make sure you get written agreements. I really suggest that people get a good team and start to investigate what kind of strategies and opportunities that their consultants are really involved in. You know, if you’re using a finance broker or a solicitor or an accountant, you really want them to be active in the property as well, simply because one, they’re very familiar with it. It’s fresh for them. They can access the documents straight away, but also their experience is not just superficial. Their money’s on the line. They’re dealing with problems like tenancies breaking their agreements or land tax problems or joint ventures going wrong or interest rates going up. So they’re very, very sensitive to it and they’re able to help you on your journey.

Money Rules: How To Buy Property Under Market Value

Money Rules are a set of guidelines that are implemented to help you manage your money in a way that allows you to become more successful. We delve into the financial side of working with other people within deals. 

In terms of loan agreements, probably when you’re using joint venture agreements or you’re using no money down deals, the loan agreements are very, very fundamental or stapled documents. That’s probably the start if you’re wanting to borrow money from investors that you might know, giving them a 5, 10, 15% return. So that’s a really good start. Loan agreements, if you’re getting stuff that’s secured by a mortgage against the property, then you’ll be needing mortgage documents as well. Furthermore, you may need what’s called a joint venture agreement or profit share agreement. If you’re buying something where someone’s funding it all and you’re doing the work, you found the deal and they’re finding it, you might need a joint venture or a profit share agreement depending on what your solicitor or accountant really, really suggest. So I think those are the fundamental agreements. There are many other agreements ranging from unit trusts to even testamentary trusts and things like that. But I think building that relationship with your solicitor, having that conversation with your accountant and going, look, this is what I’m looking at doing. What do you suggest? Because everyone’s circumstances are different. Everyone’s needs are different. Everyone’s risk profile is different. And the fundamental interests and knowledge are different. So I suggest you just get yourself educated around that as well and start to go down that path.

And it’s just important to surround yourself with a great team to be able to help you with that because legally there are so many complicated things that are involved and we won’t know everything as well. So it’s important to have yourself surrounded by a great legal team. So maybe the next question we’d probably want to ask you is, do you want capital gains or cash flow or both in a deal?

I think that comes back to what people want out of a deal. I think that’s really important is do you want cash flow? Do you want capital growth? Do you want both? And very rarely do you get both cash flow and capital gains. So is it impossible? No, it just means it’s quite unique and you’ve got to find scenarios of doing that. I’ve seen people who’ve done that before where they’re able to do that in a high growth area and they’re able to do Airbnb. What about you Tyrone? What do you think is possible in that scenario?

I think to actually get both is going to be quite challenging because you are trying to work out in both scenarios, especially when you’re developing like it’s kind of pretty hard if you’re doing a reno in subdivision to actually have a tenant in there the same time and receiving cash flow unless there’s something very unique but tenants are usually not too happy. I’ll give you an example right now like currently I’m working with a working partner and we’ve purchased a property outright where there’s a property at the front and we’re subdividing the back and we’ve just finally got subdivision approval on the back from the council after about waiting for about six months now actually. And we haven’t had a tenant in that front property, which we could have potentially. But then that would have slowed the process for us getting into and actually start the renovations because we’ve got early access.

So during that time, while we’ve been waiting, we’ve actually been going in and working out what things need to be done. If you had a tenant in there it would have taken a lot longer to be able to get access and it probably being inconvenient for them. Plus once they actually do the renovations and the subdivision at the same time in the back, there’ll be a lot of noise that happens and tenants don’t usually quite like that as well. So it is quite challenging if you want to try and get both. Ideally it’d be the best scenario you can, but I think if you’re going to, for capital growth to make a profit from the deal, you just focus on that. But if you’re trying to structure it to maybe create a boarding or affordable housing, then you go for that as well. So it just depends on your situation on how much. Also too, you’re asking yourself what kind of return you’re getting. And that’s part of one of the money rules that we’ve been discussing as well too.

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Exactly. So, and that’s why generally with my projects, I split them up into quick cash or capital gain. As in getting in, getting out, getting paid like a land subdivision. If I’m going to do a 2 to 5 for example, I’ll do it, smash it out, renovate the house, keep it vacant, and then sell it vacant for potential investors/occupier and then sell the land down. Land doesn’t generate any income. So that’s why I like to sell land down. But at the same time, I might do another project which is specifically for holding. So I might do a small subdivision and then keep some of that land, sell some, keep some. And then the one that I keep on the land, I might build a multi-occupancy or a mini boarding house. So each deal has its own merits.

And I know there’s a lot of information coming about, you can do this, you can do that, but you really want to get clarity. Think big, start small, find out what you’re looking for. For some of you, you might just be happy with increasing your cash flow by 200 to $500 a week, which is great. So you might just do a granny flat and start with that. Cut your teeth on that. Learn how to get finance for that. Get that out of the ground. Others might be a bit further down the track where you’ve got a bit of equity, you’ve got half a dozen houses or so, but you’re wanting a better return because the market may have flattened out in Sydney or Melbourne and you’ve got previous equity that you did build up through the rise of the market and you go, you know what, the capital growth is flat now, but I want to do something else.

I want to do something more aggressive or assertive or active to be able to make my money work and therefore you might do some Airbnb to increase the cash flow on those existing properties. Pull the equity out and buy a small development site where you might build 4 townhouses or cut at 1 into 2. So there are so many different ways that you can play this game. But, just start where you’re at. I think that’s the biggest tip I can give to the listeners on this podcast is start where you’re at. Grow sporadically, grow organically, you know, maybe just get into another deal in these next 3-6 months.

That’s so important. I think the next thing that would be really important to look in, this is where property development comes into play, is to work with people because working with people is also part of the actual whole process. And you’ve also got to ask yourself some of the questions about, you know, who you’re willing to work with. And I guess this is the big, big question is who are you comfortable dealing with and also what roles would you be playing within each part of the whole development process. And that’s a really, really big question and I think is important because when you’re dealing with people, everyone’s going to be coming across the table with different ideas and different things, but you just got to come together in that same, what do you think about that?

I think of the questions that I’ve raised, the one of who you’re comfortable dealing with came from a time when I was having some struggles in my business relationships and I’m not here to bad mouth, but I went through a time where one of our business partners was just really, really hard to get a hold of and wasn’t answering the phone calls. At the beginning really, really exciting. It’s like a new relationship. You have a honeymoon period, things are going great. But I think he was getting a bit too busy and wasn’t answering the phone and that really, really annoyed me. So, because it’s all well and good when things are going great, the market’s going up, everybody’s excited, money’s easier to get. But when the markets go on the other way, it’s coming back. Interest rates are going up and you’ve got to solve problems.

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You need that line of communication. So that’s really what that conversation’s about. And you’ll find town planners that you relate to or engineers or surveyors that you relate to, tradespeople that you relate to others that you won’t, for whatever reason you might have this feeling about, you know, you think they’re saying something, they’re saying, A, but they’re not doing A, and they’re not returning your phone calls. I think who you’re dealing with or comfortable with takes time to really listen to your intuition and listen to yourself. Talk about, okay, I trust this person. They’re really who I want to deal with. And also the values as well. I think that’s why you and I get on so well, Tyrone. We have very similar Christian values and generous values and we’re also similar values and principles from an investing point of view.

Low risk leveraging ourselves and figuring out who you’re comfortable dealing with also as well is building those relationships and figuring out how you add value. Because if you might be busy and you’ve got no time, then how do you bring value to that relationship? Is it because you have the capital or you have access to people who have capital? How do you add value to that relationship? Because obviously if you don’t add value to the relationship, then there’s no need for you to be there. Especially if you’re doing development. There are usually things that people need. They need skills, they need expertise, they need time, they need information, they need IP or they need capital, whether it’s capital or serviceability. So there’s usually 4 components to a deal. Whether it’s, the sales component or the production component. There’s a finance component which we won’t go into now. But my point is, if you’re not adding value to our relationship, then why are you there?

It’s so important to ask these questions because it’s very easy to get excited, as you said, in the honeymoon period. Because you go, great, you know, this is a fantastic deal here and it’s going to generate say, a million bucks profit, but then you go hold on, we’ve kind of got very similar skill sets. So you’re working with another partner and then you go, who’s going to be working with what? And you might have very similar strengths as well. Then you might have to go and say, okay, how are you going to make this whole deal work properly? And that’s where the roles come into play to divvy them up and see who’s going to actually manage those. And it’s important to have that open communication to talk about it. And especially if you’ve only met this person, you know, for a few weeks or so, it’s just important to delve into it and just kind of build that relationship a little bit longer before delving into an actual deal because it’s not something you’re going to be, you know, doing for maybe about a month or two. And that’s it, end of story, you finish a project, it’s going to be long term, at least a minimum of 12 to 18 months. And if you don’t feel comfortable working with this person for a longer-term, then that’s your gut intuition saying, okay, got to make some changes here and it might not be the right deal because as you know, there’s plenty of opportunities out there, but it’s actually just who the right fits are to do these deals with that too.

And then later on in the podcast series we’ll talk about money partners and assessing money partners. But I know that when you’re starting out sometimes because you might be financially constrained or you’re tapped out serviceability wise, sometimes you just want to get into a project with anybody that’s willing to say yes. And after a while of doing a lot of joint venture deals, no money down, I’ve realised that sometimes the partners that you work with, just like any personal relationship, are potentially the worst nightmares, they might seem soft and happy and warm and fuzzy at the beginning, but because there were signs that you couldn’t read or you misread at the beginning, the potential issues that can cause huge headaches down the track. So it’s a thing that you definitely progress along the way. Learn how to navigate it, learn what you want, learn what you’re willing to tolerate, what you’re not willing to tolerate.

And over time you create your own set of money rules, even for investors, like minimum amounts, interest rates that you’ll pay. I made mistakes where I paid too much interest because I was just so desperate to get that capital, you know, upwards of 4% a month. That’s 48% per annum if you do the math on that. And at the time, based on my feasibility of a get in, get out six months, my investors were going to get profitable and so was I. But the project stuffed up, I made some bad decisions. My business partner made some bad decisions and it took an extra year. So at 48% interest on the capital, which was the deposit and renovation costs, what was meant to be a profitable deal turned out to be a $100,000 loss, which I was definitely upset and annoyed by at the time.

And it frustrated me immensely. But it was just a bad decision. I wasn’t aware of, you know, what the consequences would be. But our point is coming back to that, this is just a part of the process, the journey. I’m a lot sharper now and a lot smarter of my arrangement for my investors and if a deal doesn’t work, the deal doesn’t work. So it’s just one of those things that you learn along the way about knowing the people that you’re working with and the arrangements and make sure that you’re not biting off more than you can chew.

That comes with experience. I mean at the end of the day, sometimes we have to go through those challenges to be able to come out at the end stronger and learn from those experiences. Ideally, we don’t want to, but I guess, we learn from these and then, you know, it makes us all sharper and know exactly who to guide because that comes back down to gut intuition as well. So maybe in the next question, in terms of saying the money rules, we probably should be asking about, you know, how long are you willing to actually wait for your capital and how much profit are you willing to take out? That would be also a good question to ask for as part of the money rules.

I remember when I was starting out doing deals and I remember just getting into any deal I was happy to do. So it is kind of like you’re just happy to participate and do a no money down deal and let’s just do it. You’re all excited and lost in the emotion. But when things started to drag on and on and on and I wasn’t getting paid for 12, 18 months, I realised, you know, time is critical. Getting in, getting out, getting paid is definitely a mantra of mine. And so I’d like to encourage people, if you’re looking at doing a deal, like a 12-month framework, I think is realistic. 3-6 months isn’t necessarily realistic. Sometimes you can get deals in and out in 3-6 months. But in more realistic terms, like a 12-month timeframe is realistic because it does take time to get approvals.

Like you said there, Tyrone, your approval took 12 months, sorry, 6 months and you’ve still got civil works to do, the renovation works are done from what you’re saying and it’s going to take time to get quotes for those civil works and still get titles and [inaudible] on there and sell the land as well. So I think a 12-month timeframe is realistic for projects up to, you know, maybe 5 dwellings. Anything larger than that involves construction or a build of a house can take 18 to 24 months on top of the approval timeframe. In Melbourne itself, that’s probably one of the tougher places to get approvals. It can take 9 to 12 months and just get plans and permits as they call it down there. As we’re experiencing with that childcare centre, it hasn’t come through yet, but still working on it. And once you’ve got the approval, let’s say it does take 12 months, there’s another 6 to 12 months to get the project out of the ground. Whether you’re building it, subdividing it, there’s more time, money and energy required. So we’re talking, you know, 24 months and not making a cent if not all the money is going out for 18-24 months.

We all face as challenges as developers is that it sounds great because when you finish the project and you get a big profit or chunk profit at the end, it, it sounds amazing, but it’s those challenges that you face during that time period because one, you’ve got to sustain cash flow and making sure that you can continue to fund the deal, pay for whatever things that need to be done to make sure that deal continues to flow through, but also to manage all the expectations because it’s not only yourself, but you’ve also got say money partners or the vendors or stakeholders are involved in all this as well too. And that’s something that I don’t think a lot of people talk enough about because these are things that people face on a day to day basis, challenges throughout property development. So, I guess what we’d like to probably talk a little bit about is I guess the last question for money rules or another rule we’d be willing to talk about is how much under market do you need to buy to make it worthwhile for you as well too, as you said to us, is that when you actually go into a development deal, it’s actually before you buy is where you make money. So let’s elaborate a little bit more on that.

Buying under market value is a really essential skill and combining that with what I call free blocks of land or having some development upsides is absolutely critical. So one of the things that people don’t consider when they’re looking at a property or buying under market value is transaction costs. So a really simple formula that I use for working out transaction cost is roughly 5% in, 5% out. So what that means is taking situations, stamp duty, legal fees, finance fees and costs. We’re at roughly 5% to get in, if you’re in some states you might even pay stamp duty of 5% which is crazy, right? So it’s just the sheer money grab that governments want or councils want to be able to offer you to transact. So 5% is a good start on the calculation and then 5% out.

So 5% out, it may include real estate agents, column of 2.5-3% depending on which city or state that you’re in. And then you’ve got holding costs, potentially negative gearing because of a vacancy during the renovation. So the reason I bring that up is if you’re buying a property 10% under market value, then if you’re buying it and then selling it at market value, you’re barely just breaking even if not making a small loss. So if you’re going to, let’s say, doing a basic buy/reno/sell, you buy under market value, you probably need to buy it from roughly 20% under market value to make a 10% earn based on 10% transactional costs. So, 5% in and 5% out. So that’s really just a highlight to look at buying under market value is one thing to be able to extract equity.

But if you’re wanting to sell it, you’ve got other transactional costs, 5% in, 5% out. When you’re doing development and you’re wanting to get that free block of land, the return on that and buying under market value may or may not apply. And what I mean by that is you may have to pay retail or close to asking price. And because of your brains or your abilities or your town planners insight, you may be able to extract 1 or 2 or 5 dwellings off the backyard.

I probably want to also just clarify a little bit about free block of land. Now I know what that means, but maybe for some of the listeners, what do you mean by a free block of land when you’re purchasing at wholesale?

Free block of land is a general term that I use when I’m talking about the opportunity to extract extra value that is right in front of your eyes. But you may have not seen it, you know, and so a couple of examples, but one of them is that house that I’ve got on 600 square metres. Due to the zoning of multi-residential, I was able to put a duplex on the back, so their backyard previously had a bit of a balcony and I’d cut off that balcony and removed that shed. And through the council process, surveying, some drawings and construction, I was able to take advantage of that free block of land in the backyard. That’s a basic example. Another one that I did last year was a 2 into 5 lot subdivision where it was on 1,062 square metres.

Once again, zone four units and townhouses, multi-residential and able to keep the house, subdivide the block, not 1 into 3, but create another 4 blocks out of it. So essentially it was already 2 lots and I cut it into 5 lots. So still keeping the house. A free block of land concept in its purest form is where you keep the house and you subdivide a property off it, you add another 1 to 5 dwellings. Otherwise, sometimes you may have to knock down the house and create 2 dwellings. So keeping the block of land, let’s say 800 square metres, a 1000 metres, knocking down the house or moving the house, sliding the house, it’s not ideal. But still maintaining the value of the property and generating 2 or more blocks of land. So that’s what I mean by free blocks of land.

So a lot of times in these instances, for example, if you’re not to necessarily sell all the blocks off, you’d keep up, say, one of the houses after the subdivision and use it as part of adding to your portfolio. Is that how you go about some of these hybrid deals?

That’s definitely one way to do it. You might as a purist scenario, go build 3, keep 1, sell 2 or you might build 5, sell 4, keep 1. So the ratios are not crystal clear in the way that there’s no sure-fire formula, but it’s just keeping 1 along the way because the ones that you’re selling down, you’re using that profit to pay down some of the debt on the 1 that you’re holding as well as you get your capital back and clearing out that debt. So it’s building some, sell some, keep some. If you wanted to even expand on that, you might do 2 projects. One might be a 1 into 2 subdivision. The other one might be a 1 into 5 projects. So you might sell one project in its entirety and keep another project. That’s another way is to sell some and keep some, sell some, keep some there too, to break it on down and to simplify your life if you want to do that.

That’s great because at the end of the day, ultimately the goal is for us to build a portfolio rather than continue to, I guess, churn the cashback in and out of developments because passive income is really something that we’re also quite heavily focused on as well. It’s a part of building up an asset because ultimately if you want to just be an active developer, it’s just really built, sell, build, sell. But to do what you’re doing buy some, keeps some is a really, really good strategy to have in place.

It took me a few years to figure out that strategy. I’ll give you a couple of models that I duplicated or copied off. One is a Harry Triguboff model. I know we talked about on the last podcast of the Meriton model where he’s built 50, 60 plus thousand apartments and he’s kept 2000 to 3000 of them and doing service accommodation. So as an example of that, if he’s keeping 2000 to 3000 apartments, call that 5% of his portfolio, that’s 1 in 20 or so. And then he’s generating, let’s say somewhere between $500 a week and a $1000 a week from their service departments at 2000 apartments, $1,000 a week. That’s $2 million a week rental income. That’s a positive net. So that’s assuming that they’re debt-free because he’s used his selling strategy to pay off and hold these properties debt-free. So that’s a good model that I’ve studied and essentially copying another one, which most people don’t know about in terms of a model is what Mirvac do. So do you know the Mirvac model there?

No, please share. I’ve only heard the Harry Triguboff method. And that’s mainly from you.

I can’t reveal all of my secrets. I’m joking, I’m joking. But the strategies I use are from good models. So I’ll give you an example of the Mirvac model. If you think about it, they sell all their houses and apartments. So essentially they sell that, but they don’t actually talk about their commercial property portfolio. So generally what they do is they sell all the residential and they keep all the commercial. So they have a model whereby the residential stuff that they have, they just buy it, develop it and sell it as fast as they can. Apartments, land, townhouses, whatever it is. But they keep the high yielding commercial property. And that’s the keyword there, it doesn’t mean that you and I have to go into a commercial property. It’s just the high yielding, high rental play is what they’re keeping.

And that’s no different to, you know, if I’m selling off 30 blocks of land and I’m just keeping or building a multi-occupancy, mini boarding house that’s renting for 10 to 12%, that’s a very similar thing as you’re selling the low yielding stuff, which is residential, mums and dads own occupier individual dwellings that are potentially, you know, 2 to 4% yields. You sell that off and then you’re keeping the high yield properties which are no different to the Harry Triguboff model, his serviced apartments in some ways is a commercial property model where the properties are high yielding as well.

I love that because when you think of it from a commercial point of view because in the instance of Mirvac, the commercial properties have a long term lease. You know, usually, it’d be like a 3 plus 3 option or 5 plus 5 option. So, therefore, you kind of have that security that it’s going to be there for quite a while and same thing with Harry’s model service apartments. They’ve got people calling in there regularly and it’s maintained on behalf as a business rather than him having to get a, I guess residential, which is just signing up like a 12-month lease. So I guess that’s very, very profitable from that side of things and looking from that commercial side, it’s a really, really powerful strategy and we can even put a whole episode behind this one in the future to talk about it because I think there’s so much gold to talk about and share with the listeners.

So I think maybe what we should do is wrap up now actually and share with them an action task or assignment that we’ve been talking about as we mentioned, every single episode at the end we’re going to give some takeaways so that way our listeners can also take away and do an assignment or an action task. So it makes it really practical. So take it away and maybe share with them what is their assignment task for this week.

We’re on episode number 2 as you know, and action tasks for this episode is to get clear on your money rules. I suggest you go back and listen to some of the questions or prompters that we’ve got. There was about probably a dozen or so, I’m not too concerned, but if you could just answer may be at least 5 of the questions, how much money maybe you’re willing to invest, how much time you’re willing to invest, what’s your minimum return on investment. Could be 3 of them and there’s a whole stack more, so relisten to that and at least answer five of the questions. You know, just send us an email of any of the responses that you have or any of the questions you might have in terms of wow responses or aha moments. You might realise, you know what, I want to do property full time, but at this point in time I’m only willing to have this two hours a week. It’s just that self-awareness and oftentimes people live in fantasy land of I want to quit my job fast, but I can only give 2 to 4 hours a week. That’s okay, there’s nothing wrong with putting in 2 to 4 hours a week doing property. It’s just matching the expectations of results to the amount of work that you’re willing to put in.

I think it’s so important to actually have these money rules in place, especially before you even start any project or any development that you go into because it really, really helps you determine where you want to head and it gives you clarity because then instead of looking at all the hundreds and hundreds of deals all at one go, you can actually narrow it down and focus on what’s going to be the best deal for your situation and for your time right now.

Exactly. And then that’s a big part of the game is 99% of the deals, in reality, don’t work for your circumstances or mine. And if you’re not clear on your money rules, that’s where people lose so much time is I look at 5 deals, 10 deals, 20 deals, and they’re trying to do feasibilities on all of them, but they’re not really sure why the deals don’t work. And that’s why money rules are so important.