Simon Loo is an investment property buyer’s agent and director of the buyer’s agency, House Finder. He has a lot of experience in the field of buying investment properties and the strategies that should be implemented in order to have greater success.
Come with us as we discuss what you should be looking for when you are buying an investment property, Loo shares with us a particular example of how he helped a client improve their portfolio, the strategies that he uses and advises his clients use to ensure that they are cash-flow positive, the advantages of having a buyer’s agent in your corner and much more on this episode of Buying Property with Simon Loo for Property Investory!
Simon Loo is a property buyer’s agent and also Director of House Finder. His company helps clients find and purchase investment properties under market value. In order to learn more about our topic, “invest like a pro”, Loo shares with us a particular client to help us understand how he was able to help them improve their portfolio.
This particular client that I have had already bought two properties just from their own research. They're a mid-thirties couple with two kids. They’re working in the corporate world earning a combined income of around $200,000 a year right now. They initially got started researching and buying a property just from listening to podcasts just like this and reading up on online forums and doing their own research. And when they embarked on the journey to buying their first property, they told me they found the process quite frustrating. Mainly due to the lack of time factor. So even though they had all the research and them kind of knew what they were doing they really only had weekends and lunch hours and after hours to go and inspect or talk to agents about property.
And it took them about six months to buy their first property and then consequently another four months to buy their second property. So a year in total. Now I know that sounds quite ambitious in terms of the relatively small timeframe, but they initially had around about $120k saved up in cash. A really good sort of saving effort from them. But you know, the properties that they ended up buying just from my experience and knowing the area that they bought in, which was in southeast Queensland, was that they weren't the worst of deals, but they weren't the greatest of properties either. And in many ways, they were probably sold those properties by the selling agents that sold it to them as great investment potential and all that type of stuff.
An expert property buyer has the experience and knowledge to understand where and what to buy. We hear an example that Loo provides about a couple of his clients and where they went wrong.
These properties were bought in your more sort of working-class areas within Brisbane, within 30 kilometres of Brisbane city. And essentially they were townhouses, so they were three-bedroom townhouses, relatively new but in this particular area that they bought in, townhouses are not usually the best type of property to purchase for a couple of reasons. Because the value of buying a proper house and proper land is not that much different in terms of price compared to the townhouses. And also essentially, just looking at comparable sales, they kind of overpaid for these townhouses with the promise of very high cash flow. But what they didn't realise was that these townhouses actually had quite high body corporate.
And when the rent is quite low and the percentage yield or the cash flow is quite high, it's very sensitive to costs such as body corporate or maintenance or things like that. So anyway, they bought these properties. They rented it out, the properties were around about $230,000 each, which in the townhouse world in these areas is not cheap. They haven't been doing too badly. But it's important to remember that townhouses in these sorts of lower socio areas tend to attract a very low demographic of tenants. So, touch wood that they don't encounter any further rental issues. But you know, in the long run in these particular areas, it's always better to have houses as well.
The other main reason I guess why having houses is also important is because you can actually add value to them. If you own the land, if you own the house, you can actually convert the house from three to four bedrooms or add an extra bathroom, laundry or something like that. You noticed as three-bedroom townhouses or units, you can really only sell them as two or three-bedroom units when it comes to exiting that property.
And the challenge with that as well with townhouses, it's already completed. Therefore you can't really add an extra room. You can't really quite do it. I mean the most you could probably do is go and do a paint job, maybe just update some of the furnishings and the fixings inside. And you've got to even go through strata as well to get a lot of this approved. So there's a lot of restrictions by the sounds of it. And for an extra 70-$80k or so, you could potentially purchase yourself a house, which you could potentially add more value on and get more equity. So, the interesting thing that we're just comparing the two, and this is not necessarily where most people hit, but for a good investment you'd probably want to look at the fundamentals. So let's talk a little bit about some of the fundamentals that you'd be looking at helping them with.
Basically what happened was after they bought these two properties they then reached out to me after reading a little bit about my own property journey and the type of properties I was buying for my clients. And that's when I really sort of dived into, why are you buying property? What's your goal? What's the reason why you bought two properties in the space of one year and within just six months again, now you're looking to buy another one. And then maybe another one after that. So we worked out, through our initial conversation that they ultimately had a goal of achieving around $80,000 of passive income from their property portfolio.
And they wanted to achieve this within around about a 10-year timeframe. So that's when I sort of worked out, to achieve around $80,000 a year, you're probably going to need around four to five properties fully paid off. So on average each of those properties bringing in about $400 a week in rent for you to achieve that goal and to get to four to five properties paid off, you probably need to buy between 10-15 properties within that time frame. And the idea is by the time you get to that point and you're going to have the option to maybe sell down some of the initial ones to offset or to pay off some of the later ones. Which is a strategy that I've done personally, to get my initial passive income and for me to quit my job about four years ago.
So interesting from that perspective, that was the goal. So if they wanted to achieve 10-15 properties within a 10 year time frame, then they're looking at around one to one and a half purchases a year consistently. Now from that, we have to look at what type of properties to buy. And the fundamentals for me when looking at the type of properties that are conducive to that passive income goal is that they must have good cash flow from the get go. Because you know, when you buy one, two or three properties with negative cash flow, it doesn't hurt you too much. But when you're buying, if your goal is to buy five or six or seven or eight or 9 or 10, you really need each property to be performing and to be looking after themselves. Otherwise you're going to expose yourself to a lot of risk because maintenance and tenancy issues and vacancies will happen and they'll happen exponentially the more properties you own.
When you are building your portfolio and buying properties there will be hits and misses. Loo explains how having more positive cash flow in your portfolio can help balance everything out.
So if you've got one property that's struggling and you've got eight other properties that are doing well, it just balances it out at the end. It still doesn't impact on your day to day living or your income or anything like that. So that's number one. The second fundamental I look for is definitely having properties that are housed on their own blocks of land for a couple of reasons.
The main reason is that you have control over that property completely. A lot of the times when I look for properties for clients, I look for properties that have potential to add value beyond painting and new floors and a new kitchen and bathroom, beyond the cosmetic stuff. So what I mean is, maybe adding an extra room, extra bedroom, or maybe adding an extra bathroom or maybe a property that has enough side access or a corner block where you can put on a dual living type scenario further down the track. So why this is important is because it gives you control over the property. Otherwise, you're at the mercy of the market. If you buy a two or three-bedroom townhouse, whether the market goes up or down or sideways, you still can only ever own a two or three-bedroom townhouse when you sell it.
So having that control enables you to add real value to it, which means that if you are forced to sell or when you choose to sell that property one day you can get more dollar for it at the end of the day. The fundamental of property investing is that land appreciates and buildings depreciate. So when you buy a townhouse for example, where you don't essentially own the land, then you've really only got a product that's not taking into account market growth and a product that's only going to experience maintenance and wear and tear over time. The third fundamental that I really focus on is, and this is probably the most important one, finding properties that are distressed.
It is human nature to be looking for a good bargain when purchasing any type of product. We find out Loo’s best tips on being able to find the best deal in investment properties.
Like anything in life, we always want a good deal whether we're buying a car or groceries and definitely property because when you buy a property at market value, you basically are buying something that you're only relying on the market going up for you to make money. Whereas if you are buying something, and I know this term gets spruiked around a lot, like buying below market value, but if you buy genuinely below market value, you can actually make money on the way in buying these properties. So why look for distress scenarios? I mean distress can be people getting divorces, people moving overseas, people losing their jobs, any reason why a seller would need to sell that property very urgently. That piques my interest because that's an opportunity for me if I'm at the right time, at the right place with the right offer to pick up a house or a property for less than what it's actually worth in real values.
So what I did with this particular client is with the first property that they bought through me, the house value was approximately $325,000. And this was based on direct comparable sales, meaning properties that have basically exactly the same that have sold in the past three months in the surrounding streets of the same area. And we managed to purchase this property just slightly below $280k. So we were kind of at the right place at the right time. The property hadn't hit the market yet. Because it was a bit of a sensitive situation where they didn't want to sell, the sellers didn't want to sell the property. They didn't want it to be public knowledge. I believe they were actually getting a divorce, so they didn't want to have their house on the market.
So maybe their friends or family would know what's happening. So the agent called me up and said, “Hey, I've got this house.” The house was fine. It's been lived in by the couple for a number of years. So there wasn't any sort of major structural or termite or pest issues. The property was in a very livable condition. So he called me up and said, “Hey, Simon, I've got this house and it needs to go urgently. If you can get me an offer today there's a good chance that we can get it for pretty cheap.” And that's when I started negotiating and I presented the property to this particular client.
With the expert advice of Loo his client went through with the deal and they were not disappointed with the result.
They ended up buying a property for just below $280k, which was just a really good deal. It's a very good steal. So it was a three-bedroom house, a typical three-bedroom brick house around 25kms from Brisbane CBD. On about 600 square metre block. It’s a family-friendly area, close to school, shops, parks, transport, like all the fundamentals are there. And there was an opportunity because the house had two living spaces to convert one of the living spaces into a fourth bedroom. This isn't something that we did or they're doing immediately, but they're going to keep that on the back burner for the future when they decide to maybe increase the rent or the equity or to sell the property one day. So we purchased the property, we rented it out, the property rented for, from memory, I think $340 a week, which would have been positive cash flow from day one. The most important thing was that within about four months we were able to take out around about $40k equity for the client to use towards the next property. $40K isn't going to completely buy you another property…
Once you buy the first property most people find it difficult to buy the second or their third. Loo provides strategies on how you can reach that next step.
So $40k was basically just purely by buying well, buying distressed. I think very rarely can you take 10-15% of the value of property out inequity just by buying and doing nothing, signing some paper and paying some money as a deposit. So anyway, we took this equity out and we went shopping for another property after that and we ended up with another property that was pretty much identical to that property in very similar numbers. We're kind of in the throes of just waiting for the next lot of equity from that second property to come back. And from there we're gonna sort of think about what's next. Because you have to remember as an investor, that every time you take equity out and you spend it, it takes a hit on your cash flow.
So when you start off with positive cash flow on each property, if you take equity out, you're basically taking a little mini loan and that can put the cash flow position back into neutral or maybe even slightly negative territory. So the third property that we're buying is probably going to be a property where it has a little bit more cash flow just to help offset some of the early purchases. And maybe in a completely different area entirely just to diversify a little bit. So I mean that's a strategy that's getting them on their way to reach that goal as long as they can afford properties there.
We learn about the situation that Loo’s clients were in, prior to working with him and looking for guidance.
Those townhouses, because of the fact that they paid a little bit too much for them beyond the market value of the properties, they were pretty much right on neutral. This is not including depreciation reports because they were fairly new kind of units or townhouses. So maybe around 10 years old, 10-15 years old, something like that. But after they were rented, they were fairly neutral, but you know, the growth prospects on something that you already paid too much for, if there is any growth in the market, then it needs to catch up to market value. And then it needs to grow beyond that. And I guess the reason why, in this particular case, the townhouses were not, in my opinion, as great as a house on land is because you can see the difference between the value of the townhouse, they paid $230,000 and I managed to buy a house for $280,000. The difference in price point isn't very high.
I never judge people's portfolios and personally I don't have a crystal ball, so I don't know what's going to go up or down. But I think, generally speaking, having a house on land is always going to be way more valuable than owning a townhouse pretty much anywhere in a capital city. So look, I wouldn't say it's a mistake, but I would say that there could have definitely been a better bit of purchasing criteria. So that's what we ended up doing.
Some people out there might think that they can do the research and don’t need a buyer’s agent. However, Loo explains the advantages of having one in your corner.
I think that's a great question and there are so many different reasons why people would use a buyer's agent. And everyone's a little bit different. There are some people who have the time and the luxury and the energy to spend their weekends entirely or after hours and maybe even during the day to help them find properties. There are also people out there that are very confident in purchasing in different markets, especially markets that are interstate that are not easily accessible. I mean, drawing back onto this particular couple, I think they were a little bit mixed in terms of they didn't really have the time or the energy to spend all their weekends and after hours researching property, especially with two little kids.
So that was probably a big factor for them, but to buy those initial properties that they bought themselves, it took them six months and they ended up with a fairly mediocre outcome. And the bottom line of them reaching that outcome is pure because they didn't have the context that's required to get abnormally good deals. So they don't have selling agents calling them, telling them, “Hey, I've got this guy, he's about to lose his job and this is the house, this is the property. What do you think?” And I think it got to a point for them where they just got frustrated and they just ended up buying something.
I think a lot of people use buyers agents like me because they want to save time and energy and focus on other things. But I think more importantly is that there is a high chance of me getting access to a better deal. And I can negotiate on a Wednesday at 2:00 PM. I'm always on the ground looking for deals, analysing deals, working with selling agents. And I do a lot of that research already as to, why is this a good area? Why is this a good property? Why is it a bad area or a bad property? You know, maybe we should avoid flood zones, bushfire zones, power lines, all these types of things I've already got a lot of experience on.
We hear an interesting perspective from Loo on what his ultimate goal is for his clients once he has been with them for a period of time.
I think the benefits of using certain buyers agents are quite clear, but I guess what these particular clients were after as well, was a little bit of guidance and a bit of mentorship. So they approached me after reading about me and my property journey and they had a little bit of faith at the beginning of that I've got a lot of experience in investing in my own portfolio, so I think that helped. And to this day, after buying those properties, I still mentor them. They still hit me up with questions about tenancy issues or whatever. And I'm more than happy to help out even though, technically my job as a buyer's agent is complete.
And look, this is going to sound counterintuitive to what I do, but for me, and this has happened to a lot of my clients, I actually want them to get to a stage where they can comfortably do the research and find the properties themselves. Speak to the right people, have the right team around them, property managers, solicitors, like all these types of people where they essentially don’t need to use a buyer's agent. I do have a lot of clients that start off very new, very fresh, very green. We sit down and have that same conversation about, why are they investing in property? What are their goals? Why should you buy in certain areas and what you should avoid and what you should buy and what should you do.
And we get going, we buy some properties, I do some mentoring. And ultimately, after two or three or four or five properties, they get to a point where they're very comfortable going off by themselves and buying properties. And I actually take a lot of pride in that. Hopefully, I played a large part to get them to that point. So it's not just all about me finding as much property for people. I do have a lot of experienced investors still come to me for deals because at the end of the day I do get these distressed deals, people always want to bargain. So there's that as well. So there's a whole myriad of things.
Using a buyer’s agent you do not only get their wealth of knowledge and experience, but also the number of contacts that they have built up over their years.
Part of my process is introducing all the people that you essentially need to buy the property and to maintain that property over time. Now, these people are essentially my own team. So, when I first started investing, I made a lot of mistakes like a lot of people do. And one of the biggest mistakes was having the wrong people as part of your team. So a very good example would be like a terrible property manager where if they've got tradies in their books where they may not be above board or they might do something dodgy or they might not do a great job in terms of maintaining your property.
Then it could be quite a nightmare for you. Not only mentally but financially as well. Part of my job, I think it's very important that I'd never force any of my clients to use the people that I recommend and the people I do recommend don't pay me anything. So there is no such kind of financial benefit, but it makes my job a lot easier if I pointed them in the right direction of using a certain solicitor that I know has a lot of experience buying these types of properties and negotiating the way that I do. We get some quotes if we buy a house that needs a little bit of work, which let's be honest, a lot of properties do.
We're not talking about major renos, but just a little teething things here and there, introducing clients to the right trades that I use personally to manage my own properties. I know they're going to provide a great service. I know they're not going to rip them off. I know it's going to be efficient. And it just completes the property investing journey that they're on, especially if they're quite new. Because when you're quite new and you buy that first property, it's already daunting enough to actually buy it. And then when you come across solicitor issues or tradie issues or property manager issues, it can really affect your attitude and your mentality in terms of progressing to your second property, your third property, and keeping motivated. So having a good team around you is probably the single most important element of successful property investing.
There's no way you can do everything yourself. A lot of my clients are buying interstate as well. So being a thousand kilometres away, if something happens, there's no way you can go there and look at every single little problem or even do things yourself. So having the right eyes and ears on the ground is super important from every aspect. So I think that's why building that team, helping them build that team around them, it doesn't only help them, but helps me as well as a buyer's agent in the long run. Definitely, because you're providing not necessarily a one-stop-shop and you're providing a place where people can access the right contacts to be able to help them along that journey. Otherwise, they have to spend more.
This episode was produced by Andrew Faleafaga with narrations and interviews conducted by Tyrone Shum.