Overcome The Hurdle of Blockages With Finance Property Management

Daniel Walsh is a successful property buyer’s agent and founder of Your Property Your Wealth. He has been working in the property market for many, many years and has been helping others build successful property portfolios. We are lucky enough to have him share some of his knowledge and expertise with us on the varying topics of property management and investing. 

Join us as we delve into the topic of overcoming financial barriers or hurdles as we learn about one of Walsh’s clients and how he has been able to help them with their property portfolio, we find out why they wanted to get into the property market, the importance of how to structure your portfolio, and much much more!

Inside this episode, we will be discussing the topic of overcoming the issue of financial blockages as in not being able to get any finance or purchase any properties. We take a look at an existing client example and learn about their background.

Both of these clients are in their mid-thirties. They've both got it background, so they work quite hard. They, they were looking to, to build a property portfolio. They actually already started building their property portfolio, but they got stuck along the way while trying to build their property portfolio. So they were very busy people in their profession. So they were both working quite hard. One of them wanted to transition out of, I guess working for a PAYG job and then wanted to start their own business. So they were working fairly, fairly long hours at that point. They had already sort of built that portfolio, I guess to a point unknowingly. But they had sorta S messed themselves up financially in terms of their structure. So they didn't know where they were going to go from there. They didn't know how they're going to untangle the finances. And I guess at that point, I think that was sort of for a few years, they just sort of sat on their hands for a little while before they realized that, you know what, it's time to actually do something about it. If we want to build wealth, we want to build our portfolio, we have to sort out the finances, we have to sort out what's going on.

Walsh talks to us about their situation at that particular time and whether they had any kids or not.

They had one young little girl and they actually halfway through working with them, they've actually now had their second child as well. So they had a growing family. They actually were in a unit and now they're looking to upgrade now into a house. But they first I guess wanted to build their property portfolio at that time. So they were living in a unit, but now they've got a growing family. So at the time of starting all this they had one child.

We find out about the reason that this couple actually decided to start building a property portfolio in the first place.

They sort of stumbled into it. So they bought their own home in Sydney and that was to live in and they lived in that for a year and then they decided that they wanted to move location. So I guess it's a classic example. If you live in a home and then all of a sudden maybe something changes in their, in their work. So for them, they had to be a bit closer to the CBD because of work. And the commute was just, I guess to them a bit tiring. So they wanted to move, but they didn't want to sell their own home. So what they did was they rented out their own house and then they went and built up, bought a unit that was a little bit closer into the CBD for them, a little bit closer to work at that point. So that's sort of how they got started with, I guess their first investment property, which was their principal place of residence. And then they decided to obviously make that into an investment property and, and move into another, you know.

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We delve into the moment where they realised that buying and holding onto properties could actually make you some money. 

I think once they got into their unit, they'd realized about a year later that their old principal place of residence, which is now their investment property, that was cash flowing quite well. So at that point, it wasn't costing them anything to hold that property, but it also was going up in value. So I think for them it was that moment where they started going, you know, what if this thing is, is growing in value this property, but it's also costing me nothing to hold. Why don't we go out there and start doing this again? Let's, let's buy another property, but maybe we'll make this an investment from day one instead of living in it and let's start building a property portfolio. So that's when they started to turn their sights to Brisbane at that point. And they ended up purchasing two properties in Brisbane in the same year at that point.

They did purchase them themselves. They acknowledged I guess about a year or two later that they probably got that wrong and they didn't I guess buy the right type of property that was going to, to grow at that point. So they sort of, I guess at that point were looking at their portfolio. So, you know what, we, we actually sort of messed up at that point. There were other markets that were growing. Maybe we need to get an expert to be able to help us make the right informed decisions on where we purchase. And then also making sure that we purchase the right type of property as well.

After buying their properties and discovering they were not performing as they were expecting, they went looking for some expert advice.

It was around 2000 I'm trying to think. 2017 was when they purchased those two investment properties. And then it was by 2018, about mid 2018 was when they started to come to us. So they had looked at going back and getting finance. They went back to their bank. So they were with one bank across the total portfolio that they had. And they went back to the bank and the bank had turned around and said, no, you know, there's no more finance that would be giving you. So I guess at that point they would, they were thinking, well, we're stuck. We want to keep investing, we've got equity to invest. And that was from their Sydney properties, but they just didn't know how they were going to get out of that mess and what they needed to do at that point.

So they came to us with not only saying, you know, we need to know where to buy next, but we also have a bit of a problem here. And the problem is that, you know, the banks are saying we can't actually get any more finance to be able to continue to build the property portfolio. So that's when we started working with them, I guess firstly with the finance and structuring. So what we had to do is obviously make sure that, you know, we, we took a look at taking a look at their, their entire portfolio. What we realized was they actually were cross collateralizing some of their properties at that point. And that's why they were sort of tied into that bank. Luckily enough their principal place of residence and where they lived now so that their unit that they live in and the investment property in Sydney, both of them had grown in value.

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So they've been able to unlock or uncross collateralize those properties. And what we're able to do is make sure that every one of those properties stood on their own merit. And that way we could actually start to move different banks. So we had to explain to them at that point that what we need to do is we need to start to realize that one bank isn't going to cut it for all these properties. We're going to need to start going to multiple banks because they're going to have more appetite for you if you only have maybe one to three loans with them instead of having an attire portfolio with a debt behind it. So we had to, I guess, look at it from a standpoint and say what banks are going to be really tough on them in the, in the early days. And we would use them first and then we'd start to tear down their finance as they built their property portfolio.

Walsh helps us understand why cross-collateralisation is not the best thing when building your property portfolio.

I guess what happens is once you start to cross securitized properties you get tied in with that bank. So it's not as, you can't be as mobile or as flexible with moving banks because you might be holding one property as security for the other property. So they won't actually release any of those properties to go to another bank to refinance. So let's say that you wanted to refinance with another bank because the other bank was going to give you equity. You wouldn't be able to actually do that if you didn't have any equity in the property that was getting held as securitization. So that's one of the big issues. And what happens is if you continue to go down the path and keep crossing those properties, then you might get to a point where you got four or five properties and all of a sudden you want to sell one of the properties, but you can't sell that property because it's cross securitized with two or three others.

So because of doing that, then all of a sudden your total portfolio type is almost like a mess. It's tangled up and you can't really do anything. So you're almost, you can't move anywhere. You can't sell the properties, you can't do anything until those properties go up enough that you can unsecure ties to those properties and then start to move banks. So it's important to make sure that they stand on their own two feet so that if you want to move that property and go to a different bank, you want to sell it, you want to release equity from it, you can do that without having constraints of other properties that are going to have that domino effect.

The couple went to Walsh to help them unlock their properties and we find out what were the next steps for him.

Once we sorted out their portfolio, we moved to multiple banks with a couple of these properties. We extracted the equity that we needed to then start moving forward with the next property. So we had to work out early on in the piece what banks were going to go to that were going to allow us to continue to borrow. So that's working with a broker, make sure the broken knows what's happening with different banks and the different policies and what their lending criteria are. Because some banks might be lending a, I guess they, their lending criteria might be a little bit different. They might be a little bit harsher to investors, they might be a little bit easier with investors. They might want different things in terms of, you know, it might be a business, they might be more business orientated. So if you had a business and you're building a portfolio, you might have to go to a specific bank for that.

So with this client, what we had to do was make sure that we, I guess, already knew what banks were going to go to and why we're going to go to those banks before we even did that. So we didn't get caught up. Now, once we realized what bank we needed to go to, we set their finances up and then at that point we extracted the equity that we needed. We went out there and got another pre-approval. At this point, I think there were across about three different banks. So we went from one bank to three different banks. At that point we've got a preapproval ready for the next purchase. And that's when we I guess started looking for that for the next investment property for them.

It probably took about four months, I think, the time that we had sorted everything out. So it was a little bit longer than normal. But that's just because obviously as you grow your portfolio in any, if you get yourself into that sort of mess, that it does take a little bit more time to be able to work out what banks you're going to go to, sort the finances out. And then obviously be able to settle the loans as well.

With all the loans and everything all sorted out and everything's running as it should be. What was that first investment property that they found for them?

The first investment property was in Victoria. They had already purchased a couple of properties in Brisbane and they'd come to us because they wanted to invest in a different state. So they wanted to make sure they were diversifying their portfolio even more. And at that point they didn't know anything about Victoria. They thought, I don't know where to start. I don't even know the rules around it, don't know anything about Victoria. So they engaged us obviously to help them purchase in Victoria and make an informed decision on where to purchase. So at that point we ended up purchasing a property for them for $432,000. Again, it was quite a hot market at that point. And what we could see was, you know, and in the sort of 12 to 18 months following, we could see that there was going to be some really good short term capital growth in that market.

So we wanted to jump into that market, but it was quite difficult. You know, we, we saw some, some properties, you know, with 120 couples going through that property before they know within the first open home. So we knew that the market was moving quite heavily. We wanted to buy it but also probably at the right price. So it makes sure that we're not getting emotional about the purchase. We're not overpaying for the purchase. So we actually lost the first property. I remember we presented a property to them and that that property was actually on the market. And I said to them, there's a really good property here that's just come up. We've done all the due diligence here. Here it all is, this is what it looks like. We think it's going to be, you know, worth around that sort of three, four 30 to four 40.

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And we set a number and we went in there with the offer and ended up pretty much getting blown out of the water by about $50,000. It was, it was, well, people were making some stupid, I guess, decisions and especially more owner occupies. They were more emotional about it, right? So if they liked the property and they'd seen all this competition, it was like we just have to put our best foot forward and, and we're willing to overpay for it. We went back to our clients at that point we said, somebody has offered, I won't fire. At that point, we didn't know how much, the agent had already discussed it with me and I worked quite heavily with that agent. And he said to me, look, they're, they're well over asking price. You know, they know where near, you know, what most people are putting in in terms of their offers.

You're going to have to just put your best foot forward. And I said to him, you know what? We're out like where we had a number to stick to. We're investors. We're not emotional about this. There'll be another one that kind of, that will come up. So I went back to my clients at that point, explained the situation and they said, what? Maybe we'll go up another 30. I said, to be honest, let's not go on. Let's find another property. I know I can find another property for the right price. We don't want to get emotionally charged because other people are wanting this property. We just need to stick to the numbers and we need to stick to what is fair market value to these properties. And make sure that, you know what, we will always maybe one or two of them, but we have to get the right one. So it was only about two weeks later we had an off market deal come through and again they wanted 400 and I think 435,000 for it and we paid four 32 for it. And that was the right property, the right price and everything worked out quite well in that property. Has done very well for their portfolio now. 

Was that the only property that they purchased since then or have they purchased more? 

That was the first purchase with us. And it wasn't, it was only about a month or two later and we ended up purchasing another property with them. We ended up going back to North into North Brisbane. So we purchased another property in Brisbane. And again, that was just because we needed to have a bit more cash flow in the portfolios. So they wanted to buy something where it was going to have good growth over the next, you know, 10 years. And we wanted to buy in a market where we could see that the growth was going to occur and hadn't been through a cycle for awhile. And, but we needed to be conscious of the cashflow side of things. We couldn't have it negatively geared. So we wanted to make sure that we're balancing the portfolio out. So we went into Brisbane. 

Walsh explains how he determined what properties they needed to look for to balance out their portfolio at that time.

The first one I guess as the Victoria purchase was more about diversification. So we wanted to jump into a market. We knew that it was rising, so we wanted to get into that market before they were out priced and they could no longer buy. So because we were trying to purchase around those low 400,000 range, we knew that those properties were pushing well up into the fives and sixes and they were doing that quite quickly. So we wanted to get into that market before we went back to Brisbane. We felt like we had more time to get back into Brisbane at that point. So we wanted to jump into Victoria first, diversify the portfolio so that at that point they had Sydney properties, Brisbane properties, and a Victoria property as well. So they crossed three different States, three different growth drivers. And then once we had taken a look at their total cash flows on the portfolio, we decided that that point that we wanted to continue to balance that portfolio, very neutral cash flow. So we ended up going back to Brisbane for a further two purchases.

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We learn about the reason behind this couple jumping into the property world and start building their own property portfolio.

The why behind them was obviously at that point they were starting a family. So what they had realised was they were in their thirties, they not only wanted to retire themselves, but what they wanted to do is be able to set their children up. So they wanted to get to a point where they go, you know what, if we could build a portfolio now and we, and now they've built a portfolio roughly worth about 4.4 million. So they built quite a large portfolio now. But what they wanted to do is go, if we could build this portfolio, now, imagine what this portfolio will look like in the next 15 years. And in 15 years when our kids are starting to grow up, we can now help them to be able to get into the property market from our portfolio. And they're always going to be taken care of.

So they wanted to obviously exit the rat race and be able to do their own thing within a 15 year period. But they were also very conscious of making sure that they were setting up their children as well for success. And they knew that the property market was, you know, is going up and it's, it's going up over time. They could only imagine what the properties were going to be worth in 15-20 years from now. So they thought, you know what, if we could build a portfolio now, we could actually give our children a property each at that point. So they wanted to build the portfolio for themselves to get out of the rat race. But they also were very conscious of their children at that point.

Walsh lets us know about what the future holds for this couple and what they are looking to achieve.

We had a conversation around that actually not too long ago. So they are looking to purchase again, we were just in the, I guess early stages of refinancing some of their properties and resetting some of their loans back to interest only to, to making sure that we can balance the cash flow again. But they are turning their sights back on Victoria, but more some, some regional locations in Victoria to be able to, you know, ride that wave of some of the growth locations out that way. So that's sort of what they're looking at as well. So they've already got a few properties. Now obviously in Brisbane they've got a few in Sydney but they've only got the one in Victoria. So they want to expand a little bit more into Victoria. Just because they know that that's going to be a really good solid market over the next 15, 20 years for them.

Have they looked into doing sort of what we discussed in another episode previously about an intermediate type of property where they can add value to it and ensure that they can actually increase or manufacture the equity or even move into developing property. Have they looked into that as well?

They haven't really, just because of where their situation is. They're quite busy people so they don't really want to go down the developing route. Really what they want to do is be able to build a large portfolio that they can set and forget that they don't have to do too much with that. They know they're going to create income in the next 10 to 15 years. They know they'll be able to retire from it. They will possibly be looking into maybe the next property where they can add a bit of value through some renovations. But for the most part they do just want to continue down that route of just set and forget properties where they can continue to work. I guess have more family time at that point, which is quite important to them. So they don't want us to be spending too much time on their portfolio. So I guess they, they're looking at, you know, they want to build the largest portfolio they can. They want to be able to create that wealth. But they also want to balance that with lifestyle and be able to see their kids grow up and not be, you know they're already working hard. They don't want to be, I guess putting their weekends aside to be also doing the developing and all that sort of things as well.

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Once you start building the portfolio it is important that you have the right structures in place, we delve into the possibility of any blockages coming up for his clients in the near future.

I guess to overcome that, everyone has a serviceability wall that they're going to hit. And it's inevitable that's going to happen as you build large portfolios. So, this client, they're going to have to go through a mini consolidation phase. So if they wanted to build a larger portfolio, they can, but they might have to consolidate for a year or two, some debt. So they'll start to pay down some debt over that period of time. Their rents will be increasing, so that will be increasing the cash flow on the total portfolio and then there'll be able to get themselves back into a state where they can then build their portfolio larger. Again, they've already built a very significant portfolio, so they're not too worried about having to double that anytime soon. But they also want to, I guess, increase the property portfolio by maybe one or two properties every few years to be able to just add to that property portfolio. So their goal at the start was to hit $5 million in property and they're at $4.4 million now. So we're looking at their next property and that should pretty much tip them to the $5 million mark. And then we'll start to consolidate and start to pay down some debt.

We often hear about the value of someone’s property portfolio but how does that translate into how much you earn on a yearly basis?

I mean the larger the asset base that you build, the more wealth you're going to build over time. Right? So let's say that you had a $5 million property portfolio and if you just averaged 6% growth over, you know, a 15 year periods, obviously you'll have periods of about, you'll have periods of down and sideways. But if it can average say 6% growth per year over that 15 years, then that would mean that in year one you would have $300,000 worth of growth. So you can see if you build a $5 million portfolio and growing at say $300,000 or you build say a $1 million portfolio, it's going to be a lot less in terms of capital growth per year. Right? So as you're building your net worth what you're doing is over time is you're building the net worth, but you also then increasing the cashflow over time with the more assets cause you can increase the rents.

So in terms of, let's look at say retirement, you're going to be, whatever your net worth is, is roughly what you could be returning. You know, four to 5% on your net worth is what you'd be returning in terms of cash flow. So what you would be earning in your pocket, I guess at that point is between that four to 5%. So let's say that you had $2 million worth of equity out of the $5 million property portfolio you'd be creating around that sort of hundred thousand dollar income from that portfolio. Now as that net worth increases over time, you'd be able to increase the cash flow over time because you now are getting to a point where your overall leverage is a lot lower and your portfolio is growing exponentially, which in return over those years, the rents will increase as well.

So let's say for example, if we look at this $5 million portfolio on say a 5% return, you'd be looking at $250,000 a year of passive income. Would that be correct to say?

So that would be the capital growth. That would be the equity side of things. So you would be growing your portfolio, your net worth by an average of 250 to say $300,000. And then the cash flow would be determined. So what your actual income, if you were to live off the rents, the income will be determined from the cash flow from the net worth. So let's say that out of the $5 million you owned two mills, you had $2 million worth of equity in that.

Then all of a sudden you should be able to create roughly about a hundred thousand dollars out of that property portfolio in cash flow. So that's what you're going to live off. But you're also going to be having $250,000 in equity. So you'll have $250,000 in growth while you have 100,000 in the cashflow.

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