Real Estate Strategies in Investing: McKnight 500+ Properties
Property investing is risk-taking, you can never truly know what you’ll face on the other side of the property door, and no one knows this better, that the man with hundreds and hundreds of properties in his portfolio: Steve McKnight.
At an estimate McKnight has between 500 and 800 properties under his name, he has seen every horrifying facet that a property can throw at you. With this experience springs a wealth of knowledge, and on this podcast, McKnight will inform you of every slip-up, mistake, or blunder a property investor can make, and exactly how to fix any issue.
– Steve McKnight
So in say 60 seconds or less what do you actually do in any given day?
Well normally I would roll out of bed around 7 o’clock or so and I’ll do maybe a half-hour of exercise or walking when I pray and give thanks to God for being alive. For that particular day, I’d come home, I’ll help the kids get ready to go to school, I’ll eat breakfast, I’ll sit and read my bible and then I’d get in and do some work usually until lunchtime and then I’ll eat lunch and then I’ll get back into a little more work and then the kids come home from school so we hang out and I help them with their homework or we’ll just have a chat or we’ll do some exercises together and we eat dinner and hang out after dinner and go to bed and the next day repeat chorus.
That’s pretty much my lifestyle at the moment.
McKnight says his vision for financial freedom is.
I think for me the vision was financial freedom which is working when you want, how you want, when you want and with whom you want and that was always the dream. I don’t think financial freedom is getting on the golf course every day or if that’s what you want to do good luck to you but for me, it was still contributing, being productive, adding value, helping people but also being around for my kids. Particularly while they’re young and giving them a lifestyle which I like to say was my, I want my special growing up to be their normal so I’m trying to lift the bar a little bit without spoiling them. I mean my eldest daughter wants a pony and my wife and I have decided against that and trying to encourage her to be a bit more responsible.
Thanks to the wealth generated by his hundreds of investment properties, McKnight focuses on giving his children the best childhood he can.
So we’re not giving the kids absolutely everything they want but we are trying to give them an experience in life that we didn’t have. My wife and I didn’t have as kids and hence that’s why we’re in the United States for a year. We moved over here, we bought a house here, the kids are going to school here and it’s a great life experience. It’s the sort of experience where when I was a kid we got into a caravan and went to a caravan park. My kids get on an aeroplane and live in America for a year and I give thanks to God for that and it’s also what real estate has done over the years to create the wealth to allow us to do it.
They’re a novelty because of their Aussie accents but they’re finding freedoms here in the U.S. that they don’t get in Australia because they go to an all-girls school in Australia whereas here they go to a co-ed school and life over here is a little more relaxed than the structure in Australia. So they’ve settled in well, that said they miss our pets at home and their friends at home so they’re also looking forward to coming home in a couple of months when our 1-year adventure comes to an end.
McKnight attributes his impressive success as a property investor to his combined skills in accounting and business.
How would I describe myself as a property investor? I would say that what I’ve tried to do is bring the logic and reasoning that you receive as an accountant, a professionally trained accountant into the world of investing. So some investors are speculative in the way they go about selecting areas and real estate and their profit expectations. I think other investors are strategic which means that there is some logic and some reasoning and some basis behind what they do. So I would count myself as a professional property investor who uses business principles and accounting reasoning to justify the investments that I’ve bought and the strategy that is adapted to unearth the maximum profit possible.
McKnight grew up in the Australia of kids without helmets, where the streetlights were your call home and there was no such thing as an iPhone. He recalls this time as his happiest years, and so strives hard to give his children an even better childhood.
I grew up in Eastern suburbs of Melbourne In a suburb, place or town called Doncaster which back in the 60’s and the 70’s was the sort of urban fringe give or take of Melbourne. So there was a lot of house and land packages going up in Doncaster temple stone in the 70’s and 80’s. I went to school at the local primary school, Doncaster primary and they were really happy years. I mean back in those days you could ride your bike to school without a helmet which is a bit crazy these days, you were able to stay up just so long as you were home before dark. There were no mobile phones, there was no internet. It was kids having fun as kids and accidents happen. The occasional broken arm from somebody who fell off a monkey bar but life went on.
From happy childhood, McKnight went on to further his education at a prestigious school.
After primary school, I went to a private school in Melbourne, Campbell Grammar. My parents couldn’t afford to send me there but my grandparents could so they paid for the high school education. After finishing at Campbell grammar, I like Campbell Grammar I’d like to borrow a line from Robert Allen you know I was in the bottom third who made the top two thirds possible.
So I wasn’t particularly remarkable at high school. I was overweight, I was the second fattest kid in high school. My nickname was Captain Blubber so I had some socially awkward moments and then after high school, I went and did an accounting degree at R.M.I.T. in Melbourne and the third year of that Accounting degree was working for a year. It was called a co-op year so I was lucky in the recession of the early 1990s to get a graduate or slightly undergraduate accounting position doing tax returns, photocopying, filing, running the bosses dry-cleaning in town, pick up his Rolex watch and I would thoroughly appreciate the opportunity but I thoroughly hated it.
Despite the opportunity of his position, McKnight quickly realised he could not keep up with the debilitating demands of the job.
I used to get to Sunday night and cry about going to work the next day, ironing shirts, it was just horrible.
Anyway, that year ended, it was great to have the money mind you so I wanted to go back and finish my accounting degree, get my last 3 years into a 4-year degree. I kept working part-time at the accounting place so the money and then I luckily got a job at Deloitte. I thought well maybe I just had a bad experience with my first accounting job. Maybe I’ll go work somewhere else and got a job at Deloitte and really loved it. Spent 3 years at Deloitte, loved the social feel about the place, loved the comradery. The work got a bit boring in the end but at that time I studied to be a chartered accountant and burned out. I was working 10 to 12 hours a day, coming home and doing 3 to 4 hours of study and that was 6 days a week and Sunday I’d just sleep all day and after 14, 15 months of that which was the study to become a chartered accountant I was just really emotionally spent. So I had a bit of a career hiatus. I quit my job at Deloitte to try and go back and study physiotherapy at Uni. Physiotherapy was always my passion.
Despite his passion for physiotherapy, McKnight was forced to pursue accounting, despite the stress and health issues that it gave him.
I love massage, I love helping people. I kind of feel like I fell into accounting because I couldn’t do H.S.E. or V.C.E. English, not English Math’s because of the high school. They didn’t want me to mess up their pass rate. So anyway as a young adult I tried to get back into physio, I didn’t get in, got close. I ended my career kind of at Deloitte. I was ready to move on anyway. Spent a while working for I.C.I. which is now Orica and then moved on. I had met my wife in Ayers Rock and then went up to Mackay in north Queensland where she lived to woe her, got sacked out of that job in North Mackay, big fish in a small pond. I remember I was in another accounting job and I just couldn’t bring myself to wear a short-sleeve shirt and a tie. I just felt that was wrong. The pedigree of working at Deloitte where you come in a suit and you’re well-groomed and then turning up Mackay where they had kind of ties with that elastic behind it, no one knew how to tie a tie. It was a cultural shock and I think we didn’t integrate well. So in hindsight they did the right thing by letting me go but my wife and I moved back to Melbourne and I got a job working in an accounting firm.
Although from here McKnight eventually began his own business in accounting; it did not alleviate the stress the profession gave him.
You can say I kept repeating this mistake like a dog returning to its’ vomit. I got another accounting job working as a manager in a small firm and I was the audit manager and the tax manager was a strapping young lad called David Bradley and after working for a while in that accounting practice together Dave and I looked at each other and said why don’t we start up our own firm? So Dave and I starting our own firm at the beginning of 1999 and after 4 or 5 months of doing that I said to Dave, Dave I’m sorry I can’t do this anymore. I was suffering health-related stress issues. I was good at accounting but it was destroying my soul and maybe that’s a point that some listeners today is that if you’re stuck in a lifestyle or a job where it’s just eating you from the inside out and in my case, I ended up with ulcers on usual body parts and you can try and fill in the gaps. I went to the doctor, he said look Steve you’ve just got stress-related illness. You have to change otherwise you’re going to die early and I had to make a lifestyle adjustment.
Even though there were bumps and turns in McKnight’s property investment journey, he feels that everything happened as it should to get him to his place of prosperity today.
Well, I think you wanted to know the down and dirty details and that is the guts and all story. I mean I was pretty devastated after being sacked from a job in Mackay. When you get sacked somewhere it takes your self-esteem down a couple of notches and it took me a few years to recover from that but with the benefit of hindsight as I said I think they did the right thing and they did me a favour because I wouldn’t be where I am today if they haven’t had done it.
Growing up McKnight witnessed his father’s dabbling in real estate and the stock market, however, his ambition for the property is clearly his own.
Dad sold used trucks and Mum taught piano after school, some extra housekeeping money but otherwise she was the principal sort of homemaker. Dad, later in his career as he was coming towards the end of it dabbled in some property investing. Pretty speculative, he had a client who brought a lot of the trucks from him and together they purchased an industrial site and he quite literally bet the house on it. He mortgaged up the house to get the investing capital buyer and just before they were going to start off operations one of the large national competing tenants told them if you ever lease out this building we’re going to send you broke and they had to make a call whether they were going to do it or kind of fold and they, I mean they had testicles the size of bowling balls because they went ahead and did it and it worked out.
With the lucky touch in real estate, McKnight had a good mentor in his father; unfortunately, this didn’t extend to the stock market.
So that was the beginning of Dad’s real estate career and he’s since brought a couple of negatively geared companies that have appreciated well in value. He also dabbled in the stock market but I have a saying that anything Dad buys everyone else should sell because he has the anti-Midas touch on the stock market. Everything he buys goes down in value so he probably should’ve stuck to real estate because he’s done quite well. Mum’s parents were, Dad’s parents were not particularly wealthy growing up whereas Mum’s parents were more wealthy so Mum and Dad have clashed regularly over their marriage and they’ve been married over 52 years now I believe but they’ve clashed regularly in their marriage over money issues.
McKnight attributes his choice to become an accountant to a childhood created a desire to help his parents with money issues.
I kind of believe that’s why I ended up being an accountant was to try, I’m the third child to be the peacekeeper in the family and try and help Mum and Dad sort out their money woes but anyway life has ended up well for Mum and Dad. They’re both independently wealthy now. Mum is through inheritance, Dad through his own self made millions and a little bit of inheritance as well and they’re fine, they’re well looked after, they’re self-funded retirees. As far as my own real estate career goes I think the lessons that Dad taught me were that if you work hard, that you can achieve great things. Mum and Dad were both very independent people. If I wanted to do something as a kid growing up it was up to me to make it happen.
The child of two very independent people, McKnight also learnt to become a self-sufficient individual.
So if I wanted to play basketball I’d catch a bus to the basketball stadium and organize myself. So while it was disappointing in some way that Mum and Dad didn’t show a great interest in what I did the lesson that taught was if you want something make it happen yourself and really that is the journey of real estate for me because if I wanted something I just had the tenacity to go away and make it happen and today people often say about me that they don’t think that I’m brilliant and I don’t think I am either but what I have is a doggedness to continue to push ahead even in difficult circumstances and maybe that was forged in those early years growing up.
McKnight’s first foray into property investment was due to the health issues of stressed filled job as an accountant. His investment career soon became a high-wealth job without intense stress.
I went to Dave and I said Dave I know that we were business partners together but I can’t do this anymore. Let’s try and do something else and we went to a Robert Kiyosaki seminar after reading his book and then in May 1999 Dave and I got in the car and we drove up to Ballarat and we brought our first positively geared investment property and then we soon after sat down and said alright we’ve brought one. How many of these would we have to buy to not have to work in accounting anymore? It was 150 or I can’t remember the number but it was a large number of houses and we said alright let’s do it. One by one by one Dave and I used the money in the accounting practice and continued working in the accounting practice in the early days and I would use the money to invest in real estate and then as time went on Dave gradually phased out the accounting practice so that we both ended up being full-time real estate investors. That’s the journey.
McKnight’s worst investing moment didn’t involve him losing money or even properties, but it did involve a horror-story encounter straight from your nightmares.
I mean there’s been some horror stories don’t get me wrong but I think out of those experiences you learn a lot and so there hasn’t ever been a moment in my life or real estate career where I’ve really felt compromised and I think because as an accountant I’m naturally risk-averse and try to avoid betting the bank on a single deal or, taking unnecessary risks. That said in the early investing years of Dave and my careers we did buy a property that we decided to renovate ourselves and with due respect to Dave and with due respect to myself we were good accountants and we were emerging property investors but we were terrible renovators. It was actually the only deal that I’ve ever done with a family member as well. We brought Dad in on it who had retired.
Without the right knowledge or experience, renovating a property can be time-consuming, and unprofitable, which is what McKnight discovered.
Dad was quite handy and we didn’t lose money but we didn’t make a lot of money and the learning lesson the was that the amounts of deals that we’ve missed because our heads we in paint tins rather than out there looking for the next opportunity versus the labour-saving by doing the work ourselves was just ridiculous. So I think the lesson there was do what you’re really good at doing and leave the rest to those that are good at doing things that you’re not. A story of a property here in the U.S. which might freak a few people out was back in 2009 or 2010 I was looking at buying a 5 plex and it was a real estate foreclosure and funnily enough Mike Koma, another Mike was taking me through the property and he knocked on the door and the tenant opened up and immediately there was this foul smell that kind of hit me in the face like a punch and I was trying to figure out what was going on.
Despite the warning signs of his agent, McKnight forged ahead to assess the property. But boy was he in for a surprise.
Anyway Mike kind of stepped back and ushered me in so any time a real estate agent does that sort of lets you go in and they go outside you know you’re in for a shock. Anyway as I walked in I was trying to find where the smell came from. It really was, pungent doesn’t do it justice, putrid is more like it and I think at random I saw a whole lot of cats and I’m like ok and as I looked around I saw the tea letter tray that was full of cat poo and overflowing and I’m like ok that’s probably the smell and as I looked around, I kind of looked at the kitty litter box and it seemed to be moving. I was like what this odd and the tenants talked to me about the property and I’m trying to listen and I’m also trying to figure out why is the kitty litter moving and as I looked at the kitty and I looked at the wall behind it seemed to be moving and as I looked around the ceiling seemed to be moving and the floor seemed, I was like am I coming down with a migraine or what’s going on? This is all odd and then just as I felt something crawl up my leg it dawned on me what was going on.
Nothing could have prepared McKnight for the horrific scene before him.
The place was so infested with cockroaches, little mini cockroaches that they were all over the walls and all over the kitty litter and all over the ceiling and all over the floor and they start crawling up my legs and I was kind of thinking, and then just as I realized this everything clicked into place. The tenant says yes as you can see we’ve got a cockroach problem here. I’ve been in hospital twice. They’re crawled into my ear and come out in the night time and I’ve had to go to hospital to get them taken out. Well, I guess I’m the guy who likes to buy problems and turn them into solutions.
Sometimes you meet people that are just determined to succeed, regardless of the challenge, and McKnight was definitely determined to turn a profit on this house of horrors.
So despite the cockroach problem we brought the property, we did move the tenant out. It’s not appropriate to have 10 cats in a little one-bedroom bed set up. So we moved her out and we had to tent, put a big tent over the whole property and gas it. Anyway, we still couldn’t, afterwards get the smell out of that unit even though the cats weren’t there anymore and the kitty litter wasn’t there and the tenant wasn’t there anymore and so we had to peel off the plaster in the walls and we took out ten 50 gallon drums of dead cockroaches, dead little mini cockroaches, shovelled them into the, well I didn’t do it. He had to take out I don’t know, hundreds of thousands of those little cockroaches and they’d infested the place and got behind the wall and then we gradually turned it around and that year or so I sold that property and made a good capital gain but it was a bit of a problem.
However, the horror is balanced by the high-class. Where one property has cats and roaches, another hosts an American President.
Well ok another story out of the U.S., most of my investing has been in the U.S. since 2009 when I cashed out of Australia and brought my money over to the U.S. because the house prices here were so ridiculously cheap. The returns were so high, the dollar was high and I foresaw an opportunity but I’ve been buying some stuff in Australia recently too. The story that comes to mind here is that I bought another property in foreclosure downtown Fort Miles Florida and there was a bit of a problem with that in that the bank-owned it but it was a double story building and there was a staircase at the back and we said to them we’ll either replace the staircase and you give us a 5,000 dollar discount on the price or you replace the staircase and we’ll pay the price, the asking price and they said no we’ll go ahead and we’ll change over the staircase back. So I had no worries. Anyway, I think ended up costing them 30,000 dollars which were a whole lot of money because the property was only 80,000 dollars and then be that as it may the remarkable thing about that building is that Obama then leased it for his campaign headquarters for South West Florida here. So I’ve had Barack Obama, the ex-president of the United States Of America as one of my tenants.
Another key to McKnight’s stellar portfolio is his ability to stay ahead of the curve, thanks to his own knowledge and the help of his friends such as Dave Bradley and Aaron Dunlop. But for McKnight, his true ‘ah-ha’ moment was realising he could stand on his own two feet.
I’ve been very fortunate that one of the skills that I’ve got is being able to reasonably accurately predict changes in market momentum. So ahead of the curve in Ballarat, head of the curve in New Zealand, head of the curve in the United States. Now that’s only by the grace of God, I didn’t have any smooth saying ability or anything else like that.
This good fortune continued for McKnight and even reached over to the United States.
It’s just I’d seen the same opportunity present itself a number of different times. I would think that the best thing that ever happened to me in my investing career solo, so after Dave and I shook hands and moved on to our own respective niches was the decision to come to the United States Of America and invest here. It was 2009 and it was carnage, real estate over here but I managed to buy a couple of hundred houses, some by myself, some with another investing partner Aaron Dunlop, mobile home parks and what’s happened is that the strategy played out and it’s always nice to see a strategy play out. You think it’ll work but when it does work it kind of feels self-fulfilling.
McKnight’s American success gave him the confidence to further build his property empire.
So the money that’s being made over here in the U.S. has been good but that aside it’s watching a strategy play out and then realizing that yes you can do this and you know a middle-class guy from Melbourne, ex-accountant, sacked of a job in Mackay, second fattest kid in high school with all the doubts and fears and insecurities that we all have. When a plan comes together, a quote from the A-team it’s great and my aha moment was I knew I could do it with Dave, could I do it by myself? And coming over here and investing in the United States proved I could. And that was an aha moment so given that I proved that I could do it by myself or as I like to say with God as my business partner that then gave me a confidence and allowed me to go to a higher level with my investing than where I had been before.
More than anything McKnight is excited by the thrill of the chase, and expanding his already extraordinary property portfolio.
What am I most excited about in terms of investing in real estate? Well if we’re talking about real estate I’m not sure I get excited. To me, it’s a business transaction. There’s emotion, don’t get me wrong, I mean I love sniffing out a deal, I put a property under a contract last week, 2 million bucks for the fund that I run here in the United States and I think that property will do well and since managing to secure it was me and another guy that were head to head trying to get it under contract. They did a bit more but I had a better track record of closing and was a cash buyer. So they went with me and the agent said well since giving you the nod we’ve had about 30 calls from other people who want it too and that is, it feels good, you know, that’s exciting because you know that you’ve got a good deal when that kind of thing happens.
But material success is obviously not all that matters. A family man through and through, McKnight is also excited to grow old with his wife and kids surrounding him.
I’m just excited about the future I guess. If I’m excited about anything I’m excited about watching my kids grow up, I’m excited about getting old with my wife and excited about continuing to invest and make money and to use that money to bless my family and to bless other people and till God calls me home to continue to try and not only because I think I’ve got enough myself but not only to provide for myself but to provide for others. I think there’s an obligation too much is given, enough is required and monetary wealth brings with it advantages there’s no doubt about it but it also brings with it a responsibility and you have to be careful about how you discharge that responsibility. I want to get Heaven and I want God to look at me and say well done good and faithful servant. So I heard that recently someone said that money is a tool and not a weapon and I think that’s a really good way of describing it and I think I want to continue using money as a tool to benefit myself and to benefit others.
Thanks so much to Steve. We will keep the conversation going in a future episode on Property Investory Podcast where we talk about how to apply the strategy,
Dave would source them and buy them and that was how we moved out of vendor financing into traditional rentals and so we would employ this principle called multiplication by division where we buy a house for 50 kept the number simple, it would go up to 100, we’d sell it at 100 and buy-back two 50,000 dollar houses in another emerging area and that’s how we brought so much property so quickly.
to exploring the mindset needed to pull off a successful investment
So in order to take on risks, I had to find a way of replacing that portion of my brain that would allow that to happen and it’s very hard to find a way to overcome risk in any transaction that’s a risk.
to resources he recommends
At that Robert Kiyosaki seminar I can’t remember much but I can remember a New South Wales agent getting up and saying I don’t understand why people negatively gear when you can positively gear.
…we crawled in through the broken window in the front and then before us was a cat crucified on the wall and the floorboards had been taken up and burned…
To first explain his strategy, McKnight uses the example of his first-ever property to reveal the disturbing shocks and lifelong lessons that he experienced on his property investment journey.
So Dave and I had been to the Robert Kiyosaki seminar and we had looked around Melbourne to try and find positively geared properties because at that Robert Kiyosaki seminar I can’t remember much but I can remember a New South Wales agent getting up and saying I don’t understand why people negatively gear when you can positively gear a book. Here’s an example of a property where the rent is higher than the expenses so it’ll put money in your pocket and it will go up in value and that was a revelation to me because I knew all about the negative gearing being an accountant and understanding the tax side of it but I had not known that there were things called positively geared properties. So following that then I come back to Melbourne and the seminar was in Sydney and we had looked around Melbourne for positively geared properties and as hard as we looked we couldn’t find a single one even out in the boondocks. We just couldn’t find a property where the numbers stacked up. So we, a friend of mine from years before had mentioned Ballarat and I had at the time funnily enough completely dismissed it and said you’ll never get positive permit, you’ll never get capital appreciation in the country so why would you bother investing there, you’re going to lose your money, don’t do it.
Well, Dave and I thought we’d drive up the Ballarat and have a look around. On our first visit or first or second visit again we struggled to find anything but we did meet a real estate agent called Mick Golding who we affectionately called Mickey G and Mickey G put us in a car and drove us around and we ended up in a housing commission in an area of West Wendouree you know you’re in trouble when you turn up to an area and there are shopping trolleys parked on the nature street. That’s an indication of the mindset of an area. Also, a large proportion of people in that area are renting because they were on government assistance and any area where a large proportion of people rent and are on government assistance you know that it’s going to be a more aggravating area to invest in. But anyway Dave and I didn’t know that at the time. We looked at a number of properties.
I remember Mick showed us through some ex housing mission stock that the government was selling off in one particular property Mick didn’t have the keys so we crawled in through the broken window in the front and then before us was a cat crucified on the wall and the floorboards had been taken up and burned.
It was a real shock for a guy growing up in middle-class Melbourne to come and see how some of the other half lived and it is part of Ballarat. All the streets are named after flowers. So there’s marigold, pagonia etc and this house was in violet avenue and Dave and I nicknamed that whole street violent avenue after because it was such a shock. But we ended up, Mick had shown us some houses and standard real estate agents trick. The last one he showed us that day was a privately owned home owned by two older people. One of them unfortunately had come down with cancer and had to sell up the house to move closer to the hospital. So we ended up buying that house on the nature street that afternoon, rented it back to them for a short while and it was positive cash flow.
From this first experience, McKnight endeavoured to learn all he could of the world of property investing, and to learn from anyone he encountered. This desire for education proved successful as McKnight quickly gained knowledge about vendor financing, which would change his entire investment strategy.
Not long after buying that property my wife and I had agreed to go and do some, a honeymoon in Vancouver and coincided with some more training on marketing that I was keen to do and I met a fellow participant at that seminar. A Canadian guy, his name was Chuck and he said that he was a real estate investor and I said great Chuck you know, tell me how you invest in real estate and he said well you know I can’t remember how many properties he owned but it was a number enough to be impressive. See it might’ve been 20 houses or something, and he sat down and explained the concept of indoor finance to me and he ensure that he would buy a house for dollars, $100,000 say and he would then sell it to someone else for $125,000 dollars, he would pay 6 per cent on his mortgage and him would charge them say 8 per cent. So he would make a margin on the price and a margin on the interest and that would be his positive cash flow and over time he would receive an annuity payment in the form of positive cash flow every week or a fortnight or a month or however often he collected the mortgage payment and he would say he could be in a deal for no money down because if his deposit was matched by the deposit the person was paying, we figure we could be in it for nothing down on a deal because if the deposit that we pay was matched by the deposit that we received, this is what Chuck would explain, then he could be in it for nothing down and that was how he was able to buy so many properties and it was like the blinkers had been taken off.
So I remember coming back to the hotel room calling up Dave that night and saying Dave I’ve got some exciting news and he said Steve before you tell me your exciting news Mickey G rang up and said that there’s someone who would be interested in buying a house off us or, I think it was $20,000 dollars more, he goes I said it would be great because you know we only brought it for whatever we did. I think we brought it for $54,000 or something like that and to make a $20,000 profit in a couple of months is an incredible return and I said well Dave we could do that but before we do that what about this for a consideration and I explained to him what I had just explained to you and he said well if you think it might work then let’s give it a go.
With this new knowledge, McKnight was ready and waiting to get back to Australia to prove his new skills.
So came back to Australia and using the marketing that I had learned at this seminar I put an ad in a local paper in Ballarat trying to find someone who would want to buy the property of us and I remember being all enthusiastic and didn’t get a single call for a couple of days and then finally somebody rang up and they said not really interested in the house but interested in what you said about I don’t need a deposit or much of a deposit. Anyway that was, he ended up buying the house off us and then got terms and that was the beginning of how we brought so many properties so quickly. We would use the money in the accounting practice to fund the deposits on properties and with $50,000 dollars or less. In doing the math, 20 per cent deposit is 10 grand plus say another 5 grand for closing costs.
So we’d made 15 grand to buy a house and then we would sell it on vendor terms and try and get as much of the deposit as we could and then we would get the positive cash flow difference on what we brought it for and sold it for and what our mortgage was and our interest rate and that was all well and good and then the government introduced the first homeowners grant and then all of the sudden the number of people who could take advantage of what we were offering exploded.
People could use their first homeowners grant to pay for the deposit and that meant that we would get more money and could make this work even more. So we go and buy properties, we would stagger the settlement dates, we would run ads in the local paper, own the home for less than it would cost to rent and because that’s how we made it win-win. People would ring up and then after a while we figured rather than us looking for properties we can empower them to look for properties and provided that they’d met our criteria we’d buy it and sell it back to them and they would let’s say we would buy $50,000 dollar house, 20 per cent deposit, $5,000 the closing cost we’d be in for 15 they would give us $7,000 dollars plus usually a couple of grand extra $10,000 or so and we would be in the house for 5 grand and then we would be making positive cash flow returns and eventually what we found happened was that values had gone up because the prices went up and people would cash us out and we would get a lump sum payment which would be a price margin, an unadvertised price margin difference between what we brought it for and what we sold it for and then what that would do is they would be a pity because there would be a positive cash flow because they paid us out but then we would have a big chunk of money in our bank account.
Next, you’ll hear how McKnight quickly build up his absurdly large portfolio, one deal at a time.
So Dave and I saw the writing on the wall but while it was great to have the positive cash flow from vendor finance sales it was finite, it would end and so we took those lump sums that we got and this was Dave’s initiative and kudos to him. He went down to Tasmania and started buying blocks of units altogether. Dave would source them and buy them and that was how we moved out of vendor financing into traditional rentals and so we would employ this principle called multiplication by division where we buy a house for 50 kept the number simple, it would go up to 100, we’d sell it at 100 and buy back two $50,000 houses in another emerging area and that’s how we brought so much property so quickly. It sounds flippant, it sounds like that’s the highlights but it was one deal at a time.
We were assisted with a really strong tailwind in the form of the first homeowner’s grant. We created a real estate product, found a market for it and monetized it which is again this business principle of real estate investing that I spoke of before. There’s no real difference between business and real estate. If you can find a market or as Robert Allen once said in a training find hungry fish which is found somebody who wants what you want, create an irresistible bait in the form of a really good offer and then drop that into the market and you’ll create a feeding frenzy and we didn’t know it at the time but that’s kind of what we did and you could do the same thing today in real estate, perhaps not with vendor finance because prices have gone up so high. It wouldn’t work on the same basis we did it which owned it for less than what you were renting it for and the laws of vendor finance have changed a little bit because people will use it, unfortunately, to rip people off but there’s always an opportunity if you can find what the market wants and provide it for them. So as long as people live in houses you can make money out of the real estate. So the opportunity may change but the concept won’t.
With so many properties under his belt, it’s undeniable that McKnight has seen it all.
When you’ve been investing in real estate for 15 plus years you brought hundreds of properties around the world, Australia, New Zealand, the United States you’ve probably seen everything there is to see and sometimes even twice. There’s never a dull moment, that’s for sure.
As McKnight explains in his own unique way, accountants hate risk, and yet property investors must live and breathe risk in order to succeed. To conquer this discrepancy, McKnight forged his own strategy to address, evaluate and eventually overcome any risk.
When you’re trained as an accountant, what they do, is they perform a lobotomy and take off that part of your brain that is willing to accept risk and that’s why accountants are so risk-averse. So in order to take on risks, I had to find a way of replacing that portion of my brain that would allow that to happen and it’s very hard to find a way to overcome risk in any transaction that’s a risk. I came up with a three-pronged strategy which I’m happy to share with you now that I hope will help the listeners.
Let’s say we have a property that we want to buy but are not sure whether to buy it or if it’s going to go wrong. I often ask people at seminars that I run, can you think of a really great deal that you didn’t buy that you wish you did? Normally everyone can go wasn’t sure about it so this is how to help people in that situation not make that mistake.
It’s three N’s. The first one is when you’ve got risk you’ve got to name and explain what that risk is. What are you afraid of, are you afraid that the property is going to go down in value or are you afraid that tenants are going to trash the property or that you’re not going to find a tenant. Are you afraid you don’t have the skills but try to identify what you are afraid of because if you can name what you’re afraid of you can do something about it but if you can’t name what you’re afraid of and you’re afraid of the dark for instance or the boogeyman, you’re afraid of something that doesn’t really exist. Maybe that’s a bad example but anyway, if you can name it and be specific about it, which brings us to the second point which is you’ve got to number it and try to assign a value to the risk. Let’s say you’re worried that you might be paying too much for the property. How much might you be paying too much?
When I first got started, we were buying 50 000 dollar houses, I was afraid that we would lose 50 000 dollars and that was a lot of money to us at that point in time but really we weren’t losing 50 000 dollars, we bought it for 50 and we had to fire sell it back to market and then really what we were losing is ten plus purchase and sale costs so we weren’t risking 50, we might have been risking 20 or 30 000 dollars and not understanding what we were really risking meant that we were perhaps passing deals that we should have had. So first you’ve got to name it, second number it and third strategy is you’ve got to numb it, which is devising a strategies to mitigate the risk so you don’t have to take on a naked risk which means you just take it on and don’t do anything about it over the hope that it doesn’t happen.
This three-step strategy is the key to McKnight’s success and is so simple that anyone can learn to perform it. For McKnight, this strategy is what keeps him sleeping easy at night, with the knowledge that any risks he took have been subdued.
If you name it and numbered it and you’ve got a strategy to try and numb it then that allows you to take on deals with risks and still proceed and sleep at night. So more recently since 2012, I’ve set up a property fund in the United States to buy property in the United States of America and we’ve brought over a hundred and thirty million dollars worth of real-estate and the only way that I’ve been able to buy some of the properties that I’ve bought is through that name it, number it and numb it strategy because with some of them, evaluate opportunities, there’ve been some problems and I haven’t necessarily known exactly how I was going to solve that problem but by brainstorming with smart people and coming up with strategies it meant that we could still buy none the less and have the confidence that we would turn it around over time so once again real-estate is all about making the most money in the quickest time for the least risk and lowest aggravation and you want to buy a property where the upside is better than the down side by enough of a margin to make it worthwhile so we’re talking about risk and the way that we manage our risk is to name it, number it and numb it and so if you can do those things then you’re able to invest at a level and mind-set that exceeds what most people are able to do and therefore you can take on bills that other people can’t and invest in ways that other people aren’t aware of.
McKnight isn’t shy to reveal the help and knowledge that he has acquired over the years from friends, mentors, and other experienced investors.
I think a mentor is someone that goes through the effort of knowing you a bit better than the author of a book so I think I’ve had influences, Robert Kiyosaki, John Burley, Robert Allen, Ron Legrand, Don Campbell just to name a few off the top of my head and then I’ve had mentors so I would call Dave Bradley a mentor, Dave Bradley is the shrewdest person I know when it comes to money and property investing. Dave has the talent of being able to sniff out every last thing in a deal and is a very smart deal maker and I learn a lot from Dave Bradley and I’ll be forever thankful for the time me and Dave had together and enjoy catching up with Dave a couple of times a year even now and trading stories and reminiscing on some of the old days.
More recently a guy over here in the United States, Stuart Silver who’s an older Jewish guy who’s in his mid-seventies who had been investing for over forty years and Stuart who I call Uncle Sely has taken me under his wings somewhat over the last five or six years has really mentored me in the field of commercial real-estate which is now my expertise and he has been a great confidant when I was feeling lonely because when you operate at a lower level than I do, there’s not a lot of people out there that really understand what’s going on so he’s been able to share some of my burdens and encourage me and also guide me and give more than anything a lot of wisdom and I’m not too proud to be able to say that I need to learn from people smarter than me and so whether it’s Stuart Silver or someone that I meet we all have expertise in our own areas and I’m always open to try and learn but I think the two most dangerous words you can ever utter are “I know” because if you say “I know” then you go from being teachable to unteachable so I’m always well tell me more, can you teach me, can you show me, can you tell me because I’m eager to learn and improve and I can always be better and so I look forward to those opportunities, I look for those opportunities to learn from other people. Not only their success but also their failures and I enjoy that.
For McKnight, the most important personal habit for a property investor is unwavering, conscientious scrutiny at all steps of property investment. Because in the world of property investment, to be optimistic is to be blinded.
I think the due diligence that you can do before going into a property transaction really sets you up for success so I’ve created a due diligence process and I’m in the process of turning that into a product but until I do this program that’s got a preliminary and a comprehensive phase to it is a habit and a checklist. It’s kind of like getting in a plane and doing a pre-flight checklist just to check everything off so you actually don’t miss something, do a little test, run through the numbers etc and I think what that does is it protects me from myself because when you’re part of the real-estate it’s very easy to form an emotional bond with it and perhaps be glass half full and overlook things that you really ought to not overlook so having a due diligence checklist and template and methodology that’s forged on the back of buying hundreds of properties and millions of dollars worth of commercial real estate is a habit and a strength and protects you from buying a property that you should otherwise say no to.
Among buying hundreds of properties, McKnight somehow found the time to write best-selling property investment book ‘From 0 to 130 Properties in Three and a Half Years’ .
My first book that I wrote was 2003 ‘From 0 to 130 Properties in Three and a Half Years’ and it chartered the story of how Dave and I went from 0-130 properties in 3 and a half years, now, listeners are somewhat familiar with that story because they’ve heard me describe it over the last podcast and this one but there is more information to talk about the deals that we bought and the strategy and lots more funny stories about the things that happened along the way. Plus there are some other accounts about people who have been following my real-estate training and the successes that they’ve had so it’s a very good read.
I mean it’s one of the best-selling business books ever. Sold over three hundred copies and a book doesn’t do that unless there’s some value in it. So for those of you who haven’t read ‘From 0 to 130 Properties in Three and a Half Years’ go to your local bookstore and pick up a copy and grab it on Amazon Kindle or whatever you want. It would be a good place to start.
I then wrote a following book, from ‘From 0 to 260+ Properties in 7 Years’ which talked about how a lot changes once you become financially free and then more recently I put out a book called ‘Millionaire’ which is a book that I wrote in conjunction with Stuart Silver who I mentioned before and it contains 260 insides and pearls of wisdom that Stuart and I shared. The context of it was if we’re only going to give one more seminar and we had our nearest and dearest in the crowd what insight and wisdom and ideas and concepts would we want to share. What would we want to say to future generations that would come after us who we’ll never meet so we put that book together which I think is my favourite book out of all them.