Why A Real Estate Plan Is Important For Your Exit & Entry Into Any Market
Simon Loo is a successful property buyer’s agent and director of property buyer’s agency, House Finder. He has been working in the property industry for numerous years and has gathered a wealth of knowledge and experience that is hard to replicate. We are lucky enough to gain some of that knowledge and receive some strategies, plan and advise on the varying topics of investing in the property market.
Come with us as we delve into today’s topic and we find out about what we need to look for when buying a property and how that can help you down the track when you decide to sell or rent it out, the best places to buy and the type of property that can be the most advantageous, how putting a little bit of money in can allow for much more money to come back out, and much much more!
We are delving into the topic of, your exit is as important as your entry. We hear about an example where this has been applied in Loo’s experience.
The notion of your exit is as important as your entry when anyone buys a property, all they’re thinking about is what they’re buying. You know, is it a good investment property? Does it generate cash flow? Is it in a good area? You know, does it have equity and can you add value to it? Which is all very important. But a lot of people, what they don’t think of is that when they sell a property is equally as important. Because when you sell a property ultimately, whether you’re holding it for 1 year, 10 years, 50 years, the sellability of that property will determine how much money you make. You know, you can strip equity out of it forever, but until the day that you sell it, you know, that’s when you actually make income.
So a story that I have is, and I actually have quite a few of these stories is I get investors sometimes coming to me with a few properties under their belt and they’ve bought properties that are very skewed towards high cash flow. Now, these properties maybe some kind of odd dual living set up. It might be a property with an abnormally large amount of rooms inside the house that they might be renting out to students. It might be a small townhouse, you know, in a lower socioeconomic area that has great on-paper yields and great cash flow on paper.
These are not necessarily in regional towns. They’re in capital cities.
In capital cities and you hear nowadays like dual key properties quite a lot. You know, where the house is actually, it looks like a normal house from the front. But inside is actually two separate houses joined together. So basically kind of like a duplex but without the facade. And you know, there are a lot of people selling these properties, you know, with the notion of having super high cash flow, which is what a lot of people chase. And a lot of people buy these properties. So the example that I have would be a property where they bought a townhouse, you know, on paper was 8% yield, which is really, really good as you can imagine.
The problem is nobody wants to buy these properties in this particular area because there’s just so many of them and also houses are very cheap. So in this particular area which is in Brisbane in the Logan area you know, the price of a two or three-bedroom, let’s say a three-bedroom townhouse, you might be looking at $220,000, which is very cheap. You might get a per cent rental yield coming out of that property, which looks really good. But there are a couple of pitfalls. So number one thing is a body corporate. You know, when you’re buying a house that cheap with such cheap rent, you’re very exposed to little costs. You know, little costs can impact your cash flow significantly. And body corporate is one of those little costs that is a huge cost when it comes to buying or owning one of these townhouse properties.
But I’m digressing a little bit into the actual ownership of the property. The struggle is when you’re buying these properties, they only ever appeal to novice investors because they are lured in by the cash flow, by the price point. So these units achieved very little capital growth because nobody wants them. But when you’re selling it, if you’re trying to sell it, if you’re in a position where you have to sell the property, whether it’s personal circumstances or you can’t financially move on to the next property, whatever it is, nobody is going to buy it, you’re going to have to sell it to another novice investor and novice investors under the same criteria or the same limitations as you were when you bought the property, which is a very small budget. That high cash flow is the only thing luring them in.
Your own personal assumptions compared to what the actual reality of the situation is, can be completely different and Loo sheds some light on this.
You’re only going to be selling that property for the same price, if not less than what you pay for it. And you’re in that period of time that you hold onto as well, which means that you’re making a loss. Now, using the dual key example property, you know, the only type of people buying those types of properties are investors. No one is going to be looking at that type of property to live in one day. You know, so you’ve immediately cut off the owner-occupied market completely, which is actually the kind of people you want to sell your investment property to because unoccupied people buy emotionally and when people buy emotionally, they don’t really care too much about price, you know. So if you were to sell it to of maybe like a first home buyer that wants to live in the property, you know, and they’re looking at their lung capacity, an extra $50K or $100K to them might be meaningless.
It’s more of a lifestyle decision lifestyle if they love it, that type of thing. So dual key properties, you know, is another thing. You know, any property with some really odd layout where it’s more conducive to creating a little bit of extra cash flow may not be in your best interest, especially when you exit from that property at a point in time. Again, kind of moving on into the whole holding of that property as well. You know, I think a lot of people at least on paper expect there probably to work a certain way during the ownership. But the reality of it is if you, let’s say, for example, you have a house with a lot of rooms, you know, and the property you bought is near a university. So the intention is to get a huge cash flow by renting to students.
That’s the intention. But the reality is a lot of vacancies. Students moving in and out. A lot of maintenance, not only have you got, you know, eight individuals potentially using one kitchen, using one bathroom, you know, the demographics of students by nature are not going to be looking after this stuff inside. So you’re going to be spending a lot of money on, you know, replacing taps and a lot of wear and tear and all that type of stuff. So, and this goes for a lot of these types of properties that have these sort of dual living or maybe any capacity to bring in some short term rental boost. You know, it may not work out how you planned, you know, during the ownership. And what I see is at that point, at a certain point, that’s when they want to try and get rid of it. They’re stuck, they have to take a loss. So your exit is really equally as important as your entry. Because we know your ability to sell a house in the market is crucial. When you buy something and it goes up in value, you only really, truly realise that is when you sell it.
We gain some perspective on this topic as we hear about one of Loo’s clients and the situation he had on his entry and exit.
Most of my clients haven’t actually sold their properties yet. But I did have a particular client that did buy a townhouse in the Logan area and his intention was to sell it, but he couldn’t. And now, luckily for this particular client, he had funds to buy another property anyway, but he kind of just wanted to get out of, you know, a bit of a dud property that he initially purchased.
So what was his reasoning behind purchasing that one initially in the townhouse there? Do you know what his motivation was behind it?
He was attracted by the yield. It was sold, that particular property, with the yield in mind. And a lot of investors need to be very careful because there are a lot of people out there that are pushing the yield agenda, the cash flow agenda to sell a property. Whether it’s a selling agent or a spruiker or any so-called property expert. It’s very important to do your due diligence, can you rent it out, will it stay rented?
What are the true costs of owning that property? And again, what’s the exit strategy? So for this particular client, you know, initially was lured in by the yields and it got to a point where it just wasn’t performing as an investment property. So in order to move forward, he wanted to sell it and replace it with a property that will actually perform, you know, over time.
What does non-performance look like?
Non-performance is basically just holding a property that does nothing over a long period of time. You might get some really bad tenants in there, which is actually a lot of the case when you’re buying cheap housing in very low socioeconomic areas. You know, the type of tenant that, if it is a low socio area, that can’t afford even a house and they have to look at like a townhouse option, then I’m renting to a demographic that is maybe just barely able to afford the rent in the first place.
So again, that would translate to very transient tenants moving in and out. A lot of vacancy periods. You know, a lot of wear and tear, a lot of maybe malicious damage to your property, a lot of insurance claims. So investors, like any rational investor can only experience that for so long before they’re like, you know, it’s too much for me. I need to either sell it or stop investing altogether. And this is actually one of the reasons why I see most investors, they start off very optimistic. They see, you know, other people experience success and you know, they might be a little bit naive, you know, entering into property and they buy a property or they get sold to a property that promises cash flow because cash flow is safe.
People when they first start off investing, they’re kind of looking at less risky options and in their mind, if a property looks after itself with cash flow, then it’s going to be safe. So a lot of people take advantage of that. That’s the expectation of new investors. And unfortunately, a lot of new investors fall into the trap. And when this maintenance and vacancies and just headaches build-up, it really puts a damper on, you know, is property investment really for me, or can I really achieve my goals? And they become really negative. And really like you speak to any investor that’s reached a certain level where they’ve maybe achieved their goal of passive income or, you know, quote-unquote success. It’s all mindset. It’s all attitude, you know, being able to own assets like during the whole ownership period to be able to manage those constant headaches and manage that up and down cause property isn’t as it gets painted out to be as consistent, you know, there’s ups and downs.
There is more to property investing than meets the eye and we gain some behind the scenes knowledge about what goes into it.
You can have a string of really bad tenants, you know, and it could cost you thousands of dollars, but if you don’t focus on the big picture, then sometimes it can really really, really make you question whether it’s all worth it or not. I think a lot of people glamorise owning lots of properties. You know, it’s all about, you know, living the life and retirement and this type of stuff. The actual reality is, the more properties you own, the more calls you’re going to get from your property manager, the more hot water tanks you’re looking after, the more kitchens you’re looking at, the more tenants you have to babysit.
You know, the risk of having something go wrong is higher. And we might get to a certain level where you’re getting a call every week or every other day about a leaking tap, fix the air con. You know, we’re recording this in December and I’ve already had to replace three aircon in my properties because what happens is no one uses them during the winter period and they collect dust, no one looks after them. And then when they turn it on in summer, something’s wrong with it. You know, it needs to be fixed. So, you know, little things like that can really put a damper on your property during the ownership period. So coming back to what this particular client does, that’s the reason why I wanted to sell because he bought this property with the intention of a really good yield.
It was just way too much for him and he just wanted to get out of it. But when he found out, when it came to selling, he couldn’t actually sell it. He couldn’t sell it for a price where he didn’t lose money. Because don’t forget, when you buy a property, let’s say you buy a property at $200,000, you know, you’ve got your stamp duty, you got your legal costs. You know, if you put a few thousand dollars into it to get it up and running, you’ve got that to add on top. And when you sell it, you’ve got to pay commissions. You know, there are all these legal costs. Again, all these costs to add to the ownership of a property. And even if you were to sell it for $200,000, so he bought it for $200,000, you’re making a loss. So that’s a bitter pill for a lot of people to swallow and that’s why having a solid exit strategy from any property is super important.
So roughly how long did this person have this property for?
Ït was only a two to three year period. Not a very long period at all. I mean, it really only takes one bad tenant to really undo a lot of the initial intention of what the property was going to play out to be.
We find out about the current situation of his client and whether he has been able to sell and move on from that property.
It remains to be seen because he hasn’t sold the property that we bought together. But what I like to stick to when I’m buying these properties is obviously, you know, like I talked about in previous episodes, are the fundamentals of what makes a good property. You know, the area, the numbers below market value, cash flow, all that type of stuff. But one of the other things that we should also focus on is buying a property that will appeal to everybody, buying a property that will appeal to investors, to owner-occupiers, to any developers. So the houses I tend to go for and the type of house that he bought was a property that’s just a standard four-bedroom brick house. It was a corner block over 700 square metres with a lot of lands, a lot of side access that you can put up maybe even a granny flat at some stage or a nice big shed.
The internal floor plan, the house was about 25 years old, which is actually a good thing because back then the floor plan was a lot more generous than they are today, you know, your standard house on the packages nowadays are very, very small in internal layout in the market. So this particular house was about 25 years old. So you know, it had four bedrooms but it also had two or three living areas. You’ve got a rumpus, you’ve got a living room, a dining room, you’ve got like a family room. So what that translates to is a lot of ability to add value internally. X rooms, you know, you can reconfigure and that again adds value. But this is one of those houses that you can plan and see if you were to spend, you know, if you were to sell in the market one day, let’s say for example, for this property, we paid, I think it was about $340,000 or something for it in this particular suburb.
You know, it’s experienced its capital growth, you know, potentially you could sell it again for $500,000. But it’s the kind of property that if you spent $50K on it to make it look, you know, render it to do a bit of landscaping to obviously paint and carpet inside, new kitchen, new bathrooms. You could potentially, every dollar you put in, you might be able to get three back because you sell it. If you suddenly create that appeal to an owner-occupier who is after that kind of thing, you know, like after comfort, after new, after something that they can imagine themselves living in.
And in any suburb in Australia, regional, the capital city, blue-chip, lower socio, you know, www.realestate.com.au, type in the suburb. If you filter it from high to low in terms of pricing, if we’re comparing like the same four-bedroom, two bathrooms, two garage house, the newly renovated ones with nice pictures that have been staged, those are the ones that get a significant price. A significantly higher price than the ones that are a little bit dated or they have weird layouts and things like that.
We delve into how to go about looking for properties that are worthy of investing in but still manage to fit within your budget.
Using Logan as an example, you know, it’s a huge area. You know, there are 64 suburbs in Logan and geographically it’s actually larger than Brisbane as well. So within Logan, you’ve got probably some of the worst areas in Australia, you know, but then you’ve also got some of the nicest areas in Australia in terms of some really large acreage properties. There are some suburbs that are, you know, million-dollar mark type properties. So, you know, it’s important to look at individual suburbs based on their own merits or they’re own downfall. You really don’t want to buy at the bottom end. If your budget doesn’t allow you to buy in a family-friendly, suburban, quieter area, even if it’s low socioeconomic, that’s not a deal-breaker. But if you can only afford the worst house in the worst suburb in the worst area, my advice is don’t buy and just save up a bit more money.
It’s not going to be a lot. And to focus on areas that are a little bit livable, you know, have more of a chance of gentrification. Let’s say these super-low socio areas don’t have that same potential, but it’s less likely and it will also take longer.
And ultimately when you’re building up a portfolio as well I guess the tenants are going to be crucial to choose. So that demographic is important, which ties back into, you know, the exit strategy. Because if you’re buying a property that has good tenants in there for the long term, then obviously if you’re going to sell it in the market in the future, you might also have good tenants or owner occupy appeal as well.
We all will have the intention to reach our goals in the property. But property is a very long term game. Most of the time it’s 10 years plus between buying and selling a property. But a lot can happen in 10 years, you know, that are out of our control. So if you’re in a position that you have to plan to sell the property financially or for whatever personal circumstance that you’re under duress at that particular time, you know, they say properties aren’t liquid, but at least you need to know that you should be able to sell it in the market without having to completely drop your pants on price. So I think it’s super important to just ensure that you have a sellable house.
Loo shares with us what he recommends we should be looking at when buying a property that will ultimately help on exit.
Unless you’re getting a bargain, you should buy a property that is not super polished. Because think about it, when you’re buying a property that’s not super polished, you’re buying a property at a not polished price. So there’s more of a chance that you can pick up a good deal, an ugly duckling on the way in. A cosmetic reno does not cost a lot of money. I think people watch too many television shows where renovations cost hundreds, thousands of dollars, and it might do so in your personal house to live in, but you know, even just $20,000 can go a very long way to spruce up a house completely. So look for that potential where you can put in a dollar and get three out when you sell.
On the topic of renovation, Loo talks us through some of the specific renovations that can add the most value.
From a pure investment perspective, the number one thing about a renovation is keeping the budget down. It’s not about the way a certain thing looks. You can make a house look very, very presentable on a very small budget. It comes down to actually investing as a whole. Just don’t get emotional about it. When I say don’t get emotional, you don’t need to buy the $400 tap. The $50 tap looks just as presentable, from a selling perspective. Don’t forget when you’re selling a property, most people just view the property.
They don’t even spend half an hour looking at the property. We’ll go in and go out and then negotiate and then they end up buying the property. So it’s all about first impressions. So keep it clean, keep it tidy, keep it simple, keep it neutral, don’t do anything out there. Don’t do anything a bit weird. Just stick to neutral colours. Look to save money. A really good example is kitchens, you know, instead of buying new cabinets, can you refurbish the existing ones? If you’ve got a burnt countertop, can you send it down and recoat it. Bathtubs, you know, if it’s old, you know, instead of replacing it, can you just paint over it?
So little things like that make a big difference. Is there anything you can save? So if you have to replace a shower or you want to retile the shower, can you keep the screen? It might be in full working order. So don’t go over the top, keep a budget in mind. And you know, do what’s necessary. There’s no need to, I mean, it really depends on what area. Obviously, if you’re renovating somewhere like a super blue-chip area, then you kind of need to use the same kind of standards of fit and finish. But most of the time when we’re talking about investment-grade properties, simple is best.
Like light fittings, changing light fittings can be a huge thing. One of the biggest differences that I see with kitchens is just simply changing the doorknobs, the knobs to the wardrobe. If it’s like an older style one, if you just, you know, go out and buy some like, you know, $4 ones, things that are a nice sort of modern brushed aluminium kind of look to it. That can completely change the look. So look for those tiny little shortcuts that can make a huge difference.
Making the slightest difference with a renovation can have a huge impact on the perception of the house in the tenant’s eyes.
I’m always on the philosophy that you shouldn’t spend too much money before having a tenant move in because a tenant will never look after your brand new paint, your brand new carpets. Actually that’s a really bad assumption on my behalf. I apologise to all the tenants out there. They’re just not going to, I mean, you’re just going to experience wear and tear. Even with the most careful of tenants, you know, you’re going to get your walls, they’re going to be bashed around a little bit. They’re going to be scratched, you know, you’re going to have the bed marks on the carpet and the couch marks and all that type of stuff. So you know, I always just keep the property in a rentable safe, tidy, presentable condition. And then when you plan to sell it in the market, that’s when you want to spend the big bucks to make it look complete.
Even with paint nowadays, I paint the rooms individually. You know, a lot of people when they say paint, they think about painting the entire house. There are some marks on this particular room. Looks particularly bad. Just paint this room and be done with it.
This is a very interesting conversation, but I think it was kind of important to just to give people an idea because when you are looking at buying, you also want to consider that exit as you’ve mentioned as well too. Is there anything else you want to add about the exit strategy if you’re looking at, I’m looking at buying as well.
My only suggestion is just don’t get lured into, you know, over-promised cash flows and don’t step outside of the norm if you’re talking about residential, stick to residential. Think about what most people want to live in, what they want to buy, which makes it good property. Just stay away from the absolute cheapest, you know, bottom type properties.
This episode was produced by Andrew Faleafaga with narrations and interviews conducted by Tyrone Shum.