（转）What I learnt out of buying 7 properties

HERO8KING

逛论坛时候发现的一个帖子，作者是华裔并且在昆士兰和悉尼买了7套投资房，然后写下21个自己的心得，我觉得很有必要转出来给各位学习一下，抛转引玉

What I learnt out of buying 7 properties

Edit - thread index:

First lesson – why you should avoid OTP
Second lesson – why you should avoid buying property with a pool
Third lesson - do your due diligence on the team members you trust and use
Fourth lesson – On the ground visit is as important as ANY due diligence
Fifth lesson – avoid buying in areas with plenty of land
Sixth lesson – investing in low socio-economic areas which almost guarantee some sort of tenant issues
Seventh lesson – Focus on choosing IPs with value add potentials
Eighth Lesson - How to select a Property Manager
Ninth lesson - why you should be extra cautious working with cash job tradies
Tenth lesson - How to effectively buy sight unseen
Eleventh Lesson - how to develop optimal offer price and cashflow forecast via cashflow calculator
Twelfth Lesson- How to negotiate purchase price with Real Estate Agents
Thirteenth Lesson - the importance of having trusted team around you
Fourteenth Lesson- A guide for NSW/VIC/QLD Buyer: Process from making an offer to settlement
Fifteenth lesson – New vs Existing, which one should I choose?
Sixteenth lesson – type of tenant requests and how to deal with them?
Seventeenth Lesson - When should you build a Granny Flat?
Eighteenth Lesson - What types of Value Add are there in a Property? (Houses)
Nineteenth lesson – What types of Value Add are there in a Property? (Units)
Twentieth lesson - What I learnt out of buying 7 properties
Twenty first lesson - CG or Cashflow Properties?

1. First lesson – why you should avoid OTP

My property journey started with an OTP purchase back in 2009 at Granville in Sydney (but it’s actually closer to Merrylands). I was young, naïve and didn’t know much back then about what I really need to do to do the research required to validate the purchase. My dad found this for me and he thinks that it would be a good fit because of the 5 years rental guarantee so I don’t have to worry about it too much. Plus the glossy brochures looked really nice! And the sales agent has a whole tonnes of research materials about the area, what the future developments are (the Stocklands mall at Merrylands was being constructed at that time) and the expected population/jobs growth at Parramatta being the second CBD.

The purchase price was $360K for a brand new 2 bed 2 bath 1 garage OTP apartment in a complex of 45 and rental guarantee for 5 years is at $450 per week. I’ve been told “it’s over 5% rental yield and easy to hold”, and I’ve done my “due diligence” based on the materials he provided and they seem feasible. Plus there are probably some parental pressure on this too (yes, Asian parents are like that, don’t want me to have too much money to spend), so I signed on the dotted line. I was 25 that year.


Fast forward to 2018, this property has:

Grown to about $500K in value, thanks to the latest Sydney boom, and allowed me to pull some equity out
Rent to-date is at $450/week
Strata has increased from $400/qtr to $800/qtr, plus there has been some serious issues with the building quality. My apartment is on level 1 (out of a total 3 levels) and couple years ago during a heavy rainfall the water had leak into my unit and damaging the carpet. To-date there is still an ongoing lawsuit which has been going on with the developer/builder for the last 3 years. And as you guessed, it’s costed all the landlord a gazillion on special sinking funds


So what did I learn out of this purchase?

Steer away from OTP as you’ll almost guaranteed to overpay for anything brand new and shiny

I’ve paid $360K back in 2009, whereas the average price for a 2 bed apartment there was less than $300K at Granville. So I’ve bought way above market median and now I understand the extra money was to cover everyone else’s profit margin (except my own!!)


Rental guarantee can be a double edged sword and most of the time it’s to make the OTP more attractive

I considered myself relatively lucky because the rental guarantee on this deal is at $450/week and for 5 years so I’ve recouped some cost back. In all honesty the agency company would’ve made a loss because they were never able to achieve $450/week during the first 5 years. But that was once off and I’ve never seen anyone else bold enough to do a rental guarantee this long – most of them only for 1 or 2 years max and there are conditions on top. They do this mostly to make the OTP property more attractive to investors because they know you’ll have trouble renting it out AND at the estimated rent (due to influx of units released at the same time), so it’s a bait to get your foot in and then after rental guarantee safe net…you’re on your own.


Quality of OTP can be shabby and costing you more to hold long term

This IP was built by a relatively renowned builder who does lots of projects out at western part of Sydney so I was quite shocked in terms of their building quality on my unit. As I mentioned above, my apartment is in level 1 and during heavy rainfall the water got from wall into both bedrooms and I ended up having to re-plaster some parts of the wall and replace the whole carpet in both bedrooms. And it wasn’t just me, other units on my level is also experiencing similar issues so clearly this is a building defect. This is another huge annoyance off for me as the OTP appearance can be brand new and shiny but you never know what was actually underneath the building structure.

What also annoyed the hell out of all owners is that it’s been 3 years and we are still not getting anywhere as the lawyers from defending side keeps playing the stalling strategy. So the owners have been forking out quite a lot of funds in the last couple of years for this law case, and hopefully we’ll get a resolution towards end of this year.


Even if you overpaid on day 1, if you hold a property long enough it will correct your mistake

Yes I’ve overpaid from day 1 on a crappy product but the silver lining is I’ve left it chugging along by itself (as rental guarantee was covering most of the outgoing expenses anyway) and thanks to the latest Sydney boom the value has gone up and I can even pull out some equity for our next purchases. I’m sure everyone makes a mistake somewhere along the line in overpaying but by holding it long term the property price will eventually catch up and correct your mistake.

HERO8KING

2. Second lesson – why you should avoid buying property with a pool


Fast forward to 2015 – we’ve pulled out equity from our Sydney properties and are now ready to go again. Being priced out of Sydney with some crazy offers being thrown around, me and my partner decided to start looking at SE QLD in particular the Logan market, as the capital investment is small but yield is high so easy to hold long term.

We’ve since found our Slacks Creek property – a highset with 3 bed, 1 bath upstairs and 1 rumpus and bathroom/toilet downstairs. Now it comes with an additional feature – a pool.

Back when I was living in Auckland the first house dad bought was a house with a pool. We enjoyed dipping in for the first couple of days, and then that was it… it then started becoming a liability as we had to continuously clean up the falling leaves and put the pump on so the water doesn’t go stale and turn green. Dad used to complain a lot about it as he was always the “lucky” one who ended up cleaning the pool despite the fact no one uses the pool at all.

And I thought I learnt something out of that. Well what did I do? I went ahead and bought an IP with a pool factoring in a number of considerations after discussing with PM:

A pool will make it more attractive for the SE QLD demographics as it’s relatively warm most of the year
Can charge an extra $10-15 per week rent to recoup back some of the cost
Tenant pays for the chlorine, as landlord we just need to fork out the pool service cost

All in all, it looks like we can pass over most of the cost by bumping up the rent.


So what did I learn out of this purchase?

There is a lot more hidden maintenance cost which eats into the yield

For starters, there are a number of other costs which I was not aware of including pool compliance certificate (~$200 for 2 years), chlorinator replacement (~$1000), and if the property goes vacant for a couple of weeks the pool will turn green (couple hundred dollar to clean up everytime there is a change of tenant)! Every little bits add up, so those came in as a nasty surprise to my initial cashflow estimate when the property was going to be positive or gearing neutral from day 1.


So for IP with a pool – always budget more maintenance cost each year, or just avoid buying IP with a pool completely. But if I was to do it again, I would never want to purchase an IP with pool. Less headache, less maintenance costs in general and more money into your own pocket.


Demographics play a big component for properties with pool

Looking back, I would also say the house with pool would play out differently it if was in say Karina, than in Slacks Creek today. A more affluent demographics in general will look after the property better and tenant moves less frequently. Over the last 2 years we’ve had 2 tenant so that’s on average one tenant move per year, with about 2-3 weeks vacancy in between. This means everytime they move out I need to do a clean and every little thing eventually adds up to the cost base.

But bottom line I would still avoid get an IP with a pool :)

HERO8KING

3. Third lesson - do your due diligence on the team members you trust and use

We all know to invest in property it’s a team work and not a solo show. So it’s important to choose the right team m embers around you while you’re on the property journey to ensure they help you towards moving to your goal.

The issue I had early days was that we would take other investors referral of team members without doing our due diligence. It builds on the high level of trust established between you and the investment team members you have around you. So logically you would take their referrals as granted as well.

But as some of you would know from my story earlier – we’ve experienced where a referred builder took the deposit for a piece of agreed renovation work and simply vanished. The deposit was not significant (only about $4K) but it did ruin my original plan where the property would have the work completed and ready for rent prior to X’mas.

I couldn’t find another builder to turnaround quickly, and I couldn’t secure a tenant being so close to X’mas period, so it ended up being a prolonged period of vacancy into the new year.

So what did I learn out of this experience?

Always validate the team member’s credentials. Look them up on authorities websites to see if they’re legit
Because of the high level trust my PM has built with me back then, I took her recommendation for granted without doing my own due diligence on the builder’s licenses. Apparently this builder has been a pro fraudster for a number of times now, and was able to get away with it every time. Check, check and triple check!
Check the referred person with other fellow investors

The referred person could have a commercial agreement with your PM, Accountant, Broker and so on so it’s best to validate from other investors who have worked with the person before. If you’re getting consistent positive feedback about the person’s work then it’ll minimize your risk of picking a dud team member.

I find Property Chat meetup really useful in this instance. Other investors are always open and willing to share who they use and what their experiences are like so if I was to do it again I would run past the Property Chat community first.

悉尼土地娘娘

不错啊，请继续

HERO8KING

4. Fourth lesson – On the ground visit is as important as ANY due diligence


I’m always a firm believer of the phrase “seeing is believing”. And for the area I invest in, I would go and visit the area myself to get an in-depth understanding of the suburb as well as what sort of people lives here. (OK I’ll also admit part of me also like to explore places I haven’t been before, so…)

Initially I would do all my due diligence online, but once I nail down the suburbs then I would actually set my foot on the suburb to work out what I can’t see behind a screen. As an example, when I was purchasing Woodridge I’ve gone into the Logan Central Plaza to check out the demographics. I took my laptop with me but I have to admit, as soon as I walk in my instinct tells me it’s quite a different demographic straight away and it just feels unsafe. So I walked out, put the laptop back in the trunk, made sure it was locked up properly and then walked back in the shopping centre. It was midday but even then my sixth sense tells me it was quite a different demographics that lives here!

I like to stick around the shopping centre and have lunch so I can watch various types of people living here – type of ethnic groups, age groups, is it dominated by young family, mature family or retirees? It’s interesting to watch and by the way they dress you can also tell easily whether they are blue/white collar. But I have to admit it was very uneasy at Logan Plaza, so I walked around about twice and then decided to head out.

But instead of trusting what I saw on the ground, I still went ahead with my Woodridge IP purchase and while the yield was great on paper, the reality is tenant instability and rental arrear have been bugging me all the along and eating into a good portion of the yield. If you were to ask me again, I will not make the same purchase in such a low socio-economic suburbs anymore. I would rather forego some of the good looking yield on paper and stepping up to a slightly better suburb to balance out yield and CG.

As another example, when I was purchasing my Murrumba Downs IP I went on the ground and checked out the Kallangur train station (which was completed but is not yet open at that time), and also noticed how much infrastructure and new houses are being built around Mango Hill. Same thing with North Lakes. These you won’t see unless you’re actually on the ground, so shows the importance - nothing beats on the ground checking things out!

HERO8KING

5. Fifth lesson – avoid buying in areas with plenty of land

As I love exploring new places after 2 Logan IPs apart from Moreton Bay I was also considering out towards the west, in particular Goodna (thanks to Seechange for the idea). So I went on the ground and check out Goodna plus the surrounding areas.

I loved Goodna’s direct distance to CBD, but half of the suburb is flood prone so I was really only targeting the small pocket between Smiths Road and Goodna cemetery where you can still pick up a house on 600SQM block around 200 to 250K and rent high 200s. So on paper it feels worthy enough for a trip. (This is back in 2016 by the way)

But when I actually walk around the neighborhood I get similar feelings to the lower socio-economic areas of Logan. There are rubbish dumped in front of houses, lawns/gardens not maintained, and people staring at me in a funny way. So as much as it looks decent on paper I felt like it might not be the type of area I want to invest in long term, after what I’ve been through after the Woodridge IP.

Driving around Goodna, Bellbird Park, Redbank, Riverview… what really alarmed me was the amount of available land out in the west. There are lots of house and land packages available for sale and no shortage of ads around which turns me off. It reminded me back in 2009, Dad and I made a trip to Ipswich because it was advertised as the “future Parramatta of Sydney”. And when we were on ground in 09 we drove a long way out to Ipswich and saw loads and loads of available land. We knew it’ll take a while to get there but almost 10 years in we’re still seeing the same thing - lots of available land around so despite the yield stacks up I wouldn’t want to invest my money here.

Don’t get me wrong, with the amount of money government is putting in to Ipswich it will eventually have its days under the sun. But from land availability perspective, I felt the supply still far outweighs the current demand as Ipswich takes it’s time to grow to Parramatta equivalent. How long would that take? No one knows.

What did I get out of this visit?

Avoid invest in areas that still have an abundance of land

Land value is what increases over time but there is no point buying land in middle of nowhere or where there is no demand but plenty of supply. This is why the land value is so different in the inner Brisbane ring in comparison with the outer Brisbane ring – a difference of demand and supply. Sydney is even a better example – limited in 3 direction with no further availability of land it can only extend out towards the west and that’s why land component in Sydney is just GOLD (literally!).

HERO8KING

6. Sixth lesson – investing in low socio-economic areas which almost guarantee some sort of tenant issues


When I was looking at Logan back in 2015 I was really attracted by the highsets and the concept of low purchase price and high rent. The original thinking behind this is that they will provide a more robust and sustainable portfolio to hold long term, in particular when interest rate start to climb back to its historical level.

The theory is sound and cashflow is great until you hit tenant issues. This is just part of the risk investing in lower socio-economic areas. Given our Logan properties are sitting at low socio-economic areas (Slacks Creek, Woodridge and Eagleby), the challenges to-date have been:

1. Difficult to secure decent tenants with a proper job/pay/employment. In particular Woodridge seems to attract tenants on Centrelink payments

2. Tenants seem to always struggle in making rental payments on time and falls into arrears from time to time

3. In QLD you need to go through a series of processes before you can evict the tenant - Notice to remedy breach, Notice to Leave, and then QCAT to evict the tenant. Plus if they do pay up some rent during the Notice to remedy breach period, then it all resets. So it was possible for the tenant to fall into arrears, pay up a bit, and then falls into arrears again just to “reset” the notices. And then it goes into a constant cashflow arrears battle


I’m sure there are great tenants in the lower socio-economic areas too however with my experience to-date it almost doesn’t seem to be worth all the headaches. To give you a real-life example, recently my Slacks Creek property has an additional “tenant” who wasn’t on the lease. The tenant on the lease was a legit full time employee at Harvey Norman but he decided to let his “mate” move in at some point without letting the PM know. And then the saga starts from there:

· Tenant on lease decided to move out but kept paying the rent

· “Mate” wasn’t interested in providing any information or sign the lease, so after going through the QLD eviction process which took over 2 months we finally to get him out (ouch my cashflow)

· During an open inspection PM spotted meth being left on table and suspect the “mate” has been doing drugs in the house. So after we evicted him, we’ve done a test throughout the house and two rooms (lounge and rumpus area downstairs) came back positive i.e. over the normal tolerance level

· So the house cannot be advertised as it’s contaminated. And it ended up being an ongoing saga between PM, insurer and lost assessor as we go through the painful process of reviewing contamination report, organizing for de-contamination process to take place, determine what is covered as part of the claim, how much is covered etc. On top they’ve discovered asbestos on the area they needed to decontaminate, just to show how “fun” it was lol…


This saga lasted over 6 months and is probably an extreme case of what could happen but I’m sharing it so people can understand the risk of investing in these areas with tenant causing issues. It was a very painful process as I’m not in QLD, have a full time job and kept getting very little update and when I do its second hand - each party constantly pushing responsibilities to others and there was a period of time where they couldn’t agree on the next steps so further drag the timeline out.

Thankfully the silver lining is the insurer finally agreed to reimburse all the rental loss throughout the whole period as the place is deemed uninhabitable and covered all for all expenses including de-contamination plus removal of asbestos. But I certainly hoped this would not happen to any other investors.

So what can we do to avoid making the same mistakes?

To invest in low socio-economic areas you need to have a gun PM who takes ownership

Engaging a gun PM is a must to minimize the risk of getting crappy tenants into your house. In this instance the tenant is legit but his mate who moved in by himself is not. The PM needs to be proactive and come in strong and take action to get rid off the mate asap who doesn’t want to sign the lease. These are early indicators but because they were still paying rent so I let it slip – so it was partly my mistake as well, but the PM also wasn’t taking much ownership in advising next steps.

Always make sure your PM is on top of who is living in your IP and take action as soon as unwanted guest starts to linger around. And again good PM selection is just paramount - check with fellow investors for their recommendations!

Having insurance is a must, and the cheapest insurer may not always be the best

I consider myself very lucky in this scenario. Just imagine if I didn’t have insurance in place – then I would probably be forking out close to $35 to $40K myself in getting rid of the contamination plus the rental loss across this period. In comparison the yearly insurance premium is nothing. So I’m grateful I’ve always had insurance across all my properties for this kind of rainy days.

Also I know some investors would just pick the cheapest insurer with the idea to minimize cost. What I find is cheapest isn’t usually the best as they have a lot of fine prints. Drug contamination case has been a rare instance even for my insurer too so they weren’t too sure initially if it was covered but we’ve got all the historical records and evidence so after reviewing them they have accepted as a legitimate claim.

I could easily imagine some other insurer may not be as generous/fair as this, as I have heard some insurer could even take up 6 months for a small amount of rental reimbursement. In my scenario I have requested an interim rental reimbursement around March (and got paid out within 2 weeks) and a final pay out just couple of weeks ago as case is finalized, at last. So having an insurer that actually reimburse on time does help.

P.S. total payout from insurer was about $35K across two transfers.

HERO8KING

7. Seventh lesson – Focus on choosing IPs with value add potentials

When I started looking at investing in QLD I have been focusing on selecting IPs that have good value-add potentials. Truth to be told, I didn’t have this mindset when I was buying back in Sydney. So what leads to this realization?

To start off, when looking around Logan in 2015 I learnt about the concept of “Highset” – where I can buy such asset and potentially utilize downstairs to maximize my rental return up to a gross yield of 7%+. I thought to myself, if I was able to get these type of properties then it’ll be easy to hold and could even help replacing my income!

So that’s where the concept started and investors targeting Highsets in SE QLD has been a popular value-add strategy to the point where you can even see ads now saying “this is a Highset with lots of room improvement/blank canvas downstairs!”.

So after acquiring two highsets in Logan that’s where I sat down and ask myself what would the savvy investors be targeting to buy? And that’s when I started to develop my own list of potential value add checklist as part of my DD, which consists of:
1. Good Yield – Gross yield of 6.5% or more
2. Excellent Location – close to good school/public transport/major shopping centre hug/major upcoming infrastructure such as new hospitals or university
3. Contains scope for value add – such as cosmetic renovation, granny flat potential, build out downstairs for highsets
4. Contains future development/subdivision potential – allows the block to be developed or subdivided at a later stage

What I would do as a deal comes up I would assess it first against these 4 criteria and for me to consider the next level of DD it must meet at least 2 criteria out of the 4. But in general the more the better…if you can find something that ticks all 4 then it’s a cracking deal!

So for the Logan IPs at Slacks Creek and Woodridge, they both tick 1 and 3 – good yield and contains scope for value add. Murrumba Downs ticks point 2 (new train station & uni) and 3 (potential GF at the back), and Eagleby ticks point 1 and point 4 (corner block over 750SQM is sub-dividable).

Not to mention the latest IP in Newcomb – this is a classic example of simple value add of adding an extra bedroom by a wall and then catching the upswing Geelong property wave. I was lucky to make easy 100K equity in the last 12 months.

So what’s the lesson learnt out of this?

· Always select an IP based on having an X factor

Having something unique about the property will allow an investor to manufacture equity when the property market goes flat into a prolonged period. Keeping in mind property market doesn’t always just trend up, it can go down as well (like what’s happening now in Sydney/Melbourne) and most of the time sideways. So in that sense you can add value when you’re ready, independent of the market condition, and manufacture equity to continue leaping forward towards your financial goal.

HERO8KING

8. Eighth Lesson - How to select a Property Manager

When it comes to investing property interstate, most people are concerned about not able to “pop by” the property when issues arise. For this or whatever other reasons, what I tend to find is the new investors will always find an excuse to rationalize why they shouldn’t invest interstate and decided to purchase in the local neighbourhood instead because they are more familiar with the area.

But the reality is, unless you are managing the IP yourself without a PM you really don’t need the IP to be close by. Well, if you do manage yourself, then yes you may want to be close to the IP so that you can respond to tenant requests in a timely fashion as required. But I believe most investors would not be doing this themselves (if you do then it’s a complete separate story). Instead majority would be willing to engage a PM to manage the property to save them from the tenant headaches.

Once an investor understands this, then the challenge comes down to finding the right PM who can be your eyes and ears on the ground (both interstate or local).

So how would you identify a good, or “gun” PM? There are a number of ways but usually word of mouth from fellow investors is the better approach I’ve found so far. If an investor is recommending PM’s service then he/she would be doing something right, and therefore are comfortable referring such PM’s service to others.

The referral is really just the first step. As a next step I personally would get in touch with the PM, preferably organize a face to face meeting where possible to get to know them personally and establish rapport. If the PM is interstate, organize a day to fly there and invite them out for a coffee – you’ll be surprised how much information they will be willing to share with you.

Get to know them well personally is important simply because PM is one of the most crucial team members in your Property Investing journey. As I have written previously in my personal blog (The importance of having a trusted team around you – Part 2), you need to be able to trust the PM to run and manage your property on a day-to-day basis. And to do that you will need to gain an understand of their personality, integrity, communication style and how they manage your (and tenant’s) expectations. No better way to do this than meeting them and understand them at a personal level!

On top of getting to know them personally, I would also run through a couple of questions to get an understand how they will look after your property. Here are some of the questions that I use during my coffee with them (nowhere near comprehensive, but I hope it gives everyone some guide):

1. How many properties does your PM manage on average?
The preferred guideline here is about 100 properties per PM (max!). If it’s over 100 the load on a PM is starting to get too much on hand so may not be able to be as attentive as they would like to.

2. Do you have experience in assessing repairs or renovations that a property might require?
The intention of this question is to understand whether the PM has any basic handyman skills or they just collect rents. A PM with basic handyman experience can help spot potential issues which investors are not trained to be aware of, and provide proactive advice on what should be done to mitigate any further risk/issues. Some PMs can also give some idea on a ballpark figure for repairs depending on their experience.

3. What separates your services from those of other property managers in the area?
This is a lead up question for them to show you where their real value-add is. Each PM agency will have a different expertise and you want to know whether this is in-line with what you are seeking. Most have the local area knowledge but they may also have other differentiator which they can demonstrate.

4. Do you have a Service Level Agreement in place if a mistake is made by your team members?
We are all humans so inevitably people do make mistakes, in particular in the rental statement area. There’s nothing wrong with making mistakes, however the important aspect here is to understand how the PM will address your issue/concerns and in what kind of time frame. You would not want a small mistake dragging out for 6 months not fixed!

5. How do you screen and process potential tenants?
This is a bread and butter PM question in understanding their tenant selection process. As a PM agency, what do they focus on during this process and is that aligned to what you are expecting as an investor? This question give them an opportunity to demonstrate whether they truly understand a local social demographics of the area and what checks are in place to filter out the crappy tenants.

6. How do you ensure repair requests and maintenance needs are dealt with promptly?
This is to uncover whether the PM agency have a backbone system in place to deal with various maintenance requests or whether it’s a purely manual process. A good, established PM agency would have a software/online system in place to be able to manage each requests effectively and to be able to show the history/lifecycle of such maintenance request. If it needs to be manually tracked then guaranteed there will be prone to human errors.

7. What experience do you have with the specific area in terms of rental appraisal and possible increases?
This is to understand whether the PM actually has expertise knowledge of the specified area. Do they know what are the “good” and “bad” streets, and which area have better tenants? What are the elements which affects the rent and possible increases?

8. Would you be managing my property, or would there be another PM who does this?
Most of the time PM agency owners (who you meet) will not be the one getting their hands dirty and managing your property on a day-to-day basis. It is therefore paramount for any investor to confirm this, as you do not want a trainee PM to be looking after your property and causing you frustrations!

It would also be wise to verify the PM’s history/experience/credentials, as you want to ensure your property is in safe and comfortable hands. Overall, that’s the number 1 reason why we are using PM services, right?

HERO8KING

9. Ninth Lesson – why you should be extra cautious working with cash job tradies

Let’s admit it, investing in property is not all rosy when you have maintenance issues. This is usually the biggest expense and it’s unavoidable. So as smart investors we all want to find ways to minimize outgoing expense.

And tradies understand that. Investors are not looking for top notch jobs. They just want someone who can get the job done, fast and at a relatively cheap price.

So how do they come up with a win-win? You guessed it – cash job!

What is Cash job?

Cash job is when customer pays the tradie cash for the service performed. As the customer will not get an invoice for the services carried out, tradie essentially won’t charge you the GST (and usually they may also avoid income tax) and therefore can quote a lower price.

The pros of doing cash job:
1. Cheap cheap la
2. Sometimes you get the job done faster as some tradies prefers cash job over official quote but not all the time

The cons of doing cash job:
1. As there will be no tax invoice provided, therefore you cannot guarantee quality of the work carried out. Tradie also takes no responsibility after work is completed should there be any defects
2. No Tax Invoice provided, so you won’t be able to claim as tax deductions expense

So as you can see there are a number of risks associated with this approach. What I’ve learnt is, if it’s a minor handyman job (couple of hundred dollars) then you may be able to get away with it. Anything other than that then cash job risk may outweigh the actual benefits.

My Experience

In my investment journey I have been burnt by cash jobs once and since then I’m not a big fan.

This happened to my Slacks Creek property. Prior to settling I was looking to get downstairs cleaned up a bit. Also couple of things needs tidying up before I can get the place tenanted.

The scope of works were:

Upstairs
1. Remove wallpaper in bedrooms
2. Paint upstairs walls, ceiling, doors – 2 coats
3. Replace carpet for 3 bedrooms plus study

Downstairs
4. Paint downstairs walls, ceiling, bathroom, stairs – 2 coats
5. Downstairs bathroom small reno – replace shower screen, shower heads, knobs, floor tiles
6. Install small kitchenette including a hot plate, small sink and storage cupboard (to turn downstairs into a single studio style)

Hindsight is always a beautiful thing. This is by all means no small work. My budget was 5K all up and the tradie I got referred to was happy to do all the work but it has to be a cash job. Alarm bells did rang at that time but I still went ahead with it due to budget constraint. That was mistake #1 – for this type of reno it should never have been a cash job. I was still relatively green in engaging tradies for reno at that time so did no check on the guy, and I didn’t consider any compliance issues.

Once the property settled the tradie and I agreed on the project duration and when the work will commence. I’ve paid the deposit and requested photo updates daily so I can check the progress remotely. Everything looks promising at that stage.

Week 1 went by and I was catching up with the tradie every two days over the phone. The only problem is I didn’t get any photo updates as he was just “starting the work”.

Towards mid of week 2, after a number of calls he reluctantly sent me a number of photos. I can see the downstairs bathroom was being worked on, and the small kitchenette sourced and installed. All looks fine so far, and I was busy liaising with PM to get a tenant so I’ve left it with the tradie.

Come week 3 which is meant to be the final week, I’ve got a call from the tradie to say he’ll need a couple more days to get the work completed as he’s still got a bit to do. I’ve told him I have the tenant moving in at end of week 3 so hurry up please as there is no room to move in the timeline. He said he’ll get one of his mates in to speed up the process, but it’ll cost me a bit more.

At that time alarm bells start to ring at that time but I wish it ranged earlier! I realized that he’s behind on his schedule and want to get paid more! Also we all know human are much more prone to making mistake when pressure is on and deadline is really close.

When my Property Manager attended the place on Friday evening for status check-up, he’s still madly getting the old carpet replaced and walls painted. The mess was everywhere and he’s nowhere completing his work, let alone starting to tidy up the place! PM gave me a call, briefed me what’s happening and sent a couple of photos to me on the works being completed. Here’s a couple that I’ll share:

[​IMG]
The carpet was “nailed” down, with nail head still sticking out! Imaging my tenant stepping onto it…

[​IMG]
Have you ever seen carpet laid this way like a jigsaw puzzle? Well, now you do

[​IMG]
Seriusly poor edging…

As you can imagine – all in all I was not impressed about the quality after seeing these photos. I gave him a call straight away to fix these up, but apparently he had a big fight with the PM and never came back to fix things in the end. And because I didn’t have an invoice I can’t hold him responsible for the crappy quality work he’s done…

The tiling was also done very poorly to the point where my PM could’ve done a better job than this!

In the end I had to spent more money to get another tradie to tidy things up and making it compliant, and it costed me more…but hey, it certainly taught me some good lessons about tradie and cash jobs!

So here are a couple of my personal takeaways:
1. Try avoid cash job for any semi-serious reno. Personally anything over $500 I would now request a proper invoice to ensure work is carried out to a good quality.

2. Anything less than $500 (i.e. relatively minor, low risk jobs) may consider using a cash job tradie. Although with such low value you may not get much savings anyway, so after this experience I just go with a proper handyman or someone who provides an invoice.

3. Ask your PM to commit to do regular check-ups for you as work is progressing. If I’m able to do this again, even if I have to pay them to do this, I would engage the PM to physically be there every couple of days to check-in on the quality of work to ensure the work is on track as per the agreed schedule. I would do this disregard whether it's cash tradie or any sort of renovation really, as PM is your trusted eyes on the ground.

4. Bottom line for me - that little extra saving is not worth all the potential risk and headaches that comes along with cash job tradies.

HERO8KING

10. Tenth Lesson – How to effectively buy site unseen

Note: below is based on my personal experience and are not advice, please seek specific advice from qualified trades/professionals in their respective areas.

A question that I get asked a lot by fellow investors is - "when you buy in SEQ, do you visit every property before you buy?"

Very valid question, so I thought I'll share my strategy on how I've done this when I was acquiring properties up at SEQ.

In short - my answer is "no I don't, I only fly up and visit when I have the property under contract. Otherwise it's a waste of my time and money."

A bit about QLD Contract Process

To be able to rely on this strategy of mine we need to understand how the QLD Contract process works. Different to NSW, QLD buying process has much better protection for the buyer!

Here is how it works - once a contract is signed and exchanged, buyer will be protected by:
1. Standard 5 days cooling off period
2. Standard 7-14 days (or longer) Building & Pest Clause
3. Standard 7-14 days (or longer) Finance Clause

Until all 3 points are passed and satisfied by the buyer then and only then the contract goes “unconditional”.

In other words, B& and Finance clause are two additional clause that allows buyer to potentially terminate the contract on a reasonable basis, which is why this is great news for investors looking to buy in QLD :)

So you might ask: this is all good information, but how does that help me in buying site unseen?

Let’s walk through how I’ve done it by splitting the overall purchase process into 2 sections - before contract is exchanged and after contract exchanged.

Prior to Contract Exchange - Inspections and submitting Offer

The two key milestones prior to contract exchange are arranging inspections and submitting offers.

For inspections, the trick is you get someone to act as your eye on the ground. This can be someone you trust, your Property Manager or your Builder if you have a reliable contact. Discuss with them about whether they offer pre-purchase inspection as part of their service offerings. Some of them are open to do this for you for free while others may charge a small fee. For me personally I've used my PM for this.

My guidelines for PM on pre-purchase inspections are:
1. Liaise directly with selling agent to check out the property
2. Report back to me on property condition, any major work required to be done that can be identified at time of inspection (such as house has been attacked by Termite), any “good to have” work to be done (such as replacing carpet), estimated rent as well as lots and lots of photos.

Based on the above information I will then be able to paint a picture on whether the property is worth pursuing or not. By working out how much additional reno cost I need to put aside, I can then work backwards to determine my offer price and evaluate the yield.

Once I have my offer price I can then submit the offer to agent (wait and pray!). If it's accepted, then and only then I'll start to arrange the travel to visit the property myself. That's when you have a deal! If the offer is not accepted, then simply move on to the next deal.

Post Contract Exchange - B& and Finance

After contract is signed and exchanged, then isn't it the exciting time of paying a visit to check out your new little IP!? Well, before you book your travel ticket there are two more steps to do - organize Finance and B& immediately.

Finance can be the one that is risky in terms of going over the standard 14 days period. So the first step should be inform your Mortgage Broker or the lending institution asap so they can start putting the application together for Finance approval. Banks do and will take their time!

Once you've initiated Finance Approval then next up is B&. What worked for me previously is to book the B& service and confirm date & time it will get carried out. Then book the ticket and fly up on the same day to meet up with the B& guy so he can run you through his findings in person. That way you get to see the B& findings first hand, and at the same time you get to inspect the new IP yourself! I like killing two birds with one stone

At that time if you found there are B& issues, you can also use this opportunity to ask negotiate with the vendor for a discount on the purchase price (depending on severity of the issues) based on B& Report, or ask the vendor to fix some of the items for you. Note though vendors are not legally obligated to do anything, but it doesn't hurt to try.

In the extreme case of structural issues or severe termite damage you can discuss with the solicitor based on B& Report in order to terminate the contract (on a reasonable basis) based on the B& clause. But if they are small defects then you are most likely unable to. For more details on how you can terminate the contract based on B& clause, seek specific legal advice.

By the time you got your B& report you would likely have heard back from your broker about finance approval too. If 14 day is fast approaching and you and your broker feel there is a risk you will not get finance approval within the time limit, ask your solicitor to request vendor's solicitor for additional extension on Finance clause. It's somewhat common in QLD that Finance can take anywhere between 14 to 21 days to approve so most of the time vendor should be able to accept this extension on good grounds.

So in summary my personal strategy for buying site unseen effectively are:
1. Contact ideally a PM or Builder who you trust to inspect the property and report back based on your guidelines
2. Work out any cost required to tidy up the IP, determine the Offer Price
3. Request the solicitor to review, sign the contract and submit the offer
4. If offer is accepted and contract exchanged, then
- Organize Finance with broker/lender
- Organize B& date and time
- Organize flight ticket to meet the B& inspector on the agreed date and time to go through B& results in person and inspect the property at same time
5. Negotiate with vendor on purchase price based on the B& findings
6. If required, ask solicitor to request additional finance extension with vendor should the finance or B& approval is struggling to meet the deadline as per contract
7. Once Finance and B& are approved, then congrats - contract now goes unconditional! Get ready for settlement :)

HERO8KING

11. Eleventh Lesson - how to develop optimal offer price and cashflow forecast via cashflow calculator

I think as an investor a cashflow calculator is an absolute minimum tool to have. At the end of the day investing is all about using money to make money – but before you can make any equity you should understand how much the holding costs are per week, month or year in order to determine whether this is an investment property you can hold onto long term! This is especially important for people who are looking to buy and hold in Sydney as the average yield is very low across the board.

The cashflow calculator allows me to achieve the following:
1. Determine the gross rental yield of a potential deal (to see if it ticks my yield box)
2. Determine pre-tax cashflow forecast of the deal
3. Risk assessment – how much the property will cost to hold at a higher interest rate
4. Determine the acceptable offer price

Let’s cover each topic one-by-one.

---------------------------------------------------------------

1. Determine the gross rental yield of a potential deal

Gross rental yield as a percentage can be calculated very easily. The formula is:

Annual Rent (Weekly Rent x 52 weeks)
———————————————————– x 100
Purchase Price of Property

In the cashflow calculator, this is determined by putting in the purchase price and the lower & upper rent (all highlighted in yellow) as part of the process. Then the Yield on purchase (highlighted in green) will be calculated automatically.
[​IMG]

For my deals in Logan to-date I have been focusing on yield that are over 6% at a minimum. Using the cashflow calculator it provides a clear vision for me on how much lower, upper rent and purchase price combination I need in order to achieve the yield I wanted.

2. Determine the pre-tax cashflow forecast of the deal

This is where the cashflow calulcator really comes in handy – allows a projection of the pre-tax cashflow once the property has settled.

The factors that affect the estimated cashflow are:
1. Loan Amount
2. Estimated Expenses such as Council Rates, Water Rates, Insurance etc
3. Estimated Rent

These fields are highlighted in yellow, with output in grey:
[​IMG]

For me, it’s easier to calculate Annual expenses that’s why I input the figures in annually instead of monthly or weekly. For example water rates are around $150 a quarter, so times that by 4 and I’ll just put in $600 as the annual amount. Same thing with Building and Landlord Insurance as you’re usually quoted on annual rate basis.

Once these figures have been put in you won’t need to change/update unless you’re moving into a new state or different council which may have different rules. Also as these are indicative only it doesn’t have to be exact to the dollar. The idea is to be able to quickly determine the projected cashflow by entering the Purchase Price (which determines the loan amount) and the estimated rent.

If the forecast cashflow is positive then the number will be black, otherwise it’s shown as red. In this example as you can see a $550K property at 80% LVR, IO repayment and 5% interest rate will need to be rented at approx $540 a week in order to break even. (which is around 5% gross)

3. Risk assessment – how much the property will cost to hold at a higher interest rate

Related to 2 above – from risk assessment perspective an investor may want to know how much will this property cost to hold if interest rate goes up. Again this is where the cashflow calculator comes in handy.

This can be done by updating the Interest Rates field (highlighted in green) and change the percentage from 5% to say, 6.5% or even 7%. Below is what happens when I change the formula simulate 7% interest rate, with no change to existing rent:

[​IMG]

As you can see the weekly, monthly and annually cashflow is now affected and yearly repayment can be severely impact the cashflow especially if the loan amount is closer to the 1 million mark!

Usually if interest rate goes up there will also be an upward pressure on the rent as landlords will be passing some of the interest rate rises onto the tenant. However to be conservative (worst case scenario) I usually leave the rent as is to see how much annual repayment it will be and this figure helps forming as a portion of the the total cashflow impact when you have a property portfolio.

In this example it illustrates the point that when interest rate goes up to 7%, for a $440,000 loan and a $380 weekly rent, you’ll need to fork out approx $16,469 a year (before tax) as your holding cost.

4. Determine the optimal offer price

If we put all these information together, it forms as part of the due diligence I use to work out the optimal offer price. The detailed steps are:
Research all recurring expenses, such as council and water rates, strata fees, insurance, etc. You can usually get these from Sales Agents, Property Managers or sometimes from the Sales Listing.
Call several property managers to confirm the achievable rent of the target property. This will feed into your Lower Rent and Upper Rent.
Input all the data collected into the cashflow calculator
Add in the asking price (and confirm loan amount) to get the yield on purchase
Tweak the purchase price until you hit the optimal yield you want to achieve. This will be your optimal offer price for the agent
Assess the estimated weekly, monthly and yearly cashflow position (before tax) for the proposed property and perform risk assessment at a higher rate if required
Submit the offer price you've worked out to the sales agent and if the offer is rejected, don’t be disheartened – you can still negotiate or simply move on to the next opportunity! Otherwise congratulations, the property is now under contract you. Time to move onto organizing Finance and Building & Pest (if applicable)!

A copy of the cashflow calculator that I use is attached for everyone. If you need any help with using the calculator just drop me a message.

刀笑

收藏了，回头慢慢看

诡秘之主

花了3秒看完了

victorvic

都还可以 但是有些适用不适应 要看在哪个城市买房了。 个人觉得第11点是很多人需要知道的

大头爸爸

能读完的都该有多空啊

HERO8KING

12. Twelve Lesson – How to negotiate purchase price with Real Estate Agents?

Negotiating with Agent isn’t easy – but trust me it’s definitely worth spend time learning as it could potentially save you thousands or more.

There are couple of tips & tricks which I’ve developed over time with different experiences I’ve gained. But overall I think it’s important to remember – REA (Real Estate Agents) are also people, so try connect with them because the more you can connect the easier the negotiation process.

Understanding what the REA wants

We all know that REA (Real Estate Agents) have quite a reputation in this industry. Most people hate them for a reason, but I guess as investors we also need to look at them from another angle.

Putting aside their REA status they are people after all. They also have emotions so all we need to do is connect with them like we would with anybody else you first met.

Of course, it might be difficult to do this during the open inspection – especially when there are groups and groups of people coming to inspect the place! In times like this, then all I can say is ask intelligent questions and ask for a copy of the contract to show that you are truly interested in purchasing the property. If you are able to convey this message across then it’ll leave an impression with the agent – to let he/she know that you are not just a tyre kicker.

Why are we doing this? Two main reasons:
1. They want to be able to help the vendor sell the property at the best price
2. They want to be able to help the vendor sell the property in the shortest time frame possible. Ideally even before the property hits the market, that way they don’t even need to do an open inspection!

So based on this understanding, they need to be able to filter out the warm/hot leads – buyers who are not time wasters and shows good interest in purchasing the property. On top of that, if you are able to ask intelligent questions to further show that you have already done your homework before hand, then you’ll definitely be in a lead from majority of other inspectors who strolls in, have a wonder around and then leave without much engagement.

Some examples of intelligent (and probing) questions include:
– Why is the owner selling?
– How long has the property been on the market? (Assuming the property is not on the market for the first week)
– How much does the property rent? (do your homework before hand so you know how much it should rent and validate this with the Agent)
- How is the rental demand for this area? What type of demographics would this property attract?

Avoid asking questions which can be found from the ad or online – you should have done these as part of your homework before you attend the inspection.

Develop the optimal offer price

Once you’ve inspected a property the first thing you’ll do is to assess whether the property is worth the advertised price or not. You can do this by following 11th lesson - how to develop optimal offer price and cashflow forecast:
Research all recurring expenses, such as council and water rates, strata fees, insurance, etc. You can usually get these from Sales Agents, Property Managers or sometimes from the Sales Listing.
Call several property managers to confirm the achievable rent of the target property. This will feed into your Lower Rent and Upper Rent.
Input all the data collected into the cashflow calculator
Add in the asking price (and confirm loan amount) to get the yield on purchase
Tweak the purchase price until you hit the optimal yield you want to achieve. This will be your optimal offer price for the agent
Assess the estimated weekly, monthly and yearly cashflow position (before tax) for the proposed property and perform risk assessment at a higher rate if required
Submit your optimal purchase price to the sales agent and if the offer is rejected, don’t be dishearten – simply move on to the next opportunity! Otherwise congratulations – the property is now under contract you. Time to move onto organizing Finance and Building & Pest (if applicable)!

We also know that REA are representing the vendor/sellers so their best interest lies with the seller. But hey, they also want to make the deal work because if they can’t sell the place then they don’t make a living. They want to sell the price at the highest price possible and as investors we want to purchase the at the lower price possible.

So the question is, how to make it a win-win situation for you as the buyer and the REA?The key lies on whether you are able to extract the important information from the REA. This is where the importance of asking intelligent & probing questions comes in.

For example when you ask why is the owner selling, REA could tell you the owner has bought somewhere else and is therefore looking at offloading their current home. What this means is there could potentially be a deadline in which the owner must sell the current property in order to fund the new one – so the vendor may be open for some discounts via negotiation. Similarly if the property has been sitting on the market for some time then it’ll also be open to negotiations – so look out for REA’s response on these probing questions as these will also have an impact on your offer price.

Once you are able to determine the offer price and assuming you’ve done all the due diligence checks you’ll then be able to start the negotiation process.

Negotiation is all about leading and meet in the middle

To make a deal work, we want to lead the REA to our optimal offer price. The strategy will be to offer below the your optimal price and then make it look like a “compromise” to land at your optimal price.

Let’s run through an example. Say today you want to purchase the property at $330,000 and the property is currently advertised for $350,000. The first offer is always the tricky one – you will need to low ball but at same time don’t put through ridiculously low offer. At this stage, you want the vendor to counter offer around $340K and ideally you can meet in the middle for $330K, therefore I would start by offering at $320K .

REA might be very upset with this initial price. This is where you as an investor can let them know you’re investing so it’s numbers that counts and not emotions. While you do like the place a lot this is the price that you can see the deal will work and you look forward to hearing back from the vendor.

There can be 3 outcomes after this initial offer:
1. Vendor rejects the offer and insist on $350K
2. Vendor counter offer – above $340K
3. Vendor counter offer – below $340K

If vendor comes back with outcome 1 then there won’t be much opportunity to negotiate further. Time to move on.

Outcome 3 is the ideal scenario but usually unlikely, as you’ll have more opportunity to get close to $330K, or even a slight opportunity to negotiate below $330K!

Outcome 2 is probably the most common scenario – vendor will come back with counter offer but it’ll be above $340K. Let’s say $345K. Now, if we take the middle price between $320K and $345K we come to $332.5K. This is where you show:
1. The willingness to meet in the middle at $332.5K, and attach a 24 to 48 hours expiry so you can put the pressure on vendor
2. You have no intention to play games so this will be the absolute final offer. Take it or leave it.

Again, there can be 3 outcomes after the second round offer:
1. Vendor rejects the offer and insist at $345K.
2. Vendor counter offer – above $332.5K.
3. Vendor accepts the offer.

Outcome 1 – shows the vendor is not willing to really meet in the middle. I would suggest time to move on.

Outcome 2 – you can decide whether to continue negotiating again and use the process above to rinse and repeat and get to as close to $332.5K as possible, or just bite the bullet if it’s not too much different.

Outcome 3 – well done on leading the vendor to your optimal price! :)

HERO8KING

13. Thirteen Lesson – The importance of having a Trusted Team around you

Property investing is not a single person game so I want to stress the importance of having a good team around any property investor to be able to accomplish a successful property investment journey.

I have been asked a write something on what consist of a good property investment team, and where would you be able to find these people? Let’s have a look below and tackle each role one by one.

During any property investment journey the following good property investment team members are critical to your success:
1. Mortgage Broker (MB)
2. Conveyancer/Solicitor
3. B&P Inspectors
4. Buyers Agent (BA)
5. Property Managers (PM)
6. Accountant



1. Mortgage Broker (MB)

The Role: to provide credit advice on how much an investor can borrow, and ensure the fund is available during settlement of property.

Most of the property investors actually underestimate the importance of having a good mortgage broker in the team. A good mortgage broker can help you in the following way:
– Assess your situation and advise on your borrowing capacity
– Review and select the most suitable loan product for the IP purchase
– Structure the loan correctly to ensure at later stage funding will still be available so a property investor can continue to purchase more IPs
– And, takes majority of the headache out of you having to deal with banks for any funding issues during settlement

A good broker is a critical team member to any investor’s successful property journey – it can be a difference between obtaining funding from banks for 3 properties vs 6 properties if the loan is not structured correctly. Ideally, a good broker should also be an investor so he or she will understand what investors are after and how to best guide them.

Note a common misconception is that brokers are just good for interest rates. A good mortgage broker doesn’t just talk about rates – interest rate is just a small component in the overall scheme of equation but he/she should be focusing on what the property investor is trying to achieve. i.e. the goal

Above all – they usually don’t charge clients a single cent! Brokers are remunerated by the banks for each of the loan they write. And there are huge effort required to ensure clients are looked after…so don’t think their job is easy as it seems because it’s not.

I can also relate that most people would prefer to go to banks directly. But if you are really serious about property investing, then a good broker will be absolute paramount member of the team.

Where can you find good Mortgage Broker? Speak to other investors and usually a good broker will not be shy of referrals!



2. Conveyancer/Solicitor

The Role: to provide legal advice on the sales contract, oversees the contract exchange and ensure settlement of property takes place in a smooth fashion.

A good conveyancer/solicitor will be able to assist in the following way:
– Provide legal advice on the contract process
– Represent buyer in a contract process, once signed contract has been exchanged (which then becomes a legally binding document)
– Represent on buyers behalf to seek extensions on any of the finance or B&P clause
– Represent on buyers behalf any negotiation required, or fulfillment or execution of special conditions
– Perform agreed free/paid searches on behalf of buyers such as title, council, development plan etc
– Attend on the day of settlement to complete settlement process on behalf of buyer and transfer of stamps/title, and advise buyer when settlement has been completed

A conveyancer/solicitor is required to handle all the legal aspects of a property purchase. When you need a contract reviewed, a conveyancer/solicitor will be your best friend. They will be able to provide general legal advice, and in particular advice on the impact of a special conditions or hidden clause within a contract which most investors will not be aware of. So my recommendation – don’t proceed to make any offer until you have a contract checked out by a conveyancer/solicitor!

Your conveyancer/solicitor will represent you as the buyer in a property purchase transaction. The seller (vendor) will also have a conveyancer/solicitor who represent them. So once the contract has been signed and exchanged, then all the formal communications will be handled by both side of conveyancer/solicitors. They will ensure any further requests/negotiations from the buyer/vendor are being discussed, as well as any special conditions are met so that the contract can proceed in an agreed fashion (or terminate, as required) onto the next stage.

Also Joe Blob may be your best conveyancer/solicitor buddy next door, however when you purchase in a different state you will not be able to use him. Each state has different law/legislation, so when you purchase interstate you will need to find a conveyancer/solicitor who can provide legal advice in that state. Usually a local solicitor that resides in that state will be able to provide such advice/service.

Where to find a good conveyancer/solicitor? Again this is where investor network comes in handy. The best way is to seek referral from investor who has purchased previously in the state you are currently looking to purchase. They would then be able to refer (or not refer) the conveyancer/solicitor details which they have used. Alternatively have a look on Property Chat – Legal Issue sub-forum for recommendations:
Legal Issues



3. Building &Pest Inspector (B&P Inspector)

The Role: to provide professional advice on building and pest for a target property.

A good B&P Inspector will be able to assist in the following way:
– Conduct building & pest inspection of the target property, and advise on any building defects (existing or potential) and also any pest issues (both existing or potential)
– Provide a formal building & pest report of the target property (sometimes it will be two different people carrying out each task – one for building and the other for pest inspection)
– The B&P Inspector should be able to walk you through and discuss the inspection result on the day if you are able to meet him/her onsite on the day
– An outstanding Building Inspector (who usually holds an active Builder license) will be able to provide a rough estimate on the cost associated with fixing any major/key defects
– An outstanding Pest Inspector will be able to advise on whether the property has had termite damage previously, and to some extent also able to trace back where these termites may have been residing – for example, a rotten tree branch sitting in the corner of a garden.

B&P Inspector are a vital team member during purchasing as a small cost upfront could save you up to thousands of dollars down the track! May it be building defect, active termite infestation…these are expert skills where you and I who are not trained in this area will not be able to identify.

Some really good Building Inspector will also be able to provide guidance on the repair cost for defects listed – but it’s not a common act and definitely not within their due responsibilities to do so. If you can find a Building Inspector who is happy to provide estimate for you – treat him/her like a gem in the team! This means you’ll be able to work out estimated repair cost required and establish the optimal offer price – refer to my previous post on “how to determine best offer price“.

So in this context B&P Inspector are there to help an investor to minimize the risk of unexpected future outlay. Note however, Pre-purchase B&P Inspection usually don’t go into the detail of Asbestos. Some B&P Inspectors will mention presence of Asbestos however will put a caveat on the completeness of Asbestos reporting being “out of scope” from the pre-purchase inspection report.

Again B&P Inspectors are best chosen via words of mouth. Referral sources are the best as someone has tested and done it before and if they are happy to recommend service then the B&P inspector must have been doing something right.




4. Buyers Agent (BA)

The Role: to recommend which property to purchase.

BA is a vital team member in your team as they do the hard yard of asset/property selection and recommendation. A good BA will be able to assist in the following way:
– Discuss with investor to understand budget, time frame and ultimate investment goal
– Conduct research for suitable candidate properties within the suburbs that fits the price range
– Review options and present recommendation to the investor
– Act on behalf of the buyer in the negotiation and contract process, till settlement completes
– Provide some investment education to the client throughout the process

To those investors who do not have time, energy or whatever reason – BA is key vital player to the team. They are the messiah to investors who would like to invest but have no idea on where and how to start. They have a unique position in the team, where their expertise, negotiation skills, as well as their connections with local agents in making a good investment deal happen.

Like conveyancors/solicitors BA is also state based. A BA qualified to recommend properties in QLD may not necessary have the license to be able to recommend properties in VIC, so it’s important to check/confirm with BA upfront on what area they can and can’t recommend.

On top of that it’s also important to understand BAs’ niche area within a state. Take Sydney for example – a BA can, in principle recommend ANY properties across Sydney and NSW region. However it’s impossible to know all NSW suburbs thoroughly, so each of BAs will have a different niche area where they are very familiar with the area and know the suburb inside out. It is therefore paramount that during initial engagement to confirm the BA you are working with do know the target suburbs inside out. Usually the deal they present will be a good indication of whether they are a claimed suburb expert or not.

BA fees are not cheap – this can range from couple thousand dollars to a percentage of the purchase price. However as Phil Tarrant from SPI repeatedly claim, BAs do this everyday so they are geared with all the ammunition in finding a better deal than you and I can discover. And if a BA can negotiate and present a deal which potentially saves you thousands of dollars, then it simply means BA’s fee are covered.

Like brokers, a good BA understands that for a good, long lasting client relationship it is vital for he/she to understand what the client is ultimately trying to achieve via investing. The recommended property will then fit into the long term investing landscape and be able to assist the client in achieving the ultimate investment goal. In this context a good BA will always be outcome driven – because they can deliver beyond client’s expectation, hence can win over client’s trust and referral.




5. Property Manager (PM)

[​IMG]
I find this interesting – all valid points on what to look out for in a PM!

The Role: once property is settled, to look for tenants and manage day-to-day issues of an Investment Property on behalf of Investor

Property Manager ranges in their capabilities and character. Some will essentially “do their job to manage” whilst some others will go way out of their comfort zone just to add value. A good PM team will be able to assist in the following way:
– Have in-depth understanding of building expertise and handyman skills
– Be able to have difficult conversations with tenant/landlord as required
– Excellent communication skills – concise and precise to the point
– Do more than just collect rent. Be pro-active and provide guidance to landlord (and tenant as required) to ensure best mutual outcome for both

Handyman skills are a good to have for PM but not a must have. My personal experience is if they do have the handyman skill and are willing to do pre-purchase inspection for you then it’ll be easy to arrive at an estimated repair cost required prior to getting a tenant into the place. This has been very handy for my QLD purchases as I would be able to arrive quickly at the optimal offer price based on the pre-purchase feedback once PM has carried out. So if contract has been reviewed and green light has been given, then I can commence negotiation straight away and beat other competitors.

Having the handyman skills also means that PM can fix things quickly during routine inspection. Sometimes a quick fix could save a trip from handyman and I’ve seen it happen before and that would be value-add!

Due to the nature of the role PM selection is absolutely critical. They will be looking after the property for you, and I’ve heard lots of horror stories where management was not done properly and owner had to step in and take over management themselves….a classic example where tenant issue goes out of control. PM is someone that you need to be able to entrust to manage your property day-to-day and solve problems on your behalf. Their role is more than just collecting rent, perform routine inspections and escalating issues….if this is all they are doing, then it’s probably time to switch to someone else.

Communication skills is also one of the most important element in choosing any PM. Is his/her communication style easy to understand? Is it concise and to the point? How would they handle difficult conversation? These are all the things that an investor need to consider and be comfortable with before taking up a PM service. But fundamentally, there needs to be a trust relationship established between PM and the investor so it comes down to how quickly the PM can establish rapport and whether they can consistently deliver the outcome to anyone’s expectation.

PM fees can also vary greatly and my suggestion is always don’t go for the cheapest. Choose PMs based on a proven record of delivering results. The best way to choose a PM is to seek recommendation from fellow investors and also where possible, do interviews with the PM directly so you can understand who you will be dealing with moving forward. Sometimes there are personality clash and no matter how good a PM is you will not be able to work with them. Be open, be honest and let them know your expectation so that they know what ticks your boxes and can deliver to your standard.




6. Accountants

The Role: to provide support and advice regarding tax and asset protection.

I have to admit I haven’t used Accountant as much as I should be so this is probably my weakest role out of them all. In my opinion a solid Accountant will be able to assist in the following ways:
– Provide advice on IP tax minimization and deductions – what you can claim and what you cannot during tax time, and what can be claimed upfront or need to be depreciated. How long to keep receipts etc. Below are some common deductions:
1. Interest incurred on an investment loan
2. Insurance incurred for the IP
3. Property Management fees/charges for the IP
4. Council, Water rates, Strata fees incurred for the IP
(Also note that new laws have recently came out to disallow claiming of travel expenses in relation to your IP)
– Provide advice on Asset protection via structures such as Trusts, Companies and SMSF (Self-Managed Super Funds)
– Provide advice on Capital Gain/Loss at the point of selling an IP
– Ensure year end compliance reporting with ATO (Tax Returns)

I’m sure there are more – but as I haven’t used Accountant much myself I can’t comment too much. But on top of my head if I have any questions in relation to what I can and cannot claim, the amount of depreciation that I can claim for an IP (you may also require to obtain a depreciation schedule from a Quantity Surveyor) and if I want to discuss about setting up Asset protection then Accountants are the ones to go to.

However as the portfolio grows it may not be a bad idea to outsource IP tax returns to your trusted accountant. They are the trusted member of the team to handle any tax related questions during selling (also to avoid making any potential mistakes in your tax return!)

(A special thanks goes to Minh Pham as an Accountant for providing insights and assistance so I’m able to complete this section!)

As you can see, each team member plays a vital role and in their assigned area to ensure the success of an investor’s property journey. Make sure you seek licensed professional and engage their services to make an informed decision each and every step of the way.

HERO8KING

14. Fourteenth Lesson - A guide for NSW/VIC/QLD Buyer: Process from making an offer to settlement

Hey all!! Today we’ll go back to some basics and cover the complete purchase process from offer all the way to settlement, which I think will be beneficial to everyone.

What I found is that high level purchase process (as far as NSW, VIC and QLD is concerned) is actually not too different. But we’ll go into details and that should give everyone a clear indication on the subtle differences.

Note this is written purely from my own experience as a buyer having purchased properties across NSW/VIC/QLD. By all means this is not professional advice and you should definitely be guided by the professionals you engage with for each of their expertise area.

1. Pre-Offer Stage:

During this stage:

NSW
1. Contract Review – engage a solicitor/conveyancor to review the contract

2. B&P Check – if you are concerned about Building & Pest issues – do a Building & Pest inspection before putting through an offer.

Contract of Sales for NSW doesn’t usually come with any B&P clause which you can terminate. You can certainly discuss with solicitor to request putting a special condition in for B&P clause.

3. Finance – in NSW there is no Finance clause which you can terminate on so seller would assume you have your finance sorted with banks or Mortgage Broker before proceeding with an offer.

Like B&P, you can discuss with solicitor to include a finance clause under special condition before putting in an offer. Note usually the more special conditions you’ve put in the less attractive your offer is to the vendor.

4. Any other special conditions which you would like to be included should go through a solicitor to ensure they can be discussed, agreed and will be included in the Contract of Sale before offer is submitted.

VIC
Mostly the same with NSW with exception of:
1. Contract Review – Section 32 is where the special condition lies so ensure this is checked by the solicitor/conveyancor before putting through an offer.

2. B&P clause – Like NSW, VIC contract doesn’t come with default B&P clause so suggest all buyer to put this in as a special condition. Typically the vendor can accept 7 -14 days of B&P clause.

3. Finance clause – Again the VIC contract doesn’t come with default B&P clause so suggest all buyer to specify Finance clause upfront unless you have the OK from your Mortgage Broker to waive Finance clause (which could make your offer more appealing to the vendor). Typical finance clause is 14 days.

QLD
Mostly the same with NSW with exception of:
1. Contract Review – special condition is located in a section within the the contract called “special conditions” so by far the easiest to identify. Also ensure this is checked by the solicitor/conveyancor before putting through an offer.

2. B&P clause – QLD contract comes with a section that allows buyer to write the number of days for B&P clause by default so to protect the buyer. Typically B&P clause is 14 days in QLD, but can range between 7 to 21 days depending on potential B&P issues of the house.

3. Finance clause – QLD contract comes with a section that allows buyer to write the number of days for finance clause by default, again in protection of the buyer. Typical finance clause is 14 days in QLD but no surprise when it goes to 21 days depending on the bank institution. It’s worth checking with Mortgage Broker on how many days the Finance clause should be in order to maximize buyer protection.

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2. Offer accepted and contract exchanged stage:

During this stage:

NSW:
1. Offer is accepted by the vendor, contract signed by both parties and contract is exchanged. At this stage the property will be taken off-market i.e. no more offers will be accepted.

2. A small deposit (as specified in the Contract of Sales) is made by the purchaser to the agent’s nominated Trust Account.

3. Cooling off commences – in NSW this is 5 business days from the date contract is exchanged.

4. If there are any other special condition such as B&P or Finance clause, it will also commence from the date is exchanged and purchaser would need to kick off the process to get the clause satisfied i.e. engage a building inspector for a pre-purchase building inspection report, or seek an official confirmation from Mortgage Broker that bank has approved for the required Finance in writing.

VIC:
Mostly the same with NSW with the exception of cooling off being 3 business days. If the B&P and Finance clause exist then they will also come into effect once contract is exchanged.

QLD:
Similar to NSW – cooling off is 5 business days and the B&P/Finance clause will commence once contract is exchanged.

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3. Contract goes unconditional till settlement stage:

This stage is common across NSW/VIC/QLD.

During this stage:

1. Once all the criteria has been fulfilled and the special condition clauses satisfied by the vendor/purchaser, then contract goes unconditional. At this point buyer will be required to pay remainder of the agreed deposit (usually 10% of the purchase price) to the specified Trust Account. The buyer will also no longer be able to pull out of the contract.

2. Both vendor and buyers’ solicitors start preparing for settlement. From buyer’s solicitor perspective, they may conduct various mandatory and optional searches on the property as requested by the purchaser. Also they will organize for a transfer of title process where buyer will be required to complete and sign relevant documentations in preparation for the settlement.

3. From Finance perspective, Mortgage Broker/Banks will issue Loan Documents for the buyer where buyer will be required to complete, sign the necessary loan application and various documents required and return to the bank for processing. Depending on the bank the application time may vary but do allow plenty of time for this process in order not to delay settlement.

Also as part of the bank’s policy they may require purchaser to provide a Certificate of Currency for insurance in order to cover any legal liability on injury or accidents of any person occurred at the property. You should take Bank’s direction on this – if they need it they will ask for it, if not then don’t need to organise till after settlement.

4. This is the stage where plenty of activities going on behind the scenes which buyers may not be aware of. Your team works hard for you to prepare all the necessary documents for settlement. But as a buyer you also need to take guidance from your solicitor & broker at this stage on what is still required and what is outstanding in marching towards the final settlement date.

Once all the paperwork from legal and finance are signed, submitted and completed, your solicitor will be able to book in the settlement date and time.

About 5 to 7 days before the actual settlement date your solicitor will work out the Statement of adjustment – how the exact funds will be disbursed, who they will be disbursed to (vendors, agents, other parties as required) and how much is still required to be paid by the buyer. This will be approved by the vendor and then your solicitor will notify you in preparation to have remainder funds ready for transfer to their Trust Account so settlement can proceed as planned on the settlement day.

You may also want to liaise with your Property Manager or Solicitor to organize pick up of keys from the sales agent once settlement has been completed.

5. On the settlement day:
– Your solicitor will represent you as the buyer in the settlement process – you do not need to be present
– Each parties will have a representative at the agreed settlement location, review and be completely satisfied that all documentation are completed and executed properly
– If a document was caught not completed or properly executed at this stage it may cause settlements to be held up or delayed
– Once all parties are satisfied with both documentation and funding transfer have been completed/exchanged, the incoming lender will take the title documents, transfer, discharge and mortgage to the land titles office for registration
– Keys getting picked up by Property Manager or Solicitor from the sales agent office.

As you can see the whole process is no easy feat – lots of moving parts and that’s why if one party doesn’t communicate or haven’t executed what they are required to be done, then settlement may not occur as planned. Hence the reason why delay in settlements are quite common…

And that’s why hopefully this guide now provides some clarity around the process at each stage so every buyer can minimize the chance of a stressful settlement!

HERO8KING

14. Fourteenth Lesson - A guide for NSW/VIC/QLD Buyer: Process from making an offer to settlement

Hey all!! Today we’ll go back to some basics and cover the complete purchase process from offer all the way to settlement, which I think will be beneficial to everyone.

What I found is that high level purchase process (as far as NSW, VIC and QLD is concerned) is actually not too different. But we’ll go into details and that should give everyone a clear indication on the subtle differences.

Note this is written purely from my own experience as a buyer having purchased properties across NSW/VIC/QLD. By all means this is not professional advice and you should definitely be guided by the professionals you engage with for each of their expertise area.

1. Pre-Offer Stage:

During this stage:

NSW
1. Contract Review – engage a solicitor/conveyancor to review the contract

2. B&P Check – if you are concerned about Building & Pest issues – do a Building & Pest inspection before putting through an offer.

Contract of Sales for NSW doesn’t usually come with any B&P clause which you can terminate. You can certainly discuss with solicitor to request putting a special condition in for B&P clause.

3. Finance – in NSW there is no Finance clause which you can terminate on so seller would assume you have your finance sorted with banks or Mortgage Broker before proceeding with an offer.

Like B&P, you can discuss with solicitor to include a finance clause under special condition before putting in an offer. Note usually the more special conditions you’ve put in the less attractive your offer is to the vendor.

4. Any other special conditions which you would like to be included should go through a solicitor to ensure they can be discussed, agreed and will be included in the Contract of Sale before offer is submitted.

VIC
Mostly the same with NSW with exception of:
1. Contract Review – Section 32 is where the special condition lies so ensure this is checked by the solicitor/conveyancor before putting through an offer.

2. B&P clause – Like NSW, VIC contract doesn’t come with default B&P clause so suggest all buyer to put this in as a special condition. Typically the vendor can accept 7 -14 days of B&P clause.

3. Finance clause – Again the VIC contract doesn’t come with default B&P clause so suggest all buyer to specify Finance clause upfront unless you have the OK from your Mortgage Broker to waive Finance clause (which could make your offer more appealing to the vendor). Typical finance clause is 14 days.

QLD
Mostly the same with NSW with exception of:
1. Contract Review – special condition is located in a section within the the contract called “special conditions” so by far the easiest to identify. Also ensure this is checked by the solicitor/conveyancor before putting through an offer.

2. B&P clause – QLD contract comes with a section that allows buyer to write the number of days for B&P clause by default so to protect the buyer. Typically B&P clause is 14 days in QLD, but can range between 7 to 21 days depending on potential B&P issues of the house.

3. Finance clause – QLD contract comes with a section that allows buyer to write the number of days for finance clause by default, again in protection of the buyer. Typical finance clause is 14 days in QLD but no surprise when it goes to 21 days depending on the bank institution. It’s worth checking with Mortgage Broker on how many days the Finance clause should be in order to maximize buyer protection.

---

2. Offer accepted and contract exchanged stage:

During this stage:

NSW:
1. Offer is accepted by the vendor, contract signed by both parties and contract is exchanged. At this stage the property will be taken off-market i.e. no more offers will be accepted.

2. A small deposit (as specified in the Contract of Sales) is made by the purchaser to the agent’s nominated Trust Account.

3. Cooling off commences – in NSW this is 5 business days from the date contract is exchanged.

4. If there are any other special condition such as B&P or Finance clause, it will also commence from the date is exchanged and purchaser would need to kick off the process to get the clause satisfied i.e. engage a building inspector for a pre-purchase building inspection report, or seek an official confirmation from Mortgage Broker that bank has approved for the required Finance in writing.

VIC:
Mostly the same with NSW with the exception of cooling off being 3 business days. If the B&P and Finance clause exist then they will also come into effect once contract is exchanged.

QLD:
Similar to NSW – cooling off is 5 business days and the B&P/Finance clause will commence once contract is exchanged.

---

3. Contract goes unconditional till settlement stage:

This stage is common across NSW/VIC/QLD.

During this stage:

1. Once all the criteria has been fulfilled and the special condition clauses satisfied by the vendor/purchaser, then contract goes unconditional. At this point buyer will be required to pay remainder of the agreed deposit (usually 10% of the purchase price) to the specified Trust Account. The buyer will also no longer be able to pull out of the contract.

2. Both vendor and buyers’ solicitors start preparing for settlement. From buyer’s solicitor perspective, they may conduct various mandatory and optional searches on the property as requested by the purchaser. Also they will organize for a transfer of title process where buyer will be required to complete and sign relevant documentations in preparation for the settlement.

3. From Finance perspective, Mortgage Broker/Banks will issue Loan Documents for the buyer where buyer will be required to complete, sign the necessary loan application and various documents required and return to the bank for processing. Depending on the bank the application time may vary but do allow plenty of time for this process in order not to delay settlement.

Also as part of the bank’s policy they may require purchaser to provide a Certificate of Currency for insurance in order to cover any legal liability on injury or accidents of any person occurred at the property. You should take Bank’s direction on this – if they need it they will ask for it, if not then don’t need to organise till after settlement.

4. This is the stage where plenty of activities going on behind the scenes which buyers may not be aware of. Your team works hard for you to prepare all the necessary documents for settlement. But as a buyer you also need to take guidance from your solicitor & broker at this stage on what is still required and what is outstanding in marching towards the final settlement date.

Once all the paperwork from legal and finance are signed, submitted and completed, your solicitor will be able to book in the settlement date and time.

About 5 to 7 days before the actual settlement date your solicitor will work out the Statement of adjustment – how the exact funds will be disbursed, who they will be disbursed to (vendors, agents, other parties as required) and how much is still required to be paid by the buyer. This will be approved by the vendor and then your solicitor will notify you in preparation to have remainder funds ready for transfer to their Trust Account so settlement can proceed as planned on the settlement day.

You may also want to liaise with your Property Manager or Solicitor to organize pick up of keys from the sales agent once settlement has been completed.

5. On the settlement day:
– Your solicitor will represent you as the buyer in the settlement process – you do not need to be present
– Each parties will have a representative at the agreed settlement location, review and be completely satisfied that all documentation are completed and executed properly
– If a document was caught not completed or properly executed at this stage it may cause settlements to be held up or delayed
– Once all parties are satisfied with both documentation and funding transfer have been completed/exchanged, the incoming lender will take the title documents, transfer, discharge and mortgage to the land titles office for registration
– Keys getting picked up by Property Manager or Solicitor from the sales agent office.

As you can see the whole process is no easy feat – lots of moving parts and that’s why if one party doesn’t communicate or haven’t executed what they are required to be done, then settlement may not occur as planned. Hence the reason why delay in settlements are quite common…

And that’s why hopefully this guide now provides some clarity around the process at each stage so every buyer can minimize the chance of a stressful settlement!

HERO8KING

16. Sixteenth lesson – type of tenant requests and how to deal with them?

So, you have purchased an investment property and it’s settled! The tenant moved in and just when you thought everything is settled, popped the champagne and getting ready for the first sip…

The PM called, and tells you there was an urgent request from tenant and it’ll now cost you X amount of money to get it fixed…

Sounds familiar??

Yep, as soon as a tenant moves in the battle between tenant and landlord begins! At the end of the day, you want to keep the tenant happy because they’re the one helping you to pay the mortgage, but at same time you are also not going to say yes to all the requests they put forward. So there is a fine balance in managing tenant requests, and I thought I’ll share my personal experiences in dealing with the managing agents and tenant requests.

As a landlord, the following are the types of request you’ll get from the tenant:
1. Requests that are related to safety compliance / issue
2. Requests that will benefit tenant and may potentially increase rent during the next rent review
3. Requests that will improve property value in the long run

Let’s look at each one by one.


1. Requests that are related to safety compliance / issue

These are the type of requests that as a landlord you should prioritize as it relates to safety concerns of the tenant. For example, smoke alarm for fire safety, or replacing rotten handrail/balustrade, or wooden stairs (for a Highset house).

They are pretty self explanatory – if you don’t do it, it could have much more serious consequences. Especially if the tenant is injured because of such safety defect, then the tenant could take landlord onto court (for non-compliance to minimum safety standards).

Therefore my advice on any request related to safety issue – get it fixed asap. It’s cost of doing business. If the quote is expensive you may like to get a second quote for comparison purposes, but just be mindful the longer the delay the higher the risk to tenant, especially if it’s something that the tenant will have to use everyday (such as handrail, for example).


2. Requests that will benefit tenant and may potentially increase rent during the next rent review

These are the type of requests that are not a threat to safety or compliance, but more of an improvement in nature. A couple examples of these type of request includes:
– Installing flyer screen to windows
– Installing ceiling fans in bedrooms
– Installing mirror wardrobe in bedrooms

Feasibility of these request can be assessed by the potential increase in rent. For example, by spending $600 to install ceiling fans for 3 bedrooms is there an opportunity to increase the rent by $5 a week? This would be a question for Property Manager. And if rent can be increased by $5/week, then how long would it take to claw back the initial investment? In this case that would be $600 / $5 = 120 weeks or about 2 years and 3 months in order to claw back the initial investment.


3. Requests that will improve property value in the long run

These are the type of requests that are again not a threat to safety or compliance. They are usually higher in value, and are geared more towards capital improvement in nature. A couple examples of these type of request includes:
– Replacing existing floor covering with new floor covering
– Replacing air conditioning, cooktop, oven or the likes

As these are higher in value landlord are usually less inclined to proceed unless it’s absolutely necessary. For example, the carpet may have been damaged to the point above restoration so new floor covering should be considered.

One way of looking at these type of request is to see whether there is a potential to increase rent, and to assess the likelihood to improve on the property value (if revalued) and therefore an opportunity to increase equity on the property. Again, you can check with your trusted Property Manager to get their advice on the likelihood of rent increase and potential value increase before making a call.


And I guess more importantly don’t forget tenants are also everyday people like us. I'm a big believer that if you look after them and their requests they’ll also return the favour by staying long term and looking after the place well.

HERO8KING

17. Seventeenth Lesson - When should you build a Granny Flat?

In recent years Sydneysiders have fallen in love with a product called Granny Flats (GF) – especially when it has a good cashflow return to help support the mortgage repayment. Investors absolutely love a block which has the ability to build a granny flat in the back yard.

But is building a GF as good as what everyone thinks? We explore some upside and downside in this post so you can make the logical decision yourself on when would be the best time is to build the GF.

The different phases of a property journey
To understand when is the best time to build a GF an investor must understand which of the phase he/she is currently in. The normal phases a property investor will go through are:
1. Acquisition Phase
2. Consolidation Phase
3. Retirement Phase

Acquisition Phase is when property investor, Bob, goes hard in acquiring properties to his/her portfolio. Usually in this phase as the number of properties increase so too are the level of mortgage/debt.

As Bob’s cash/serviceability runs out that’s when he moves into consolidation phase. During this phase Bob focuses on holding his portfolio for a long period of time so that rent essentially surpass all the outgoing expenses and starts to form passive income. Bob can also execute some value-add strategies to speed up the passive income/wealth process.

Lastly after the portfolio has had a good capital growth run, Bob may decide to sell down some, if not all of the assets to reap the reward and move into Retirement Phase.

During the Acquisition Phase and if Bob has a really aggressive risk appetite then he will (naturally) want to acquire as many properties as possible and in the shortest timeframe possible. In order to do this he’ll need to divert all his resources towards purchasing assets – this means both cash and borrowing capacity.

However if today Bob is an investor with a low risk appetite, who decides to purchase IP1 with a big backyard and due to his risk aversion nature, wants to make sure he maximizes the cashflow/yield of such IP before moving onto the next. To do so he wants to build a GF on IP1 to boost the rental return. Couple of implications on this approach:

1. This may limit his ability to purchase additional properties during acquisition phase
To do this he’ll need to divert either his cash or serviceability against building the GF. Let’s assume the two bed, vanilla GF cost him $120K. This will either have to come out from his cash or equity (which means less deposit for his next IPs), or if there’s no cash/equity then it’ll need to be a construction loan which impacts serviceability (less borrowing power moving forward), or most likely a combination of both.

Either way, by directing resources to GF instead of being able to purchase another 2 IPs after IP1, he may be confined to IP1 + GF only.

2. How much value does a GF add?
Once built, if Bob decides to get the place re-valued by the bank then the valuation returned will rarely reflect 100% of the GF value - on average they will only reflect about 60% of the GF value. In other words, you may only get an additional $72K capital value after spending $120K cost upfront.

3. Additional rental income is the icing here
Rental income should hopefully be good once rented out therefore speeding up the mortgage repayment process or at least helps holding IP1 more comfortably. It also means that Bob now has two streams of income coming from IP1 – and if one goes vacant, then the other leg will be available to support the mortgage repayment.

Personally point 1 and 2 should be enough to turn down most of the investors – as they can see the money is not working hardest for them by going down this approach.

Which is why a smart investor will look at acquiring IPs with potential to add GF, but hold out till acquisition phase is completed before looking at building out the GF as part of consolidation phase exercise to improve overall portfolio cashflow.

During consolidation it is all about holding onto the properties for as long as possible to maximize the CG potential (buy & hold) or execute different value-adds such as cosmetic renovations to improve CG/cashflow. To be able to buy & hold for long term, the portfolio needs to be robust enough to attest the time of interest rate fluctuations. GF is a great way to boost portfolio cashflow and would certainly make holding of the property portfolio easier.

Just another general note – not all suburbs are suitable for GFs so I would definitely recommend every investor to do their detailed due diligence and engage GF specialists for an assessment before pulling the trigger. GF in the wrong location may not have the demand and may not achieve the desired rental return intended.

HERO8KING

18. Eighteenth Lesson - What types of Value Add are there in a Property? (Houses)

The ability to identify Value Add potentials during asset selection is crucial for all investors who wants to be able to manufacture their own equity rather waiting on the market to do the heavy lifting. This is even more important in particular at low growth periods like where we are now.

So let’s have a look at the different types of value adds today which an investor can implement in order to propel themselves further in the wealth creation game!

In part 1, we look at some options that can be done to houses and in later parts look at what can be implemented to units/apartments. The ones we'll look at today are:
1. Construction – Granny Flat
2. Construction – Subdivide and build
3. Construction – Building out downstairs (dual-level occupancy)

House on a block of land simply has a lot more options in terms of what can be done and by no means this is an extensive list. But I think it is a start for investors who wants to be able to pick something more than just a vanilla property.

1. Construction – Granny Flat
Difficulty: beginner - intermediate
Risk: low

Granny flat is one of the simple way of adding value by constructing a secondary dwelling (Granny Flat) at rear or other side of the existing house. I have already covered quite a bit of details in the previous lesson, When should you build a Granny Flat?, so I won’t cover in details again here.

I've defined the difficulty as beginner to intermediate. It can be suited to investors who are starting out as GF is the simplest form of construction with low risk of going wrong with a smaller investment fund required. So if you have bigger ambitions down the track to do bigger projects such as building out a unit complex then this would be a good entry level way to get an understanding on the construction process and some general pitfalls.

2. Construction – Subdivide and build
Difficulty: intermediate - complex
Risk: medium - high

Subdivision is the process of splitting one block of land into two or more smaller chunks. Every state, every council has their own criteria for subdivision. For example Logan council in QLD requires minimum size of 750 SQM for a corner block, or 1000 SQM for a standard block. There could also be a criteria for frontage so it is important to do your own due diligence to check these criteria before purchasing a block rather than blindly trust an advertisement that says has “subdivision potential” with S.T.C.A stated with it.

Couple of options with this approach:

- Acquire, on-sell with DA approval
I have also seen some investors buy a sub-dividable block, got through to DA approval and then simply sell the block for others to complete the subdivision process. There is value add even by just obtaining the DA approval – simply because they have spotted the opportunity that the block has subdivision potential, and got through the DA approval process. Instead of continuing on and execute the split, they may decide to leave the remaining work to someone else and just take the profit as is. Profit will depend on where the cycle is at that time, but if the entry price is good (i.e. you've identified the subdivision potential when others haven't) then this can still be profitable.

- Acquire, obtain DA approval and subdivide
And then there are the investors who will obtain DA approval and then continue onto completing the subdivision process. If the property cycle is in a rising market then an investor could sell the subdivided block for a good profit once the electricity/gas/water has been connected (i.e. ready to build) or even sell with a design plan in place. From that point the next person can take on the subdivided land and proceed with engaging a builder to either re-design or build out the property. This is a relatively simple approach and much lower risk involved overall and is quite commonly used by investors who's had some experience in the game but don't want to take on the risk of construction themselves, or don't see much profit in the end product.

- Acquire, obtain DA approval, subdivide and build out second dwelling
Then there is the type of investor who would go all the way, from acquisition of a sub-dividable block, going through DA, subdivide, design and build. The investor can decide whether to keep second dwelling and rent it out, or simply on-sell and reap the reward of the hard work. This type of approach requires careful upfront due diligence on numbers with good profit margin and a good read of where the market is heading, as the decision to rent or on sell will somewhat depend on where the market cycle is at time of project completion. At time of making such decision, if the market is at peak and starting to turn then an investor may want to on sell the block rather than carrying out the full build instead.

- Acquire and develop (multiple dwellings)
Last but not least are the ones who would purchase a development block and knock down the existing house and re-build. This is more inclined towards full development. To warrant a profit on these projects, careful due diligence and consideration is required upfront to ensure the end dwellings can be resold for a sizeable profit. That's why the end product almost need to be the likes of multiple dwellings such as apartment complex to ensure enough profit margin is in the project to outweigh the overall risk and ideally with a conservative buffer of contingency. Which is why development is usually high risk and high reward and is more suited for advanced investors only.

So there is quite a few exit points using this strategy depending on how comfortable an investor is with this process and his/her risk appetite. In general, start with simpler techniques or engage professionals to assist you in making a logical decision on which approach could be best suited for your circumstances.

3. Construction – Building out downstairs (dual-level occupancy)
Difficulty: intermediate
Risk: medium

This is the type of value add that is more specific to QLD's "highsets" where a property has two levels with upstairs being the functional level (living area, bedroom, bathroom, kitchen) and downstairs has the potential to be utilized as second functional space.

In QLD, whether downstairs are legal height or not they have the potential to be built out and transformed into a fully functional level, including living area, kitchen, bathroom and bedrooms. Note if downstairs is not legal height then they will not be able to be leased out separately. But they do suit demographics that has big family requirements. Also as it's a proper construction of living space you should be mindful that council approval will most likely be required - contact the local council for their specific requirements on this.

Depending on the what the structure is downstairs and what has been completed already, it may cost anywhere $75K to $120K to build out underneath (based on my 2016 estimate obtained - probably more expensive now in 2019 terms!). So it’s not a small investment. But in Logan (SEQ) for example, a fully built out highset can present it’s own unique attraction to demographics and can provide up to additional $100 to $150/week rent (in comparison with highset that does not have downstairs built out or single level dwellings) depending on build quality, how many bedrooms and available space.

Note I'm generalising here as these are the numbers that I had back in 2016 terms - there are much more dual-living properties available for rent in Logan now so the additional $100 - $150/week rental return may no longer be applicable in the current environment. Again do your own due diligence and speak to local PM agencies to get a good idea on the potential ROI.

This can be an option to increase overall cashflow position of the property and make it easier to hold for the long term. In addition if done well, there may also be some potential equity to be made.

Given not all land are set for granny flat configuration, building out downstairs may be an alternative option for investors to consider to improve the overall portfolio cashflow.

HERO8KING

19. Nineteenth lesson – What types of Value Add are there in a Property? (Units)

Today we’ll continue the discussion and unveil a few more value adds in general that can be done to houses/townhouses/units, including Strata Title of land as well as renovations, both cosmetic and major renovation.

4. Strata Title
Difficulty: intermediate - complex
Risk: medium - high

The simplest way to understand strata titling is splitting one into multiple – in a sense similar to subdivision of land, but this term is more commonly used in Units/Townhouses, as strata title will involve some common area.

So the biggest difference between subdivsion and strata titling is subdivision is complete separate without any common area – each LOT will be to it’s own. While strata titling will involve some form of common area such as stairs in units or driveway for garage and these will be used and shared by all LOTS.

For this reason strata titling strategy is mainly used in townhouses or units, where there could be an old apartment block that is available for sale as a whole, and an investor can purchase the whole apartment block as a single title (maybe 4 or 5 units), and then go through the strata titling process to split each unit into it’s own. Before strata titling the whole apartment block would be known and registered as for example, LOT123. After strata titling unit 1 would then become 1/LOT123, and unit 2 will be 2/LOT123 and so on. After each unit has it’s own strata title then essentially each unit can be sold on it’s own!

While the concept is simple but in reality there are quite a number of steps and hoops to jump through. I have outlined them in very simple terms:
1. As a start an investor will need to check whether there are any restrictions to the current LOT or land, such as size or disposition that could potentially prevent strata title from proceeding.
2. Then once the restriction aspect is cleared, there will need to be a strata plan drawn up to clearly outline common property and each lots.
3. And then a Community Management Statement will need to be prepared to include by-laws and LOT entitlements.

Once all the plans and relevant documentation have been completed and in place then the individual LOTS can be registered and the body corporate will then come into the party.

You can also strata title two houses on a block of land separating each into it’s own LOT. Some people do this in order to be able to sell one off without having to sell both (on the same LOT). In NSW this is known as “duplex” – two houses on a single LOT.

5. Renovation – Cosmetic
Difficulty: low - intermediate
Risk: low - medium

In my view cosmetic renovations can be as simple as repainting a bedroom to as complex as complete kitchen renovation. Either way the goal of cosmetic renovation is to improve the value of the property, and as a basic rule of thumb for every dollar you spend on cosmetic reno you would want to get 1.5 to 2 dollars in return depending on the type of cosmetic reno. So I believe it's important to do your DD and work out estimated Return on Investment (ROI) before going ahead.

Cosmetic reno are usually lower risk in nature and are more suited for everyday investors. They can be applied to all property types including houses/townhouses/units. There are professional builders who focus on purchase run down places, live in the place while transforming the property via cosmetic reno and then flip at the end for a profit. So as you can see, if done well, cosmetic reno can have excellent rewards in both increasing property's intrinsic value as well as rent increase should you wish to continue keeping the property afterwards (plus making the property more attractive to securing a decent tenant!).

Fundamentally, cosmetic renovation is to be able to transform the appearance of a property without changing the underlying structure of building. Some of the common ones are:
- New carpet/floorboards
- New interior/exterior paint
- New kitchen or bathroom
- New lighting/fixtures, blinds/curtains

6. Renovation – Structural/Major
Difficulty: intermediate - complex
Risk: medium - high

Structural renovations are the ones that fundamentally changes the building structure. Examples are house extensions – changing current floor layout, adding a second floor or extending additional space out towards the backyard, and these actions will involve a team around you - quantity surveyor, various engineers and will almost always require council approval.

Structural renovations are usually costly so are not commonly adopted as an investment strategy (not for beginners anyway) and risk of budget overruns are much higher.

They’re more carried out by owner occupiers, who are emotionally attached and would like to improve living quality at home or needing additional space due to growing family. If purchasing a new home proves to be too costly and not viable, such as the current affordability issue in Sydney property market, then structural renovation on the existing home could be a more viable alternative in comparison.

Nevertheless for home owners it is definitely a way to improve the value of a property whilst being able to enjoy the fruits of renovation.

HERO8KING

20. Twentieth Lesson - 3 years on, what did I learn from my Slacks Creek (Logan) IP?

The Slacks Creek IP is my first interstate acquisition and by no means was perfect. 3+ years in since I initially bought this property I thought it's interesting to do a "rear mirror view" and see what events have happened and share what I would do differently if I'm to purchase again today.

And this time instead of writing out thousands of words, I thought I'll do a video on it for a change - hopefully conveys faster & more info than written words!

https://www.youtube.com/watch?v=1EfoCgrauaY

https://www.youtube.com/watch?v=CdoOve7SsL0

HERO8KING

21. Twenty first lesson – CG or Cashflow Properties?

As investors, we constantly ask ourselves whether next property should be a Capital Gain (CG) or Cashflow property to add to the portfolio. I was no exception before, and having gone through purchasing a few properties now I thought I could share some of my own thought process & experiences during purchase to help people consider where they could go from here.

By all means it's not a perfect portfolio, but the roles and underlying thinking of each property are as follows:

1. IP – Granville apartment, NSW – CG focus

Search Criteria/Goal: First investment so as trouble free as possible while having majority of rent covering all outgoing expenses

Location: the unit is about 1km to Merrylands train station and 1km to Stockland shopping centre

Considerations: Granville is in close proximity to Parramatta, Sydney’s second CBD. At time of purchasing Merrylands Stockland shopping centre was undergoing brand new extension and Merryland train station upgrade with bus lanes. So new retail giants coming into the area and future prospects of Parramatta were the considerations at time of purchasing.

Another key factor is I was able to get $450/week rental guarantee for 5 years - at time of purchasing that's around 6% gross rental yield so in a sense you could say it was both CG & Cashflow.

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2. PPOR – Hornsby unit, NSW – CG focus

Search Criteria/Goal: PPOR so for my own living - hence priority is around decent living suburbs (north shore), reasonable commute time to major employment hub such as CBD/Parramatta and some lifestyle & shopping centre is a plus. Ideally the place is somewhat renovated. Also low strata was important to minimize ongoing cost.

Location: 500m walk to Horsnby train station as the major interchange to the north; 700m walk to Hornsby Westfield shopping centre;

Considerations: Mainly due to budget at that time which is why I was pushed all the way to Hornsby - we started from Chatswood and had to keep going north! Hornsby is self-sufficient and a very liveable suburb, plus has super express train to Central and express to Wynyard during peak hour so that ticked the commute box. While it felt quite far back in 2013 it's not that bad now.

Hornsby ticks a lot of boxes for CG - transport, Westfield, hospital, aquatic centre plus plenty of good private schools around the suburb. And being so close to transport, if we want to turn it into a rental later on it would not be an issue.

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3. IP – Slacks Creek house, QLD – Cashflow focus

Search Criteria/Goal: First interstate investment so being very conservative, want as low purchase price on the way in with as high rental return as possible. Hence Logan caught my eye and this IP had a decent yield from day 1.

Location: within 1km radius to Springwood shopping mall, quite close to the industrial/factory section of Slacks Creek

Considerations: As the property is focused on cashflow the main value add is downstairs has a rumpus and second bathroom which can attract larger family and hence paying for more rent. Also the pool adds a bit to rental income as well. (Having said that, from hindsight, I would still steer away from purchasing anything pool now!)

Whilst main focus is on improving cashflow I also strategically chose the pocket to be as close to Springwood as possible based on Greater Springwood Master Plan in order to get the ripple effect later on from Springwood.

The factory section worried me a bit initially as I thought the factory exhaust may cause undesirable effects around the neighbourhood, but after physically checking out and walking around the area it proved to be a bit of distance to the property so was happy to go ahead.

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4. IP – Woodridge house, QLD – Cashflow focus

Search Criteria/Goal: Similar strategy with Slacks Creek IP - want as low purchase price on the way in with as high rental return as possible.

Location: within 1km radius to Logan central plaza but that's about it. Location wasn't one of the key criteria I've ticked for this IP.

Considerations: As the property is focused on cashflow the main value add is potential to build out downstairs (half was legal height), two rumpus area already exist downstairs but not fully built out - so that's the value add part to be completed down the track into dual-living.

Note there are also two big powered shed at the back.

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5. IP – Murrumba Downs house, QLD – CG focus

Search Criteria/Goal: to capitalize on the new Moreton Bay Rail (at time of purchase is still to be completed) and the new University of Sunshine Coast at Petrie. Ideally cashflow neutral but the key is to be as close to the new train station & new university zoning. Key focus is on location of the property rather than value add.

Location: within 500m to Kallangur train station and within 2km radius to the upcoming new USC.

Considerations: First IP in Northern part of Brisbane and specifically targetting future growth areas whilst maintaining a balance of yield (about 5.4% gross from day 1).

With big retailers like IKEA entering North Lakes the area does attract young people entering the area. The property is situated more towards Murrumba Downs side and has some big houses sitting on decent blocks with a nice neighbourhood feeling. Initially there were concerns around an oversupply of new townhouses at the time of purchase - vacancy rate did hit over 5% mark back in 2016 due to those townhouses. But thankfully it has not impacted houses as much and was rented out days after settlement to a good tenant over the years, and never had a single issue with paying rent.

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6. IP – Eagleby house, QLD – Cashflow focus with subdivision/GF potential

Search Criteria/Goal: I wasn't going to get another one in Logan but ended up getting this one because of the future subdivision potential opportunities. Like every investor, as we endeavour on becoming more and more experienced we also like to purchase assets that you be creative and manufacture equity down the track.

So when a 750sqm+ splitter corner block comes up at $280K and most boxes are ticked I had to pull the trigger! Current fibro house will need to be demolished down the track to split the block, but in the meantime a granny flat can be built with an alternative entrance from side street. And gross yield has about 6% from 1 hence it ticks the cashflow box with bigger plans down the track.

Location: within 500m to the local Eagleby shopping plaza and state schools. Location definitely isn't as stellar as Murrumba Downs.

Considerations: I'm aware Eagleby also has a social demographics issue however surprisingly enough I didn't have much tenant issues at all in comparison to my other Logan properties. Having a good tenant definitely helps and it was rented within a week after settlement. I didn't even have enough time to replace the old yucky carpet in bedrooms! :p

As a cashflow focus property it's been cashflow neutral player for me and I'm happy to have this addition to the portfolio so I can do bigger things with the block down the track.

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7. IP – Newcomb house, VIC – CG focus

Search Criteria/Goal: First interstate investment in VIC. Budget was around $300K and I was hoping to achieve 5% gross rental return so Melbourne is definitely out of equation. To meet my selection criteria I had to go more towards the regional cities and that's where Geelong caught my eye.

Again looking to achieve a balanced approach of a property, ideally in a gentrifying suburb with value adds to manufacture equity.

Location: within 3km to Geelong CBD. It'll be very close to the former Alcoa site & Point Henry if it does go ahead :)

Considerations: Newcomb was gentrifying when I purchased back in early 2017. A lot of knock down - rebuild was happening in the area. And set next to East Geelong where median price is $600K+, at some point the price will overflow (and it did).

In addition this was originally a 3 bedroom house but was converted to 2 bed by previous owner. As such all I needed to do is purchase at 2 bedder price, restore a wall and install a new door and now I'm renting it out as a 3 bedder! I've covered a bit more detail about the deal here for those interested:
My latest Geelong purchase - Go Newcomb!!

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So within the portfolio 4 are defined as CG player and 3 as Cashflow player. If we exclude the PPOR, then it’s 3 CG and 3 Cashflow. In essence for every 1 CG player purchased I would look at buying one or two Cashflow player to balance the negative cashflow, and make the portfolio easier to hold long term.

Because most of my portfolio are based in QLD the general yield is not too bad. For example even though Murrumba Downs was defined as a CG player by me, it’s gross yield at purchase was at 5.4%. At that time my intention is to offset with another cashflow player so I looked at Logan again, picking Eagleby, which was returning gross at 6% yield from day 1. Later on if I build a GF, can take the gross yield close to 10% easily.

By having this concept in mind, that’s when I was able to take more risk and jump into the Geelong market in early 2017 and focus on picking another CG player. Note Newcomb’s gross yield from day 1 was only at 5% but I think that's considered relatively acceptable in VIC.

For investors in the current environment I would suggest you review your portfolio to determine the yield and cashflow that the portfolio is doing for you. My general advice is for each CG player you would want to offset with at least 1 cashflow player unless you're looking to tread into commercial later (which is a totally different ball game). If your CG players are heavily negative (say at 2-3% gross yield) then you may want to consider offsetting with 2 cashflow player at 6% or even 7%. The goal is to try bring the overall portfolio cashflow to neutral or positive which will make it easier to hold long term.

With interest rate at record low level and here to stay you may have more tolerance to go for CG properties. However this was my strategy back then to mitigate the risk of having to force sale any of the IPs when interest rate returns to the average 6% or even 7% historical level.

Happy hunting! :)

cantonese

LZ有心人，谢谢分享

lspmail

有借鉴意义

沏茶

值得借鉴

tenpinjing

7套写这么多呀！我也买了7套了，总结出一条，悉尼买house。