In this episode of our 'Investor vs. Developer' series, Flux sets the record straight and defines 'financial freedom' versus 'wealth creation'. With over 20 years of investing and an extensive knowledge in property development, he outlines the four fundamental high-level reasons to buy property and emphasises the importance of having a clear vision while focusing on one strategy at a time. Plus, he shares his lucrative 'secret sauce' to wealth creation that can lead anyone to financial freedom!

Timestamps:
00:01:17 | Defining Terms
00:03:14 | Debunking Misconceptions
00:09:22 | Reasons to Buy Property
00:13:15 | On Negative Gearing
00:17:48 | The Goal Behind It
00:20:47 | The Bad Rap of Property Developers
00:22:41 | The Chicken or the Egg?
00:26:09 | The Other Advantage
00:29:18 | Clarity in Strategy
00:33:42 | On Assessments and Next Steps
00:37:52 | Rob's Secret Sauce
00:39:29 | The Magic Formula

Resources and Links:

And so, as crazy as it sounds, if you're a janitor, earning not much at all, you're going to be living within your means. It's much easier for you to become financially free than it is for a doctor or a lawyer who's on $250,000 [or] $300,000 a year and has the uber-million-dollar home and, like, they're probably still paying that off for 20 years.

This is Property Investory where we talk to successful property investors to find out more about their stories, mindset and strategies.

 

I’m Tyrone Shum and in this episode of 'Property Investor vs. Developer', we’re once again going to the property trenches with Rob Flux from Property Developer Network. In defining financial freedom and the steps to achieve that, he outlines the four fundamental high-level reasons to buy property. Plus, he shares his 'secret sauce' to wealth creation!

Tyrone Shum:
As most people mistakenly muddle the definitions of 'financial freedom' and 'wealth creation', Flux delves in to set the record straight. Considering that he's been creating wealth since he purchased his first investment property at age 21, he covers the topic with credibility and authority —beginning with the definition of financial freedom.

Rob Flux:  

Well, I'm going to start by saying what it's not. 

And it's not, I guess the thing that's been sold to us, which is the big house and the shiny car, and the jet plane and all that sort of stuff, right? All of that is lifestyle that comes after you are financially free. 

So financial freedom is having enough passive income to pay your debts. That's pretty much it. 

So what does it cost you to put food on the table? What's it cost you to put fuel in the car? What's it cost you to send the kids to school? The lifestyle you're living today—what does that cost? 

Now, if you understand what that is, then if you've got enough passive income to pay those debts, then you don't need to go work anymore. 

That's right. You're financially free. 

Time is now on your side, and you can do anything that you want. Then you might choose to do more of the thing that got you financially free, which then gives you the lifestyle. But you have to get through this financial freedom side of things first. 

But I think the biggest challenge is that people are sold on the dream of the shiny house and the jet plane and all that sort of stuff. And it's so far out of reach that they feel like they can't grab it. 

Yeah. 

So they strive towards it. But it's still too far away. 

So as I said, you have to get through this financial freedom element to get to the lifestyle. So use this as a milestone along the way. You know, use this as a guidepost to say, ‘Hey, yeah, I'm actually making it‘ and then get the shiny house.

Yeah, I agree. I think to make it simple for listeners out there, say, for example, I'm going to use numbers here—which would probably make them a lot more sense for me anyway—but like, so for example, if your living expenses are between, say, $50,000 and $60,000 a year and you're working right now earning $70,000 a year, but after taxes, and so forth, you'd probably take home, maybe say $60,000. That's enough just to cover your costs. But the thing is, you're still working. 

Now, what you want to try and do is replace your working income by finding assets that generate passive income. And an example would be using property to receive rental income and whatever that rental income is minus expenses, can cover your your current day-to-day expenses, whether it be $60,000 a year, then you are basically able to find a way to generate passive income, and then aim for that financial freedom. 

Now, people have a misconception that you might need $200,000 [or] $300,000—depends on where you live, you know. If you're living very, very luxuriously right now, then yeah, obviously, you need a lot more money. But if you're living with minimal means, and getting through day to day— you don't have to live a big lifestyle—$60,000 or $70,000, you know, probably could be an average I'm guessing here. But depending on on the cost of living for life.

Well, you've touched on a really good point. And that is... Look, it's been a little while since I looked at this stat so it might be just factually a little rubbery at the edges, but it's pretty damn close: The average Australian wage is approximately $80,000. 

Yeah, I was making guesses... [laughs]

Because it's around that $80,000 mark, we tend to live within our means. 

So that random number that you threw out there before of it's costing you $50,000 [or] $60,000 to live is actually not that far off the mark. And so when we look at what it takes to actually do that, it's not a huge amount of properties or a huge amount of money. 

Everyone's got this huge— like you said, they want $200,000 a year or $300,000 a year. But why do you need that to get through the financial freedom stage? You don't. You need about that $80,000 mark by the time you take your taxes out to still keep doing that. 

Now, the crazy part is that as our wages start to go up, so do our lifestyle choices. And we do choose the better car or we do choose the bigger house. And then we have the bigger mortgage. And so, to pay those bills generally takes more. 

And so, as crazy as it sounds, if you're a janitor, earning not much at all, you're going to be living within your means. It's much easier for you to become financially free than it is for a doctor or a lawyer who's on $250,000 [or] $300,000 a year and has the uber-million-dollar home and, like, they're probably still paying that off for 20 years.

So, you know, it's a lot harder for them to actually get financially free. Now, many of you have heard of a gentleman by the name of Robert Kiyosaki. 

Yeah. 

He has a game called ‘CASHFLOWⓇ‘. 

And that's exactly what I was going to talk about just now. I'm glad you mentioned it. We‘re both thinking of the same thing.

Robert Kiyosaki is all about buy-and-hold. And I'm all about property development. So there's some subtleties between the difference. But he's basically teaching you that, ‘Look, that passive cash flow... and the moral of the game is: The less you actually earn, the easier it is to actually become financially free‘. 

Now, I'm just going to put a pin-drop in that. Because right this very moment, I'm in the process of creating a property development game that is going to take some of the principles of cash flow and some of the principles of the property development side of things to say how do you accelerate that process? 

So at the time of this podcast going live, we are, I guess, coming up with some beta concepts on how that actually starts to look. But watch this space; it might take a little while before it actually gets into print.

Yeah, well, I can't wait. I'll be probably you know... Rob invited me to be the one the first people to play the game. Because when I played the game CASHFLOWⓇ, I fell in love with it. And I still have it. It's such an amazing game. 

And that's exactly what I was going to raise up. 

When I played that game on CASHFLOWⓇ is that when I became a janitor, which was the easiest and the lowest one, where you actually have to be able to get your passive income, I was probably the first one out of the rat race. Because once I became a doctor, my gosh, it took ages, because the amount of expenses that you have to actually find to be able to cover took ages to be able to build that asset base.

And the basic reason why that happens is because when you've got cash, you go for instant gratification: ‘I want that nice car now. I want that nice house now.‘  That instant gratification—we don't put that towards investing into our future. And if they had have flipped it on its head, there's no reason why somebody on a high income couldn't get financially free, much, much faster. 

But they've gone for the sugar hit up front and net—that means that they have to pay for it for a very long period of time. 

Yeah, absolutely. But you know, if you know how to play the game well—and this is what happens in life—, there is a way you can actually just reduce your expenses and still have a high income, and you have this massive chunk of cash, which you can use to celebrate and build up your asset base much faster. And I think that's also another strategy in the game. 

But we'll leave it out there for other people to play that game. I don't want to tell you too many little tricks and tips yet.

Just somewhere back over there. I've got about 15 copies of CASHFLOWⓇ. We we occasionally have kind of little 'cash flow parties' for a lack of a better word... 

We should do that next time when you're down at Sydney then. Bring it down, please.

Note to self.

Definitely, definitely. Well, it's really good now that we've defined what financial freedom looks like and at definition. I guess maybe we should probably talk about the reasons why people look at different asset bases. And as you know, there's like three different asset bases—we can look at buying businesses, investing into shares, or buying property. 

And obviously, this being a property podcast, we're going to focus on that. So maybe let's talk a little bit about some of the reasons why we would be looking at using or buying property to be able to help us achieve that financial freedom goal.

Absolutely. So there's really fundamentally only four high-level reasons why you buy a property. Okay, so the very first one is lifestyle. 

That is, we want that nice house. 

That lifestyle is going to be based on nothing from an investment purpose. But typically it's... does it have the right number of bedrooms? Is it close to the school that the kids are going to go to? Is it convenient to get to the shops or to work or those sorts of things? 

So your lifestyle choices tend to influence the outcome of that design. Now, sometimes, that is your principal place of residence, and sometimes it's a holiday home. But you know, we were making that our priority. 

The property-making profit is incidental. It kind of happens as a byproduct of owning it, rather than its primary purpose in life. And so, from an investment point of view, it's probably not the smartest choice in most instances, because we've not put any deliberate focus into making profit out of that.

Totally, it's an emotional buy. Ultimately, at the end of the day, you're going to have a larger kitchen, you're going to have a bigger garage because you want to put your nice cars in there and all that. You're not going to make necessarily money on this unless you've designed it in that certain way. 

But as you said, at the end of the day, sometimes these properties incidentally make a lot of money because of the market, [or] the cycles that go up. But you don't know if that's going to happen. It's really taking a bit. If it does, great. You know, that's the cream on top. But if it doesn't, it's really your focus is to enjoy what you've got there as well—which I totally understand and that's the reason why a lot of us initially start to buy property because we buy it for our own home. 

But something along the lines changes. You might decide I want a bigger home so you might decide to keep this one and you turn it into an investment property. And then that's when [you‘re] like, 'Hmm‘ —which we'll talk about shortly whether or not it's actually still good property as an investment.

Yeah. 

Once we've kind of covered the four categories, I'll kind of show you how to assess on a regular basis, were not those things are actually performing as intended. But the second reason why you'd be buying a property would be for long-term capital gains. So this is the tried and true tested method that a lot of people are actually purchasing their property under. 

And the idea being that, look, the market cycle tends to lift over time, there's [a] rhetoric out there, whether you believe it or not, that your property will double every 7 to 10 years. And because of that, people think if I buy it today and hold it long enough, it will eventually make money. Okay? 

Now, the challenge with that is that in order to do so, you have to cash-flow that purchase along the way. It ties up a whole bunch of capital, upfront. You're going to put down a deposit on it, and you're at the mercy of the market as to how quickly the capital gains actually occur. And also, what happens with interest rates. And you know why, right now, interest rates go through the roof. 

So what could be a really, I guess, good performing asset at one point in time—things like, you know, interest rates kind of impact your ability to actually keep acquiring those properties. 

I think that's a good point that you raised, because, as you know, prior to COVID, actually, around COVID time we had one of the lowest interest rates. And then since after that many years later, rates have gone up, skyrocketed, as you mentioned, which actually makes it more expensive now than actually buying a property once back then that was returning a good yield that was even more than what you're carrying for the interest. 

So you kind of think to yourself, is it really worthwhile buying an asset that is basically going to be taking more money out of your pocket, rather than you getting receiving money from your pocket? Or from these assets, I should say. And obviously, you can't really quite generate cash flow, unless it's positive cash flow, because then it's really not really an asset then—it becomes more of a liability.

Yeah, well, like most people, I guess—looking at these capital gains—are doing it with a negative-gearing type approach. So negative gearing is where the cash that is generated from the rent from the property by the time you take expenses and depreciation and a whole bunch of other things out means that, on paper, we're losing money. 

So we're having to top up the loan or top up the property in order to keep it alive for [indiscernible]. And then that negative cash flow—that means that it's actually costing us more to become financially free, because we've now got our living expenses plus the expenses to actually hold that property—so it actually is going to take us more to become financially free when we're in that negative-gearing type [of] situation. 

Now, what we're relying on is that the value of the property that capital gain will occur over time, and make us asset rich. Okay. 

The challenge with being asset-rich, though, is you can't eat an asset. And so I know many, many, many people who are millionaires on paper, but they still lead a pauper lifestyle, because they haven't got the cash flow that actually which is generated from that. 

And the only way that they tend to do that is they tend to, at some point in time, sell down an asset in order to cash in, which then means paying a whole bunch of tax because you are impacted by that capital gain 'event' (for a lack of a better word).

Yeah. 

Well, in some sense, you know, sometimes paying down the debt will allow you to be able to pay down all the properties that you currently own, if your asset-rich and cash-flow-poor. But hopefully, that paying down that debt will actually increase the amount of cash flow that you have coming in from those assets—if they are producing rental income. Because some people do buy land and they don't really do anything until for a long time. 

So it's really interesting to be able to look from that point of view, because ultimately, you [have] got to ask yourself coming down: What are your goals? What's the whole reason behind why you're buying these properties?

Yeah, correct. And I think that's a decision that a lot of people don't really consider too much is why am I buying this property? 

I'll kind of touch on that a little bit more [in] detail, after we've gone through these four reasons. But I guess the the third reason would be cash flow. We're buying it specifically for cash flow. 

Now, the idea being that we're in an area where the rent is so high, that it actually outstrips what we're paying in interest in doing so. So then it washes its own face. It means it's not costing us to hold. It puts some cash in our pocket right from the get go, which [is] fantastic. 

That is now something that is assisting us towards our financial freedom because now the property is not costing us money, but rather generating money. 

So the amount of cash that we need, [the] net, in order to pay our bills now becomes less. So the more positive cash flow properties we got, the better. Okay. So that helps to pay our bills and helps us on a daily cash flow basis, and all sorts of things like that. 

Which would lead us to financial freedom, hopefully. 

Absolutely. 

The challenge with cash flow properties is that they tend to only happen in areas where people are not looking for capital gains—and they're not looking for capital gains, because there's not much actual growth happening in the area—and so that makes the property cheaper to buy. So often, they're in more regional areas. They might be in mining towns. Areas where people aren't looking for the capital gain is typically where you're going to get the high-cash-flow-type outcomes, which means it's one or the other. 

Okay, it's typically not both that you're going to get. Now, sometimes you can, but typically, it's not. So then you're buying it purely for the cash flow. 

We've seen in many instances where the demand on those properties is based on one industry vertical. So it might be tourism. It might be mining. It might be something like that, and then that one industry collapses and, all of a sudden, the cash flow stops. And because there was no demand on the product for any other reasons, it can actually be quite problematic. 

And I've seen many people get hurt by buying in the wrong area and then that industry vertical kind of disappears.

You [have] got to be very careful once you look sort of further out out of the CBD or [in] the suburban areas of major capital cities. But you [have] got to ask yourself, once again, what‘s your goal? Are you looking for cash flow or you're going for capital growth or capital gains?

Now, you could equally go for cash flow where you've got maybe a commercial property, for example. So commercial properties tend to be more positive cash flow and that sort of thing. But equally, you've got to do the assessment on the kind of property you've purchased. 

Would there be lots of demand for the kinds of tenants that you've got? Now, there's 27 million people in Australia that need a roof over their head. But how many businesses are there? And then, based on how many businesses are there, how many of those happen to be medical versus office versus mechanics versus... [et cetera]

So you kind of narrow that down.

Of those, how many mechanics are in my geographic area? And then of those, how many already got a property that they're already renting. And when you chunk it down, chunk it down, chunk it down—the commercial can, in some instances, be a little risky if you don't have a huge amount of demand for the kind of products that you've got. So it needs to be very carefully considered if you're wanting to go down that path.

Yeah, I think then the next one that we're sort of looking at—the next fourth reason—would be looking at manufactured profits as well.

Yeah, manufactured profits. That's what we do—property development. So we are using our skills, our sweat equity, to be able to manufacture a product that is needed or in under supply by that particular areas' direct demographic. 

So what we do is we have a very careful understanding of supply and demand. We have a look at what is under supply in an area where there's a huge amount of demand. And if we can create the right product in the right place at the right time, then we are manufacturing the profit for people. 

Now there's a whole bunch of things that go into that. But we basically were trying to solve a problem for Joe Public. So Joe Public doesn't have the knowledge in how to do development applications. They don't know how to construct buildings. They don't know how to do civil works and just put sewer and stormwater and all those sorts of things. So if we solve the problem for them, and we give them a finished product on a platter, they will generally pay us a premium for going through that hassle for them. 

So we are time savers. We're problem solvers. And more importantly, we're makers of community, because we know what the community is looking for [and] we put the right product in the area at the time.

Yeah. That's the beauty of property development —is that we're helping you solve a problem in the area. Because as we're discovering, there is not enough supply of properties all across Australia, and hence the reason why we're starting to see more people coming back into actually... you know, they‘re demanding for more properties tend to live in.

Property developers have got.... we've got a really bad rap. 

We're known as these evil property developers [jokingly imitates a villian‘s maniacle laugh] and we're just gonna rape and pillage the Earth. 

But the reality is that last statement I made—we are the makers of community. 

Let's have a look at Australia 220-odd years ago. We were a one-lot land subdivision. Okay, so every road that you drive on, every school you send your kids to, every house that you live in, every set of shops that you actually go to, was built by a property developer who looked at the demand of the area and who put the right product in the right location at the right time. 

And if we can continue to do that, Australia will have a thriving economy. And we're going to have the lifestyle that we want and that sort of thing. 

But there are some of those evil developers who don't really care about the product. 

But the better developers are doing the right thing and actually saying, ‘Look, we're going to create this community and make it vibrant and want people to actually live there‘ —and that sort of thing. So that's the goal. 

Yeah.

We've kind have summarised or pretty much given four main reasons why people should be buying property. We're a bit biassed being in the property space. But I think those are the key things that we look at as being building up the assets, to be able to help us to be able to create wealth creation and financial freedom. 

As we sort of just touched on, there are going to people out there who are asset-rich, [who] have either that or they want cash flow, or they're looking for chunk money. 

Let's talk a little bit about that. Because the thing is, the challenge is, how can we achieve [that], if possible, or do we have to go through a stage to be able to do either or? 

Well, it's chicken and egg, right? Which came first? Do you build your assets first, sell down the property or two and then pay off the debts and generate cash flow? You know, that's one of the things that you touched on before. Or alternatively, do we generate cash flow, so that we can buy more assets and allow the assets to grow? 

So that's the challenge that most people take when they're looking at a traditional buy-and-hold-type approach. And with both of those approaches, you tend to hit a glass ceiling. Because our borrowing capacity is what actually tends to slow us down. We need to have deposits in order to purchase a property. 

And we get assessed on our ability to pay the loan over a 20- or 30-year period. And so based on the rent that we're generating and the wage that we're actually earning, we have this glass ceiling as to how much money we can actually borrow typically. And we keep bumping our head on that glass ceiling, which stops us scaling to where we want to go. 

Now, the antidote to all of that is the manufactured-profits approach—so property development. 

So rather than looking at the serviceability of the loan and what [I can] actually afford, we can start to look at alternative lending solutions that look at what is the profit we're going to generate out of the deal? Does the deal make sense? And if the deal makes sense, because it's on a much shorter period of time— 

You know, some developments... my record is about six weeks. That's... $996,000 in six weeks is my record. But some projects will take two or three years to run. But that is a relatively short period of time compared to a 30-year buy-and-hold loan. 

Yes. Right. 

The funders, whether they be private funders or commercial-development-style funders, will look at the profitability of the deal, and go, ‘Do you know what? I'll back you on that because we can tell that the product that you're creating is the right kind of product, and there's an exit strategy that's going to pay us back in a relatively short period of time‘. 

And so we can do things where cash flow is not considered anymore, but rather the quality of the deal and also your skills in being able to find, run, and acquire that deal. 

So it's more about the deal itself, which then means that we can break the shackles and smash through that glass ceiling. And so long as the deal makes sense, we can just start to scale the size of our deals bigger and bigger and bigger as we go.

That's right. And that's where that chunk cash comes in. Because, ultimately, say, you go out in your full-time job and stuff like that, there is a certain amount of income that you can earn. And with the cost of living all across right now where we are in Australia, majority of our income is currently gone to living, no? 

So where is there enough money to be able to pay to start [or] do a development or even just put back into property? And that's the biggest question mark. 

So doing some type of property development allows you to generate some additional cash—like chunk cash that we're talking about—that you could actually reinvest back into another development or you could go and build more assets that will generate cash flow, and ultimately, at the end of day, allow you to be able to grow your wealth and then create that financial freedom that you're looking for.

Yeah, and we've covered this next point on one of your previous episodes— what do you do when you've got little or no money to start with? Okay, so we had an episode on ‘No and Low Money Down‘, so [we] won't kind of loiter on that one. We [will] make people go back and watch your back catalogue of stuff. 

But the other advantage of this is, because of the fact that we can see there's a clear in and a clear out, and we're not relying on the market because we're forcing value under the property, because of that, we can do these creative finance strategies when we have little or no money. 

And so, that glass ceiling is not just the serviceability, but it's also the equity to get the deposit to buy the property in, like I said, a property development perspective. We can bypass that. 

We can sometimes completely avoid purchasing by just controlling the property. We can do some really creative things where we work with the landowner and never bite the first place. There's all sorts of things that we can do where we can manufacture money out of thin air.

That's really, really cool, isn't it? Well, we won't go down too much. But yeah, check our previous episode on that because we did go into a lot of detail about that. So I guess the thing is, if we want to do all this, it sounds great and all, Rob, but the thing ultimately at the end of the day is there's so many options to choose from. 

As you said, do you go and buy assets? Or do you go and buy assets that already have cash flow? Or do you own development? But why? Which one would you choose? And I think the thing is that we've got to ask ourself: What is your goal? What's the purpose of doing all this at the end of the day?

Yeah. 

One of the biggest factors in all of this is a lot of people know that they want to get into property. They know that they want to get financial freedom, but they don't really understand the mechanisms in how to get there. And they know that there's multiple ways to get there. And because they know there's multiple ways, they figure if they just buy anything, it'll work. And it's not quite right. 

Coming up after the break, he adeptly explains how clarity in your vison and strategy impacts your trajectory towards property success…

So whatever your strategy is, then just pick one; get very good at one. And that one is going to then tell you—well, where does that one start to make sense? 

He explains the nuances that come with buying and selling property…

But you know, I'm not saying, ‘sell‘. I'm not saying, ‘buy‘. I'm saying, ‘ check in regularly‘.

He unveils the magic formula behind his secret sauce in creating what he calls a 'free property'.

But if you do that, this is an asset that is now owned 100% positively geared to owned 100% outright. So it is now immune to interest rates.

And that’s next. I’m Tyrone Shum and you’re listening to Property Investory.

Tyrone Shum:
From his extensive knowledge of using property development and invesments to create wealth, Flux dives deeper into the matter of having a clear vision, establishing goals, and focusing on one strategy at a time in your property journey.

What you want to do is you want to be very clear on your strategy. Now, if you're buy-and-hold, that's great. But are you buy-and-hold for cash flow? Or are you buy-and-hold for capital gains? 

Because where you buy that property is going to be completely different. 

If you're looking for cash flow, you're going to be looking in one area, and if you're looking for capital gains, you're going to be looking in a completely different area. 

You have different problems to solve, different price points to be worried about. And there'll be different drivers that drive that particular market and economy, okay? 

If you want to do property development and manufacture your profits equally, the kind of development that you're going to do and the size of the development will equally change where you're actually starting to look. 

So unless you get clear on your strategy, and very clear on your purpose, whether it be manufactured profits or your typical buy-and-hold type [of] approach. Getting clear on that and getting good on that is going to largely impact your your likelihood of success. 

So firstly, get clear on your strategy, folks. That is the probably the number one recommendation that I would say. And then whatever strategy you choose—[ahem] probably development—whatever one you choose, then start to educate yourself on that and get very good at that. 

If you don't concentrate on the one thing, we tend to look at more and more things. And when we look at more and more things, we don't look at them with a lot of depth to them, right. But if we spin it on its head and we look at one thing, [with] the same amount of effort, we can get very, very deep in our knowledge. 

So whatever your strategy is, then just pick one; get very good at one. And that one is going to then tell you—well, where does that one start to make sense? 

And then assuming that you made the right decision to purchase the property, you put all the homework in, you educated yourself, and you purchased the property, the next most important thing is you want to keep regularly checking in to see if that property is performing as it was intended, alright? 

Because the number of times where we make some smart decisions upfront and then we just park it and you go, ‘That'll be fine. We'll come back in 15 or 20 years and cash in‘, and then find that the market has moved massively in the area that we thought was going to work as is no longer going to work and, you know, it probably stopped working 10 years ago and we just missed the boat because we weren't looking at it. 

So my guidance is: Look, no matter what your investment strategy is, keep checking in on how your property is actually performing every three months or so typically. 

If you're choosing capital gain, you want to make sure that there is capital growth actually happening in the area. If you chose a cash flow, you want to make sure that there's high demand for renters and tenants in the area and low vacancy rates and all that sort of thing. 

And you want to start to see the market change before everyone else notices the market changes. If we can start to get in there, we can be proactive in our management approach and start to make hard decisions on whether or not that asset is still performing as intended. 

Yes. 

It's interesting that we say that because looking at cash-flow-type of properties, typically, as we've known, most of the cash-flow-type of properties are usually see sitting out sort of the regional areas. Now, I'm not saying that regional areas are good or bad; all I'm just saying is that there are still so [much] potential in there. 

And the reason why I say that is because I've purchased very good high-cash-flow property that was in a regional area that is still growing down towards in Victoria. And what's been really interesting is that as COVID has hit, previously, a lot of people were changing and moving out of the main CBD area or main suburban areas [of] capital cities into more regional, because they can still work from those locations and still have a beautiful lifestyle as well, for a lot less cost as well. 

So, as Rob has talked about, look and monitor the area, see the changes, and then see where there is growth as well, and, you know, enjoy that ride.

So if you're clear... I know what my strategy was, and I'm checking in on a regular basis to see is it performing as intended for that strategy? Then we can start to make some some logical choices. So do I keep the property as is where it is because it's doing the right thing? And that's a good, easy answer. So the answer... if it's performing well, then why wouldn't you keep it? 

That's right. Yeah. 

But if it was performing badly, then you want to start to make an assessment on— well, do I think it's going to keep performing badly? Based on what I'm seeing in the market right now, is it on a downward trajectory? Is it about to haemorrhage? 

Maybe it is performing relatively well. But when you look at other areas of the country, maybe it's underperforming compared to someone else[‘s]. Maybe you could take the money out and put it somewhere else and still with the same strategy, but get it to perform better somewhere else, right. 

So opportunity costs. Maybe your money is not working as hard as it could actually be. 

Or in some instances, maybe it's actually losing money. And where that happens, we tend to have the ‘old ostrich head in the sand‘ type of approach and go, ‘Well, the market will recover it. I don't actually lose money until the day I sell it‘. 

And in many instances, the property is not only going backwards from a cash flow perspective, but relative to the rest of the economy, the capital growth side of things might be going backwards as well. So the buying power of that dollar that you're keeping... so you might get the face value back. 

You know, if you paid $500,000 [to] buy a property, it might take you 10 or 15 years before it's worth $500,000 from a face-value perspective. But $500,000 in today's money and $500,000 in 10 years‘ time‘s money might not buy the same thing anymore. 

So a lot of us have more concern about that face value side of things and ‘I didn't really lose anything‘. 

So based on the outcome of those, that research that you're doing on a regular basis, you then start to make hard informed decisions. Do I keep it because it's doing great? Or perhaps, do I sell it, take a loss, but it's better to lose a finger then lose an entire arm? 

But you know, I'm not saying, ‘sell‘. I'm not saying, ‘buy‘. I'm saying, ‘ check in regularly‘.

Yeah. 

The last part of that equation,—and I see this immensely in our community—a lot of people start down the buy-and-hold investment type [of] approach, and they bump up against those glass ceilings that we were talking about before and go, ‘Well, I can't go any further‘, then they change their strategy typically to a manufactured profits [or] property-development-type approach. 

And then after they get over the learning curve, and they start to make more money through forcing value under the property. At that point, their money's working a lot harder on these new deals. And they look back at their old investments and they go, ‘Whilst it's still performing well for the purpose that I bought it, perhaps now that I'm smarter, could I repurpose that money a little bit better?‘ So the opportunity cost of leaving it there— ‘Look, it's going to make money. I don't have to take any effort. But over here, could I do lots more over here?‘  

Now all of that is going to be based on your skills, your risk profile, [and] how well the property is actually performing as is where is what the long term growth of that particular asset is, and a whole bunch more. 

But the key point that I'm trying to make to everyone is, if you don't have a clear vision, if you don't measure whether or not that clear vision is performing as intended, if you change your vision along the way and you don't reassess your circumstances to go you know, ‘All the decisions I made before, are they still relevant now‘?—if you're not doing those things—, then your asset base is not working as efficiently as it could for you.

Yeah, that's right. So I think it's really important once it comes down to, once you've got past that level, like, say, you've achieved that financial freedom and now you've got a lot of time on your hands and your portfolio [is] performing well [and] you're moving into, say, manufacturing profits through property development, you will have to reassess and maybe change your goals. Most likely, you will change your goals because you've already reached that particular goal, and then from there make that decision. 

And I think this is the thing is that there's no right or wrong answer here. There's no one fixed way. Once you start off as buying property, you start that buy-and-hold journey, you don't just continue on that way for the rest of your life unless you choose to. 

And this is where—as Rob has been emphasising is that—you need to assess, continually go back and check in to see how things are going. You're going to have to change your budgets, because lifestyle changes as well too. Your family may change; situations change, all those kinds of things, and you've got to factor that all in. 

Maybe parting words for people out there... What kind of approach would, say, maybe ‘Rob's secret sauce‘ approach, as we call it—what approach would you take from that point of view?

Thank you, mate. Thank you. 

Well, I'll put this in context first. I did 20 years of buy-and-hold before I became a full-time property developer. So I've got the traditional investment mindset. And I've also got the new and improved property developer‘s mindset. And I‘ve come up with a hybrid approach that combines those two worlds to get the maximum outcome and to squeeze the lemon really hard.

Right. That's the secret sauce. [laughs]

So what I do is I use property development to manufacture the profit. 

That's the foundation piece. And then I stack on top of that to say, well, if I can get a deal large enough, that the profit I get from this process means that once I pay down a few of those assets, it actually leaves an asset owned outright.

 

So if I can do that, I've basically manufactured a property out of thin air. (Now, there's a magic formula that I'll talk to in a sec that says how you [could] create a free property.) 

But if you do that, this is an asset that is now owned 100% positively geared to owned 100% outright. So it is now immune to interest rates.

Inflation going up is to your advantage because it both raises the value of the property and also raises the rent that's actually being generated from that. And so, that's the ultimate goal. [It] is to actually manufacture an entire property owned outright. 

Now, in order to do that... The magic formula that sits behind that—and you say, my secret sauce, but it's not that secret. I'm telling everyone, mate; anyone that will listen—and it's really just a math equation.

So almost everyone that I ask—whether they are property developers, or otherwise—, they all have this mythical number that they know every property developer‘s aiming for. So I'm going to ask you the question, mate. What is the typical profit-on-cost percentage that every developer is aiming for? 

Usually around the 20% mark.

20%? It's a universal answer. 

Everybody comes back with this. So let's use that 20% benchmark and say, ‘Well, if I do a project that is six in size, then if I sell five, it will pay the cost. And the sixth one will be owned free and clear‘. 

So then the big question is, ‘Well, how do I do six? How do I learn the skills in how to do six?‘ 

Well, today, it's probably too risky for you, because you haven't done probably development. But maybe you could say, ‘Well, if I know I want to end on six, oh, I'll just learn to do a smaller version of that. So I might do a four. Well, I still don't know how to do a four. So maybe I'll do a smaller version of that. I'll do a two‘. 

And so, what we're trying to do is we're trying to build a roadmap of saying ‘Well, is that a project that is within my reach, within my grasp? Could I do a 1-into-2 or a duplex or something like that?‘ 

And then based on that, can I... Remember how I said do one thing really well and really, really deepen the knowledge [on that]? 

If we keep applying the lessons we learnt to have that project and then step up a deal size, what I did in that duplex, I can now do to a triplex or a four-pack and use the exact same skills, the lessons that I learnt—I'm going to apply them. [And] I'm going to get better and better at doing that. Alright, so I'm going to do a two-pack, a four-pack, [and] a six-pack. 

And so within three deals, I'm at the potential of actually owning a property outright. 

So repeat, rinse and repeat. Now, if you do that, there's a little bit of magic within the magic. 

You only pay tax the day you sell the property. So that last one, the sixth one that you hold, you have not realised the profit yet. Now, because you've not realised the profit yet, you might sell it in 20 years‘  time or 30 years‘ time, [and] you'll pay tax then. But until then, you've got 100% of the profit that you've got within the property, and that 100% of the profit is actually growing. 

If you sold it today, you'd have to pay GST, you'd have to pay company tax, you'd have to pay income tax, and so that 100% gets whittled down really quickly to about 55%. So instead, you keep it. You don't cash in day one. And now 100% is growing with the market. 

So now you've got your asset base, your capital growth is growing, your rent is going to grow, because that will also grow with the market over time. So you've manufactured the profit, and then you've stacked the capital growth and the cash flow on top of that. Alright? So that is squeezing the lemon hard, my friend.

Thank you to Rob Flux, our guest on this special episode of Property Investory.