Join us as we discuss a case study wherein one of Loo’s clients purchased a property at just below market value in Brisbane, and it rose nearly $100,000 in value plus generated $50,000 in organic equity in just three months! If you’re an investor in Brisbane, you’ll be interested to hear Loo’s insights on one of the best suburbs for investment in north Brisbane. 

Investors everywhere will be interested to hear his ideas on how to navigate needing to increase a long-term tenant’s rent to market value, yet still retaining the star tenant. It may be a tricky situation, but Loo has some tried and tested tricks up his sleeve to make it fair for all, and most importantly, profitable for you.

Timestamps:
01:59 | Booming in Boondall
04:01 | Trustworthy Tenants
07:37 | A Double Edged Benefit
08:24 | Communication is Key
12:07 | Have the Equity, Whether You Use It or Not
14:08 | Buffering, Please Wait
17:55 | How To Play Leapfrog
20:10 | Help, My House is Teething!

Resources and Links:

Transcript:
Simon Loo:

[00:07:13] Even though this one wasn't super, super below market value— we bought this property in very, very early January— and even now, it's already experienced around about, I would say, somewhere between 20 to 25% of organic growth, in terms of how much equity that my client is actually extracting from this house. 

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 Invest Like A Pro presented by House Finder we’re chatting with founder and buyer’s agency director, Simon Loo. He shares the story of his client who gained $50,000 in equity organically in just a few months. Let’s find out how you, too, can experience up to 25% equity gain before the season even changes!

Tyrone Shum: 

Loo proudly explains the success his client has achieved with a house in the north of Brisbane, close to the CBD.

Simon Loo:   

[00:00:33] This particular client was based in Sydney. Like a lot of my clients, they had that initial goal of wanting to build long term wealth and achieve passive income, so they can quit their jobs. That's a very common theme with a lot of my clients. And when we set out looking at properties, we obviously decided Brisbane was going to be the best place to achieve immediate growth and immediate performance, with both cash flow and with the property. The market's just increasing in value organically as well. 

[00:01:15] When we started targeting areas, obviously, we had the budget in mind. We were looking at a number of options on the ground, but we ascertained that a particular area on the north side of Brisbane would have been the best place for this particular buyer to get into, based on her budget, based on her requirements and so forth. So after quite a bit of searching, we had a couple of options. One of the options didn't quite hit the mark in the sense that the house needed a lot of work. It was very rundown. It had, I believe, some termite activity as well, so we immediately passed on that one. 

[00:01:59] But then I got access to a property. I can even reveal the suburb, in a suburb called Boondall on the north side of Brisbane. The property is approximately 18 kilometres to Brisbane. So quite close, really good position right near the shopping centre, right near Boondall train station, right near several parks and schools as well. And we picked it up. It was a three bedroom, two bathroom, two garage house over 600 square metres. So it ticked a lot of those boxes, just a typical sort of investment property. 

[00:02:44] The benefit of this house as well was the owner actually spent quite a bit of money renovating the house. So it was new paint, new carpets, new security screens, new blinds, smoke alarms. He even even had a brand new bathroom, a new ensuite that was added. New fans, new LED fittings, all that kind of stuff as well. So basically it was just buy and rent. It was a complete no brainer.

Tyrone Shum:   

[00:03:13] Why was the vendor selling this particular property?

Simon Loo:   

[00:03:16] The property was already tenanted as well, that was another huge bonus. Now, this particular seller was liquidating assets. So he or she must have been in a position where they maybe over-committed themselves in other areas in life financially, and they just had to get rid of some assets to, I don't know, maybe pay off the bank or get themselves in a position that was a lot less risky. But the property was rented to very, very, very long term tenants at $405 a week, which was below market rent. When we did the appraisal at the time it was about $450 a week. So [a] huge difference. 

[00:04:01] I see that a lot— landlords, when they have really long term tenants, they choose not to increase the rent on them. Because if they're looking after the place and they're paying rent on time every single week, then sometimes increasing the rent can work against you as a landlord. But I would say that kind of difference is a little bit too much. It's important to stay at market rent, but to increase every single year obviously is not going to end well for most landlords. So, irrespective of the lower rental amount, the client that bought the property was enjoying cash flow from day one. Even at that price, even at that rent in this current market, it was definitely still cash flow positive, based on the fact that interest rates were around about 3% or less. 

[00:04:54] So a typical house, good area, good cash flow and what we paid for it was, I would say, somewhere around eight to 10% below market value. So not [a] huge amount below market value. But it definitely ticked a lot of the other boxes that we talked about—being rentable, being good property, good location. And this particular area Boondall, if any of the listeners know, is getting absolutely smashed at the moment. If you just go on realestate.com.au, anything that hits the market is literally selling within hours. If it even hits the Saturday open, it's gone. 

Tyrone Shum:   

[00:05:34] Wow! What's so special about this particular area that is actually driving the interest?

Simon Loo:   

[00:05:40] Being only 18 kilometres from the city, it's considered quite a typical sort of family friendly suburban area. But most importantly, it's quite affordable. For a typical house currently in this current market, you might be looking at around about the sort of $600,000 or below mark. And in that price range as well, like if you're a first time buyer, you have access to a lot of government grants, a lot of first time buyer grants and things like that, as well. So I think that's also an appeal. 

[00:06:21] There's some decent schools in the area as well. So young families are looking to get themselves into this market with a long term aspect of establishing a family home in this area. And you've got access to a lot of things. A lot of shops, big shopping centres, parks and transport options, and reserves and things like that as well, you're not too far from the water. So I think there's just a lot of that kind of livable appeal in this particular area. 

[00:06:58] That's representing growth that's happening right now. Like I said in previous podcasts, a big focus of ours [is] off market properties, properties we can buy cheaply, properties we can buy below market value. So even though this one wasn't super, super below market value— we bought this property in very, very early January— and even now, it's already experienced around about, I would say, somewhere between 20 to 25% of organic growth, in terms of how much equity that my client is actually extracting from this house. 

 

[00:07:37] So when we bought this property, I won't tell you the exact figure, but it was in the very low fives. And when it got revalued very recently, it revalued around about the $600,000 mark. Without being specific. A lot of that was— obviously, we bought a little bit below when we did the comparables, when we bought it it was probably worth around about the $550,000 mark. And the extra $40,000 [or] $50,000 on top has been organic. It's kind of like a double edged benefit, not a double edged sword, but a double edged benefit that we're buying these houses that are inherently good deals on the get go. But also being able to enjoy that organic growth. 

[00:08:24] When we pull that equity out just three or four months down the track, it's usable equity. $80,000 [or] $90,000 equity, $70,000 equity is definitely enough to help you buy the next one, and the one after that. And with the cash flow as well, the lease renewal is coming up. So obviously, when it comes time for lease renewal, we'll probably bump that back up to market rents. And that will sort of level out the cash flow a little bit as well. But I think $50 a week over a four to five month period is not a huge sum, in terms of being able to buy something that you can pull out $70,000 equity from.

Tyrone Shum:  

[00:08:24] I was gonna say, how do you think the tenants might react? Because that's quite a big jump, $50 per week increase. Most of the time, I've only done $10 to $20.

Simon Loo: 

[00:09:01] In the process of doing the due diligence for this property, part of what we do is if the property is tenanted, we actually reach out to the tenants and go, 'In this situation, it's clear that you guys are paying well below market rent, which is fine, you've been in there for a very long time. You've got a landlord that has definitely looked after you but obviously this landlord is letting go of this property now to us. Now we want to be fair, we don't want to increase your rent above and beyond market. But I think what's fair to both the tenant and the landlord is if you started paying rent that was at the market rate.' 

Coming up after the break, Loo expands on the various options landlords have in the current market... 

[00:11:23] It's a factor that I think even in this particular market, around the Boondall area, the vacancy rate and the demand for rental properties is so huge as well. 

He reveals the missteps he sees buyers taking in a seller’s market...

[00:16:22] You're hearing about these stories left, right and centre: people buying a property and then six months later they make a couple of hundred thousand dollars by selling it. A lot of people get carried away and they go, 'You know what? I want to make as much as possible'.

He shares his advice for buyers purchasing a property that needs renovation.

[00:20:29] When you buy any house, you have to spend money to clean it, to do the yard up, maybe it needs new curtains, maybe it needs new taps or whatever it is. All that kind of stuff costs money. 

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

Loo demonstrates how he would deal with raising rents for long-term tenants by using comparable properties, while still honouring both the tenant and landlord.

Simon Loo:   

[00:10:02] It's very easy to find, obviously, you just go on realestate.com.au and see what kind of properties are renting and for how much. So when you kind of presented to that option that we go 'Look, okay, we've got to increase your rent to market rent. But we still want you to stay, we love the fact that you guys are looking after the place as well'. From the renter's perspective, from the tenant's perspective, if they don't accept it, they're gonna have to go out and find a new place to live in anyway. In which case, they're going to have to pay market rent anyway, if they want the same kind of product. 

[00:10:37] Also they're unfamiliar with the property, they're gonna obviously have to move, they're going to come across a landlord that may not be after like a long term tenant or maybe there might be issues there. But basically, it's just a lot of risk factors for the tenant themselves. Now, as landlords, we don't need to take advantage of that risk factor for the tenant. But I think it's just fair for everybody if they're paying market rent at the end of the day.

Tyrone Shum:   

[00:11:05] Yeah. And that definitely makes sense. With a tenant, if they're just already comfortable where it is and they go, 'Okay, by the time I go and move, the cost of actually finding another place, the time and effort, it's too much of a headache...' Just pay an extra $50.

Simon Loo:   

[00:11:19] Yeah, exactly. And it's a factor that I think even in this particular market, around the Boondall area, the vacancy rate and the demand for rental properties is so huge as well. But from purely a landlord perspective, if you've got a tenant that's refusing to pay market rent, it would not be difficult to replace that tenant. Except for obviously in periods like December or anything like that, like January. But if it's just a normal period of time, during the year, in this current market, it would not be difficult to find a tenant who's willing to pay your market rent, not even above. So I think from an investor's perspective, or from my client's perspective, it was a no risk situation.

Tyrone Shum:    

[00:12:07] Excellent. So I guess with this particular property, with drawing the equity out and so forth, how it's just moved so quickly, and so organically— this is not a typical example that happens all the time. But I'm assuming that the client has been extremely happy with this kind of situation. What do they need to do in order to be able to extract this equity out?

Simon Loo:   

[00:12:29] Well, that is really a question for the mortgage broker, to be completely honest! It comes down to, obviously, their serviceability, it comes down to what other debts or assets that they have at the time. For this particular client, again, without going into too much detail, they were already in a position to buy multiple properties in the first place. So obviously having this equity boost is just going to do a couple of things. First thing is to minimise their risk. Technically, if they had to sell this house today, they would make a nice tidy profit out of it, just from the organic growth that's happened. But I guess more importantly, moving forward, if they were to pull the equity out, they're really just pulling the equity back out to the same value as what it's currently at. So they're not over leveraging or anything like that. 

[00:13:23] For these guys, I think it's just a matter of having that equity, whether they use it or not, sitting there in their offset account, to help them progress to the next house and having enough cash flow as well to not have to worry about the house being negatively geared or impacting their lifestyle or anything like that. I think it's a really good property for these guys to leverage off and to expand their portfolio on. The fact that the physicalities of the house as well— being newly renovated, tenanted already, good area, good aspect, good brick foundation kind of property— minimises a lot of risk to continue borrowing, and to continue buying more properties. 

[00:14:08] With that said, though, I do need to tell our listeners, it's probably a good idea at the moment to not over leverage, to not borrow as much as you possibly can. I think there's a lot of people out there at the moment that are, again, having a lot of FOMO and they're feeling like they want to take advantage of the market or they're missing out, it's growing. I see a lot of people doing 100% loans. Even 95% loans I feel is quite risky in this current market, especially given what's happening as well in the economy. It's really important to have a bit of a buffer, it's really important to just ensure that you're not over-risking yourself, the cash flow makes sense, everything makes sense. 

 

[00:14:56] If you were in a position where, let's say, the next six months, you might lose your job— you're not in a position where you're financially struggling with all this debt and repayments and things like that as well. And also anticipating potential interest rate increases. I think it's really important to think that the economy is definitely recovering, in Australia at least— that might pave the way for interest rate increases in the near future, not immediately. If you're holding a property for five years or 10 years then you're probably going to be exposed to high interest rates. So it's about kind of anticipating what is likely going to happen in the near future as well.

Tyrone Shum:   

[00:15:40] That's really important that you've mentioned that and I think that's very investor-savvy advice, to make sure that you do have buffers in place. Because the last thing you want to do is start investing into all this and then you go hard at investing but then you don't have anything to cover for tough times, challenging, uncertain times. Especially in a pandemic. Everyone thought 'Wow, things are just gonna go backwards' and luckily it didn't— touch wood— but in that short period there was a lot of uncertainty and some people unfortunately just didn't have any buffer in place, and then tough times came along.

Simon Loo:   

[00:16:16] Definitely. And I think there's the opportunity there. You're hearing about these stories left, right and centre: people buying a property and then six months later they make a couple of hundred thousand dollars by selling it. A lot of people get carried away and they go, 'You know what? I want to make as much as possible'. But that's the thing about investing— in anything, really— you never know when the top is, you never know when the bottom is. Things can change at the drop of a hat. A new government policy being announced. COVID or some other thing taking off again. And you just don't want to be stuck whenever something like that happens so it's really important to, again, just be sensible about it. Yes, invest, invest logically, buy properties, don't overextend yourself, don't pay over what a property is worth, and just maintain a bit of a buffer. Whether it's a cash buffer, whether it's a borrowing buffer, just to ensure that if something were to happen then you've got time to make sensible decisions. You don't panic sell or you don't do anything illogical, if that makes sense.

[00:17:30] That's what I'm telling these clients. These clients are in a great financial position, they've bought a great property, they've got a lot of equity just sitting there organically. And the fact that we bought a good deal and they're using that to leverage the next one. I tell pretty much all my clients this: there's no need to just go absolutely crazy and buy several properties within a month. It's about balance as well.

Tyrone Shum:   

[00:17:55] Which is really, really important, I totally hear you on that side of things. I'm just curious then, for people who are looking to build a portfolio out like this, using this strategy to draw out equity from all this organic growth— how would they be able to leapfrog from one property to another, then, if they do just take a step back and go, 'Okay, maybe this is not the right time to buy'? Even though the market is booming. It's a bit of a counter theory then to maybe what we should be doing then.

Simon Loo:    

[00:18:30] There's so many variables, right? The first thing it comes down to is an individual's personal circumstances. How much money they're earning, how much debt they already have, good debt versus bad debt, what their goals are. If their goal is to achieve x amount of passive income within x amount of years, then as long as you're moving towards that goal, that's progress. Just to be blunt, it's important not to get super greedy. It's important not to get greedy in the first place. As long as you're progressing, as long as you're making money, as long as you're investing and doing the right thing, I think that's... I don't want to say good enough, but that's good already. You know what I mean? It's not necessarily about getting as much as possible as quickly as possible, because that's where a lot of people fall out. 

[00:19:28] For this particular client they're in a very good cash flow position, a very good income position. This is their... from memory, I think it's only their third investment property. So given their income, given the amount of debt they have, given the amount of cash flow they have across these properties— they're good properties in good areas, rented out, bringing in a lot of cash flow— and their overall LVR, or their loan to value ratio across their portfolio is quite low. It's not like 95% or anything like that, or 90%. Then you're more than comfortable to buy another property to add to your portfolio without over risking yourself. 

[00:20:10] Having a cash buffer as well is super important. I see a lot of people with, let's say, $100,000 in savings, and they spend $95,000 on a property, leaving them with very little to deal with some teething issues on that house. Which all houses have. When you buy any house, you have to spend money to clean it, to do the yards up, maybe it needs new curtains, maybe it needs new taps or whatever it is. All that kind of stuff costs money. And some people, if you don't even have enough money to do those teething issues, then that's probably a good sign that you should probably take a step back, and just to recoup your funds. Save up a bit of money, get a bit more equity out before you move on to the next one. 

[00:20:54] Sometimes it's a waiting game. I think that's the beauty of investing in property as well. It's a very long term thing. And it allows people— if you're patient enough— to make calculated and sensible decisions. It's not something that you have to be thinking about all the time. You can kind of just take a step back and let things grow naturally.

Tyrone Shum:   

[00:21:18] Absolutely. Coming back to the property that you just recently helped your client purchase, was there any other potential add value type of things that they could do to that? Even though the previous owner already did quite a lot of renovations and threw in quite a lot of things without really asking, it came with it when they purchased, [were there] other potential development opportunities where they could subdivide the land? Because it was quite a big block size.

Simon Loo:   

[00:21:50] It was 600 square metres. Look, it's not subdividable. With that said though, there was one opportunity for the property to add value. And that was a completely separate two car garage to the house. Now this two car garage was brick, it was basically just a separate building. And you could have easily converted that into an extra living space or a little studio or a little granny flat in the future. So that wasn't something that my client did immediately because the house was already tenanted. But that would have been definitely an add value opportunity as well. Just something small like that you can do stuff to. 

 

[00:22:41] It is worth mentioning that Boondall is in the city of Brisbane; Brisbane City Council. Which means that if you were to put a granny flat up, you wouldn't be able to rent it out separately. But I will say that there is a massive demand on the ground for these types of rentals where there are two separate living spaces. Because the trend at the moment is large families or extended families living under the same roof. 

[00:23:06] There is also another trend where people are working from home, as I'm sure most listeners are aware. And having that separate space, completely separate where they can set up their own work from home office or somewhere where they can even have clients come through as well without impacting the main house is getting more and more desirable. And that represents higher rents as well. So just because there's these granny flat potentials or a separate living area potential where you may not necessarily want to rent out separately to separate leases, there is still a big demand for this type of property. 

Thank you to buyer’s agent Simon Loo, our guest on this special episode of Invest Like A Pro presented by House Finder. 

Also, for being a loyal listener of the podcast, I’ve asked Simon to offer a free 1 hour strategy session normally valued at $500 to help you put together an actionable property plan.

To get your free strategy session, simply visit housefinder.com.au and fill out the contact form, or call Simon directly on 0415 626 342 and quote “Property Investory”.