In this episode he’s over west in Erskine, south of Perth. Western Australia is experiencing a rental frenzy where areas are commanding high rents yet rental properties remain in high demand, making it a goldmine for investors. In toeing the line between staying close enough to the city to make use of it but far enough away that it doesn’t feel too metro, south of Perth is the place to be. Loo purchased the property featured in this episode for a price unheard of on the East coast, but it turns out that buying in a lower socioeconomic area doesn’t disqualify you from getting fantastic returns.

Timestamps:
00:31 | The WA Rental Frenzy
02:05 | We’re Not All in the Same Boat
05:55 | Location, Location, Location
08:57 | Beautiful Beaches
13:22 | Buying Bargains
14:47 | Reputation
18:06 | Cash Flow and Capital Growth
24:25 | Why Bother?

Resources and Links:

[00:03:26] And when people can't afford $1,000 a week, when they can't afford $700 [or] $800 a week, they're looking at what used to be $400 a week options. And when you've got a massive amount of people looking at a $400 per week option, then it might ultimately end up being a $500 per week.

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 we’re chatting with founder and director of House Finder, Simon Loo. He takes us on a tour of the rental frenzy just south of Perth, where rental demand can easily get $500 a week for a $395,000 property. With prices half of those closer to the city, the southwest WA market is set to become an investor’s dream.

Tyrone Shum:   

Since Loo has been focusing on Western Australia, he’s accumulated some interesting examples of what's been happening on the other side of the country. His latest case study emphasises how rental appraisals are being blown out of the crystal clear waters that surround the idyllic area.

Simon Loo:   

[00:00:31] I think one of the things that I've been recently quite surprised with is... 

  

[00:00:39] We've all heard in the media how tight the rental market is at the moment, the pressure of rents rising. And I think in Western Australia, or parts of Perth, parts of Western Australia, like in suburbs close to Perth, the examples of this happening is probably one of the best examples that I'm seeing at the moment around the country. 

  

[00:01:08] Some of the houses we're buying... 

  

[00:01:10] When we look at a property or any property, we obviously come up with a rental appraisal. Generally, with rental appraisal, we give a range. So let's say we go, 'Okay, this house will rent for anywhere between $430 to $470 a week', right? $470 being high, $430 being conservative. 

  

[00:01:33] And we're finding as soon as these properties hit the market, they're actually renting for, like, 10% or 20% more than the highest range. 

  

[00:01:43] And it's renting for that much more because the landlord's, like, being deliberately, like, they actually price at, let's say, $450 a week. But just because of the amount of competition, the amount of people applying, automatically, every single property just becomes a bidding war. To the point where these properties are renting for ridiculous, ridiculous money.

Tyrone Shum:   

[00:02:05] There must be a huge demand, then, for rental properties in Western Australia. Why do you think that has come around the corner now? Because we've been seeing [the] majority of the markets all across Australia, from [the] eastern coast side, where not only [have] rental [prices] been going up, but prices have sort of slipped back in terms of purchasing, sale prices of properties, but we're seeing something completely different happening over in WA.

Simon Loo:   

[00:02:29] I think we tend to forget, as investors, and I know a lot of listeners here already have properties and equity, and may be professionals with savings. There are a lot of people out there at the moment that are actually struggling. 

  

[00:02:46] We're talking about, like, a standard situation where it's, like, a working couple with young kids, they don't have very much [in] savings. And they need a place to live. And it's that kind of pent up demand. 

  

[00:03:05] And also, I think it's been made more apparent when things are starting to become more expensive now. So not only everyday things due to inflation, but obviously things like interest rates rising, it's just created a huge demand for affordable housing within majorly built up areas. 

  

[00:03:26] And when people can't afford $1,000 a week, when they can't afford $700 [or] $800 a week, they're looking at what used to be $400 a week options. And when you've got a massive amount of people looking at a $400 per week option, then it might ultimately end up being a $500 per week. 

  

[00:03:43] I know that sounds pretty bad. But $500 a week is still affordable for most income earners, even lower income earners. If you're talking, like, a, let's say, dual income household. And it's a house with maybe three or four bedrooms, where they can house their kids as well and all that. 

  

[00:04:05] I've always, always been a huge advocate of affordable housing. Because you're insulated from downturns. Not entirely, but to the point where whether if you're in an economy or in a situation where people are unsure whether properties are going to go up or down. If you're in an affordable housing area, you just can afford to sit back and see what happens. 

  

[00:04:44] I think that's so important, because a lot of people, as we're starting to realise now interest rates are going up, next year, a lot of these fixed rates are going to turn into variable again. There's going to be a lot of people caught out, unfortunately. 

  

[00:04:59] So these areas that are not only commanding high rents, but also consistently in demand for rentals, investors should be really paying attention to this kind of stuff at the moment. 

  

[00:05:13] One of the examples is in a suburb called Erskine, which is south of Perth. It's actually quite far south of Perth. It's kind of like an area where it's kind of half coastal and also within driving distance to Perth, I would say [it] takes maybe 30 [to] 40 minutes to drive to Perth. So if you look at it from a Perth perspective, it's actually quite far out. It's not a city, it's not an area that's quite accessible to the city.

Tyrone Shum:   

[00:05:55] So I just want to understand Simon, why did you choose that particular location for looking at purchasing for an investment for one of your clients?

Simon Loo:   

[00:06:05] This area and surrounds, we're extremely active in at the moment. And the reason why we're picking this area is because this is where people are choosing to live. These are where the owner occupiers [are], these are where the young families are going. 

  

[00:06:21] And I'm not saying young families and owner occupiers aren't living in Perth, so but they're now choosing to live further away and near the water. Because not only is it a lifestyle decision, it's nice, [it's] got more like a holiday feel, that type of scenario. But it's actually more [that] affordability is so big at the moment. 

  

[00:06:43] So think about any capital city where you can still... let's say you're buying. Because the Erskine house, we actually paid $395,000 for it. And it's a four bedroom, two bathroom, two garage, brick house, about 20 [to] 25 years old, big land like about 600 square metre land. Nothing wrong with it. It doesn't need any reno. 

  

[00:07:10] So think about even [in a] capital city where you can still buy a property like that, that's maybe five minutes' drive or a five minute walk to the beach, like a proper beach, and also within 30 [to] 40 kilometres of the city. It's an extremely limited proposition. So I think there's a bit of a scarcity factor there as well. 

  

[00:07:30] But we're buying heavily in these areas because we've just noticed that there's like, if you're new to Perth, and you don't have a lot of money, or if you're in Perth and you don't have a lot of money, these are where young families and owner occupiers and first time buyers are looking to set up their life, their family life. 

 

[00:07:52] And the equivalent of this kind of suburb to let's say within Perth itself would be, like, a low socio area. Because you can get properties for $300,000 [to] $400,000 much closer to Perth. But now you're starting to look at suburbs that are probably a bit lower socio.

Tyrone Shum:   

[00:08:14] So if you weren't able to go, like, 30 [to] 40 minutes outside of Perth, get something that's close to the water [in] very good, solid condition. And you're to bring that kind of quality back into Perth. How much would you be paying for something like that in Perth?

Simon Loo:   

[00:08:33] I would say at least $700,000 [to] $800,000. That type of thing.

  

[00:08:41] And that's a lot of money. I mean, it's, like, double.

Tyrone Shum:   

[00:08:46] Just to be close by in Perth, you know. Unless you're working in the city and you need to be in the city. But due to COVID and people working remotely nowadays, is it a necessity? Not really.

Simon Loo:   

[00:08:57] And I think a lot of listeners may agree, especially if they know Perth. A large appeal of living in Perth is to be close to the beach. Because the entire coastline is beautiful beaches. And the beaches, there are so many. Like, I'm from Sydney and I go to Brisbane a lot but the beaches are completely different. I think maybe it's because it's facing west and the sun goes down so you see these amazing sunsets. It kind of creates a much more scenic scenario. 

  

[00:09:34] So coming back to Erskine, $395,000. We anticipated the rent to be about $450 a week. That's what we presented to the buyer. And a $450 per week rent on a $395,000 purchase is amazing cash flow for a house the capital city anyway. 

 

[00:09:51] The house settled. Within two days, the house rented for $520 per week. And it wasn't because the buyer was like, 'Let's shoot for $520, let's see if we can get greedy and get the rent that we want'. It's just the fact that as soon as it went online, so many people came in and applied for it, and it just ended up being $520.

Tyrone Shum:   

[00:10:17] What kind of tenant took this property or rented this property out?

Simon Loo:   

[00:10:22] That I actually do not know. 

Tyrone Shum:   

[00:10:25] I'm just curious if it was, like, a family?...

Simon Loo:   

[00:10:28] It will most likely be a family because as part of our process, we advise our clients on how to have good tenant selection, and what to look for, and all that kind of stuff. So I would say most likely it was going to be maybe like a young family with a couple of kids. 

  

[00:10:50] By and large, maybe, like, 90% of the properties, we buy our tenants into these types of demographic, this type of demographic. So let's assume it's a good tenant, because a lot of people applied as well. So I'm sure that within those people, there's some not great, some good, [it] wasn't really just about the price. 

  

[00:11:09] But yeah, decent tenant, really high cash flow. And it's becoming increasingly important— we might talk about this on another show as well— it's becoming increasingly important that the cash flow that you get from a property is more is more of a priority than it used to be.

Tyrone Shum:   

[00:11:35] To be able to cover the cost of holding or servicing, if you've got a loan to be able to cover that, because the challenge is that the market is changing now.

Simon Loo:   

[00:11:45] It's changing. And like I've always said from day one, property is a waiting game. You'd want to buy something for $1 and sell it for $2 or $3. And the time it takes to get to $2 or $3, nobody knows. So your job as an investor is just to be able to wait until that happens.

Tyrone Shum:   

[00:12:05] To be able to wait you've got to be able to service it or hold on to the property.

Simon Loo:   

[00:12:09] And from that you need cash flow. So the cash flow doesn't need to be excessive or exorbitant, it's not about making an extra $100 a week as you hold this property until you sell it. But it's about just making sure that in whatever situation you're in— employed, unemployed, COVID, no COVID, good economy, bad economy— it's just in the background, doing its thing. And it's not affecting your lifestyle, your family. 

  

[00:12:34] And the worst thing I've seen, like, we all have regrets, right? A lot of people say they regret not buying earlier. Probably a more worse regret would be, like, buying a property and then selling it prematurely.

  

[00:12:52] I mean it happens, obviously, and a lot of people are in situations where they have to be forced to sell. Let's say they lose their job, and they've got a property that's negative geared costing them several hundred dollars a month or a week, even to hold on to. If you lose your job, it's only going to be a matter of time before you need to be forced to sell that property. So you never want to ever want to be in that situation. 

Coming up after the break, we venture slightly further afield…

[00:14:47] Another example [is] a house in Greenfields, I don't know if people know Greenfields but it's all the way down in an area called Mandurah in Perth. 

We find out what the most important thing really is…

[00:18:06] You'll hear a lot of people say cash flow is not the most important, the most important thing is capital growth. 

He explains why not having a choice sometimes works out for the best.

[00:25:07] But I knew I didn't care. Not only did I not care, per se, but I didn't have a choice.

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

Coming back to the house, Loo reveals the surprising figure that its valuation came in at.

Simon Loo:   

[00:13:22] [The] Erskine house that we just talked about, so we bought it for $395,000 [and it] rents for $520. We did a valuation, and it came back at $500,000. 

  

[00:13:33] So again, maybe for another episode, but equally as important when you're buying in this market as well— wherever you're buying, it doesn't matter if you're buying on the water in Sydney, or if you're buying these houses in Perth— the norm is about getting bargains. You should be shopping for bargains, you should be getting off market, you should be looking for distressed sellers. And this is one of the ways to increase yield as well. 

  

[00:14:01] So let's assume this house is not worth $500,000. Let's assume it's worth, let's say, $450,000 or $470,000. On a $470,000 purchase, let's say you paid market value for it. At even $520 a week, the cash flow is good, but not, like, amazing. So buying bargains will also help get you higher cash flow. $395,000 on $520 a week, that's great. That not only absorbs the interest today, but probably a few low rate rises as well. And ultimately, that's what's gonna enable you to not only hold on to this house, but also buy more.

Tyrone Shum:   

[00:14:39] And that's the key thing that I think we've talked about on numerous occasions, is your entry. You've got to buy well. You're not going to make your money when you purchase it.

Simon Loo:   

[00:14:47] You realise it when you sell one day. Another example [is] a house in Greenfields, I don't know if people know Greenfields but it's all the way down in an area called Mandurah in Perth. 

  

[00:15:06] Now, Mandurah and Greenfields has not had the best of reputation in the past, I'll be honest. It's one of those areas where it used to be, and maybe even still is in some pockets, a little bit low socio. But this particular buyer, I've recognised that if the fundamentals on the ground are right, sometimes these are the areas where you can set yourself for a lot of growth. 

  

[00:15:44] So another thing about Greenfields and Mandurah is that we are noticing a larger influx of these owner occupiers and first time buyers moving in. So that's why we're in this area. And if you look at the map, geographically, you're right next to areas like Horsehead, which is, like, a really nice waterfront feel. You've got canal houses, you've got really nice beaches and facilities and things like that. So from my perspective, it's only going to be a matter of time before these areas start pumping. Where this happens, nobody knows.

Tyrone Shum:   

[00:16:21] It's the neighbouring suburb. So if you've already got an injection suburb that's already got a good value, then it's only a matter of time that it just falls on. What's it called, the effect...

Simon Loo:   

[00:16:33] The flow on effect. 

  

[00:16:39] Where basically you get one suburb go up and then just flows on. We see that in Melbourne. Like, I always say this, Frankston is a really good example. Frankston is on the water. It's right next to Seaford. It's right next to a lot of the suburbs on the beach, on the water, that's super expensive. But for some reason, Frankston in the past has been considered too low socio or left behind. 

  

[00:17:03] I think Dee Why is a good example in Sydney. Dee Why, if you look 20 years ago, the difference between Dee Why and Freshwater, or anywhere along the northern beaches, was night and day in terms of perception. All it is is perception. 

  

[00:17:23] But now it's kind of like the same as any of the other suburbs, like, that low socioeconomic element has gone. And part of the reason for that is people were thinking, 'Wait, hold on, literally a couple of hundred metres down the road, the price differences is here and here. Maybe we should look at it. It's not that bad, is it? It's not like people are getting stabbed every day on the Esplanade or anything like that. Is it real? Is it just perceived?

Tyrone Shum:   

[00:17:53] It's like any market when you think about it, it is perception at this point in time, like people perceiving that things are really bad when interest rates gone up. And then that's obviously driven some prices down. And hence the reason why there's potential opportunities and bargains.

Simon Loo:   

[00:18:06] So cash flow is very... like, you'll hear a lot of people say cash flow is not the most important, the most important thing is capital growth. The most important thing is actually both. You can't have capital growth without cash flow, because you can't afford to wait until the capital growth happens. And without cash flow, you can't build a large enough portfolio of properties to actually make meaningful returns. 

  

[00:18:30] Because if these houses double, we paid $300,000 [or] $400,000 for them. Yeah, you make $300,000 and $400,000, which isn't a big deal in the scheme of it. But if you've got several of them, that's where it adds up. 

  

[00:18:45] So it's kind of like, how do you hold by that much? How do you hold on to that much until that happens is what any investor should be looking to achieve.

Tyrone Shum:   

[00:18:53] So can we go back a little bit just to talk a little bit about Greenfield, the house there? What was the criteria behind why that purchaser felt that it was comfortable? Because as you said it was a little bit of a lower socio economical area. And why did they not choose something closer or similar to Perth?

Simon Loo:   

[00:19:15] Greenfields and Mandurah, there's several parts to it. Like, there's parts that we definitely avoid. And there's parts that we don't have any issue with buying in. 

  

[00:19:23] Now, this particular investor, even though it was his first time— it was a couple, sorry, it was their first time buying property— they were quite comfortable with me educating them into what area or what type of properties to buy.

  

[00:19:46] I don't say that I've got a crystal ball or anything. But at the end of the day, whether we're buying in Greenfields, whether we're buying closer to the city, whether we're buying in a blue chip suburb, it doesn't matter. For me, what's made me and my property portfolio successful is the fact that we're just focusing on getting deals, on getting bargains. 

 

[00:20:11] So we saw this house, we paid $385,000 for it. It's a four bedroom, two bathroom, one garage house on close to 900 square metres. So a really, really large block, very usable block as well, it's got good side access, it's got a lot of space in the back, if you wanted to add a granny flat, it's entirely possible. [It's in] a good part as well, you walk into everything, major shopping centres. It's not walk to the beach front. I mean, it is, it will be a very long walk. But it's maybe five minutes' drive.

Tyrone Shum:   

[00:20:49] Still pretty close.

Simon Loo:   

[00:20:52] So it was a good property. And like, internally, externally, there's nothing wrong with it. The house is maybe about 20 years old, a little bit of wear and tear. I'm actually clicking through it as we're speaking. I'm just looking at the pictures. And yeah, good kitchen, good floors, good walls, multiple living areas, large outdoor patio area, good backyard, that type of thing, very flat level, black backyard. So, like, all those kind[s] of physical fundamentals are ticked. 

  

[00:21:27] But most importantly, we look at value. So we paid $385,000, and a house of this kind of nature on this block size should be selling well into... I would say close to around about the $450,000 ish mark. [That's] the main reason why the buyer and myself decided it was a pretty good deal. 

  

[00:21:53] And, again, we were surprised because we ended up at $370,000, not $385,000. We negotiated some more money off when we did the inspections. But we anticipated the property to maybe rent for, like, $450 [or] $460 a week. 

  

[00:22:12] And exactly the same thing happened to Erskine. And then it just ended up renting for $500 a week, pretty much immediately. Literally on the day of settlement. Because we instructed the property manager to advertise the property prior to settlement. And on the day of settlement, there was a tenant that was moving in at $500 a week. 

  

[00:22:47] 7% yield on a standard house, no dual living, no weird sort of set up with two kitchens. No boarding room kind of setup or anything like that. No dual occupancy, it's just the straight normal four bed house, to a good family that's renting for 7% rental yield. From my perspective, that's like bulletproof. 

  

[00:23:21] In an area where vacancy rates are also less than half a percent. If I was starting again, I wouldn't mind holding a dozen of these types of properties. And you just sit there and wait.

Tyrone Shum:   

[00:23:42] That's the way to go. I think there's a lot of gold in what you said there. And I think it's moving with where the market is, the trend. Obviously, not everyone has a crystal ball, and no one can predict what's going to happen. But once again, it's almost repeating the same process that you did back when you purchased your properties over in Brisbane, in [the] Logan area. 

  

[00:24:02] Because the thing is, you were looking at cash flow, and you're looking at buying them at bargain prices, and you purchased enough of them that over a period of time, a decade and a little bit over a decade, they started to move and they've moved substantially. 

  

[00:24:15] And it's the same process and there's a formula there that you're able to follow and other people can also learn and follow as well. And that's a proven formula that works.

Simon Loo:   

[00:24:25] That's a very good analogy, because when I remember when I first started buying my initial portfolio that got me to quit my day job at the time. I was paying 6% [or] 7% interest rates, before they gradually came down. So back then— especially when I was buying heavily heavily in Brisbane— there [were] no signs of growth. People were talking about Logan, people were talking about Ipswich, they were talking about Moreton Bay. The narrative five [to] 10 years ago was that it was just like, 'Why would you even bother looking at these areas? [They're] never going to grow. You're wasting your time. The tenancies are bad', all that kind of stuff. 

  

[00:25:07] But I knew I didn't care. Not only did I not care, per se, but I didn't have a choice. When you're faced with the prospect of 6% [or] 7% interest rates, the only way to get around that is to buy a house at 7% yield, just to offset the interest rates alone. I didn't know, but I had a lot of confidence that these areas were going to shift. It would not stay a $200,000 to $300,000 area anymore. At some point in time. 

Tyrone Shum:   

[00:25:44] I think everyone kind of knows that usually is what happens across the board. It's just when is that going to happen. Because we've seen it happen across every single state.

Simon Loo:   

[00:25:54] And look, I got in very early, like, way before there was any noise of or inkling of the areas like in Logan and Ipswich started to go up. But I don't expect investors to go take that risk, as well, just go completely buy in an area where there's almost zero growth prospects at the time. 

  

[00:26:13] But I think it's also possible to identify areas that [are] at the very start of that sort of, shall we say, boom phase. And the thing that I'll always come back to, that always shows the first sign of that, is when you start getting a massive increase in owner occupier, first home buyer, young family activity. 

  

[00:26:38] Because when they start going in, a couple of things happen. Number one, you know the area, the type of people demographics is starting to change. The lifestyle of this particular type of demographic demands things like nice cafes [and] nice parks. The quality of the schools. That all changes following the influx of these young families. That ultimately raises the profile of the suburb or the area. 

  

[00:27:19] And this happens much quicker than you think. Like, if I look at Brisbane and some of these Logan suburbs that I bought in where they used to be super low socio, Loganlea and Eden's Landing and Nathania and Crestmead and Marsden. The type of people living there or buying these properties there now are completely different to the types of people that were buying just five years ago. 

  

[00:27:49] Five years ago it would have been a mixture of investors like myself, or, like, maybe like a low income worker, a blue collar worker, something that kind of level, like demographic.

  

[00:28:07] And now the people buying there are like, IT couple professionals, looking at a place to call home. Interstate buyers that are migrating to Brisbane are looking at areas like Loganlea now. Because they're going, 'Oh, wow, not only is it affordable', somewhat still, but you're 30 minutes to the Gold Coast, and then 30 minutes to Brisbane and you've got the Hyperdome, and you've got all these amenities there, and decent schools and all that kind of stuff. So that's where a lot of these areas tend to come on its own. It came out to a point where it's, like, actually a decent place to live.

Tyrone Shum:   

[00:129:02] It's amazing how that can happen. And that's the thing, you can't time it, but you can only wait and see and hold. And that's the thing that we said at the beginning of this. The reason why rental income is important, or cash flow is important, it helps you allow it to better hold on to these properties, which allows you to ride the growth, which is what we've just been talking about this whole episode. So important.

Simon Loo:   

[00:29:31] One thing to take away [for] listeners for this particular episode is that whatever you're doing now, like now is actually a really great time to be accumulating a portfolio. Because we're seeing and getting better bargains. Number one, that should be the norm. [The] number one thing is ensuring that you're not paying retail for any property. 

  

[00:29:48] Number two is focusing on areas that have a very high cash flow, very low vacancy rate to absorb these interest rate rises and possibly what's going to happen in the next one to two years where there's going to be a bit of a global economic crunch, shall we say? Everyone's talking about it looming, looming things happening. 

  

[00:30:14] And also ensuring that they're in locations that are going through, currently going through or will have that potential to gentrify, to change into a better area. And these tend to exist. These are the areas that tend to experience shorter term growth. We also prefer these areas to be near capital cities.

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”.