In this episode he takes us to Port Kennedy in Western Australia, where his client, an experienced investor, got slightly more than they bargained for— in more ways than one! This property was a diamond in the glittering Indian Ocean that it overlooks, and the investor was able to rent it at 20% more than expected. However, as Loo is keen to point out, while it’s important to remember that property investment is a business, there’s a fine line that every landlord needs to draw in the sand.

Timestamps:
00:48 | Diamond Deals
04:42 | The Vulnerability Factor
09:01 | Sinking Supply and Distinctive Demand
16.01 | Values and Rents
11:30 | Opening Up a Cold Can of… House?
12:14 | Cost of Living vs. Wages
16:45 | The Search for Simplicity
22:41 | Doing it Differently

Resources and Links:

[00:19:09] And when we looked at those houses and go, 'Okay, cool, all these very similar houses are under contract now for $480,000. And here we are with this almost identical property that we can pick up for $410,000. That's really the most important thing, that's the most important thing. 

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 heads back west stopping in Port Kennedy. While this latest case study features the typical type of property Loo dives into, including a final sale price $70,000 under its comparables, this one could have easily sold for a lot more than it did! 

Tyrone Shum:   

The client in this study is somebody Loo knows well through their work in the property industry. Knowing his appetite for properties with a strong rental potential, Loo was an easy first choice when he knew he wanted to invest in WA. Thanks to his expertise, Loo was able to bag him a diamond deal.

Simon Loo:   

[00:00:48] He wanted to buy in a very specific area, which was around Rockingham down to the Mandurah kind of stretch, which consists of a few dozen different suburbs. 

  

[00:15:11] But the understanding of my core business, which was all about my main value add, which is more about, again, buying off market, distressed type properties, houses [that are] easy to maintain, and very high yielding properties off the bat. 

  

[00:01:30] He's a very experienced investor, he's got quite a few properties himself that he's bought over the years. Some of that is sold already. He's into investing into a couple of other things like shares and businesses and things like that as well. So he's a well-versed investor, he's not a beginner by any means. 

  

[00:01:50] And off we went searching. We found this property in a suburb called Port Kennedy. The property itself was a four bedroom brick home. Four [bedroom], two [bathroom], two [car spaces], very standard sort of house that was about 20 odd years old. Not super old. [It had a] decent land component, above 600 square metres. We paid $410,000 for the property. When we ran the comps, it was probably worth around about the $460,000 [to] $470,000 [to] $480,000 mark. So it was a solid deal.

Tyrone Shum:   

[00:02:36] Definitely.

Simon Loo:   

[00:02:37] All boxes ticked, it was what I call an all rounder. Do you know how when you were— I don't know if when you were little, if you used to play computer games, like those racing games, where you choose the cars? And you get a diamond based on the strengths and weaknesses. [So] if it's better acceleration, it's worse [at] brak[ing]. If it's better handling then it's worse this. 

  

[00:03:00] And this house is like a perfect diamond. So you've got good acceleration, good braking, good handling. In this case, the house was presentable, nice looking, low maintenance. It was decent cash flow, below market value, good area, all that kind of stuff. 

  

[00:03:26] We paid $410,000, it was about 10% [to] 12% below market value, something along those lines. Now, interestingly— and this is a sign of the times in terms of the rental market— we're hearing a lot at the moment about rents going up. And renters struggling to find places to live in, in most capital cities in Australia. Or they're maybe complaining about the sudden increase in rents. And you see these arguments or forums, on media websites, Facebook pages, things like that. 

  

[00:04:09] The other argument is landlords saying that the cost of ownership, holding properties, is increasing. And also, the laws around rentals are changing rapidly, and it's swaying very much towards the tenant side. In terms of rights and in terms of what you can and can't do. [It] is now very pro-tenant. Which personally, as a landlord, I actually think is the right thing.

Tyrone Shum:   

[00:04:42] I think so too. It has been going on like that for a while. Because you know I'm also a tenant as well. And I'm pro for that as well because there's benefits for that. And it makes it a lot easier as well, too, for us landlords, because then we're giving the onus back to the tenants to make sure they're doing the right thing as well for us.

Simon Loo:   

[00:05:00] I just look at the situation and go, 'Who's more vulnerable?' Obviously, there's a million different circumstances, both on the landlord side and the tenant side. But as a whole, as a tenant, you're probably a lot more vulnerable than the landlord if things change at the drop of a hat. 

  

[00:05:20] Also, I think it's right that tenants should be more protected. But the changes that are coming in are starting to become— at the very least— a lot more controversial. In terms of how, or if you can even evict a tenant. Even if the tenant's not doing the right thing, in terms of maybe not paying rent or maybe even damaging the property and things like that. 

  

[00:05:46] So it's starting to get to a point where where in some cases, I feel like it's starting to become a little bit unfair for landlords as well. But irrespective of that, the main crux of the situation is that rents are going up. And everyone's asking, 'Why is rent going up?' 

 

[00:06:08] I think, for a very long time, in a lot of capital cities— Sydney, Melbourne, Brisbane— where house prices have gone up exponentially, rents have remained relatively stagnant. You get the odd increase here and there and all that kind of stuff in line with inflation. But there hasn't been much change in rents, by and large. There's obviously many examples that there are. But in the cases where it's causing the most uproar, it's been pretty stagnant for a while. 

  

[00:06:43] So naturally, rents are now starting to catch up. As with any boom cycle, when property prices go up in value, rents tend to follow eventually. And especially in the case of what's happening today, with things like inflation, with things like interest rate increases, land tax changes in certain states. [The] cost of building, costs of building materials, cost of tradespeople. 

  

[00:07:10] The ownership of these properties, as landlords are increasing as well. And it's definitely not a case of just passing on that cost to a tenant. But that's one cause. The increased cost of ownership is one cause as to why rents are rising. 

Simon Loo:  

[00:07:30] The other causes are things like purely supply and demand. There's literally very little stuff on the market for rent. And there's a lot of people looking for properties. 

  

[00:07:41] In this particular scenario, when we ran the comparables looking at Port Kennedy when we bought this house at the time, which settled about two months ago, we anticipated the rent to be about $410 a week. So a $410,000 purchase, rent for $410 a week, that's a pretty standard scenario. 

  

[00:08:10] And when we came to the $410 number, we're actually looking at direct comparables that [are] online at the moment for Port Kennedy. Granted, there were very few. The Port Kennedy vacancy rate is, like, half a percent at the moment. It's extremely, extremely low. 

  

[00:08:26] So the property settles, everything goes smoothly. And the property manager advertises the property for rent. And there was a massive, massive influx of applicants. Good applicants, not just really crappy people that couldn't find a place to live in. But just very solid applicants. And the property ended up in just one week renting for $480 a week. 

Tyrone Shum:   

[00:08:58] That's almost a 20% increase.

Simon Loo:   

[00:09:01] And from $410 to $480, just off the back of purely the fact that there's no properties out there, or very few properties out there for rent, and there's just this pure demand of people wanting a house to live in, is the reason why this property ended up renting for that kind of money. 

  

[00:09:20] As a landlord, we look at these properties like a business, obviously. Property investing is a business. And it's not about necessarily purposely charging less rents to be a good Samaritan. It's kind of being fair to yourself as a landlord as well. Because clearly the demand is there. The market rent is what it is, at $480 a week. That's the benchmark. 

  

[00:09:50] And if the landlord went off and [said],' You know what? I don't want $480 a week, I want $520 a week. I'm going to take advantage of this situation', then that would be a problem. That would be completely unfair to the tenant's side if they somehow just took advantage of that level of demand and said, 'Yep, you can rent it, but you're gonna have to pay $520'. 

  

[00:10:10] And he probably would have got[ten] it, for a desperate family that was really super keen to get into this house. But he kind of just let the situation happen by itself. And it ended up renting for $480. Now, conversely, if he started out saying, 'Okay, $410', it would be unfair to the landlord for him to accept that as the market rent as well. Because that's clearly undervaluing what it's actually worth. 

  

[00:10:39] I think at the end of the day, it is a bit of a issue socioeconomically, the fact that rents are rising, but it's not extraordinary in the sense that it's pretty in line [with] what's happened in the past. When these property values go up in value, rents tend to follow. When there's inflation or when the economy is changing, rents tend to go up as well. So I think it's just a natural part of the cycle. 

 

[00:11:08] But I think in this time around, we hear about that a lot more, because obviously, social media and everything is a lot more [common than] 10 [or] 15 [or] 20 years ago, when the last rental boom started in a lot of these major cities. 

Coming up after the break, we dive into the myths surrounding landlords and aim to uncover the truth…

[00:14:18] I think there's a notion as well that landlords make a lot of money by owning a lot of these investments. And while that might be true for some landlords, it's actually not true for a lot of landlords. 

He reveals the true cost of peace of mind…

[00:19:56] For this client, he didn't really care. He was in a very good, well-paying business, he's got other investments elsewhere. 

He shares the element of contracts in Western Australia that nearly ended everything for his buyer before it began.

[00:22:02] So during the entire tail end of the settlement period, which was about 20 [to] 30 days, the agent kept calling me up and saying, 'Is your buyer still keen to go ahead?’

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

Tyrone Shum:
When it comes to renting a home, it turns out that this process has more in common with buying a soft drink than you may have thought. 

Simon Loo:   

[00:11:30] A lot of properties we buy, being off market, actually come with tenants. They come with very long-term, very good tenants in most cases. And they're still paying quite low rent, from maybe three or four years ago from when they first signed up. And maybe the landlord hasn't had the heart to increase the rent. 

[00:11:50] But obviously with a new new landlord coming in, they just look at what it's worth, and they increase it. And some of these increases are 30% [to] 40%, from what they were paying. And it's not like a cash grab, again, but it's kind of like, 'Okay, you were paying so low rent previously'. It's completely not...

Tyrone Shum:   

[00:12:12] Not feasible to keep charging the same rate.

Simon Loo:   

[00:12:14] Not even feasible, but it's just not normal currently. It's like, back when I was in high school, to buy a can of Coke was, like, $1. Now you go to Woolies or something [and] it's, like, $3 something. To expect to buy a can of Coke for $1 again is not realistic. 

[00:12:39] So unfortunately, this is just the natural part of the cycle. And as a landlord, you don't want to shoot yourself in the foot with lower rent. But you also need to be fair as well, there is a level of not being super greedy either.

Tyrone Shum:   

[00:12:14] It's very good points that you raised there. And I totally agree with you. Whenever the property prices go up, there will be a time where the market adjusts. Especially when we saw during COVID, we were also considering looking to move, but when we saw how much the rental had increased across Sydney... 

  

[00:13:13] It went up, like, almost 20%. Average housing, around four bedrooms, stuff like that was about $600 a week. Now they're renting out for $750 a week. It's [a] substantial increase. 

Simon Loo:   

[00:13:27] It's pretty crazy. 

Tyrone Shum:   

[00:13:28] It's crazy. And that's also because the fact is that when you look at the values of the property prices have gone up 20% [or] 30% in some areas, it has to actually move in proportion. 

  

[00:13:38] What concerns me the most, and since we're talking about this, is wages haven't moved very much at all. And that's where the biggest concern is. The cost of living has gone up so much, like, how can I afford to pay rent when they've gone up [by] 20% [or] 30% when wages have only maybe increased with CPI, at most, maybe one or 2%? How can people afford to do that? 

  

[00:13:57] And that's the reason why there's been such a tight crunch between that, and hence small businesses like us have gone out to find opportunities to make more money, because there's no way that we can live on an average income to best support ourselves. 

Simon Loo:   

[00:14:10] I completely agree. Like, it's tough for a lot of people out there at the moment, including landlords. I think there's a notion as well that landlords make a lot of money by owning a lot of these investments. And while that might be true for some landlords, it's actually not true for a lot of landlords. 

  

[00:14:26] In fact, a lot of landlords that bought regular investment properties in the last few years, they might be actually in a position where they're taking a pretty big loss every week, or even to the value of the property. 

 

[00:14:45] I don't think there's any easy answer to affordability, especially in this day and age with everything that's been happening with COVID, which started off the entire economic... I want to use the word meltdown, acceleration, meltdown, whatever you want to call it globally. 

  

[00:15:06] But it's definitely a problem that we need to face. And I guess one of my concerns is a lot of the reforms and a lot of these policies that's coming in [are] band aid solution[s]. I don't think it's really been nipping affordability in the bud completely. What governments, I think, are trying to do, are adding more policies to try and make a situation better temporarily. Whereas they should actually be removing some of the, perhaps, tax benefits that landlords are getting on negative geared properties or something like that. 

  

[00:15:46] But that takes a lot of balls, like, a lot of guts to do. You know what I mean? There are very few politicians [who] would actually want to do that, because they're investing themselves. 

  

[00:15:59] Coming back to to rents, across the board, it's happening mostly in the affordable rental market. So the $400 [or] $500 [or] $600 [or] $700 a week, up to $1,000 a week in in Sydney and Melbourne, because the demand is huge. That's bang on in the middle of if you're earning $70,000 [or] $80,000 a year, times two. So as a couple, it's affordable, it's something that you can get into. So if you've got a bunch of people looking at [them and] wanting to rent these properties, they're just going to keep pushing it up and up and up. So that's a bit of an issue at the moment, especially for for these capital cities.

Tyrone Shum:   

[00:16:45] Just coming back to this Port Kennedy property that you purchased for the client there as well, tell us a little bit about how that how you found that particular one. Because as we've been discussing in most recent episodes, you're starting to move across more into WA at the moment, because there's opportunities. It's still early part of the market at this point in time. How did that one come across your desk? And what were some of the criteria that you assessed it based on that? Because we're talking about rent, but also pricing as well.

Simon Loo:   

[00:17:15] This particular client wanted something pretty easy. Even though he was a seasoned investor, he just wanted something that just didn't require any effort or any headaches. 

  

[00:17:23] We get a lot of off market deals from agents, we get a lot of properties of all different kinds in all different areas. Most don't make the cut, but the ones that do tend to be the ones that the numbers dictate the deal to be good. 

  

[00:17:43] And to be completely honest with you, in this market, there's no excuse to not be buying bargains. Like, there's so many out there right now. The difference between today versus just three months ago has been night and day in terms of the rhetoric that we're getting from selling agents. We're getting all these calls from agents we haven't heard from for years, going, 'Hey, Simon, I've got this house, they're willing to sell for this price'. So it's a buyer’s world, it's starting to become that way again. 

  

[00:18:18] Because for the people that are still paying market value, it's an incredibly risky thing to be doing right now. Interest rates [are] going up, inflation, all this kind of stuff. A lot of markets are starting to— especially at the upper end, [the] more expensive end of the market— [show] signs of cracking and stuff like that. 

  

[00:18:41] So the biggest and most important thing about this deal, as with all the other deals, is we just look at how much we can pay for it. And when we ran the comparables, these exact same houses were currently selling— not three months ago, currently selling— for about $480,000. And these are properties that aren't even settled yet. So maybe they were under contract like, a week ago or something like that. 

  

[00:19:09] And when we looked at those houses and go, 'Okay, cool, all these very similar houses are under contract now for $480,000. And here we are with this almost identical property that we can pick up for $410,000. That's really the most important thing, that's the most important thing. 

  

[00:19:26] And because this particular investor wasn't really too caught up in the rental yields, the cash flow, a lot of my clients are really big on the whole cash flow component, because affordability is very important to them. Maybe they're in just average income type jobs where they can't afford necessarily to have properties costing them money every week, and all that kind of stuff. And also with interest rates going up, they want a bit of a buffer to cater for that as well. 

  

[00:19:56] For this client, he didn't really care. He was in a very good, well-paying business, he's got other investments elsewhere. So he just wanted peace of mind. So he was happy with the $410 per week that we anticipated. Cash flow wasn't a huge consideration. Even though it's still pretty decent yield, it's not stellar. So it was actually a surprise for him and me that he actually ended up renting for $480. So that was just like a bonus. 

  

[00:20:29] Other things that we looked at [included] proximity to the beach. If you know Port Kennedy quite well, most of it is quite close to the beach. So this house is only a few streets, literally, away from the beach. The fact that it was a nudist beach that didn't have anything to do with it. [If] you look at Port Kennedy, there's a beach that's actually a nudist beach. But it's sand and waves. That's all we care about.

Tyrone Shum:   

[00:20:57] No one looks at that those particulars at this point. 

Simon Loo:   

[00:20:59] Sand, waves, ocean, winds. That's that. The house itself [is] just very easy, no maintenance at all. Actually, I remember when we closed the deal, because in WA typically there's quite a long settlement period. Settlements happen after you get finance approval, that's when the settled period starts. So I think it was a 60 day settlement period. 

  

[00:21:36] And during the 60 days, the agent advertised the property online. It's [a] very common thing we see. Even though we buy these properties off market, the agents would chuck it online for two reasons. 

  

[00:21:50] Number one, to get their name out there, and hopefully get more people inquiring about selling houses. And number two, to collect backup buyers in case your one falls through. 

 

[00:22:02] So during the entire tail end of the settlement period, which was about 20 [to] 30 days, the agent kept calling me calling me up and saying, 'Is your buyer still keen to go ahead? We've got all these other buyers, they're willing to pay a lot more money for this house'. Music to my ears. Because I obviously double checked that the buyer, my client, is still good to go ahead financially, all that kind of stuff. And if he is, great. That's a really good sign that we got a good deal. When there's suddenly all these other buyers coming out of the woodwork wanting to pay more money for it. So that was a criteria.

Tyrone Shum:   

[00:22:41] Can I just ask though, in other states, most of the time, once you've exchanged, you're pretty much locked in. And if you forfeit that you lose your deposit. Isn't that the case in WA? Or is that different?

Simon Loo:   

[00:22:52] It's completely the same. But I think there is an element where buyers can't settle on time. Or maybe the bank stuffs up their loan documents and they need, like, an extension. In some very rare cases, if the seller has the opportunity to not grant an extension or settlement, they might get out of it. 

 

[00:23:23] So it's really important to build these conditions at the start of the contract. When you sign it, give yourself plenty of room, plenty of buffer. Because if you buy a property cheap enough, and during the settlement period, or during the bind period, the seller realises that they could have got[ten] more money for it, they're going to do everything they can to get out of that contract. 

  

[00:23:49] And you might say, 'Oh, if they get another contract, you're going to lose your deposit'. For the seller, they might even return your deposit.

  

[00:23:57] They might just say, 'Don't worry about it. Here's your deposit, I'm gonna go with this buyer who is willing to pay $50,000 more'. And sometimes the seller gets cold feet during the finance condition period. A lot of times, as buyers, they need to extend the finance condition if the bank hasn't given them the full formal approval for whatever reason, delays or whatever, which is quite common nowadays. 

 

[00:24:29] And a lot of times, the seller won't allow that to happen. Because in their mind, that's another way for them to maybe get out of the contract. 

  

[00:24:40] This actually happened with this deal. We came to the end of the finance condition period, and the buyer wasn't actually 100% ready to go unconditional on the finance condition, because he hadn't gotten formal approval yet. But luckily, his finance position was extremely good. And the thing that was causing that delay in getting finance approval was literally [because] you're in a queue when you're getting a loan from a bank. And the bank was just delayed.

Tyrone Shum:   

[00:25:17] That's typical in this environment, all the banks and all the lenders are very, very slow at this point in time, unfortunately.

Simon Loo:   

[00:25:23] So he decided to just simply waive it anyway. Because he knew that it was a good deal. He knew there were other people wanting to pay more money for it. So he decided to take a relatively small risk: 'I'm gonna go unconditional on the finance'. And within literally a few days, it was going to come through anyway. Lo and, behold, it did. So he proceeded with the deal.

Tyrone Shum:   

[00:25:46] Excellent. Excellent.

Simon Loo:   

[00:25:48] So sometimes you just have to look at your situation, your risk, [and] all that kind of stuff. But sometimes if a deal is worth it, you've just got to do what it takes. If it was any other normal house where he could have just walked away— because he could have bought any other house in Port Kennedy for market value— he wouldn't have had that pressure or urgency to ensure that this deal still goes ahead.

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”.