Plus, he dives deeper into the implications of this reality on the country's property investing space, and underscores how the value of the land comes into play in driving house prices in a predominantly capital-growth-oriented market.

Timestamps:
00:01:09 | From Tech to Property
00:04:00 | Australia's Real Estate Industry
00:10:09 | It's Hard Work, Mate
00:12:30 | Consider the Principle
00:15:29 | The Facts in the Time of COVID
00:16:54 | Did You Know This About Australia?
00:19:54 | The Big Australian Dream
00:22:57 | On Renters and Landlords
00:24:27 | Let's Talk 'Investment Grade'
00:27:03 | Buying Quality Family Homes
00:28:30 | The Bank of Mum and Dad
00:31:54 | The Win-Win Situation
00:34:02 | Solving a Social Problem
00:37:03 | Harvesting Capital Growth
00:39:29 | A Superfund…But for Houses
00:42:23 | The Road to Higher Returns
00:46:10 | Dear Sophisticated Investors

Resources and Links:

And then I wandered off unsupervised with a spreadsheet one summer, and I asked myself a question: 'But how well are my clients doing? My landlords? What's their investment performance on these properties? I didn't buy them for them. I didn't sell them to them. I don't have a dog in the fight. I'm just managing them. But they don't look like great properties to me'. 

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, we're talking with LongView Executive Chair, Evan Thornley. As a property investor in Australia for over three decades, he poses the principle of the '1% of 100'. Plus, he reveals how home buyers can make better returns on their property investment without the hassle that comes with being a landlord.

Tyrone Shum:
From Silicon Valley to Australia's real estate industry, Thornley has always had a good sense of where he wants to make a positive and lasting impact. With impressive bona fide experience in both tech and property investing in the last 30 years, he talks about his work within his real estate firm and how he helps his clients better manage their properties. He begins by sharing his background that ultimately paved the way of his property journey.

Well, I grew up in a single-parent family on welfare. So I've had to kind of make my own way in the world. And for better or worse, I managed to do that and got a law degree from the University of Melbourne. 

And then decided I didn't want to be a lawyer, so I went to be a management consultant at McKinsey & Company, which is one of the great business finishing schools of the world. But then I became a tech entrepreneur. 

So [I] left McKinsey in 1995—in the early, early days of the internet, just after Netscape had gone public. And we decided that in a world of infinite information, the power of position would be 'search'. And so we built an internet search business that ended up pioneering internet search advertising. 

And particularly what you now see and things like Google [Ad]Words— that whole business model was pioneered by my company LookSmart and another company called GoTo.com. 

And so we were the first Australian tech company, listed on NASDAQ— took it to $14 billion in market cap, which was proper money in those days. 

Yeah, it's a lot of money. 

[We got] backlisted on to the Australian Stock Exchange, and then went through the crash— the dotcom crash—, and then came out the other side and got the business back to profitability. 

And anyway, so that's a bit of my background. 

So I ended up... I'm a recovering lawyer, who's a Silicon Valley entrepreneur. 

I'm Jewish. And in the Jewish community, a lot of people started out in what's called 'shmutters' in the rag trade in fashion, and then end up in property, right? The fashion shop ends up paying for the building, then you buy another building, then suddenly you find out it's actually the property. 

And so now we start out in tech and end up in property.

I think that's a way of the trend.

There are various ways of creating wealth. And then there's various ways of wanting to preserve and manage that wealth. 

Like most of your audience, you know, I saw property—residential property—as a safe and, hopefully, over time, attractive investment class  [that's] much safer and less volatile than equities or, you know, crypto or all that other stuff. 

Totally. 

You know, safety first and then work on how we can get better returns. 

So I just drifted into property. And I couldn't believe how badly property investors were treated by the real estate industry, by the developers, by everybody, actually.

How did that happen?

You explained to me that there was, you know, this scenario where you came from the States, and you came back to Australia and go, 'Oh, wow, you know, I want to buy property because that's where most of the wealthy people hold their funds'. But the experience was really appalling. Let's talk a little bit about that story first.

Well, you know, most people outside the real estate industry don't understand the real estate industry, right? So I'd go and start looking at properties. And then agents wouldn't return my calls. 

And, you know, you'll forgive my ego, I'm a little bit of 'Don't you know who I am?' And they always throw in a question on if you got a property to sell, you know. And I go, 'No, because I [have] just came back [from] the U.S.'. And then you never hear from them again, right? Because I didn't understand that sales agents are about getting the listing; it's the only thing they care about—the property ... [indiscernible]. 

So you know, you can walk in, as I literally did, with tens of millions of dollars to invest and no one would return your call. This was unusual to me, because in other asset classes... 

They'll be running after you and say, 'Evan...' 

Folks at the Goldman [Sachs's] ultra-high net worth desk— they return my calls, but the local real estate agent not so much. Like, hang on, this is really weird. 

And, you know, just talking to friends who were often small-scale property investors and landlords, and as one of my friends said, 'I've never met a happy landlord'. And so my business partner, Anthony Cohen, and I— Anthony was a senior guy at KPMG for 28 years on board, [and] founded and ran the corporate finance practice and the energy and resources practice—, we both said, 'Well, why is that?' 

And then we found out how the real estate industry works and found out that all the property management was really owned by real estate salespeople. And, you know, they didn't care about property management. So we said, 'Well, let's, let's start by doing that properly'. 

So we founded the company to start just trying to make sure that property investors could be looked after. And we called it 'LongView' because property is a long game. And so that was eight years ago. 

And we now manage 4,000 properties for clients up and down the East Coast, and I'd like to think we do a good job. We just got voted 'Best Large Property Manager' in the country. We just got voted actually by the real estate industry in Victoria—the best residential agency in Victoria—, which I thought was pretty good for someone who doesn't sell houses.

It's no small feat to get that many property listings. Most people usually, or most agencies, have an average [of] about probably a maximum [of] thousands, you know, depending on the size.

We do that well. But over after... and it took a long time and a lot of hard work to learn [to do] it. 

It was much harder than it looked [indiscernible]... 

Anything like that is, yes. 

And I'll be honest, as you can probably detect from my conversate, we're a little bit arrogant about it. I'm like, 'How hard can this be?', you know. I've done all this fancy stuff in Silicon Valley. 

It turns out it's really hard to do well. And to build a team and to deal with the practical problems of thousands of different... every home is different. But we did start doing it well. 

And then I wandered off unsupervised with a spreadsheet one summer, and I asked myself a question: 'But how well are my clients doing? My landlords? What's their investment performance on these properties? I didn't buy them for them. I didn't sell them to them. I don't have a dog in the fight. I'm just managing them. But they don't look like great properties to me'. 

And lo and behold, I discovered that our landlords, which are, given the scale of our client base now—a pretty representative sample of Australia's landlords—, were getting 2.8% per annum, 280 basis points below housing market average in terms of their capital growth. 

And as we know every property market's a trade-off between capital growth and yield. Australia, more than almost any other country in the world, is a capital growth market. So you're not in this for yield, right? If you want to be in it for yield, go to the Sun Belt, to the U.S., and get 8% to 10% gross yields—you won't get that in Australia or, you know, very remote regional Australia. 

Yeah, and other places. 

So if you were 290 pips below average in capital growth... 

So I looked at it and I went, 'Well, these nice people are paying us $10 million or $11 million a year to do really an outstanding job of managing their property. But their opportunity cost on these properties that we're managing for them is $100 million a year of lost capital growth just to housing market average, let alone if they could have had access to top quartile or top decile assets, they probably would have been several $100 million-a-year better off. This same group of clients. 

So we're like, 'Hey, there's no point in helping people manage properties well, if you don't help them buy the right assets'. The buying well is 10 times more important. The most important thing is asset selection. 

So then we started bringing a bunch of, you know, senior veteran buying advisors onto our team—people that have bought a thousand homes each over the last 20 years, and obviously do really good work and really know this stuff. But then we back them up with a team of data scientists. 

And so we analysed every sale price of every property in Australia for 50 years to start answering the question, 'What drives good capital growth?', at a really detailed level. 

And so if you combine, you know, really deep, what I call, 'field experience'—people who literally bought a thousand homes, so they must have looked at a hundred thousand, right?—with data science, then you can start getting pretty good at working out which properties to buy to generate the best capital growth. 

And so that's what we did for the next few years. And once we felt we did that well, we know how to buy well, we know how to manage well, then we came back to where we actually originally started.

Which was Anthony and I couldn't understand one simple thing as people from the big end of town: Why is the single biggest asset class in this country and on a risk adjusted basis, almost unarguably the best asset class in the country, certainly not the worst, strong performance and very low volatility, why is there not a single investment grade fund to invest in this asset class? 

Why is it the only way you can invest in this asset class is 'one buy, one buy, one buying individual properties'? Right? There's more crypto funds in Australia than there are residential property funds. 

Yeah, it's a good question. And you know why? It's hard. It's hard work.

Exactly, right? So I went and talked to other fund managers, and they said, 'Yeah, we wanted to do that'. And then we're like, 'How we're going to manage thousands of properties and fix the Danny's in the [indiscernible]. Oh my God, I can't do that. 

I'm sitting in a fancy office in Pitt Street or Collins Street, you know, as a screen jockey. And then I go and talk to my Silicon Valley mates or the PropTechs and FinTechs and they're like, 'Oh, we can do all this from a beanbag in Surry Hills'. And I'm, like, 'Really?' I suspect, 'Not actually'.

And I went out to do that, and you know that ended badly, right? Because you've got to— and so if you look at the major residential property funds in other parts of the world, it's a huge industry that when I call the housing fund industry... you know, I was talking to the CEO [of] the biggest housing fund in the U.S., they've got 100,000 single-family homes. 

Yeah. 

They bought the first 59,000 of them one by one. 

Yes. 

They got $100 billion under management. 

It's very common over there in the States... 

And that's only a 15-year-old company, right? And they got $100 billion under management, right? So this grew very quickly. 

Yes. 

And no kidding, they have strong field operations. You need people out on the ground. 

That's right. 

You know, looking at each individual home working with the person who lives in that home, whether they're an owner occupier, or a renter, depending on the business structure, right? There's just no easy way. 

So you've got to be good at the financial engineering. You've got to be good at the data science. You've got to be good at managing a whole lot of legal and compliance and other important issues. But you've also got to be good at field operations house-by-house. 

Yeah. 

And so that's a hard thing to do well. And so it became clear to us that that was really why no one had set up a resi[dential] property fund in Australia.

Yeah. And it makes sense. The reason why we can see that is because, typically, all the fund managers lean towards commercial. And with commercial, they're usually looking at the larger assets, which is lower maintenance. Usually the tenants...

I shouldn't say is... it's not easy at all, but it's manageable—it's probably a better way of saying it, okay. 

You know, I bought five regional shopping centres, and I got them at a good cap rate. And then, you know, yada yada, did a bit of reno and [I was like], 'Oh, okay, fine', then that's fine. But yeah, house by house, that looks hard. 

It is. 

So for a fund manager, that looks hard. But when I turn it around... you know, we're having a bunch of dinners with our clients—now our landlords, right—and just talking to them, and I asked them a couple of really interesting questions. 

So the first question I said to them was, 'Imagine a world where you could choose: Would you rather own 100% of one property, or 1% of 100 properties?' And most of them sort of think about it and go, 'Oh, that's really interesting. Probably 1% of 100 properties, I guess'. 

And they sort of, you know, some folks will use fancy words like 'diversification'. Others will just go, 'Probably good to not have all my eggs in one basket'. But everyone intuitively understands that, all other things being equal, you would prefer that from a sort of financial risk point of view. 

Of course. 

Depending on what type of properties they were. And then I say to them, 'Let me ask you another question: Which have you got the better investment performance from—your family home as a property or the property you bought as a property investment?' And they sort of wriggle a bit in their seats. And in 8 1/2 cases out of 10? They come back and go, 'Actually, our family home has been a much better investment'. 

Yep. Yep, very true. 

And I'm like, 'And that's before tax, right?' Because that's an untaxed investment, and it's outperforming by a mile even before you get the fact that it's untaxed versus all of... You know I live in the People's Republic of Victoria, right? The land taxes keep going up.

Not only that, you get to enjoy the home as well, too. So that's a huge benefit.

So we're sort of going, 'Okay, so if you could invest in quality family homes, wouldn't you rather invest in that than in any kind of crappy investment properties and crappy new build off-the-plan, high-rise apartments and stuff?' And they're like, 'Sure. But, you know, I don't have a lazy $1.8 million or $2 million'. I'm like, 'Okay, but if there was a fund that bought a lot of them, then you could just own a chunk of the fund'. 

That's right. Yeah. 

And so people go on, 'Okay. That sounds great. How would it work when you say it's a family home?' And so that was our... 

Our thinking was how do we help our landlords do the thing that they do for the reason they do it? They invest in property because, first and foremost, it is safe. They understand it. They understand how it works. They know they're not going to wake up one morning like they can with a share portfolio and find out it's dropped 40% or 60% in value as the share market does every 10 or 15 years.

Yeah. And it happened pretty much during COVID. Everyone saw that happen. Whereas property [just] stabalised pretty quickly.

And what happened with property— just glided through.

Actually, it maybe even did better. Like, why didn't we all buy before COVID?

A whole bunch of the fancy pants people in the [Australian] Fin[ancial] Review said, 'Oh, when interest rates rise, property is going to crash!' And we we sent out a note to our clients saying, 'No, it's not. Here's a graph of interest rates and property prices for the last 60 years. And interest rates are doing this, and property prices are doing that'. 

I'm just saying, mate, that's just facts, right? So that's not going to happen. And the world conducted a perfect live experiment. We had a much bigger rise in interest rates than anyone predicted, and a much smaller drop in price property prices than anyone predicted. And as we know, it's now pretty much recovered even from that modest correction. 

That's right. 

And so this is why we decided to put out some white papers to explain actually how residential property in this country really works. And so the first... And we did it jointly with PEXA—the big electronic conveyancing giant. They've got more property data than anyone else, because they conduct all the conveyancing. 

Correct. 

So we and PEXA analysed all the data. And we said, 'Look, sure, interest rates impact property prices a little bit. Negative gearing policies and all this stuff that politicians get excited about has a little bit of impact. The amount of foreign investment has a little bit of impact. Supply side constraints, which is the topic of the day, they have some impact. All of those things have some impact'. 

Yup. 

They just have one or two orders of magnitude, less impact than something else. And in Australia, that something else—which is an easily verifiable fact, you can get it on Google in 15 seconds, but most people don't know this—[is] we have the second highest population growth rate in the world. 

Wow. Okay. 

Right? 

That I didn't know. 

Trust me, this is an easily verifiable fact. 

Okay... [indiscernible] 

Outside Sub-Saharan Africa and some of those very less-developed countries. But compared with all Europe, or North America, all of North Asia—China, India, everyone—, Australia has the second highest population growth rate in the world. Actually, the only country with a high population growth rate over the medium term is Israel.

Wow. Okay. Why? Why do you think that's the case? That's... 

Well, you know, we are, my friend, an immigrant nation. 

Yeah. 

And we have been since our inception. But there's another fact that most people take for granted. But when you compare it to the rest of the world, that people don't realise, in this wide brown land, for some bizarre set of historical reasons, we cram our population into a tiny number of places. Right? 

We have the highest level of population concentration in the developed world. I mean, outside say, Singapore, or Monaco or a few other city states, more than 50% of our population is in just three urban centres—Sydney, Melbourne and southeast Queensland. And that percentage is actually growing, despite governments, for 50 years, trying to get people to move out. 

We keep doing the opposite, right? It used to be 47%. It's now 52%. The Bureau of Statistics says it'll be 57% shortly. So okay, well, what does that mean? If you have the second highest population growth rate in the world and the highest level of urban concentration in the world, what that means is that well-located suburban land is a scarce. 

Coming up after the break, Thornley explains why buying the right type of asset can make or break a property investor's returns in the long run.

And people get tricked into buying those assets. And that's why they're not making money in their property investment.

He unveils the truth on how home buyers and homeowners can make better return rates…

So like I said, when we talk this through with our landlords, [their] main question is, 'Hang on a minute, this sounds too good to be true'. But that's how it works. 

He lays down the compelling evidence and time-tested and proven data that show how Shared Equity can be a game-changer for property investors.

Well, the returns in this will be higher, because the homebuyers are making money on the bank's money, whereas the older homeowners all own their homes outright. 

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

Tyrone Shum:   

Continuing on the astounding fact that Australia has the second highest population growth rate in the world, Thornley dives deeper into the implications of this reality on the country's property investing space. He underscores how the value of the land comes into play in driving house prices in a predominantly capital-growth-oriented market.

Okay, so let's understand what drives Australian house prices. If you have the second highest population growth rate in the world, and you cram that population principally into just three cities, then that means that well-located suburban land is a scarce commodity. And so the land underneath the homes in Australia's three major cities has been growing 9% compound for 100 years. 

That is phenomenal. 

Right? The value of the land underneath the homes has been growing, has been doubling every eight years, for 100 years. So that's what our first white paper with PEXA said. 

Everyone has all these theories about what drives Australian house prices. But what drives Australian house prices is the value of the land underneath them. And that is because of the unique population growth and population concentration that Australia uniquely in the world has. 

If you understand that (that was white paper, too), that's how you understand why this is a massively capital-growth-oriented market, not a rental-yield market. Because the land is scarce. And as our population keeps growing, we keep putting more and more people on the same amount of land, the value of the land goes up. 

And so, once you understand that, then you understand why quality family homes outperform, for example, high-rise investment apartments—massively outperform them. Because in your average quality suburban family home in a good location, 70% or 80% of the purchase price of that home is actually the value of the land underneath it.

Yeah, because everyone wants that great Australian dream. They want to live, you know, with the backyard. They want a big house.

They'd rather be close to transport and amenity and yada yada, right. And that's what drives Australian house prices. And you know, in simple terms, land appreciates in value [while] buildings depreciate in value. 

Yes. 

So the more of your money that's buying the land underneath the home, the better the investment. And, ironically, when people buy a quality family home they're typically buying a home that they're often period home, so they... You know, the building has depreciated and the land is what they're paying for. It's the location.

So all the stats has come from PEXA and the combination of all your data and [indiscernible].

I'll give you the reverse. I can give you the names and addresses of every property in Australia that has ever been sold at a loss. Okay, every single one of them. Okay, let me tell you something about those addresses. The vast majority of them have a slash in the middle of the address and two to four digits before the slash.

That's pretty obvious. For the listeners out there who don't know, it's units. We're referring to apartments or high rises, yeah.

I'm not talking about a block of four [indiscernible] in Bondi— they're doing great, right? Because the value of the land underneath them has gone forever, for 100 years, right. So but yeah, high-rise, new build apartments, the building's depreciating. You've got hardly any share of the land. And so they go nowhere, right? In fact, they often go backwards. 

So now that we understand that, that's when we wrote the second white paper that said, 'So what's wrong with the rental market in Australia? Here's all the things that make it a bad place to be a renter'. And everyone knows those things. 

But the assumption is, therefore, it's a fantastic country to be a landlord. No. If you actually analyse the investment returns of all of Australia's landlords, they vary wildly depending on whether they bought good assets or not, and a couple of other factors, and how they finance themselves. But on average, the landlords of Australia have been getting a 6% return on their money.

That's mediocre. 

Which is less than if they put it in a balanced super account. 

That's right. It's very, very mediocre. 

And to have all of the hassles that we all know about being a landlord. With the interest rate risks. That land tax. You know, the challenge you have with maintenance and with the building, and sometimes with tenant issues. You know, it's not easy being a landlord costs, and yet the average return is actually pretty poor. 

And so, we analyse why that was. And the answer is mainly they bought the wrong assets. Right. And they got tricked by real estate salespeople and property developers who tricked them into buying…

Investment grade, as per se kind of... 

That phrase... Sorry, I'll lose my temper in a minute. In the world where I come from, when you talk about something being 'investment grade', that means that it's better than everything else. 

In institutional investment, when you say something's 'investment grade', it means it's super high quality. And in the property development industry, it means it's rubbish quality.

And not only is it not as in an asset, it is not investment grade, it's a rubbish investment that makes really poor, if any, capital growth, and not that much better in yield once you take into account all the body corporate and other fees. And they're, in many cases, poor dwellings for people to live in. 

And people get tricked into buying those assets. And that's why they're not making money in their property investment. They come to us all the time and say, 'Oh, I thought my property would have gone up now. I thought the market's gone up?' And we have to say, 'The market has gone up. But not for you. Right? Because the asset you bought is not the right type of asset'. 

So that's when we said, 'Okay, how do we help the landlords of Australia who want to invest in property because it's safe? And because they know for their own experience in their family home, that it can go up in value over time quite a lot? How do we help them just get more of that thing which they already have? Which is what they've had in their family home?' And the answer is, 'Well, let's invest in quality family homes, that the principal driver of their value is the land underneath the home'. 

Makes sense. 

And then that's when we said to our clients, 'Would you rather own 100% of one property, or 1% of 100 properties?' And they quite rightly said, 'Well, it depends what those properties are'. And then when I said, 'Well, what if they're quality family homes in the sort of $800,000 to $3 million range?' And then they went, 'Well, yeah, sure, that'd be great. I ought to invest in those. I don't have that sort of money'. 

And I'm like, 'Right, but that's where the 1% of 100 comes in. So let's put a fund together, which we're calling the 'Homes Investment Fund', which invests in quality family homes, which are therefore going to generate good returns and [are] going to be diversified across Sydney, Melbourne, and Brisbane'. In different quality locations. In price ranges from $800,000 to $3 million. 

So you're getting a good broad swath of quality family homes. It's kind of an index fund for quality family homes.

Yeah. And that makes absolute sense. The challenge, as we kind of discussed about early on in the podcast, is it's quite hard work, you know, to manage those many homes. I mean, I don't know how many homes you're planning to put into this fund, but how do you actually go about managing that many…

So that's where it gets interesting. So again, thankfully, as we've recently been voted the best large property manager in the country for the 4,000 homes we already managed. Okay, so we're already managing 4,000 homes that are not in a fund; they're owned by individual landlords, but those individual landlords have put about $4.5 billion into those assets. 

So we're already managing $4.5 billion worth of assets—just managing the assets, not the money. So, you know, [with] the fund, we'll manage the money and then buy the assets and make sure we buy the right assets. 

So it's actually not that much of a change from what we already do. And I'm gratified to say our peers in the industry have recognized we do exceptionally well. 

So that's the basis of the Homes Investment Fund. But then you say— and we'll come back to how do you manage those homes in a tick—, then you come back to, 'Okay, but if you're buying quality family homes, you're renting all them out?' 

And we're like, 'Actually, no'. 

There's a better way. There's a better way of investing in those family homes. And that's to invest alongside the families who live in them and own them. 

I get where you're going. 

And if we're co-investing with those families, and we do that in the right structure, they're not paying land tax, which means we're not paying land tax. 

So now you're investing in quality family homes whose value is driven by the value of the land underneath them, but you're not paying land tax.

I want that.

Okay, so how does that work? Well, that works, interestingly, by solving another one of the massive housing crises in this country, which is, if you don't have the 'Bank of Mum and Dad', it's incredibly hard for younger families and many other families, by the way, to be able to get the deposit they need to be able to buy the home in the first place. 

So we're about to release our latest research, which shows that there is a new financial institution that has just taken over from the Commonwealth Bank as the single biggest financier of first homes, first-home buyers. And that new financial institution is called the 'Bank of Mum and Dad'. 

I thought that was going to be something very different.

Which is fine. I mean, Macquarie's nipping at people's heels, so that Macquarie is No. 3 in the Big Four, except they're the fifth. And so the ANC said it's now the fifth in the Big Four, which is probably not a good place to be.

But the Big Five are actually smaller than BIOMED, which is bigger than them all in first-time buyers. It's third biggest overall in all of housing; biggest in first-time buyers, right. But there's a third of a generation that don't have the 'Bank of Mum and Dad', you know. Many of them, they're migrants, or children of migrants, they're solo parents or the children of solo parents, in many cases. They're children of renters. 

So you have a country where, increasingly, homeownership is an inherited privilege. And that's not a society that any of us want to live in. 

And so what we're doing is we're co-investing alongside those homebuyers who don't have a 'Bank of Mum and Dad', and our Homes Investment Fund becomes the 'Bank of Mum and Dad' for them. 

And so, in simple terms, let's imagine you're trying to buy a million dollar home. Often more than that, you don't get much in, like, Sydney for a million bucks these days, right? You need $200,000 for the deposit, and the bank will give you $800,000 for your mortgage, okay. Getting the $200,000 is hard. And then you need $55,000 for steps. 

You need the best part of a quarter of a million to buy a million dollar home. Well, we know how hard it is to save a quarter of a million dollars after tax. You know, it takes people decades, and by the time they do it, the value of the house has gone up. 

And so people are... You know, these are hard saving hardworking people, because they know there's no 'Bank of Mum and Dad' to help them. They're going to have to do it all themselves. 

So let's imagine they've got two-thirds of the way there. Okay, well, the fund then gives them the last one-third and gets them in, and helps them. Then our buyers advisors and our data scientists help them choose the right home that's going to be a good fit for them and their families. 

You know, young homebuyers can't see around corners; they often buy the home that feels good today, but two or three years from now, it's not the right [one]. So you know, our buying advisors who bought a thousand homes, you know, know all those stories. So [they] help them buy the family home that's going to be the right home for them and their family's needs, but also one that's going to be a really good investment for them. 

And so we help them buy the right home. We give them a portion of the deposit—usually not more than a third. And then in exchange for that help buying the right home and the money to get in it, they give us the same proportion as a share of the capital growth in the home when it grows. 

So if the fund puts in a third of the deposit, the homeowner gives a third of the capital growth of the upside in the home over time back to the fund.

That's a win-win situation. 

It's a total win-win. 

And so the investors will only ever make $1 if the homeowner makes $2. The homeowner pays the mortgage because they were going to be paying their mortgage anyway. 

Anyway, yep. 

They get to live in a better home sooner. They look after the home because it's their home. But they're not paying land tax. The fund is not paying land tax. And the bank will lend them a higher proportion of the value of that home than it would have lent us on the exact same home if we bought it as a mum-and-dad property investor. 

So the leverage of the bank's money is greater for homeowners than it is for property investors. 

So let's imagine this situation. We've all been there. We're at a suburban option for a quality family home in a good location. And Mum and Dad are thinking, 'Oh, we might buy this as an investment'. And you know, this is a good home. It's going to double in value in 10 years. It's going to do 7% compound; double in value in 10 years. 

And the bank will give us maybe 65%, you know, as an investor, maybe 65%. It will be yeah right 3X gearing. And then we're going to have a lot of land tax, and a lot of interest, a lot of other things. It'll be costing us money to hold the property. We might get some of that offset with negative gearing, but it's negative cash flow for a period of time. And then we sell it at the end for double what we paid for it. 

If you do the math on that, that mum-and-dad investor make about 9% on their money over the 10 years, which actually means they've done better than two-thirds of landlords. 

Definitely. 

That's not bad. But on the exact same home, if they turn to the kiddies next to him and said, 'Hang on a minute, why don't we not buy it and rent it to you? Why don't we help you buy it for your family home?' 

Then the kiddies next door buy it as their family home. They get 80% from the bank, so they're on 5x gearing. They're covering the cost of the home, because they were going to cover those costs anyway. So there's no holding costs, and there's no land tax, and then it sells for double. 

And so, the homeowner is making a much better rate of return on the exact same asset than you would have as an investor. And if you've helped them become the owner, then you participate in their returns. 

Makes absolute sense. 

Right? 

On literally the exact same home, because you're doing it in what's called 'Shared Equity' with the homebuyer, you're actually going to make a better return on the exact same asset and do some good to help these kiddies get into a better home quicker or get a home at all, and not have any of the hassles of being a landlord. 

So like I said, when we talk this through with our landlords, [their] main question is, 'Hang on a minute, this sounds too good to be true'. But that's how it works. 

So we're trying to solve a really profound social problem. 

You know, I grew up in a single-parent family on welfare. I'm not going to get the 'Bank of Mum and Dad'; that's not going to happen for me, right? And for thousands, and many, particularly, migrants and children of migrants, children who have grown up in, you know— If you choose your parents badly in this country, and they don't happen to be homeowners, then, you know, then it's tough for you. 

So [it] solves a really important social problem that actually delivers a better investment return, with no holding costs and no landlord hassles while doing some social goods. 

So that's what our Homes Investment Fund or technically called the 'Shared Equity Fund', because it's a co-investment with the homeowner. 

Yeah. 

That's how we invest in quality family homes. 

Yeah, and the question I've got for you, Evan, is how would you guys extract the equity or the profits? Because until they sell, are they going to be holding onto these homes for 7 to 10 years?

There's a couple of questions people ask, and that's the most common and, obviously, good question. So this is where the 1% of 100 thing comes in. 

Or in this case, our first fund, which will be about $30 million, means we'll be helping 200 families by home. So we'll be helping buy 200 homes across Sydney, Melbourne, and Brisbane in the $800,000 to $3 million range. 

So what we know from 100 years of data, is that every suburban real estate agent knows this: Well, [for] whatever reason, a certain proportion of people sell in year one, a certain proportion sell in year two, a certain proportion sell in year three, just that's how life works. It's how it's always worked. It's how it always will work. 

But what happens is every year, a proportion of those homeowners, for whatever reason—you know that kids change school, they have twins and suddenly it doesn't work for them, [or] sadly, they get divorced, they get a promotion, all sorts of reasons people sell their homes—, so you can pretty statistically rely on, once you've got a portfolio of a couple of hundred that have a certain proportion again at turnover every year, and so then the capital and the capital growth from those contracts is returned to the investors. 

So it ends off actually throwing off a lot of cash.

Yeah, I can imagine.

Each year.

We think if there's any in the first year or two, we'll reinvest that money. But after year two, then all of that money then just gets returned to the unit holders in the fund. And so, you know, on our modeling, we think that probably means they'll be getting roughly 15% money-on-money returns from year three onwards. 

Wow, that's a phenomenal return. 

Right? So, and rising to into the 20% [range] most likely in the later years. So the fund itself is a 10-year fund. And so, at the end of 10 years, about two-thirds of those homes will either have been sold, or the home buyer can buy out the fund. They can buy back their capital growth, which many of them will do is their equity goes up, as their incomes go up, maybe interest rates come down. 

It makes sense for them to buy back that third of their capital growth. And so you just do that at the market value as if the home was sold, even though it wasn't. 

So we think [with] about two-thirds of the homes, the money will be back in that 10-year period. And then that last remaining tail of the portfolio then either gets rolled into a new fund or sold to an institutional investor. And the last proportion of the money comes back to the investors in year 10.

That makes sense. Yeah. So I guess...

It's like owning a property, but it's sort of harvesting the capital growth on that property—because there's not one property, it's 200 every year— and starting to capture that capital growth. So it feels like income— [with] actually much stronger cash flows than you would get in any sort of yield product. But it's actually what I say 'harvesting capital growth' piece by piece along the way. 

And we anticipate like, you know, if this happens, and I guess it's very hard to say that majority of the people decide, 'Oh, it's done so well, I want to actually buy my property back or buy my share back and I want to own the home', then would you be planning to take those funds and reinvest in buying more and more properties until... 

Yeah. The first fund is a closed-end fund so people can have certainty that it's a maximum 10-year investment, and they will get those sorts of returns. 

I think when we launch the next fund, it'll probably be what's called an 'evergreen fund', where it just keeps recycling. And what will make that easier is—and we're setting this up at the moment; this is not in place yet, but it will be shortly—new investors can also just buy out old investors. 

If somebody needs to sell their shares in the fund for whatever reason, and then if a new investor comes in and can buy those shares in the fund, and the new investor comes in and keeps going, the old investor can take their money out without anyone hav[ing] to sell any homes. 

So we just we revalue. The auditors check all this. We revalue the portfolio every quarter. And so we know what the net asset value of the portfolio is. And so people can buy or sell their shares in the fund separate from the homes themselves. 

Yeah, it says pretty much like almost trading shares in between a fund, I guess you can say. If you're buying some shares inside a company and they decide to sell it down the track, you can pretty much sell it. 

Yeah, that's right. 

Now, in a company listed on the stock exchange, that's easy; you can do it every day, at any time of the day. We won't be doing that. And but partly because, actually, when you can buy and sell things all day, every day and do derivatives and stuff, that's what leads the volatility on the stock market, [which is] exactly what we don't have. 

Yeah. 

So anybody buying or selling shares in the fund will only be able to do so at the value of the properties in the fund—not above that, not below that, [but] at the value. 

And there may be a little bit of a spread between the buy and the sell, but tied to the values of the property. It's not going to be something that starts looking at the share market. That's not what people want. 

So when we've explained to our landlords what this is, a number of them came back to us—you know, your customers tell you what your product really is. And they say, basically, 'So it's kind of like a superfund, but for houses'. 

Yeah, pretty much. 

Yeah, I guess that's right. That's actually not a bad description. So yeah, so that's how it works.

I'm pretty sure there'll probably be a lot of other questions that people want to ask. But for me, I probably want to ask: What are some of the potential risks? Have you also looked into that and have [encountered] any questions like that?

So to give you a sense on this, there have been Shared Equity products and structures in the world, in Australia and overseas for about 20 years. So whilst this may sound like a new idea, it's actually been around for some time. We're not splitting the atom in new ways. 

And so this structure works. It's been proven to work in plenty of different environments. 

There's actually a very large Shared Equity Fund in Australia that's been buying shares of quality family homes for 18 years. It's now got shares. It's had shares in 6,000 family homes. It's got a billion dollars in it. It's made 9.8% per annum returns with no bank gearing at all, by the way. 

So it's just a different form of Shared Equity that's been for older folks who want to stay in their home but are short on money, and so they sell a share of their home and stay in the home. 

So we actually use the same lawyers and the same structure of that proven mechanism that's been around for 18 years. That billion dollar investment in all those hands is owned by Bendigo Bank. It's called 'Homesafe'. 

And so we looked at that and said, 'Well, let's do something like that, and learn from you know what's already worked and already bought shares of good family homes and has consistently delivered good investment returns. But let's just do it in a different way with young homebuyers where we also get to participate in the benefit of making money on the bank's money'. 

Yeah. 

As, you know, homebuyers do it. 

So [there's] a little slight difference, but the whole model is very similar. Because [with] my next question, I was going ask you is why not just invest into the 'Homesafe' program when they've [already] gone [and set] this whole thing up? 

Well, the returns in this will be higher, because the homebuyers are making money on the bank's money, whereas the older homeowners all own their homes outright. So the returns will be higher when doing it with early stage homebuyers. But otherwise, it's the same mechanism. 

Early stage homeowners also tend to have shorter tenure in the home. So the money comes back quicker.

Yeah, that's great. So, Evan, what's the next stage if people are wanting to find out or investors want to find out more about it...?

They can go to the LongView.com.au website, and you can go to the funds management part of our business. And also... but there'll be many on this podcast, either themselves or their children, who might also want to get the 'Bank of Mum or Dad' from us, right. So they should also go [there]. 

And so the offering to the customer is called 'Buying Boost'. So some folks, may[be] them or their friends or family or their kids, might need some help buying their home. And so we can do that. 

And others will be looking to invest in being the 'Bank of Mum and Dad', for folks to buy their home. So I should say this is very important: At this stage, all of this, we've spent three and a half years building this platform. We've really done all of the detailed work, all of the detailed legal work, the tax work. 

There's a 70-page investor memorandum that goes through who the investment committee is, who the independent trustee is, who the auditors are—this is all done, you know, [with] real investment grade like any proper managed investment sort of fund is. And so that's all outlined in the investor memorandum, so people can go through that in detail. 

That's all done under an Australian Financial Services licence. But currently, it's only open to people who are designated by asset to be what's called 'sophisticated investors'—and you and many of your audience will be familiar with this. 

Anyone can ask their accountant to either give them a certificate to say they are or they aren't sophisticated investors. The test is principally whether there's a household income above $250,000 a year on net assets, including the family home of above $2.5 million. 

So in our experience, about half of our landlords can get a sophisticated investor certificate from their accountants, and probably the other half can't. 

We will, I think in time, probably not too far away, also be able to offer the fund to other investors. But not as yet. But yeah, people can learn more about it at our website, and then they get in touch. And we take them through how it works, [and] answer their questions. Their financial advisor, or their accountant or their wealth manager often has questions, and we just take them through that. 

The minimum investment is $150,000. And so, again, now you can invest in quality family homes, but do so with a smaller amount. 

So when I originally started talking to landlords about this, I was saying, 'You should sell that rubbish property and buy into the fund'. And they're sort of like, 'Well, steady on cowboy. I might do that one day, but not today. But what's your minimum?' I'd say, '$150,000'. And they go, 'All right, well, I'll put $150,000 in, and if this works, then yeah, I might sell or I might not'. That's fine. 

We're finding a lot of people are wanting to see if this is as good as it sounds. And if it is, then I'm sure, over time, they'll end up investing more and more into the fund and, in some cases, less into the hard work of being a landlord.

And I totally understand that side of things as well. I guess what I want to just point out to the audience out there: We're not giving any financial advice. This is basically, you know, targeted towards wholesale and sophisticated investors. So obviously, you need to go out and seek financial advice and legal advice from your own personal situation. 

But yeah, it is a very great opportunity for people interested to have a look. And it's something that I personally understand and might be something that I would be looking into as well, personally as well. 

So it's interesting to hear so many amazing opportunities to be able to help people out there because, as you know, the housing crisis is a bit of a huge, huge problem. And just trying to get kids in the market, or future generations— there's no really any other way to look at it unless you have the 'Bank of Mum and Dad'.

It's very gratifying for us on the buying side with the buying client. Our first clients that we've started buying these homes with, with our clients, our first clients were an Indian migrant professional family who's an IT consultant. 

She's a corporate marketer, living in a little tiny two-bedroom apartment in Box Hill South, saving every penny to help them and their two teenage girls. And they literally used to look across the road and say, 'One day, we're going to buy that home'. And that home came on the market. 

And they've saved a pile of money. I mean, they saved $260,000 in five years. So they're really hard working, hard saving people. They needed another $130,000 to be able to get that home. 

Wow. 

And so we said, 'Well, that's a good home that's sitting on 598 square metres, on high quality dirt. It's a short walk from Laminam station. That's going to double in value all day long. We're happy to be a co-investor in that asset'. We gave them the extra $130,000. And they bought the home. 

It's really exciting to be part of that. But, as I say, we literally could have been a mum-and-dad landlord and bought that home. And for the exact same home, we would have made less financial return by definition, because of the difference in structure, than by co-investing with the owner. And we would have had all the challenges of being the landlord.

It's a smart strategy to look at. 

Well, Evan, I want to say big, big thank you so much for coming on to the podcast today. It's been amazing to be able to hear, you know, things are going really well in terms of the fund and also for LongView. I really, really congratulate you on the success there. And thank you so much for being able to manage that many properties. It's a great pleasure to be able to hear....

It's been eight years of hard work, but it's starting to pay off now. And we really appreciate it. So thanks for your interest and I look forward to talk to you again. We'll give you an update perhaps in a while, and we'll tell you about all the homes we've helped by that stage and how our investors do it.

Thank you to Evan Thornley our guest on this special episode of Property Investory.