Steve McKnight is a professionally trained accountant turned property investor whose tenants include the everyday Aussie to the likes of the 44th President of the United States, Barack Obama himself! He’s also one of Australia’s most successful real estate authors, penning #1 bestselling books like From 0 to 130 Properties in 3.5 Years and its follow up, From 0 to 260+ Properties in 7 years. His opinions on real estate and finance are regularly sought-after throughout Australia and internationally, making him hot property all of his own.
Join us on this episode where you’ll hear how he went from a self-confessed socially awkward kid who was discouraged from doing VCE maths, to being unable to hold a job, to the highly regarded property investor he is today. You’ll learn all about the seminar that changed everything, and hear some fascinating stories involving critters, the house a real estate agent refused to step into, and the horrors of short-sleeved shirts.
01:30 | Second Verse, Same as the First
06:35 | Off To the Big Smoke
09:16 | A Fish Out of Water
13:45 | Perseverance Pays Off
18:31 | Micky G and West Wendouree
21:07 | Visiting Vancouver
24:12 | Slow and Steady Wins the Race
31:01 | Not For the Faint of Heart
35:43 | Red, White, and Blue
40:54 | Good Feels, Good Deals
00:18 | How to Overcome Your Lobotomy
04:53 | The Mentor Next Door
09:41 | Want More Stories? Here’s Where You Can Get Them
12:24 | When the Stars Aligned
Resources and Links:
[00:12:02] In May 1999, Dave and I got in the car. And we drove up to Ballarat, and we bought our first positively geared investment property. And then we soon after sat down and said, 'Alright, we bought one. How many of these would we have to buy to not have to work in accounting anymore?
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 speaking with Steve McKnight, a professionally trained accountant turned property investor and Australia’s #1 best-selling business book author. We’ll hear some fascinating stories about investing in up to 800 properties in Australia and the US, featuring creepy crawlies and to a certain tenant whose name you may have heard before!
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McKnight has bought so many properties since May 1999 that he doesn’t even know the exact number, but the professional property investor estimates it’s between 700 to 800 properties.
[00:00:48] I went from being an unhappy accountant, in practice with a business partner at the time, Dave Bradley. And together Dave and I cast a vision to buy enough property to never have to work in our accounting business again. And by age 32 we achieved that goal. And both of us, although we're no longer business partners, have moved on to our respective niches in real estate, and continue to profit from it.
Second Verse, Same as the First
His typical day is more relaxed now than it used to be, as he happily splits his time between working and spending quality time with his family.
[00:01:30] Normally I'll roll out of bed at around seven o'clock or so. I'll do maybe a half hour of exercise or walking when I pray and give thanks to God for being alive for that particular day. I'll come home, I'll help the kids get ready to go to school, I'll eat breakfast, I'll sit and read my Bible. And then I'll get in and do some work, usually until lunchtime. And then I'll eat lunch. And then I will get back into a little bit more work.
[00:01:58] And then the kids come home from school, so we hang out. I help them with their homework or just have a chat or we do some exercise together. And we eat dinner and then we hang out after dinner and go to bed and the next day, repeat chorus! That's pretty much my lifestyle at the moment.
[00:02:13] I think for me, the vision was financial freedom, which is working when you want, how you want, when you want and with whom you want. And that was always the dream. I don't think financial freedom is getting on the golf course every day, or if that's what you want to do good luck to you. For me, it was still contributing, being productive, adding value, helping people, but also being around for my kids, particularly while they're young and giving them a lifestyle.
[00:02:45] I like to say I want my special growing up to be their normal. So I'm trying to lift the bar a little bit without spoiling them. I mean, my eldest daughter wants a pony. And my wife and I have decided against that, and trying to encourage her to be a bit more responsible. So we're not just giving the kids absolutely anything they want. But we are trying to give them an experience in life that we didn't have, my wife and I didn't have as kids.
[00:03:12] And hence that's why we're in the United States for a year. We moved over here, we bought a house here, the kids are going to school here. And it's a great life experience. It's the sort of experience that when I was a kid, we got in a caravan and went to a caravan park. My kids get on an aeroplane and live in America for a year. And I give thanks to God for that. And it's also what real estate has done over the years to create the wealth to allow us to do it.
[00:03:38] Wow. And how old are your kids at the moment?
[00:03:41] I have a 13 year old and an 11 year old. Two girls.
[00:03:45] Two girls, and they're in primary school at this point in time. Actually, no, that would be high school to equivalent to Australia.
[00:03:52] One's in middle school over here in the US, which is high school in Australia. The other one's also in middle school, which is the end of primary school in Australia.
[00:04:04] How are they settling in with living in the US and going to school there?
[00:04:08] They're a novelty because of their Aussie accent! But they are finding freedoms here in the US they don't get in Australia because they go to an all girls school in Australia, whereas here they go to a co-ed school. And life over here is a little more relaxed than the structure in Australia. So they've settled in well. That said, they miss our pets at home and their friends at home. So they're also looking forward to coming home in a couple of months when our one year adventure comes to an end.
He brought the logic and reasoning he learnt as a professionally trained accountant into his new world as a property investor.
[00:05:05] Some investors are speculative in the way they go about selecting areas and real estate and their profit expectations. And I think other investors are strategic, which means that there is some logic and some reasoning and some basis behind what they do.
[00:04:54] I would count myself as a professional property investor, who uses business principles and accounting reasoning to justify the investments that are bought and the strategy that is adopted to unearth the maximum profit possible.
Off To the Big Smoke
McKnight grew up in Doncaster, which in the ‘70s was considered to be Melbourne’s urban fringe, and attended the local primary school there. He looks back on those days fondly.
[00:06:35] Back in those days, you could ride your bike to school without a helmet. Which would be crazy these days. You were able to stay out just so long as you're home before dark. There were no mobile phones. There was no Internet, it was kids having fun as kids. And accidents happen— the occasional broken arm from somebody fell off the monkey bars— but life went on.
[00:06:56] After primary school, I went to a private school in Melbourne, Campbell Grammar. My parents couldn't afford to send me there but my grandparents could, so they paid for the high school education. After finishing at Campbell Grammar... I like to borrow a line from Robert Allen, 'I was in the bottom third that made the top two thirds possible.' So I wasn't particularly remarkable at high school. I was overweight, I was the second fattest kid in high school. My nickname was Captain Blubber. So I had some socially awkward moments.
[00:07:33] And then after high school, I went and did an accounting degree at RMIT in Melbourne. And then third year of that accounting degree was working for a year. It was called a co-op here. So I was lucky in the recession of the early 1990s to get a slightly undergraduate accounting position, doing tax returns, photocopying, filing, running the boss' dry cleaning into town, picking up his Rolex watch.
He appreciated the opportunity to work in his chosen field, but thoroughly hated corporate life at the same time.
[00:08:08] I used to get to Sunday night and cry about going to work the next day. Ironing shirts... it was just horrible. Anyway, that year ended— it was great to have the money, mind you, so I wanted to go back and finish my accounting degree given that I was three years into a four year degree.
[00:08:24] I kept working part-time at the accounting place for money. And then I luckily got a job at Deloitte. I thought, 'Well, maybe I just had a bad experience with my first accounting job. Maybe I'll go and work somewhere else.' And I got a job at Deloitte and really, really loved it. Spent three years at Deloitte, loved the social feel about the place, loved the camaraderie. The work got a bit boring at the end.
[00:08:52] But at that time, I studied to become a chartered accountant, and burnt out. I was working 10 to 12 hours a day, coming home, doing three to four hours of study. And that was six days a week, and on Sunday I'd just sleep all day. And after 14 [or] 15 months of that, which was the study to become a chartered accountant, I was just thoroughly emotionally spent.
A Fish out of Water
He took some time off in what he calls his career hiatus, to focus on his mental and physical health. This helped him rediscover a passion from before his accounting days.
[00:09:16] I quit my job at Deloitte to try and go back and study physiotherapy at uni— physiotherapy was always my passion. I love massage. I love helping people. I kind of feel like I fell into accounting because I couldn't do HSC or VCE maths because of the high school, they didn't want me to mess up their pass rate. So anyway, as a young adult I tried to get back into physio. I didn't get in, got close. That ended my career kind of at Deloitte. I was ready to move on anyway.
[00:09:44] Spent a while working for ICI, which is now Orica, and then moved on. I'd met my now-wife at Ayers Rock and went up to Mackay in North Queensland where she lived to woo her. Got sacked out of that job in North Mackay. Big fish in a small pond. I remember it was another accounting job and I just couldn't bring myself to wear short sleeve shirts and a tie. I just felt that was wrong.
[00:10:09] The pedigree of working at Deloitte, where you come in a suit and you're well groomed, and then turning up at Mackay where they had ties with that elastic behind it, no one knew how to tie a tie. It was a cultural shock. And I think we didn't integrate well. In hindsight, they did the right thing in letting me go.
It was when he and his wife returned to Melbourne that he got a job in another accounting firm and met Dave, his future business partner.
[00:10:39] You can see I keep repeating this mistake, like a dog returning to its vomit. I got another accounting job, working as a manager in a small firm. I was the audit manager, and the tax manager was a strapping young lad called Dave Bradley. And after working for a while in that accounting practice together, Dave and I looked at each other and said, 'Why don't we start up our own firm?'
[00:11:03] So Dave and I started up our own firm at the beginning of 1999. And after four or five months of doing that, I said to Dave, 'Dave, I'm sorry, I can't do this anymore.' I was suffering health related stress issues. I was good at accounting, but it was destroying my soul. And maybe that's a point for some listeners today— if you're stuck in a lifestyle, or a job where it's just eating you from the inside out... and in my case, I ended up with ulcers on... we'll call it unusual body parts, and you can try and fill in the gaps. I went to the doctor and he said, 'Look, Steve, you've just got stress related illness. You have to change, otherwise, you're going to die early.'
[00:11:46] I had to make a lifestyle adjustment. So I went to Dave and I said, 'Dave, I know that we're new business partners together, but I can't do this anymore. Let's try and do something else.' And we went to a Robert Kiyosaki seminar after reading his book, and then in May 1999, Dave and I got in the car. And we drove up to Ballarat, and we bought our first positively geared investment property. And then we soon after sat down and said, 'Alright, we bought one. How many of these would we have to buy to not have to work in accounting anymore?' It was 150, or I can't remember the number, but it was a large number of houses.
[00:12:22] And we said, 'All right, let's do it.' One by one by one, Dave and I used the money in the accounting practice, he would continue to work in the accounting practice in the early days and I would use the money to invest in real estate. And then as time went on, Dave gradually phased out the accounting practice so that we both ended up being full-time real estate investors. That's the journey.
[00:012:44] Wow. I don't think I've actually heard the journey in such detail. So thank you so much.
[00:12:50] Well, you said you wanted to know the down and dirty details and that is the guts and all story. I mean, I was pretty devastated after being sacked from the job in Mackay. When you get sacked somewhere, it takes your self esteem down a couple of notches. And it took me a few years to recover from that. But with the benefit of hindsight, as I said, I think they did the right thing and they did me a favour because I wouldn't be where I am today if they hadn't have done it.
Perseverance Pays Off
[00:13:45] I wanted to find out a little bit more about maybe growing up with your childhood— did you have any influences from your parents to actually get into property at all?
[00:13:57] Dad sold used trucks and Mum taught piano after school for some extra housekeeping money. But otherwise she was the principal homemaker. Dad, later in his career as he was coming towards the end of it, dabbled in some property investing, pretty speculative. He had a client who bought a lot of trucks from him and together they purchased an industrial site and he quite literally bet the house on it. He mortgaged up the house to get the investing capital to buy it.
[00:14:33] And just before they were going to start operations, one of the large national competing tenants told them, 'If you ever lease out this building, we're going to send you broke.' They had to make a call about whether they were going to do it or fold, and they had testicles the size of bowling balls because they went ahead and did it and it worked out.
[00:15:01] So that was the beginning of Dad's real estate career. And he's since bought a couple of negatively geared properties that have appreciated well in value. He also dabbles in the stock market, but I have a saying that anything Dad buys everyone else should sell because he has the anti Midas touch on the stock market. It goes down in value, so he probably should have stuck to real estate where he's done quite well.
McKnight’s two sets of grandparents differed greatly in their attitude towards money, which affected his parents' marriage and influenced his foray into finance.
[00:15:25] Dad's parents were not particularly wealthy growing up, whereas Mum's parents were more wealthy and so Mum and Dad have clashed regularly over their marriage and they've been married 52 years now I believe. But they've clashed regularly in marriage over money issues. I kind of believe that's why I ended up being an accountant, was to try and— I'm the third child— be the peacekeeper in the family and try and help Mum and Dad sort out their money woes.
[00:15:49] But anyway, life has ended up well for Mum and Dad. They're both independently wealthy now— Mum through inheritance, Dad through his own self made means and a little bit of inheritance as well. And they're fine, they're well looked after, they're self funded retirees.
[00:16:10] As far as my own real estate career goes, I think the lessons that Dad taught me were that if you work hard, you can achieve great things. Mum and Dad were both very independent people. If I wanted to do something as a kid growing up, it was up to me to make it happen. So if I wanted to play basketball, I had to catch a bus to the basketball stadium and organise myself. So while it was disappointing in some ways that Mum and Dad didn't show a great interest in what I did, the lesson that that taught was, if you want something, make it happen yourself.
[00:16:46] And really that is the journey of real estate for me, because if I wanted something I just had the tenacity to go and make it happen. And today people often say about me that they don't think that I'm brilliant— and I don't think I am either— but what I have is a doggedness to continue to push ahead, even in difficult circumstances, and maybe that was forged in those early years growing up.
McKnight believes the details of his first deal portray the journey he undertook which has led him to the 500+ properties he has purchased.
[00:17:56] Dave and I had been to the Robert Kiyosaki seminar and we had looked around Melbourne to try and find positively geared properties. Because at that Robert Kiyosaki seminar— I can't remember much, but I can remember a New South Wales real estate agent getting up and saying, 'I don't understand why people negatively gear when you can positively gear. Look, here's an example of a property where the rent is higher than the expenses. So it will put money in your pocket, and it'll go up in value.' And that was a revelation to me because I knew all about negative gearing, being an accountant and understanding the tax side of it. But I did not know that there were things called positively geared properties.
Micky G and West Wendouree
[00:18:31] So following that, Dave and I had come back to Melbourne— the seminar was in Sydney— and we had looked around Melbourne for positively geared properties. And as hard as we looked, we couldn't find a single one. Even out in the boondocks, we just couldn't find a property where the numbers stacked up. So a friend of mine from years before had mentioned Ballarat. And I had at the time, funnily enough, completely dismissed it and said, 'You'll never get capital appreciation in the country. So why would you bother investing there? You're gonna lose your money. Don't do it.'
[00:19:05] Well, Dave and I thought we'd drive up to Ballarat and have a look around. On our first or second visit we struggled to find anything, but we did meet a real estate agent called Mick Golding, who we affectionately called Mickey G. Mickey G. put us in the car, drove us around and we ended up in a Housing Commission area of West Wendouree, where angels fear to live.
[00:19:37] You know you're in trouble if you turn up to an area and there are shopping trolleys parked on the nature strip. That's just an indication of the mindset of the area. Also a large proportion of people in that area rented because they were on government assistance. And any area where a large portion of people rent and are on government assistance— you know that it's going to be a more aggravating area to invest in.
While they were unaware of the area’s reputation, Mick showed them through some ex Housing Commission stock the government was selling off.
[00:20:12] In one particular property Mick didn't have the keys, so we crawled in through the broken window at the front. And there before us was a cat crucified on the wall, and the floorboards had been taken up and burnt. It was a real shock for a guy growing up in middle class Melbourne to come and see how some of the other half lived.
[00:20:34] In this part of Ballarat, all the streets are named after flowers, so there's Marigold, Begonia, etc. And this house was in Violet Avenue, and Dave and I nicknamed that whole street Violent Avenue after that, because it was such a shock. But Mick had showed us some houses and standard real estate agent trick, the last one he showed us that day was a privately owned home owned by two older people. One of them unfortunately, had come down with cancer, and had to sell up the house to move closer to the hospital.
[00:21:07] We ended up buying that house on the nature strip that afternoon, rented it back to them for a short while, and it was positive cash flow. Not long after buying that property, my wife and I had agreed to go and do a honeymoon in Vancouver and it coincided with some more training on marketing that I was keen to do. And I met a fellow participant at that seminar, Canadian guy, his name was Chuck. And he said that he was a real estate investor. And I said, 'Oh, that's great, Chuck, tell me about how you invest in real estate.'
Chuck owned an impressive number of houses, and although McKnight can’t recall the exact number, he remembers his explanation of the concept of vendor finance clearly.
[00:21:55] In short, he would buy a house for $100,000, say, and he would then sell it to someone else for $125,000, he would pay 6% on his mortgage, and he would charge them, say, 8%. So we'd make a margin on the price and the margin on the interest. And that would be his positive cash flow.
[00:22:01] And over time, he would receive an annuity payment in the form of positive cash flow every week or fortnight or month, or however often he collected the mortgage payment. And he would say he could be in the deal for no money down. Because if his deposit was matched by the deposit the person was paying...
[00:22:52] We figured we could be in it for nothing down on the deal. Because if the deposit that we paid was matched by the deposit that we received— this is what Chuck would explain— then he could be in it for nothing down. And that was how he was able to buy so many properties. And it was like the blinkers had been taken off.
[00:23:11] I remember coming back to the hotel room calling up Dave that night and saying 'Dave, Dave, I've got some exciting news!' He said, 'Well, Steve, hang on before he told me your exciting news, Mickey G rang up and said that there's someone who would be interested in buying the house off us!' For, I think it was $20,000 more. He goes, 'That'd be great!' Because we only bought it for whatever we did, I think we bought it for $54,000 or something like that, and to make a $20,000 profit in a couple of months is an incredible return. And I said, 'Well, Dave, we could do that. But before we do it, what about this for a concept?' And I explained to him what I just explained to you. And he said, 'Well, if you think it might work, then let's give it a go.'
Slow and Steady Wins the Race
Using the marketing he had learnt at the seminar, he came back to Australia and put an ad in the local Ballarat paper to find a buyer.
[00:24:12] I remember being all enthusiastic and didn't get a single call for a couple of days. And then finally someone rang up and they said, 'Not really interested in the house, but interested about what you said that I don't need a deposit, or much of the deposit.'
[00:24:30] He ended up buying the house off us on vendor terms and that was the beginning of how we bought so many properties so quickly. We would use the money in the accounting practice to fund the deposits on properties that were $50,000 or less. You're doing the maths, a 20% deposit's $10,000 plus another $5,000 for closing costs. So we'd need $15,000 to buy a house and then we would sell it on vendor terms and try and get as much of a deposit as we could. And then we would get the positive cash flow difference on what we bought it for and sold it for and what our mortgage was in the interest rate.
All was well and good— until the government introduced the First Home Owners Grant.
[00:25:18] And then all of a sudden the number of people who could take advantage of what we were offering exploded. People could use their First Home Owners Grant to pay for the deposit. And that meant that we would get more money and could make this work even more. So we would go and buy properties, we would stagger the settlement dates, we would run ads in the local paper: 'Own a home for less than it would cost to rent!', because that's how we made it win-win. People would ring up. And then after a while, we figured out rather than us looking for properties, we could empower them to look for properties and provided that met our criteria, we buy it and sell it back to them.
[00:25:52] Let's say that we'd buy a $50,000 house, 20% deposit, $5,000 for closing costs, we'd be in for $15,000, they would give us $7,000 plus usually a couple of grand extra, $10,000 or so. And we would be in the house for $5,000. And then we will be making positive cash flow returns.
[00:26:11] And eventually, what we found to happen was that values have gone up because prices went up and people would cash us out. And we would get a lump sum payment, which would be our price margin, our unamortised price margin, the difference between what we bought it for and sold it for. And then what that would do is there would be a pity because it would end the positive cash flow because they paid us out. But then we would have a big chunk of money in our bank account.
They saw the writing on the wall that while it was great to have the positive cash flow from vendor finance sales, it had an end in sight.
[00:26:45] We took those lump sums that we got— and this was Dave's initiative and kudos to him— he went down to Tasmania and started buying blocks of units together. Dave would source them and buy them and that was how we moved out of vendor finance and into traditional rentals.
[00:27:03] We would employ this principle called multiplication by division where we would buy a house for $50,000— keep the numbers simple— it would go up to $100,000. We'd sell it at $100,000 and buy back two $50,000 houses in another emerging area. And that's how we bought so much property so quickly. It sounds flippant, it sounds like that's the highlights, but it was one deal at a time. We were assisted with a really strong tailwind in the form of the First Home Owners Grant. We created a real estate product, found a market for it, and monetised it, which is again, this business principle of real estate investing that I spoke off before. There's no real difference between business and real estate, if you can find a market, or as Robert Allen once said in a training, find a hungry fish, which is fine to find someone who wants what you want, create irresistible bait in the form of a really great offer. And then drop that into the market, you'll create a feeding frenzy.
[00:28:00] And we didn't know at the time. But that's kind of what we did. And you could do the same thing today in real estate, perhaps not with vendor finance, because prices have gone up so high it wouldn't work on the same basis that we did it which was owning it for less than what you would have to rent it for. And the laws of vendor finance have changed a little bit because people will using it unfortunately to rip people off. But there's always an opportunity if you can find what the market wants and provide it for them. So long as people live in houses, you can make money on the real estate. So the opportunity may change. But the concept won't.
Coming up after the break, we dive into the gory stories...
[00:31:50] Any time a real estate agent does that, sort of lets you go in and they stay outside, you know you're in for a shock.
He divulges his three pronged strategy to assess risk...
[00:01:06] I often ask people at the seminars that I run, 'Can you think of a really great deal that you didn't buy that you wish he did?' And normally, everyone can go, 'Yeah, a property that I talked myself out of or wasn't sure about it.' So this is how to help people in that situation not make that mistake.
He shares the importance of asking for help and sharing knowledge.
[00:06:58] And I'm not too proud as to be able to say that I need to learn from people smarter than me. And so whether it is Stu Silver, or someone that I meet— a valuer, an accountant, someone at a seminar— we all have expertise in our own areas.
And that’s up next. I’m Tyrone Shum and you’re listening to Property Investory.
<insert money partner advert here>
McKnight has had some shockers of stories over the years, but he has learnt a lot from every experience and hasn’t had a moment in his real estate career where he’s felt compromised.
[00:29:29] As an accountant, I'm naturally risk averse and try to avoid betting the bank on a single deal or taking unnecessary risks. That said, in the early investing years, in Dave and my careers, we did buy a property that we decided to renovate ourselves. And with due respect to Dave, and with due respect to myself, we were good accountants and we were emerging property investors, But we were terrible renovators. It was actually the only deal that I've ever done with a family member as well, we brought Dad in on who had retired, Dad was quite handy. And we didn't lose money, but we didn't make a lot of money.
[00:30:41] The learning lesson there was the amount of deals we'd missed because our heads were in paint tins rather than out there looking for the next opportunity, versus the labour saving by doing the work ourselves was just ridiculous. So I think the lesson there was do what you're really good at doing and leave the rest of it for those that are good at doing things that you're not.
Not For the Faint of Heart
One of his best stories involves a foreclosure and a foul smell, but that’s just the beginning.
[00:31:01] A story of a property over here in the US, which might freak a few people out was back in 2009 or 2010, I was looking at buying a five plex. And there was a real estate foreclosure. And funnily enough, Mike Koma, another Mike, was taking me through the property, and he knocked on the door, and the tenant opened up. And immediately there was this foul smell that kind of hit me in the face like a punch.
[00:31:42] I was trying to figure out what was going on. Mike kind of stepped back and ushered me in. So any time a real estate agent does that, sort of lets you go in and they stay outside, you know you're in for a shock. Anyway, as I walked in, I was trying to find where the smell came from. It really was... pungent doesn't do it justice. Putrid is more like it. And I was looking around and I saw a whole lot of cats. And I'm like, oh, okay, and then as I looked around, I saw the kitty litter tray that was full of cat poo overflowing. And I'm like, okay, that's probably the smell.
[00:32:24] And then as I kind of looked at the kitty litter box, and it seemed to be moving. I was like, what?! This is odd. And the tenant's talking to me about the property and I'm trying to listen, and I'm also trying to figure out, 'Why is the kitty litter moving?!' And then as I looked at the kitty litter, I looked at the wall behind it, and it seemed to be moving. And as I looked around, the ceiling seemed to be moving and the floor... I was like, 'Am I coming down with a migraine?! What's going on? This is all odd.' And then just as I felt something crawl up my leg, it dawned on me what was going on.
[00:33:02] The place was so infested with cockroaches, little mini cockroaches, that they were all over the walls and all over the kitty litter and all over the ceiling and all over the floor. And they'd started crawling up my legs. And I was kind of thinking, 'Ugh!' And then just as I realised this, everything kind of clicked into place. The tenant says, 'Yeah, as you can see, we've got a cockroach problem here. I've been in hospital twice, they've crawled into my ear canal in the nighttime, and I've had to go to hospital to get them taken out.'
While others would’ve been out the door by this point, McKnight doesn’t shy away from a challenge.
[00:33:39] Well, I guess I'm the guy who likes to buy problems and turn them into solutions. So despite the cockroach problem, we bought the property. We did move the tenant out, it's kind of not appropriate to have 10 cats in a little one bedroom bedsitter. So we moved around and we had to put a big tent over the whole property and gas it. Anyway, we still couldn't afterwards get the smell out of that unit, even though the cats weren't there anymore, and the kitty litter wasn't there and the tenant wasn't there anymore.
[00:34:10] And so we had to peel off the plaster in the walls and we took out 10 fifty gallon drums of dead cockroaches, dead little mini cockroaches. Shovelled them into the— well, I didn't do it. Cleaning up property did it, he had to take out... I don't know, hundreds of thousands of these little cockroaches that had infested the place and got behind the wall. And then we gradually turned around. About a year or so ago I sold that property and made a good capital gain. But it was a bit of a problem.
[00:34:51] Gosh, that is a very, very interesting story. I'm even just sitting on the edge of my seat going, ‘Oh gosh.’
[00:34:58] We could spend the rest of the day talking about things that I have seen and done in real estate! Real estate investing when you buy problems and turn them into solutions is not for the faint hearted. But you can make a lot of money out of it. I'm not talking about slumlording or ripping people off, I'm just talking about buying a property that is somehow inefficient, and solving that inefficiency, and making a margin on doing it either in extra rent or extra value.
Red, White, and Blue
McKnight certainly shows us it’s possible to end a horror story with a happy ending! He delves into a sticky situation where the outcome can only be described as presidential.
[00:35:43] Most of my investing has been in the US since 2009, when I cashed out of Australia and brought my money over to the US because house prices over here were so ridiculously cheap, the returns were so high, the dollar was high. And I foresaw an opportunity. But I've been buying some stuff back in Australia recently, too.
[00:36:04] The story that comes to mind here is that I bought another property in foreclosure downtown Fort Myers, Florida. And there was a bit of a problem with it in that the bank owned it, but it was a double storey building, and there was the staircase at the back. And we said to them, 'Look, we'll either replace the staircase, and you give us a $5,000 discount on the price, or you replace the staircase and we'll pay the asking price.' And they said, 'No, no, we'll go ahead and we'll change over the staircase back.' I said, 'Okay, no worries.'
[00:36:44] I think it ended up costing them $30,000, which was quite a lot of money because the whole property was only $80,000. And then be that as it may, the remarkable thing about that building is that Obama then leased it for his campaign headquarters for Southwest Florida here. So I've had Barack Obama, the ex President of the United States of America as one of my tenants.
[00:37:08] That's fantastic. Wow, what an amazing story to share on that one. That's great.
[00:37:17] When you've been investing in real estate for 15 plus years, you've bought hundreds of properties around the world, Australia and New Zealand, United States, you've probably seen everything there is to see and sometimes even twice. There's never a dull moment, that's for sure.
McKnight sees his aha moment as not so much a moment, but as a realisation that the self-described average man from Melbourne had become a successful investor on the other side of the world.
[00:38:03] I've been very fortunate that one of the skills that I've got is being able to reasonably accurately predict changes in market momentum. So ahead of the curve in Ballarat, ahead of the curve in New Zealand, ahead of the curve in the United States. Now that's only by the grace of God, I don't have any soothsaying ability or anything else like that. It's just I've seen the same opportunity present itself a number of different times.
[00:38:32] I would think that the best thing that ever happened to me in my investing career solo— so after Dave and I shook hands and moved on to our own respective niches— was the decision to come to the United States of America and invest here. It was 2009 and it was carnage real estate over here, but I managed to buy a couple of hundred houses, some by myself, some with another investing partner Aaron Dunlop, mobile home parks. And what's happened is that the strategy played out and it's always nice to see a strategy play out. You think it'll work but when it does work, it kind of feels self-fulfilling.
[00:39:19] So the money that's been made over here in the US has been good but that aside, it's watching a strategy play out and then realising that yeah, you can do this. A middle class guy from Melbourne, ex accountant, sacked of a job in Mackay, second fattest kid in high school, with all the doubts and fears and insecurities that we all have— when a plan comes together, to quote the A-Team, it's great.
[00:39:49] My aha moment was I knew I could do it with Dave, could I do it by myself? And coming over here and investing in the United States proved I could. And that was an aha moment. So given that I had proved that I could do it by myself, or as I like to say, with God as my business partner, that then gave me a confidence and allowed me to go to a higher level with my investing than where I'd been before.
Good Feels, Good Deals
As much as he loves real estate, before emotion comes into it, he first and foremost sees it as a business transaction.
[00:40:54] There's emotion, don't get me wrong! I mean, I love sniffing out a deal, I put a property under contract last week, $2 million for the fund that I run here in the United States. And I think that property will do well. And since managing to secure it, it was me and another guy that were head to head trying to get it under contract, they bid a bit more, but I had a better track record of closing and was a cash buyer. So they went with me. And the agent said, ‘Well, since giving you the nod, we've had about 30 calls from other people who want it too.’ And that feels good. That's exciting, because you know that you've got a good deal when that kind of thing happens.
[00:41:39] I'm just excited about the future, I guess, if I'm excited about anything. I'm excited about watching my kids grow up, excited about getting old with my wife, and excited about continuing to invest and make money and to use that money to bless my family and to bless other people. And until God calls me home, to continue to try and not only— because I think I've got enough myself— but not only to provide for myself, but to provide for others.
[00:42:11] I think there's an obligation that to whom much is given much is required, and monetary wealth brings with it advantages. There's no doubt about it. But it also brings with it a responsibility. And you have to be careful about how you discharge that responsibility. I want to get to heaven, and I want God to look at me and say well done good and faithful servant. I heard someone say recently that money is a tool and not a weapon. And I think that's a really good way of describing it. And I think I want to continue to use money as a tool to benefit myself and to benefit others.
How to Overcome Your Lobotomy
He can only think of one thing that was holding him back from initially investing in property, and it had everything to do with his prior training.
[00:00:18] When you're trained as an accountant, what they do is they perform a lobotomy and take off that part of your brain that is willing to accept risk. And that's why accountants are so risk averse. And so in order to take on risks, I had to find a way of replacing that portion of my brain that would allow that to happen. It's very hard to find a way to overcome risk, and in any transaction there's risk.
[00:00:51] I've come up with a three pronged strategy, which I'm happy to share with you now, that I hope will help the listeners. So let's say that we've got a property that we want to buy and we think it's really good, but we're not sure if we want to buy it. I'm not sure what's going to go wrong. And I often ask people at the seminars that I run, 'Can you think of a really great deal that you didn't buy that you wish he did?' And normally, everyone can go, 'Yeah, a property that I talked myself out of or wasn't sure about it.' So this is how to help people in that situation not make that mistake.
McKnight’s strategy revolves around the three Ns, and the first step is as simple as knowing what you’re afraid of.
[00:01:26] The first one is when you've got risk, you've got to name it. You've got to explain what that risk is. What are you afraid of? Are you afraid the property is going to go down in value? Are you afraid the tenant's gonna trash the property? Are you afraid you're not gonna be able to find a tenant? Are you afraid you don't have the skills to be able to pull this off? Try and identify what you're afraid of. Because if you can name what you're afraid of, you can do something about it. But if you can't name what you're afraid of, if you're afraid of the dark, for instance, you're afraid of the Boogey Man, you're kind of afraid of something that doesn't really exist. If you can name it and be specific about it, then you can do something about it.
[00:02:07] Which brings us to the second point, which is after you've named it, you've got to number it. You've got to try and assign a value to the risk. Alright, so let's say that you're worried that you're gonna pay too much for the property. How much might you be paying too much? Is it $10,000 is it $20,000? Is it $100,000? When I first got started, and we were buying $50,000 houses, I was afraid that we would lose $50,000. That was a lot of money to us at that point in time. But really, we weren't losing $50,000. We bought it for $50,000. And we had to fire sell it back to the market at $40,000. Then really what we were losing is $10,000 plus purchase and sale costs. So we weren't really risking $50,000, we might have been risking $20,000 or $30,000. And not understanding what we were really risking meant that we were perhaps passing deals that we should have accepted.
[00:02:58] So first of all, you got to name it. Second of all, you got to number it. And then the third strategy is you've got to numb it, which is devise strategies to mitigate the risk. So you don't have to take on a risk, what I call a naked risk, which means that you just take it on, you don't do anything about it, hope that it doesn't happen. If you've named it, if you've numbered it, and you've got a strategy to try and numb it, then that allows you to take on deals with risk and still proceed and sleep at night.
More recently, McKnight has set up an Australian property fund to buy properties in the United States, and has bought a staggering $140 million worth of real estate since 2012.
[00:03:41] The only way that I've been able to buy some of the properties that I've bought is through that name it, number it, and numb it strategy. Because some of them evaluate opportunities. There've been some problems and I haven't necessarily known exactly how I was going to solve that problem. But by brainstorming with smart people, and coming up with strategies, it meant that we could still buy it nonetheless and have the confidence that we would turn it around over time.
[00:04:06] So once again, real estate is all about making the most money in the quickest time for the least risk and the lowest aggravation. And you want to buy a property where the upside is greater than the downside by enough of a margin to make it worthwhile. So we're talking about risk. And the way that we manage our risk is to name it, number it, and numb it. So if you can do those things, then you're able to invest at a level and a mindset that exceeds what most people are able to do. And therefore you can take on deals that other people can't and invest in ways that other people aren't aware of.
The Mentor Next Door
[00:04:53] Any resources or mentors? Did you actually seek help from? And I know you've mentioned Robert Kiyosaki from Rich Dad, Poor Dad. Were there any other people that you sought advice from?
[00:05:05] I read widely. But I think a mentor is someone that goes to the effort of knowing you a bit better than just an author of a book. So I think I've had influences— Robert Kiyosaki, John Burley, Robert Allen, Ron LeGrand, Don Campbell, just to name a few off the top of my head. And then I've had mentors.
[00:05:30] I would call Dave Bradley a mentor. Dave Bradley is the shrewdest person I know when it comes to money and property investing, Dave just has a talent of being able to sniff out every last cent in a deal. And he's very smart deal maker. And I learnt a lot from Dave Bradley. And I'll be forever thankful for the time that Dave and I had together. And I enjoy catching up with Dave a couple times a year, even now, and trading stories and reminiscing on some of the old days.
[00:06:05] More recently, a guy over here in the United States of America, Stu Silver, who's an older Jewish guy, who would be... I'm guessing in his early to mid 70s, who has been investing for 30 or 40 years. And Stu, who I call Uncle Sally, has taken me under his wing somewhat, and over the last five or six years has really shepherded and mentored me in the field of commercial real estate, which is now my expertise. And he has been a great confidant when I've been feeling lonely, because when you operate at a level that I do, there's not a lot of people out there that really understand what's going on. So he's been able to share some of my burdens, and to encourage me and to also guide me, and to give more than anything, a lot of wisdom.
[00:06:58] And I'm not too proud as to be able to say that I need to learn from people smarter than me. And so whether it is Stu Silver, or someone that I meet— a valuer, an accountant, someone at a seminar— we all have expertise in our own areas. And I'm always open to try and learn. I think the two most dangerous words you can ever utter are 'I know,' because if you say I know, then you go from being teachable to unteachable. So I'm always, 'Well, that's fair. That's interesting. Can you tell me more? Can you teach me? Can you show me? Can you tell me?' Because I'm eager to learn, I'm eager to improve. You can always be better. And so I look forward to those opportunities, I look for those opportunities to learn from other people, not only their successes, but also their failures. And I enjoy that.
[00:07:50] That's fantastic. Great advice there as well. Can you share with us a personal habit that's been contributing towards your property investment success as well?
[00:07:58] I think the due diligence that you can do before going into a property transaction really sets you up for success. So I've created a due diligence process. And I'm in the process of turning that into a product. But until I do this programme, which has got a preliminary and comprehensive phase to it, it is a habit. It's a checklist. It's kind of like getting in a plane and doing a pre-flight checklist, just to check the list, check everything off, check, check, check, make sure you don't miss something, do a little test, run through the numbers, etc, etc. And I think what that does is it protects me from myself.
[00:08:47] Because when you find a piece of real estate, it's very easy to form an emotional bond with it, and perhaps be glass half full, and overlook things that you really ought to not overlook. So having a due diligence checklist, and a due diligence template, and due diligence methodology that is forged on the back of buying hundreds of properties and millions of dollars worth of commercial real estate, really is a habit and a strength that protects you from buying a property that you should otherwise say no to.
Want More Stories? Here’s Where You Can Get Them
McKnight is the author of a handful of books relating to his property journey, all of which have received reviews praising his strategy as well as his sense of humour.
[00:09:41] My first book I wrote was 2003, From 0 to 130 Properties in 3.5 Years, and it charted the story of how Dave and I went from zero to 130 properties in three and a half years. Now, the listeners are somewhat familiar with that story, because they've heard me describe it over the last podcast and this one. But there is more information in the book about the deals that we bought and the strategy and lots more funny stories about the silly things that happened along the way. Plus, there are also some other accounts of people who've been following my real estate training and the successes that they've had. So it's a very good read. And then it's been Australia's best selling business book ever, sold over 300,000 copies. And a book doesn't do that unless there's some value in it. So for those of you who haven't read From 0 to 130 Properties in 3.5 Years, go to the local bookstore and pick up a copy or grab it on Amazon Kindle or whatever you want, it would be a good place to start.
[00:10:40] I then wrote a follow up book From 0 to 260+ Properties, which talked about how life changes once you become financially free. And then more recently, I put out a book called Millionaire, which is a book that I wrote in conjunction with Stu Silver, my mentor who I mentioned before. It contains 260 insights and pearls of wisdom, which Stu and I shared. The context of it was, if we were only going to give one more seminar, and we had our nearest and dearest in the crowd, what insights, what wisdom, what ideas, what concepts would we want to share? What would we want to say to future generations who will come after us who we'll never meet? So we put that book together, which I think is actually my favourite book out of all of them.
[00:11:30] And then, for those of you just starting off at propertyinvesting.com, you can get a free book, which is From 0 to Financial Freedom, which is a story of how you can use real estate today to achieve your goal of financial freedom. You can't just buy 130 properties like what Dave and I did, property prices have gone up too high. There's a different methodology that you need to adopt today. And that's all outlined in the book that you can get for free, just pay postage at propertyinvesting.com.
When the Stars Aligned
McKnight took bits and pieces of his Australian investment strategy and applied it to his experience in the US, but much of it needed to be modified due to one big, Florida-sized reason.
[00:12:24] The United States of America is a big country. There's nearly as many people live in Florida as the whole of Australia. So that gives you some idea of just how big the United States is. And in 2009, the Australian dollar was getting up there. And it went over parity. And since come back down, prices had been crashed with what they call the Great Recession. And I was cashed up. So 2009, I came over here and started buying single family, multi family homes and some mobile home parks as well.
[00:13:00] The residential property market started coming back, and so I thought the next thing that would move was commercial real estate. And not having enough money to go and buy millions of dollars worth of commercial real estate, I went back to my database of propertyinvesting.com and said, 'You guys have always been asking me to create an investment opportunity. I've always said no, I'll teach you how to do it. But I don't want to do it for you. Well, the stars have aligned, the dollar's high, prices are low, residential property's coming back, if we're ever going to do something, let's do it.'
[00:13:30] So I bought an unlisted public company, got an Australian Financial Services licence, went to the database and said, 'Who wants to come on the journey?' The problem was people kept asking me, 'What's the return going to be?' And I kept saying, 'Look, I can't tell you because I don't know. And it's illegal to give an earnings estimate if you don't have a basis for it.' So all I could do was raise money on the back of trust, and, well, I guess it goes to show that people did trust me because we raised $30 million, got started buying commercial real estate.
As people saw the properties they bought and the deals that were going on, they began to invest more and more.
[00:14:09] So the maximum that we got was $75 million, which was as high as I want it to go and we're currently full so people couldn't invest even if they wanted to. And then we turned that money, we borrowed a little bit and we went and bought commercial real estate in Dallas, Georgia, Tampa, Orlando, Fort Myers. And the strategies played out. The real estate market's come back, exchange rate's gone down. And I think the return that people have got since inception is somewhere around 75 or 80%, which is pretty good for a managed fund.
[00:14:43] Now, past performance is not a guarantee of future performance. No earnings or estimates are made, people have to read the PDS. We do have a once a year redemption which happens in around September each year. And then that's an opportunity for new people to come in. But my investing today, Tyrone, is I continue to head up this fund. We've got a management team over here in the US, so I oversee the management team in the US, I oversee the management team in Australia. And I'm soon going to be starting a commercial property fund in Australia. That's my next project. ASIC has just varied our licence to allow us to start up a fund in Australia. And I'm soon going to start putting together the product disclosure statement.
[00:15:27] I know that people are interested in commercial real estate, there's a different way of thinking about commercial real estate than residential real estate. The dollars are bigger, so it means that people are unlikely to be able to own a $10 million commercial property in their own right. So for people who are interested in finding out more, you can go to propertyinvesting.com and join the database there. And when more information is available, I'll email the database, and you'll be able to find out about it and read the product disclosure statement and see if it's for you.
[00:16:00] But it's my next exciting opportunity. It's sort of where I see the next 10 years of my life, setting up this fund. I've done it in America, the next thing to do is to do it in Australia. And I think I've got the ability to do it. But we'll have to see how it all pans out.
Thank you to Steve McKnight, our guest on this episode of Property Investory.