In this episode of Investor vs. Developer, Flux plunges into the three different ways to approach property investment and explains the differences between passive, semi-passive, and active investors. Timelines play a big role across all forms of investment and development, and he explains how and why it’s so crucial to know where you stand. Last but not least, Flux answers imperative questions such as: If you don’t have the resources and serviceability that the banks want, can you ever get into property in the first place?

Timestamps:
00:35 | Same Same But Different
04:19 | Cash Flow is King
15:13 | The Big Four
18:54 | Plus the Big Three
29:07 | Livin’ It Up
34:00 | All in Hindsight
43:42 | The Population Growth Factor
47:28 | Supply and Demand
53:44 | Delegating vs. Abdicating
57:28 | Changin’ It Up
01:02:09 | For the Tribe, By the Tribe

Resources and Links:

[00:05:08] Cashflow puts food on the table. There's a lot of people out there who are millionaires in theory, but they're living a poor lifestyle because they can't unlock the cash and actually put that into their assets. So these conversations that we're having through this series are going to help people to actually understand how do they position themselves much better moving forward.

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 special episode we’re speaking with Rob Flux from Property Developer Network. He shares all there is to know about the three different approaches to investing and the importance of finding the deal that ticks all the right boxes. Last but certainly not least, he also reveals how you can make money from a property without ever owning it.

Tyrone Shum:  

There are so many ways to look at and approach property investment, and Flux has a wealth of experience in them all. Whether it be his own property journey or a member of Property Developer Network, he’s seen it all and is keen to share. While each strategy has its distinct characteristics, he notes that they have a lot more in common than it may appear.

Rob Flux:  

[00:00:35] Everyone tends to go through a journey in the way they want to attack their investment approach based on where they are in their life, what their risk profiles are, and a whole bunch more. 

[00:00:46] And in most instances, they'll start out as a normal everyday investor, so what I like to refer to as a passive investor. Now, by passive, what I mean there is that we take a small amount of effort at the start, but then we kind of let the property do the work. And we let the market do the heavy lifting for us. 

[00:01:06] So it's a long term approach. And we're not really doing a heck of a lot on a day to day basis, other than keeping our property managers at bay and making sure that they're doing their job appropriately.  

[00:01:18] The next approach is the exact opposite of that, that is an active approach. And that is the property development realms of an active developer. And they are putting lots of sweat equity into the process, lots of knowledge, lots of effort in order to force value onto the property. 

[00:01:38] Then there's the 'Well, what happens if I want to be halfway in between? How do I go from one to the other?' And that is a semi passive investor, where they might be an investor that partners with a developer in some way, shape or form and lots of different ways that they can actually partner in doing that. 

[00:01:55] So there's really those three phases that people can approach. And there's massive differences between each of those approaches, how you look at a deal, how you fund a deal, how you assess a deal, what sort of returns, what sort of timelines, even your risk profiles, everything changes massively on the way for each of those. 

[00:25:17] So we want to flesh that out today and give some people some insights into, what does the scary world and development look like? And how do we maybe get there?

Tyrone Shum:  

[00:02:28] What would be really good, just also for me to understand this is to maybe to provide examples of maybe the passive investor, the active developer, and a semi passive [investor]. 

[00:02:38] I think we kind of just talked a little bit about it just a moment ago, what that is, that's basically the who, the how. But we're kind of thinking, 'Okay, who is that typical?' Would that be someone who's maybe just bought one or two investment properties, has a principal place of residence and up to people who have dozens and dozens of properties, who are just buying and holding?

Rob Flux:  

[00:03:00] Buy and hold is the investor type approach. That is the long, and the hold part is exactly the passive part that I was actually referring to, is that you're not really doing a lot with it. We're just collecting properties. So if you're a person who collects properties, almost certainly you're an investor. 

[00:03:18] There's only really a couple of reasons to be buying a property in the first place. And I think some people don't really put the right energy into: Why am I buying the property in the first place? 

[00:03:31] There's really four reasons. So there's capital gains, there's cashflow, there's manufactured profit, and lastly, there's the lifestyle. 

[00:03:40] Now, a principal residence is very clearly lifestyle. Investment is really the capital gains and the cash flow side of things. And the property development is the manufacturing profits with putting our sweat equity into forcing value onto the property. 

[00:03:58] Then there's the what happens if you do do property development, and you keep some stuff? Well, then you actually segue between forcing value on and then you just sit on your profits and let that grow with the market as an investment as well. So there's ways to combine both of those strategies together.

Tyrone Shum:  

[00:04:14] That's absolutely right. And the interesting part is that you've done both, and you are also doing both still.

Rob Flux:  

[00:04:19] I like to think of myself as a wholesale investor. So I'm manufacturing the profit into it. So I'm manufacturing the properties at a wholesale rate, and then trying to keep those ongoing. And that wholesale is the value that I've forced on. But then I keep it long term for the passive cash flow that it actually generates. 

[00:04:44] And it really comes down to the fact that there's really two kinds of return that you're actually going to get out of a property. One is wealth creation, and that is the capital gains. Wealth creation means that you could be a millionaire on paper, but being a millionaire on paper doesn't actually put food on the table.

Tyrone Shum:  

[00:05:06] We always laugh about that one.

Rob Flux:  

[00:05:08] Cash flow puts food on the table. There's a lot of people out there who are millionaires in theory, but they're living a poor lifestyle because they can't unlock the cash and actually put that into their assets. So these conversations that we're having through this series are going to help people to actually understand how do they position themselves much better moving forward.

Tyrone Shum:  

[00:05:30] I guess on the flip side, as well, just from my experience, and seeing that developers [are] also very similar as well, too, because developments can take anywhere between two [to] three [to] five [to] 10 years, sometimes, depending on how large the development is. And unfortunately, equity is locked in as well until the property actually gets sold. 

Rob Flux:  

[00:05:50] Sometimes they can take that long, but I've done deals that are only six weeks in nature. My record is a six week turnaround for a $194,000 profit. That's not my record from an amount of cash [perspective], but that's a record for the fastest I've turned a project around.

Tyrone Shum:  

[00:06:10] That is phenomenal. So actually, yeah, then I'll be corrected on that. Six weeks anywhere up to 10 years. Oh, that's awesome. 

[00:06:20] I think the interesting thing is that there's so many different ways to look at this. And being on a passive approach, yes, you can accumulate and buy all these properties. But if the cash flow is not there, then you're pretty much, as you said, on paper, you've got all this equity that's sitting in there. But to unlock it, you've got to do a different way. 

[00:06:34] Whereas a developer wants to try and extract the equity out as quick[ly] as possible [so] they can use it on to their next project or live their lifestyle, or whatever they choose to do with it, which is phenomenal. 

[00:06:44] So I think what would be really interesting to talk about then is to jump in, as we kind of touched on the reasons why you buy property, and then the different perspectives behind it. So should we take a look and have a look at say capital gains, because that's an interesting topic we just kind of just touched on right now. But let's delve a little bit deeper on that one.

Rob Flux:  

[00:07:03] Capital gains is the value that is actually added to the property. By letting the market do the uplift, so you buy it at one price, and you sell it at another price, that is the capital gain. 

[00:07:15] The ATO loves to have their little grab at that when we actually do eventually cash in. But if you never cash in, you don't actually pay tax on capital gain. So I guess you want to try and get to the point where you're not having to sell your properties down to put food on the table.

Tyrone Shum:  

[00:07:32] That's right. But at the same time, if the strategy is just to hold on to these properties, and try not [to] pay tax, which we don't want to be not doing, but at the same time, I guess how do you extract that out from a passive investor point of view? And this is where the challenge I'm looking going, you've got this massive portfolio, I know some people who've got $20 million property portfolios, but they've still got $100,000 in debt. Having to pay every year $100,000 in cash flow to be able to keep this portfolio going alive. That's not a very good outcome in that many properties.

Rob Flux:  

[00:08:08] I'll talk to an approach to get that out, which is not one that I subscribe to, but I know certainly a number of people that actually do. But I guess there's firstly when we look at it, if you're looking for a capital gain type perspective, we're letting the market do the heavy lifting. And it's a long term type of approach. 

[00:08:26] And in the short term, that's going to have some cashflow implications, it's going to consume some equity in order to put the deposit down, and potentially is going to consume some serviceability in order to fund the debt that's actually going to get there. 

[00:08:41] So for the first five or six years, you're in a position where it's kind of only just washing its own face in many instances. And if you're negative gearing, it's actually going backwards and actually hurting you whilst you're waiting for the capital gain to actually start to come in. 

[00:08:58] If you look at the matrix of time versus return, it gets to a point where you can be negative geared and it's actually cash flow out of your pocket. But at some point, it actually gets to the point where it actually turns around where it actually starts to come back in your favour. 

[00:09:15] And so for me personally, from an investment point of view, and remembering I've done 20 years of investing and 15 years of developing, negative gearing is just a really bad business model. In my humble opinion.

Tyrone Shum:  

[00:09:33] That's the reason why we look at positive cash flow properties nowadays, because it's supposed to be self sustaining.

Rob Flux:  

[00:09:39] But once it gets to the point where it's washing its own face and it's positive geared from that perspective, then as time starts to go on, not only is the capital starting to grow, but typically your rents are gonna start to go up as well. And it starts to get better and better and better the longer you actually hold it. 

[00:09:56] So there's this segue where you're trying to get to that one, I guess the crossover where those two start to collide. And once you've beaten that, then you can afford to hold anything for as long as you want to. 

[00:10:10] But that's the hard part to get. And that's where property development enables us to get to that segue much, much faster because [we're] actually forcing the value on. And rather than buying it at what I call retail price, where somebody else has made a profit out of it, we're manufacturing at a wholesale price, which means that the equity that we've built into it day one, our sweat equity that's gone into it. So we get to that segue much faster.

Tyrone Shum:  

[00:10:39] Which is very similar to what you've said, you've done a deal in six weeks, and you've made capital gains on that one in a very short space of six weeks.

Rob Flux:  

[00:10:48] I did not make a capital gain on that. And we'll talk about taxes in a sec. I made a profit, very distinctly different. And maybe we segue into the taxes that apply to them right now.

Tyrone Shum:  

[00:11:02] So we [had] better distinguish the differences between a capital gain compared to a profit for the audience and also my sake, because I am now going, 'Okay, yeah, you're probably right actually,' thinking about how this is different.

Rob Flux:  

[00:11:14] I want to put a great big asterix and a disclaimer here to say I'm not an accountant, I'm not a lawyer, I can't give financial advice or those sorts of things. 

[00:11:22] But the ATO looks at your intent. So if your intent is to be a long term investor and hold on to the property, then they're going to say that capital gains applies, and they're going to allow the market to do the lifting, and they're just going to look at the uplift in the market. 

[00:11:40] If you're doing property development, where you're forcing value onto the property, then the ATO deems that as what they call an enterprise. An enterprise is, I guess, you have the purpose of actually going out and manufacturing something. And in this instance, we're manufacturing property, [that] is our widget. And so we're turning one something into many somethings. 

[00:12:04] And so they're gonna say, 'Well, if you're running an enterprise, you're effectively running a business, if you're running a business, then GST starts to apply instead'. So you can pay CGT, or GST, you can't pay both. It's an either or type tax.

Tyrone Shum:  

[00:12:22] That's really interesting, because then at the beginning— and sometimes this is where I think people stumble into this, particularly property investors— when they first start this, they may go, 'Okay, look, I've got some property here, I may have held it for maybe two or three years, and I've decided I'm going to do a renovation'. In a very short space of maybe six to 10 weeks or something like that they have renovated a property and then decided to put on market to sell. 

[00:12:44] I'm not sort of leading into any answers for questions for these, because it's going to be sort of like a tax accountant type of question. But it's interesting, because that's what we got differentiate the difference here. Whereas if you're [a] straight out developer, then you would be thinking, 'Okay, I'm going to be really running a business from the start. And everything that I make from the development of these properties is essentially profit'. Business profit, which you can actually consider as being.

Rob Flux:  

[00:13:11] In that example that you just gave me, the intent— and remember that's what the ATO looks at— the intent was that somebody was going to long term hold that and at the tail end of that, then they force some value on through the renovation. 

[00:13:25] So the ATO looks at, 'Well, the original intent when you actually acquired the property was the long term buy and hold'. And so the bit that you did at the end, they go, is just you really realising the best return for that original intent. 

[00:13:38] And so that's the distinction. So if you had have bought it with the intention of flipping it on the spot and getting rid of it straight away, then they would have said, 'Well, that is a business'. Whereas if you're holding it, and then you renovate it at the end, then they say, 'Well, actually, that's an investment'. That's the subtlety. 

[00:13:58] There is a segue from a timeline perspective where it kind of gets a little bit murky. I'm going to highly, highly recommend you go talk to your accountant, as to where that blurry line starts to fade. And equally, it becomes blurry if you manufacture it upfront, and then choose to then hold it at the end. So there's also a segue between, well, when does GST turn into CGT if you hold the assets that you kept that you manufactured for the long term?

Tyrone Shum:  

[00:14:32] Gosh, okay, that is definitely an accountant slash tax advice there that someone will need to seek on. So that's very interesting, though, because it gives you the different perspectives that can happen. 

[00:14:42] And I think, from my perspective as a sort of a passive investor, as well, too, you typically buy the property and you go, 'Yep, it's been sitting there and holding well'. And I can give you an example actually, it's my principal place of residence. I bought it, we lived in it for about five years. And then after five years, we decided to rent it out. But before I rented it out, I went in and did a reno for it. [I] just uplifted the bathroom, the kitchen, painted it and everything. And now it's turned into an investment property. And that's typically the segue .

Rob Flux:  

[00:15:13] Let's have a look at that one example, mate. So remember I said there are four reasons to buy a property? So you bought for lifestyle. So when you assessed that property right up front, you didn't assess it for the capital gains, and you didn't assess it for the cash flow purposes, you assessed it because hey, it met your family needs. 

[00:15:34] Then when you decided your family needs had moved on, you've decided, 'Look, I want to potentially turn this into an investment'. But you hadn't gone and chosen: Is this the best place for capital growth? You didn't go and assess [if] this [was] the best place to get my cash flow. 

[00:15:52] And so that particular property, while it might be performing well, is there potentially an opportunity for you to say, 'Could I have done better by putting that money somewhere into a different property?' And I think a lot of people do that really quick. 'Oh, I've already got it. I'll just keep it'. And they don't do the hard assessment and go, 'Actually, is my money working hard enough if I actually left it there?' And in some instances, it's not.

Tyrone Shum:  

[00:16:19] That's exactly right. Just from my personal perspective, I've held that one for now 12 years. And I look back, if I had actually purchased a block or house, a land and house package out maybe 10 minutes down the road from where it is, I would have done tremendously better because it's got a land and house. 

[00:16:36] Whereas this is in the complex of townhouses that we purchased it. It suited our needs when we were younger, and we thought, 'Okay, that's great, we're gonna have a small family'. Obviously, that family house didn't turn into a big enough house to live us. So that's the reason why. 

[00:16:49] And then I just thought, you kind of get busy with family. This is the challenge we all face. When we have young kids, have a family and stuff like that, you end up just going, 'Okay, I'll put this on the side and just live life'. 

[00:16:58] But then you realise after a few years seeing capital growth and the changes in the market, then you go, 'Maybe five years ago [I] should have just offloaded it and then bought something else as well'. So it's [a] good point that you raised there.

Rob Flux:  

[00:17:10] This is the wisdom of hindsight. And so for everyone out there listening, learn from the lessons from both of us. And say you should be regularly assessing every single one of your properties at least every six months, and preferably every three to say, firstly, out of those four reasons that I bought it, is it actually meeting its original intended purpose? 

[00:17:34] Now remember, the markets are going to go up and down, there are going to be times where lots of capital growth happens in a very short period of time. And there's going to be other times where that doesn't occur. And so you might have a look at your portfolio and say, 'Well, right now, is this property performing as intended?' And if it's not, then ask yourself the question, 'Can I do better with my money? And is it the right time for me to actually turn that over?'

Tyrone Shum:  

[00:17:58] Very, very good questions. Which kind of also leads me to ask the question about cashflow, too, because we just talked about capital gains, particularly for just a buy and hold strategy. And yes, it's very important to assess that. And as markets have gone, don't get me wrong, the property I had had doubled quite well. But as I was saying, it could have been invested into another location. 

[00:18:00] Cashflow wise, though, that's interesting. Because the cashflow on this one after I think maybe about [it], I think it's about five years or so, it started just paying itself off. And it has been since then, which is exactly what we talked about at the beginning, when you start getting to a certain point, you might buy a property, it's a little bit negatively geared. And then after a few years, bang, it starts to become positive cash flow, because of the capital growth and the cash that you've received from the rental increases and so forth. 

[00:18:45] So maybe let's have a chat a little bit about the differences between cash flow for say, a passive investor compared to say, a developer or active developer.

Rob Flux:  

[00:18:54] In order to do that, we need to understand that for any investment, whether it be passive or whether it be active, there are really three lots of cash that you need to worry about. 

[00:19:05] The first one is the deposit in order to purchase the property. The second one is the debt in order to fund the balance of that purchase. And the third one is any liquid cash that you need to actually get the deal to work. 

[00:19:22] So you might need stamp duty as in searches, and that sort of thing from an investment perspective, or you might need development approvals and town planners and that sort of thing from a development perspective. So those three levels of cash are needed for any deal at all. 

[00:19:40] If you then start to have a look at, 'Well, when do I need that?', well, there's the acquisition phase where you need to actually assess how much those three elements are needed. It's then start to go into a development, you then need to go into, what about a construction phase? So I'm going to need more... I guess the banks start to call it equity, they changed the word deposit over to the word equity. And they said, 'Well, you need more equity, because you're gonna go into bigger debt. You need to increase the amount of debt because you're now constructing as well'. And the liquid cash to run the deal starts to go up, as well. 

[00:20:18] And then the third phase is, well, if I start to sell some of those down, and then I get to keep some of the stock at the end, any residual stock that I have, which then goes back to kind of a an acquisition type approach. 

[00:20:30] So you've got those three different stages with three lots of cash needed. And it's about having a look at, I guess, the peak of each of those to say: When do I need the most amount of cash to actually run this? 

[00:20:42] And for some people, they don't have the cash. And so they just stay at the acquisition model, and they don't worry about construct, and they don't worry about retaining anything else. And some people get really, really creative in their funding models and say, 'Well, what if I never purchased the property in the first place? Is that even possible? Can I do a deal and make money and therefore fund it?'

Tyrone Shum:  

[00:21:06] That's getting down to really advanced strategies there. 

Rob Flux:  

[00:21:08] [There's] lots of different ways, lots of different ways. But when we look at those three elements, a typical residential property— whether it be for cash flow [or] whether it be for capital gains— the bank is really looking at a 20 or 30 year investment type approach. And so they're really looking at: Can you afford to actually pay this on an ongoing basis? 

[00:21:37] The bank is taking a little bit of a risk that you're going to keep your job for all those 20 odd years. So they take a very conservative approach to can you afford it. And so the equity of the deposit upfront, and the serviceability tend to be their primary assessment criteria, to make sure that that is actually the case.

Tyrone Shum:  

[00:21:57] When you say that, it's really interesting, because that seems to be the reason why a lot of people seem to stay in their PAYG jobs, because they just want to show the bank that they can actually just borrow for those purposes to buy more property. 

[00:22:09] But when it comes to say, for example, trying to generate more income through a business, there's a reason why they want those business owners to have absolutely a minimum of two years in business before they can actually assess them just to see if they're viable. 

[00:22:21] Which is really fascinating, because in my opinion, I still think that the banks are still going off the stone ages. Because what happens if, say, for example, your serviceability goes shot because you lose your job, only for a short period of time. But you know you've got lots of equity in your properties, and you've been proving that you're servicing it, then that basically stops you from being a borrower. It's just, in my opinion, still a little bit of a very Stone Age kind of philosophy or assessment criteria. 

Rob Flux:  

[00:22:48] The banks are controlled by some regulations with APRA dictating that, look, the bank has to actually make sure that the bank has viable business. That's really important. So APRA is making sure that the economy as a whole can actually stand up on its own two feet. As the property market goes up and down, you don't want banks to be under duress. 

[00:23:12] So APRA is really designed about protecting the bank and also trying to protect the investor to make sure that they're not over committing themselves in that process.

Tyrone Shum:  

[00:23:23] But what's really interesting is that, say, for example, you have bought a property that is positive cash flow from day one. It can find itself even give you additional cash. But the bank doesn't really take that into criteria at this point in time as much as they used to, which makes it really challenging. So that's why I'm saying, how do people really get out of that situation to be able to sort of move forward? Even if they've got a large portfolio of properties. 

Rob Flux:  

[00:23:48] I think it comes down to, I guess, the investment approach. So if you're trying to do the long term hold, the bank is constrained by those APRA regulations. And so it's very easy to do bank bashing and say, 'Look, damn those banks, they're always against us'. 

[00:24:05] But APRA is really the one who's dictating the amount of serviceability that they're able to take into consideration. They won't take into consideration all the rent, for example. They also need to stress test the interest rate that is actually applying at any one moment in time and add a buffer on top of whatever the current rate is, and make sure that you can still afford that. 

[00:24:26] So APRA is trying to do that to protect the consumer. But what happens if you don't have those resources? What happens if you don't have the deposit to purchase a property and what happens if you don't have the serviceability? Does that mean you can't get into a deal?

Tyrone Shum:  

[00:24:43] Definitely not. 

Rob Flux:  

[00:24:45] That was very deliberately a loaded question, because that's where property development starts to come into its own. Because rather than looking at a 20 or 30 year loan horizon, the banks now start to look at this as to say— well, I gave an example before, six weeks, right? They start to take a much shorter view of the deal itself. 

[00:25:11] And they look at the deal, and they're not really so much worried about your serviceability side of things, but rather, is the deal profitable? Is this actually gonna make some money? 

[00:25:21] Now, they're taking a little bit of risk on the fact that you know what you're doing. And they're not taking 30 years worth of interest out of you. So they tend to shorten the timeline, and they ratchet up the interest rates, so their profits stay pretty similar. So you pay a higher interest rate. 

[00:25:40] But now, serviceability doesn't actually start to factor in when you're starting to get more commercial style development loans. And so that then starts to create really, really interesting scenarios to say, well, if we look at those three elements, if I no longer have serviceability as an issue, then all I really need is the equity for the deposit and the liquid cash to run the deal. 

[00:26:03] And so cash starts to become a lot more important from a development perspective. Or would I like to go work in working equity, the ability to pull the cash out of it? 

[00:26:15] If you then start to get really, really creative in how you acquire the property, maybe you might even eliminate one of those, meaning what if I don't need a deposit at all? Now it's just the liquid cash to run the deal. 

[00:26:32] We're going to talk about this on one of our future episodes in how can we go low and no money down deals, but I want to give people just a little bit of an insight to say, if you never purchased the property, why do you need a deposit?

Tyrone Shum:  

[00:26:50] I love that question. And I'm gonna sort of give a bit of a hint for people that just have a think about potentially, this could be vendor financing options, all those kinds of different advanced strategies.

Rob Flux:  

[00:27:02] Delayed settlement with early access, all sorts of things. There's seven different ways that we can actually make money from property by never owning it.

Tyrone Shum:  

[00:27:11] I love that, that's going to be definitely a future episode, because there's a lot to it that we would probably need.

Rob Flux:  

[00:27:16] That's a very big topic.

Tyrone Shum:  

[00:27:20] I love it. And this is what I also love about development, because I've been on both sides, and I'm sort of more leaning towards the active development side, because that's what I've been seeing that space, particularly the finance side of things, is that it's very, very important to make sure that when you are assessing to do a deal, particularly from the perspective of a[n] active developer, that there is going to be enough capital for the future project. 

[00:27:42] Because if you work out that, okay, I've got enough to acquire the property. But after acquiring the property, there's just enough cash to do certain things like getting consultants on board and so forth, but you don't have enough to be able to continue with a working capital, then you could pretty much come to a standing halt. And that could potentially be detrimental to a project. 

[00:27:49] So it's something that people need to consider as well, because it's not something that you just hop in and go buy a property like a buy and hold strategy that you go, 'Okay, I've just gotta find the deposit, I've gotta find the stamp duty fees, etc, costs and stuff like that', then you're done. 

[00:28:12] It's not as simple as that. There's actually a lot of things that people don't really even talk about until it gets to the point where, oh, gosh, there's all these additional costs that [are] required to get the project complete to the stage where you can sell it and make money.

Rob Flux:  

[00:28:27] Liquid cash, my friend, is the answer to any approach. So whether you are a passive investor or an active investor, liquid cash is the thing that will grind you to a halt very, very fast.

Coming up after the break, Flux examines the property investment catch phrase that many misunderstand…

[00:29:23] And the reason why most people don't have a good grasp on it is because they're sold on a dream of something that is a little bit out of reach.

The differences between assessing an investment and a development, and why it’s so crucial to make the distinction…

[00:38:49] Each property has its own parameters that sit in around behind it. So you need to actually take quite a scientific approach to how you actually assess it. 

We dive into factors such as population growth, the government, and how the closed borders over COVID-19 took a bigger toll than we may have realised.

[00:45:40] So what's happening right now— and I'm mindful that somebody might be listening to this podcast in a couple of years time— what's happening right now is the property market is starting to slow down because the government is deliberately slowing it down. 

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

Tyrone Shum:  

Flux has detailed the different possibilities, cash flow, and capital gains for both active and passive investors. The last on our list is lifestyle, one of the biggest reasons people plunge into property.

Rob Flux:  

[00:29:07] What we're trying to build, I guess is in any of the approaches, is the ultimate goal that everyone's after, which is financial freedom, right? It's this much maligned word that everybody talks about, but nobody really has a good grasp on it. 

[00:29:23] And the reason why most people don't have a good grasp on it is because they're sold on a dream of something that is a little bit out of reach. It's people standing in front of fancy cars and in front of big houses and that sort of thing, saying, 'This is what financial freedom looks like'. But in reality, financial freedom is just enough passive income to pay your debts. 

[00:29:43] Now, that statement I want people to resonate on, because most people actually are living a fairly meagre lifestyle. The Australian average income is about $80,000 to $85,000 per year and we're living within our means typically. Which means that by the time we put food on the table, fuel in the car, send the kids to school, that sort of thing, the majority of us are living— if we're singles, I guess under that $80,000 mark, and as couples somewhere probably around the $120,000 mark worth of expenses— which means that we actually don't need a lot of passive income to actually pay our debts. 

[00:30:21] Now, it won't give us the fancy car, and it won't give us the flash house. But it will mean that the lifestyle you're living today can be fully funded without you having to ever work again. And at that point, time is free. And then you can do anything you want with your time, including going out and making more money so you can get the fancy car.

Tyrone Shum: 

[00:30:43] That's if you choose to.

Rob Flux:  

[00:30:45] If you choose to, that is correct, if you choose to.

Tyrone Shum:  

[00:30:49] That's fascinating, because I think that's the thing. The reason why we're talking about this, especially on the podcast, is to give people options. Because ultimately, if you can cover all your expenses, be, let's say financially free, which is to basically not worry about any of your day to day living expenses, and you have the time and freedom to be able to do those other things that you might enjoy, whether it be going to become a more active developer, or you want to just buy and hold and become a passive investor, that's the thing I guess you got to consider as well, too. 

[00:31:17] Because this stuff does sometimes take time. And if you don't have the time, and you're working a full time job, and that's taking all of your effort, or you've got a family that you've got to look after and so forth, that's taking a lot of time, you've got to be able to find the time to be able to free that up. 

[00:31:31] And if you're worrying about all the day to day living expenses and stress of that, it's going to be very, very challenging to get in. And that's a very, very good point that you've actually raised as well, too.

Rob Flux:  

[00:31:39] I think the difference, when we start to look at the difference between an investor and a developer, the timelines to become financially free are very, very different. 

[00:31:52] So what we're looking at from an investment point of view, we're typically letting the market do the heavy lifting. So the market's gonna go through cycles. And typically, [a] market cycle is every seven to 10 years that the property will double. That's the rhetoric that's out there in the market. 

[00:32:09] So by the time you actually start to do that, you might start to accumulate a few properties, hit a glass ceiling, 'Hey, I can't get any more deposit, I can't get any more serviceability', you have to wait for the property to lift up enough to then pull some equity out to then reload that again. So it takes a while to actually do that. 

[00:32:27] And eventually, if you can collect enough properties, you pay a couple down, because they've doubled in value. That pays down your debt, and all of a sudden, you've got your cash flow. That's the magic of that. 

[00:32:38] But that can take anywhere up to 20 odd years to do. That's certainly what it took me the first time around that I did it. It works. Absolutely. But it's a long, slow, gradual process. But not everyone's got 20 years to hang around. 

[00:32:53] And so that's where property development comes in. And you can start to manufacture the profits, which means you can compress the timelines massively. But in order to compress the timeline, you increase the effort involved on your behalf, because you have to actually learn the trade, you have to apply the trade, you have to go find the deal, you have to run the deal. It takes quite a bit to actually make that happen. 

[00:33:19] But when we're talking about somewhere in that $80,000 to $120,000 passive income type approach, we find a lot of people are actually able to do that, and generate that passive income in about five years.

Tyrone Shum:  

[00:33:32] It's fascinating, because you've seen it from both approaches. And as you said, it's taken you at least up to 20 years to build that passive investor type of approach. And then after that you switched over to become a developer. 

[00:33:32] Is it something that, with hindsight, would you have started on going down the active developer approach first, before going to maybe semi passive? 

Rob Flux:  

[00:34:00] In hindsight, it's very easy to say, 'Absolutely'. So the first time it took me 20 years, the second time, it took me six. If I had to do it again, now, would it take me three. And that's because I've learnt from the lessons of everything before and I can actually apply that and accelerate much faster. 

[00:34:16] But I wouldn't be where I am today unless I went through that pain. And so I guess, it's much easier for me to now look at it and say, 'Yeah, I can actually do that now in three to five years for most people'. And that would be the approach that I'd recommend, but [I'm] not legally allowed to recommend. So I can't. 

[00:34:38] All I can actually say is, 'Hey, here's an alternative. If you've got the time, if you've got the effort and the inclination and the ability to take on that workload, then that approach is much faster'. But it's not get rich quick, mate. It's just get rich.

Tyrone Shum:  

[00:34:57] And that's the thing. It's also dependent on your personality trait as well, too, which is actually the perfect kind of segue into this. Because it's not suitable for everyone. What we're talking about here could be like, 'This is not for me, because I'm very conservative, I just want to buy my properties, sit back, hold it, and then just wait'. 

[00:35:16] Whereas other people, like myself, who are a little bit impatient, want to actually move a little bit faster. So it'd be actually interesting to share what your thoughts [are] on that with the different types of personalities who might be suitable for these type of different views.

Rob Flux:  

[00:35:31] You touched on a really interesting thing there, which is risk. Everyone's risk profile is something very, very different. I've got a slightly different approach on that. 

[00:35:44] So firstly, I'm going to quote someone that everybody knows, Warren Buffett. He talks about risk only com[ing] from when you don't know what you're doing. So when you educate yourself, you're going to be able to identify the risk and put a risk management plan in place. 

[00:36:01] And so risk really just comes down to: Have I got the time or inclination to actually learn about this thing that I'm going to apply? So that's the first part to risk. 

[00:36:01] Then the nice simple solution, I think we touched on this on episode one, we're told that crossing the road is risky when we're a kid. But we get told look left look right, look left again. And you can cross the navigate the road quite safely. But the risk has never changed. The risk is still there, the car is still dangerous. But we now know how to navigate that. 

[00:36:33] The second part to risk is: Are you in control of your destiny? Now, I would actually argue that if you're buying a property and letting the market do the heavy lifting, the market's gonna go up and down at different points in time. And there might be a time when the market is down, you have lifestyle circumstances change, you might be made redundant, you might get sick, those sorts of things. The market is down at that point in time, you are no longer in control of whether or not you're actually maximising your investment. 

[00:37:05] And so the risk equally applies to both, but the perceived risk is different. Now, investment has a little bit of a forgiving trait in that time will heal all mistakes. And if we wait long enough, the market will come back and it'll recover and that sort of thing, but not everyone's got the benefit of time to just wait it out.

Tyrone Shum:  

[00:37:32] That's right. And also not the benefit of having money. Because for example, when my parents purchased a property at the top of a boom, they were hoping that it'd go up in capital gains. But unfortunately, the market turned so quickly. And they had to hold on a particular property for many, many years, for about five years. 

[00:37:52] But it got to a point where they couldn't hold on to it because the cash flow became extremely challenging to be able to fund, even with the rent that was provided. So they had to make a tough decision to sell. And they sold it pretty much at the bottom of the market, unfortunately. 

[00:38:04] And these are typical stories I've heard from Mum and Dad investors, unfortunately. And then a couple years later, bang, [the] market doubled. And if only they could have held for two more years, it would have been okay. It's sad. 

[00:38:18] But I guess when you think about it, that's the thing you've got to take in consideration, whether or not that is something that you can do. And it is something that could be part of mitigating any of the risks that are involved, because you've got to actually understand what are involved and take that knowledge behind you.

Rob Flux:  

[00:38:34] Part of that is about assessing the deal. Whether that be a property development deal or an investment deal, part of that is actually assessing the market. Because the market is going to change at all points in time. And each property has its own parameters that sit in around behind it. So you need to actually take quite a scientific approach to how you actually assess it. 

[00:38:58] Now, interestingly, the way you assess an investment is very, very different to how you assess a development. So, when you're looking at an investment, remember you're assessing it for really two factors: Capital gains, or, or cash flow. Depending on your investment approach, you're going to look at those two.

[00:39:23] Which might mean that the supply and demand of an area, the market demographics, all those sorts of things that will go into those elements. But we tend to have a look at that and we tend to look at what we call market indicators. 

[00:39:38] An indicator is something that looks back in time. So something that's already happened. So auction clearance rates, median house prices, days on market, those things have already occurred. 

[00:39:52] The problem with that approach is that, when you get to measure it, is actually a result of a decision that typically happened about four months ago. 

[00:40:02] So as an example, I decided to sell my property, I then go through a little bit of a process where I need to go out and talk to a whole bunch of agents. The agents tell me, 'Hey, what you need to do is you need to clean up your property, you need to renovate this way, paint those walls, those sorts of things, get it ready, get it market ready'. 

[00:40:19] And then you put a marketing campaign together, you put it on market it, a few weeks of open houses, finally get a contract, you wait for some time, that will eventually settle. It's the settlement that we're actually measuring on the indicator, but the decision to sell happened four months ago. 

[00:40:37] And so it's baffling to me that the media talks about auction clearance rates, and they talk about median house prices and that sort of thing, because they're four or five months behind what actually happened.

Tyrone Shum:  

[00:40:53] So much can change in four to five months. And that's the problem.

Rob Flux:  

[00:40:57] Have you seen someone driving down the road, and they jump into your lane, and they're three quarters into your lane, and then they turn the indicator on in the car? Have you ever seen that? It's like saying, 'I have just turned left'. 

[00:41:12] This is kind of what the media are doing. They're looking at these market indicators and saying, 'It's all doom and gloom, the sky is falling'. Actually, the sky has already fallen. Most people aren't aware of it.

Tyrone Shum:  

[00:41:24] That's exactly right. They kind of bring it to light basically four months later.

Rob Flux:  

[00:41:30] Instead, what we want to start to look at is market drivers. Now, [a] market driver is what is the motivation for that market to actually move? There's actually 16 market drivers, and they fall into really four different categories. 

[00:41:46] One of them is government incentives. So, is the government printing money at the moment and creating a whole bunch of jobs? Are they creating a whole bunch of infrastructure in certain areas? Are they giving things like building bonuses and stuff like that? The governments are trying to stimulate the economy, so they do a lot of things to actually stimulate the economy. 

Tyrone Shum:  

[00:42:09] I was gonna say, with something like stimulating, though, that takes a few years for that to actually see the effects of it, though. Like, say, for example, during COVID, we had some cash boosts and so forth, just to help the economy keep it afloat during that pandemic. But we didn't see the effects of it until literally, maybe a year later. And that's really interesting, because by then, it's too late to really jump in.

Rob Flux:  

[00:42:34] But it's not, though, that's my point Tyrone. [My point] is that if you're looking at the market drivers, you're seeing that it's gonna take a year to happen. And you've got a one year view ahead to actually see that's about to happen. 

[00:42:50] So I'm looking in my crystal ball, going, 'I can actually start to predict the market'. Now it's a little bit fuzzy, it's not perfect. But we can actually say, 'Hey, those jobs being spent there, the business bonuses that are actually going in, that's going to start to stimulate the economy'.

Tyrone Shum:  

[00:43:12] Gotcha, gotcha. That's very smart. That's the thing that I think I obviously overlooked on that, but looking back at it and going, Okay, that at that point in time, when the property markets started taking a huge climb up during COVID, that was when I was like, 'Okay, this is pretty much repeating history itself, again'. Because that's typically what happens after some kind of war, or after some kind of big world event, the property market, every single market seems to go straight up. 

Rob Flux:  

[00:43:42] There's a few other [categories], I said there's four different categories. The next one is population growth. Now, population growth happens for a couple of different reasons. So there's into intrastate migration. So people moving from the city to the country, people moving from the country to the city. 

[00:43:59] There's interstate migration. So people moving from one state to the other. There's births, deaths and marriages. And then there's international migration with people actually moving across. 

[00:44:09] And so you need to look at that on balance and say, 'Is this particular market growing up?' Now, an example, during COVID or before COVID, Sydney and Melbourne were growing at a great rate of knots. But during COVID everyone was fleeing Sydney and Melbourne and moving to Brisbane and Perth. 

[00:44:34] And they're also moving out to the regionals. And so you're seeing that particular areas were getting a huge amount of market drive where others weren't. You can actually start to see that actually starting to occur. 

[00:44:48] Now, the biggest market driver for population is international migration. And for all of COVID we had no international migration because all the international borders were shut. If we did not have a market driver pushing the demand on property at that point in time. So the government had to stimulate the economy with all of the incentives and drivers that they put in from projects and billions of dollars they spent on our economy, to kickstart the economy. So the boom we just had was artificially created.

Tyrone Shum:  

[00:45:27] So now that with borders open, then we potentially could see population growth increase. And by the way, Rob's rubbing his hands.

Rob Flux:  

[00:45:40] So what's happening right now— and I'm mindful that somebody might be listening to this podcast in a couple of years time— what's happening right now is the property market is starting to slow down because the government is deliberately slowing it down. 

[00:45:58] So affordability, they're changing interest rates, they're making interest rates slow us down, inflation is going up, the cost of actually being able to afford the property. This is the third of those areas that we need to look at is the housing affordability. 

[00:46:18] Unemployment rates, we're at record low unemployment rates at the moment. So we've got a couple of forces that are kind of pushing. One is what I like to call a tailwind. They're pushing us forward. And some of them are headwinds, and they're pushing us back. 

[00:46:33] So you've got to look at all of those on balance and say, 'Have I got more things pushing against me, or more things pushing behind me, pushing me forward?' 

[00:46:43] Now, right now, we're at a knife's edge. And the market is starting to go backwards because of that. But I see a very big switch coming in the not too distant future, that's going to be mostly tailwinds.

Tyrone Shum:  

[00:46:58] It's interesting, because I've had similar thoughts and a few other investors who have been speaking to saying very similar things. Because when you're looking at all the facts here, it does show that there is potential there. 

[00:47:11] That's the reason why, as you said, or as we kind of discussed, sometimes these market leading indicators are at least a year ahead of what we should be. So perhaps if what we're seeing right now, we'll know in a year's time what the outcome will be. And hopefully, there'll be enough time for us to prepare.

Rob Flux:  

[00:47:28] And the last of those four categories is the true supply and demand. So when people are moving into an area, how much product actually exists there. 

[00:47:39] Now, in most instances, in order for a product to actually be created, whether it be a house, a townhouse, an apartment, whatever that is, a developer— that's someone like me or my community— actually has a look at where their population is moving towards and saying, 'Can I put an opportunity in front of that person, just as the demand starts to hit?' 

[00:48:01] So we have to go through a few phases to make that happen. We need to get a development approval from Council. That's the first part. So we can actually measure how many development approvals actually happened. 

[00:48:11] We then need to get a building approval to say, 'Can I actually get an engineering level of approval to say, "Hey, this thing's not made of straw and it's not gonna blow over in the wind?"' So that building approval. 

[00:48:24] Now, not every development approval gets a building approval. And so you can see that there's a surplus between the amount of development approvals and the amount of building approvals, which is what I like to call slack. There's a whole bunch of slack in the market to say, 'Look, there's the potential that this could be created, but it hasn't actually necessarily been realised'. 

[00:48:45] And then when you get funding approval, that means that you're actually going to construct it. So when you look at those on balance, you can actually see, 'Hey, is there too much potential supply in the market? Am I actually not necessarily putting something in the right place?' 

[00:49:01] Now, what's super interesting is because the way that COVID kind of played out, and the artificial boom that was actually created, there were very, very few development approvals that were actually done during that timeline. 

[00:49:16] Because firstly, at the start of COVID, the property market was dropping, and nobody knew where COVID was going. So everyone said, 'Whoa, I'm not going to get into that because I don't know where the bottom is'. So then there were no development approvals at the start of that process. 

[00:49:33] Then the government said, 'Hey, hang on, we've got no population growth driving the market, the property market is actually starting to dive, we need to protect it'. So they created an artificial stimulus with all of the building bonuses, and a whole bunch of infrastructure projects. They spent billions and billions of dollars on roads and highways and tunnels and schools and all sorts of things like that. 

[00:49:54] So, suddenly, the amount of building a approvals took off. And so there is no slack left in the system. So all the development approvals that were already in existence got consumed. Now there's no slack. Okay, so there's no potential there. And so when the borders are now open, international migration's starting to come back, where are they going to go?

Tyrone Shum:  

[00:50:25] And that's where we've got to find the supply, eg DAs, and so forth. But what's interesting is, why would people go through a DA and then not go ahead to build if the intention was to get a build done?

Rob Flux:  

[00:50:39] There's a combination of things. And it largely comes down to the fact that when we look at statistics, most developers are actually part time mum and dads. Somewhere between 80 to 90% of all development approvals, depending upon the council that you're in, are small scale, six pack and below type projects. 

[00:51:03] So they're people who aren't professional developers, they're not really trained in the process. And they think that just getting a development approval is enough. And they forget— if you remember those three stages of funding I talked about— they forget that it takes a lot more money to actually fund the second stage. And they go, suddenly, 'I don't have it'. So that's one problem. 

[00:51:26] Two, they don't understand the demographics, and where are people going. They don't understand the supply and demand. And maybe they got an approval, but there's no demand to actually take that up. 

[00:51:38] Or, lastly, they don't understand the demographics of the area to say, 'Have I built the right product for this market?' And that's because most of them are part time. 

[00:51:48] And so when I said before that Warren Buffett quote, risk comes from being uneducated, they haven't taken the time to actually educate themselves on 'Hey, just because it can be done, should it be done?' 

[00:52:05] And so there are a lot of DA approved sites that that are basically worthless. As a matter of fact, 90% of all development sites are not profitable. And unfortunately, most people don't understand that. And they think that just by going through the process and getting the approval, because Council will give you the approval, because you've met and complied with all of council's rules about what can be built, the council don't care about the profitability of the deal.

Tyrone Shum:  

[00:52:37] That's very true. And it kind of makes you think, Wow, you go through the whole process, because it's quite costly. It's not cheap to be able to just get a development approval. You have to spend many hours, many consultants' fees and so forth, to get a DA approval. And even if it needs changes, you'll have to go back. And there's additional costs involved in doing that. 

[00:52:52] I'm going through one right now. And if you don't do your research, and you don't actually meet what the market wants, basically, you are literally just throwing money at the wall. And I'd be happy to set that money. If it doesn't go through the wall goes to me, I'd be happy to do that for you. But anyway, that's really fascinating. I didn't know that stat, that is phenomenally strange when people do that.

Rob Flux:  

[00:53:16] So if you take the time to educate yourself, and understand those market drivers, and you put the right product in the right location, as the demand is starting to take off, you will be successful. 

[00:53:32] It's when you don't put the effort into the education side of things, and you create the wrong product in the wrong location. That's when you're almost guaranteed to go backwards.

Tyrone Shum:  

[00:53:44] I think this is [a] really good time to sort of just talk a little bit about finding the deal that's suitable for the area and then be able to potentially use experts or outsource to people who actually do this day in day out. Because as you said, a lot of them are mum and dad investors, maybe they might not necessarily have the time or maybe might not have the experience and there might actually be a good idea to get some experts on board to be able to find those deals and help them with that. Because then that would be beneficial not just to them, because they'll profit from it, but also to the area because they're delivering a product that people want. 

Rob Flux:  

[00:54:22] Outsourcing the finding of the deal is a fantastic way for you to accelerate with a limited amount of your own sweat equity. But— and I've got a very big but here— you want to be very careful that you are delegating, and not abdicating. 

[00:54:44] Now, by delegating, it means that you actually understand how to assess the deal yourself. You have the skills in order to be able to do it. And you're giving that task to somebody else, and you can validate when they come back to you and say, 'Hey, I think it's a deal', you can actually validate and prove that it really is a deal. So that's delegation. That's a very smart way to actually outsource and scale. 

[00:55:08] Abdicating is when you give that to someone, they go and do the work, and they bring it back to you and you have no ability to tell whether or not it really is a deal. So you're taking their word for it, and you have no idea to be able to determine whether or not their skill is actually there or not. 

[00:55:27] And so there are entire industries that are based on finding the deal for you. But you've got to remember how they're remunerated. They're remunerated by you buying the deal. They're remunerated by how much profit you make out of the deal. And so their incentive is for you to buy it, not necessarily for you to profit. 

[00:55:54] There are going to be times when unscrupulous people will take advantage of that, or people who are not intending to be unscrupulous, but they're just not educated enough to be able to assess the deal well enough. They think they've assessed the deal well, but they fall into that category of just because it can be done, they don't really realise that it shouldn't be done. 

[00:56:16] And so they've gone, 'Yes, it's got lots of development potential', but they don't realise the profit potential is not there. And so it's very easy to be given a dud deal when you abdicate.

Tyrone Shum:  

[00:56:28] And this is why it's so important to actually do your own due diligence behind it, really educate yourself to learn the reasons why a deal is stacked up or not. Because the more you do it, the better you become at assessing the deal. 

[00:56:40] And in my opinion, I think it's smart to be able to leverage and use other people's expertise to find a deal because it saves a lot of time. I mean, I know what it's like to go find a deal, and it takes a lot of time. But if you can get someone to help you and you give them the right criteria, and then you assess that deal, then you'll be able to move much much quicker. Because there are a lot of other components that are necessary as part of any development. 

[00:57:00] And sometimes it might be just worthwhile spending a bit more time on the other parts rather than going acquire a deal. Not saying you shouldn't do it. But it's something that there are plenty of people out there who do it full time as their job and they love it.

Rob Flux:  

[00:57:14] I think [it's] super important [to] educate yourself on: Do you know how to assess the deal yourself? Only at that point do you determine whether or not you should outsource.

Tyrone Shum:  

[00:57:28] That's so true. Before jumping in… Wow we've talked a lot today about this. This is great. So maybe the one last thing is, I think we'll kind of lead into this because as we've talked about the three different approaches from a passive investor to active developer to in between where you do semi, which is basically a passive and active. 

[00:57:49] Let's say for example, if you have one investment approach right now, one investment property as a passive investor, how do you go through to potentially go into an active developer? Just like myself, I've been in this passive approach and considering going to development.

Rob Flux:  

[00:58:09] Well, there's a couple of different ways. There's one that fits in the middle, which is the semi passive investor. So there are two different approaches to being semi passive. An example might be, look, I bought an investment property, let's just say 10 years ago, and at the time, it was at the outskirts of the city. But now the city has grown, the population has come towards me, and all of a sudden, this is now in an area that's just been rezoned, or is now going through massive growth. Maybe that property now has, maybe it always had development potential. But now it's actually in a place where the demand for that product is actually super high. And so you've got a property that has got lots of development potential, but you don't know what to do with it. 

[00:58:54] So one approach is, look, do I go to a community, like my Property Developer Network, find a developer who knows what it is they're doing? I have the property. The developer has the skills. Do we join forces, and we do a profit split type arrangement? In doing that, that so that's kind of one approach. 

[00:59:12] [The] second approach would be, look, I don't have that property. But I've accumulated a lot of wealth, I've got all this equity that's sitting here, I may even have some fairly decent cash flow that's actually coming out of that. Perhaps I can, again, go and partner with somebody. But this time, I'm actually providing the cash. 

[00:59:31] Remember those three parts of the deal that the developer needed? Maybe I can provide the cash, the developer's got the skills, but once you put the money into one deal, I've got the skills to do deal number two, deal number three, deal number four, but I don't have the cash to do those ones. So I can partner with a developer who knows what they're doing. And again, do a profit split type arrangement. So that's the kind of semi passive approach. 

[00:59:56] And then I guess the third way is go learn the skills yourself. Go get yourself educated, go take the time to go do a programme that's going to teach you exactly what you want to do. 

[01:00:09] The one caution that I would say with that last approach is be very, very mindful to say, 'Well, what kind of development strategy do I want to do? Do I want to do subdivisions? Do I want to do townhouses? Do I want to do apartments? Do I want to do rooming accom?' 

[01:00:26] There's lots of different ways to actually do developments. Choose what you want to do, then find the educator that will teach you on that. Don't do it the other way around, go to a free course and the person at the front of the stage is a great salesperson, they're going to tell you that their solution is the only solution. And it's not. There are many, many solutions. 

[01:00:47] And then you find, look, their content was great, but it doesn't serve your needs, and it doesn't serve your goal. And so you can have two people sitting in the same programme, one person is going to get heaps of value because it did fit their needs. And the next person is gonna get no value because it didn't. 

[01:01:05] And it really came down to did they take the time, firstly, to work out what approach did they want to take? And is this the right educator for them?

Tyrone Shum:  

[01:01:14] I think that's the key thing. I think, just talking from personal experience, I kind of wandered a little bit in the development realm for a while, because I wasn't sure. I heard people say, 'Get into construction, build something'. At least that way, you know you're gonna be able to make a profit on, say, maybe a four pack, 10 pack, townhouse, etc. And I thought that sounds really great. 

[01:01:32] And then I started to learn a lot more. When I did, then I realised, 'Hold on, subdivision's probably a faster way to get in as experience'. I'm not saying this is the way to go. But I think the key thing is to speak to as many people as you can, particularly people who have been doing projects already and understand what their challenges have been, because that will give you an insight into what sort of suits your risk profile. 

[01:01:52] Because everyone's going to be different. Some people might love to want to build, other people might just want to do [a] subdivision [and] get in and out quickly, [and don't] care how it looks as long as they make a profit. So there's so many different ways. Somebody might want to be hands-on, do renovation. So just a few things just to consider as well.

Rob Flux:  

[01:02:09] I think that's where the networking group that we run, Property Developer Network, we run a little masterminding sessions in each of our monthly networking groups where you can actually come and ask those exact questions. Just say, 'Hey, what have you done? How's it worked? What was your success rate? What educators did you try?' All those sorts of things in a very unbiased point of view, because you're actually getting the community to help the community. So it's for the tribe by the tribe. 

[01:02:37] So that whole approach, I think is fantastic. In doing so, there's a couple of points of guidance that I'll give people. There are lots of different development strategies, and every single one of them makes money. There's no question at all about that. 

[01:02:52] But fundamentally, there's only two development strategies that are scalable. And what I mean by that is, I can start small, learn the skills in a relatively low risk approach, then do a slightly bigger deal, using the exact same skills. And then do a slightly bigger deal, using the exact same skills. 

[01:03:16] So those two approaches are land subdivisions— so I can do a one into two land subdivision— and I can build an entire suburb or an entire city that's master planned. So that is still the exact same strategy and you just kind of scale, start one into two, one into four, one into six, one into 10, then all of a sudden, I'm building an entire city. 

[01:03:37] The other approach is multi residences. So that is, either townhouses or apartments, they pretty much have very similar rules in most councils. Now, you can do a duplex and then a triplex and a quadplex and go up. If you're doing apartments, you start to go up many, many floors, and you do 200 [or] 300 apartments, build Meriton Towers, and all sorts of things like that. 

[01:04:04] So you can start really small, really low risk, small amounts of money, small amounts of time and effort, and then start to grow as you go. When you start with those two approaches, you're going to be able to— like going to the gym, lift up a five kilo weight, then a 10 kilo weight, then a 20 kilo weight and all of a sudden you look like Arnie. But you can't be Arnie first go. It just doesn't happen. So you've got to put the time into actually do the hard work to actually get there.

Tyrone Shum: 

[01:04:40] And this is the key point that we're gonna drive home, is that this stuff does take time. It's not get rich quick overnight, but you will get there as long as you put in the time and the effort. And I think that's exactly the point that I think is so, so important for every one of us. And you've already heard from Rob, 20 plus years already in investing. Myself, I've been in over a decade already. So it's time. And you can only learn from that.

Rob Flux:  

[01:05:04] The one open loop that we left right at the very, very start of this that I'd like to close out just to end our session. We talked about the ultimate goal being financial freedom, passive cash flow. How do we use an active approach to become that passive investor? Well, the ideal goal— and I'll ask you a loaded question, mate, you fund development deals— what is the typical profit on cost that most developers are actually aiming for?

Tyrone Shum:  

[01:05:33] They're always saying about that 20%.

Rob Flux:  

[01:05:36] About 20%. That is almost a universal answer that I get when I ask that question. So if we look at a 20% profit on cost, then there's a magic number of six. That is, if I do six of something, if I sell five, it pays the costs. Which means that the sixth one is free. 

[01:05:59] Now, if it's free, that means I have no debt on it. That means 100% has positive cash flow. It's going to grow with the market every seven to 10 years. The rent is going to go up as the market actually starts to go up, and it becomes the passive cash flow that we're looking for. 

[01:06:16] Now, if we're doing that, in most of the capital cities, we're gonna get somewhere between $20,000 and $25,000 net return after management fees, as positive cash flow on that. Which means that for most people, it's somewhere between three and five properties owned outright will actually make them financially free. 

[01:06:38] So if you think about that, if we said, let's just say four for somewhere in the middle, that's four projects to become financially free. Now, the trick is: How do I learn how to do a six pack? Well, you do a smaller version of that. Do a four pack. And how do I do a four pack? Well, do a smaller version of that, do a two pack. And this is why scalability is really important. 

[01:07:02] So you might do two to get yourself the skills in how to actually do that kind of deal. And four to get yourself out, which means that most people, somewhere between three to five years, they can get themselves out.

Thank you to Rob Flux, our guest on this special episode of Property Investory.