Phillip King has $30 million worth of reasons he’s the Sutherland Shire’s king of commercial real estate. Aftera 30+ year career at IBM Australia, where he was one of the first mobile phone owners and worked with computers as big as living rooms, he thought it was time for retirement. He was wrong.
Harnessing 3 decades of commercial investment thanks to his childhood chats with his Uncle Joe, King realised his calling and jumped at the chance. Now with 53 commercial properties of his own and a database of 350 clients, he’s living the career of his dreams.
In this episode King delves into what it was like to grow up in God’s country, where his childhood revolved around sport and definitely not around writing books! The author of Engines of Wealth: Commercial Retail Shop
s describes how and why he got involved in commercial property
investing, and why residential property just wasn’t the fit for him. Plus, millennials rejoice: we hear how you can have your avocado toast and flat whites and
save for a house deposit, using just one spiralling method!Timestamps:
01:20 | A Passion for Property
04:38 | Retirement? No, Thanks
15:09 | Early Days in Engadine
17:05 | The Great Generational Debate
20:59 | Tapes and Pagers
24:52 | The Times They Are A-Changin’
28:17 | Transient Tenants
03:41 | Why Commercial Over Residential?
08:58 | Why Spend $10,000 to Fix a Property When You Can Make $1M by Doing Nothing?
13:20 | Life is Like a Game of Football
17:00 | Want to Sleep Like a Baby? Make an Onion
21:56 | It’s an Ant’s World
27:06 | Shops are Steps
31:05 | Graph to Generate
33:24 | Get Started on Your Snowball
37:53 | Admit Your Mistakes
39:12 | Love What You Do
Resources and Links:
[00:26:15] I remember her calling me, 'Son, I'm sleeping better at night, my anxiety's gone and this shop will just tick away, and I can now help my daughter, I don't have to ask her for money.' So an amazing turnaround there.
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 Phillip King, the Sutherland Shire’s own king of commercial real estate currently with a portfolio of over 50 commercial properties. He shares a wealth of stories, ranging from his carefree childhood to his unexpected degree, and answers the age-old generational debate: who has it harder?
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After a 33 year career at IBM Australia, King tried retirement on for size but found it didn’t quite suit. However, while he was at IBM, he was harbouring a passion he could turn to.
A Passion for Property
[00:01:20] I held several roles there, sales roles, and ultimately sales management roles. And during that time, I had a passion for property. I owe a lot of that to my uncle, who was an accountant. But first and foremost, he was a property investor. And he taught me a lot, and I think instilled an interest in commercial property.
[00:03:45] When I first retired, my day to day used to be to get up, get dressed, go to golf. I sort of thought that I'd like to have a really good crack at being retired. And so I started playing golf three to four days a week. But after a couple of months, I realised that you really need to do things within limits. And that was too much golf. And ultimately, I got bored.
[00:01:45] And throughout my 30 year career at IBM, I was collecting and purchasing commercial retail shops. And I'm happy to delve into why I found that a superior asset class to build wealth on. So during my 30 years at IBM, I continued to buy commercial properties. And I've managed to build up a portfolio now of 53 commercial properties. Which, to prevent my children having a garage sale with my life when I pass, Tyrone, and I knew they wouldn't sit and listen to me for two hours, or even an hour podcast. But it was my hope that they would read the book that I wrote, to teach them why I've built up this portfolio of commercial properties.
[00:02:37] And if they keep them, how they will be able to live off the income that they generate. And hopefully, if they understand the principles in the book, they'll be there for their grandchildren as well. So I spent the last few years of my career, when I was traveling overseas, in and out of airports— which seems a distant memory through COVID— I wrote chapters and pages whenever I got the chance. And eventually, when I retired, I published the book, which is simply titled, Engines of Wealth: Commercial Retail Shops.
Day-to-day life is much busier now than it was during the golf days, but that’s just the way he likes it.
[00:08:16] I've got a database of about 350 real estate agents. I try and ring them every month, just to ask them what they've got listed, what their line of sight that they're about to list, and hopefully, so that I can secure properties before they even go on the internet and on the market.
[00:08:33] And once I've found those properties, my job is really analysing that particular property. And I might analyse 15 properties to pick two or three properties that I really like. And that analysis would entail checking all of the outgoings. Often there's a lot of outgoings that aren't declared. I've got a great article on the website, there's a website that you can go to, enginesofwealth.com. It talks about alarming omissions. Agents just like to say, 'Well, here are the outgoing rates, water rates, council rates, insurance.'
[00:09:07] And it's like magically no other outgoings exist, but there's often real estate administration charges, there's annual fire safety inspections. There's annual audits, if you're charging outgoings. You must have an allowance for repairs and maintenance.
[00:09:24] So part of my job is to just make sure all the outgoings have been accurately declared. And we do land on the correct net rent, because that's what we're basing our valuation on that property. It's based on a capitalised return on that net rate. It's so important. So a lot of my analysis work is done on each and every property and that also involves me talking to the tenant. And in my book, pretty well everything that I've learnt over the 30 year career investing in commercial property I've captured in the book, but it's about all the questions that you want to ask the tenant.
[00:10:00] Have you reported anything to the landlord that hasn't been fixed? Does the roof leak when it rains? Do they have public liability insurance themselves? How's business? Are you making money? Is the rent killing you? And a lot of these tenants are more than happy to have a talk, if you tell them, 'The building's for sale, I'm interested in purchasing it, ultimately, I may become your landlord.' A lot of them are happy to have that conversation with you.
[00:10:32] So the bulk of my day really is, if I have time left at the end of the day, I spend it searching on the web, but also then interacting with clients. And it's about me understanding my clients' budget, understanding my clients' investment goals. And what I typically say to a lot of my clients is, 'I'm not really here to help people buy one commercial property, I'm here to help my clients build a portfolio of commercial property that will generate a positively geared income that will fuel their retirement.'
He delves into his personal background which involves a degree you wouldn’t expect, and a reminder of just how far the mobile phone has come.
[00:12:12] I grew up in Engadine, which is God's country, they call it, Tyrone. The Sutherland Shire. I went to university in the University of New South Wales, I became a chemical engineer, and realised four years after graduating, that I really didn't like chemistry. And I got a job in IBM, which was obviously computers. I felt fortunate to be in IBM, it was a large global company. And I had the privilege of traveling internationally for many, many years with the company. So I got to see a lot of the world through my job and business. And I think I was also in an industry that just had amazing growth over that 30 year period. Right now, when I first started, the computing power in your mobile phone wouldn't have fit in an entire lounge room.
[00:13:21] I felt very special to be one of the first people with a mobile phone, and I carried it around with a car battery to run. So a very interesting career at IBM. And as I said, my uncle was an accountant. And I used to go out a lot and I used to babysit my nieces and nephews. And he would pick me up to drive me down to babysit and the following morning, he'd drop me back home. And I got the privilege of being in the car with him for a half an hour down and a half an hour back every day. And we would just talk about properties. And so that's really where I had a passion for property. And my uncle John just instilled that in me. And has been there as a sounding board pretty well through every property that I've purchased.
[00:14:17] Is Uncle John still alive?
[00:14:20] Yes, he is. And he's an accountant in Helensburgh and he still knocks out tax returns at 84 years old.
Retirement? No, Thanks
After his book was published, he found readers approaching him to thank him for writing something so accessible and understandable.
[00:04:38] And I was starting to receive a lot of requests to assist people with their search for a quality commercial investment. So again, I asked my mentor, my uncle, my accountant, what I needed to do to be able to help people with their search for a commercial property. And that entailed actually getting a real estate license. And so after 33 years in the IT industry and approaching retirement, I spent four months studying real estate and attaining my real estate license, so that I now act as a buyer's agent, helping people get property.
[00:05:24] And I'll be honest, at first, I thought the hard part would be finding clients. And the easy part would be finding investments. But it's been quite the opposite. I've had a lot of inquiries from clients. And have been able to secure a lot of interested investors. And one of the difficulties has been actually finding good quality properties at healthy yields.
[00:05:55] And as you know, we can talk about it a bit later, but three years ago, when I started, I'd never really bought properties in Victoria. Because in Victoria, the yields and properties have been capitalised down there around the 4-4.5%. And lately I've been seeing them trade at 3% yields, which for me, has just been too expensive. A lot of the properties that I own, that I started buying years ago, and I'm talking 15 years ago, in Sydney, because I was able to buy properties around that six and a half to 7% yield.
[00:06:32] Well, unfortunately, Sydney has now followed the path of Victoria and properties here in Sydney are trading around that four, four and a half, 5% yields. Very tight. So my search took me to what I like to call the golden rectangle of Queensland, which is the Gold Coast, Brisbane, Sunshine Coast. Because I'm able to still purchase properties and find really good investments up there around the six [to] 6.5% yield.
[00:07:04] And a few years ago, two years ago, I was buying them at seven, seven and a half, even 8% yields. And we do need to be careful, there'll be properties out there today that you can still buy at eight, eight and a half percent. But typically, they'll be in remote regions, or they could be in flood zones, there might be an underlying problem that we really need to be careful that we're not buying potential problems. So that's my caution. If you see a property at a high yield in today's market, there may be underlying issues that we have to investigate.
In everything he does, he has his family at the forefront of his mind and his plans.
[00:11:08] And the most important thing about that is that we're actually building a legacy for your children. Because long after you go to God, this money won't stop. These properties will continue to generate this positively geared income. So you have the confidence and comfort of knowing that this income, this portfolio you've created, is a legacy for your wife and your children. Because that money will continue to roll in and fund and fuel their lives. So that's really what I'm working with with a lot of my clients. And I have several clients that have bought five and six properties through me already.
Early Days in Engadine
King’s siblings were shocked to find that he was writing a book, as the idea just didn’t mesh with the brother they grew up with.
[00:15:09] I went to Engadine Primary, I went to Engadine High. And I lived in Engadine with my parents till I was 24. I moved out around the corner and rented a house with mates in Engadine. And I was into waterskiing, and sport and squash. Furthest from my mind was studying and excelling in any sort of academic endeavors. It was just purely sports focused.
[00:15:39] And now my brothers and sisters can't believe that I was an author! But the book isn't a love story. It is absolutely, purely, the way to build wealth out of commercial property. And it explains the principles of why this is such a superior asset class.
[00:16:02] Then I moved to Como, married, I had a daughter to my first wife. And my investment career certainly had two major phases when I grew up. I started buying residential property. And my theory then, which a lot of people, I think, agree and pursue, is that you buy a residential property at the entry level of the market. I used to love it when I found a residential property with a granny flat because it had that dual income potential. And you knew that when the market lifted, the value of these entry level properties was going to rise. And it didn't have the sponginess of the higher properties.
The Great Generational Debate
King’s very first residential property was a two bedroom unit in Cronulla, which he paid $105,000 for.
[00:17:05] At the time, I'd just graduated and got a job working for IBM. And my annual salary was $25,000. So when you hear our kids today say, 'Dad, we've got it harder than you.' And everyone says, a lot of us older generation will say, 'No, you haven't, it was just as hard when we were young.' Well, it absolutely wasn't. Back then the average wage was $25,000. I bought the unit for 104 times your average salary to buy a unit in Cronulla. Today, that very same unit sold a couple of months back for $850,000. Now the average wage is only sort of $80,000 [to] $90,000. So it's over 10 times more. So when our kids today say, 'Dad, we've got it harder'— please, let's believe them. They absolutely have.
[00:18:01] You're the first to say that! Every person I’ve interviewed said that the kids just don't understand it, and the generation back then was just as hard!
[00:18:09] As a matter of fact, I was published in an article in the Leader, which is the local Shire paper here. And that article I wrote was called A Different Property Path. And back in my day, and I'm 56, we couldn't afford to just go straight out at entry level age, when we just started working and buy a four bedroom house. They were out of our reach. So we bought a residential two bedroom unit. And that was our stepping stone, to buy the unit first, which was affordable. Help us pay it off, either stay living at home with your parents and rent it out so that you had a tenant helping you pay the mortgage, and pay that loan down to the point where eventually after five or six years, you can sell that unit. And then upgrade and buy a house.
[00:19:05] And the article I wrote for our young kids today to read was really a different property path, which meant there needed to be an extra step. And I think commercial property can provide young people that extra step. Because I've bought clients commercial properties for as little as $230,000. So it's a low barrier to entry. Young couples can afford that. And they can use that commercial property as a stepping stone to get to the unit and then get to a residential house.
[00:19:39] So that's what the article in summary was about. It was adding that extra step and how commercial property enabled them to get into the market. To get a tenant to actually start helping with them paying the mortgage and building their equity and getting the capital growth happening. As they increase the rent each year, the value of that shock is going up in value, that they can ultimately leverage against and get themselves to the next step being the unit.
Tapes and Pagers
He explains how he got his job at IBM, and lets us in on how the computers of the day worked— as long as the weather held up.
[00:20:59] We were about two months out of graduating in our fourth year at university. And I was sitting at the Roundhouse Cafe at the University of New South Wales. It's still there. And I used to work as a waiter in that Roundhouse Cafe, for a bit of pocket money. Over on the board, you tore [it] off, there was an IBM interview board, and they had tear off time slots. And I tore off a time slot. And I went to the interview with IBM at the Roundhouse Cafe. And I got a second interview in an IBM, and eventually, they gave me a job.
[00:21:41] So I never spent one day as a chemical engineer. I was straight into IBM, and they taught me. I spent the next 12 months in IBM's school at Rosebery, where I learnt how to fix machines. So I was literally running around with a tool bag. And back then I was in what was called the mainframe team. And I would fix large CPU processes, which is— if you think about a PC, it's got a motherboard, when you're talking about the big machines that the Westpacs and Commonwealth Banks and NABs of the world ran— that motherboard was a big CPU. Central Processing Unit. And it was a big machine about the size of your bedroom. And I was trained to fix those.
[00:22:32] A PC had a hard drive. Over there, they had these machines called 3380s. And they were about the size of a refrigerator. And there were basically big discs spinning inside them, which had accessible heads that went out and read the data. So I would fix those machines. And then also the permanent storage of the day back 33 years ago were tape drives. And I used to fix the tape drives. So data would be stored on what was called a direct access storage device, the hard drives, because that was accessible quickly. And then when it wasn't required, and it needed to be archived, it would be written to tape. And then the tapes would be filed, if they ever needed, in the event of a disaster, to reload that data.
[00:23:21] So I was trained by IBM in all those machines. And then I was given a pager, one of the first mobile phones in Australia. And you'd be running around answering calls when clients rang up and said, their machines failed. Out you'd go and you'd fix those machines. But back in the day, when we had a lightning strike, it was a busy time. Because all the machines fell over. All the computers, all the motherboards would seize. Obviously today when lightning hits, the technology has advanced and it doesn't wipe the memory and wipe the disk like it did in the old days.
The Times They Are A-Changin’
After his successful career at IBM, King settled into family life.
[00:24:52] I got married, I had my daughter. And I guess like any father would, you're besotted by your daughter and your marriage and you want the best for your family. And I had a definite drive to create a bright future for my family. And I meet a lot of clients. And that's their underlying drive of what they want to do.
[00:25:15] Now, as you get a bit older, it also becomes, 'Well, I want a solid, reliable income stream, so that I never have to work again ever, through my retirement and when I get old.' And what's happening, obviously, with COVID and the fact that banks are offering super low interest rates, is a lot of these retirees are now faced with that very problem of having to work again. Because the strategy they chose back then was one of just put your money in the Commonwealth Bank in a term deposit. And that is no longer working for them.
[00:25:49] So I've got an article on my website called For The Times Are A Changing. And it's about an 86 year old lady, Val, Goodman, who for the very first time, at the age of 86, pulled her term deposit out of the bank, and bought a commercial shop, which is returning over 7% it's a little pool shop in Kowloon on the Sunshine Coast. And I remember her calling me, 'Son, I'm sleeping better at night, my anxiety's gone and this shop will just tick away, and I can now help my daughter, I don't have to ask her for money.' So an amazing turnaround there.
[00:26:29] But for me personally, at the time when I had my daughter and was newly married, my strategy at the time was to build a portfolio of residential property. And look, it went really well. And I dare say there's a lot of people that have been into residential property have done very, very well. And predominantly, they've done well because their property has risen and has had this capital growth. And when they look at their investment performance, they're counting that capital growth.
[00:27:03] But as you know, you can't live on it, unless you sell the property. And if you sell the property, you have to pay capital gains tax, which means that money is not working for you anymore. And then you've got the money and then what are you going to do with it? Put it in the bank at 0.1%? No. And so a lot of people choose to keep their residential properties.
[00:27:24] Typically they're contributing because they bought them negatively geared. And over many, many years, they may become neutrally geared, but they're really not to the point where they're going to generate an income that's significant enough to live on. So that's the first problem. But what I found is that as I purchased residential property, the first property you buy you're negatively geared and you'll wait a couple of years and you buy another one, leveraging the equity in the first one. And then you buy another one, and another one, and eventually you start to spiral in.
When the bank was looking at him, he was becoming more and more negatively geared as he purchased more properties. All was well, until the day he tried to buy property #6.
[00:28:17] The bank manager rang me and said 'Mr. King, we're not lending you any more money. We're too exposed to you now. You're so negatively geared that if all your tenants moved out, you wouldn't be able to afford to pay the loans.'
[00:28:30] And I remember screaming at the bank manager, saying, 'What's the chances of six tenants all moving out?!' And the bank manager looked at me and said, 'Well, it's actually higher than you think, Philip. All the tenants are transient. They are renting because they don't own a home. They're all probably saving to go and buy a home themselves, and they'll leave. They've all signed short six to 12 month leases, some of them are going month to month. And a lot of tenants after their six month or 12 month period, a lot of residential tenants demand, 'Can I go month to month?' Because they don't know what they're doing. Or they get a job elsewhere and they terminate the lease.'
[00:29:10] So, typically that was the bank's position. And if you compare that to commercial property, when you buy your first commercial property, when buying it on a mathematical formula that will see a six and a half percent cash flow return. So when you buy your one commercial property, you're positively geared. You buy a second, you double positively geared. Suddenly you got three times cash flow, four times cash flow. And as you keep buying commercial property. So in residential when I got to six residential properties, the bank stopped me borrowing any more money.
[00:29:48] That's when things changed, is that right? To decide okay, this was your turning point to do something different.
[00:29:54] Well the truth be known, Tyrone, I got— what happens to some people is you get divorced. And I thoroughly don't recommend that for anybody. But if it happens, it gave me an opportunity. Because the judge said, 'Mr. King, you have to sell those properties and give out your ex wife.' And you shake yourself off, dust yourself off. And you get to reset, where you go in on the second time. And this time, I'd had that experience.
[00:30:21] And so this time, I started my new life with my second wife, who I've been with for 20 years, purchasing positively geared commercial properties. So this time when I got to my sixth commercial property, and I went to the bank and asked, 'Can I have a seventh?' The bank manager said, 'Yes, you could.'
[00:30:42] So what you're doing is, I call it you're now riding the outward spiral, where your cash flow is growing. Every time you collect a property in commercial, it's growing your cash flow, and what do the banks love? Cash. So the banks love this positive cash flow income. So I was able to continue to grow that portfolio out to where it is today. 53 properties.
[00:31:24] As you're collecting up, you're spiraling in, where you're becoming more and more negatively geared to the point where the bank says 'Stop.' And in the book, we talk about the outward spiral, where you're buying commercial properties, and you start spiraling out to where the bank says, 'Keep going.' And they enable you to keep going. And right now, I've only just finished a meeting this morning with my bank manager. I'm looking at buying another commercial property.
As for his first residential property, he ended up renting his two bedroom Cronulla unit to a very well-known Sutherland Shire organisation.
[00:00:24] I rented it out to Cronulla Leagues Club. And they had a football player come over from England that was playing for us for the season. And they rented it off me for 12 months. And I rented that unit for about three years before moving into it.
[00:00:58] It was absolutely fantastic. I mean, to own property... I mean, even when I remember receiving the contract, and it was an inch thick, and I remember sitting there, and I wanted to try and read the whole thing. And I did give up after probably halfway through and thought, 'I need a lawyer to do this. This isn't me.' And I was just genuinely rapt to own my own property. To know that I had somewhere that I could stay in. That I wasn't reliant on my parents anymore.
[00:01:37] But also the fact that I was renting it out. Because I bought the property fully furnished. It was a divorce. And the couple sold it to me— I wanted to offer $100,000, we agreed on $105,000 but they leave the furniture. So I was able to rent it to Cronulla Leagues Club fully furnished for a football player to come in. So I was getting a premium rent to what other two bedroom units were achieving here.
[00:02:08] So I was stoked that I had my wage. So I was paying my savings off the loan from my IBM job. So I was still living at home. Any money that I could save, I was paying off the loan, I was paying the interest and I was on an interest only loan. And any money that was left over from the tenant, I was paying off the loan by choice as well. And the value of the property was increasing every year, as properties do.
[00:02:45] I love that expression on the superannuation ads. 'Past performance is no guarantee of future performance.' So there's no guarantees residential properties aren't going to cool, flatten or even go down. I mean, as we know, they've gone up. I've heard 30% this year, which is an enormous increase. So there's every chance that property prices could flatten.
[00:03:17] What pleased me the most was that I now had an investment, where I was building equity three ways. My savings, the tenant's positive income, and capital growth. And I knew I just had to keep that property for a couple of years, then I could borrow against that equity that I'd built, and go and buy the next property.
Why Commercial Over Residential?
[00:03:41] Coming down to the first commercial property, because after as you mentioned, you got divorced, and then you had a clean slate to start again. Why did you decide to go into commercial property instead of going back into residential? How did you determine that factor or that change?
[00:03:58] It's a good question. And one of the questions you sent me through, Tyrone, was maybe you could tell us about your worst moment in your investing. This is a big reason. For any residential landlord, it's the fact that you have your tenant stop paying the rent. And that can be a nightmare. Because, look, you can take them to court, and you need to get the judge to evict them. And let me tell you, the courts don't want to see young families and children evicted onto the street. So it's not that easy.
[00:04:36] And a judge has in the past said, 'Well, no, I'm confident the tenant has had some misfortune. They've lost their job. He's been retrenched. There's a confidence level there that I have that he'll get work. You can give him six weeks to get a new job and start paying rent again and work out a plan to catch up.' And whether you as the landlord say, 'No, no, I'm done with this tenant, I want him out'— no.
[00:05:08] Tenant issues can be bad. And I had pretty well one of the worst experiences with a tenant where they stopped paying the rent. I started legal action to have them evicted. And in the end, I got a phone call from one of the neighbors that said, 'Oh, do you know your tenant's moving out?' And it was the middle of the night. And I went over there in the morning. And the state of the property was indeed, not what I had hoped for. It was terrible.
You may think dogs make the biggest messes, but there’s one pet you haven’t thought of yet that can easily outdo them!
[00:05:39] The individual tenant had owned a pet python, a snake, which you don't see very often. But the unique problem with that is that it excretes an oil out of its skin, which left a black film on the carpet. So I was up for new carpet, I was up for $4,500 in new carpet. They were heavy smokers. And so the roofs and the gyprock ceilings were stained grey. I needed to take two weeks off work, I needed to paint the property. The grill and the ovens hadn't been cleaned for the two years that were there. And I pretty well just went down to Second World and bought a new oven and put a new oven in there.
[00:06:23] The gardens and the lawns were overgrown and had never been done. And this is something that I talk to my clients about— it happens, it absolutely happens. So I was left to take two weeks off work, go in there, paint the property, replace the carpet, do all the running around to get tradesmen to fix things and ultimately spend about $8,000 to get that property back up to a lettable state so that I could get a new tenant in there.
[00:06:54] Now, do you want to be doing that in retirement? When you're old, and you're living on the money that's being generated from your investment portfolio? If you've got a portfolio of residential properties— and this is a regular occurrence— and you've got to continually get tenants out and fix properties back up. Because it's not their property, they don't want to spend their money on it.
[00:07:17] And let's compare that to a retail shop. When you're buying a retail shop, effectively, you're buying three best of brick concrete walls, a concrete floor, a glass shopfront. There is nothing really in there that you own. Everything in there is the tenant's fitout. So they spend their own money on the fitout. Some tenants spend $100,000 [or] $200,000 on the fitout for their shop, because they want their clients to have a beautiful shopping experience.
[00:07:50] And in addition to that, the only things that can go wrong is two things. The air conditioner, and you know what? To cool that 80 square metre [or] 100 square metre concrete box, you only need a five [or] six kilowatt unit, they cost about $5,000 and they last 10 years. And you can write them off on the government's instant asset write off in the first year. So it's not a big expense. It's not going to break the bank.
[00:08:22] And the only other thing that can go wrong is the hot water service. And they're even cheaper. They're, like, $1,000 and they last 10 years. Actually, I have a shop that I just pulled the hot water service out at Yarrawarrah Shopping Centre. And I said to the plumber, 'Is that worth fixing?' He said, 'Have a guess how old it is.' I said, 'I have no idea.' 32 years. I think that’s a record. I had one hot water service last for 32 years. Now I don't say they don't make them like that anymore. But I think you'll get 10 years out of a hot water cylinder.
King explains why he prefers commercial investments over residential, a realisation he came to after a $10,000 incident.
[00:08:58] The tenants themselves, you're going to keep in mind, they spend their own money on the fitout. But it's also their job. It's their livelihood. If they can't pay the rent, they'll borrow it off their mother, their auntie, their uncle, their father, their sister, their cousin. Anyone but you. But they're not gonna let you evict them. Because their fitout is suddenly worthless if you lock the doors.
[00:09:24] And unlike the courts [say about residential properties], there's no children living there. And the courts acknowledge that they're renting the commercial property for the purposes of making a profit. And no children live there. So if they've gone 14 days in breach of their lease and haven't paid their rent, you're legally allowed to go and padlock the door. And when you do that, they've lost their job. So they're going to go find and help.
[00:10:20] Telling you my worst experience— that would have been it. Like, having to take the two weeks off work, or having to take two weeks out of your retirement, and go and fix up your property and drop $10,000 into it. It's not what you want to be doing.
Once he made the transition to commercial real estate, he never looked back. He shares a story about one particular tenant that will blow your mind!
[00:10:33] The best experience in my life— I had a tenant that basically ran a no name, no brand, grocery store, and it was rundown, their lease expired. They rang me up and said, 'Oh, unless you halve the rent, we're not going to renew.' I said, 'Thanks. That's okay. I don't think you're adding any value to my building anyway.' And I had an IGA franchisee, and this is a shopping center with 10 shops in it that I own in Yarrawarrah in the Sutherland Shire, God's country, as I said.
[00:11:08] And 10 shops in that shopping centre, and IGA signed a 15 year lease with me. At the time I thought 'I'm not even sure I'll be alive in 15 years!' But I'm happy to sign it because the longer lease tenure you have, well, the more investors want to pay for that safety and security. And IGA is a national tenant.
[00:11:13] And what then shocked me is the franchisee came in and stripped the supermarket. They spent around $500,000 of their own money, putting in new roof, new flooring, new fridges, new freezers, new shelving, new signage. I went up there, literally my jaw dropped and hit the ground. And I said, 'Oh my god, I own this. Wow.' And I'd only had it value for the purposes of buying a building 12 months earlier. And when that finished, I went back and said to the bank, 'Hey, could you go and value that again, now that IGA has gone in there? Because I really think that that's added significant value to the building as a whole.'
[00:12:22] And what happened was, the valuer that went out there, Herron Todd White, valued each and every shop, not just the supermarket. He also valued the pizza and the doctors and the chemist and the beautician and the hairdresser. All of those individual shops, he valued higher, because there was this modern new national brand supermarket in the complex. I got a valuation back $1 million higher than what they valued it at the year before. So that's probably the best moment ever in my investing life, was when I leased the property out to IGA. And they spent $500,000 of their own dilly beautifying and upgrading my property.
[00:13:09] So a $500,000 investment which was in yours, and you got a $1 million uplift in your own property. Phenomenal.
Life is Like a Game of Football
[00:13:20] In the book, when people read the book, there's an analysis there. I talk about if you really want to be wealthy in life, who do you ask? And there's an analogy that I heard that said, 'Let's treat life as like a game of football.' And I would teach graduates at IBM property investing in the lunch hour. I enjoyed helping the graduates. And the most common answer that I would get is, 'I would ask a financial planner, they're going to be able to set me a plan for wealth.' And look, some of them do. Definitely, some of them do.
[00:14:05] But what in my experience I've found is that they're the first aid guys running up and down the sidelines of the football field. They want to come out and sell you life insurance. Which is important, of course, and you need it. So if you get injured out there you're going to need third party, disability insurance, you're going to need income protection, insurance, life insurance. So you need to have it but a lot of people just get that through their Super fund.
[00:14:34] And I've even had financial planners, when I've said to them, 'You're coming out to tell me how I can make money or you're coming out to sell me insurance. I've already got my insurances set up.' They've turned around and walked away. And I've also had them coming out in their Hyundais and I've opened my garage and said, 'I've got a Mercedes here, and you're gonna tell me how to get wealthy? Really? So, how are you going to do that?' So that sums up the answer for financial planners.
[00:15:01] A lot of people would ask about the accountants. 'I'd ask my accountant.' Now in my case, yes, I think my uncle was rare. He had a passion for property. He was a property investor before he was an accountant, first and foremost. But for me, accountants, typically you tell them how much you work. They tell you what your legal deductions are, and they help you minimise your tax legally. And they tell you how much tax you've got to pay. So they're just the score boys. They're the scoreboard boys in the footy field. They're just keeping score, tell you what you're paying.
[00:15:40] And the third surprising answer that I got was, 'I'd ask my lawyer.' Now who, when they're 25 [to] 30, even has a lawyer? I don't think so. But maybe it's just because you think they're the smartest people, because they do a six year law degree that they'll know how to get wealthy. And to me, that's just the referee on the football field. You know, the lawyers, they just penalise you if you're breaking the rule, and you need them if you've earnt that money illegally.
[00:16:05] So the answer come down: who do you ask if you want to be wealthy in life? You ask one of the players. You ask the richest person you know. And you ask how did they get wealthy. And that's what I would say to the graduates to kick off the meeting. And I'd never say to them, 'I have an investment portfolio of 50 odd commercial properties, I'm able to generate an income that will fuel my retirement now. And I can teach you how I did that.' And all that knowledge and that lesson is front and centre in the book.
Want to Sleep Like a Baby? Make an Onion.
While there are many ways to make money, King sees this as the most secure way. And when it comes to making a meal of wealth, there’s only two key ingredients.
[00:17:00] Obviously knowledge and strategy is number one, which I provide through commercial property. But the other element that you need is leverage. You need an asset that you can borrow lots of money against. If you make 50% on a $100 investment, well you've made $50. You're not going to be too happy, it's not going to be able to retire on that. Whereas if you make 5% on $100,000, you make $5,000, and that's something to talk about. So the message here is, right now today, I owe the bank $50 million. And people say, 'Oh, my God, how do you sleep at night?!'
[00:17:42] And I say, 'Like a baby.' Because you have all of these layers of onion rings that you could sell, that you can get rid of that are generating a positively geared income, that I can offload if I want, I can sell them if I want, before I get to my domicile residence. So largely I'm well-protected by this investment. And it's generating a positive income stream. So I collect my rent, I pay all the expenses, I pay the bank their interest, and there's money left over that can fuel my life. So I don't require a job to pay the loans anymore. The commercial properties have always looked after themselves.
[00:18:26] And that's the best thing when I'm talking to investors. I buy a property worth 500,000. And if we're buying it at a 6.5% return, the bank at the moment, we're only paying 2.5% on the interest. So we're making 4%, which is $20,000 a year on $500,000. And you look at that and think, 'Okay, that's $500 a week.' Imagine going down the pub every Friday night and playing the poker machine, sticking $5 in, winning $500 every Friday night for the rest of your life. You'd think you're the luckiest person in the world.
[00:19:06] Yeah. And you multiply that.
[00:19:09] This is exactly what you can achieve when you go and buy a commercial property on a 6.5% return. And you get our eyes wide open to look at what it is you're buying. Let's say the tenant in that shop was an accountant. And he'd been there for 15 years. I asked people: do you use the same accountant every year?
[00:19:34] Of course, most people do.
[00:19:36] Most people do, right? So I've been using the same accountant for 30 years. And I've never changed and I wouldn't think to change and he's got all my details on file. He's got all my depreciation schedules in his computer. It could be a mess changing. So if I buy a little shop, which has got an accountant and he's been there for 15 years, odds are he's got a loyal, well established client base. He's not going to go anywhere.
[00:20:04] Likewise, one of my favorite tenant types is hairdressers. Because girls typically are fiercely loyal to their hairdresser. My wife goes to the same hairdresser, I actually go to the same barber. So again, if I find a hairdresser that's been there for 15 years or 10 years, odds are she's got a great clientele of loyal customers already built up, she'll be there another 10 years. So these are the types of investments that we're looking for.
[00:20:38] Just to summarise it quickly, and if people want to email you, I'll forward you a PowerPoint presentation if you don't have time to read the book, and it captures a lot of the key points that I've discussed today. But if I look at this one here, the characteristics of a great retail shop, it's obviously location, location, location. You imagine a cafe opposite Bondi Beach— pretty well, it's never going to be vacant, right? There's plenty of examples like that— a cafe next to a hospital, next to a park where lots of mothers frequent. So we're looking at those location attributes in the shop. I've discussed a tenant with a long trading history— hairdressers, accountants, etc. Modern expensive fitouts. Do you think that that IGA tenant that's spent $500,000 on his fitout, do you think he's gonna go anytime soon? No, he's gonna stay there so that he gets the benefit back of the $500,000 that he invested.
It’s an Ant’s World
The best way to find a commercial property goldmine is to think like an insect.
[00:21:56] The other thing I love about Google, I say in the book: we want to buy a property in an ant's nest. So people are watching it in a heavily populated area where there's lots of houses around, and you get up on Google Earth. And you zoom up to three kilometres in the air, and you just make sure that it's a mature, densely populated, that there's plenty of houses around there. So you know that there's going to be lots of foot traffic and lots of people to ensure that that tenant's business is successful, and well [patronised].
Coming back, King reveals where the title of his book Engines of Wealth came from, and what it means.
[00:22:47] I was sitting in Vietnam in a place called Nha Trang, which has a big dragon going over the bridge, and every half hour, the thing shoots fire out of his mouth. And I sat there with a bottle of bourbon and started writing out potential names for the book. And I think that night, I wrote down 50 names. But the one that stuck with me was Engines of Wealth.
[00:23:15] And if you have a look at the logo up here on the back, I hand drew this logo, and then they digitised it for me. It's the engine blocks: bakery, doctor, hairdresser, food, takeaway. And that's your engine block, you've got this portfolio of shops, and they're pumping out money. So I wish it could shake like an engine revving. But that's pretty well what I did, I just sat there writing down names, and I discussed them with my wife the next day.
[00:23:49] And that was pretty well, the night I also said, 'I'm going to write a book, I'm going to write a book on commercial property.' And then I planned out the chapters. And one of the other really important things, just to finish off on those characteristics: Often, the number of employees when you're buying a shop is a sign of the health of the business and the volume of business they do. And obviously, if it's the tenant itself, if it's a national chain, like KFC, Subway— you try buying a KFC or a Hungry Jack's, they're trading at yields at sub 4%. So they're hard to get.
[00:24:28] There's an article on my website, which is called The Cost of Quality. And it's an analysis on the last 12 Bunnings. I always like to say there's always a bigger fish out there. I personally can't afford to buy Bunnings. The one at Caringbah here in the Shire, it sold for $59 million. That's a lot of money. That's not me. But another important thing is that there's a whole chapter in the book about my top tenants that I love. And I've mentioned a couple of them. My number one would be hairdressing salons. Bottle shops. If you get bad news, like you've lost your job, you'll go and buy a carton of beer. Drown your sorrows. Commiserate. But if you get a promotion at work, you're gonna buy a bottle of champagne and celebrate. So it doesn't matter what's going on, bottleos are selling something.
[00:25:27] Cafes are good. We all love our coffee in Australia. Restaurants, especially, I've noticed a lot of my restaurants actually have had an uptick in business. Because people can't go out they're saving a lot of money. So they're ordering in. So Thai, Chinese, Italian, seafood. These are popular restaurants with the Australian people and we order out quite a lot. So they do very well.
Shops are Steps
To own such a large portfolio is impressive by any standards, but over 50 commercial properties takes it to a whole new level. King walks us through how he did it.
[00:27:06] There's basically a table in the book where I take you through step by step. Ultimately, you can see the shop, shop one, shop two, shop three. So the book starts off with buying one shop. One little cafe. It explains how we value it, how we work out the net rent, all of the outgoings are there, and make sure that they're all being accurately sighted when you're going to buy that shop.
[00:27:40] So we buy one shop, and you probably keep it two years. As I said, it's about you working, going back, focusing on your job, saving and paying the loan down. The property when you buy it will be earning 6.5% percent. So the tenant will be helping you pay the loan down as well.
[00:27:58] And then built into the lease, there'll be 3% or CPI increases built into the lease. So your shop will be rising in value about 3% per year. So if you're talking a $500,000 shop that's $15,000 or $20,000 a year, that property is going to go up in value. So in two or three years' time when you go to the bank and have it revalued, you've got this building equity from the positive cash flow, the capital growth from the rental increase, plus your savings. And you're able to then leverage that to go and buy your second shop.
[00:28:35] And then the book takes you through how you go and buy that second shop. And you'll be 100% borrowed on that second shop. Plus you're probably borrow the stamp duty and legal fees. So if that second shop cost you $500,000 it'll probably cost you $530,000 by the time you've added on purchase costs. But you're using equity from the first one and so the bank now holds the two titles over both shops. And we'll give you the full loan for that second shop.
At this point, those following the steps will need to keep saving hard for another two years, but will also be building equity in both shops at the same time.
[00:29:15] So if you're building $15,000 in the first year, now you're building $30,000 a year. And that's before you wake up and get out of bed and go to work. At the end of the year you've got $30,000 sitting there in equity growth. Plus you've got the cash flow, and if you're positively geared 4%, that's $20,000 a year in the tenant's cash flow.
[00:29:34] Now you do have to pay tax on that. That's income. So maybe you'll get to keep $15,000 of that as well. But you're now talking $45,000 plus what you can save over two years. And a lot of people can save $20,000 [or] $30,000, it isn't out of the question. Some people say, 'Rubbish, I can save $10,000.' Okay, well isn't it great to know that you've got equity growth and the tenant positive income that's adding $45,000 a year in equity to the two shops.
[00:30:06] So after a couple of years, you can go and borrow against that new equity now and buy a third. So the book takes you step by step through the process of buying five shops. And you'll eventually— it takes about 11 years in the book to do it. Now all the numbers are in there, if you don't understand the numbers, that's when you if you want, you can go to my website and order a one on one with myself or anyone in my team. I've got three other staff that run one on one consulting seminars.
[00:30:44] Or, go and have a chat to your accountant, or a property investor. Any other property investor loves talking about property. My wife said to me, 'How long is this podcast?' Tyrone, and I said, 'I think it's about an hour.' She said, 'Oh, that's a long time with the spoon.' She thinks that I have the spoon for an hour. Oh my god. So she couldn't possibly listen to me.
Graph to Generate
[00:31:05] But the book takes you through step by step, building that first portfolio of five shops. And I think by the time you own five shops, you're going to be generating $100,000 a year in income per year. That's enough to retire on. And you mentioned is there anything I would recommend people reading. There's a great book that I first read, my first property investment book I read. And it's a book by Robert G. Allen. And it's called Creating Wealth Through Property. And he talks about buying residential houses. He's a US author. It's about the US market. It's not as relevant today to the Australian market.
[00:31:56] But I first read that and there's a graph in there. And he basically believes by the time you own five properties, you will be what he calls 'in financial orbit'. Where you're building equity and cash flow faster than you can spend it. You never met my wife, she can spend it faster than that. But I got to this point where I just felt: why stop? Aren't we supposed to be the best we can be in life? So I just had a passion and thought well, I may as well keep going, and I just never really stopped.
Get Started on Your Snowball
He reset his strategy from residential to commercial 25 years ago. While he didn’t start his commercial portfolio from scratch, it has taken him 30 years to get to where he is today.
[00:33:24] It is like a snowball running down the hill. When you first buy your first shop, it might be three years before you built that equity, that you can go and buy your second one. And then it might be two and a half years before you can buy your third. But then it'll only be two years before you buy your fourth. And then it might be a year. And what happened to me is actually I bought two in one year. I sat back and waited. And when I went and got them all revalued, they'd all popped in value. And I found that I could go and buy two that year. But now when I've got a portfolio as large as it is today, yeah, I can buy a property, I'll have enough equity after six months.
His takeaway is not to underestimate the power of leverage when it comes to property.
[00:34:53] I owe a lot of money on that portfolio that I have. So I don't own them. I owe the bank a lot of money. And so the bank are very comfortable with shops. Now if that was a share portfolio, and the share market goes up and down, you're right, I wouldn't be able to sleep at night. The moment when COVID hit the world, the share price of lots of companies...
[00:35:20] Oh, 50% drop, straight away.
[00:35:22] Just dropped. I'm sure when Scott Morrison banned international travel, I'm sure that the share market of Qantas took a dip that day. And if your bank manager, if your share manager, your bank manager rang you up and said, 'Philip, your portfolio's dipped, you need to stick $1 million or $2 million in it's called a margin call.' And I don't have it. I don't have that sort of money, I don't have any money in the bank. I can't tip that money in. Well, they would sell my share portfolio, crystallise my loss, and I'd be tossed to the side.
[00:35:55] So I don't think that shares and share portfolio is a safe way to borrow and use leverage and to borrow large amounts of money. Now, it might be perfectly good for those people that actually have money in the bank, and can take the risk, and it doesn't matter. And they're only risking 10% [or] 15% [or] 20% of their portfolio. And I'm sure there's lots of millionaires out there that did it through share trading and options and futures.
[00:36:24] But the pure and simple thing is that's not how I built my portfolio. It's not how I generate a solid income to retire on and live on. I did that using commercial shops. And I think it's a very, very stable, reliable way. The tenants are invested with me, they've got their money in the fit out. It's their job, their livelihood, they look after the property, they spend their own money, making it beautiful. And I haven't got that problem when I'm retired to fix it.
[00:36:56] And the other good thing is that it allows us to remote manage easily. So because we are in a concrete box, and the tenant, it's their job, they're there on site every day. This means I don't need to live around the corner. I don't need to be there. I can buy it and own it in Queensland. And if there's a problem, a water leak, the tenant can ring a plumber, get it fixed, send me the bill. Done. So it's very simple to remote manage something that's so low maintenance.
Admit Your Mistakes
For anybody who thinks they made a mistake early on, it can be hard to break out of that mindset. But King’s words to his younger self are a reminder that you can always switch gears.
[00:37:53] I would have said: 'It worked. Well done. It worked.' Because I made that decision. And I talk about it as a full chapter in the book, I'm very open with my life. I am someone that says I did make a mistake, and I have made errors. The first big error I made is I chose the wrong vehicle. I chose residential property. I was negatively geared, I spent a fortune on maintenance and repairs. And I had lots of problems with tenants that didn't keep the property nice. Had lots of times where I took weeks and weeks off work to go in and fix properties up and re-let them. And the whole time I'm paying real estate agents exorbitant fees, 15% of the first year's rent to find me a new tenant.
[00:38:45] So I switched strategies over to commercial retail shops. And I'd love to go back to myself and say, 'That was a great decision. And it really worked. Well done.' And now if I'd had have said, 'One day you're going to write a book on it', I would say, 'Rubbish.'
Love What You Do
[00:39:12] Looking forward into the future. What are you most excited about in your journey for the next five years? Whether it be in property or helping your clients, what do you see yourself doing in five years' time?
[00:39:24] I would say to you, I absolutely love doing what I'm doing today. I didn't really like being a corporate executive of IBM. I was the National Sales Manager. That role took a pound of flesh out of you. They were 10 hour days, lots of travel, lots of time away from the family, and doing something that I really didn't enjoy.
[00:39:51] I've retired, I'm now doing something that I love. I love keeping my eye on the market. I love talking to real estate agents. It's like being in charge of the ice cream. I'm watching fantastic investment options come through, I really enjoy getting those good quality properties in the hands of my clients. I've got lots of clients and if people are looking for references I can happily provide those. Some of my clients have had meteoric rises over the last two and three years in the values of their properties. Now we all know the market has the yields of contract. And more and more I'm seeing properties listed 5- 5.5% in Queensland now. So a lot of my clients that only 12 months ago bought at 6.5- 7%. Well, they've done really well.
[00:40:45] And I love seeing the fact that I'm teaching them how to replicate what's worked for me. I enjoy coaching and mentoring young people. And I wish someone when I was 20 had steed me into commercial property. And I wouldn't have needed to go through that residential learning curve. But I guess our experience make us what we are today. But both those journeys are discussed in the book. And that's really one of the highlights. And I've always been doing that. When university graduates joined IBM, they would come along to my— I used to call it the Lunch and Learn Sessions. So I would run property investment Lunch and Learn sessions for the graduates, and I think they got a lot out of that. And I know, there's lots of those graduates today that have been now in it for 10 [or] 15 years. So that's how long I've been coaching people.
[00:41:51] That's fantastic. You're impacting a lot of young kids, especially the younger generation. I'm so grateful to hear that that's what's happening as well, because there is a lot of education that I think is missing in our current education system about building wealth about property. And if we can tap into that and help the younger generation, they'll be much better off for the future.
[00:42:12] We need to because as I said, they've got it harder than us. Believe me, they have. They do.
[00:42:23] You've done a lot in your life, you've built up a successful commercial property portfolio. How much of that do you think has been due to your skill, intelligence and hard work? And how much of it do you think is because of luck?
[00:42:38] It's absolutely been due to a strategic decision not to live your life in a normal manner. So I think when I look at that normal manner, my mother and father, that you buy a house. And a lot of couples do, and they pay that house off. And they don't even think about another investment, or leveraging the equity in their property until it's paid off. And then they want to save the money. They're against debt, and they're against borrowing money. They think 'If I borrow money and get loans, I'll end up going broke.' Well, that comes down to borrowing money for quality investments, and income producing investments.
[00:43:23] And that's a very different thing to borrowing money to buy a car, or a holiday, or expensive Christmas presents for your kids. So it's definitely a strategic decision you need to make to say, 'Right, I am going to live my life this way. I am going to make a strategic decision to invest. I'm not going to just buy a domiciled residence. As soon as I've built up equity in that domicile residence, I'm going to leverage it, and I'm going to look and go and buy a shop that will now help me with a positive income, capital growth occurring.'
[00:44:04] And by the way, the positive income that's being generated from the shop, you use to pay your domicile residence off first. I mean, any accountant is going to give you that advice. You can still then go to the bank and borrow against that domicile equity and buy the other property. There's a discussion in the book where I talk about this very point, where I say a lot of couples that I meet, they've been paying their house off.
[00:44:35] And one couple reached out to me and said, 'Oh, well we own our house.' And I said, 'How much is it?' And they said, 'Oh, well, we think it'd be worth $1.2 million.' Wow. Okay, so the bank would lend you 80% of that. So let's say the bank lends you $1 million, and that means you've got $1 million, you can go and buy a $1 million dollar shop. And again if we're buying it at 6.5% return and the bank's charging us 2.5% on the money, we're making $40,000 a year. That's $800 a week. With an $800 win on the pokies, how would you feel? That can give you $800 a week extra income because you bought that shop. And you've made that strategic decision not to sit on your hands, and to be brave.
He’s learnt a lot over the years, but he’s come to realise knowledge does more than just educate.
[00:45:27] And the one thing that removes the fear is knowledge. Knowledge, if you understand it, and you're fully immersed in what you're doing, and you've got advice from other experts. There's lots of people out there. I'm one property investor, but I have this strategy that I say to people about learning to get the knowledge. It's step one, read the book. Step two, book a one on one with me, they go for about two and a half hours, you can log on to the website, put your details in there. And we can jump on a two and a half hour call, with me or my staff.
[00:46:09] And step three is you can sign up as an Engines of Wealth client, and I produce reports on properties. And I can email some of your listeners a few of those example reports that I've done on properties that I've already purchased. And they can see in there, here's a property. There's one on the Taunton fruit shop that I bought for a client. Here's what I like about it, it's in the main street, Woolworths is across the road. So it's in the middle of an ant nest. It's got a mother and daughter team that are the tenants. They spent $250,000 on the fit out. It's beautiful, modern, it's in a fairly new building with good depreciation benefits. If we're buying it at this price, these are the outgoings, this is the profit it's going to return. This is what money you're going to make each year.
Thank you to Phillip King, our guest on this episode of Property Investory.