Chris Gray gives us his expert advice on investing in property.
The finder.com.au team filmed buyers agent and property investment expert Chris Gray in late 2012. He had plenty to say so we didn't want you to miss out on any of the timeless details. Here is the extended version of the interview for your property investing learning.
F: How did you start out buying investment properties?
- When I was a first time buyer, I had no money. My mortgage was seven or eight times my income, when technically you can only borrow three times. My mortgage was more than my wages before tax, let alone after tax. I had the same as everyone else, but then again it comes back to if there's a will, there's a way.
I'd worked out that buying a place and getting flatmates was cheaper than renting myself.
F: How big is your personal portfolio?
- I've got about $10,000,000 - $11,000,000 across 13 properties, mainly around Sydney and a couple back in the UK. The properties are roughly around 70-80% geared and the negative gearing or out-of-pocket expense on that is about $200,000 - $300,000 per year.
It's more money going out than most people earn in a lifetime.
The key to getting around that is by using equity to cover the losses. So if, for instance, my property
portfolio rises 5-10% a year, I make $500,000 - $1,000,000 a year in capital growth.
Assuming the banks lend me money at say 80%, they lend me $400,000-$800,000 and I use part of that money to pay for the negative gearing — which is the out-of-pocket expenses. I'll also get some tax back as well and then I use part of the money leftover to re-invest so my portfolio's always growing and part of it I use as income as well.
You need to read the Empire book to really understand that, but ultimately what I'm doing is taking out the rise in equity to help cash flow for a few years and I constantly re-invest.
But the great thing is about the portfolio now is that it probably takes me one to two hours a month to manage it so I basically just count 13 rents coming in, 13 mortgages going out and that's managing a portfolio which ideally will make $500,000 a year.
F: Which investment experts do you use?
- I've got a really good team of advisers and I think of those advisers is making me money rather than costing me. I go to Deloitte Private, who I used to work for. Between the accountant and the bankers, even if I was on my deathbed, they could run my portfolio for me.
Now, I spend a lot of money on advisers. I might spend anywhere from $10,000 - $40,000 a year on advisers, but once you've got that kind of portfolio you need to reinvest it.
I was always told to invest 1% of your portfolio each year on getting better information. If you've got $1,000,000 of property you should be spending at least $10,000 a year to try and get better advice to make sure you're doing things right, to make sure you've got your insurances in place and that you're aware of anything like a GFC that might be around the corner.
F: We've heard you rent your home. Why?
- People think that you've got to own your home if you want to retire comfortably.
I rent rather than buy. I buy lots of sub-million dollar properties, which are worth roughly $600,000-$800,000. There's lots of demand from young professionals for those, so the rent's really high — around 4-6%. Whereas I rent properties worth anywhere from $3,000,000-$6,000,000. Anyone that can afford to rent those generally buy them, so there's no market for renters so the price goes down.
So typically as a renter of a $3,000,000-$6,000,000 property, I'd pay anywhere from 1.5-2.5% rent return to the owner.
I've basically worked out that whatever I can afford to buy as a house, I can afford to rent a property 3-4 times more expensive. Say for instance you buy a $1,500,000 home. For someone with kids $1,500,000 doesn't get you anything these days. At 7% interest that would cost me $100,000 a year in repayments or $2,000 a week.
For $2,000 a week I can rent a harbourside property in Double Bay, boat marine outside, pool on the harbour wall and north facing in a four-bedroom unit. To me, I'd rather be in that than a $1,500,000 home with no aspect and nothing particularly special.
F: When should people make the transition to property investing?
- First time buyers should get into the investment scene straight away.
Even with first owners grants and stamp duty concessions the property is always going to cost you money. The rent is never going to cover the mortgage. You're actually better off treating it as an investment because then you get all those losses back in your tax. Sure, it might only be a third of the losses back, but cash flow wise, it's a lot, lot better.
All your expenses are suddenly tax deductible.
If there are grants available, maybe buy the house, rent it out for 11 months then live in it for six months if that's what you need to do for your state and then rent it out again.
There's nothing wrong with renting out property rather than having it first time.
F: How should someone begin investing in property?
- Firstly, sort out your reasons of why you want to get in and then start trying to work out the numbers.
Searching for a property is the last thing on the list. It's the last 5%.
F: What is your take on positive cash flow vs capital growth?
- The reason I chase capital growth is because I can refinance that through the banks by saying my property has risen in value. I can pull 80% of that money back out without paying any tax, whereas, if you get a dollar of positive cash flow income, you've got to pay tax on that straight away.
Capital growth is worth more.
The downside of that kind of investing is cash loss. The amount of money you've got to pay out of your own pocket is a lot, but ultimately if you just leave that property, the rent is going to rise over time, while the regular repayment amount is constant, so it will turn positive cash flow at some point.
My argument is when it turns positive cash flow, it means you've got too much equity in there and you should pull the equity out and refinance and re-invest.
I don't mind it being negative and the key is even if you're on a low income, try and use the equity to pay for that cash flow. It's a very simple concept, but it's quite complicated to get your head around because you're basically borrowing more and more money to build wealth.
F: Does capital growth investing reap higher returns?
- Mathematically, I think it does purely on the tax basis. Whether you can get more money, it really depends and it's ultimately down to hindsight whether you bought better on a cash flow place or on a capital growth.
Coming through the GFC, if you look at the Bondi Beaches, the St. Kildas, the Kirribillis, all those blue chip suburbs that are technically negatively geared property, generally they've held up really well in cash flow and in capital growth.
Generally, the better quality asset that you buy will weather the storms much better and in the good times will generally make more money as well.
F: How much should investors rely on property data?
- Until you physically see something, on paper it looks like there's 10 two-bedroom units, but when you go and see them, they'll all be vastly different.
While I'm a believer in using the stats, it's really getting out and looking at the properties, talking to people, seeing what the feeling is on the street that really makes the difference.
It's very hard to be a textbook investor. A lot of people say you can buy over the Internet, but I wouldn't recommend it. Even for the experts, quite often they can make mistakes doing those kinds of things.
You've really got to see it, see what is going on in the surroundings — there could be a multistory car park behind it. Unless you know the area very well, it's very, very dangerous.
F: Why should an investor use a buyers agent?
- I'm a buyer's agent. A buyer's agent is a professional investor generally or professional buyer that all they do all day is invest in property.
When someone sells a property, they use a professional salesperson, they pay them about 2% of the property value. So maybe it costs $10,000 - $20,000 to sell it because they're going to sell it better than if the person did it themselves.
The argument is that especially if you're a first time buyer and you've never done it before in your life, you're may be spending $500,000. Why would you risk doing it yourself when you could use a professional?
A buyers agent might cost you $10,000 - $20,000 depending on the price point of your property. But if they can save you 5% or 10%, they may save you $25,000 - $50,000. If they can choose a better investment because they've seen thousands of properties and they get you an extra 1% or 2% growth a year, that's another $5,000 or $10,000.
Again, it's very hard for first time buyers because they haven't got a big deposit, so it will take a huge chunk of it out but quite often you spend more money, you'll make more money.
F: What tips do you have for inspections and dealing with a selling agent?
- When you find the right kind of property, the biggest thing to do is to try and quiz the agent to find out if the vendor is truly motivated.
Ask: 'Do they really want to sell?' and 'What are price are they expecting?'
If agent says they are after a specific price, say $500,000, ask 'if I came to you with $500,000 today, would you sell the property?' And quite often the story changes...
After you question the agent to ensure the vendor is motivated to sell, do your due diligence.
F: Should an investor use a strata check?
- You need to get a strata check if it's a strata plan unit — there could be a $100,000 special levy just around the corner.
F: Do investors need a building inspection?
- You need to get a building inspection because you're not likely to know what concrete cancer looks like or what damp looks like and the potential cost. Just because a building has damp or concrete cancer, it doesn't mean the repair costs are prohibitive, it could be $1000, but it could also be $1,000,000. The cost range can be vast.
F: Do experienced investors need valuations?
- I always get a valuation. Even though your bank's going to do one, quite often they're not going to do it until after the event and if you've got a lot of assets, they don't really care what it's worth because it's in a pool of other assets.
I pay for those things and quite often it's about $1,300 to get those three reports. A lot of people will say why pay $1,300 for those reports when there's no guarantee you're buying the property?
But I wouldn't risk $500,000 or $600,000 or even $300,000 without paying for those reports because I could be liable for $50,000 or $100,000.
I'm given a price range when I get a valuation. Say, for example, a valuation of a prospective investment property is $500,000-$550,000.
In this kind of current market, we're roughly paying in the middle of the valuation, so roughly about $525,000. When the market comes back slightly stronger, quite often we're paying at the top end of the valuation, so $550,000. In a really booming market quite often it'll be five or 10% over the valuation, so maybe $575,000 or even $600,000.
You need to understand valuations as well as just getting the report. It's about reading and understanding the market as to what to pay based on that valuation. At least by having the valuation I'm not going to pay $700,000 or if I am going to pay, $600,000 I know I'm doing it based on a reasonable thought rather than just being emotional.
F: Do you buy at auction?
- I find that the best properties always sell well, so generally I want to buy such a property before it goes for auction. A property will go up 5 or 10% at auction as more people see it.
As soon as I see the right property, I get the report done and then I get a contract done. I sign the 66W certificate which means there's no cooling off period — which locks me into the sale like an auction would. This makes it a really strong offer.
I put my 10% on the contract and go to the agent and say, 'look, it's maybe not the best offer in the world but it's a guaranteed result.' So say my offer is $500,000, I say to the agent, 'if you take the property to auction, you might get $525,000, but you could get $475,000 — here's a guaranteed bird in the hand.'
F: How do you snavel a bargain?
- In my experience of thousands of property sales, I just see the good properties sell well and the bad ones always sell cheap.
So, do I want a cheap property? No, because it's always going to be cheap.
In a down market it's always going to be harder to rent, it's always going to be harder to sell, whereas even if I pay a premium for a good property, say, 5 or 10% — quite often you'll always get premium rent and you'll get a premium when you resell. So while buying price is important, to me, the number one priority is to get the right investment.
F: What is your technique for negotiating a sale?
- So once I give it to the agent quite often I'll say, 'look, I'll give you 12 or 24 hours to take this to the vendor, I'm not going to allow you to shop it around and try and use my offer to get someone else's.' But ultimately there's nothing you can do.
Even if you were going to do that it really just comes down to negotiation, technique and your relationship with the agent.
Ultimately, then you just have to wait really and it's really up to you.
Most of the time we'll put in our best offer because it's not worth risking a deal over $5,000 or $10,000.
A lot of people try and steal a property at a lower price. But out of 200 properties on the market I'm probably only interested in 10. Out of those 10, there's probably only three that the vendors expectations are right so when I find those three I'm not going to risk losing those to then have to then search through 200 more properties.
F: What professionals should a property investor use?
- You need to try to get as many professionals as possible. There's no way you're going to know everything.
I've been in the property business for 20 years and if you've been in for one day, there's no way you're going to get that information straight away.
The whole idea is to try and get all these people on board. The more money you pay, think of it as a larger investment rather than a larger cost.
Ultimately, you need a mortgage broker, you need an accountant, you need valuers, building inspectors,
strata inspectors, people that can help with DAs, solicitors for conveyancing.
There's a whole group of different people. You're not going to be able to afford them all straight away necessarily.
When you start off, you might be paying someone a couple hundred bucks an hour. After a while, you want to gravitate to paying them $500 an hour or $1,000 an hour. It will cost you 10 times as much, but if you sit in front of someone that's worth $1000 an hour, the information they can give you can make you tens of thousands of dollars.
F: What is your take on insurance?
- I'm a massive fan of insurance and I insure myself for pretty much anything that can happen, both to me personally, to my properties, to my business and to everything else.
A lot of people are trying to make money from saving money. Insurance is the last thing that they want to spend money on because they think these events are never going to happen, but they do.
When buying investment properties, you definitely need to get a landlord's policy if you're going to rent it out because otherwise most household policies aren't going to cover you if the tenants trash things which they can do or set the whole building alight. These things can happen.
If you're not covered, suddenly your financial life is pretty much over straightaway. When it comes to personal insurances, both income protection, disability and trauma and life insurance — all of those I maximise as much as I can.
I've had lots of friends in their 30s that have had strokes, heart attacks, some have died, some still living thank God and a lot of them are between insurance policies.
I've seen people in hospital beds for a month with a kid at home and a wife that's not working and suddenly they're worried about holding onto their properties because it's negative-geared.
Whereas I'm insured for anywhere between $3-$10 million. If you've got an insurance policy and you've got millions of dollars coming in, life's pretty relaxed. So definitely worth the investment.
F: Where should an investor go for property finance?
- When it comes to choices like going to a non-bank lender vs a bank or going to mortgage broker; a lot of buyers will concentrate on this a lot of the time because they think if I can save an extra 0.1%.
Twenty years on, it's all completely irrelevant.
The old way of making money was all about saving money. That's how our parents did it, whereas, the new generation now it's all about if you concentrate on buying a better property, you'll make thousands of dollars, if not tens of thousands.
My personal thought is to go straight to a mortgage broker. They don't cost you any money. They can access 30 or 40 different lenders. They're doing it all day everyday. They're going to do a much better job than you.
Don't go and annoy all the mortgage brokers by going to the mall and then bouncing off one another. Just go to one, if they're good, get it sorted and move on.