Building a property portfolio in a tough market | The Property Couch
Momentum Wealth managing director Damian Collins chats to ‘The Property Couch’ about his experience as an investor: mistakes and lessons learned; and some of the horror stories he’s seen in the industry.
Hear what he had to say in the video above and transcript below.
Welcome to the Property Couch, where each week you get to listen to two of Australia’s leading property experts, Bryce Holdaway, Co-Host of ‘Location Location Location Australia’ on Foxtel’s Lifestyle channel, and Ben Kingsley, Chair of Property Investment Professionals of Australia, and the 2014 and 2015 Property Investment Advisor of the Year.
Bryce Holdaway: All right, folks. You’re on the Property Couch, where each week Ben and I bring you the insider’s guide of property investing, and this week it’s something very special, very unique… we have got a very special guest today. We’ve got Damian Collins from Perth from Momentum Wealth…Damian, you’re the Founder and Managing Director of a very successful business over in Perth called Momentum Wealth. So today, we thought it’d be great to get some insights from you on a number of things, one the fact that you are a property investor yourself, so we’d love to share some of your wisdom with the listeners or the viewers, but also just what it’s like being in the Perth market and some of the insights or tips? So, I guess the first question, the obvious question is how did you become a property investor in the first place?
Damian Collins: Well, Bryce, it was all back in… my dad was a real estate agent, and when I was a kid and got a bit of a bug for property and went and did a university degree in finance and accounting and became an accountant and realised I had maybe a little bit too much personality to stick with accounting. No offence to accountants!
Ben Kingsley: I’m sitting with two accountants on the couch. What’s wrong with this story?
Damian Collins: We got out of it. We sold out. It was interesting though, when I was in the private tax area, a lot of the very successful clients had a lot of property investment, residential and commercial. So I thought well, I guess, really, to get ahead financially, you’ve either got to start a business or you’ve got to invest. Just working day to day [isn’t enough], because even partners in this accounting firm, even though on the surface looked like they had a lot of money – nice house in a nice suburb – they were still 60 and still didn’t look like they had a lot to retire on. So really that’s where I got the bug for investing. And property, I love property, the great thing about it is, every one is unique, every property. They talk about the stock market being an efficient market, well, the property market has got opportunities out there if you look hard enough and you can see things that others don’t see, so that’s where it all started. Started investing from there and here I am, sadly, more than 20 years later.
Bryce Holdaway: Sadly?
Ben Kingsley: Sadly?
Damian Collins: Sadly, it has gone quick.
Bryce Holdaway: But you never forget your first one. Can you remember where that was and can you sort of let us know what the process was for you?
Damian Collins: Yes, I do remember it. It’s in Surrey Hills in Melbourne here, eastern suburbs of Melbourne, I’d say about 14-15 kilometres out. And yeah, nice little house, did a bit of work to it and it was in the early ’90s in the recession we had to have, sadly, but still made a nice little profit. Back then, you could buy a house in Surrey Hills for $160,000, believe it or not.
Ben Kingsley: Median prices are over $1 million now.
Damian Collins: Yeah. So bought it, renovated it, and sold it and picked up I think about $25,000. I thought to myself, “It’s pretty good,” considering my salary at that time was about $32,000. So from there, after a couple of years, got into doing that full time and got out of the accounting role and sort of continued from there and realised later on actually I should be holding some of these. I didn’t need to keep selling and developing to earn an income because you can’t eat bricks sadly, so you need an income from somewhere to support the properties. But yeah, got into it full time and developing and then started on the side building up a portfolio and about yeah, 10 years ago nearly, our 10 year anniversary is up this year, we started Momentum Wealth.
Bryce Holdaway: Is that still your philosophy now to buy and hold?
Damian Collins: Absolutely. For the vast majority of investors, buying and holding is the way to go. If you’re a professional developer, we do developments for our clients and a lot of those clients, they do hold, but some of the products we do develop to sell, but that’s… you know, we’ve got a team of professionals, who know what they’re doing. For the average investor, trying to trade property is not the right thing, because most often, they get the wrong stage of the cycle; there are a lot of transaction costs as we all know, stamp duty, agent’s fees. It’s hard to trade in and out unless you are professional. So for 98% of people buy and hold is the way to go.
Bryce Holdaway: We do have a similar story, because I was the same. I worked for a chartered accounting firm in West Perth, and I remember I was in tax and business services and I was really drawn to doing the tax returns, where someone had an investment property, because I was passionate about that type of thing. Now, the fact that you’re in Perth and it’s a town that’s, I guess, one product, one customer in terms of the mining to China. How have you found investing in that market and advising clients, given in the last couple of years, it’s been… the sentiment has been quite low there?
Damian Collins: Yeah, confidence is still pretty light on. There’s a lot of clients who are hesitant to make decisions, but there’s still been opportunities. I mean, we’ve gone back and looked at our portfolio. We’ve outperformed the market by about 2.9% per annum over the last seven years, so that’s great.
Ben Kingsley: Great. That’s huge.
Damian Collins: So, what we do is, again, being a buyer’s agent, very much targeting specific types of properties in areas. We’ve bought a lot of properties in proposed rezoning area well before the curve, before the market knew, where it was in preliminary stages and some of those properties have gone up 70%, 80%, even though the Perth market itself has probably gone up, near zero in the last three, four years. Just because of that rezoning potential. So, even… look, it makes it a lot easier to buy a property in a rising market, because everything is going up, nearly everything, but when it’s a softer market, there are still opportunities, but you’ve just got to look harder.
Ben Kingsley: I think from that point of view, it’s the long-term game and the long-term play and having that confidence to, say, going counter-cyclical to the market, because everything in your DNA is telling you it shouldn’t be doing it, but that’s actually some of the best buying opportunities, because we’re thinking 10, 15, 20 years ahead, and we think that Perth… well, based on the ABS statistics, they are saying that the population growth will be bigger than the Queensland or Brisbane metropolitan area. So ultimately, from that point of view, it’s going to be an interesting story to sort of make that gutsy call to go into a marketplace and trying to time it right. I don’t think anyone who says that they’re ever going to get that perfect flat bottom is actually being truthful. Even the best science that we put into it can’t tell us when we’re going to basically completely bottom out.
Damian Collins: No, exactly. I mean it’s… you want to buy, certainly, at the best opportune time, but no one can exactly predict the bottom. And so, again, if you’ve got that long time horizon, you’re not looking at what’s happening next month or next quarter. It’s the next 5, 10, 15 years, then buying counter-cyclically is the smartest thing, but most people don’t do that, Ben.
Ben Kingsley: No, they don’t.
Damian Collins: As you know, when the rush is on and when it’s in the front page of paper, that’s when most people come into the market. And we particularly saw that in the west in the Pilbara. I remember very clear… we didn’t buy properties up there for clients. We just knew it was overheated and unfortunately it’s a really sad bloodbath up there. And I remember so many questions in 2009, ’10, ’11, even ’12, should I buy in the Pilbara, and we said no, it’s overheated, over cooked, don’t do it. A lot of East Coast investors went in there thinking 2,000 or 3,000 a week rent was sustainable. You know, paying $1.2 million, $1.3 million for properties and now they’re worth $300,000 and $400,000.
Ben Kingsley: Ouch.
Damian Collins: It’s a lot of pain and lot of people. We’ve had people who’ve come to see us subsequent to that, who… and getting cross collateralise their loans, it’s a mess they can’t do anything…
Ben Kingsley: Yeah, the reality is there’s not enough equity there to uncross it and get rid of… it’s just a horror story.
Damian Collins: So yeah, just don’t want to buy at the top and sadly for most people, that’s the way they go.
Ben Kingsley: So, I’m interested if we can just go back and look. I reckon we want to come back to that, but on your journey, which has been a highly successful one not only from the business point of view, and obviously you’re a board member of PIPA, which is wonderful. So we’ve had a lot of time to sit down and chat. I want to go back into the journey and the light bulb moments that you’ve had along the way. So when you first started out and you started flipping property, what was the trigger to look at that and improve the asset as opposed to now you’re a passive investor, which is effectively what I am as well, where we don’t necessarily add super amounts of value, we just sort of pick the right location and let the asset do its thing. I’m really keen to sort of get an understanding of when did you start having these observational moments around what type of research you look at and the things that have got you to be the expert you are today.
Damian Collins: I think it was just… a lot of it was time in the market, Ben. It was… I mean as we know a lot of the spruikers out there will tell you that apartments are great and they’re getting big commissions on it and we’re saying what’s going on in Sydney, Melbourne at the moment with the oversupply and really it was… Yeah, what I was looking at and studying the market, why do some things grow better than others? Ultimately, to me, was the land value that’s embedded in that property, because the asset fades away. The building fades away, but even apartments have, obviously, an implicit land value even though they don’t necessarily have their own title, and that was, I guess, one of the light bulb moments that I thought. And our business has been based on buying properties that have, not necessarily the size – they could be 200 meters in a great suburb – it’s more the value of the land, because ultimately that’s what goes up in value. And so that was certainly the thing I learned. And when you’re flipping, it was probably less important, because you’re in and out of the market.
I guess it was my late 20s. Up until then I was really just flipping and then I realised, well, looking to my financials and all the stamp duty I was paying, agents fees, I’m going ‘the government and the agents are making more out of this than I am’.
Ben Kingsley: Yeah, and if I’d just kept one of those three that I flipped, I’d be in a better position, because I have equity available to do it.
Damian Collins: And then seeing what some of those properties are worth. So I transitioned out of it, started holding more and flipping less and then… well, I needed income that’s the difficulty thing, so I still had to develop and sell and do that sort of thing, but you need an income and that’s why your properties are in negative territory, you need an income to support them.
Ben Kingsley: And so, you were learning a craft over here in Victoria before you moved to Western Australia. What lessons or what observations could you take out of the Victorian or Melbourne market that you adopted in the Perth market?
Damian Collins: Definitely. Melbourne is double the size of Perth, and so Perth, when I first went there, it was about 1.5 million, so a pretty small town and Bryce you probably remember, public transport, people don’t use it much, congestion didn’t exist. And I’m looking at these properties near train stations and people must have thought it was a down side… you know, ‘someone will come and rob me’, you know that sort of mentality…
Bryce Holdaway: Well, I was actually telling that to someone yesterday, the differences between Melbourne and Sydney and Adelaide and Perth,and I said we only ever use the train in Perth when we need to get to the Royal Show, or to go to Port Beach, and the only reservation about going to Port Beach is we might have got beaten up by some of the Fremantle supporters. But you’re right, it’s only until they sort of put the train down the middle of the freeway and down to Mandurah that it became accepted that that’s a system of motor transport in Perth.
Damian Collins: So that was one of the real observations was I had seen it in Melbourne how, as the city gets bigger, the way it moves out – the people can’t afford that suburb they go to the next one, it gentrifies and that’s where… and that’s the sort of properties we target. Ones that are on that gentrification curve or wave and that we know we can start to see it happening and our research shows that the demographics are changing and that’s where you get your uplift. Because we all want to… we can’t just rely on the market to go up 8% anymore, that’s not going to happen in the low inflation environment. So, we want to be targeting properties that yeah, find the cities that have got the population growth, and those suburbs and those areas that are going get rerated by the market either through zoning or through just demographic and gentrification.
Ben Kingsley: And I think part of that is also the congestion story that comes with that. The inability for government to offer that quick node of transport from those out of suburbs as your population base grows drives you to be more time poor, life moves quicker, quicker paced environment. Congestion has played a big part in not only the story, most of Australian capital cities, but globally. And to a point, where if you buy in Beijing and Shanghai and Hong Kong and London, apartment living is 100% acceptable, because it’s really the only choice because the land value is so expensive that you’re not going to be able to build your little 480 square metre, three bedroom, two bathroom house next to the skyscraper, it’s not the best utilisation of land.
Bryce Holdaway: So with gentrification, are you looking for the traditional gentrification story of having some period homes, which Perth has sort of in its western suburbs, because it’s always interesting when you come from Perth that the western suburbs are more desirable than the eastern suburbs over here. I know that you like to buy some stuff in the north eastern part of Perth as well because of that zone changing, but doesn’t necessarily have that period look. So what sort of things are you guys on a top line level trying to look for?
Damian Collins: Yeah, a lot of Perth doesn’t have that, Bryce, as you know, it’s set in a newer, more modern city. So when you go out the eastern side along the Midland train line, there is a bit of stuff around through Bayswater, Bassendean, that’s got that period look. And you go north, it’s all pretty much suburbia sort of ’70s houses. So we don’t target as much the particular house, because that’s not as… as you know in Melbourne, those period houses people love them, there’s not as much of a chase on for those [in Perth], so it’s more about the suburb and even those suburbs, as you mentioned in the northern area, they are certainly starting to change. And again, we were talking about transport before, people are now starting to value it because the congestion on the roads is getting worse and so I think yeah, Melbourne, Sydney, they pay 20% more to be near a train station that will come to Perth and again that’s an area we really want to target near public transport.
Bryce Holdaway: Is there any sort of… you talked about some of the blood on the streets that you’ve seen from the mining story and that’s really prevalent for your market, but have you… are there any other stories that you see, where clients come in and you look at their balance sheet and shake your head and just think ‘how did you actually get that’. Can you think of some horror stories if you like… that you like to share with the viewers or the listeners?
Damian Collins: Definitely, the ones I guess that… I guess, I feel sad for the client, but also annoy me, are the ones where they’re being led by clubs, groups, that are really masquerading as…
Ben Kingsley: “Educators”.
Damian Collins: Yeah, “educators helping clients build wealth”. And I’ve seen some horror ones particularly on the Gold Coast, where people have bought in at $450,000 – $480,000 and getting all crossed, everything is all tied together, we do revaluations and to get them financed and they’re coming at $330,000 – $340,000. It’s sad, because people have put their faith and trust in someone who’s meant to be helping them and…
Bryce Holdaway: Unfortunately Perth can be vulnerable too, because the East Coast is often sort of the bigger brother for the Perth paradigm, and they come and rent one of the nice hotels and they come over selling the dream of the Gold Coast. Because if you’re in Perth, you don’t grow up going to the Gold Coast on holiday, you go to Bali. So the Gold Coast is quite foreign to Perth people, not so much now with low cost airlines, but back in the early 2000s, it was. So they are potentially really vulnerable, because they’ve got all these huge incomes from the mining space, they’ve got the big brother coming home saying how great it is and you’re obviously seeing it day to day in the business.
Damian Collins: Yeah, we have. And if people have bought good solid investment properties, even though the Perth market is down about 6 or so percent over the last couple of years, most of them have held their own or come back a little bit. It’s where people have gone and bought into regional towns, gold or mining towns I should say, or being led astray by over-inflated property on, generally, on the Gold Coast. We’ve even seen a bit of it, Melbourne apartments, they’ve sort of been targeting particularly as the market dried up in the last six months targeting over there. So they’re the ones that I’ve seen where people have gone and made the worst decisions and got themselves into difficulty. And it’s tough when you’ve got negative equity, you can’t get them out of it; it’s very, very difficult.
Ben Kingsley: I mean, it’s the second highest disposable income per capita around Australia in terms of… so Canberra has got the highest disposable income, Perth is second highest. And so, that says, in terms of when an economy is flying, and there’s a remote location. So people get paid a premium to go and work in these areas, because they’re sacrificing lifestyle, but that comes back to the point that, you’ve got to look at property investment as a lifestyle choice. I mean, people stay in a location because it offers them the lifestyle and amenity that they’re looking for. If it’s just offering them high incomes, then chances are they’re going to take that money and then they’re going to go back to where they get that lifestyle drive. So they’re making a sacrifice to live remotely to get that opportunity. So when you do go out to areas like Newman and all these other areas, you’re only really out there, predominantly, to earn that bigger money. There’ll actually be salt-of-the-earth Australians who stay out there and they’ll be forever there, but we all don’t want to rush and live in a place that in the middle of summer is 45 degrees every day. So those economics cycles all pass. The problem with these so-called educators and these visionary people who know everything about property investment, is people get sold on billions of dollars of iron ore that we’re going to export and this is… China is going to explode and then there’s going to be India, then it’s going to be Brazil, and then there’s going to be Africa. This is an everlasting opportunity. Well that’s not going to be the case, there’s going to be those cycles that come and go.
Damian Collins: And that’s the thing, I mean the Perth market is more cyclical than other markets round Australia. I mean we are a mining-dominated town. But there’s still… actually more people work in healthcare than they do in mining. People might be surprised to know that, but yeah, you’ve got to think about it, in WA, a lot of the work is fly in fly out, because Perth is the capital city and if you’re really looking at… I still think that the long-term story is very bright for Australia, and the commodities are still going to be needed, and Port Hedland and Karratha aren’t going out of business, they’re going to be there for 100-plus years, but they’re not the prettiest places in the world, and there are 20,000, 30,000 people and when the kids… the standards still is you either do fly in fly out, or if you go and live up there, when the kids get to high school, the wife goes ‘it’s not really the place we want to be long term, we’ll come back to Perth’. And so they’re never going to be 200,000 population towns, they’re very inhospitable as you say, but there’s an economy there, but yeah, if you want to take advantage of mining, Perth is where most money ends up coming back to.
Ben Kingsley: And taking the long game, long-term view, the Ord River scheme, the amount of water in Lake Argyle, that beautiful and unbelievable basin of fresh water, Broome actually has a bit of lifestyle appeal to it. It’s certainly got from a sentiment and a branding point of view, it has that. Now, when you got a government, who’s bullish on Northern Australia, not only obviously the Queensland and Northern Territory, but that upper end of North and Western Australia, it is an incredible place. I’ve really enjoyed my time when I’ve gone and holidayed in Broome, and I suspect that there will be opportunities in those markets, when the time is right. Because I think people could say to themselves predominantly for a reasonable period of time that they could live in an area like that and maybe send their kids to boarding school as part of that story. But once you’re also talking about food export to Asia and all those other things, it’s going to diversify agriculturally and there’s going to be good money to be made up there. The question is going to be is that money going to be transferred back to the Perth environment or even people flying in and out from the East Coast of Australia to deliver that.
Damian Collins: Definitely, I look at the strong economics up there, that I guess Broome, you mentioned that, we are still not up there yet. We look at it, beautiful place for a holiday, but the prices are back to 2005 in their property prices, so it’s still got a bit of hurt there as well. But look, I think the… one of the things I’ve said to our clients is when they want to go to these small towns, regional areas, if it’s your first investment property, don’t do it. You want to have three or four good quality properties under, it’s a bit more speculative, if you’re willing to take a risk, you could get it right, but if you get it wrong, at least that’s not going to ruin everything. But if it’s your first one, and you get it wrong, if you bought that first one in the Pilbara and you’re underwater a couple of hundred thousand, you’re probably not going to be buying properties for another 10 or 20 years.
Bryce Holdaway: And you’re gonna lose the faith.
Ben Kingsley: I think it’s brilliant advice. In fact, we talk about two to three million. Once you got that two to three million in the bank, we’re happy for you to take on bit more risk. And that’s normally the evolution of the investor. They go from a naïve, unintelligent, unknowledgeable platform and as they work with advisors and firms like yourselves, they take this transformation into greater knowledge, greater understanding, greater interest and they can basically build that confidence up, and they move from basically being in a position of complete procrastination into going into that sort of ‘okay, I know I’ve got a good wealth base behind me, so I’m ready to take on a bit more risk’ and reward potentially comes with that.
Bryce Holdaway: That’s really good advice. Damian, have you noticed any transition from the mining community, because there were lot of media reports when it was flying, that they were coming home and buying a jet ski and having a V8 Ute and spending money on toys. Have you seen a sentiment shift from… because we have lots of listeners and potentially viewers who are actually listening to us right now in the mine in Northern Western Australia… have you noticed them now going ‘okay, this thing is going to last forever’ and in terms of your client base coming to you saying ‘alright, we probably should make hay while the sun shines, because in the past I’ve been guilty of buying two jet skis, whereas now I probably should be spending that surplus into property’… have you noticed anything changing like hat…
Damian Collins: Bryce, we have certainly seen people realising exactly what you said. Well, they’re getting crazy amounts of money up there. Unskilled labourers getting $140,000, it was just not sustainable. Now that the… there’s still lot of employment up there, no doubt about it, but the labour supply particularly off the construction projects, has come back into the market. So wage is coming back to normal. So people go ‘oh, well, I’m not going to have all this excess income forever, and I’m still getting good money, I’m still getting around $90,000-$100,000, but I really do need to invest for the future, I don’t want to be doing the FIFO lifestyle, it’s tough, tough on the families. And I don’t want to be doing that, so I want to start to invest and start to get into the market’. So we’ve certainly seen… particularly in the younger ones, surprisingly, we get, as a buyer’s agent, a lot of our clients tend to be sort of 35 to 55, 60, but we do get a lot of mid, low, even early 20s making that first step, which is great.
Bryce Holdaway: It must have been from the ones that we’ve seen Ben here who do have that FIFO lifestyle, it is the younger ones and sometimes I’d look at them and I go I can’t believe that you fit the stereotype of working in a mining community. But they are very keen to say, well, ‘I’m going here for a reason, I want to trap the surplus so that we can use it rather than get caught up in the lifestyle’, because then it comes to the point where they can’t get out of the lifestyle, because they haven’t done enough with what they’ve done. They’re established in the lifestyle. So the message to the miners…
Ben Kingsley: Five years of pain for long term gain is exactly what we potentially see as well. So, I think it’s great.
Damian Collins: There’s not many people, Ben, who do it for long… 20, 30 years, it’s definitely 5, 10 years. Most people have got a timeframe in their heads. We’re going to do it for this period of time and then I’ll still get a job in Perth, maybe I’ll take a 30 grand haircut, but that’s okay. For the next 5 to 10 years, we’re going to sacrifice this and get some extra cash.
Ben Kingsley: We do the same thing. So we’ve got a lot of clients, who come in and basically these are the incomes that they’re on and we do long term cash flow projection. So they say to us well, I’m on $180,000. Can you actually make sure that in 5 years that model goes down to being on $90,000 and build me a strategy that’s based on that, as opposed to based on these higher rates of income. So, they’re being realistic, but they’re also saying this is going to fast track me into the next stage of life and we’re going to focus on having our family after we’ve got one or two away in terms of property investments away and then off they go.
Bryce Holdaway: Damian, we know that you’re one of the good guys in the industry, because in our industry there’s lots of people who are… their agenda isn’t pure for the client. So through chats off-air, we know the principles that you employ, but for the benefit of the listeners and the viewers, what are some of the fundamentals that you want to cover if a client’s coming to you, getting advice around building a portfolio or buying investment property or a combination of both. Are there are some principles or fundamental that you stick to that you talk to your clients each and every time?
Damian Collins: The first thing we do is a fact find. Find out about the client, that’s the first thing you’ve got to do, because people have got different risk tolerances, different life circumstances, a whole raft of things. So people come and say to me, “what’s the best property to buy,” and I say “well, I don’t know enough about you”. So this is a right a property for you, but that might not be right for somebody else. So it’s really about finding out where they’re at in their journey, their risk tolerances, what their future plans are. I know we all can’t plan, we can say we’re going to have kids in two years, that may or may not plan out… all those sort of things. But what’s their future plans and trying to be, I guess, conservative within that. I don’t want to ever get to a situation where a client is unable to afford a property. So if they want to be pushing aggressively on servicing, I will say, “well, look, you really want to fix your rates then so you’re locked in at least for next three to five years, and so, I don’t think rates will probably go up, but just in case you lock that and that side of it, you’ve got your income protection insurance. So if something happens in your job or you’ve got… you get injured, at least you can keep making those payments.” So it’s really about understanding the client, developing the right strategy and putting protections around them. We can’t, again, guarantee the future, but putting as many protections in place as we possibly can, so that if things get a little bit of stray, the client is still safe and doesn’t… last thing you want is force selling. You don’t want to have to get to people where they have to force sell.
Ben Kingsley: Totally. And it’s a trend for all the good guys in the industry; they do tailored solutions, no shoehorning, no off the shelf type stuff. That’s the difference that separates quality, independent advice from those people who are basically “educating you” to how we can make more commissions from the sales of the properties that we do.
Damian Collins: I really look at like, the property advice industry, to me, is like what financial planning was 20 years ago, where it was just product flogging, there’s not really many people in the industry at the time who are doing it well, it was all just about selling products, getting commissions and that industry has evolved and been forced to evolve and I’d love to see the same in our industry, where you can’t be just a product flogger, it’s not advice, it’s a product. When you’ve got a box or an apartment or whatever it is or a particular one horse town, that’s the right one for everyone, you know automatically that they’re not advisors, they’re selling you a product. And hopefully one day more and more people will see that in property. Still a lot of ‘do-it-yourselfers’ and people getting shafted by the product floggers, but I do see more and more people veiling advice and buyer’s agent who they know are working on their side.
Bryce Holdaway: Very good there. So that’s in terms of advising. What about you as a property investor? You’re about to go into the market this weekend and you’re going to buy another property for your portfolio. What is some of the principles that you stick to when selecting assets, building a portfolio, getting your loan structure, is there one or two or three that you’d want to share with the listeners?
Damian Collins: Well, certainly on the loan structure, I’ll touch on that first. I do not cross collateralise anything. Every one of my loans or my investment properties is standalone. So, I just don’t want to put that together so another banker has got control on my assets so I do have it quite spread around. And that gives you flexibility too. When properties… if you’ve had one that’s gone down and one has gone up, if you’re looking to get extra cash out, you just get the reval on the one that’s gone up. When they’re crossed, you’ve got to get them all revaluated. So never cross collateralise. That’s my recommendation.
So if I’m going to buy a property, I’m looking again in those areas that ‘what’s going to change’? I’m trying to envision what is it going to be like in 5, 10 years’ time and it’s not what it necessarily is right now… because that’s where you can get those hidden gems where, okay, not everybody buying here, people don’t realise the story, but we know in 10 years’ time, ABS stats, Perth’s going to be at least half a million bigger than it is now. So more congested, people going to value their transport and all those sorts of things. I guess when I comes down then to the property itself, it’s got to be something that’s rentable and again different markets, three bed, one bath in some area is perfectly fine, in other areas not. So you’ve got to make sure that it suits the market in that particular area.
And then really then I go down and say ‘what’s the land value here’, because ultimately in 30, 40 years, or whatever that time period, that building is going to be most likely, unless they’ve got character like what you do get more of in Melbourne, most likely that house is going to be ready for rubble and it’s not going to be worth much. So what’s the land component value. We always aim for minimum 50%. I prefer 70$, but minimum 50% of the value of what I’m buying is in the underlying land. And that way at least, we get clients who are bit more cash conscious, and it’s a trade off if you’ve got some of the higher land value, less value in the building, the rental returns probably going to be less and so I need more negative cash flow. For clients who are more cash concerned and cash constrained, we’ll still get them something that’s maybe bit newer, not necessarily brand new product, maybe a 10 year old villa or town house.
Bryce Holdaway: So, you will buy sort of medium density sort of boutique town houses, boutique sort of old-style flats, rather than the new apartment, you’re happy to buy?
Damian Collins: Oh definitely. Yeah, again, even the with the apartment ones, we still do see what’s the implied land value, and lot of apartments, particularly in established areas, can have more than 50%. Not new ones, generally we steer clear of the brand new ones, but some of the older style are ones that were built in the ’70s and ’80s and boutique complexes, they’ve got good inherent land value, there’s not a lot of supply of them around in those areas that they came at good investments for sure.
Bryce Holdaway: Ben, there’s a consistent message for every guests that we get on. Damian just said then I wouldn’t buy the brand new stuff. So, if our listeners don’t get the message now after 73 episodes that don’t buy anything brand new, I don’t know what else to do.
Ben Kingsley: And look for those new to the podcast and watching on the video, land to asset ratio, so it’s the common thing that’s coming through there and I think it’s really important that minimum 50%, land to asset ratio of 70%, so effectively what you’re doing there is you’re measuring… So, for those people who are just beginning, what we’re basically saying is, you’re measuring the land value and you’re measuring the improvements on the land and you’re giving a valuation on those improvements. You’re taking them away and you’re basically working out what percentage of that land the total price is, to work out what the land to asset ratio is.
Damian Collins: Exactly.
Ben Kingsley: Perfect. So for those… so fundamental analysis in what we do, that’s the starting point. So by doing more and more research and doing more and more comparable sales, you’ll get an understanding of that, you can talk to real estate agents. They have an underlying value of what they think the land is worth, and that forms part of some of the appraisal work that they do in helping the vendor establish what the property is potentially worth. So have good communications with that, write those numbers down, start to work that out and that’s the technical way in which you assist property. And that’s what I’ve always loved about the way you’ve gone about it is, you’ve always had that technical analysis that supports your observational analysis, and it’s the way in which good businesses and good advisors work. You’re doing the fundamentals. You’re overlying that with demographic research and again it’s the reason why your business is so successful and your clients are so successful.
Damian Collins: Yeah, and I know you guys do, again, that sort of research. What you guys do here, the level of research amazing, and I just wish there were more of us out there in the market. But yeah, I mean that’s the thing. We can’t rely on the property market just to go up anymore, someone getting in today, the historical growth of 8% or 9% that we’ve had, it’s a different world today. Interest rates have come down, wages growth is lower, the average market is not going to go up that much anymore, so it’s really about the selection and that’s where firms like us and your firm can really help clients.
Ben Kingsley: Correct.
Bryce Holdaway: Damian, we’d like to give some firm takeaways for our listeners and our viewers. So, any mistakes? So, you bought your first property in Surrey Hills 20 years ago, did you say?
Damian Collins: Oh, Gee, now I must be getting on about 27 years ago.
Bryce Holdaway: So, fast forward now to 2016, what would you tell Damian Collins back then that you know now to not repeat the same mistakes again? You’ve got one or two?
Ben Kingsley: Or what was a mistake to start with?
Damian Collins: Certainly the land to asset ratio, land value, that was a mistake I made on one of my own investment properties early on, it didn’t go up as much. It was only a two-year-old villa and that was a mistake. When I looked at my other properties, I’m going well, that one is going up 7%, 8%, 9%, this one is about 5% or 6%, why was that, and that’s because I didn’t really focus on the land component value.
And I guess the other thing is rushing, getting emotional about properties. I’m completely detached now, but I’ve been in the game for 27 years. So, for a lot of investors out there, just don’t be emotional about it, it’s an investment decision.
And be focused on the long term, that was the other thing. I did too many buying and flipping. I needed to do that to get an income to some degree, but I wish I had a lot more of those properties now. And rather than paying the capital gains tax, the stamp duties, the agents all cleaned up and sadly I left a lot of money on the table for the next buyer.
Bryce Holdaway: Do you subscribe to the theory of a few good ones or… Because we get clients that just wanted to build big empires of 10 to 20 properties, and then they often come to you and go ‘jeez, I wish I could sell them and just hold four or five really good ones’. Have you got a view on how many should be in the portfolio? With the backdrop of it being a tailored solution, but are you ‘more is better’ or you just ‘quality is paramount’?
Damian Collins: It’s definitely the quality, because that’s the asset. You’re buying a quality asset that’s going to grow in value. The only, I guess in the Perth market, we try and stick up to about… so if a client came in with $2 million capacity to invest, I’d probably be targeting three, maybe four, properties generally. Again, that’s depending on the client’s individual circumstances, because the yield starts to drop. So if you buy a property for a million or $1.5 million or $2 million in Perth, the yield is just so low, the negative cash drain is just that substantial, and if you have one vacancy…
Again, spreading your risk around as well. No property is perfect, no one can 100% see the future. So, I would generally tend to buy about $400,000 to $650,000 range, maybe pushing $700,000, depending on the client circumstances. So, it’s more so that than a particular number of properties. But you know, we’ve got clients on their seventh or eighth property, which is great for us, we’ve only been going 10 years, so that’s good to see. But it’s interesting, clients talk about number of properties, don’t they? They don’t talk about value.
Bryce Holdaway: I think you make a very good point. Essentially, your conclusion is that it’s about the value in the market and not the number that you’ve got.
Ben Kingsley: Timing in the market versus time in the market, what’s your view on that?
Damian Collins: Well, I think number one is time in the market; you’ve got to be in it for the long haul. So you’re doing your research on the cities, and we like the four major cities, Sydney, Melbourne, Brisbane, and Perth, because they are the ones that are growing in population. Melbourne is going to be eight million, Sydney is similar, Perth 5.5, Brisbane 5. So poor little Adelaide and Tasmania – probably great spots to live, but probably wouldn’t recommend any investment dollars there for the long haul. So it’s definitely about time in the market.
And look, you do want to try, to some degree, timing, but it’s always difficult to get that exactly right. And I’ve seen more money lost by people waiting for the right time to buy and sitting on the sidelines and waiting for the market. I remember someone I spoke to when I first moved to Perth in ’98 and I was buying a property then, and he said ‘oh no, it’s not a good time to buy, not a good time to buy’. I knew him through social circles in Perth, and I saw him about six years later, this was the middle of the time when Perth was having a really strong run up in 2004, and it kept going to 2007 and he said, ‘Oh no, it’s too hot now, it’s not a good time to buy’. And I saw him 2010 again, and he said ‘Oh no, it’s still not the right time to buy’. So, some of those people are never going to do anything. So, I’ve seen that you want to try and time it. And, certainly, if your market is rapidly overheated, you steer clear, but I’ve seen, as I said, more money lost by trying to time the market than by getting into a really good long-term market too early.
Ben Kingsley: And you’ve done some borderless investing as well, so you’ve taken your investor clients into other states purely based on, I suppose, those principles, where you feel that the market is not offering value at that time in the cycle, so you’ve taken them interstate.
Damian Collins: Yeah, we have purchased properties in Queensland for them, particularly in the Brisbane area, and they’ve done reasonably well over the last few years. It’s very… lot of people still like to… we find still particularly in the west, they still like to have their own property, the first one, in the west.
Ben Kingsley: Their own state.
Bryce Holdaway: So they can drive by it.
Ben Kingsley: They just know it’s there.
Damian Collins: We say to them here’s the short term market, look for the major cities in the long term. If you want to be in Perth and invest for 20 years, it’s great spot to be, but in the three years, you’re probably going to make more in Brisbane, and that’s the way it is. But most still divert back to Perth.
Bryce Holdaway: Well, there you have it, folks, we’ve got some really great insights from Damian Collins, who is the Founder and Managing Director of Momentum Wealth business over in Perth. And mate, we’d love to spend all day chatting to you, because we’d never get sick of hearing some of your insights.
Damian Collins: Great to be here and great to be on the first video of the Property Couch.