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2 Interview with an expert : Lloyd Edge from Aus Property Professionals This is Hugh Thyer, and today I am talking with Lloyd Edge, owner and director of Aus Property Professionals. Lloyd is renowned for souring properties which most investors only dream about. That is, they are cashflow positive, high growth and typically have over $100,000 in equity built into them from day one. This means investors can invest in one of these, and use the equity and cashflow to go again almost straight away. There s no waiting around for enough capital growth to go again, and because they re cashflow positive you actually improve your standing with the banks as your portfolio grows. Lloyd is a fully licensed buyer s agent, holds a Diploma of Property Services and is a member of Property Investment Professionals of Australia. He has been featured in Australian Property Investor magazine, Your Investment Property Magazine, the Daily telegraph, on 2GB and has been interviewed by Kevin Turner from Real Estate Talk. This is sure to be a revealing interview! Welcome Lloyd Thank you for the intro Hugh, and it s a real pleasure to be talking with you today. Lloyd could you please share who you are and what you ve achieved in your property journey? Sure Hugh, I ve been investing for around 15 years now. In that time I ve accumulated a large portfolio worth around $7,000,000 using a number of different strategies. Those strategies include cashflow properties, through equity gains including duplexes, and different types of properties in the outer suburbs and regional areas. And I ve also got a number of blue chip properties in the capital cities around Sydney and Brisbane. The way I ve done it is by focussing on building equity into each property when I buy it rather than hoping for the best. I ve always believed you make your money when you buy, not when you sell. So if you really focus on trying to get something under market value then you re going to be ahead and not pay too much up front. By following this process I ve been able to move ahead quite quickly. Each property I buy helps set me up for the next one. If I m buying something a bit under market value and I m planning to do a renovation on it, I know I can put value into it straight away. If I m building a duplex I know I ll get a lot of equity out of it while I build it and strata title it. I can then use those funds to go ahead and buy another property, maybe a blue chip property or do another duplex.

3 So my portfolio is worth around $7,000,000 right now and the yearly income from it is around $500,000. This includes the rental income and the equity gains I m making. A lot of this is instant equity where you build the property and then you strata title it and get that revalued so you get instant equity out of it. It s a really fast and safe way of investing in property. From here you funds can go to paying off your other debt or buying more properties. It s a very impressive portfolio Lloyd. What does this mean for the life you lead? It s given my wife and I a lot of freedom to do a lot of things most people really can t do with a 9-5 job. We can go on holidays, we spend time with our family and friends, and we get to choose how we spend each day rather than being forced into a 9-5 job. One of the important strategies I do, and I encourage my clients to do is to consider paying off their home because that s non-deductable debt. By doing this you can pay off your home using your investment portfolio. A lot of the profits from our portfolio go into paying down the debt on our home. This means our home is almost completely paid off through our portfolio. If you rely on your salary to do this you can get stuck for 20 or 30 years trying to pay off your home. Also you can put your kids through the best schools without needing to worry. That s what a successful portfolio allows you to do. You just have to focus on equity gains and positive cashflow. If you re too negatively geared you re not going to get ahead. You need to make sure there s a balance between the two. I guess people don t usually think about how much interest they pay on their own home. And yet as we head towards retirement, or we ve got kids we want to send to private school or take more elaborate holidays that interest bill is a huge amount of money that could be better spent. Yet most people don t even think about it. You re right, it s a huge chunk out of anyone s income. When you think about it, most people have to plan and save up for their next holiday for months leading up to it, and then they still worry about where the money is coming from. So having a property portfolio with the right structure really leads you to living the life you want. It s all about living life on your own terms Rather than the way society expects us to. You know what I mean, where you leave school, go to uni and work your whole life so you can pay off your house. on your terms. This is a much faster way of doing it so you live life For sure, and you re living proof that it can be done once you know what you re doing. There s a lot of fulltime investors out there, and not just people who rode the last boom upwards either. It s more than achievable now, isn t it?

4 It sure is. It s all about having the right strategy in place, and your strategy is critical when it comes to investing because times are changing a little bit. The days of holding your house and it tripling in value like they did in the 1970s and 1980s are over. So you need to look at other ways to build wealth, and you d be wise to get professional help. You certainly need to look at ways of creating instant equity in your deals when you buy. Building equity into your deals so you don t have to rely on the markets moving is what I call sophisticated investing. It s certainly still very achievable these days. You just have to do things a bit differently to the way our parents might have done it, that s all. Certainly in our mum and dad s days it was all about buying blue chip properties 2-8 kilometres from major capital cities and relying on the capital growth. But this isn t going to cut it anymore, is it? It s not going to cut it anymore, and it s even more difficult now that APRA have just made changes the lending criteria for investors. It s getting harder because the low interest rates and massive investing people have done in the last few years, particularly in Sydney and Melbourne. The exceptionally high prices and low interest rates mean APRA are trying to slow it down. I actually think it s a good thing, and people just need to be careful about how they go about doing things, otherwise they won t be able to get ahead. That s why looking for alternatives like doing small developments, building duplexes, buying cheap and doing a renovation means building equity and getting a positive cashflow. This will help satisfy the banks lending criteria, and that s how you can go again so quickly with another property. I believe the market will slow down a bit over the next few years. Certainly that s what APRA has tried to do with their changes. It s mainly because Sydney and Melbourne got so hot, and it ll affect everywhere. If you just buy a property and hope for the best I m afraid it won t appreciate as much as it has in the past. If you want to make money you have to use some of these more sophisticated strategies. I still build duplexes in areas of high growth potential where there are all the pillars of economic growth including a diverse range of industries, lot of infrastructure, educational institutions such as universities, hospital upgrades, cafes and restaurants and good transport facilities. These pillars of economic growth contribute to jobs growth and population increase which in turn puts an upward pressure on house prices. As well as this however, building a duplex in these types of locations means you also get the instant equity and good cash flow from the dual income. In a lot of ways it will help those investors who get stuck - the people who only buy one property it will help them a lot. Is this the case? It sure is. Duplexes, for example are perfect because you manufacture your own capital growth because you re building one property, then strata titling it at the end to create two properties. The equity you have created can then allow you to buy another property potentially making it three properties from just the one initial investment. And two properties are worth more than one.

5 It s an excellent way of creating some massive growth, and you can do it in virtually any market. Obviously I build duplexes in really strong markets as I mentioned earlier. There are some really strong regional markets around, as well as some excellent outer suburbs where the land prices are much cheaper. Everyone would love to be doing these projects in the blue chip suburbs but it s too expensive to buy the land there. Most of the land has already been developed. Anything left is in such high demand your chances of snaring a bargain are basically zero. So you if you have a lower budget you can go out to a regional area, get some affordable land and build a duplex there. While other investors are frustrated that their portfolios aren t going anywhere, you can buy again straight away because you set yourself up to do this. If your strategy is a bit smarter you ll get ahead while everyone else is stuck with one or two properties with nowhere to go. One of my personal mottos is return OF my money. So if something went wrong and I had to get out, one of the best things about duplexes is you build instant equity you could use to cover your initial deposit, legal fees, stamp duty, etc. Is that correct? Absolutely. Even if you don t get as strong a valuation as you d like the fact is you ll still make plenty of equity on a duplex because you created two properties out of one. And in bad times you still make money, you ve covered your expenses and you get your initial deposit back. Duplexes are also really good because there s so much you can do with them. You can keep both, you can sell both, you can keep one and sell the other. You can live in one and rent the other. You ve got a world of options. They re a little different from multiple properties on one title because they have to be sold as one title. But with duplexes being strata titled you can do anything you want. There are lots of options. What about first home buyers doing this so they keep one and rent the other one out? Or retirees downsizing and creating a retirement income? Absolutely, you can do all these things. There are so many options. Something else about duplexes is you get enormous tax discounts too. You sure do. Of course, you should never just buy a property for depreciation. You should always be looking for the ultimate capital growth from it. But depreciation sure is a big bonus and it certainly helps with your cashflow. With a duplex there are two lots of everything. There are two kitchens, two dishwashers, two ovens etc. There are two lots of things you can claim and that makes for a really healthy tax return, further adding to the cash flow of the property. Tell me Lloyd, who are the types of people who typically benefit from working with you? There are typically three types of people. One is the first time investor who wants to get into it but doesn t know where to start. They think they have to buy blue chip properties and hold onto them for years.

6 Then there are people who might have one or two properties and they re looking to move to the next level but might have reached their serviceability limit with the banks. And then there s people who have bought a number of properties and want to accelerate their wealth using some more sophisticated strategies. Again, these people are often also stuck for a way forward. These investors usually come to me with 3 or 4 properties, perhaps negatively geared in capital cities or regional properties they have bought which have seen little or no growth. They re perhaps finding themselves maxed out and they can t invest any more. They want to know how to add value to their portfolio and become like the people in property magazines who have huge portfolios. I sit down with people at our first strategy session and ascertain their financial and lifestyle goals over the next 5, years. It s all about strategy and duplexes need to fit into part of an overall strategy towards financial independence. I show them how they can get into developments and build in instant equity so they can start moving forward, no matter where they are in their investing journey. They do this with the extra equity and the extra income. And from the bank s point of view, they ve got plenty of new cashflow. You see, even though your portfolio is growing, you re actually improving your borrowing power because you ve got two more rental incomes. They ve now got dual income properties with over 7% yields. So they build that duplex, then go on to do it again and again. It s about finding a process that works and then repeating it. As I said earlier I have clients coming to me who have 1 or 2 properties and they re stuck. About 90% of Australian investors only buy one property and never go any further. And there s a few reasons for this. One is getting bad advice and having the wrong financial structure. Buying the wrong properties is another. Quite often they ve paid too much for a house and land package 5 years ago and now the house is worth less than what they paid for it, even though the area has increased in value. They can t work out what s going on, and it turns out they paid too much in the first place! Some people have cross securitised their properties and that s another problem they have to sort out. This is when the bank bundles up their properties together. Because they treat it like a package they won t let you borrow again without getting each one valued individually. This can be a big problem if some of those properties have decreased in value. Rather than the bank lending you more money they might insist you pay back some of the debt. You always need to remain in control of your property portfolio. Don t give control to the banks. And often, once you hit 3 properties they see you as over-exposed so they won t lend to you anyway. Same thing if another bank sees it. So we sit down with a broker and work out how we can fix their structure up. Then we set them up so they can move forward with their next property.

7 From this we could do a duplex deal or whatever is the best option for them. I love duplexes but it s about the strategy. And that may mean doing something a little different as well. I often get clients who have never purchased. So I sit down and work things out with them, where they want to go, what their financial and lifestyle goals are and how property will help them achieve those goals. The same as I mentioned earlier for clients with multiple properties. You can tell I m very big on strategy. You must invest with a strategy so you know where you want to head. With all these types of people they re often time-poor, so working with a buyer s agent and project manager like me means I can do the work for them. They often don t have the confidence or knowledge, and because they have to go to work before finding the time to research the markets and manage a project they re often better off getting some help. Let s say I wanted to do it myself, and I had the time what would I have to do if I wanted to build my own duplex? OK, I ve got a pretty strict due diligence process. After devising their strategy, I look at the serviceability of the client, and how much they can borrow for the deal, in consultation with their mortgage broker. Once I know this I find the best location which gives us the best growth possible. One of my sneaky tricks is to follow Bunnings and McDonalds because these guys do their research seriously well. And if they re going in then it means it s a pretty safe bet for strong growth. Of course I also use professional research organisations such as RP Data Core Logic and BIS Shrapnel. After we ve chosen our location I get on the ground and find suitable lots of land to build the duplex. This means lots of research online as well as calling real estate agents and developers. I m really familiar with some of the best suburbs and towns, and a lot of the agents and coffee shop owners think I m a local! You have to do the hard yards to know a market intimately so you can make great decisions. Something else I check out carefully is that it s surrounded by owner occupied properties. If you build in an estate full of investors it can inhibit growth. Price increases are determined by rents instead of buying pressure from people who want to live there. Once I ve done this I check the zoning with the council to make sure I can build what I want. Sometimes the zoning won t allow multi-dwelling properties. Sometimes there s a covenant stopping it. And if there is, I negotiate with the council to see if I can get that changed, and that s been surprisingly successful. All this happens before buying the land. The next step is getting a quote for the actual build. Although building a duplex is similar from one

8 to the next the build costs can vary depending things like the type of land. If it has contours or a slope it can increase the cost because of the earthworks needed. I also get the boundary and easement diagrams to make sure nothing s going to impact on the build. After this is done I get a final quote from my builder. I work with builders I know and trust. Their quality of work and financials are assured. Next I put in a DA which stands for Development Application. A DA can take around 2 months to come through. Where possible I get what s called a Development Consent from the current owner which means I can lodge DA before settlement. Settlement can take up to 6 weeks so this saves time, and saves money on holding costs. Once we ve got the DA the builder takes over. One of the things I make sure of is the builder can start quickly, and they usually start within a month. I manage this entire process for my clients. One of the things I make sure of is the building contract is fixed time and fixed cost. A duplex is usually a 26 week build, so from the day they start they ve got 26 weeks to get it done. It is usually completed in an average of 4 months however but 26 weeks is the maximum allowed timeframe if that is what we have put in the contract. Sometimes there can be major weather delays. But if there are other issues like not being able to get materials or subcontractors then they have to pay liquidated damaged to the client. This is some security and assurance for the client that the builder will finish in the shortest possible time. One of the things which trap some people is signing a contract without a set time because these projects can drift on and on. And your builder s focus will go to another project, not yours. Being a fixed price means there s no sneaky surprises at the end. What they sign for is the exact cost they re up for at the end. This includes all council fees and the cost of strata titling too. This includes the extras like landscaping and so on. I have photos of each stage sent to the client, and I fix any issues along the way. It certainly makes sense to use someone like you. It can be a daunting process and some people will give it a go themselves and get stuck. Some people get lucky and don t run into problems. However there s lots of little tricks like getting a development consent to save time, making sure everything s included in the building contract, doing a fixed price and fixed time contract and so on which add up to tens of thousands of dollars if they re not done right. How long does it typically take from the start of the process to the finish? This does depend on if we buy land already registered and how long the DA process takes I generally allow at least 9 months from when I source the land. You are safe if you think of it as a 12 month process. Just depends on the land. That s for another conversation and I am happy for people to call me to discuss those options.

9 What kind of figures do you give to clients to help them make a decision? I do a full feasibility study before we purchase the land. I look at comparable sales in the area, rents, how big the land is and I put together a comprehensive financial on how much the duplexes will be worth at the end of the project, and what they are expected to rent for. What kind of equity gains can you expect doing this? I generally look at trying to achieve over $100,000 in instant equity. Sometimes it can be a lot more but sometimes we also balance that up with the growth potential of the area which might mean slightly less instant equity for better long term growth. Again it depends on your strategy and what we want to achieve from the project. I d love someone to show me a buy-and-hold type property where you ll gain over $100,000 in less than a year. Possibly the odd property in Sydney but that s not going to last. And you d have to be seriously negatively geared to get something like that. Doing this process of instant equity gain you can create wealth regardless of what the market s doing. I call it manufacturing capital growth. With the blue chip properties you have to buy them, and hold them a couple of years before there s any usable equity. And of course you re forking out a whole lot of money in the meantime to hold them. What I love about your process is that in less than a year after you start, you ve got plenty of equity and cashflow to go again. Exactly. Having the dual income and extra equity you re reducing your LVR (Loan to Value Ratio) as well. You could easily go from 90% LVR to 70% LVR. And your serviceability has improved dramatically. If you hold a house in a capital city and it doesn t move your LVR is stuck at 90% and you can t go anywhere. A lot of people buy a property and hope for the best. If it doesn t move then 2 years down the track you could be stuck waiting to buy your next one. A lot of investors dream of growing their portfolio. But if they use the wrong strategy, like buying a property and hoping for the best it means your property portfolio gets stuck. It s mainly been Sydney and Melbourne going up in price in recent years, but the rest of the nation has stayed pretty steady. So this strategy keeps you moving forward. For the typical mum and dad type investor who can t afford their property to go down in value, or the negative gearing to rise if interest rates go up this strategy means they can sleep well at night. All their repayments are completely covered. That s absolutely right. It s all positive gearing. For years we ve been taught to negatively geared to save on tax. But it doesn t make and sense to lose a lot of money to make a little bit back on tax. This gives you a sleep at night factor because your repayments are all covered including your

10 mortgage, your rates, insurance. If you ve got a 7% yield or higher everything is covered. And because the houses are new you don t have a very high maintenance bill either. Plus you get some excellent depreciation you can claim on your tax because everything is brand new as I pointed out earlier, sorry to repeat myself! What many people don t realise is the banks use a higher interest rate to assess your serviceability. It s around 2 to 2.5% higher than the current rate. So if you re paying 4.5% interest, they assess you as if you re paying up to 7% interest. Because the duplexes are so cashflow positive you won t have a serviceability problem, even at a higher assessment rate. And you won t have any trouble paying your interest or expenses, even when interest rates rise, which they inevitably do. I ve helped a number of people who couldn t get finance for a more traditional investment property who suddenly could when they factored in the higher rents from a duplex development. This keeps you in the game. What are some of your biggest successes with your clients? I can think of one in particular who lives out of Sydney on the south coast. He had 2 negatively geared properties which were cross securitised. This means the banks treated them as one bundle, rather than two individual houses. They wouldn t let him access any equity because even though one had gone up in value, the other one hadn t. It gets very messy doing this. So I worked out a way to separate those loans and put them with different lenders which is something I strongly recommend. We went and did a duplex deal. We found some ideal land, and we got a valuation on the land which was $14,000 higher than what he paid for it. Anyway, we did the duplex deal and got an equity gain of $120,000 at the end of the deal. So that was a huge success because he went from the banks not letting him do anything to suddenly pulling $120,000 out of this deal. And having enough cashflow coming in to cover the negative gearing on his existing portfolio. I had to get him out of the mindset of blue-chip properties, and now I have he s ready to do another deal. He s building up a really strong portfolio and he s going to be really wealthy in a few short years. Amazing! What else have your clients done? I have another client from Newcastle who got caught by an overpriced house and land package in Brisbane. He paid way too much for it a few years ago just north of Brisbane, and they were badly negatively geared. The still house wasn t worth as much as they paid for it 5 years ago.

11 Worse still it was cross-securitised with 2 other properties. So when he went back to the bank for more money they saw him as over-exposed. When he went to another bank they assessed him as being overexposed to the original bank. It was a real mess. Anyway I worked with my broker and we managed to find a way to separate his properties out to separate banks to fix this up, and I negotiated a property for them which was $50,000 below market value through some hard negotiations. So this meant they got some decent equity which they re drawing out at the moment to go into another property deal. They went from 3 properties which were stopping them borrowing any more to having a 4 th, and being able to look around for their 5 th. So as you can see it all comes down to having the right strategy and getting good advice. You mentioned a free strategy session. How does that work? When I first meet a potential client we start with a free, no pressure and no obligation strategy session. We can do this in their house or office, a local coffee shop, or if they re further away on the phone or with Skype. What we do is we go through their financial and lifestyle goals, and what they want to achieve over the next 10 or 15 years. It could be an early retirement, financial freedom, putting kids through school etc. Then I map out a strategy to get them there. And I ll often include properties other than duplexes. As you know, I love duplexes but the most important thing is getting the strategy and the balance right. I often recommend some blue chip properties from Melbourne, Sydney or Brisbane in their portfolio. Building duplexes with the extra equity and cashflow can get investors into these high growth properties without the burden of negative gearing. So you might do an equity gain by picking up a property below market value and doing a renovation on it. You can take that equity into a duplex deal, and then use this new equity and cashflow to secure a blue-chip property in Melbourne. The other thing we do is create an exit plan. So for example in 15 years you may have 12 properties. You can sell half to pay off the debt on the rest, and you ve got 6 debt-free properties which gives you a passive income. This exit strategy sets you up for financial freedom. We also talk about the best areas to invest in right now, and why they re such good areas. And I always look for up and coming areas rather than the ones which have been flogged to death in the investing magazines because these up and coming suburbs are where the best growth opportunities come from.

12 For example, I ve recommended Sydney in the past but I don t recommend it now. My clients in Sydney have made extraordinary gains, but I look to Brisbane now because it is still in the upswing of the growth cycle. We call this 7 o clock on the property clock. There is also price point difference of about 40% between Brisbane and equivalent properties in Sydney. And yes, I encourage people to ask me their toughest questions because sometimes it s that one question they don t ask which costs them a shot at their dream lifestyle. Typically this takes around an hour, but if there s more questions or things to discuss I stay with them until all their questions have been answered and they completely understand the strategy we put together. I ve spent up to 3 hours with some people over a couple of cups of coffee going through everything at their pace, making sure they re comfortable. And there s no cost or pressure, right? Absolutely. The way I see it, if someone is comfortable and understands what we do and how it moves them quickly towards their goals then they may ask for my help. That s it. If, at the end of this they ask for my help then that s great. If not, that s great too. Everyone s different, and I only want to work with people who decide I m the right fit for them and their investing goals. I understand you have a teaching background. How does this help you? It means I ve got good communication skills and I can explain often complex concepts in very simple terms. People need to be comfortable with what they ve been told and I make sure they understand everything fully. Lloyd, you ve had an incredible journey so far. What does the future hold for you? I m going to continue with development projects because you can t help anyone unless you practice what you preach. So it s really important for me to be an active investor and developer. Besides, it s a real passion of mine. I m also looking at triplex developments which are three properties instead of two. And I m doing my due diligence on some larger projects as well. Interesting times, for sure! Is there anything you d say to people wanting to get into the market right now but need a little advice to get going? The number one thing is to start with a strategy. You need to get some professional advice with this too. Don t just go out and buy something because you fear missing out. If you do this it could be your biggest mistake. You also need a good team around you. This includes a mentor, a broker, a solicitor, and accountant etc. When people work with me I give them access to my team of specialists and advisers. You need to plan how you re going to build your investment portfolio, and the types of properties that will make it up. Lloyd, for someone interested in doing a strategy session with you, what s the best way for them

13 to get started? The easiest thing to do is contact me: Phone Website Lloyd, thank you for spending this time with me today. I ve learnt a lot and I know anyone reading this will have learnt a lot too. My pleasure, thank you Hugh. Book your free strategy session with Lloyd Edge from Aus Property Professionals. Call or