How to make real money from Real Estate – part 2

Over the past decade or so I have learnt a few secrets about investing in property and developing property. Today I would like to share one of the biggest secrets I’ve learnt, if that’s OK with you. (I am certain that if you can master this little gem quicker than it took me to, you could change the results you achieve from your property investing.)

When I first got into real estate development some 14 years ago, I was, of course, a newbie. Like every other beginner, I  went to all the seminars available to discover all the strategies and techniques to make money from real estate. I was like a sponge soaking up any information, trade secret, hint or interesting tidbit.

One of the most common “secrets” I was given was the maxim “You make money in Real Estate when you buy”. No matter what the strategy was, the focus always seemed to be on buying or developing your real estate so your cost base was below market. Now I don’t know about you but if everyone is saying something then it really isn’t a secret is it!? And the reality in my experience is that the absolute opposite can often be true.

The real secret I discovered years later is that you really make your money in real estate when you SELL!

Now please understand I am not writing this for shock value or to just try and be different so you remember me. I am happy to be a nobody so long as my clients are doing well. I am writing this for you so hopefully you can learn from the mistakes I made and the time I have had to waste chasing the wrong “secret”!

Let me show you a number of ways that following the “wrong secret” can cost you.

1. Lost Opportunity

In 2001 I discovered a suburb in Melbourne where I could buy houses for around $75,000 – $85,000. At the time I was following the “wrong Secret” and was offering $5-10,000 below the listed price to try to make my money when buying. At the time I had significant financing capacity especially considering the properties once rented would be cashflow positive. Unfortunately after all my efforts, I only found one motivated seller who would accept my lowball offer.

Of course, in the past 10 years that property has grown in value more than 300%. When I look back at it now, I could have paid $5,000 above the listed price and bought 10 similar   properties that were on the market. By now I would have a property portfolio that was rapidly paying off its own mortgages or I could sell them all for 300%+ profit. In fact right now, if I had more of them, I could sell them all below the current market and still bank some serious money after capital gains tax.

2. Lack of activity.

The second part of the secret became more obvious to me in 2005 when I started working with a group of investors who had been trying to use their significant capacity to buy property in bulk at 20% below the market. For 2 years they had been hammering away with builders and developers trying to get their buy price down to create the discount they wanted. The properties were getting smaller and the finishes cheaper.

When I met them they were nearly at the end of their tether. No actual investing had happened yet. I asked the investors what they were trying to achieve by acquiring more property at a discount? I also asked whether they were going to hold the property? To which they answered ‘yes we want hold and sell down the track”. It was here that the problem became obvious.

Everything they had done to make their houses smaller and cheaper so as to get the price down had actually dramatically reduced the number of people who would be happy to buy them down the track. Therefore because the size and quality was well below the average property for the area the number of potential buyers competing to buy the property would be limited to just investors chasing a high yield because of the low price or home buyers with very low budgets. So we looked at it the other way round. What type of property was going to have high demand when selling? Bigger properties with higher specifications & superior locations, of course. When we started focussing our criteria on the selling at the other end we were able to create a selling price so high that our cost price quite by accident all delivered the saving they were after. Many were quickly sold for profits a few years later because they were in high demand.

Over 2 years had been wasted trying to make the money at the start, when simply looking at the end goal the short term goal was also achieved. ☺

3. Cash in the Bank

Early on in my property development career I had to build up a base and a history for the banks so I was forced to sell each of my projects. This meant I had a great bank balance and a good documented income from taking profits. This of course made the bank happy to work with me.

Once I had put down this foundation I started trying to hold onto all the property I was developing. What I started to create was paper profits (high valuations – real or assumed ☺) which appeared to be great. I didn’t have to pay taxes on the deals yet because I wasn’t realising my profits and I could still access some of the upside through finance.

The problem was I started to get looser with my developments because I knew I could always push the valuation around to achieve the paper margins I wanted. (A false reality) I also started to have issues getting finance because I was no longer showing the same level of income, I was just showing a strong asset position. The problem is the bank wants to see both. To avoid being stopped by the banks I decided to sell some of the property from my portfolio. Now, when the market was offering me prices that were below my valuations I was upset and started blaming the market for perceived losses.

The truth of it was that the paper profits were never there. They were never really "cash in the bank". A profit based on valuations is never tested until you go to the market. I now always sell part of any development I undertake, to ensure I am looking at the truth of how profitable (or not ☹) the development was, so that I actually end up with Cash in the bank instead of debt.

4. Emotional Decisions

Over the years, I have met lots of clients who have a story about one or more of their properties. They tell me about how well they did when buying the property or the extraordinary growth the property had experienced during a particular time in the market. But now, some years later, I am sitting with them analysing their portfolio and looking at their property thinking if I had the same one I would sell it. Maybe because the yield has got low or the property has had all the growth it is going to have. When I recommend they sell I am often met with alarm. They say things like, “I can’t sell that, I got it for a steal! I want to hold that one for ever” or some variation on this theme.

Over time, they have become so emotionally involved in the initial success of the property or the great growth they once experienced that now they can’t let it go. In fact I have seen some properties that once had tremendous performance in the beginning but over time have ended up being the worst performers of all. The emotion gets in the way of turning that exceptional performance into real money.

So hopefully you can benefit from the lessons here that I had to learn the hard way. Maybe you can even see some patterns within your own investing history or what you are still holding onto. This is perfectly understandable when we are told “secrets” that may not be as workable as they first appear.

I hope this opens up your mind to looking at how you may be able to create more actual money in your life from your property investing and live a happier more successful life. If so then I and everyone here at Investors Direct have fulfilled our purpose in helping you be in a better financial position.

Happy investing

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