This week as our feature guest we talk to Michael Yardney.
This time it’s not to get advice but we want to know about his personal portfolio, who inspires him, how he got started and if and how his strategy has changed. Quite revealing!
Kevin: Tell me how you got involved with property investment.
Michael: When I was young, my parents were immigrants. They were both working, and I saw that they used to struggle at the end of the month. The money never lasted the whole month, and they used to argue.
On the other hand, I saw that my friends’ parents seemed to manage to go away on holidays. They had cars, when my parents didn’t have a car. They were able to live in nicer houses. I realized that a lot of them invested in properties.
It was a little bit like “Rich Dad, Poor Dad.” I learned things my parents didn’t realize. That’s not the way I wanted to be. I saw how my friends’ parents managed to not fight as hard and as much about money. They didn’t struggle, and it was because many of them seemed to invest in property. That’s what I wanted to do.
Kevin: I want to ask you a number of questions about your personal portfolio and how you got into that, but just before we leave that point, could I just ask you: do you find that the people you talk to come from similar backgrounds? In other words, did they learn those lessons from their parents?
Michael: I think most of us learned about how to handle money, finance, investing, and much of the way we live from our parents. The apple doesn’t fall far from the tree. That’s why many of us walk around with blinkers on with the wrong programming – things we learned as a child that are probably not relevant today.
Kevin: Has property investing changed a lot from your parents’ day to now?
Michael: The biggest change I can see is the amount of information that potential property investors have. That’s good and bad. On the one hand, when I first started investing there was no such thing as median prices being regularly circulated. There were no auction clearance rate results. You found out a little bit about increasing property values a year or two after they all occurred.
One had to do much more local homework to understand the market, but it was really hard to get data. Today there’s a wealth of data that makes informed decisions easier. It also makes us easier to get stuck in the analysis paralysis where you have so much data and no perspective.
Kevin: It’s an interesting point you make. Looking back, you talked about the lessons you learned from your parents. Now that there’s so much more information available to us, we don’t have to rely on that source. Because there is so much information, we need to decipher it a bit. Is that where the mentor role has come in nowadays?
Michael: We need to have somebody to follow, somebody who’s already achieved what you want to achieve. One of the biggest changes to my investment career was when I realized I didn’t have to be the smartest person on my team. I didn’t have to know it all. In fact, I didn’t have to do it all. I had to find somebody who knew it, or a group of people who knew it and, in some cases, pay them for the advice. I was then able to stand on the shoulders of my mentors and see a lot further forward.
Kevin: You’re one of the most successful property investors in Australia. Who’s on your team?
Michael: I have a number of mastermind groups and mentors that I continuously use to keep growing. They include property tax, finance, marketing, and business people. For the last ten years, I’ve also had coaches and mentors that I’ve been prepared to pay.
Kevin: That’s still the case today? You still have coaches and mentors?
Michael: Very much so. I learned many years ago of the concept of tithing – giving 10% of your earnings to other people or charities. It’s something that I’ve followed. I took it one level further. I reinvest 10% of my income in myself and my personal development.
Interestingly, it’s one of the best investments I make because if invest in property, I sometimes make a 10, 12, or 14% return. If I invest $10,000 in myself, I often make $30,000 or $40,000 in return.
The trouble is, as you earn more income, it’s harder to keep reinvesting ten percent. That’s why, over the years, my annual reinvestment in business coaches is a six-figure number. That’s why you find Tiger Woods and the best sports and business people having the best coaches in the world they can. The dividend that they get back is very strong.
Kevin: I’m going to test your memory now. Take us back to your first property deal. What was it?
Michael: My first property deal was one where I went halves with my parents. Neither of us could afford the whole deposit or the serviceability of the property, so I took a $2,000 personal loan from the bank, and my parents had some savings. We bought a property on Larch Street in South Caulfield. We paid $18,000 for it. We got $12 a week in rent, and we were really excited. We took a 30-year loan. We had no idea how we were going to repay that $18,000, and that was in the very early 1970s.
Kevin: Do you still own that property?
Michael: I sold my half-share of the property to my parents a few years later to get a half-share of $30,000 back. I used that to buy my first family home when I got married.
Interestingly, in 2001, my wife Pam and I bought that property on Larch Street back off my mother for $250,000. We’ve since built two townhouses on it that we still own as an investment. They’re probably worth about $900,000 each.
My first property cost $18,000 around 40 years ago. Today it’s worth about $1.8 million.
Kevin: What are the lessons you’ve learned from that experience?
Michael: One of the good lessons was don’t sell property. Save it for the long term. The other is to select the right location. I was very lucky because, as I said earlier on, there wasn’t the research information. I bought a property close to where I lived, two streets away from the school I went to, in my comfort zone. It was pure luck that I chose a good area and a good location. That gave me strong capital growth.
Kevin: Is holding property your strategy now? Tell us about how you built your property strategy over the years.
Michael: Initially, I thought I had to buy, sell, and trade property to make profit. It took me a while to learn that, in fact, most profit is made by allowing compounding leverage and time to increase the value of your property, and then just to refinance.
I also learned the concept of “value add” in the 1970s when I started doing renovations, and in the 1980s when I started to get involved in property development. That hasn’t changed over the last 20 years. I still like buying properties to which I can add value, either through renovations or more regularly through redevelopment of properties.
I use a top-down approach. I have a look at how the economy is going, and is it the right time to invest? Sometimes the right thing to do is nothing – it’s just the wrong time in the cycle. Then I look at which states in Australia are in the right state of their property cycle. I like buying in a state that’s in the upturn stage of the property cycle. Within those states, I choose areas that are going to outperform the long-term averages in regards to capital growth. Within those areas, I look for the right streets and then the right properties.
So I use a top-down approach. While price is important, it’s probably the least important of all the factors. I very rarely, over the years, have ever bought a property that I thought was a bargain. I make my money when I buy property by buying the right property, not by buying it cheaply.
Kevin: I’ve heard you say that you’ve made money over the years from the properties you didn’t buy. Tell me about that.
Michael: I’ve become much more selective in what I buy. I decided I want to get to where I want to get to, using the correct vehicle. I want to get there in a Mercedes or BMW, not in a Commodore. I only select the best properties because, as a property investor, most people can only own a certain number of properties. You want the best ones, the ones that are going to outperform, so you’ve got to say no to the mediocre deals so you have money left for the good deals.
There’s more opportunities than any of us will ever have money available for, so you’ve got to keep your money available for those better deals.
Kevin: What was the best property deal you’ve ever done?
Michael: Interestingly, it was that first deal, I believe. It was pure dumb luck finding a property that increased in value that much, that gave me the confidence to move further forward and gave me the equity to be able to move forward.
While it was really only $10,000 extra I made, in those days it was a big amount of money. As I said, it gave me the confidence to try again. I think some investors, unfortunately, buy a dud property first up. That puts them out of the market for the rest of their lives because either they don’t have the equity to move forward, or they lose confidence and say, “Hey, this property thing doesn’t work.”
Kevin: When it comes to the type of property that you’d buy, what do you think is best? Should you invest in apartments or houses?
Michael: When I first started investing, I bought houses because that was the sort of property the widest demographic of people wanted. I bought houses in areas that were growing, which were, in general, where the baby boomers were moving in those days.
Over the years, how we lived has changed. I don’t own any houses anymore. I only own blocks of apartments or groups of townhouses that I’ve built. To me, in the future, medium-density housing – apartments and townhouses – is where a very wide demographic is going to want to live.
Kevin: Would you would buy a property if you had the ability to add to it, and then turn it into another development, like apartments?
Michael: My strategy is a four-stranded approach. I like buying properties below intrinsic value. That’s one of the reasons I don’t buy new or off-the-plan properties. I like buying properties in areas that are always going to outperform the average. I choose areas where the demographics are going to be able to afford to push property values up.
The third strand to my approach is finding properties with a twist – something a bit unique, special, and with something different about them. The fourth strand is what you just mentioned: the ability to add value, whether it’s through refurbishment of an existing block of apartments, or total rebuilding and building a new group of townhouses.
Kevin: You mentioned that part of your strategy is where you buy, what suburbs you buy in. Tell me exactly how you pick those suburbs. What data do you look into?
Michael: I like finding areas that are going to outperform the averages. One of the things I look for is long-term capital growth. One of the indications of future capital growth is past performance.
To me, a more important factor is the demographics – the people who are going to live in that area. Over the last census period of five years, the average wages of Australian’s grew 20%. If you dig down deeper into the census, you’ll find certain municipalities where wages grew 40%. In other words, more than double the average.
If you look at that, those are most likely areas where people have more disposable income, and the ability to add value to their houses and improve their houses. Interestingly, they tend to be more affluent areas, as well.
I like finding areas which are more affluent; where people have disposable income plus the inclination to spend their money on housing. I like areas going through gentrification, where new people are moving in and are going to increase the value of housing in that location.
Kevin: It’s been great talking with you. Thank you very much for giving us your time.
Michael: My pleasure.