Our feature guest is Stuart Wemyss from Pro Solutions Private Clients. We dig deep to hear his personal stories about investment in property.
Kevin: Stuart, thanks for your time. Tell me, why did you get involved in property investment?
Stuart: It started, I guess the same as for most people, by reading “Rich Dad, Poor Dad” by Richard Kiyosaki and in an effort to understand how to build wealth and create financial independence.
While I learned lots of things from that book, and it was really enjoyable, I decided probably the best path to financial security was to become self-employed and build a business that generated a bunch of cash flow, and then use that cash flow to build a passive residential property investment portfolio.
Kevin: Was that book the launching pad for you to do that?
Stuart: I think so. I remember a few years prior to that, having just finished my bachelor of commerce and just starting practice as an accountant, I remember looking at property investment. I couldn’t understand how it worked. I thought, “You buy this property; is it going to lose money?” I didn’t really understand. It didn’t make a lot of sense to me.
A couple of years later, I read the book “Rich Dad, Poor Dad.” I think that was the impetus, as well as probably a little bit of maturity, in thinking outside the square and doing some longer-term planning.
Kevin: What age were you when you picked that book up? Do you remember?
Stuart: I would have been probably 23 or 24. Early days. That seems like a lifetime ago, now.
Kevin: When you did that and you made that decision to get into property or property investing and look at it seriously, do you remember how long it took from the time you made that decision? Tell me about your first property.
Stuart: A couple of years. At that time, my earning capacity was pretty limited – being young – so it took a couple of years. We first bought a home and then leveraged that into buying an investment property. But it did take a bit of time because we had to save some after-tax dollars for a deposit and wait for some equity to grow.
Kevin: The first property you bought was your principle place of residence?
Kevin: Were you married at that time?
Stuart: Just about to get married. We bought it just before we were about to get married.
Kevin: Okay, you have a principle place of residence and then a few years saving a deposit. Do you remember what your first investment property was?
Stuart: Yes, I do. Really, we bought that home as an investment property. We just decided to occupy it for a period of time. The aim was very much about getting some capital growth from that property.
I remember we only paid about $150,000 for it, or maybe just a touch more. I think we contributed $20,000 or $30,000 as a deposit. We sold it for, I think, about $400,000 a few years later. We did quite well out of that and experienced a bit of growth. We sold that, and then we rented for a while and bought an investment property.
The first investment property I purchased was an off-the-plan property in a smaller development. That was my first investment, and that was my first mistake.
Kevin: I was going to ask you that. Very good that you identified that. Do you still own that property?
Stuart: No – sold it. I realized that was a mistake.
Kevin: Tell me, what was the lesson there for you? Why was it a mistake?
Stuart: Firstly, it’s hard to buy a property that isn’t yet built, because you can’t walk through it. You can’t see how big it is. You can try and step out a floor plan, but until it’s built and you can actually stand in the room and see how the light works and see how the floor plan works and imagine where the furniture can fit and whether it’s livable, it’s very difficult to make that assessment.
The second one is to make an assessment as to the value of that property, because it’s not built and lacks comparable sales. What’s a true market value for that property? Is it the market value when I sign that contract or when expect it to be completed?
Thirdly, there tends to be a lot of costs – which I didn’t expect – when it comes up for settlement, like putting in blinds. They put some crappy down-lights in there, so the transformers would blow, and so we had to replace all of them. It’s all these little unexpected costs that crop up.
Add to that the chance of not making very much of a capital growth. All those experiences, I think, tainted that whole mistake – or maybe you put it down as a lesson.
Kevin: Many people would associate with that and probably have been in the same position and decided not to continue with their investment journey. Did that put you off at all, or was it just valuable lessons you learned?
Stuart: It’s a valuable lesson. Did property investment just did not work? The answer would be no; I just made a mistake. I took responsibility for decisions I made, and it was really that decision to buy that property was a mistake. It wasn’t whether property investment works. I just used the wrong strategy. I chose the wrong asset.
It didn’t put me off. I was lucky. I sold the property and I made a little bit of money from it, so I didn’t lose out on it. But I don’t get any solace from that. It was still a mistake.
Kevin: We’ll talk strategy in just a moment, but if I could ask you at this point, from that lesson, if someone were wanting to start out in property investing today, what would be your advice to them?
Stuart: My advice would be get in as soon as possible. Save the five percent deposit. Don’t worry about mortgage insurance or anything like that. The cost of getting in, it’s the [6:04 inaudible]. Just get started.
Save as hard as you can to get enough deposit to get started and focus only on the quality of the asset that you’re buying. Instead of trying to optimize one or two or three different criteria, just focus on the quality of the asset.
We’ll talk more about that in terms of strategy, but it’s like chasing two rabbits. If you chase two rabbits, you probably won’t catch any of them. Just chase one rabbit. Pick the quality of the asset. Get that right and buy the best quality asset as soon as you can, and it should all work nicely from there.
Kevin: Let’s talk strategy now. That first property that you bought, you learned a lesson from that and you sold it. Do you now have a buy-and-hold strategy?
Stuart: Definitely. Buy and hold: capital growth. Buy the best quality asset. Don’t speculate. Bet on sure things. A very low-risk boring strategy, but one that I think works well over time.
Kevin: Is that your mantra: something that is nice and secure, steady? You’re not a speculator?
Stuart: Definitely. It depends. I think it’s like playing golf and you’ve got to choose the right club for the right shot. I very much believe, for myself and talking to clients, we need a core investment strategy.
A core investment strategy needs to get us from A to B, which is typically from where I am today to maybe age 55 or 60 or when I think I would like to retire or the latest I’d like to work in my working career.
“If everything goes wrong, how do I fund retirement at that stage?” That’s that I call a core investment strategy. I think that core strategy needs to be low-risk, safe, blue chip, boring but works. All those adjectives.
Once a core strategy is implemented, then there are things that I might be able to do that bring forward that retirement date or improve my net worth position and that might be a bit higher risk.
There’s really only three ways to make money. It’s investing, speculating, or business. That’s when business and speculation may come into it, where I can afford to start taking higher risk knowing that my core investment strategy is under way and protected.
Kevin: There is no one strategy that works for all people, is there? There are a number of different strategies for different situations.
Stuart: I guess it comes back to your risk profile and the time that you have until retirement. When I say retirement, maybe that’s really more about passive cash flow and financial freedom, but however you want to define it.
I think, theoretically, you can sit down and decide. There are some superior strategies out there, but there’s no point trying to sell a point or a strategy to a client if it doesn’t fit well with them, because ultimately, they won’t adopt it for a longer term. At one point, they will become uncomfortable with it.
It’s a little bit like going to a property investor and trying to sell them the benefits of investing all of their money in shares. If they don’t know it, they don’t understand it, they don’t like, they don’t feel comfortable with it, theoretically, it might work for them. But practically it’s just not going to work, because they might start doing it and two years later the share market drops five percent, and they say, “See, it’s not going to work. It’s not for me.” They sell out.
It might not be because shares don’t work; it’s because it doesn’t suit them. You’ve got to choose a strategy that suits you and that you like and understand and feel comfortable with.
Kevin: As the market cycles and changes, do you think there is a time when you can actually flip property, turn it over quickly and make a dollar? Or do you think it always needs to be looked at as a long-term proposition?
Stuart: I think, again, if you bring it back to choosing the right club for the right shot, and is it part of our core strategy or is it something above the core strategy? The core strategy, I think, is very much long-term buy and hold, because the transactional costs of flipping property eat into the profit. You’ve got to pay five or six percent going in and another two or three percent going out. You want to be assured of a pretty high margin to offset those costs, as well as the capital gains tax that you’ve got to pay to the government.
I suspect the answer is no, but I guess it’s about always seeing the opportunities, as well. You’ve to be open to them, as well. They might be right in front of your face, but if you’re not open to seeing the opportunity, you’ll never see it. Maybe there are opportunities where flipping does work.
It’s really interesting. I’m addicted to watching property shows that are U.S.-based, and they do a lot flipping there. The margins seem to be really significant. I feel it’s completely different to the Australian market.
Kevin: I sometimes wonder how legitimate that really is, or whether they’re just picking best case scenarios. If you look at the U.K. shows, it’s a totally different situation, isn’t it?
Stuart: Yes, that’s right. How much is it to sell the show and a bit of hype? They probably don’t talk about all the ones they’ve lost money on.
But going back maybe ten years ago, I think it would have been easier to flip property. Now, it’s becoming a lot more difficult and I just don’t think the margin is there.
Kevin: Do you think that’ll change?
Stuart: I don’t think so. I guess it depends on the areas. But looking at the areas that I really study, which is the blue chip, inner-city, proven performers, I think that market is so saturated with such excessive demands – the demand is out-stripping supply – that I don’t think the market will allow those arbitrage opportunities to exist. Whether that happens in regional or more outlying areas, I’m not sure.
Kevin: Stuart, to date, what is the best deal, the deal you’ve been most proud of?
Stuart: The house we bought in 2008. It was just after Bear Stearns in the U.S. crashed. It was right in the heart of GFC. A property was up for sale that was kind of unique. It was two single-fronted Victorians, two-bedroom homes that were joined together to make a four-bedroom home in the suburb Prahran in Victoria, which is a great suburb.
It’s a little bit different. I thought that it was going to go well over my budget. I only wanted to spend about $1.2 and I thought it was going to go for more than that. It was later in the year –November, approaching Christmas. I thought it was a great asset. It thought it was a great opportunity.
I was a little bit worried. There were a lot of doom-sayers at that point: “The market’s going to change, investing’s going to change, the market’s going to drop, everyone’s going to go bankrupt.” All that hype and hysteria was around at that time, so it was probably the worst time to make a decision and buy a property.
I went to the auction, with the help of some property advisors, and was lucky enough to pick it up. That property is worth about $1.8 today.
Kevin: What did you pay for it?
Stuart: About $1.2.
Kevin: And you still own that property?
Stuart: Still own it.
Kevin: On another subject, if I could, Stuart, your pick in advising people, would you suggest they look at houses or apartments? Or don’t you think it really matters?
Stuart: My view is probably two-fold. Firstly, buy the best quality property you can find. Whether it’s a one-bedroom apartment, a two-bedroom apartment or a house, I don’t really care very much. I just want the best quality property.
If I’m comparing a one-bedroom apartment and a house and I think the one-bedroom apartment is superior, excluding the fact of the size of accommodation, than I will invest in that one-bedroom apartment. It all comes down to, from my perspective, the capacity to double its value in seven to ten years and continue on that trajectory for the foreseeable future. Then there’s an element or assessment of risk of whether that property can do that.
I would rather, if I’ve got the best one-bedroom apartment, and I think it ticks all the boxes and its past performance has been magnificent, I’ll put my money into that every day of the week.
Ignoring that, assuming you’ve got two properties on equal footing there, I think it comes down to what’s in your portfolio and getting a bit of diversification – geographic or tenant diversification, property type, all those sorts of things.
From a financial planning perspective, if you can invest in smaller assets, dollar-value-wise, it gives you a little bit of flexibility going forward. You’re typically going to get a higher rental yield across your portfolio, but it also gives you some flexibility to sell down one or two assets here and there as opposed to having two big, lumpy assets such as two homes, for example. It gives you less flexibility in that regard.
Kevin: When you’re looking for the best type of property, do you take into account any value that you might be able to add to that property? Is that an important consideration for you?
Stuart: It’s very much a satellite consideration, and it comes back to my comment about chasing two rabbits. Almost 95% or 99% of my focus is making sure that I’m almost certain that this property will double in value. Once I’ve ticked that off, if there’s some opportunity to maybe put a facelift on the kitchen or put a coat of paint or those sorts of things, then I’m happy and open to doing those sorts of things.
If it’s more substantial improvements to the property, then I again consider whether that’s going to fit my strategy. Buildings depreciate. Land appreciates. Do I want to spend money and get what is often a once-off or spurt in capital growth? I might spend $100,000 and the property improves by $200,000. That’s nice, but that’s a once-off thing. I’m much rather have that compounding growth year on year, and that’s what I tend to focus on.
Kevin: In those early days, when you were getting into property investment itself, did you have any mentors, people you turned to?
Stuart: One of the very first property investment seminars I went to, even before I started my business – so it would have been 12 or 13 years ago – was put on by Wakelin Property Advisory, Richard Wakelin. I read the book that Monique and Richard wrote, “Streets Ahead,” and that tended to make a lot of sense to me. As someone who was very green to property and didn’t really understand it, they explained it in a way that helped me understand it.
I’ve obviously gotten to know both of them over the course of business, and so forth. I think because they share very similar core values and belief in property strategy and so forth, I think they’ve been mentors of that process.
Kevin: The Internet, of course, has opened up so many opportunities for people to do their own investigations, become more knowledgeable about it, and in some ways, it’s made the world a much smaller place to live. Do you think that’s opened up opportunities for people to invest overseas in property?
Stuart: It definitely has. I guess the U.S. is a really good example – something that has been on clients minds’ for maybe the last four years and more, in terms of investing beyond Australia. I think we’ve got to be really careful about doing so. I’m not saying it doesn’t work, but again, you are accepting high risk. You’re accepting some currency risk, for example, as well as compliance risk, taxation risk, and those sorts of things.
I definitely don’t think it’s for everyone. If someone wants to accept that high risk, I certainly hope they got their core investment strategy worked out – so they’ve got a good, safe strategy that’s ticking along here in Australia and that covers off all the risks. If they’re then able to accept higher risk and take what is more akin to speculation to investing, in my opinion, then it works for them. But certainly the Internet helped that significantly.
Kevin: Coming back to Australia, investing in different parts of Australia, some people suggest that you can actually invest site unseen. Do you think that’s a wise strategy?
Stuart: No. No is probably the short answer.
I’ve always used a property advisor. Even though I’m in the industry, I’m not out there looking at property six days a week and I’ve not been doing that six days a week for the last ten or 20 years, as some property advisors have. There’s experience and knowledge. I can always get knowledge from reading books, but I can never get experience from reading books.
I know as a financial advisor and an accountant, you can go off to university and do the degrees and studies and so forth in two or three years. In three years, you’ll have the same amount of education as me, maybe a little bit longer, but you won’t have the same experience so you can’t give the same quality advice. What I’m paying an advisor for is their experiences. I’ve always used a property advisor.
Kevin: When you say a property advisor, do you mean a buyer’s agent?
Stuart: Yes, but buyer’s agents say, “I’m there to buy the property for you and negotiate to get you a great price.” That’s not what I’m really concerned about – I can do that. What I want is “Find me the best asset for my money, based on your experience.” That’s what I believe a good buyer’s agent does.
If I can find a buyer’s agent who I know and trust on the ground, then I’m happy to buy a property based on their advice. Obviously, he would have had walk through and see it and do due diligence, and so forth. But if it’s just looking for a property on the Internet, I wouldn’t. That’s just too risky.
Investing is all about getting the highest return for the lowest risk. Good investors like Warren Buffett always think about risk first. They go to mitigate as many risks as possible before they start thinking about what return they might get.
Buying a property without seeing it, that’s just asking for trouble, I think. That’s just too risky.
Kevin: In looking around for a buyer’s agent, it’s a pretty important decision you’re actually turning over to them, and that is that investigation stage. What sort of questions would you expect them to be asking you so that you get a comfortable feeling that they know what you need?
Stuart: First, I think it’s really important to understand you can’t delegate responsibility. It’s my money. It’s my responsibility. You can’t just blindly go and appoint someone and then expect them to look after your money like you do your own. There are lots of great, ethical people out there, and they will treat it as their own money. That’s fine. You’ve got to find those people. That’s good. But I think my advice would be don’t ever fall into the false sense of security that you now don’t need to worry about it. It’s your money and you need to look at it as your responsibility. You can’t delegate it.
In terms of asking questions, a good buyer’s agent should understand what my key concerns are. They should be partly understanding what my key concerns and my primary objectives are, but also educating me about what my primary objectives should be.
If I relate it back to my business, whether it’s mortgages or financial advice, what I want to do is understand the client and understand what their goals are, and so forth. If I think they’re going in a direction that I think is not right, then I need to educate them about why that direction is not right.
If a buyer’s agent meets me, I’m going to tell them my goal is 100% capital growth. I just want the best growth he can give me and the rest, I don’t really care about. I don’t care where it is, if it’s two-bedroom, one-bedroom. I don’t care if it’s art deco or brand new. I don’t care about anything. Just give me a property that I can buy today and, if I want to, in 20 years, I can sell it and it’s going to be three times the price that I’ve just paid.
That’s all I want. A buyer’s agent shouldn’t need to ask me any questions beyond that.
Kevin: As a successful property investor, what would you say is the most common question that you get asked, and how would you answer that?
Stuart: That’s a really easy one. The most common question I get asked typically is, in a couple of words, “How do I get rich quickly? How do I cut corners? How do I get from here to property millionaire in the quickest possible time?”
My typical answer to that is that there is no quick and easy way. A good, proven, safe, tested investment strategy takes time. If you don’t want to put in the time, then you’ve got to accept high risk, but it’s akin to going down to the casino and putting all your money on black.
That might be an extreme analogy, but we can’t fool ourselves that if we’re going to try and get rich quick, we have to accept high risk. Therefore, there is a high probability it won’t work. The problem with doing that is that you waste time – time you’ll never get back again. Money, you can always make back, but time, you’ll never get back.
If you want to spend the next five years chasing that rich quick strategies, you’re going to waste five years, likely, and there’s a very strong probability you’re going to be no richer if not maybe a little bit poorer.
We’ll have the same conversation in five years’ time and, at that point, you’ll say, “Stuart, you’re right. Slow and steady wins the race. It gets the highest returns for the lowest amount of risk.” That would be my response.
Kevin: That leads me very nicely into my next question, which is what do you see as the essential qualities and the attributes of successful investors, renovators, or developers?
Stuart: I think, typically, humans are motivated by two main emotions: fear and greed. I think a successful investor ignores both those emotions. They don’t get greedy. There’s a saying, “Be greedy whenever everybody else isn’t.” And the reverse. They don’t get greedy, and they don’t worried by fear.
There are a couple of stories there when Warren Buffett invested in Merrill Lynch, right in the heart of the GFC when no-one’s making any kind of investments. I can’t remember the amount of money, but he’s made billions of dollars from that one investment alone. He thought about his downside. He got a 10% yield on the bonds he invested, and they converted into shares at a really low price.
If the stock price is going to go up and the market is going to go up, you make lots of money. If not, he’d still get a good income return. He didn’t get worried about fear. He looked at the company, the quality of the asset, the quality of the investment, and made a decision there. Similarly, to a much lesser extent, buying a property in 2008 when Bear Stearns crashed and the world was ending, everyone was fearful and didn’t want to make a decision.
But really, the fundamentals of investments don’t change. As Warren Buffett would say, the fundamentals of what makes a good company don’t change. The fundamentals of what makes a great property don’t change. These things are established over time. They’ve worked for the last 40 or 50 years. They’ll work for the next 40 or 50 years.
It’s about ignoring the fear – your own personal fear and the fear that you hear out there, and also the greed. Don’t pay too much for a property when everything is going up because you’re worried you’re going to have pay $200,000 in 12 months’ time if you don’t buy it today, and, don’t buy a property now thinking we’re in a bubble and it’s going to crash next year.
You’ve got to really ignore those fear and greed motivators and run your own race, and that’s what successful investors do, in my opinion.
Kevin: You’re obviously a very successful investor, yourself. Do you continue to invest in your own personal development?
Stuart: Yeah. A business coach told me once, “Work harder on yourself than you do on your business.” By that, he meant continually educate yourself. You never stop learning. That’s key: going out there and talking to people, reading books and going to seminars.
You talked about the Internet. I think that’s probably one of the best things for dissemination of information and content. These days, there’s just a world of content available, and there’s no excuse not to continue learning.
I think, also, you can’t underestimate the power of asking good questions. Generally, I’ve found people are willing to share. Going out and finding successful investors and asking them ten questions, or finding unsuccessful investors and asking them ten questions – you can learn a lot just by talking to people asking the right questions. I think learning from people’s experiences is the best kind of learning, rather than learning from a textbook.
Kevin: If you had the opportunity to sit in front of Warren Buffett right now, what would you ask him?
Stuart: If he’d adopt me?!
I would ask him how does he ignore the emotions of fear and greed? How does he block that out? What was he thinking when he invested millions of dollars in Merrill Lynch at that point? Surely, he must have been nervous. How does he overcome those nerves?
I think it’s a natural human emotion. We’re pack animals as humans. When everyone is fearful, we’re going to be fearful. How do you block those emotions out and stay focused? The worst thing you can do is get emotional about money and emotional about decisions.
That’s why a lot of people get a lot of value from working with a financial advisor or accountant, because they’re very unemotional about their money. They can look at it and say, “No, you’ve borrowed too much. Don’t borrow anymore.” Or, “Your fear of borrowing now is ridiculous. You’re in a very strong position. You should borrow now.” It’s really about helping people past those emotions.
That’s what I would ask him. How does he manage them?
Kevin: How much of that would come down to confidence in his own ability and belief in himself?
Stuart: I don’t know. I’d have to ask him. I would imagine it doesn’t hurt to have that belief. I always tell clients the hardest investment you’re going to have to make is your first investment. Once you invest in property, and assuming you make a good decision on your first investment, you can start to see it work, and you get a lot of confidence from that fact. That’s why the first investment is the most important.
I’ve found that the people in our business who were investing through the GFC were experienced investors. First-time investors just didn’t have the fortitude to make those sort of decisions in that market. I think having experiences and getting runs on the board and seeing what works makes you more confident. Then you have that ability to ignore all of the media hype.
Kevin: What does success mean to you?
Stuart: It’s two-fold. Success means to me making the most of your opportunities. If you look at two clients, one earning a million dollars a year and one earning $70,000 a year, just because the million dollar person has slightly more net worth than the $70,000 person doesn’t necessarily make that person successful, in my opinion. It’s really about making the most of your financial opportunities. Maybe from an investment perspective, I guess that comes down to a net worth dollar of passive income and so forth, not that life is all about that.
Secondly, success is just being comfortable with your achievements. Some people have very modest needs financially and only need a very small amount of passive income in retirement. Other people have very grand plans. I don’t think either of those two types of people are any less successful than each other. It’s really just about being comfortable with what you’ve achieved.
Kevin: I think most people aspire to be successful. What do you think it is that actually holds them back from achieving what it is that they desire?
Stuart: Fear of failure, probably. Fear of making a mistake. Fear of looking stupid. I think those are probably the only things that stop people. It’s easier. Humans don’t want to make decisions. They’ve got an aversion to making decisions because decisions are risky.
I can procrastinate beginning my investment journey. It’s probably not going to hurt me today. On the longer term, it’s definitely going to hurt me, but today there’s no pain in procrastinating. That way, I get out of making a decision that could end up making me look stupid or not working for me or losing me money. I think it’s really just fear of making a mistake.
But again, if we look at the context of the longer we have to invest, the longer the time horizon we have to invest in, the lower the risk we need to take. I’d argue that there’s no pain today from procrastinating another year before buying your first investment property. But there is an immense amount of pain in the longer term.
A lot of people leave starting their investment journey until the kids leave home or they’re close to leaving home and they think, “We need to start building our own base now.” The problem with leaving it that late is now you’ve only got a finite time until you’d like to retire. You’ve got to start taking higher risks to make it work.
Kevin: Stuart, thank you very much for your time. It’s been great talking to you.
Stuart: My pleasure.