James Freudigmann is a co-founder and director of PMC Property Buyers. We chat about his background as a valuer and how that helps him source well priced property for his clients. We chat about off market transaction and how he got his start as an investor.
Mike Mortlock: Welcome back to Geared for Growth. This week we’re chatting with James Freudigmann, who’s the co-owner and Director of PMC Property Buyers based in Sydney and Brisbane. James has a valuation background, so we have a chat to him about his experience in valuation and how residential valuations are put together, and the problems that property investors can come up against when they’re having valuations done to redraw their equity. We also have a chat to him about how he helps his clients purchase good quality investment stock close to the Brisbane CBD, and the fundamentals that he looks for when selecting investment properties for his clients. Here’s James. James Freudigmann, thanks for joining us here on Geared for Growth.
James Freudigmann: No worries Mike, good to be here.
Mike Mortlock: Beautiful. Now, I just wanted to kick off with a little bit of an insight into who is James Fridgemagnet. Who are you and what do you specialise in?
James Freudigmann: Mike, so I’m one of the co-founders of PMC Property Buyers. We’re a buyer’s agent company. Myself personally, my background is property valuation, project management and buyer’s advocacy. That’s sort of what’s led me to, I guess, where I am today and what I do. But PMC’s very much a quality property investment advice business. We run a buyer’s agent business, assisting owner occupiers, residential investors and commercial investors to go and buy property, but at the same time, if there’s people there looking for advice on their existing portfolios, if they’re looking at ways to build a strategy towards wealth creation through property over the long-term, we assist with that as well.
It’s very much a tailored advice business, but more so our focus is, I suppose, on the established property market as opposed to a lot of companies that really focus on brand new or off the plan.
Mike Mortlock: Yep, and we’ve certainly done a bit of off the plan property spruiker bashing on this podcast before, and I definitely want to get into that and of course a little bit more about what you do and your background so we can get a bit more of a taste of you James. What were the posters on your bedroom wall as a youngster?
James Freudigmann: Mike, I’m a pretty passionate sporting supporter, so it doesn’t really matter too much about what sport it is. I’ve just been one of those kids that’s fortunately grown up, we had acreage, so I was always outside in the backyard or running around the bush. As a kid I think the biggest ones for me were people like …
I think I had a big Allan Langer collage from the Brisbane Broncos back in the day and the old Mal Meninga, that sort of thing. But mainly it was just sporting stars pretty much, so the Waugh boys at cricket and people like Pete Sampras with the tennis, and that sort of thing. I’m probably showing a little bit of my age here. Your younger listeners probably don’t know who those people are, but that was me pretty to a T, very much outdoors.
Mike Mortlock: Awesome, Caitlin in our office didn’t know who Bryan Adams was the other day, so it is a dire state of affairs unfortunately. James, how did you get started in property and what was your first investment?
James Freudigmann: The way I got started funnily enough was just going through school, as I said, I was just basically into sport. I didn’t really worry too much about focusing on my school work, but I basically got to year 12 and I sort of went, “Okay, I don’t really know what I’m going to be doing after school.” I was doing accounting and economics and things like that, but my grandfather actually owned a property valuation business, and his background was commercial development. So being a semi-ADD sort of child, having to be active, can’t sit behind a desk, I basically and just did some work experience with the valuation firm and just really enjoyed it.
You’re out on the road, you’re looking at properties, you’re assessing values, you’re using I guess all your calculation skills and I seem to have a pretty good, I guess, handle on numbers and that sort of thing. That became something that I think I could really do this as a profession. That’s sort of how I ended up in the property space.
I finished school and enrolled into property economics at uni, and went through and did that course and worked as a valuer’s assistant during that time. Then once I finished uni, obviously went on from there. Personally that’s it for me-
Mike Mortlock: What sort of projects did you-
James Freudigmann: Go ahead.
Mike Mortlock: Sorry, yeah, I’ll let you finish that question.
James Freudigmann: No, no, you go.
Mike Mortlock: I was just going to say what’s sort of-
James Freudigmann: Yeah, and then-
Mike Mortlock: … what sort of projects did you work on as a valuer, was it mostly sort of residential or did you do a commercial mix as well?
James Freudigmann: The first couple of years coming out of uni, they sort of changed legislation. You used to have to do your uni degree and then two years of valuation experience before you could start. Fortunately when I finished uni, they changed it. That as long as you’d already done two years’ experience, you could get registered. I’d been working the full three years at the valuation firm. They started me off with residential valuation, so I did that for a period of about three and a half to four years. Then gradually sort of went up into the prestige residential space with your riverfront, your penthouse units and things like that. Valuation becomes a relatively, I guess, monotonous and repeat style business Mike.
It’s very much the same thing day in day out. Getting into the prestige was a good challenge of the mindset, so you don’t just sort of get into a bit of a rut. Then from there I started to go into development valuations, so I did some discounted cashflow analysis of projects, a number of commercial warehouses, some office space and things like that. It was definitely a bit of a mix over the sort of seven years that I was actually working as a pure valuer.
Mike Mortlock: So you’ve got some good exposure to the different sort of valuation methodologies. Obviously the commercial stuff’s a bit different to the resi. Now I don’t want to interrupt this question again. What was your first investment James?
James Freudigmann: My first investment Mike, was actually … I was 22. I just literally started valuing and I didn’t have a lot of money and I wanted to travel, so I bought a house out at Dalby of all places, Dalby in Queensland. It’s about four hours west of Brisbane.
Mike Mortlock: Finally enough I was there not that long ago. It’s a place where there are road trains and actual tumbleweeds, which was a surprise.
James Freudigmann: Very much so, and this is going back nearly 15 years when I bought my first house there. There were all sorts of power stations that were going to be build there and that sort of thing. I remember the house pretty well. I paid, I think it was a $153,000.
Mike Mortlock: Wow.
James Freudigmann: It was a purple house of all things, which I probably wouldn’t recommend to a lot of my clients these days, to buy something that’s purple, but at the end of the day you can always repaint something to change the street appeal. But it was a great little investment, a 153 odd grand. I think it was renting for about $230 to $235 a week, so for me not earning a lot of money first year out of uni, it was a great little starter for my portfolios.
Mike Mortlock: With the interest rates, was it sort of cashflow positive or close at that time?
James Freudigmann: Yeah, it was very close. I think it just sort of washed its face Mike. I don’t think it was … it definitely wasn’t raking money in for me, but it wasn’t really costing me anything either. It already had a renovated kitchen and bathroom, so there was a bit of depreciation in it.
Mike Mortlock: Good, good.
James Freudigmann: It was a good little investment for me as a starter.
Mike Mortlock: Still got it?
James Freudigmann: No, no, actually I sold it about five years later, because I had a few sporting injuries and shoulder reconstruction and decided I was going to quit my job and go travelling for 12 months. I couldn’t afford to do that without selling my property, so it’s all good.
Mike Mortlock: Cash in. How did you do as an investment on that one? Did you get some good growth?
James Freudigmann: Yeah, oh, I did Mike. I mean you’re starting on a pretty low base, so it’s not too difficult to get growth out of a $150,000 property if you look at the percentages. But yeah, I sold that for, I think it was about 230 to $240,000, somewhere in that range within sort of five years.
Mike Mortlock: Nice.
James Freudigmann: It probably went up by roughly 50% over that five years.
Mike Mortlock: Yeah.
James Freudigmann: No, it’s worked out really well for me with that one.
Mike Mortlock: So you’re off to a good start.
James Freudigmann: Yeah, yeah. No, it gave me … when I saw the potential in it, and from the amount of money that I’d put in to buy it originally, which was pretty minimal, it really sort of wet my appetite for it, sort of going, “Well, if you can get these sorts of returns without it costing you a lot of money.”
Well there’s got to be a bit more of an art to this as opposed to just sort of speculating a little bit more, ’cause that was definitely, being out in Dalby and I didn’t live there, I’d drive out there for about five or six weekends looking at properties. I sort of went, “Okay, there’s got to be something to this.” But the returns I got out of it, I was very happy with and that’s sort of really, I guess, set me up that when I came back from overseas I was going to get back into it again.
Mike Mortlock: Yep. Was that a bit of a catalyst for you moving from valuation into the buyer’s agency?
James Freudigmann: Not really. At that stage Mike, I didn’t know buyer’s agents existed. It was just … I came back from overseas, went back into valuation. I was only back in val’s for about 18 months, and then I was actually approached by a company that said, “Look, we’re a buyer’s agent company. We’d like you to come and work for us.”
I came recommended through someone they knew or something like that. That was my very first understanding that a buyer’s agent even existed at that point, sort of six, seven years after I purchased it. That was bit of an eye opener at that stage, but as soon as I saw that business existed, it definitely got me pretty excited.
Mike Mortlock: How does the valuation background sort of weigh in to your day to day life now as a buyer’s agent when you’re selecting properties for investors? It’s got to be a real sort of leg up when you can look at something and run your calcs over it and make sure that you’re buying it under market or at least not for a premium.
James Freudigmann: I guess one of the major elements with our business Mike, is insuring that people aren’t paying at premium for a property, because very easy to let emotion get into the mix. With the valuation background and a couple of the other stuff, we have here all valuers as well. It’s great, we go through, we run the numbers exactly as a bank valuer would. When we present to a client, we can say, “Look, from a bank valuation background, here’s our summation approach of your land plus your improvements depreciated back to X value. Here’s a comparison against other properties are sold as a check method. Here’s exactly where the value sits.”
It’s great, ’cause we get a lot of people talk about those automated valuation models. I think that’s what they call them, the RP data where you can print out whatever it is. We get a lot of people coming to us for those going, “Oh look, we’ve seen this.” But the statistical analysis, process I suppose, hasn’t been refined enough. I think you can’t really blanket and go “Well, a three-bedroom house in a suburb’s going to be this,” because the quality and size varies so much. The valuation background’s definitely been something that a lot of our clients really value, and at the same time for us it’s great. We know that if we get a property under contract and then they go to their mortgage broker to get it valued, we know that there’s never going to be any problems of getting that supported.
Mike Mortlock: Now I do want to talk about you being a buyer’s agent, but obviously we’re in a nice position to get some inside tips from a valuation guy as well. I’ve got a little bit of a valuation background, but obviously you’ve got plenty of runs on the board and have worked there for a number of years.
On the residential side of things, presumably there’s a number of different ways that you can value a property. You mentioned the summation method, which would be your land value plus your buildings and then the comparable. So, obviously what are comparable properties, so if you’re looking at a three bedroom place, what are three bedroom places with the same number of car spaces sort of selling in that area for?
Are they the sort of main methods that you would utilise as a residential valuer, or that a bank valuer would do to come up with a value, and do they favour one over the other?
James Freudigmann: No, definitely they’re the two methods that we use in residential valuation. The banks don’t particularly ask … all the calculations we do with the land value, improvements value to get your total value of the property, in a bank valuation you do do a breakdown of land and improvements, but they don’t ask you to run out your rates per square metre.
Mike Mortlock: Yep.
James Freudigmann: The way we do it and all the way I did it, which is probably a little bit more old school to the way some of the valuers do it nowadays, but my method was always we ran it out at the brand-new construction costs. So in today’s market, what’s it going to cost to build that property?
Then based on the age and condition of the property, we would then depreciate that value back to where we saw the current value of the improvements, add that to the land valuing and there we go. A lot of the valuers nowadays run it out of the already depreciated rate, and then to do a replacement insurance value. They’ll obviously rerun it out of the brand new value. That’s the primary method to determine the valuation, and then we look at the market sales evidence from within the last three months.
But it can be tough. I mean, there’s unique properties in every suburb, so to do an analysis on a Tudor style home where you’ve got everything else that might be a timber home is going to be very difficult to provide that comparison exactly. There’s an element of, I guess, educated decision making, but there’s also … you’ve got that summation approach, which provides a support for it.
Mike Mortlock: Is there ever a capitalization style approach where you’re looking at what the rental income is and applying sort of multiples on that, or is that more of a commercial sort of thing?
James Freudigmann: Yeah, more in the commercial space Mike. That’s very much done on all your commercial investments. It does get done occasionally on, for instance, like a block of flats. You might run it out with a capitalization approach, because flats are more being purchased from a cashflow model as opposed to the actual bricks and mortar side of it.
Mike Mortlock: Yeah.
James Freudigmann: But in the residential space, not so much.
Mike Mortlock: All right, so let’s talk about buyer’s advocacy. You are a buyer’s agent. That’s your day to day now at PMC Property Buyers. What are some of the main mistakes that you see property investors make that either are coming through and they have a different mindset, or you can see properties that they’ve purchased outside of using and expert? What sort of things do you see James?
James Freudigmann: There’s probably a couple there Mike. The biggest one that we see a lot of people doing when they’re going out, especially if they’re buying an investment, obviously a home’s a little bit different. But when they’re buying an investment, a lot of people just purely go, “What is it right now? I’m just going to invest for now.”
They’re not really looking forward going, “Okay, well in five years or 10 years or 15 years, who’s going to be wanting to buy this property?” Or, “Is this going to be in an area where in 10 or 15 years’ time it’s going to be in demand?” A perfect example would be in a greenfield estate where you might be 40 or 50 kilometres out of the city, and you’ve got all the new house and land packages. If you haven’t got any great transport infrastructure to get into a major employment hub, like i.e., the city or any of the other suburban employment hubs, then long-term, 10 or 15 years’ time, I mean traffic right now is pretty bad so I can only imagine what it’s going to be in 10 or 15 years.
Is that going to be an area where people are going to want to live in 10 or 15 years’ time? You’d have to say, well, if you can be in an area where you can get to work in five to 10 minutes with pretty low maintenance, or you can get there in 45 minutes and low maintenance, and the property’s still low maintenance, you’re probably going to be favouring the one that is a heck of a lot closer. That’s probably, one is, people are just purely looking at the here and now, not looking in the future. The other one is very much just looking purely at the glossy brochure. As you were saying you sort of, I guess, bashed around a few property spruikers. I definitely think, and at PMC most of our staff feel the same, there’s definitely … new property is definitely not something that we’d necessarily say new property is bad.
But particular areas or estates or high rise unit blocks may not be the ideal investment, but there’s definitely still, we believe, the position for new property within our healthy portfolio. But a lot of people do look at it purely on that cashflow. They go, “Oh great, well it’s only going to cost me a $100 a week,” or something like that, as opposed to an established home in a better area might be costing them $200 a week, but they’re just purely looking at the cashflow.
They’re not looking at where the value of this property going to be in the future. Is this this something that appeals to owner occupiers as well as investors, or is it just purely an investors driven property? They’re probably the two, I guess, biggest mistakes we see from people going and doing it themselves. From buyer’s agents, I guess it’s the same as every industry I suppose Mike.
You’ve got good, you’ve got bad, you’ve got in the middle. It’s a big world out there. Probably the one thing that we do see from a number of buyer’s agent firms, and this is where we try to be a bit different. But buying in a … if you have a client come to you that’s got a budget that’s slightly below where you believe you can into a really good area, a lot of companies will go, “Well, let’s just push out an extra suburb or an extra two suburbs.” I think that gets you into dangerous territory.
If you haven’t done your research on that particular suburb and the pockets within those suburbs, I think you can end up making a bad investment, even using a professional advisor. I guess we sort of take a bit of a different approach with that and say, “Well, if a client doesn’t have the budget that gets them into the blue chip area close to the CBD, what other areas are still low risk areas that we could invest in for clients?” Rather than just going, “Oh, we’ll just go the next suburb out for the sake of it.” They’re probably the three majors.
Mike Mortlock: I guess there is a disincentive to say to someone, “You might need to save a little bit more, because there are no other suburbs that are a little bit cheaper that are of good value at the time.” I’ve certainly hear of real estate agents saying, “Look, you really need to do a renovation on your bathroom before we put the property on the market, to get a great sale.”
It is a little bit unusual, because you send someone away, there’s a greater chance that they’re not sort of going to come back to you, isn’t there? But there’s that ethical side of if you’re trying to the best for them, then you’ve got to take that into consideration.
James Freudigmann: Yeah, absolutely Mike. I guess we’re fortunate, we’ve got a property management arm as part of our business as well. That was sort of developed because of the, I guess, lack of quality service in that industry space. That provides us with stability of income for the business, so we don’t have to get a deal done for every client within a week or two, just to keep our revenue stream going.
Our job is to get the best quality investment we can possibly find for that client. If that takes three months versus three weeks, well, we’d rather take the three months because it’s a long-term investment. But you’re absolutely right, there’s definitely that ethical element where we have to say to a client, “Look, we don’t think you’re going to be able to get into a quality area. Come back to us when you’ve got another $20,000 or $30,000 or whatever.
Mike Mortlock: Yeah, whereas there’ll be plenty of glossy brochure wielding spruikers that will be happy to take their money. Let’s have a chat about those newer properties. Brisbane was sort of in the media a year or so ago as the next sort of boom suburb, or boom area. It hasn’t really materialised in the way that it was sort of predicted.
Is that sort of dragged down by potential oversupply with the unit market in the CBD? ‘Cause I do know that there are some suburbs in Brisbane that are performing really, really well right now.
James Freudigmann: Yeah, you’re absolutely right Mike. I’ll probably just preface this. We’ve got, obviously a Brisbane office and a Sydney office.
Mike Mortlock: Yep.
James Freudigmann: I’m obviously based in our Brisbane one. You’re absolutely right, the unit market in Brisbane for a few years, there have been talk of oversupply, well, 12 months maybe or so, they’ve really started to put it out there in the media saying there’s going to be an oversupply and that sort of thing. We stopped buying units nearly three years ago for clients, stopped recommending them. We saw there was a little bit of writing on the wall at that stage. I think fortunately, I mean good and bad I suppose with everything, but fortunately that the media has now actually come out over the last 12 months or so to say that it looks like there’s going to be an oversupply.
It appears that with that combined with the banks tightening up on the lending and the foreign investment being I guess curbed a little bit more with increased stamp duty etcetera, we’ve actually sort of seen that semi self-correcting. A lot of projects that were approve and expected to then be build, aren’t actually going ahead.
Mike Mortlock: Right, the margins aren’t there for the developers anymore.
James Freudigmann: That right, or they might be developers that have had other projects and realised at the end a lot of these people aren’t actually settling, so they could get stuck with their product at the end. I think it’s a good thing that that sort of semi self-correcting.
I still definitely think there’s an oversupply, and we’ve seen a little bit of pressure on the rental market, and I think we’ll probably see that for maybe another six to nine months and then it might ease up a little bit. But I think given the correction that’s gone on, I don’t think we’re going to have a five to seven year period before we’re going to soak up the supply. I think that’s probably come to back to maybe three, three and a half years.
Mike Mortlock: Okay.
James Freudigmann: I think if you’ve got residential units currently, I don’t expect you’re going to see a lot of upside in that for probably three to five years. But at the same time, we’ve already had a pretty big drop in the values of those units over the last six to 12 months, and I think it’s sort of at that stage where within the next six months or so, it’ll probably level out a little bit more and we’ll probably see the bottom of where they’re going.
That unit market’s a very different market to the housing market. I think the statistics for Brisbane I think was something like three and a half percent last year, across the board. But it’s like anything, you look at some suburbs in Sydney that have probably done 30% in a year, but the average for Sydney might be 12, which is still phenomenal growth.
Mike Mortlock: Yeah.
James Freudigmann: But in Brisbane it’s the same sort of situation where you’ve sort of got Brisbane’s I guess 50-kilometre radius from the CBD is really what encompasses Brisbane.
Mike Mortlock: Yep.
James Freudigmann: You’ve got a pretty broad spectrum of where you can go to determine all your stats, but most of the established houses we’re buying are sort of within that seven to 12-kilometre ring of the CBD. Over the last couple of years, we’ve probably seen the prices move there by between 15 to 20% combined over the two years, so averaging sort of somewhere between seven and 10 per year for the last couple of years.
It’s very good sustainable growth, it’s not the heated investors driven market that Sydney really has been over the last few years. I think Sydney had-
Mike Mortlock: Yeah, but it’s probably double the national average isn’t it? I guess you’re in a little bit of a less risk averse market. You might be able to chase 50% growth going to mining locations, but you’ve got a long-term performing asset there, haven’t you?
James Freudigmann: Absolutely, and the fortunate position I suppose for Brisbane, because it hasn’t had a spike the way Sydney and Melbourne have, that the rental yields are still reasonably strong.
Mike Mortlock: Yep.
James Freudigmann: You can take a percent less in growth if you’re getting a percent higher in your cashflow. It sort of provides a reasonable balance. I think that gives Brisbane security going forward. I don’t think we’re going to see Brisbane booming. I notice a lot of people say, “Oh well, Sydney and Melbourne have charged, so now Brisbane’s going to charge next.” I don’t believe that’s the case. I believe we’ll still have pretty stable, consistent growth, but until employment growth really starts to climb, I can’t see us having growth of consistently 10 plus percent the way Sydney and Melbourne have over the last sort of three to five years.
Mike Mortlock: Yeah. There’s real scarcity issues with the Sydney market as well. There’s obviously a lot of demand in the city and there’s only a certain number directions the expansion can sort of go in. Obviously you’ve got offices in Sydney and Brisbane, is Brisbane where you’re doing most of the purchasing for investors at the moment? Is that where you’re seeing the best value?
James Freudigmann: Yeah, sort of two markets Mike. Brisbane’s definitely where we’re seeing some reasonable value for investors with the balance of cashflow and growth. But the other market we do a reasonable amount of buying in is actually your hometown, Newcastle.
Mike Mortlock: Right.
James Freudigmann: One of our buyers’ agents grew up there. She’s actually moving back there in January, but she commutes from Sydney two or three times a week to go and look at properties. The Newcastle market obviously is, as you’re aware I’m sure Mike, has done reasonably well over the last four or five years as well.
It’s had a really good sort of piggyback off Sydney, but Brisbane and Newcastle are where we see still reasonable buying opportunities where you’re not in that frenzied pace the way Sydney has been, but at the same time quite a good balance of that cashflow and growth. If we stay pretty consistent and selective with the suburbs and property types we buy in them, we’re pretty confident that long-term clients will get a good overall investment result.
Mike Mortlock: Awesome. What sort of areas, what sort of suburbs are representing good value in Brisbane and Newcastle? Where have you sort of been active over the last few years, if you don’t mind giving away some of your secret herbs and spices?
James Freudigmann: Yeah, absolutely Mike. I think our markets seem to change every six months or so we won’t just buy in the same suburb all day every day, every year because obviously if the market’s moving, you start to see one market get a little bit overheated. We go, “Well, we don’t want to be in that suburb anymore. That’s really getting into premium territory.”
But the consistent performers that we’ve seen I guess in and around Brisbane is a place like Greenslopes, which is about sort of three and a half to five kilometres from Brisbane CBD on the south side. Relatively small suburb, very close to employment hubs with multiple hospitals, easy access into the CBD, outer sporting locations, things like that.
It’s been a really good performing housing market for us, as has Coorparoo, which is probably the next suburb out, or one and a half suburbs out from Greenslopes. Again, really good market. A lot of character style homes. There is a lot of unit development going on in a couple of pockets of Coorparoo right now, but the housing market is still in very, very strong demand.
Those two areas on the south side and a place called Holland Park, which is then if a client had a lower budget, we would’ve pushed further out to Holland Park. That’s more around your eight to 10k ring. Those three have been very good long-term performers, and nice and consistent as well. Then if we sort of move around over to the north side a couple of suburbs like Mitchelton and Enoggera have been actually some really good performers for us.
They’re a, I guess, more affordable market than if you move within that five kilometre radius. Houses have been there over the last few years’ between 500 and 700, 750, they’re now sort of getting towards the upper end of that market. You’ve got shopping centres there, you’ve got train lines into the CBD within 15 minute commute, that sort of thing. I still think long-term they’ll continue to perform.
Mike Mortlock: How important are the sort of transport connections into the city for property investment? Obviously you’re looking in that sort of 7 to 10k range of the CBD, is that really just because I guess there’s a point at which the commute gets over a certain number of minutes and the desire to live in that suburb goes down sort of exponentially?
James Freudigmann: Yeah, to an extent Mike, I guess. We do some buying sort of 35 kilometres from Brisbane CBD as well, so as I was saying with some companies, we’ll just push out one suburb. We’d probably take a different approach and we’ve actually made a jump out to another precinct that’s on the water. It’s still very well connected to employment hubs in the CBD.
But I think the transport nodes are definitely, as I said earlier, traffic is something that a lot of people get very frustrated with, and it’s getting worse day by day. Long-term I think we’ve still got to make sure we’re probably within a few … if you’re going to be in a suburb that’s further from the city, you’d probably still want to be within a five-minute walk from one of the major transport access routes into the city so that you’re not having to drive your car for 10 minutes just to park it to then getting onto public transport, go from there.
I think from that perspective, transport’s very important. For everything we do, it’s really three E’s and a T. It’s close to education, close to employment, close to entertainment and close to transport. That’s really our, I guess, core fundamental.
Mike Mortlock: Three E’s and a T. I love it.
James Freudigmann: Yeah. That’s our, I guess, initial check when we do the macro element of an area as to whether we’re going to invest there, and then from there we can delve into the micro details of the property and the street and things like that.
Mike Mortlock: Yeah, okay. How much difference does the street make? I was chatting to someone recently and they’re basically saying that getting the right streets within a certain suburb can make a 20% difference in capital growth. Is it really important to pinpoint that, because when we have the conversation about hotspots or booming suburbs, we’re talking about the suburbs. But not all streets are created equal because of their proximity to public housing, to transport nodes or just being a dodgy street. Does that make a big difference to the capital gains, and if so, how do you find those pockets?
James Freudigmann: It definitely makes a bit of a difference Mike. I guess the old philosophy of the worst house in the best street, I don’t necessary a 100% agree with. I think if you buy the worst house, well you could have a maintenance nightmare.
Mike Mortlock: Yeah.
James Freudigmann: But I definitely think there’s pockets within a suburb, so there’s always going to be one or two, I guess, prestige streets in a suburb. If you can get in there, I think a major growth difference compared to the rest of the suburb isn’t likely to occur, because otherwise you end up with a huge disparity of the same house two streets apart. I think it would reach that point where people go, “Well, it’s not really worth me paying a bit more just to be on that street.” A couple of the-
Mike Mortlock: And lives two streets back and get a pool.
James Freudigmann: Yeah, yeah. Exactly, for the same sort of money. I think there’s a couple of elements that really come into it though. I think if you can go down a street and you can see it’s nice and wide, it’s a nice green street. You’ve got quite a number of renovated homes in that street already, then you’re in an area where you know an owner occupier is going to drive down that street and go, “I really like this. I want to be here.”
I think it’s more the appeal of having that quality street that is going to enhance your marketability of a property and probably mean you’ll get a slight premium, but you’ll also be able to sell it in a good market or a bad market. Whereas if you’re in a street that doesn’t appeal very well, there’s a lot of rundown homes, there’s public housing, or there’s a mix of unit blocks and houses and things like that, in a quiet market that’s going to be much more difficult to sell than something that’s in a beautiful street. I think that, and your aspect of the property whether you’re north facing versus west facing and things like that again, are things that owner occupiers really look at.
Mike Mortlock: Yeah. Now I obviously want to go even deeper into your special source. I love to give some good tips to people if I can. We’ve got the three E’s and the T’s. We’re obviously looking in that sort of seven to 10k ring, I’m guessing because there are supply constraints, there’s not so many things that can come onto the market. Are there any other sort of tips and tricks that you have?
I mean as a valuer people would be sort of asking the questions, “Well, if you’re buying a four bedroom house, then you have to stick to four bedroom comparables.” Are there any other sort of things that you look at for creating sort of instant equity or anything like that?
James Freudigmann: I think probably the hardest part about our job is the amount of renovation shows and home buying Australia and all these shows that just go, “Oh look, you can buy it for this, you can spend this and you can make this.” It’s probably all well and good to make it look like that, but if you’re paying a professional to do it all, so if you’re paying someone to buy the property, paying for someone to project manage it for you, paying for someone to sell it, et cetera, by the time you factor in all your costs, you’re probably not really going to come out ahead if the market’s relatively stagnant.
But I guess some of the areas where we see, I guess, ability to add value, not only to the capital value of the property, but for your rental appeal if it’s going to be an investment property as well. Number one is looking to create an en-suite. A lot of the old homes in Brisbane, colonials or Queenslanders might have an enclosed veranda that we can convert into an en-suite off a master bedroom. It’s quite cost effective and because these are timber homes that aren’t sitting slab on ground, it’s very easy to access your plumbing, so it’s a much cheaper way to do a bathroom. Creating an en-suite makes it appealing for owner occupiers, it’s appealing for tenants and generally your return where you might spend $15,000 on an en-suite, you might get an extra $50 a week. So as a return on your investment, it’s very strong.
The second one that I think a lot of people overlook, ’cause everyone just focuses purely on the house, is your landscaping and fencing. You can change the full appeal of a property by doing some really good yard work. I think people can walk around and go, “This just presents beautifully from the street.” Regardless of what sort of condition the house is in internally, that very first impression and the very last impression when they turn around when they get back down on the road, is “Wow, this looks beautiful.” From a cost effective perspective, I think they’re probably two of the quickest ways to add value to your property or add appeal to it.
Mike Mortlock: Awesome. I think that’s some great advice, especially the en-suite tip there. I guess there’ll be a lot of property investors sort of listening saying, you know, “I’m buying a property and I going to hold it for 20 years, what do I care about the owner occupier appeal until I’m actually looking at selling it when I’m in retirement mode.”
But I’m guessing the appeal’s important because at the end of the day, the cashflow relies on a good rental yield, so the tenants got to be attracted by the property. But also there’s those valuers coming in that are pretty key to sort of withdrawing equity and investing again. They’re going to want that owner occupier appeal to sort of get the better valuations. Is that fair to say?
James Freudigmann: Absolutely Mike. I guess with our property management business, I guess we’ve really learned that the old school mentality of just buy a house and just leave it sit and rot, because it’s just an investment property, or it’s just for tenants, is really gone now. Tenants are far more selective about what property they’re going to go for.
They want to have the air-conditioning in the master bedroom, they want to have a nice deck, they want to have open plan et cetera. If you don’t maintain your property well, you’re going to find it’s going to sit vacant for a lot longer than something that has been maintained well, or you’re going to have to take a pretty good hit on your cashflow.
That’s probably number one. The second thing is, as you said, from the valuation perspective. They’re the ones that at the end of the day if you want equity, you need your valuer to support it, doesn’t matter who else tells you how great it is, it’s going to come down to the valuer at the end of the day. No disrespect to valuers, ’cause I think they do a very good job and they get worked pretty hard by the banks, but they’re not keen to sort of support something if it doesn’t look appealing and doesn’t look secure.
If your property presents really well, the valuers are in and out of … the people have to remember they’re in and out of probably between eight and 12 houses a day, all day, every day. If you want to make a bit of a lasting impression, or you want to get a good supported valuation on yours, you need to make your property look good so that they remember it. They walk in, they get there exactly like an owner occupier does, or you if you were going to go and rent a house. You want to walk up and go, “This looks really nice.” A valuer’s mentality is exactly the same. If it’s touch and go on $5,000 or $10,000, if they go, “It presented really well. I’m going to be pretty confident that’s going to stack up when a sale goes through,” then they’ll be more likely to be a little bit more flexible.
Mike Mortlock: Yep, and a bottle of wine, a cup of coffee, any other tips to increasing these valuations James?
James Freudigmann: I’m concerned if your valuer takes it. He’s probably not going to allow all that. But probably just keep it minimalist. Like a lot of the valuers, because they are busy, they don’t want to stand around and have a chat. Probably the biggest thing to do is, if you want to give them some information about a couple of sales that have gone on, you’re better off just going, “Look guys, there’s two sales around the street. I know they’ve just gone under contract. Here’s the details of them.” Is probably the best way to do it, as opposed to trying to have a big conversation, because a lot of them do do that job because they don’t like chatting with a lot of people. They very much keep to themselves kind of people. The less you can disrupt their time, probably the better lasting impression they’re going to have of you and more likely going to assist you.
Mike Mortlock: Yeah, so don’t sort of ear bash them with, “I think this place is worth 50 times what you’re probably going to write on that piece of paper, because of X, Y, Z.” But if you can say, “I know that you’re looking at comparables sales, these ones might not pop up, but I know from the agent they’ve gone unconditional and these were the prices. I’ve printed it out for you. I won’t talk to you any more than that. I apologise for existing.” That’s probably the best approach?
James Freudigmann: That’s pretty much spot on, yep.
Mike Mortlock: Excellent. I just want to bash valuers once more if I can. I don’t know how many of them listen to this show, and there might not be any after this, but one thing that is a little bit perplexing is that you purchase a property or you go to purchase a property and you’re getting bank finance, the valuer comes in. Sometimes you’ll pay for it, other times it’s sort of rolls into the package. But every single time that happened to me, the valuation comes back at the exact agreed purchase price. Now what’s going there?
James Freudigmann: I think the banks very much … ’cause what a lot of people think is that the valuers work for the banks, but they actually don’t. All the valuers are privately owned firms, they’re not owned by the bank. They just have contracts with the bank to do valuation in particular areas.
If you get a contract that comes through, it might be a random figure, it might be $712,000 and you think you’ve got yourself a steal by 20 grand, there’s no value for the valuer or no interest in the valuer to put in anything higher than the contract value. If it looks like it’s a 10% difference, then that might be a little bit different. The valuer will then sort of look to support close to a higher figure, but if it’s within probably a five percent variance of where they see they’ve done their figures and it would stack up, then they’ll support the contract price, because-
Mike Mortlock: Yeah, they’re not going to want to put their insurance on the line-
James Freudigmann: Absolutely.
Mike Mortlock: … unnecessarily I guess.
James Freudigmann: What we do find though from a valuation perspective, and it mainly only happens in a hotly rising market or just as a market comes over the top and starts to plateau or decline. This is where a few people in Sydney could be at risk if they’re still paying premium money at the moment as it’s come off the boil a little bit, you may find that if you’re right at the top end of the value range of where it looks like it’s going to be supported, if a valuer doesn’t have enough evidence to support that, they won’t just miss it by $5,000 or $10,000, they’ll probably pull it back to a much more comfortable valuation range, which might be end up knocking it by five percent to eight percent.
I’m not saying they’re doing anything wrong there, because they’re still doing it within the valuation range from all their calculations and the sales evidence, but if it’s looking very, very top end or top heavy for the value, they’re more than likely going to pull it back a little bit further for protection. That’s where I think a lot of people go, “Oh, valuers are just so conservative.”
But it’s really not, it’s more a protection exercise where they know that if there’s five offers on a property and four are around one figure and one person’s 25 grand higher, well, that person’s not paying market value. The other four people that were around the same figure, that where the value sits. That’s sort of where that element comes in.
Mike Mortlock: I guess there is a difference between the highest possible price you can achieve in a marketing campaign, to say a bank taking possession of a property and going to auction with a sort of a fairly minimal campaign. There could be a big variance in what someone would be able to achieve if they’re happy to sort of sit on the market for a number of months. Does that sort of factor into that as well?
James Freudigmann: Absolutely Mike. I don’t think the valuers will so much think about the difference between a current marketing campaign or bank campaign in the future. I think it’s more them just going, “Well, if I know there’s multiple offers and everything similar and there’s an outlier there, well, that’s obviously someone who’s passionate and emotional about that property, but it’s not indicative of the majority of the market. We’ll stick with the other end.” But I think you’re exactly right, if the market cools at all, that change in price from that emotional buyer will probably stop pretty quickly. If anything goes wrong in 12 months, two years, three years, they valuers can be held liable for up to seven years from the date of the valuation.
Mike Mortlock: Wow.
James Freudigmann: They’ve got a pretty long exposure period.
Mike Mortlock: Yeah, excellent. Well excellent is probably not the right word, but let’s get back to purchasing investment property. Obviously there’s been some changes with interest only loans. The banks are not sort of as favourable on those. There’s been some changes with APRA of course. How is that affecting demand in your space and what’s the general demand for investment properties in the suburbs that you’re active in at the moment? Is there a reasonable sort of uptick in owner occupy or first home buyers, or is there quite a bit of competition still despite the changes?
James Freudigmann: Despite the changes there is still quite a bit of competition Mike. I guess Brisbane, the market here is very much driven by owner occupiers, it’s not a hot investment market the way the Sydney market has been. We can provide with much more balance, so stock levels are definitely down. They’re down probably 30% to 40% on last year. Some suburbs are down even as far as 50% on last year. Normally you would say, “Okay, well, if stock levels come down that far, prices are going to absolutely charge.”
But that’s just when you’ve got emotionally charged people that are wanting to get into a market and not miss out. When we’re dealing with the owner occupied space, they’re still very calculate, they’re saying, “Well, yes. I like that property, but I’m not going to pay that sort of money for it.” It’s still a much more balanced market, and I think it will probably continue that way for a little while.
Mike Mortlock: Now let us know a little bit about what you do at PMC. A bit about obviously your methodology we sort of dug into, but why should property investors work with your company, and especially with a buyer’s agent in general, rather than doing their own sort of DIY investing?
James Freudigmann: Look, it really does come down to I guess personal preference Mike, and probably affordability. There’s obviously a fee associated with what a buyer’s agent does. I guess our real, I guess, focus for all of our clients is hopefully they’re going to be portfolio builders. Not necessarily going to 10 properties or anything like that, but getting the fundamentals right in the first property.
Then they’ve got a good base level to build on from there. I guess where our passion for property investment has come from, is really seeing the capacity of leverage and the capacity more of your return on your own personal investment. Because essentially you buy, and let’s just use some really round figures, you buy a million dollar property, and you put in 10% yourself.
If that property goes up by five percent each year, so you’re getting a $50,000 return each year on a $100,000 investment, it’s a pretty phenomenal return when you look at it on your own personal investment. Even if you take out negative gearing, it’s still a very good return. Return on the overall investment of the property, is five odd percent, but the return on your own personal investment is obviously significant higher.
That’s where we really see the power and that’s what’s driven our passion with property. But where we’ve sort of I guess taken it a little bit differently to just going, great, well this shotgun approach and just go everywhere. It’s really looking at, not so much going just get a property, get someone into the market, get them in a property and off they go.
It’s really saying, “What are you trying to achieve personally? Is it cashflow? Is it depreciation? Is it you want to invest for seven years and you want to sell it and you want to put your kids through private school from the proceeds? Are you a 20 year investor? Are you a portfolio builder? Are you pure capital growth and you’re high income, so you don’t want to worry about the cashflow?”
Every property investment journey for every different person is different, and it needs to be different because not everyone had the same capacity. For us it’s really understanding a personal situation, working out what they’re trying to achieve from that investment, what’s affordable for them in terms of servicing as well as initial purchase budget, and then from there saying, “Based on that, these are the areas that we believe, here’s our research behind why we believe these areas, this is the type of property, and here’s why we believe this type of property.”
Then if the client’s in agreement to that, then that’s what we obviously then go out there and find. Part of the other value in what we do is, one it’s essentially we’re a project manager for the whole process. We’re doing it from the very first brief, all the way through to settlement, handover of keys and everything. We’re basically taking a lot of the stress out of it. We’re looking at properties day in, day out. We’re there six days a week looking at properties. We do probably about between 40% and 42% of the purchases that we do across both our offices, are off market.
Mike Mortlock: Wow.
James Freudigmann: If you’re just out there looking on weekends, you genuinely would not see majority of these opportunities that we end up buying, or half of the properties we end up buying. It really does open up the opportunities for a client, one, to get into areas where they may not be as familiar. Two, to be getting the right type of property that fits with their own personal strategy, rather than just sort of going, “Oh well, I’ve read a couple of property magazines, I should buy in Gladstone,” or something like that.
Three is really the valuation background for us is big one for a lot of clients. The due diligence we go to on a property, including things like public housing searches, nearby development applications, zoning changes, pipes over your site, caveats, easements, restrictions et cetera, et cetera. There’s a lot of other things that we look at, that most investors wouldn’t look at.
That’s been a refined process over a period of sort of 10 plus years as well. That’s what I guess where we see the value that we can bring to a client, and then being an ongoing sort of sounding board for them as well.
Mike Mortlock: It’s a pretty strong pitch James. I’ve got to say. You mentioned off market transactions being, what was the figure? 42% of what you do. Firstly, that’s a huge percentage, but I want to find out what is the reason these properties are for sale off market and what sort of deals can you get on these properties that, I guess, you’re purchasing below what the potential market value would be?
James Freudigmann: I think Mike, a lot of people do say, “Oh, you’re buying an off-market property, great, you’re going to get yourself a steal.” But it’s not necessarily the case. The reason we get a lot of them is real estate agents know that our clients have a finance pre-approval, ’cause we get all our clients to do that before we start searching.
They know that if it ends up under contract, they know one, we’re valuers from background so we’re not going to be paying a premium, but two, they know that the finance is already there, it’s going to
go through, whereas most buyers coming through an open home, the real estate agent won’t know what their pre-approval is or any insight into their background. They know that if they sell it to us, then they know that it’s likely going to go through. Yes, there’ll be some challenges with building and pest. If there’s anything there we’ll go back and renegotiate and push them pretty hard, but they know that finance wise it’s all okay. They’ll bring us a lot of opportunities before they go to the market. I guess the benefits for the off market is, one is you’re not in as much competition.
Where we might say it’s worth $700,000, we might have to pay $700,000, but if it went to the open market, we know that due to limited supply, or due to the position it’s in, or whatever elements of that property, we know it’s going to end up in a multiple offer situation and it’s going to go beyond $700,000. It’s that benefit that you’re just getting access to the property without that competition in the rest of the market.
Why people are actually doing it off market, there’s all sorts of different reasons. We deal with people getting divorced and they just want to do it quietly, they don’t everyone else to know what’s going on. We get elderly people, they just don’t want people coming through their house all day every day. What else do we get? We get sort of deceased estates where the kids just want to get rid of it and they don’t care.
You get other people that just go, “Look, we want our privacy. We don’t want our neighbours to know we’re selling. We’re happy to run it as an off market campaign and do it that way.” There’s all sorts of different reasons why people sell off market. I think it wouldn’t be accurate to say you’re going to get an absolutely steal, because you’re buying off market, you might still pay market value, but it gets you into the area that you want to be in with the type of property, just without having to pay any sort of premium.
Mike Mortlock: Awesome. I was just really interested in the incentives of the vendor, why they would do that, but that makes sense if people are just not wanting people trapesing through their house, or their neighbours coming in and having a look at their property, which obviously fills some people with dread. You mentioned before about the individual strategies of the investor and how you’re sort of tapping into what their potential goals are and that’s sort of thing. We talked about sort of yield versus cashflow. Is there a sort of sweet spot where you can achieve both, or is it by necessity that if you want the best potential cashflow, then you have to suffer a low yield?
James Freudigmann: Or the stronger cashflow, a little bit lower growth, is that what you mean Mike?
Mike Mortlock: Yeah.
James Freudigmann: Yep.
Mike Mortlock: Yeah, so-
James Freudigmann: Yeah, definitely. I don’t think it comes hand in hand, but generally speaking, the closer you get to a CBD area, generally speaking, your yields are going to be a bit tighter. We still see majority of the properties we’re buying housing in close to CBD in Newcastle, Brisbane, we’re still achieving north of a four percent rental yield, which is reasonable.
But to get something that’s cashflow neutral or cashflow positive, it’s a very, very difficult achievement. So very difficult to achieve that. You would generally have to compromise on the quality of your asset if it’s a single residential house, or unit. You’d have to generally compromise on your area in order to get that better yield.
For instance, you could go to some lower socio-economic areas where most people aren’t owner occupiers, they all rent. The value of property isn’t being driven up by owner occupiers wanting to be in there, so you’ll find that the rental is going to be higher and so you’re probably going to get a more neutral to positive cashflow, but at the same time you do have an element of tenant risk in terms of the quality of tenant, can they afford to pay their rent, how much vacancy are we going have, are we going to be a QCAT all those sorts of things.
It’s not a hard and fast rule, but definitely we do notice the closer you get to the city into the more blue chip areas, because there’s more owner occupiers there, you do tend to find that the prices move faster than the rental market does.
Mike Mortlock: Yeah, and they’re paying a premium for that location, whereas I guess the demand for paying $1,000 a week in rent is not necessarily as high?
James Freudigmann: Yeah, and we’ve also noticed Mike, with our property managers, and it was news to me over the last few years, ’cause I’ve never done property management, I see genuine value in quality service, but we’ve noticed properties that we would go through and buy for a client, we go, “Oh, it’s beautiful. The view that you get from this property is phenomenal,” and the property owners goes, “Yeah, the view is amazing.” A tenant’s not going to pay a lot more for that. They’ll pay a little bit more, but not compared to the extra you’re paying to get that view for the value of the property.
Mike Mortlock: Yeah, okay. Whereas an owner occ is going to take a different view, ’cause they’ve got a guarantee that they’re there as long as they need to, whereas a tenant might be kicked out in 12 months because someone’s moving back in or something like that. Is that the reason?
James Freudigmann: Yeah, I think it’s just because they know it’s not theirs and like you said, if they can get kicked out, well, they go, “Well, I’m not going to pay a premium for that, because I could rent the same house down the road for $50 less or whatever and I just don’t have quite as good a view.” It just doesn’t seem to play into their psyche as much as it does for owner occupiers.
Mike Mortlock: Yeah, interesting. Look James, I really appreciate the time today, and I wanted to sort of let people know how they can get in touch with you. What’s the best way to reach you if any listeners have got questions?
James Freudigmann: Yeah Mike, they can go to pmcproperty.com.au and put an inquiry through there, or they can give me a call on my mobile directly, and/or drop me an email at firstname.lastname@example.org.
Mike Mortlock: Awesome, and just to finish off James, if there’s one piece of advice you can impart, and I know this is always difficult, what would it be?
James Freudigmann: Probably the one piece of advice I’d give anyone investing in property Mike, is really don’t take a risk on your first property. If you’re going to go and buy an investment property, try to make sure that the first one you buy, it’s in a good quality area, very low risk, very low maintenance. You can take big risks in the future if you’ve got something to fall back on, but if you mess up your first investment, it can really cripple you financially for the rest of your life. You’ve got to make sure, if you’re going to buy property, don’t take any risk on the first one, and if generally speaking, the brochure looks too good to be true, it generally speaking is. Like a lot of people from mining towns.
Mike Mortlock: Yeah, and I guess that amplifies the results, doesn’t it? So, if you have a great result on the first one, in 10 years’ time, you’re going to be in much better position. But that first one is often that stumbling block, isn’t it? I mean the stats are still saying that property investors are only owning one property on average, and do you think that’s the reason is that people are not making an educated decision on that first one?
James Freudigmann: Yeah, definitely. We see a lot of people that have bought properties in relatively random areas and they’re sort of come and go, “Look, we’ve now got these two properties in areas that aren’t really doing anything. What do we do from here?” It’s pretty tough to sort of get them out of that hole. I also think affordability obviously comes into it at the end of the day, so don’t stretch yourself too far. I mean interest rates look wonderful right now, but what are they in five to seven years’ time? So make sure it’s still going to be affordable for you as well.
Mike Mortlock: Exactly. Great advice James, thanks very much for joining us. Really appreciate it.
James Freudigmann: No, appreciate it Mike. Thanks for your time.
Mike Mortlock: All the best.
James Freudigmann: Cheers.