Chunk Deals for the Astute Investor

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Transcription:

Astute investors recognize that there is a need to keep up with changing economic times. Changing market indicators and therefore changing their approach to the market. Continual education is very much a part of that, and that as why I am so strong and so focused on that continual education at a fundamental level.

When you understand the dynamics of a market and you can relate what’s going on and the indicators of a market back to how it applies to you, and how you can take advantage of that information, and how you can apply it to what you should be doing next in the investment market then you’ve got your future completely sorted because that’s basically all you’ve got to do. Regardless of whether the market is increasing, flattening out with the rents are going up, or flattening out—there’s always an opportunity for the astute, educated investor to cut a deal that puts money back in their pocket.

Much of the opportunity around at the moment is in the form of what I call chunk deals. Chunk deals is simply an acronym I’ve given to the process of buying a property, doing something to it and making it worth more. Now, that can be broken into a myriad of types of deals. You might be doing speculative building and creating something that when it’s finished it’s worth more than it’s actually cost you to go in and produce it. You might be buying something that’s older and improving it, renovating it, making it more modern and therefore worth more than it was before; but not only worth more, also able to rent at a higher figure.

You might be buying a block of units—just like I started out—buying them yes for cash flow and even though right now with the house prices the way they are they may not be completely, positively cash flowed; the opportunity to go in and renovate the block of units—unit by unit, one by one—improve the value of the property as a result, and improve the yield on the property. Plus, possibly even going in and strata titling that block of units. Breaking them down into individual titles; so instead of having a block of four on one title, or a block of five on one title, you actually break them down into individual titles—that process is called strata titling. And those individual units on individual titles are worth more collectively than they would be if they were left on one title. That gives you an enormous growth potential to be able to use that additional equity that you’ve created—simply by shuffling some paper in reality—and being able to rebound off that equity to continue to invest whether it be into cash cows or into more chunk deals.

It also gives you another opportunity when we’re talking about strata titling, and that is it gives you the opportunity to potentially sell off part of the block of units. So, maybe sell down three out five, or four out five, or three out of four, whatever it is and keep the remaining units. And the profit that you make by actually perhaps buying them, renovating, strata titling them, increasing the rental yield on the property, and selling off part of that property and using the profits that you’ve generated from that process to pay down the debt on what you had remaining—that one or two units that you’ve been able to hold on to—you’ll end up with a property that is nicely positively cash flowed. The reason that it’s positively cash flowed is because that property will have a much lower debt ratio on it. So, now all of a sudden the rule of two goes out the window because the rule of two applies to a property where you have 100% borrowing on the property. But in this particular case you’ve used your profits from your dealings to pay down the debt on the remaining property, thus giving you a very nicely positively cash flowed property because of the significantly lower debt. And potentially, that property is going to be in an area of growth. So, bingo you’ve just gone and manufactured a cash cow in an area that you can target for growth and you’ve got the best of both worlds.

Now that’s just one strategy. You can do exactly the same thing when we’re talking about sub-divisions. Go out and buy a little ol’ house on a big block of land—preferably a corner block of land, I love corner blocks of land—on the corner of a street, and subdivide off the land. Sell off the land, use the profit from the land to pay down the debt on the front house and again you’ve now get a nicely positively cash flowed property in potentially a growth area because of the level of debt that you’ve been able to manufacture on your remaining property. You could do the same thing with a speculative build. You could do the same thing with getting a development approval and building approval on a property. You can do the same thing in the commercial field. The opportunities are endless, but the name of the game is being aware of the fundamentals, being aware of the economic climate that is producing the house prices, that is producing the increasing or decreasing population, that’s producing the demand in a particular area understanding what that means and then capitalize on it.

One criteria when we’re talking about cash cows that I like to get my students to think about when they’re deciding whether they should hold a property or on seller a profit, is that a property they would like to have when they’re 80? Now, some properties are suitable for very long-term hold. They’re the kind of property you want in your portfolio forever and a day. They’re the kind of property that has a nice strong yield. They’re the kind of property that is in a growth area. They’re the kind of property that you want to pass down through the generations. They’re not a property that necessarily dies when you do.

So, if you think about things in that kind of criteria then you can break down your overall portfolio into core properties that you want to keep for a very long time, where you want to hold those properties long-term; and the others are probably more transition properties where you’re holding them for a period of time. You’re manufacturing growth on those properties. You’re doing something to them to make them worth more. You’re doing something to them to make them have a higher return so that you can then pass them on at a profit. And you’re using the profits from that transitional group of properties to pay down the debt on the core properties that you do want to hold long-term.

And the other thing, it’s a good thing to think about is how much money do you really need, or do you want to have through your retirement? What’s your game plan? Where’s your pig in the sand? How much do you need to maintain your standard of living right now? How much income does that mean to you? And therefore, how many properties does that relate to? What does that mean from an investor portfolio perspective? Do you need three properties? Do you need four properties? Do you need 10 properties?

If they were sitting there all fully paid off and they were a certain type of property how many would you need to produce the required level of income to give you ultimate security? To give you ultimate choice? So that you can choose what you do with your time. You can choose what you do with your life. Even if you love your job and are absolutely happy doing what you do now to earn your income; having the security of having that money coming in regardless of whatever else you do gives you the opportunity to do something because you want to do it. And to make decisions because you want to make those decisions.

As opposed to you have to because you have to, you have to make those decisions just to put bread on the table. And I can tell you now those decisions are much better decisions. They’re want to decisions. Want to decisions are much better decisions than have to decisions. And your whole life starts to change when you get to that point.

And the name of the game right now is to come back to the fundamentals. What’s happening at a fundamental economic level to produce certain economic factors that determine what’s happening in the market. Whether the market is increasing, decreasing, going flat there is always opportunities for you to manufacture growth and get those core properties to a point where they cover your basic requirements—your living requirements.

One of the biggest obstacles you’re going have to overcome is that the motivation, the excitement, and the enthusiasm you may feel now wanes, and you get that kind of that comfy couch. When you’re starting out with nothing, when you’ve got nothing to lose, when you’re at the bottom of the pile it’s often easier to get ahead from that point than it is from when you’re on the comfy couch, and you earn a little bit, and you have a little bit behind you, and you’ve got responsibilities and you know there’s more to lose, there’s more at risk.

Because when you’ve got nothing—when you’re at zero—it’s really easy to think clearly at zero because you’ve got nothing to lose. Where as when you’re at the comfy couch things start to look a little bit clouded and fear starts to creep in and your decisions start to be tampered by your responsibilities and by the fear of losing what you’ve already worked so hard to build up and that’s understandable. But one thing you do have to do is to recognize your situation if you are sitting on that comfy couch. Recognize the fact that life for you may well be a little bit too comfortable, and there’s not enough pain to actually make you move forward and get to that next level.

The comfy couch is a really cozy place to be, but when it comes to achieving your goals—particularly if those goals are vastly different from where you’re at right now and the standard of living you have right now—it’s going to take effort. It’s going to take motivation, continual motivation and it’s going to take an element of uncomfortablness—if that’s word. Recognize that that’s the case and commit to the process. Just doing things differently at a very small level can often make a huge difference.

Try driving to work a different way today, or tomorrow. I bet if you’ve been working at the same place for a considerable amount of time, you drive exactly the same way there and exactly the same way home every single day. Break your routine. Get out and drive a different way home. Have a look at the houses. Have a look at the opportunities. Have a look at what’s going on around you rather than listening mindlessly to the rubbish on the radio.

Actually put some educational CDs in your CD player in the car and turn it into a little mini-university. Try brushing your teeth a different way. Do anything just to experience life in a different way. And the more you get used to that, the more you get used to the process of living life to its’ fullest now as opposed to being stuck in a rut—because that’s what the comfy couch syndrome is.

The more you’re going to be able to apply those small changes to something much bigger and have the courage to take that step to give it a go, to buy something that is a manufactured chunk deal that you can do something to produce a profit because unless you actually give it a start it’s not going to happen. Learning on its own is never enough. It’s the application of that knowledge; it’s the application of that energy, that motivation that makes the difference.