Mike Mortlock: Hi, everyone, and welcome to another episode of Geared for Growth. This week, we have another special guest for you, Paul Sonntag. Paul runs Aquus Property Buyers, a buyer's agency on the lower north shore of Sydney that specialises in investment properties in Australia's complete market, but specifically Sydney and Brisbane at the moment. We have a chat to Paul about his investing philosophy, about investing based on yield curves, about creating instant equity with renovations and everything that goes into what he does as a buyer's agent. Without further ado, here is Paul. Paul Sonntag, thanks for joining us.
Paul Sonntag: It's been my pleasure.
Mike Mortlock: Now, just so we can get a bit of a background into yourself, who are you exactly and what do you do?
Paul Sonntag: Cool. I'm a buyer's agent. I run a boutique buyer's agency in at the lower north shore of Sydney and we help primarily property buyers but primarily investors in securing, in what we feel are the great investment options Australia-wide but, at the moment, we're primarily targeting Sydney and Brisbane.
Mike Mortlock: Beautiful, and let's have a little bit of dirt on you. What posters did you have on the bedroom wall as a kid?
Paul Sonntag: As a child? I actually had a poster ... First ever poster was of a Ferrari Testarossa.
Mike Mortlock: Nice.
Paul Sonntag: Beautiful red, yeah, motor vehicle that was on my wall pretty much my whole childhood. And then, as I got a little bit older, I was a big Van Damme fan so a few Van Damme movie posters.
Mike Mortlock: Nice, yeah. Any particular standouts? Kickboxer was a big one amongst my mates.
Paul Sonntag: Kickboxer was big. Bloodsport was a favourite and then I didn't actually like the movie as much but I love the poster of Time Cop. It's a horrible ... No, no, sorry. Not Time Cop, it was Hard Target. Really good poster that ... Not the best movie, but his older things. What was it? Double Impact and Bloodsport I think are my two favourite movies. Anyway, we digress.
Mike Mortlock: Awesome. How did you get started in property and what was your first investment?
Paul Sonntag: Right. I grew up with real estate. My old man kicked off as a real estate agent and then got into property developing and ended up in one of the largest independent property developers in Perth. So I grew up on development sites, building sites. I'm led to believe that he used to take me along to his home openings when I was an infant to help with the sales process.
Mike Mortlock: Right, you were part of the pitch, were you? Get the cute little kid in there and overcome the objections.
Paul Sonntag: Exactly. I know he's quite smart. I'm hoping to implement that myself in the future. Yeah, I just grew up with it and then I wanted to ... about to train with the university and studied science but as soon as I graduated, I then went and did my real estate licencing. Won my sales course and got stuck into real estate sales at 20 years of age.
So, I bought my first property two years later. I was selling a land estate for a large Australia-wide property developer and yeah, selling the land estate and bought a block of land in one of the earliest stages, which was great in a rising market. Meanwhile I was helping drive the process up with sales and, yes, sort of bought that at 22 and sold it a year later. I think I bought it for $123,000 and sold it for $165,000.
Mike Mortlock: That's not a bad way to get started.
Paul Sonntag: It wasn't a bad way, and then used that profit along with sort of savings from what work I was doing to them, bought my first house at 23 for $440,000 and that was literally the ... Yeah, the same month that the property boom at Perth really took off so I think we saw about 46% growth within the 12-month period and I'd luckily just bought this property in that first month so it was a wonderful start.
Mike Mortlock: Yeah. Wow, you've got fantastic timing, obviously.
Paul Sonntag: A lot of luck there. Yeah, spent $100,000 renovating that and I think within four years had it valued by the bank at $930,000 so generated hundreds of thousands in equity in the first one, and yeah. It was an amazing start.
Mike Mortlock: I mean, yeah. That is a fantastic way to get things kicked off. How important do you think that sort of first play is for property investors? Obviously, that one's kind of set you up to choose your own adventure, in a way, isn't it?
Paul Sonntag: Yeah, but then it depends on what you do with it. So, I guess I certainly would love to know now what, if I could apply that to what would be, what 12 years ago but, yeah, look. It's a great way to get started but then, knowing what I know now, to be able to leverage off that and get into more cashflow neutral investments and then be able to leverage again and just build a portfolio but I wasn't aware of any of that at that time, so just sort of parked it and stuck with that one property and then I ended up moving overseas for five years, working and travelling, and yeah. Certainly, in hindsight, I didn't leverage off of that first investment any way near as well as I could have but this is part of the game of life. Learning the rules and also learning from your mistakes.
Mike Mortlock: Yeah. Absolutely it is. Now just getting to some of your buyer. You're a founder of Aquus Property Buyers. You've been in the game for 15 years. MBA, which slides in there somewhere, next to the science degree. We can talk about how that sort of helps you along in the industry that you're in, and you also had a sales and marketing role in an agency in London as a manager as well, so you've got a pretty diverse background.
Paul Sonntag: Yeah. I've been fortunate with my career. I started out in sales. I think it was six or seven years in Perth initially and then moved overseas with it. But it was also, yeah, wanted an adventure and to have a bit of fun. I just saw it as an opportunity to get away and travel. Otherwise, if I didn't, I'd be stuck in my career in Perth for forever potentially, so took the opportunity and it was great.
Had the five years away to work with some really good property developers in Canada and in Spain. Yeah, in England, it was a good exposure into the sales market there, selling some property from Australia to English ex-pats, but yeah. Very, very tight market at the time. And then finished off with doing my MBA and then moving back to Australia and starting Aquus.
Mike Mortlock: And here you are now.
Paul Sonntag: Here we are now. Exactly right.
Mike Mortlock: Your Twitter profile describes you as a property pundit and a lover of the finer things in life. What poisons are we talking about, Paul?
Paul Sonntag: Finer things can be I guess taken one of two ways. The finer things would be more the red wine. I'm a lover of red wine. But then I'd also took I guess a broad explanation to the finer things but it's more based around experiences. I guess the finer experience is not necessarily the most classical or the most expensive, but just what I feel is something that really sort of knocks the senses back, so if it's the opportunity to ... My wife and I don't go and do typical beach-side holidays for a week. We prefer to strap on our backpacks and tackle a hiking in South America or through Cambodia or Vietnam and things like that, so yeah. I see them as the finer things in life, being able to appreciate the finer cultures and finer experiences that the world has to offer.
Mike Mortlock: Yeah. Well, everyone gets to have their own definition of that. I certainly chat to a few people that have got quite a bit of wealth behind them and they rate experience as well above things, so you're well and truly doing some good living there.
Paul Sonntag: Yeah, yeah.
Mike Mortlock: You specialise in blue chip investments. What defines blue chip when it comes to property?
Paul Sonntag: I'd use the past a lot to try and appreciate how things might look in the future and no one's got a crystal ball of where things are going, but looking at how past performances have been for suburbs and then just keeping it simple. Looking at historical growth rates to see how suburbs have performed over the last 20 or 30 years. Typically, those suburbs that are closer to the city have performed better. Hence, why your median house prices are higher closer to the centre, so just trying to leverage off that and get closer and closer to major CBDs, not too close, with the oversupply of properties in a lot of the CBDs currently.
Mike Mortlock: Yeah.
Paul Sonntag: And then so, whether we're looking at apartments, trying to avoid any areas of oversupply. Meanwhile, tapping into what are the best-performing suburbs over the last 20-year period. We define them as blue-chip suburbs. And then at the housing market, we don't want to be ... Yeah, it's great if you can buy closer and closer but then the prices that you're paying versus the yields that you'd be generating just don't warrant the purchase. So, in some cities, we'll then have to push out a little bit further but never further than sort of 15, 16 kilometres from the city.
Mike Mortlock: You're looking at I guess a sweet spot between the potential for capital growth and rental yield. You sort of reference in our conversation off air that you like to focus on sort of neutrally-geared property. Is that part of the approach?
Paul Sonntag: Well, capital growth is the primary driver especially for younger investors or first or second time investors to get into their first property, and if it's costing them 200 dollars a week shortfall because you've got this huge difference in repayments versus the rental return of the yield, solely because you're just seeing this explosive growth in the last two or three years in Sydney for example. That's difficult to then get them off the ground into their second property.
But if we can buy earlier in the growth phase in another city where we're buying a house with a yield of say four and a half percent and it's costing them maybe 50 to 80 dollars a week, then after taxes costing them next to nothing, but then they're also getting some growth over the next year or two and puts them in a position to borrow against and buy again and again and again, that's where we can see some power in what we do, as opposed to them just sort of wrapping up all their funds in one property and for it to be stuck there for potentially years.
Mike Mortlock: Yeah, and obviously, equity is the way out of that situation and you do sort of state that you have a goal for your investors to have several properties. The stats aren't really sort of backing that up. I mean, somewhere around about 15,000 investors have six or more properties that the vast majority only have one. Why do you think this is the case?
Paul Sonntag: Quality in investment.
Mike Mortlock: Right.
Paul Sonntag: There's a lot of companies out there that are pushing or spruiking investments, obviously. But their drivers are from getting paid by developers these exorbitant sales commissions, so they're not trying to fight and find the best possible investment for their clients. They're just trying to make sales. When you've got a huge volume of those transactions occurring and you've got young first-time investors or self-managed super fund, investors buying these very average investments, there's no reason why they're going to go and buy property two, three, or four because they don't have the ability to do so.
You've got groups that are generating sales commissions up to 55,000 dollars that are 450,000 house and land package, so what's the true value of that property. Well, any of us can say it's definitely sub-400, so you've got many, many years to wait for your $450,000 purchase price to actually see the value of that property, get to a level that matches what you pay for it, so you lose five, six, seven, eight years. You maybe sell at a loss.
Are you going to go and invest again? Of course not, so it's all down to the ... In my eyes, it's down to the quality of investment. If you can buy well at the start, buy well under the median house price of the suburb, especially when you're buying ... Whether it be houses or units, if you're buying well under the median and then if you can manufacture some growth for renovation, then you're going to be able to put yourself in a position to invest again hopefully within a year or two. It's all about buying well.
Mike Mortlock: And there is a temptation, I guess. If you've got a property that's under-performed in the long term and then suddenly you can see that it has hit that point of the market where it's a positive investment, there is a bit of a temptation to sort of lock in that profit, isn't there? That's not a great way to generate long-term wealth.
Paul Sonntag: No, not at all, and it's also just avoiding the areas of high supply. So, whether it's off playing apartments in centres that have got hundreds, if not thousands, coming out of the ground at the same time or these house and land propositions that have just got hundreds, if not thousands, of land lots off the back of it. If you've got this endless supply of property, then how are you going to generate any growth?
Mike Mortlock: And that's a big factor, isn't it? I mean, supply and demand, it sounds pretty simple but that's really the driving force between behind everything, and making sure that there is a limit to the supply is one of the fundamentals of investing in the right area, isn't it?
Paul Sonntag: Well, everything comes back to basic economics, and as they say, the best things in life are the simplest. If you can keep this simple, I think you'll perform a lot better than try to over-think things and over-analyze and just keep it simple, and if you can buy in the markets that have got much higher demand than they deal with supply, then fantastic. Whether it be rentals or ideally in the sales market, you're going to see an increase in price.
Mike Mortlock: It sounds pretty simple, doesn't it?
Paul Sonntag: Yeah. But that's the thing. But then people say the shiny new things or the brand-new apartments or the brand new homes and the much higher depreciation elements, as you're obviously very familiar with, Mike.
Mike Mortlock: Yeah.
Paul Sonntag: But then they get caught up in that shiny new investment and not realise that it's just attracted another thousand blocks of land that they're going to develop over time, and the potential for growth is just not there.
Mike Mortlock: We see that a lot and I do want to talk about the emotional side of investing and depreciation is a good example. I mean, we love depreciation, of course, if that's even possible. It's a pretty dry topic but, even though that's our bread and butter, we certainly wouldn't recommend someone pursuing investment because it has great depreciation. It's just one component of the property. In all honesty, it's a pretty small component of the property, when you're considering the capacity for capital growth.
Paul Sonntag: Without a doubt. We're just making the comparison over a $500,000 purchase and if you're generating 12, 14, 15,000 dollars in depreciation in a year, which might be possible, compared to something that's maybe 30, 40 years old and you're only generating a fraction of that. But, in that same year, you're able to generate 30, 40, 50,000 dollars in growth. I know where I'll prefer to be parking my money.
Mike Mortlock: Yeah. It suddenly becomes pretty insignificant. I want to have a chat about your agency. So Aquus is the name of your property buyers’ agency and it's derived from the word aqua, and you reference this on your website and fluidity. So, the fluidity of water as part of your approach. Now this is some pretty esoteric stuff. I want to get to the bottom of how that sort of relates to what you do.
Paul Sonntag: The biggest is fluidity and also transparency, so just looking at the nature of order in the sense that the transparency's very appealing to me or to us, in that we're very transparent in what we do. We do what we say we're going to do and we've got our values behind and our morals and ethics behind everything that we do. So very big on transparency and then the fluidity's more around just getting set in one market. Much like Bruce Lee's famous quote. Don't get set in one form. Build your own and let it grow. Be like water.
So, we try and build our own firm and move with the markets, so we're not just stuck to investing in one particular suburb in Sydney but we do monitor all the markets Australia-wide and try and realise great investment opportunities across the country.
Mike Mortlock: Awesome. That's a pretty good quote from Enter the Dragon. That sounds like it could be a poster as well of yours.
Paul Sonntag: Maybe. I'd rather not say.
Mike Mortlock: Your website hints at the fact that future generations may need assistance from their parents to enter the property market. Is this an intentional point that you're making or is it just I guess a reference to the problems of affordability?
Paul Sonntag: No, it's more a long-term perspective. So, the Sydney housing market's gone up on average 7.5 percent year-on-year over the last 20 years. And even actually if you extrapolate that out of the last 35 years, it still achieved 7.5 percent. But using that, to project out over the next 35 years. If we look back from 35 years’ time to now, it's gone from a factor of five times average earnings to about 12 to 13 times now. If it continues in that same vein with average house price going up 7.5 percent and average wages going up 5.5 percent, as it has done over that period, it's a median house price of 14 and a half million and average earnings of half a million a year, so it's a 29 times average earnings cycle.
I'm not saying that that's going to happen, but even with recent reports from late last year suggesting that the median in Sydney in 2050 would be six and a half million, if it's anywhere between 14 and six and a half, even if it floats between five and seven, to then generate a 10 percent deposit plus the stamp duty to get into your first property, so by the average house. We think we've got it tough now. How's it going to be in 20, 30 years’ time, for the next generation?
Mike Mortlock: It sounds pretty crazy, when you put it in those terms. What I can remember not terribly long ago that people were saying, "Oh, well, the median's not going to be over a million dollars. It's sort of a psychological point that can't really be crossed. People aren't going to be wanting to pay more than a million dollars but that didn't turn out to be the case, did it?
Paul Sonntag: No, and that's the ... That beautiful quote from Albert Einstein. When it comes compounded interest, he who understands, earns it. And he who doesn't, pays it. And he claims it's the 8th wonder of the world. It's a powerful tool, if you can tap into it but if you don't and you suffer from it, and if you sit back and don't get into the property market and just sit back and complain year after year, the you'll just continue to watch it get further and further away from you, just from the power of it compounding year after year.
Mike Mortlock: And you got into the property market fairly young. I mean, how important is it to jump into the market as soon as you can?
Paul Sonntag: Look, the sooner, the better. I'd still maintain that the quality of the investment is important, so I'm going to ... A good friend of mine who I didn't know at the time but he bought his first property at 23. It was a one-bedroom apartment in Queenscliff but just didn't understand the due diligence process and bought into a building that was rooted with concrete cancer. He'd scrimped and saved and got into his first property years before his mates, and within six months of owning it, he was getting called for 35,000 dollars in special levies, and it sent him on the verge of bankruptcy by 25. He's now 33 years old. Doesn't own any property. He's scared of it. Started to work through some options now but it's really ... You might get in early but you've still got to buy well.
Mike Mortlock: Yeah. That's a real eye-opener, isn't it? And I'm guessing that plenty of his mates will be looking at that thinking, you know, this is maybe a fairly typical thing that can happen.
Paul Sonntag: And then you could imagine his disappointment now, looking at what a one-bedroom apartment in Queenscliff worth and seeing that hundreds and thousands of dollars in growth that he should have been enjoying but he's missed out. So yeah, getting in early is very important but still getting well is the most important thing.
Mike Mortlock: You're obviously big on research but planning comes across almost even stronger as part of your marketing material. Why is planning so important?
Paul Sonntag: When we sit down with clients first and ask them why they want to invest, we start by ... Our methodology is based around starting with the end in mind, so where do you want to get to? Do you want to just ...? You might be thinking about investing for the sake of investing and you start asking about capital growth, the yields, and almost every client says the same thing. That they want both. But it's sort of starting to tap into why. Why did they want one or the other?
And then when you start asking the right questions and needing out the right information, then you can start getting a feel of what's really driving them to do this and take this step. And if it's, when the absolute majority of who we work with, they're looking to good, long-term capital growth and then when you start throwing it around these scary figures of potential median house process for Sydney and other cities, then you can start realising that they need to be doing something for them but also for the next generation. If they're planning towards that, then at least it just gives them some perspective and purpose in what they're doing.
Mike Mortlock: Do you sort of work backwards from, say, an equity nest egg or retirement sum that they have in mind and what they need to do to achieve it or is it more of a lifestyle thing? How do you sort of come up with an idea about what the end goal is?
Paul Sonntag: We're working with financial planners quite heavily in putting a plan together with them so it's all covered across from their initial financial structure and then moving forward from there. And then as for I guess the lifestyle that they want to achieve, we can put basic sort of forecast in place and give them the very basic sort of snapshot of what it could look like with very conservative growth forecasts but we just, we don't ... Well, I guess certain growth rates but when it comes to forecasting and things like that, we don't want to ... we don't get involved in that side of things and it's easy just to I guess put a very conservative snapshot in front of them and if they like the look of the picture, then that's what we can work towards.
Mike Mortlock: And your job is to find the properties to help them get to that.
Paul Sonntag: Yeah, and that's why we really just concentrate on the property side of things. Like we've got great financial planners and mortgage brokers that we work with and refer to but when it comes to the finance questions, we just delegate that to the professionals and any tax questions, we delegate to the accounts that we work with and then, you know, and as it goes the other way, then any property questions come our way and we just ... We specialise in our areas and just keep it simple.
Mike Mortlock: Yeah, awesome. Now, you've got obviously a little bit of a background in the UK and you've drawn some parallels between the London and Sydney markets when they sort of were really taking off around 2013. What did the markets sort of have in common at that time?
Paul Sonntag: God, time does go fast. That was almost four years ago. At that time, we've seen both cities spiking. Seeing huge growth that was driven initially by international investment. A lot of it coming from China into both of the cities, but then also ... Yeah, London also had the added demand in the higher end market from Russian investment. So, the residential market had just sort of sat dormant, relatively dormant, for quite a few years. And then just sort of ... Yeah, through what we felt was mainly driven by international investment. Really got things moving and then you can say the domestic investors, the domestic occupies jumping on board and then that really got the market moving and off it went to enormous and one can argue unsustainable growth rates.
And then the other thing that was also driving it was record-low interest rates. Both countries had the lowest interest rates in the history of both of the countries. I think at around 350 years. History for England, I believe. This is three years ago. I put the article together and then Australia I think was 166 years old at that time. You know, this is record-low interest rates. Lowest it's ever been, so money was cheap. A lot of international investment driving the growth markets up, and then also interestingly, the rest of the country has just been left behind.
So, you know, England's really just a one-horse race, at least. Australia's a little bit more diverse with your Melbournes and Brisbanes but it's just an interesting time and then also London or England was a lot more progressive with their macroprudential tools that they were implementing from the Bank of England to slow down lending. Australia's doing that in varying levels through APRA and also now sort of bank to bank. I just found it interesting almost four years ago and still now. It's interesting with the parallels.
Mike Mortlock: It's easy to sort of think, looking at Sydney's double-digit growth over the last couple of years, that it's just an out-of-control market, but it did really sit still for a long time before the upturn, didn't it?
Paul Sonntag: People forget that. There's eight years of next to nothing and then very marginal growth and then the last three or four years have obviously been explosive but when you pull the pieces string out over that 10, 11-year period, the growth rates aren't that horrifying. That scary. It's one thing that we look at. The belief is that everything is cyclical. In order to ... some of those cycles are shorter. Some of them are longer. Some of them are more gradual and some of them are more aggressive.
Mike Mortlock: Yeah, and it's funny. We have the negative gearing conversation. We have the affordability conversation. Really on the back of that crazy growth in the last couple of years but those sorts of lines of inquiry were a bit dormant at the same time the market was, really, were they?
Paul Sonntag: Yeah, it's true. That's the thing. Everything's so reactive in Australia, especially with the lending and the government involvement and all that, I guess as it is worldwide. But I guess the concern is that, at the moment, it's not just that old basic economy and old basic market that we had 20 years ago, where prices had risen, you had increased interest rates, slow down growth, and it was just quite an easy seesaw but now there's a fair few fingers pulling the strings of the puppets that are driving this market and one's going to ask you if they're all talking at the same time.
Mike Mortlock: So I want to get into your special sauce. How do you select the regions that you want to invest in, and even the streets that you're looking to purchasing?
Paul Sonntag: We, I guess more for a macro perspective, picking suburbs. I've invented an analysis tool about three years ago which I called the Yield Curve Analysis, where we can look into any of the over 8,000 common suburbs in Australia and then divide them up into the housing market or the unit market and really see where they're at in their growth cycle and just see if it's going to be an appealing proposition for investors because our belief that investors start and stop all of the growth cycles, so we're looking for suburbs, particular suburbs and particular markets that are appealing to those investors that are then going to get in there, start buying, start driving up the prices, but we want to get in as early as possible and jump onto that early growth phase as soon as possible.
Mike Mortlock: How does the yield factor in to that analysis? Are you looking for, I guess, increasing yields where property prices are staying flat as a bit of a precursor to growth?
Paul Sonntag: Essentially, yes. We're looking at ... We don't want to, yeah. It's not a yield-based property. We're not trying to buy it for the yield but we're just looking to where investors are going to be looking. As an investor, do you really want to be buying at the end of a growth cycle where the yields might be three percent, or do you want to be buying at the start of the growth cycle where the yields are much closer to your five percent mark.
Then you look back on even four years ago in ... like the housing market in Blacktown, for example, four years ago. You'd buy in there and the yields were I think around five percent. But now you've had I think it's about 66 percent growth in the last two years in that suburb alone. The yields now are I think probably 2.8, 2.9 percent. As an investor, do you want to be buying there now or do you want to be buying there three years ago.
Mike Mortlock: Yeah, and that's a pretty good insight. Obviously, we're always looking for ways for our listeners to get a bit of an insight into the how the pros select properties so yeah. Interesting to hear how yield affects the potential of capital growth. What about getting down a little bit to the pointier end and in terms of the streets and even the properties? Is it based purely on demographics? What makes you pick one type of property in one street over another?
Paul Sonntag: Broadly speaking, obviously big on the basic fundamentals. The big thing is to steer clear from busy roads and noisy locations. It might be easier to buy these properties and you might save a bit of money initially but the long-term growth of these locations is heavily startled. I'd strongly suggest that people steer clear of those. But for us, we stick to the basic fundamentals. Strong location, close to amenities, and whatever else. But as for specific streets, my suburbs have got their good areas and not so good areas so it's having that local knowledge of understanding which areas in the suburbs that you want to be tapping into, realising which are the better schools. Obviously, if you can get within walking distance or a short drive to those schools. Even bigger again is transport and accessibility to the city. If you've got something with a walking distance to a train station. We love the streets that are near to those but not too close to then get the train noise and then breaking it down for specific streets.
A big one for buying on the high side of the streets when we're buying houses. We'd much prefer to have a ... you're buying on the high side of the street, you walk out of your back door and you've just got the land graduating upwards away from you. It's much easier to then be able to renovate and extend under that type of land. Plus, it's much more aesthetically appealing to walk out on to that back yard, as opposed to if the land's falling away from you and you have to then ... If you're trying to extend and the earth works and stilts and all that type of thing are a lot more expensive, so into something as simple as that. And then also the street scape and the street appeal of a home on the high side of the street is a lot more appealing. I would also look into ... Yeah, and then even looking into orientation. Ideally, if it's got a north-facing backyard for better accessibility of winter sun. And then also ideally having the master bedroom on the south side to then ideally cooler in ... cooler in the summer months.
That's probably more of a concern in Perth, where I started my career, where the summers are pretty hot. But looking at areas of Brisbane that we buy where it gets very, very hot through the summers. If we can buy something that's got the master bedroom position on the southern side, then at least it's going to be a little bit cooler for sleeping at night.
Mike Mortlock: Yeah, those are some really interesting insights, especially when you're looking at renovating and extending and the fall of the land and that sort of thing. You mentioned renovation as one of your potential arrows in the quiver or one of the strategies. Can you talk to us about how that sort of works?
Paul Sonntag: Yes. For clients and also for ourselves. My wife and I just bought our last, most recent property was in October, that we then renovated. But as also for clients, we've got all the trades and necessarily specialist at our fingertips for any level of renovation, even up to town planners and things like that for developments. For the renovation side of things, we find that when we're buying properties that need some love, it's less competitive in that market, compared to buying something that's already renovated. Obviously, unoccupied or investors can just get in and occupy the property immediately so we find that the unrenovated properties have got a smaller market, which is great for us. We're competing with less people.
Then just try to put something together that's got a bit of an edge. Like if we ... most of the homes that we buy in Brisbane are three bed, one bath homes. Obviously, if it's got a second bedroom. Fantastic. The property that we bought is a three by two, in an area that's typically three by ones. And just having ... and then we also actually bought a house across the road for a client earlier in the year, which is a four by one. So, having that extra bedroom is also a big plus.
Mike Mortlock: And that helps with valuations too, doesn't it? Because, I mean, the value is trying to find comparables, and if there aren't comparables with the same number of bedrooms, it can change the dynamics of that valuation, can it?
Paul Sonntag: Yeah, absolutely. And if you do the renovation well ... When I say well, I mean as cost effectively as possible, meanwhile maintaining the highest level of quality, especially in-line with that market. You don't want to be over-capitalizing and spending too much if your eventual rental prices are only going to be, say, 350 or 370 a week, you don't want to be spending at a level that you're expecting to get a thousand dollars a week in rent. Just renovating for the market, and then if you've done it well and you can look at even refinancing in sort of six or twelve months, like you were just saying, to have that strong evaluation to leverage of, fantastic.
Mike Mortlock: Yeah. I guess you're looking at properties that have less competition because they're not as aesthetically pleasing and you're looking at ways that you can inject a relatively small amount of capital and increase the rent and potentially the valuation and then, as you say, revalue and replicate perhaps.
Paul Sonntag: Exactly. Another big thing for our property selection is ceiling height. To look at a low set brick home that we don't typically touch. If it's got 2.4 high ceiling or 28-core ceilings. In order to give that more space, no matter how white you paint the ceilings and no matter how good your downlights are, you're never going to give the feeling of space than if you had 2.55 made of high ceilings and just as soon as you walk into that space, you've got a much better feel and ambiance to it.
Then the only way you could replicate that with a low-set brick home is to rip the roof off and lift it. Well, that's just a waste of money. If you want to buy better, buy something that's maybe a little bit older, that's got a bit more character. It's got high ceilings, so then when it comes time to renovate, then you sort of white the walls and repaint everything, it feels huge. That's when we finally can ... you can manufacture a lot of value compared to getting stuck with a low set brick home, as an example. There's only so far you can take that renovation.
Mike Mortlock: Yeah. I mean, that's a great sort of point for tenants. It's going to be more attractive for them but also, in the long term, I guess at the end you want an increased value so it's going to be a little bit more attractive to owner occupiers and value as they come in along the way as well.
Paul Sonntag: Absolutely. And if you can renovate and it can appeal to both the investor in the owner occupier market, then great. Our business or our strategy is never to sort of renovate and flip. But, at the same time, if you're renovating to a level that's appealing to both, then it's more likely that your value is going to walk in and be pretty happy with the result and give you the valuation that you're looking for.
Mike Mortlock: Well, it gives you that option, doesn't it? Either to dispose of it and do what you'd like with it, or to re-value and pull the equity.
Paul Sonntag: Exactly, and that's what we preach is to pull the equity out and go again and again and again and just slightly build that portfolio over time for them and also for the next generation.
Mike Mortlock: I was going to ask what areas you're looking at. You've referenced Brisbane. Are there other areas that you're looking at? And what is it about Brisbane that you see value in?
Paul Sonntag: A lot of our analysis is based on cycles, so we just see that it's ... We've been buying in Brisbane for three and a half years. We still see parts of Brisbane as good buying, when we make the comparison to other parts of Australia. The other appeal to Brisbane is I guess the sheer size. We use the analogy of a Sydney, Melbourne, or Brisbane. You imagine a big cruise liner going through the ocean compared to a tug boat, which might be a much smaller market like a Darwin.
Once a cruise liner starts going in its path, you've got an idea of which direction it's going a lot better than a tug boat that can obviously turn on itself quite quickly. This is not to say that markets don't move very quickly, and we're seeing collapses in other parts of the world but you've got a bit better idea of where things are going in the bigger markets, which appeals to us, the Sydney, Melbourne, and Brisbane.
But then obviously Sydney and Melbourne have had such explosive growth over the last few years. The Brisbane market still hasn't had that and we're certainly not sitting here saying that it will have similar growth but looking at the averages over the last 20, 30 years of growth rates, compared to what is done over the last five years and eight years, it is so far below the historical averages. Our belief there's still a fair way to go.
Mike Mortlock: I mean, sticking with your metaphor of the cruise ship, obviously, there's some inherent problems with the bigger markets as well, isn't there? Because I mean, you've got the upper decks, where there's affluence and everything's going well, or you've these little sections where the chappie from the Titanic was hanging about. What I'm getting at is there are pockets of Brisbane that are doing very well and pockets of Brisbane that aren't doing very well at all. How do you find those parts of the market?
Paul Sonntag: We've got that Yield Curve Analysis that we've developed is very handy. The big thing at the moment of knowing where not to invest is mainly based around supply levels. If you can avoid areas with the highest supply, whether it be in the units market or the housing market, and then looking at how it's performed over the last few years and certainly our analysis tool that we use is very handy for that then. You start getting an understanding of whether it's a good buy or whether you've potentially missed the boat. If it's performed well over the last 20 years, then an average of seven and a half percent year on year but over the last two years, it's already jumped up by 25 percent, then we're probably arguing that there's other areas that we could target that could still get a better short-term growth for clients.
Mike Mortlock: Getting on to supply, obviously, there are potentially supply problems with the unit market, especially in Brisbane and even just in general with the amount of stock that can come on to the market in a relatively short time frame. Do you steer completely away from the unit market in the places where you're looking at property?
Paul Sonntag: Depends on the city. So, we buy units or apartments in Sydney. In certain parts of Sydney. In the suburbs that we've targeted that are tightly held and you don't have the-
Mike Mortlock: More the lower density type suburbs.
Paul Sonntag: Exactly. You look out over those suburbs and you don't see towers of 20, 30, 40 story apartment buildings. Their tightly held and we like those, as long as they line up with the other fundamentals. Our other fundamentals. And then like Brisbane, we don't touch any apartments there because even the ... You've got the over-supply in the city but then our agents that we ... The selling agents that we work with, they're having issues moving apartments 8, 10, 12, 15 kilometres out from the CBD. So the whole apartments market is really struggling. We just don't touch it but then we just tap into I guess the long-term belief of land scarcity and that's why we just buy houses there.
Mike Mortlock: You also gave another insight into your strategy just a little while back, and that's buying under the median price. Why is that important?
Paul Sonntag: Well, we don't want to be the front runner of price in a suburb. If you're buying 10 percent over the median for a suburb? Yeah, sure. It might be a more premier property, whatever else, but we don't want to be the property that has to then pull up the other properties to that level. We much prefer to be under the median and then getting pulled up. I guess it's a lot easier to be pulled up than having to be the one that's pulling someone else up yourself.
We just keep it simple. If we can buy sort of five, ten percent under the median, that's ideal. That's a great way forward. The belief is that even if the market continues to go in a moderate fashion, you're still going to be well ahead, and then that's also why. Under the median, it might need a little bit of love, a little bit of renovation, but for a small investment into renovating, you can then hopefully take it to at least the median, if not above, and then you should have some good equity that you've generated to then be able to leverage off and buy again.
Mike Mortlock: And it comes down to affordability too, doesn't it? Because, I mean, there's more competition at the lower end of the market. So ideally, the more competition you have, the more opportunity you've got to sell at a premium, so sort of thinking of the buyers as a pyramid. At the top, you've got this six and ten million dollar properties that there aren't a tremendous amount of people that can afford to buy but sort of getting down towards the middle and under that median. It's that competition that makes it an attractive investment, isn't it? Is that what you're referencing?
Paul Sonntag: Well, we're referencing probably more on that competition side because we're not looking to sell but we are obviously looking to rent. In those markets, we don't like going too cheap. The further out you go, the lower the historical growth rates, the lower the rates are going to be that your investment's compounding at year in, year out. We don't want to be too far out, so just finding that sweet spot in the middle and then also having it be at a level that it's reasonable to rent.
So that's where you're tapping into that lower-middle section of the rental market than the pyramid that you're talking about where you've got a really strong long-term rental demand with lower vacancy rates, so you can rent the property quickly. If you've always got that in place, then if you do need to on sell it to another investor, the demand should be there because you can rent the property. But it's when you're stuck with something that you can't rent out and then you try and sell it and then an investor doesn't want to buy it because you're not able to rent it. But then you can't actually sell it to an owner occupy because it's not really an owner occupy property, then you're stuck with this lemon.
Mike Mortlock: In terms of the properties that you're looking at, you've specified some components of the properties that you're looking at. The high ceilings, the number of bedrooms. How important is the emotional side of property investing, and is that something that you have to overcome with your clients?
Paul Sonntag: Yeah. No, we try and cut that out immediately, to be honest, and that's one of the reasons that people should go with buyer's agents to invest, especially when it comes to investing is to cut the emotion out of it. A lot of our clients analyse properties with us and then the immediate response is, "Oh, I can see myself living there so I think it's a really good investment," but that's not what it's about.
It's trying to work out if the people, your target market, your tenants, are going to want to live there. And if they do, then great, and that's what you really need to worry about. I think having a good buyer's agent that can take the emotion out of any process, whether it be buying your home or your investment, you've just go to keep your emotions at bay and really just go with the data and the numbers because that's what it's all about. You're not looking to feel better about yourself in five or ten years. You're looking to make money.
Mike Mortlock: It all comes down to treating it like a business, doesn't it? Is that sort of the one piece of advice that you would give to property investors, is treating it like a business?
Paul Sonntag: That's part of it. I guess my main suggestion would be just to keep it simple and realise that everything comes back to supply and demand. If you can keep it simple and find those areas of limited supply, meanwhile in those areas that are boasting strong to market tenants and perspective buyers, then you should be fine. Obviously, if you can do that in conjunction with being unemotional about it and treating it like a business as you said, then I think you're going to be going better than most and hopefully you'll fall into the category of not being one of the thousands and thousands of Australians that only buy one property but tap into the segment that buy multiples.
Mike Mortlock: That sounds like a pretty good way to wrap up there, Paul. How do people get in touch with you if they want to get in touch with you?
Paul Sonntag: They can just through our website, which is at Aquus.com.au. Otherwise, all our contact details are there. Otherwise, they can just reach out to me. Obviously email or phone. Yeah, we can organise for a coffee in the lower North Shore or via Skype if they're elsewhere in Australia.
Mike Mortlock: Awesome. Appreciate your time, Paul. Thanks very much for joining us.
Paul Sonntag: My pleasure, mate. Thanks for having me.
Mike Mortlock: Cheers.
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