Presenter: Ed Nixon of Trilogy Funding
Guest: Chris Gray
Guest Bio: Chris Gray inspires individuals with the thought that to make real wealth you need to do the complete opposite to what everyone else is doing.
At the age of 22 Chris Gray began his journey investing in real estate with a deposit of $35,000. By age 31, Chris had turned his initial deposit into a $3.5m property portfolio and left his full-time job as an accountant at Deloitte’s for semi-retirement. Since then he has more than tripled his personal portfolio to well over $10m and now builds property portfolios for time-poor professionals through his Buyers Agency ‘Empire‘, searching, negotiating and renovating on their behalf.
Chris is a host on Sky News Business Channel’s ‘Your Property Empire’ and features in major business press and newspapers. He was also the Property Expert on Channel 9’s ‘My Home’ and most recently seen on ’60 Minutes’ and guest judge on Channel 10’s ‘The Renovators.’
Chris Gray discusses the different types of properties to assist people in deciding which type best suits their investment interests. To choose from direct or indirect, residential versus commercial, industrial or retail property – one has to consider the positive and negative sides in order to come up with the best decision and Chris Gray is here to enlighten us through his expertise and experiences in real estate.
Health Professional Radio
Ed: Hello and welcome to The Property Show. I’m Ed Nixon from Trilogy Invest Property Funding. Today I’m interviewing Property and Wealth Creation Expert, Chris Gray, to get latest tips and ideas in creating more freedom of choice in your life. Chris is the host of Your Property Empire on Sky News Business Channel and is also the CEO of ‘Your Empire’, a buyers agency that builds property portfolios for time-poor professionals. The title of today’s show is “What Type of Property Should you Buy – direct, indirect, residential, commercial, industrial or retail? Welcome Chris.
Chris: Hi there Ed. How you doing?
E: Well, thank you. So Chris, once people have made a decision to buy property as a wealth creation vehicle, the next question is what type of property should they buy?
C: Ed, look. There’s a whole bunch of different properties and you kind of lifted them there. But you spoke briefly that Direct and Indirect really means kind of – is it something you gonna own yourself, kind of like your home or is it Indirect like something in a Trust Fund or something like that. And then once you then get into that kind of property, then it could be Residential, Commercial, Industrial or Retail. So certainly, quite a lot of choices for people.
E: Okay. So let’s talk about Direct Property.
C: Okay. So, typically this is something that I call – it’s when you own it or control it, a 100 % yourself. So something like a home, a holiday home or maybe an investment. So, I quite like Direct property because it’s reasonably safe because you’re managing all the decisions and if your lifestyle suddenly changes or something financial, you can directly do something about it. You’re not relying on someone else. And so quite often for people buying homes, generally they buy homes very well because they’re actually gonna live in it, they’ve compared lots of other properties and so generally they buy pretty well. Now, the only downside about buying your own home is everytime you upgrade, it costs you 2 to 3% of its sale or maybe 6% to rebuy another one. So that’s the only thing I’m not keen on that. But look, if you’re buying direct property, if you buy the right one in the first place and hold onto it, then ideally through re-financing – which obviously brokers like you can explain that kind of thing – is certainly you’re not paying a lot of in and out costs. And look, you might be able to leverage maybe 80 to 95% on residential or maybe about 70% on commercial.
E: Yes. That’s pretty much correct as far as funding ratios go. So Chris, what about Indirect Property? Explain to me what indirect property is.
C: Yes. So indirect property is generally when they talk about when you invest in a trust. Like a real estate investment trust which is usually called “REIT’s,” and so it’s almost like buying a share. You can buy one for maybe a few dollars, save them and if you have a few hundreds or a few thousand dollars, you can get into it. Whereas often with direct properties, you are buying the whole thing which might be five to six hundred grand plus. And I guess the big downside is because you’re only buying a portion of it, it’s not really under your control. Someone else who’s choosing what property to buy, someone else is managing it and dealing with the tenants and all the cost, and you don’t necessarily have a say in exactly what’s gonna happen. And so I think, and this is where the GSP is going to show this, the share market or the trust market can change almost overnight because suddenly the big end of town is suddenly valuing it differently or they’ve suddenly seen the economy slowing down and so suddenly they’ll revalue all of those trusts. Typically, that won’t happen when you buy a main family home. So I think when you’re buying into these trusts, you really need to look at the management of the trust, the fund managers and the people actually managing the property because that’s gonna really dictate how well it goes. And suddenly if the value of the trust goes down, you might get margin calls, and again it’s all in the GSP, you could easily drop 50% off your value just by changing the economy. So where you’re buying direct properties, you might gear it maybe 80 – 90 – 95% on residential. With REITs, maybe you’re only gearing about 50%. So your hundred grand’s only buying two hundred grand’s worth of the assets rather than maybe five hundred grand in residential.
E: Yeah. A lot of it comes down to, like what you said with the margin, the ability to leverage but also to who’s actually driving the trust, who’s running it, what’s their tract history? Whereas when you’re buying direct property yourself, you’re controlling that, you get the wins as well. So yeah, I think with the REITs, there can be some risks involved there. What are your views on joint ventures and property syndicate ventures? Expand a bit from REITs to those.
C: Look, I guess they can be a mixture of Direct and Indirect type of Investment. In the main way for me, again, is you’re not really controlling it.
E: No you’re not.
C: So quite often I get to hear these things like three or four mates ring me up and say that, “We’re thinking about investing. We’ve got a lawyer friend, we’ve got a builder friend, we’ve got this friend and that friend. We’ll connect, combine our expertise and gonna do some investing.” And I said, “Look, you’re opening a whole a can of worms there.” And probably you can tell the listeners what it’s like to have three or four different people on mortgage. I mean, how complicated is that?
E: Like mustering cats or herding cats and it’s not just that. I mean, that’s just more paper side of things and communications as the transactions are going through. But look, my experiences have been is that many of the syndicates or joint ventures – and let’s have a defined timeline on them. Ten years is a long time. What are you doing in ten, twenty, thirty years’ time when someone’s past away or other parties can’t buy them out, divorces. There are all sorts of variables that go on. I think joint ventures are okay if you’re a bit of a sophisticated investor and you understand what both parties want to achieve and the timelines. You might buy a development site, you might want to build four townhouses on there and then choose to buy, develop and sell all four and the timeline might be 24 months. You know, that’s foreseeable future than to buy and hold for into the never, never – cracky. How many of our friends have we seen over the years get divorced and all that terrible stuff.
C: Terrible… terrible stuff.
E: Yeah, it is. That can be difficult to put together. So, that’s direct and indirect. I mentioned earlier about some of the other options. Let’s explore some of those which was Residential, Commercial, Industrial and Retail. What are some of the main reasons why you’d want to invest in residential, Chris?
C: Okay. Well look, I think this is the easiest form of property investing because it’s generally pretty stable. We all understand it and once it’s residential, it’s nearly always residential and people don’t move in a hurry. So see, you got a GSP, people don’t suddenly move out of the home so generally they’ve still got jobs. And even if they live their jobs, they will do whatever they can to afford to keep the roof over their heads. And that’s the thing that our families in the UK where a lot of people thought the market is down 30 or 40%, while in the good areas it wasn’t because people still have the jobs and they held onto those properties. So even though no one was buying, if there’s no one selling then the price didn’t really drop off. I think the other thing is suburbs are made up of thousands of individual properties and they’re all owned by individual owners. Whereas suddenly if you are, I guess, buying into shares or buying into big office blocks where there’s a hundred or two hundred towns in there, then certainly that’s gonna be owned by big conglomerates that suddenly make massive decisions and so one big decision could affect the whole of that building.
E: We could make comments around – we’ve seen the retail industry change so much. So if you had a shopping center and you’re relying on retail for those internet investing in retail shopfronts could be seen as quite risky.
C: Oh, a hundred percent. So we know places like Paddington and Sydney and I’m sure in Melbourne and Perth and Brisbane are about the same thing. It’s suddenly one minute it’s all retail shops, then something comes along and then suddenly changes completely straight away. Well that typically doesn’t happen in residential unless it’s potentially a one-industry town – so like a mining company or big manufacturing powerplant or something like that. Or say, you’re in farm areas and then suddenly the weather changes or something like that. Or say, like a town where they’re all in government or army or camp, then one change of industry can literally massacre a commercial or residential property.
C: And I think that with the banks lending it up to 95% on residential, that’s really is a great sign that they believe in it and then not overly worried about it.
E: Banks are risk adverse, aren’t they? They’re not going to loan a business owner, for example, 95% the value of what they think his business is worth and then you get some franchise models. But they’ll happily give to a young health professional or a nurse or anybody else, 95% to go and buy a house or investment property. That’s because they believe that their asset class that they’re buying is rock solid.
C: Exactly. And so look, I think the main return in residential is, ideally, you’ll be wanting a 4 to 5% yield. If you’re buying in the inner cities, maybe 5 to 7% plus regionally. And again, for capital growth, no one can guarantee what you’re gonna get but ideally you’d be looking at 7 to 10% growth in the inner city over the long term and might be slightly less regionally. So again, it’s gonna cover most of your mortgage and as long the market moves to 3% then generally you’re gonna make a profit.
E: Okay, so that’s residential and the reasons why invest in residential space. What about why would you invest in a commercial, industrial?
C: Yes. Look, I kind of mixed them altogether, but obviously specialist in those areas would say they are all completely different. So, I think the main thing about Commercial, Industrial and Retail is it’s pretty much done by the big end of town. It’s generally reasonably expensive to get in. Sure you can get some starving units for a couple hundred grand, but most of the big properties are of tens of millions of dollars. And because, I guess, it’s done by the top end of town, generally they’re valuing it by yields. So they look at the future income, they discount it and then say, “The property’s worth that because I’m gonna get extra dollars per month in for the next 10 or 20 years. And so suddenly on the positive side, if you want to create a lot of money and then you’d find a derelict building that’s got no tenants, no income stream and you can get it cheap and then you can put tenants in there with a massive income thru over 10 or 20 years, then you can probably double or triple that building’s value almost overnight.
E: And I think Chris that a classic example of that is Harvey Norman. You look at them and they’re generally in industrials areas or commercial areas. They put a big shed on it, they fit it out nicely and then all of a sudden it all becomes retail and they can charge tenants a larger amount of money to all individual tenants in there.
C: And then look, a lot of shops are going to be around in that same area because they know they’re gonna get traffic in as well.
C: That’s the thing. So that’s where a lot of people make a lot of money, but just as they can be positive they can always on the negative as well. And again without bring up the GSP too much, then that shows us kind of what they could be like. So, I think with all those fluctuations and then suddenly having a more expensive entry point and suddenly where tenancy – suddenly you might not have a tender for a couple of years, most Moms and Dads and even health professionals or accountants, lawyers, doctors – they generally can’t afford going further down because they’re spending the majority of what they make in what they do best in their own professions and so unless they’re really an expert on what is of massive interest, I think it’s generally pretty much too hard for them. And look, maybe you can get 5 to 10% yield there or maybe 5% growth – that’s kinda almost the opposite to the residential side. I just typically find that, for those whore are specialists, it’s probably not the right thing to get into.
E: Yes. And here look, there’s also a lack of tenants too. How many times have you driven through pass through country towns and you’ll see a vacant property and just by the look of the sign that’s on the window, you can tell that it’s been vacant for years because it’s all faded and there’s fallen hinges or whatever the case may be. The curse is on the owners, they’re bleeding cash withholding those assets.
C: And that’s why the bank would typically only lend 60 – 70% because they realized it’s more risky and so they are not willing to lend as much on it.
E: Yep, that’s right. That upswing could be great but also the downswing could be equally as negative as well. So Chris, what do you prefer and why do you prefer it?
C: Yes. So look, I’m pretty much an Armchair investor. Even though that’s my specialty, that’s what I’m doing in all day, I don’t wanna have to read the newspapers. I don’t want to have to predict the future. I want an assessment to get on this stuff and if I can get five to ten percent capital growth forever, then I’m generally pretty happy with that. So probably investing in residential property for, say over 20 years, ideally I would want my properties to double roughly every 7 to 10 years given that that’s what they have done so far. And so my typical strategy, and again, we’ll talk in about in more detail on one or the other interviews, about exactly what property buy and why? But generally, by buying near the capital cities, medium sized properties – 80% of the population can afford to buy and to rent. I generally find that pretty stable. The banks generally love it. They’re happy lending money on those things, subject to feasibility. And to those buying the property, look at it once a year, re-finance once a year and then come back the next year and in the meantime just go and relax on the beach and watch for years as the sunrise unfolds.
E: (Laughing) I like your thinking Chris. I like your thinking. So many thanks Chris for today at joining me.
C: Wonderful, anytime.
E: And look, if there’s anyone who would like to know more about what Chris does, get to his website yourempire.com.au. Chris has written a good little book which give you more ideas about property investing and wealth creation, it’s called the “Effortless Empire.” It’s basically written for time-poor professionals and show them how to build wealth from property. You can download it from his website. Of course if you’d like some more help with your funding on your property portfolios, simply get to trilogyfunding.com.au. Until next time, this is Ed Nixon.