Australia's attractive negative gearing rules seduced French-born Philippe Brach into property as a wealth-building strategy, and he's certainly not looking back!
When Philippe Brach arrived in Australia in 1997 at age 36, he'd hadn't made any plans for his retirement, nor did he have any superannuation. He had been an expatriate for many years and had a successful career in finance which had taken him all over the world. He and his wife had now decided to settle in Australia. His investment options came down to three choices - cash, shares or property - but he decided to invest in property after learning about negative gearing and the low volatility of real estate prices compared to shares. After a bit more research he discovered that only three countries in the world gave extensive negative gearing provisions: Canada, New Zealand and Australia. On learning this, the advantages of property investment in Australia became obvious to Philippe. "If you look at the numbers, in Australia it doesn't make sense not to have an investment property if you've got a job," he says. "It was clear to me this was a great opportunity to use this (near) unique tool for wealth creation."
Eight years later, Philippe's portfolio of 12 properties is worth more than $5 million.
Although he had done little planning for retirement, the French-born Philippe did have some decent savings, which made his first foray into the property market relatively easy. In 1998, he purchased the property that would become his family home in Engadine, a suburb bordering the Royal National Park in Sydney's southwest. He paid $392,500 but today the property is valued at over $800,000.
"Having been an ex pat for so many years, I actually bought it with a very small mortgage - so I had plenty of equity in it," Philippe says. It wasn't until he and his wife had settled into their new home that he began to think seriously about property as an investment. Philippe was, however, on the lookout for a way to fund his retirement and he was encouraged by the leverage offered by property investment. "If you want to create wealth you really need to leverage and property offers you that," he says. The promise of a steady return and manageable risk were also attractive to him. "Once you crunch the numbers, it's a no-brainer as far as I'm concerned," he says. "Unlike shares, property price volatility is a lot more subdued and overall risks are manageable with the right strategies in place. And historically, the growth has always been there. Low volatility in property prices is a huge comfort. 100 per cent of people trading in the stock market are investors. So when there is bad news, everyone sells. In the property market only 30 per cent of buyers/ sellers are investors. The other 70 per cent are owner occupiers. They do not sell when they hear bad news, they just stay put but this, combined with low liquidity of property, makes property a lot less susceptible to sudden price swings. Once he had made the decision, Philippe began to educate himself about real estate and financing options. Not content with going along to property seminars and reading countless books and magazines, he even became a licensed real estate agent just to get to know more about the processes involved in property transactions. "I did a real estate licence course because I wanted to understand how real estate works," Philippe says.
"I had heard so many bad things about real estate and two-tiered marketing that I wanted to understand how real estate agents think". After doing his homework and speaking to mortgage brokers and other professionals, Philippe put together a strategy. "I knew I wanted to build a portfolio and have 12 properties of about $5 million to get me where I wanted to go," he says. "Once I made this plan fit with my current circumstances, there was no fear - I just went for it."
THE FINANCING STRATEGY
Philippe was confident, but he knew that fitting such an ambitious strategy into his life would mean some serious financing. So, he took out a $500,000 line of credit on his home, intending to use it to cover all 12 properties. "That was my day-to-day account on the investment property side because lines of credit, as you know, are fully transactional," he says. "I calculated that if I wanted to buy my 12 properties I needed that much cash." Philippe planned to buy all properties at an 80 per cent loan to valuation ratio (LVR), but with $500,000 this was unachievable. Nevertheless, rather than start off slowly, he decided to continue with his original plan and began buying at 90 per cent LVR instead. While this meant he had to pay mortgage insurance, he calculated the additional cost would be equal to six months' growth, a sacrifice he was willing to make. Once the line of credit was approved, Philippe went on a 'shopping spree', starting at the end 2003 and buying five properties with in six months. "I just divided the line of credit into the number of properties I wanted to buy and left a bit of a buffer for ongoing expenses," he says. Philippe still uses a line of credit for his investment properties and the strategy remains the driving force behind his portfolio. "It's my day-to-day account, so all my expenses come out of this line of credit and all the rent goes back into it," he explains. "The line of credit slowly increases with the amount of shortfalls because of the negative gearing. The key is monitor and ensure that your portfolio equity (value less debt) keeps increasing over time. This is how wealth is created. "This was the initial strategy and is still the strategy today." As for selection of the properties themselves, Philippe has aimed for a good mix of capital growth and cash flow. With his target of 12 properties in mind, however, he also needed to be mindful of holding costs. "I had to be careful that I could continue to service each property," he says.
LOOKING TO THE SUNSHINE STATE
Armed with his $500,000 line of credit, Philippe turned his investment eye north to the state of Queensland. His first investment property was a villa in Calamvale, midway between the Gold and Sunshine Coasts, for which he paid $190,000. That was at the end of 2003 the property is now worth $385,000. At the time, large numbers of people were migrating to Queensland from NSW and Victoria, creating a big swell in the state's population. Queensland's diverse regional centres were also an attraction to Philippe. "When you talk about investing in NSW in the current market, you have Sydney and if you're pushing it, Newcastle - that's it," he says. "In Queensland, you have true regional centres. The State Government have decentralised to places like Townsville, Gold Coast I Rockhampton, etc .. ," Philippe also found himself increasingly attracted to Queensland's strong infrastructure development. "To me, infrastructure is by far the biggest driver of property growth," he says. Land tax charges in Queensland, compared to those in NSW, were also a lot more competitive than in NSW. "With the 12 properties I have now, my land tax bill is around $3,000.If I had the same portfolio in NSW, the figure would be frightening'" he says. Following the purchase of the Calamvale property in late 2003, Philippe bought another in May 2004, two others in August and a townhouse in September 2004. That last purchase, a three bedroom townhouse in St Lucia, would prove the most challenging but also a very profitable one.
A RISING TIDE
The flooding in Queensland over the Christmas and New Year period caused massive destruction and unfortunately, the St Lucia townhouse was not spared. Located in a bend of the Brisbane River, the city suburb stood little chance and the floods caused $30,000 worth of damage to the property late last year. "This is why I keep telling my clients to always keep a buffer when they invest in property" Philippe says. "I was lucky because I had a line of credit in place, so as soon as the property was dry again I could pay to organise a builder to come and sort it out." Philippe had bought the property, located in a small complex of 12, for $370,000 in 2004. Today it is valued at $530,000, probably a bit less after the floods, but time will fix this. Once the flood damage had been repaired, the townhouse was the first in the complex to be occupied once more by tenants. Philippe had been on a business trip to Brisbane when the townhouse caught his eye. The tenant, a local coffee shop owner, was paying $380 per week. Soon after Philippe took over, the coffee shop owner stopped paying rent and was soon evicted. Philippe then looked around and saw an opportunity in the nearby University of Queensland. He approached his agent about getting in students as tenants and within weeks three students were paying a combined rent of $530 per week! "That was a month after I settled on the property, so it was automatically cash flow positive from day one," he says. The current tenants are paying $580 per week, but their rent might reach $600 due to the shortage of rental properties in St Lucia follOWing the floods. "The student market is different" Philippe says. "You've got three people paying rent and they can usually afford more than one coffee shop owner can. "What happened is that when I bought that property [the then owner was] targeting the wrong market."
WHAT NEXT? Since Philippe's 'shopping spree' between 2003 and 2007, he has been content to sit back and let his equity grow. "The line of credit was finite and I knew at some stage I would get to the end of that cash. "I wanted to see some capital growth happening before I went ahead and did some more" he says. Philippe has now built up $I.5 million worth of equity in his portfolio and its average yearly growth is 5.6 per cent. "I could have done better, but to me that's fine ," he says. "In equity terms it's just going to accelerate because of the compounding effect of capital growth," he says. With his risk now reined in, Philippe hopes to make some new purchases soon. "I keep saying to my clients that the most important thing is that you need to be able to sleep at night and that is the position I am in," he says.
PHILIPPE'S TOP INVESTMENT TIPS
BE PROPERLY MENTORED
Surround yourself with a team you can trust. If you try to do it alone, it could end up a disaster.
SEEK PROFESSIONAL ADVICE
Don't listen to family members or friends with good intentions who aren't property investors themselves.
Even if you're being helped by a professional, it helps to do your own research to get familiar with the advice you are being given.
If you decide to use a line of credit, you have to be quite disciplined and make sure spending doesn't get out of hand. Regularly monitor property growth against debt.
Don't wait for properties to become cheaper tomorrow. The only time properties were cheap is yesterday. Make a decision and go for it. Don't procrastinate!