Investing In Positive Cash Flow Properties In Rough Areas (Ep102) – Interview With Ben Turner
If you are interested in investing in positive cash flow property or maybe you’re looking into investing in areas that are a little bit rougher then where you usually live. Well today I sit it down with Ben Turner from iPropertyInvestor.com.au and we discuss his investing career which has been very successful where he has invested in positive cash flow properties, negatively geared properties and also properties in the United States.
So I sit down, I talk him, I ask him about his investment career and then we go into more detail about investing in rougher areas. So here we go, let’s go straight into the interview with Ben Turner.
I’m really excited to have Ben here. We met, I guess he found me in one of the property forums and then we’ve been conversing over email and found out that Ben actually had a very successful property career both in the Australian market and now in the US market as well.
Ryan: So I really appreciate you taking the time to chat with me and to chat with my listeners today Ben.
Ben: Thanks for having me Ryan.
Ryan: Yeah, no worries. I just figured just so everyone can get to know you let’s start with your story, how did you get started in the property market in Australia or in the US?
Ben: Okay, in brief basically I was serving in the military or in the Army for about 11 years and in 2006 I was at seas, I was in Iraq with the army obviously and my father he sent me a book which I’m sure you are familiar with which is ‘0 to 130 properties’ by Steve Mcknight…
Ryan: That was actually the book that got me started in investing or looking into positive cash flow properties. So that’s a pretty… that book is very close to my heart too.
Ben: Yes and I’m sure a lot of your viewers as well can now relate to that. But before that I was pretty bad with money. I actually had a pretty decent job. The army covers a lot of your IV heads as you can imagine- accommodation, food, things like that but I still managed eat nice and to drink away and party away my paycheck at age 49. And once I read that book it just made sense to me, I’m like single, I’ve got all this money coming in because you get pay quite well especially since it’s tax free money. So I thought hey this sounds good, I certainly had the deposits ready to go from the deployments and things like that so I just out from there.
Ryan: So 2006 was when things really changed for you after reading that book. How long was it between reading the book an actually going ahead going ahead and making your first investment?
Ben: Probably about less than six months because I read the book when I said I got IV there, it could be seven or six months to this. By the time I got back I obviously had the money and a bit and knowledge so I thought I was ready to go, so at the end of the year and I was like you was right, into positive cash flow property. So at the time I found a lot of it down in Tasmania so I immediately once I got back jumped on a plane, shot down. I had some relatives down there, stayed with them and obviously I purchased my first property from there and my second one as well down in Tasmania.
Ryan: Okay so tell us a little bit about the Tasmanian market. Obviously you went there because of positive cash flow properties but was there anything else that drew you there and talk us trough your first experience about going to those open houses, how do you know which property to peak?
Ben: At that time I was just after rental yield so I had an…I obviously I wanted a cheap property as well so I just started looking at around Hobart area and I started on a unaltered housing commission in suburb called Rokeby and I purchased a little one bedroom unit that had been rehab, obviously developer or someone was coming bought the whole block and rehab them. And it was selling for about $85, 000 with a rental guarantee and I just said ‘look about that rental guarantee can you meet me discount?’ and he sold it to me for $84,000 and it was, from memory, renting about a $140 a week at the time so it was it was a positive cash flow.
Ryan: Yeah and so then you went on to buy a second property what, within the next 12 months or something like that?
Ben: Yeah absolutely. So within probably less than 12 months again I broad to the town house in another suburb, in the northern suburb, it was called Clairmont. From memory I think that was a $195 and I think is was running for about $250 a week. I think that was at the time actually that was brought on neutral maybe just slightly under. As the Tazzy had a big property boom down there around leading up to this and I didn’t realize it at the time with my inexperience I was actually buying at the peak so, I don’t know if anyone remembers but a lot of properties doubled and tripled down there from the early 2000’s that had a big city property boom it sort of raided out an peaked probably around ’06.
Ryan: Right when you’re getting into the market was the very peak at the market which is probably not the ideal time to get into a property cycle, would you agree?
Ben: Yeah absolutely, absolutely. Obviously you had from a cash flow point of view, so that would be safe with me, it would be worse if it was heavily negatively geared if you are living alone. At a time I met my wife as well, She was also based in Sydney so she was into properties as well so then we started buying some things in Sydney as well. I got a little bit of growth focus there, I’ve lost my way a bit, moved away from positive cash flow and started buying some negative geared properties but those were **** one-bedroom apartments and things like that in Sydney or two bedroom units at near the airport and I did really well out of those from a growth perspective and the rents eventually did catch up and they became cash flow neutral/cash flow positive. But yeah, it was a bit touching go there sometimes when interest rates were pushing up, I got a little bit stressed and that’s when I and she actually began to sell a couple of them off. That was the feel back in that time and then obviously GFC was…I don’t know if you remember the poverty GFC the interest rates dropped right down but then they started creeping up it was at that time when I started flicking them off an obviously they got back down again.
Ryan: Talk us trough that time where you went from, you bought these two properties in Tasmania, you realized that you bought them in the peak of the market, probably no capital growth potential in the near future. How did you then go from that point and purchase more properties? Did you save more deposits yourself through your work with the military or how did you go about getting into more properties?
Ben: Yes actually that’s a good point, I should have mention that. I was just doing multiple employments with the army, I was going to stay more back and forth and a few other places and plus you often do a large training blocks in the army so you got a way of saving a lot of money that way. Also my wife was a bit of a saver as well so we were using obviously her money as well as deposits and things like that. So that’s why we didn’t really run out straight away of money for a deposits. And because I had a government job my wife had a full time job, we didn’t have a problem getting mortgages, getting finance. But that’s another reason why I started buying in the city market and things like that which I thought was undervalued at the time which looking back now what it was undervalued. And I did get the capital growth and that’s when I did start doing you know what most property investors would do- getting loans of credit and equity loans until they program to the next property.
Ryan: So you said that when you invested in this Sidney properties you lost your way a little bit moving away from positive cash flow. But from the sounds of it you got pretty good capital growth. Why would you say you’ve lost your way, or do you see them as successful investments or do you see them as kind of not moving in toward your goals the way you would have wanted?
Ben: On one hand yes, it was a good if you look at the capital appreciation. I think one of my best ones, I had one bedroom apartment in Sorry Hills. I sold less than 2 years later, didn’t do anything to it and I made about 130k on it – you look at that think that was good, but then when you look again you say ‘hang on’ – the pain of being negatively geared and having to find the money – pulling money out of your paycheck to put on to negatively geared properties – it’s sort of a short term pain for the long term to gain. My goal is always to step out of the workforce and I started realizing as interest rates pushed up, I think at the time me and my wife owned a combined of $1,800,000 and a quarter of percent interest rate or half percent interest rate – you do feel it when you’re borrowing that sort of money and it just became very stressful at times. Then I realized this isn’t getting me close to stepping out of the workforce, I had to work more because I was making to repayments.
Ryan: So you had to work more your properties. That’s what a lot people don’t think to look at property in that way because here you are, everyone looking from the outside see in you a very successful investor – $130, 000 on one property in 2 years is nothing to scoff at, but you realized quite early in your investing career that ‘well even if I’m gaining money with it, it’s not actually moving me towards the lifestyle goals that I want.’ So when did you make the turn away from this negatively geared properties towards positively geared properties again and how you’ve gone since then.
Ben: Well I’ve always had interest in positive cash flow properties, researching… And I was actually researching the US market around this home at the GFC, I’ll go into that a bit later. But yeah, I’ve always had an interest in it obviously. Just one more thing before we go on, as we talked about ending up asset rich – cash flow poor. What I realized ‘you’ve got all this equity, you can jump forward and borrow again so you can move to the next property’, but you’ve got to remember – if you are heavily negatively geared on one property, and you’ve got a $150, 000 equity in it and you take $50, 000 out, well guess what – your mortgage repayments have just gone up because you’ve borrowed another 50k on a negatively geared property. So if you were down $200 a week then you’re going to be down another $50 to $65 a week if you’ve had an interest under the line. It’s kind of like this vicious circle and that’s why I just thought it’s got to stop – sold off a few, consolidated some dept and sort of sat tight for about a year and a half. That’s when I purchased another property down in Tazzy which was again in housing commission so I sort of went polar opposite – I went all cash flow, not concerned about growth. I picked up a house there, 3 beds all gum and house in place called Gagebrook which is a very rough kind of area down in Hover, but at the time I thought I’m really experienced in property investing and tenants, and I used property managements – I thought I can handle this. Bought it for a $125 000 and I immediately started renting it for $250 a week so I was getting 10.4% rental yield, I was really happy. And I put down maybe about 20% of positive as well, so it was very cash flow positive.
Ryan: How did you go with the tenants in that area? Obviously, investing in a rough area – a lot of people get worried of tenants damaging places or not paying their rent or doing god knows what.. How have you found tenants? Because now you got 2 properties in rough areas.
Ben: Yeah that’s right, and I’ve seen Saul buy for them as well. The one Rokeby which is kind of a rough area, and then the Gagebrook one, and to be honest – although the cash flow is good you really got to be on top of your insurance and things like that because when things go bad, they go bad quickly so can have a good run or a good tenant for a couple of years, no dramas, then have a period where I was going with three tenants every month. It felt like six months and with the Gagebrook one it got really bad – I had a woman there who had 5 kids, all different dad, so I’m sort of painting a picture here of what sort of person she was. So I felt like they were onto something. She paid rent for about six months, had a lot of issues – using the proper tenancy trial I finally got her out, changed the locks and all that. And they came back and trashed the places; they were putting rubbish under the house for some reason. So it cost a bit of money to get all the rubbish pulled out – it was a nightmare. But like I said the insurance covered it. And they came back as well, must have been out of spite and tried to start a fire in the house and they really only burned about one room but smoke damaged the rest of the house. It was a nightmare but insurance covered all the renovation and things like that, and as soon as that was done I immediately put it on the market and basically I found a buyer for $136, 000 – I just wanted to get out, I wasn’t too concerned whether I made a profit or not actually, I just wanted to get out. But in turns that I made a very small one. Another funny story – once the new buyers got the building inspection done and had a new good tenant in it now with his wife, the building inspector found guns in the roof and under the house from the new tenant and kicked off the place and police did a raid on it. So I’m just using that story to build a future of heavy scenario risks. But to the buyers, they were happy just to have a renovated property and they still paid me the 136, so I didn’t have any major problems and I offloaded that to them.
Ryan: I had a similar situation, well probably not that bad with guns, but a friend of mine had owned a property in Adelaide, again in a rough area because they were going after cash flow, had issues with tenants. Their house was on the market for quite a while and lot of their plumbing was on the outside of the building, so that got stolen not once but twice. Their house got raided and all the copper piping was stolen. So again the insurance covered it but it was obviously a pain in the ass. So did that end your investments in rough areas?
Ben: Well, yes and no. If I saw a really good deal in there or whatever. I do believe there’s, you know.. Out of 5 or 10 rough areas then some are not as rough as the others – it’s just about picking the best streets in those rough areas. I don’t want to turn people off it. I just believe you’ve got to choose your suburb wisely as the owner, because even in these rough suburbs there were no-go areas even for the locals, where as some of the other streets which have been sold off, a lot of the government housing had been sold off to investors or other occupiers. Some of those streets are obviously a lot nicer and I would see a better turn there. So it’s up to you as an individual. My main focus is on a sort of working class hero in the US. The only sort of place I’m looking to buy in Australia, I’m purchasing another place to live because my family expended, and that’s about it.
Ryan: Ok, well let’s move on to US property in just one sec. I just wanted to ask you one last question. For people who are considering investing in rougher areas, how do you know which areas are the worst of the worst and how do you work which straits are the good ones? What due diligence can you do as an investor so you don’t end up with a meth lab in your house or something like that?
Ben: Absolutely, that’s a good question. What I tend to do is, I tend to speak to speak to locals in the area. So I obviously go and look around these areas, because often I don’t know about these areas. I shot down to Adelaide, Northern Suburbs once, I didn’t end up buying there but that’s the sort of research I do a lot to get on the ground. Typically I talk to shop owners in the area, the small business people – they’re usually pretty honest and you say ‘I’m looking to move to the area, what do you think of it?’, and they’ll say yes or no way. That sort of help narrow down a bit as well as watching the news, stories and things like that. You call the local police station as well, and get a rough idea on certain straits or whatever. You don’t call triple O oversea, you just call the police number for that branch. And if they got the time they’ll have a quick chat with you. You’d say ‘hi, I’m looking at such and such street, do you have a lot of activity there?’, if they say ‘yeah, we’re down there every night’, well then that’s probably a sign not to buy in that street. Also esthetically it’s usually quite obvious. If you’re driving through and there’s old cars on the lawn, or there are burnout marks on the street or whatever, that’s probably a sign as well and just a general make up of the demographic of people that you see. Whereas like I said you go to some parts of the suburb that are maybe privately owned by a owner occupies all the people, you find that they have their little gardens and the roses growing and the grass is green and things like that, that’s like a more of a visual sign. That’s the sort of things that I tend to look into.
Ryan: So it really does come down to actually getting into that. So if you’re going to go and invest in rough areas it’s probably not a good idea to do it from a distance. It’s a better idea to get there, to look at the streets, talk to the business owners and as you said if the police have time talk to them as well. Those are some great ideas.
I hope you liked that interview with Ben Turner. We’ve got another one coming up tomorrow where we talk about Ben’s investments in the US property market and we talk about some things that new investors into that market should think about if they’re going to go and invest overseas.
Obviously investing overseas isn’t something that is really easy to do so you need to have your feet firmly planted on the ground and you need to know what you’re doing. So if US properties is something that sounds interesting to you, then I suggest you listen to this episode tomorrow, which will episode 103. So you can find today’s episode by going to OnProperty.com.au/102 and that will redirect you to the page, you can get the full transcript, blog posts, you can see the video, the podcasts, you can download it – all that good stuff.