Serving an ace to economic adversity

Being forced back to the baseline by a series of brutalizer shots is a daunting position for any tennis player to be in. Michael Hirata, who suffered through the economic equivalent of this situation early in his career, knows this well.

After the failure of his first IT business when he was just 22, he was left with significant debt. Forced to seel most of his possessions and move back home to his parents, he managed to work his way back into the black.

He then started an online IT import business. While this business did quite well initially, when the economy hit a rough spot the business suffered and he was forced to close it down. No one could accuse Michael (who is a tennis enthusiast) of being a quitter. Always ambitious, he took some time out to reassess his life and moved into a hospitality venture, which eventually provided him with the money for the deposit of his first property.

These days the 34-year-old is in complete control of the game. After investing for just three years, he has built up a portfolio of 28 properties, worth $6.7m in total. Further, his investment activities now provide him with full-time work. Recently, he also started a small company that specialises in finding good deals for like-minded investors.

False starts

Michael says he has long been interested in real estate and property.

Initially, his interest was fanned in the early 2000s when the market was booming and agents, buyers and sellers were all doing well. There was a lot of positivity in the air and he got hooked on the excitement. "I liked the idea that property could provide you with the opportunity to do something and transforming it."

In 2011, Michael attended a seminar run by a well-known spuriker. Despite the dubious repute of the presenter, he had a light-bulb movement and decided to move into property investment.

However, after listening to a few doom-and-gloomers and family members, he was convinced not to. As a result, he did not make his first investment steps until 2011. This is something he regrets. Regrets aside, since embarking on his investment journey he has moved aggressively to build up a significant portfolio. While this can be nerve-wracking, he believes it is necessary to take some risks. And being prepareted to do so has paid off for him.

Going with the flow

In Michael's view, strategies inevitable change with time and circumstances. This means they should be updated and modified to suit lifestyle, goals and inspirations. Overall, he aims for investments that can provide equity gain due to

renovations, while achieving cash flow on the way, and with capital growth as a bonus. He is also interested in the opportunities that come with development projects and joint ventures.

"I'm not too keen on flipping, as it can be expensive," he adds. "If the figures stack up, the it's great.. But lining the pockets of the agent/government while you do the hard work doesn??t really appeal to me!”

With properties in Victoria, NSW, SA and Queensland, Michael’s selection criteria depend on the location and time of the market. Decent-sized blocks of land factor highly when he is looking at properties. But his broader strategic intentions also come into play.

In the past he has focused on houses, as opposed to units, because of the greater potential for transformation and improvement. However, as his ambitions have grown, he has become interested in developing a block of units himself.

Property focus: Early investments - Properties 1 & 2

Michael's first investments provide a good example of his early strategising, and of how his thinking has changed as he has become more experienced. After undertaking rigorous due diligence on several areas, using online tools such as RealEstate.com.au and PriceFinder, as well as property investment forums, he decided to make his first investments in Ballarat, Victoria. He selected this area because it was within his budget, which was quite low at the time. Crucially, it also had good growth prospects, diversified industries, and a strong local economy.

Further, Ballarat was within driving range of his Melbourne base. Although he will now buy properties sight unseen, he didn’t want to do this with his first investments. So he spent several weeks visiting the area and looking at different properties. In January 2012, armed with a 20% deposit (plus legal costs and stamp duty) of $60,000 gained from the sale of his hospitality venture, he purchased his property. It was a three-bedroom brick house on a corner block, for which he paid $233,000. He initially thought the asking price was a bit too high, but the vendor dropped the price by $10,000 and that sealed the deal.

Thinking ahead

A couple of months later, the property next door (a two-bedroom house on a bigger block) came up for sale, and it took him just three hours to decide to buy it so that he could own two adjacent properties. The asking price was $180,000, but after some negotiation he bought it for $175,000.

Michael went in with an 80% LVR on both properties. “I always do,” he says. “Because as long as you are getting a house in reasonable condition, lenders will lend if you are going for 80%. To work it out I tend to use a broker, as I find lenders lenders generally offer much the same, with just a few small differences.”

There have been some minor, niggly maintenance issues, like a backyard pipe bursting and the demise of a power box, but no major challenges with the properties. Performance-wise, they are chugging along. There has been some growth in rental yield and the value of both properties, without the need for any major renovation work.

He didn’t get the timing on these investments quite right, he adds. “I am just keeping them as they are for the time being. Capital growth in the area is expected to increase in future. So, in the next few years, I might tear them down and put up some units or townhouses.”

Property focus: The major reno job - Property 3

Michael has always been keen on renovation work. He always wanted to get his hands dirty and do some work, yet it took him a decade to actually pick up a hammer. Since he started investing, he estimates that about 50–60% of his portfolio has required some renovation work. This has ranged from small-scale work to get a property up to rentable or market standard, to larger-scale work to create equity and increase rental returns.

However, he recently finished his biggest reno job yet. The project involved a two-bedroom unit damaged by a kitchen fire that had burnt out a quarter of the property. Although the unit had been on the Ballarat market for 12 months, it didn’t catch Michael’s eye until an agent pointed it out. With an asking price of just over $100,000, it had been ‘sold’ three times already, but each time the deal had fallen through.

Seeing the hidden potential

Seeing the potential in the project, Michael bought it, unconditionally, for $100,000 (at 80% LVR) in November 2013. He then spent a further $50,000 on renovations. By doing a lot of the work himself, he managed to keep costs down. The entire unit had to be resheeted, the roof essentially replaced, and most of the internal walls rebuilt, and it needed to be rewired and replumbed. “It was almost like building a dwelling from scratch, but with the slab and a few wall frames already in place,” he says.

He also turned the unit from a two-bedroom into a four-bedroom by creating a corridor to provide access to a formerly detached room on the side. This further maximised the potential of the property. However, there were some major challenges with the project. The neighbours’ driveway had to be torn up and then replaced, in order to do the rewiring. Worse, he had a number of nasty disputes with tradies over the quality of their work and/or costs. Despite this, he loved working on the project and feels the outcome has been great. “After spending $150,000 in total on the unit, it is now worth about $240,000. Going by sales of similar properties nearby, I think it could sell for about $260,000 plus. And it brings in $280 per week in rent, which is a 9.6% yield.”

Property focus: Moving into development - Property 4

As Michael's confidence has increased, so havev his ambitions. This has led to the next step in his investment journey - a venue into property development. In a joint venture with a partner, he has purchased a three-bedroom house on a 900sqm block of land in Hawthorn, Melbourne. They plan to tear down the existing house and replace it with a three-level block of 19 to 25 apartments.

He came across the property when he was bidding on a neighbouring property. Having already done his research on the area, he knew that it ticked all his boxes. The research also meant that he noticed the property’s lot size was unusually large, which was uncommon in the local market. This, combined with what he describes as a “very reasonable asking price”, led Michael to think further about the potential for creating higher returns on the investment. However, the agent involved wasn’t sure about development of the property, largely because local regulations are newly rejigged and strict.

As a result, Michael decided that a joint venture, in which he would be sharing the risk, was the best way to go. He and his partner paid $1.75m for the property, using a deposit of $300,000 with an 80% LVR. His partner has a bigger share of the project, but they will split the profits accordingly. Currently, they are going through the planning and approval stage of the development. They are also working out construction costs, with quotes ranging from $4m to $7m. Until they have council approval, the project is up in the air. But, if all goes according to plan, the development should take one to two years.

"It's a significant project and a bit of a steup up for me in terms of investment," Michael says. "Ultimately, it is about diversification. There are higher risks, but also the potential for much bigger returns on the investment." If the multi-apartment block development doesn't fly with the council, he and his partner may consider plan B, which is to build two or three townhouses on the property.

Managing the future

Michael intends to keep building his investment portfolio at a fast pace, as well as expanding the breadth of his projects. While this does require taking risks, he has a stringent set of risk management strategies in place, due to the economic adversity he has faced in the past.

These include lender diversification, and using a mix of trusts and his own name when securing properties. He tends to stick to variable rates as refinancing can be costly at fixed rates; and he only has 80% LVR loans, with a buffer of about three months of rental payments.

“I also don’t assume rental increases every year and try to think of a worst-case scenario every single time. I purchase below market cost – often more than a simple renovation cost. This means that, assuming there is price movement, I will be safe and have an exit plan, ie my property will be competing with other unrenovated properties at the same price entry point.”

Michael feels confident about the future. While he is no Bill Gates, he has done well so far, he says. “But this all came about due to a lot of hard work, sweat and tears, sacrifices and risks along the way. Luck has also played a part in my path, but I believe I have found my true passion.”

This article was published in the July 2014 edition of Your Investment Property magazine. You can subscribe to the magazine here.