If a young person full of energy and enthusiasm comes to you with a business idea… how do you respond, and what advice would you give them?
This question was asked to my wife and I yesterday and my wife gave the following response:
Come up with a list of three or four people who have succeeded in that field, take your idea to them and see what they have to say…
There’s no right or wrong here but I think my wife’s answer is very sensible.
As experienced operators in the relevant field, industry experts are the people best placed to challenge your assumptions and comment on your ideas.
Imagine being able to discuss your new retailing concept with Ruslan Kogan, or if you wanted to start a new restaurant what if you could spend an hour or two with George Calombaris? How about if you could get feedback from Kelly Slater on a new surfboard design or what if you had an idea for a new online marketplace and Andrew Bassat, the founder and current CEO of Seek was willing to meet with you?
Industry experience counts for a lot. There’s only so much insight Sir Richard Branson could provide if what you wanted to start was a restaurant. The meeting with Branson would still be invaluable, and if he liked you he would have many further people/restaurateurs to introduce you to, but the advice he could provide personally would only be general. “Are you adequately funded to implement your objectives, have you thought through the key risks, do you have the right team, location, branding, what’s your key point of difference”… that sort of thing.
George Calombaris on the other hand could be a lot more specific.
Whose advice do you think is more helpful?
The same logic applies for property. It makes sense talking to the top investors, buyers advocates, wealth accountants and finance brokers, even if you don’t end up working with them. But more often than not it’s friends, family and worst of all the media, which guides most people’s decisions.
Can you see how crazy this is?!
Take the simplest example of a young couple in Melbourne on reasonable incomes who decide they want to enter the property market. For the past six months countless media reports have discussed the Melbourne housing market performing exceptionally well and the couple decide that Mount Waverley is where they want to purchase. With no further research they walk into a CBA branch to see how much they can borrow. The resident lender asks a few questions and informs them they can borrow up to $800,000, she also agrees that Mount Waverley is a great idea.
WOW… $800,000! The couple had no idea they could borrow that much, all they want is a small two bedroom, 1 bathroom apartment, they thought they could borrow $450,000 or maybe $500,000… but $800,000 is significantly higher than they were anticipating.
What next happens is tragic. The couple leave CBA with their $800,000 pre-approval, they’re feeling mega wealthy and on top of the world. The 2 bedroom, 1 bathroom apartments they can buy for $900,000 in Mount Waverley ($100k deposit, $800k loan) are UNBELIEVABLE. So they buy one. They have just made every mistake in the book, and it can turn out to be very costly.
- If the 2 bedroom 1 bathroom apartment was only intended as a short-term property before the couple would have children and move into something bigger could the couple have spent less money on an investment property, and then set themselves up to buy the larger home afterwards?
- Was it wise taking on the maximum $800,000 non-deductible home loan debt?
- Could the after-tax cost of running an investment property using an interest only loan assisted the couple to save for a larger deposit, and save $25,000+ on insurance?
- Did the couple purchase the property using the right ownership structure, not only to protect the asset but also in such a way that would enable them to re-gear it later for additional purchases?
- Given Mount Waverley has just risen in value by 50% over the past three years was that the most sensible suburb to have purchased in, or may there have been suburbs with higher growth potential elsewhere?
- How might the apartment be valued in the future and what universe of buyers might be interested?
- What kind of rental yield might the asset generate and how is this relevant for a future sales process?
- Was the couple’s bidding strategy at the auction effective or could they have saved $20,000+ in that area alone, had they approached it differently?
- Was it smart to have bought the most expensive 2 bedroom apartment in the suburb, what developer premium did they pay?
- The lifts, gym and swimming pool look great but do the higher strata fees represent value for money?
- If the couple had to buy in Mount Waverley, what other properties may have represented better value?
There are so many more considerations.
What if the same couple first took their ideas to some property and wealth experts?
It wouldn’t be easy setting up meetings with Kogan, Caolmbaris, Slater, Bassat or Branson… but how about arranging to meet some of the top property investors, buyers agents or finance brokers in Australia?
It wouldn’t be difficult at all, and it wouldn’t cost anything. These operators deal with thousands of clients and buy hundreds of homes each year, and just like George Calombaris with the restaurant example most have a fairly good idea as to the things that work, and those that don’t.
The basics of real estate are very simple and in a market like Australia which has generally enjoyed decades and decades of uninterrupted growth most people out there believe they’re experts.
But rather relying on your friends, family and the media, it’s worthwhile speaking to real property/finance experts, and to get feedback on your ideas. Even if you don’t work with them they will help you go in with your eyes wide open. You’ll learn from some of the top operators in the industry and hopefully they can at least help you make smarter decisions.
No one knows what they don’t know.
You learn can learn this the hard way – when you realise that you’ve made terrible mistakes – or you can take a more proactive approach, and reduce your risks.
