Custodian Millionaire Case Study: James Smith

JAMES SMITH

  • Occupation: Computer Software Engineer
  • Age: 46
  • Family: Single
  • Began investing in residential property (year): 1999
  • Property portfolio value (including principal place of residence): Approx $4.4 million
  • Number of houses you own (including principal place of residence): 10

James Smith owns his own home in a north-western suburb of Melbourne, 15 kilometres from the CBD. Over the past ten years he has built a residential investment portfolio of nine properties as well as buying his own home. He intends to continue to buy more properties whenever he can until he retires.

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In the early 1970s, James’s mother passed away and he inherited a share portfolio from her estate. In investment terms, this gave him a great boost.

“Receiving an inheritance from my mother certainly made a difference to my ability to build my investment portfolio. I couldn’t have done as much as I have without it,” he explains. When he immigrated to Australia in 1995, his portfolio was worth approximately $250,000.

Prior to investing in residential property James grew his share portfolio, financed by share trading and his earnings as a computer software engineer. He was happy to rent a house as he ‘didn’t feel like buying his own home’ and he channelled his savings into shares and bank bills. James earns a good salary: for the past 10 years he has been earning around $90,000 per annum.

James selected shares based on the advice from his broker and his own research. However, his experience with shares has been mixed. While he still has a small share portfolio, James realised over time that it was ‘time to get out’.

“If you’re lucky and skilled, you can do quite well but often shares go down. However, property generally doesn’t. Yes, you might not have bought well, but overall, the market doesn’t go down. Shares are high maintenance and volatile. You have to constantly monitor them. Property is low maintenance and after you’ve set up the right structure, it looks after itself,” says James.

In 1999, James went along with a friend to a Custodian seminar. James had been reading about residential property investment so he was open to what John Fitzgerald had to say – and he wasn’t disappointed. “I was impressed by the fact that they guarantee that when you buy a property through them it is at the bank valuation price. It may not be a bargain but you’re not getting ripped off. There are a lot of sharks out there and the bank valuation is the key. I liked what Custodian was doing and I jumped,” explains James.

That year, James converted some of his investments to cash to fund the 20 per cent deposits on two Custodian investment properties in South East Queensland. In 2000, James purchased another four properties in outer Brisbane. He had bought all six properties before the early 2000s Brisbane property boom and by 2003, the value of his portfolio had almost doubled. investment and if I move, I’ll try to keep it and rent it out – even if it means I have to rent something else.

I hate selling and re-buying because you lose money in paying stamp duty,” he says.

James also bought two properties in Perth prior to the boom there and he sold one of those houses in 2006 to buy his current principal place of residence. In 2008, James purchased two more houses, one in Deer Park, Melbourne and one through another investment company in the North Eastern Victorian town of Beechworth. “Cash flow is very important: interest rates fluctuate; properties aren’t tenanted 100 per cent of the time; and there’s the cost of maintenance.

I’m fairly cautious with my spending habits. It also depends on how much you want to push yourself as to how tight you run your cash flow. You need to be disciplined. For example, after a while, you may think you have a lot of equity and think ‘I can draw on that and spend it’ but if you do, you still have to pay interest. But if you draw on it to buy a house, you get income and another asset,” James enthuses.

James purchased his first six investment properties through his earlier investments and later through the increased equity in his property portfolio. He paid off his principal place of residence but has since redrawn some of the equity to duplicate. The interest payments for his investment loans are all paid through a combination of rental income and his salary – and the tax breaks that come with negative gearing. “Once you have 4–5 properties, you pay very little income tax,” he explains.

James considers his best investment decision was building a property portfolio despite a couple of ‘bad tenant’ experiences. In 2009, James had tenants who wouldn’t pay their rent. After being served with an eviction notice, James says the tenants ‘disappeared and trashed the place’. However, James had insurance which helped cover the cleanup costs, “The property was a bit tired and needed painting and re-carpeting so the insurance money went towards that.” He has also had to evict another tenant for non payment of rent but James says while it is a hassle, that is the beauty of having a property manager. “Yes, these things happen and the property manager rings up and says, ‘I’m sorry to tell you something else has happened’, but they’re the ones who have to deal with it. In the scheme of things, the hassles are insignificant.” After 10 years, James is well and truly a property man. When buying his own home, he not only bought something he was happy with but he also considered it in terms of whether it is a good investment. “It’s a good

MANAGING CASH FLOW

“I built my portfolio quickly. It was daunting initially but I got used to it and once you’ve set up the right structure it largely takes care of itself.

There’s less work and less worry than having a share portfolio,” says James.

He has a spreadsheet that details each investment property – the buying price, the current valuation, the rent, the loan amount and interest rate so he has a clear snap shot of his portfolio.

INVESTMENT ADVICE

James advises to have a buffer in the form of a line of credit – for James that buffer is equivalent to a year’s salary. He explains, “If something bad happens – high interest rates or I lose my job – the buffer gives me time to work out what to do. I might have to sell a house or two but you need time – selling a house doesn’t happen overnight and you might not have to if you have some breathing space.” He also advises to look carefully at the break cost fees for investment loans before signing. “Some loans have prohibitive fees if you want to pay off the loan and refinance with another lender. I found this out the hard way.

I have a couple of loans with lenders which I want to refinance because their interest rates are no longer competitive – but I can’t without incurring huge break cost fees. I’ll just have to wait until they no longer apply – which is five years from the time the loan contract was signed,” explains James.

As for investment advice for peoplestarting out, James says that while it is good to buy a house to live in, it is better to buy an investment property and rent somewhere to live. “You are better off and you pay less tax.

It’s all about deductible and non deductible interest payments. If you’re lucky enough to buy your own home outright, then that’s okay but most of us aren’t and it takes a long time to get enough equity to be able to start investing,” he advises.

James investment philosophy is simple: “Whenever you get equity, you can either spend it or invest it for the future. In day-to-day cash flow terms, I’m probably worse off. If I just had super, I’d have more spending money now but I don’t mind having less money while I’m working. I’d rather have it when I retire.”

GOALS

James’ motivation for building his investment portfolio is providing for his retirement.

“I looked at the money I had in super and it really wasn’t enough. I didn’t have the income to get a good lump sum by the time I retired. Besides, I don’t like super as an investment vehicle because super funds charge fees whether they make you money or lose it. And I don’t trust the government: tax policies on super change over time. The current government might be okay but a future government might be looking for money, change the rules and heavily tax super.” James aims to keep growing his portfolio, buying a house whenever he can until he retires. “I don’t have a set number of properties or a dollar value in mind. However, I do want to retire comfortably with the same kind of income I’m used to now. Most people retire with little spending money.

It’s not much fun having little or no spending money, especially when you’re older. When you’re younger, it doesn’t matter so much and you have more options. If you lose your job, you can get another one or go back to study and re-train. I like my work and I’ll keep working until it suits me to stop – perhaps at 60–65. And I’m still in the growth phase of my portfolio.” While James hasn’t thought much about what he will do in his retirement, he’s clear about his goal.

He says, “My goal isn’t to become super rich but to retire comfortably, with the same kind of income I’m used to now. I have family in England and I visit them every year. I want to be able to continue to travel when I stop work.”

LIFELONG LEARNING

Reflecting on his investment journey so far, James says that it has been a good learning experience. “The experience of being a landlord certainly teaches you to be financially responsible and that flows through to other parts of your life. Having my investments in place and on track is one less thing for me to worry about. If I didn’t have property, I’d be worrying about my retirement. My portfolio gives me peace of mind,” he explains.

It is also important to be positive and maintain a positive mindset.

“There are times when you may be tempted to get discouraged, for example, if you have your stride. It’s part of doing business and the benefits far outweigh the hassles. Building a portfolio takes effort but in the scheme of things, that effort is insignificant in relation to the investment return. It’s not like it’s active all the time. You buy when you can in a lower point in the market cycle and then relax for a while until after the next boom, when you can then get new valuations, re-finance and draw down on the equity to duplicate,” says James.

James attends Custodian events, which he says helps him keep on track by reminding him why he’s doing it and how well residential property investment works as an asset class.

“Every ten years your property portfolio doubles in value. That means if you have a $1 million portfolio with $500,000 in equity, in 10 years it is worth $2 million and your equity has tripled. You won’t make money over night and you need to be patient, but the return is very high for the amount of effort involved.” Before investing with Custodian, James had a share portfolio and savings. He now owns his own home, has nine investment properties and he has kept a small number of shares.

If I didn’t have property I’d be worried about my retirement.

My portfolio gives me peace of mind.

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