If you’ve read Steve McKnight’s first book, you know that when he started investing in 1999, it was possible to build a passive income stream through buying positive cash flow rental properties. That same approach today, however, will not get the average investor very far.
Over time, the market has changed. Because properties are a lot more expensive than they used to be, to achieve the same result in Australia will require you to cough up a lot more cash for deposits, and take on a lot more debt.
Unless you’re earning a huge income, you’ll reach the limits of your cash reserves and borrowing power after just a few properties.
Changing times require us to evolve with the market. Many investors have therefore shifted to quick cash value-add strategies like renovations, subdivisions and developments. These strategies require a higher level of sophistication, but those who are focused and committed enough to invest in their education are getting results.
I recently caught up with a friend who is kicking some serious goals in property development. His name is Matt Leeworthy, and he’s only 23 years old. Living and investing in the Albury-Wodonga area, he’s banked hundreds of thousands of dollars in profits over the past few years, and he’s only just getting started.
Matt generously agreed to allow me to share his insights with the rest of the PropertyInvesting.com community. The interview that resulted was both highly informative and quite inspiring.
Matt, Thanks So Much For Sharing Your Story With Us. Can You Tell Us How You Got Started With Real Estate Investing?
I bought my first property when I was 19. I had just become qualified as a carpenter, and I knew I could use my skills on the tools to help me make a start.
What I really wanted to do was a subdivision and development, but I didn’t have enough money at the time. I was shocking at saving money, so I just started by building one house on a small block, about 450m2. I came into that first deal with only $5,000 that I had saved.
At the time, Victoria had a $26,500 First Home Owner Grant. I used that, plus my savings, and then worked on the tools to invest as much time into the project as I could.
Every day for six months, when I finished work at 3 p.m., I would go work on my house. Whether it was landscaping or putting up battens, I did whatever I could to cut down on my labour costs.
Between the First Home Owner Grant and my sweat equity, once I was able to sell, I turned about a $60,000 profit on that first house.
Once You Had Some Capital, What Was The Next Step? How Did You Break Into The World Of Subdivision And Development?
As soon as I finished that house, I started speaking to as many people as I could about how to get started doing developments. I actually had one guy who really helped me out big time. He is a local surveyor who has been around for a long time and is a very knowledgeable man. I came to him and said, “I need help; this is my dream and this is what I want to do.”
I’m not sure why, maybe because he saw my passion, but he started to help me. Anytime I had questions, he would give me his time, and he wasn’t charging me his normal $260 per hour fee. I feel very indebted to him.
I’ve also had the benefit of being mentored by my old man who’s a builder and developer. He used to tell me that “small fish taste sweet.” He encouraged me to be happy to start small, and then work my way up to bigger deals over time.
So, I began looking for an older existing house on a corner block that I could subdivide and then build another unit or two on. The surveyor told me that because all of the houses would have street frontage on a corner block, my subdivision costs would be lower and I could make more money.
One night I was at my mate’s house having a few beers and telling him about all I was hoping to do. Sure enough, I walk out his house and look next door and there’s a corner block with a “for sale” sign just getting put up.
It looked perfect. It had a little house in the front and a granny flat out the back. I told my friend, “I’m going to buy that house.”
The next day I went in to see the agent face to face at his office. Turns out it was a two bedroom house and they wanted $195,000 for it. Since I was so young, I played the “poor card,” and talked him down to $181,000.
I started looking for comparable sales in the area of three bedroom dwellings. I wasn’t sure at the time, but it looked like I could knock the granny flat down and put two units on the back – hopefully three bedders.
The block was 910m2 but the house was right up on the front corner, which gave me plenty of room on the back.
As soon as I purchased it, I put a tenant in the front house and there was already someone renting the granny flat, so it was paying me $290 per week in rent. It was positive cash flow from the very start. Over the next eight months while waiting for the DA to go through, I was making money the whole time.
Thankfully, I was able to get the two-unit development approved on a community title with the existing house. Had I only been approved to build one unit, I’m not sure there would have been enough profit in the deal to be worth my time.
How Important Was Knowing Your Exit Strategy From The Start On This Deal? Who Did You Plan To Sell The Finished Product To?
I developed a relationship with a marketing group in Sydney that sells properties to investors. They said they could sell them before I even built them. I told them that if they could promise that, then I’d let them have them. Otherwise, I would put them on the market through a local agent.
They were able to sell both of the houses for top dollar before I even started the build. I had to fund the construction, but I had unconditional contracts with deposits paid.
How Much Did This Deal Cost You? How Much Of Your Own Money Did You Need To Put Into It?
The house cost me $181,000 and I financed 80 percent, so I put up about $40,000 for the deposit. I also had my subdivision costs. The DA was about $10,000 and the contribution costs were about $10,000 for each unit. So, there’s another $30,000 gone.
Then I had to start putting services in the ground. It was starting to get really expensive, and I was running out of cash. In order to finish the subdivision, I had to get a loan against my car.
I tapped into the equity of my car, just so I could finish. I was scraping through, but because I had unconditional contracts, I knew the deal was done.
It was emotionally really tough. I can remember going home at nights stressed trying to figure out how I was going to come up with the cash to finish. But I wasn’t going to give up and so I pushed it through somehow.
What Did You Do With The Existing House?
Like I said before, it was a two bedroom house, but I knew that if I could add a bedroom, I could get more money. So, I put a carport out front and turned the garage into a third bedroom.
Then I updated the house with new curtains, carpets and blinds and put a whole new kitchen in.
In the bathroom, the floor tiles were in good shape, so I just painted them with a two-part epoxy that sticks really well. In all, I ended up spending about $13,000 on the reno and used all my own labour.
I had an offer from someone to buy this existing house on vendor finance for a really good price, but I wanted as much cash out of it as possible to put into the next deal. It turned out that I was able to sell it for even more through the same marketing group in Sydney.
My total pre-tax profit on this deal was $242,181. Honestly, I don’t even know how it happened and I’m not sure that I could find a deal as good as that one again. A few years ago, there weren’t as many people looking for development sites as there are now. Being a building supervisor also helped, because I was able to negotiate a really good build price on the two units.
I think if you could make $100,000 to $150,000 on a similar deal in this current market, you’ve done really well.
What Have You Been Working On Since Then?
I was keen after finishing that last deal. I was already looking for the next opportunity before I handed over those units.
Next, I found some vacant land to build a six-unit development on. I’m nearly finished with deal now with only about four months to go. At the moment I have four of the six units pre sold and I live in one of the other two, so I only need to sell one more.
According to my calculations, my pre-tax profit on this deal should be $334,988, once completed and sold. I’m currently $20,000 under budget, so it’s looking like it’s going to be a great development.
Since I had some money left over from the last deal, I’ve also purchased another block of land that’s now been approved for a 10-unit development. One of the things I’ve learned is that from the day that you start, it can take up to 12, or even 16 months just to get the DA through when you’re working on a bigger project. With this deal lined up now, I can jump right into it once I’m finished with the current one.
My goal on this next deal is to have all 10 units sold by the 30th of June, 2016. I’m estimating a profit of $659,310. At the moment, I’m $36,000 under budget, but there’s still a lot of work to do.
What Advice Would You Give Someone Who Wants To Get Started In Property Development? What Are Your Top Three Tips?
First, the biggest thing would definitely be surrounding yourself with the right people. I’m a product of the people that I have around me. I believe that my success is not my own. It’s because of people around me who are more knowledgeable than me, and who have a strong drive and mindset, that they will achieve their goal at any cost.
To have those people around you lifts you up on days when you feel like giving up.
The guy that leads the marketing group in Sydney is a great example. He is so driven, and his determination and focus has been inspiring for me. My dad has brought a lot of guidance to me. He’s been a builder and developer for twenty years. The surveyor I mentioned before who took me under his wing, he’s helped me a huge amount.
I have a mortgage broker who has helped me get finance when we both wondered if it was even possible. Also, my solicitor; she looks after me and makes me feel really safe.
The second thing is to have a clear picture of who you want to be and what you want to do, and then maintain that focus. I have my goals plastered across the wall in my bedroom. When you’re focused on what you want to achieve, you feel like you’re going somewhere. So many people can’t make decisions, because they don’t know where they’re going.
I can remember walking into town planner council meetings when I first started, and I knew they didn’t respect me because of my age. But I was so focused and driven and I knew what I wanted. Over time they’ve seen that, and I’ve gained their respect.
The third thing is to be clear on your numbers and make sure the deal stacks up before you get started. Otherwise you can end up buying something that is an absolute shocker.
When I first got started, I thought every deal was a good one. Now I might look at 10 deals before I find one I like. Even when you think you’ve found a deal, if you keep looking you may find one that’s even better.
So many people I’ve seen on their first development are emotionally attached. When they are emotionally attached, they can end up spending too much money.
What happens is you put something extra in that makes the property look good. I’ve already presold my houses, so I only spend just enough money to make it look good enough to sell.
But, calculations are not my greatest strength. Once I’m confident a deal will stack up, I pay a surveyor to work out all the calculations and create a cash flow plan for the whole project.
What’s The Long-term Dream? Where Do You Want To Be In 10 Years?
I don’t tell many people about this, but I set a goal when I was 20 to have a property portfolio of $30 million by the time I’m 30.
Can You See A Clear Plan Toward Achieving That Goal?
What I didn’t mention before is that I’m also working on plans now for a 50-lot subdivision behind the 10-unit development site I mentioned. If everything that I can see in the pipeline goes to plan, I think my long-term goal is very achievable.
Of course, the economy is a major factor. If the market buys my houses quick enough, then I’ll hit my goal. If it doesn’t, it might take me an extra five years. Or, maybe a deal could go wrong and I’d lose a bit. But that’s my focus and my goal, and that’s what I’m going for.
What Is The “Why?” Behind Your Goal That Motivates And Drives You Toward Fulfilling This Big Goal?
My family is so tightly knit. My brother is completely opposite of me. I started setting these big goals because of him.
He did his carpentry apprenticeship with me, but rather than pursue that, he’s working full time with troubled youth. That’s his passion. I remember asking him once what he would do if he won $5 million dollars.
He told me he would give 95 percent of it away to the church and to other causes, and keep just enough to live on for a year or two. I’m doing this for him. I’m doing this for my church. I want to change people’s lives and make a big dent in the world.
I went to Burma when I was 13 years old and I saw the poverty over there. I remember sitting down for a meal in someone’s home to eat some rather unimpressive food.
I later found out that they had saved up for a month just to provide that meal for us. It didn’t seem like much to us, but to them it was huge. Their love made me feel like I really wanted to help people and give back to the community.
The things that have made my friend Matt successful should be glaringly obvious. Having a clear goal, having a compelling reason for the goal that keeps you focused, surrounding yourself with people who are stronger and smarter than you, finding a duplicable investing niche, and carrying out thorough due diligence are all musts for any investor.
In Steve McKnight’s Property Apprenticeship course, we cover all of these topics and more. The first two modules of the course focus on goal setting and strategic planning, while module three gives you a system for buying with confidence. In our mentoring programs, we put the right people around you to empower you to succeed. You can learn more about our training options here.
If you have any questions for Matt, feel free to ask them in the comment section below. Or you can connect with Matt on LinkedIn.