how did Steve McNight finance his properties?

All

What's with human nature these days.  I thank Steve very much for his books. I first became a property investor when we were moved for my husbands work.  Thankfully our PPOR rented very quickly and for a good price.  This got me thinking, so i went to the bookstore and found Steve's book 0-130 properties.  This was the start of what I call my Stay at home career. 

I was stunned when reading the manner in which some of these posts have been written.  For our family, who rents and owns IP's, Steve's guidance, ideas and encouragement  through his books have been fantastic particularly when faced with tenants who trash a house (all covered by insurance), or one that doesn't pay.  I find it good at these time to go back and remember why I am doing this.  For me it so I can be with my children, take them to their various activities, go on holidays and have a safe vehicle to drive. So thanks Steve and all those who post positive thoughts.

As for trusts.  I am a little against having assets that are untouchable.  I have had some experience in the court system, and seen too many times people doing things, or not  doing things that have caused injury to others.  Because of these untouchable assests the victim can be left high and dry.  When I purchase an IP I pay an electrician to put in a safety switch, check it out and certify it.  I also put in new and more smoke detectors.  If a handyman does any work at the home, I pay for them to change the batteries.  These things add to the costs which is why I look at buying property that are around 10-12% return.  These are just a couple of things we do I think that reducing the risk by looking after the safety aspects of the home which should minimise risk enough that I have done everything "reasonable" to make the property safe.

Thanks Steve and I hope the family is coping during a stressful time.
JL

Just as there are a diversity of opinions on this forum, there is a diversity of investment strategies and you have to chose what suits you best. Naturally read books but as someone else mentioned,  note the context of the book. The year and the property cycle in which properties were bought.

While steve's strategies worked for him they arent my style, but I wouldn't call his book crap. And  I have seen enough of the man to trust his integrity. 

The most  glaringly obvious thing to me reading this thread, is the importance of getting a good accountant that knows and understands property investing. Cattleya has said she/he is an accountant and I suspect many of us get out the yellow pages and select the closest accountant. Now I don't want this to be seen as a personal attack on Cattleya but I do think it is important to have an accountant that specialises in property.

This book really is interesting. Here's some principles I learnt that confirms what C2 said above.

1.  For any seller, cash is king. Hence, if we want to finance property using OPM, which is not necessarily cash, the seller must have an incentive to accept this. Hence, it's very difficult to use this in blue chip suburbs as there are plenty of buyers willing to pay cash deposit.

2.  We have to have the background knowledge eg. tax, finance, property and negotiation knowledge to be able to evaluate these opportunities ie. where the seller is willing to sell but we think the price is too dear. We need to assess:
– what's the highest price we can do (financial, property and tax skill)
– what price we can push the seller to come down to (nego skill)

Then we structure the deal using these tools:
– cash: maybe $10k now, another $10k in 4weeks, first mortgage on my share portfolio and a second mortgage to my existing commercial property.
– time: long settlement time ie. similar with WRAP or short settlement time but with little cash. The vendor might be interested in minimising his tax by getting the sale proceed in the next financial year which, for example, is 7 months away.
– other assets vendor might be interested in
– other things (I haven't finished reading the book)

3. The deal have to be structured in a way that's beneficial for both sides. Hence we really need to know the cents and dime, our own cash flow etc. Hence we can make sure that every deal is positive cash flow. If it is not, why bother negotiating. Remember, the seller is willing to talk to us because he is having problem finding a buyer.

4. Deals like these have to be found. So we need to plough the streets and be sensitive looking at every possibilities in a deal. It sounds like we need to be a full time investor to do this. Also, when you are a full time well known investor like Steve, people come to you with all sorts of deals and willing to negotiate. So after a while, when we have our reputation, the deals find us rather than the other way around.

5. There are private investors who are willing to lend money to do deals like these. Aparently in the US, the accountants and lawyers have access to their clients' financial strengths and interests. They play a major role in contacting their clients telling them there's a quick bucks to make. So for example, I need $100k to finance a purchase. Rather than going to the bank and pay 8.7%, these private investors are happy for 7%, which is better than bank savings rate. Obviously, there has to be trust. We have to have earned our good reputation before the door to this private funds is openned.

The lawyers / accountants get a fee. So we have to incorporate these extra fees into our numbers to see whether the deal is still worth our while. Aparently there's many incidental fees like this, so again… our financial / accounting / taxation skill must be top notch.

6. To get this good reputation we have to be visible, have lots of good connections. The book speaks about keeping contacts with council officials, bankers, accountants and lawyers, fellow investors and leaders of the society. Sounds like hard work to me, but not unbelievable.

These people will give you bits and pieces of information that will not be available to the public. Or at least we'll know much sooner than the public. It is then up to us to put the pieces together to see the big picture and identify opportunities.

7. This is an entirely different ball game from the regular property investing I know ie. pay 20% deposit, take mortgage with the bank. I didn't even negotiate because there's this RE agent who said this has to be so and so….  and yet everything is negotiable. But then again, I probably didn't have much chance to negotiate as there was always legions of buyers willing to pay cash.

Happily sharing with you,
Cattleya

The truth about financing.

Hi Steve! It's been many years (2001) since we attended one of Steve's first seminars. We were dumb enough to take his advice and simply get on and do. Surprise, surprise – it actually worked. I suppose the other point was that we decided that even if it didn't work, we'd probably only drop $10K so it was a small risk.

The market has evolved since then and finding cashflow +ive properties is now more difficult, as there are many more people looking. Yet, what I know is that if you look you will find. For example, recently I was in Cairns and fluked across a small office for sale. Negotiated price was $135,000. This will rent for up to $300 pw plus tenant would pay outgoings. Demand is such that the last time a vacancy came up in this complex the new tenant was actually helping the old tenant move so as to be able to move in.

My experience suggest that there are deals out there but they either need to be massaged into shape, or are not easy to find. It seems that many new investors are keen to criticize Steve because the market has changed. Perhaps a good analogy would be BHP shares. Years ago you could buy them for less than $10. The market perceives they are worth much more now. 

Steve has always stressed that success is a mindset – doing things differently. My strongest suggestion is to get out and about and find deals – do not believe that viewing realestate.com.au will uncover opportunities. I would also suggest that there are still bargains to be had in the Latrobe Valley in Victoria, some Western suburbs of Melbourne, and many regional areas.

To give another example, I know of one investor who recently purchased 4 small offices in a regional area for $160K. Each was tenanted, with two of them to Government departments. The yield was 13%. When I asked the buyer how he found this deal, he replied that he was reading the Age when he found a small ad listing this deal. He was then dumb enough to actually drive to the town, inspect the properties, and make an offer.

Knowing Steve personally, I can vouch for his integrity. It disappoints me when newbies launch an attack on him, when they would be much better off, listening, reading and learning. It is very possible to emulate Steve, and you will be surprised what opportunities and finance open up when you actually decide that you will make it happen. Thanks.

There is nothing hard about financing properties. If you can keep coming up with the deposits, you can keep getting finance.

Steve bought his properties on 80% lend.

remember while steve was looking for his properites Dave (his Partner) was running the accountacy firm generating the profits they used for deposits.

if there were stuck they would turn over a property to unlock the equity so they could use it for further deposits.

they also used wraps to generate income and equity which could be used to fund more deposits.

Hi Steve

It's been nearly 3 months since your post on this topic- I sincerely hope that your wife is well now?

I am also very interested in HOW you went about the financing of so many properties. You mentioned that you'd do a newsletter on this topic sometime. Hope i didn't miss that?

I have a current post where i questioned how it is possible to finance large cashflow (+) portolios given the very difficult lending criteria the banks have (i.e. not recognising all the rental income from the property and large deposits).
I am hoping I will find the answers to my questions sometime in the not too distant future.

Hi, Neilvs, Cattleya

I do not think you can buy a cashflow positive property just off the street, even with some hard searching. The market is such that when Steve wrote his book, it was possible while looking around in the regional areas. If you want to invest in those areas and that is your strategy, that's fine. Also, when he and his business partner, Dave, were buying back in 1999, it was possible to buy cashflow positive almost off the street.

In the current economic conditions, cashflow positive properties have to be manufactured via renos, targeting different tenant markets, or using different investment approaches (Often a combination of these methods and others), and you also have to factor in the current bank lending criteria.

For example:

1 – Cashflow positive thru Renos: Buy a well-placed property at a good price, do a reno on it to increase rental to cover the purchase cost of the property;

2 – Targeting different markets: Say you bought a high-end property, instead of renting to the residential tenants, maybe you rent out to corporate tenants who are willing to pay more; hence turning your property into cashflow positive;

3 – Different investment approach: Instead of renting out an entire property, you could rent it out per room to increase the rental returns and turn the property into cashflow positive.

May I suggest that you spend more time reading the tens of other PI books available in your local public library first, and surf this forum and other similar ones like Somersoft.com often, so that you can structure your questions better. I see that there are very few replies relative to the number of viewings.

I suspect that it would because while you want to seek out answers to your questions, it comes across you are just looking for the answers to be given to you and that you are not willing to put in the hard work to find them out yourself. Read up one PI book or magazine per week for the next 6 months; that will really accelerate your understanding.

Saying that this or that PI method does not work is how a reflection of the method, but a reflection of how you are seeing the issue.

All the best.

Daniel Lee

You might consider finding a tenant, such as Defence, a company, or even Housing Trust, who will take out a 10-year lease. If that suits your circumstances (ie prepared to eliminate the possibility of selling to an owner-occupier for that length of time), then many lenders will allow you to count 100% of the rental income. I’m not suggesting it’s appropriate for everybody, but it is one way to get around the serviceability issues you mention.

Since I’m sure many are concerned about this: if you let to the Housing Trust, I believe they guarantee to return the property to you in the same condition as it was let, and they manage the property. So it can be a very low-hassle option.