Jason Marianoff Interview

Jason Marianoff Interview

Jason Marianoff Interview

Jason MarianoffIn this interview Brisbane property investor and developer Jason Marianoff tells us how he got started, how he searches for great property buys and some observations on the Brisbane property market now and into the future.

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Jason Marianoff interview

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G: Hello there! I’m Geoff Bayly from Affordable Housing Company, and today I’m speaking with Jason Marianoff who is a successful property investor and property mentor around Brisbane.

So, Jason, how did you get started in property investment?

J: Hi Geoff. Thanks for this opportunity to be interviewed. The way I got started was originally from a book I had read, back in 1992; that book was called ‘Building Wealth Through Investment Property’ by Jan Somers. To explain briefly; I found this book and read it, and it just shifted my thinking to say that a longer term strategy with property could actually end up being a vehicle to retirement.

So that book was what I would acknowledge as my inspiration to start investment, albeit that was just a ‘buy and hold’ strategy at the time and I’ve changed a bit since I started. But yes, reading a book – that’s what did it for me!

G: So you read the book, and then you must have then gone out and purchased some property. Do you have any tips for people at that point in the process about how to find a great buy?

J: Yes. The way I started, was quite simple; I just looked in suburbs that I was familiar with and that were near me and things like that. I hadn’t really come up with any great strategy. The only key point that I had at the time – and I think it’s still valid today – is that I would look for suburbs where I could find a property that was below the median or average price.

So I was there thinking I wanted the property at the cheaper side of the market, the reason being I thought there would be more opportunity to sell them later, and easier to rent them and get a little bit of a higher yield compared to the price I paid. So yes, in the early days there wasn’t a great deal of focus on how I would choose other than, as I said, lower than median price and in areas that I had already driven through, or had an interest in.

I do remember at one point thinking that I needed to have a look on Street Directories, like the old UBD or Refidex – you know, the things that are now being replaced by GPSs. – and I’d look and I’d think, “Now, in this suburb, where are some locations that have good proximity to schools and to shops and public transport. Where’s the train station?” Things like that.

So that was something that I evolved into in a little bit more, over time. But you know the other thing, and the big thing about finding a great buy? Really, is to put in offers at a price that you know would make it a great buy.

So I guess that’s the secret, really. You’re actually creating a great buy by putting in an offer that makes a particular property at a particular location become a great purchase. And if you just look at asking prices and go by that alone, you’re actually missing out on opportunity.

G: That’s probably the clearest explanation I can remember hearing about how to get a great buy! That’s great, Jason.

J: And it’s not necessarily always just a low offer, but an offer at a price that works, and therefore don’t just buy something without being thoughtful about how you put in your offer, and such.

I’m not saying that it has to be like a real predatory low offer, but an offer that you know will work. And that is really the biggest secret; you could think all day, analyse suburbs all day, look at alerts on www.realestate.com and listings and such, but until you put in offers, you don’t get the experience of whether a great buy can happen for you.

G: Okay. That’s making it even clearer. So then you’re working at a price that works for you. So how do you work out that price? What are your key items for working out the price that works for you?

J: That’s a great question. So what I like to do is to think about what is it with this property that I’m going to do to add value? So one of my approaches is; I don’t want to just buy a property and do nothing and then hope that I’ve made money. I like to see somewhere to add value.

It could be through some kind of minor makeover or renovation to improve its appeal, it could be looking for a block of land, with or without a house that could have a higher use – maybe that block could be suitable for townhouses or units, or being sub-divided.

So I look for something extra and then, basically, to actually know what price to offer and things like that I look at “What would the end value be if I did all of that work to it? For example, if I had to get an approval from council to put townhouses?” And if I was to build the townhouses and such, and then I went to the market and wanted to sell them, I’d be thinking, “Well, what are those townhouses likely to sell for?”

And then I’d work backwards and I’d say, “Okay, so here’s the total value once I’ve finished the project.” I would then think, “Well what did it cost me to get there from the start?” I might need to pay council to get an approval. I might need to pay other consultants and such. And then if there’s a construction element, then I’ve got the costs of that. So I’ve got to work out all of the costs and then think, “Well, if these are the costs and this is the end value, and I want to make a profit, then I need to allow for that as well.|”

And you kind of, by working backwards, come back to a point where you go “Okay, so for this to work, here’s roughly what sort of price I can afford to pay for that project or that site – the property – to begin with, to actually enable me to go forward and cover everything I need, including a profit.”

So that is effectively the way I prefer to do it; start with the very end in mind, work out the figures there and work backwards until you can get clear about what would be a price to offer to make that project work.

G: Now you started off a few years ago using that strategy. Do you think using that same strategy is still as valid today as it was a few years ago?

J: Well, I think that in the property market in more recent times, we haven’t had capital growth. In fact, we’ve had some falling values. So I actually think that what I’ve just described is even more important than just buying a property and doing nothing, and to just think, “Oh, I’ve just bought it a little bit below market value but haven’t had a chance to add value.” That doesn’t mean you’ve made money if a year later the property has fallen 5% or 10%! It kind of works against you.

So I think in every market you want to use this sort of approach to effectively find how you can add value, make sure the price you buy at lets that ability to add value become profitable for you, and then at least if there’s a slight fall in the market, your profit margin will give you a bit of a buffer. So hopefully, even if you make less, you’re still making something.

So for me, this is important. And the other thing that I’ll say is to be conservative in the time that you estimate, and the costs that you allow, because often what happens is that projects can take a bit longer than you might think, or there might be some extra costs that you weren’t aware of. So if you’re conservative, that’s another way to help make that work.

And I guess on another note, when I look at properties and even though I’ve worked out what would it be at the very end – lets say after it’s constructed and sold – what’s that value? And then I work backwards. It doesn’t mean that I’m going to take that project right to the very end. Can I explain a bit about what I mean there?

G: Certainly.

J: Okay, great. So what I like to do, is have multiple exit points – or exit strategies – where I could determine certain check points along the way where I might think, “Okay, here’s an opportunity for me to exit the project and make a profit. So I’ll just give you an example of a few, and how this could apply:

So it might be that my first exit point, or possible way to just make the money and move on, is that I’ve bought well enough that even without doing anything else to the property, I could just put that back on the market and make a small profit. That’s one possible way.

The next way might be that I get actually an approval from council to do something else with the land, but instead of acting on that approval, I just put the property back to the market with that approval and see at that point if someone else is willing to pay a price that let’s me profit and move on.

Or it might be that I act on the approval. Let’s say it’s a subdivision where I’m creating two lots from one. Then the next phase after that could be to do the subdivision and then end up with these two blocks, And then another exit point there could be, do I sell both those blocks or now, is it time to build on those blocks?

So kind of every step along the way to me is a potential exit point where you can take your profit. And in some markets these different exit points become easier or more difficult; there is more bias in certain markets for certain types of exit points. For example, I found that just selling vacant land is not so easy in a market that’s not a strong market.

In a stronger market where people are seeing values going up, then more people will just buy vacant land. And that will depend too, on location, and such. But why I just shared that is because as well as working out overall what price to put in to make the project work if I went right through to completion, I also like to see, “Well, can I make some money along the way?” So, I’m not forced to go all the way through the project.

G: When you have a block of land that you’re trying to sell – and I think you’re quite right is saying that it is much harder to sell land at the moment, and maybe you’re right about a declining market – so, how do you decide what sort of thing you would build? Or even that you would apply for a building development application to put on that block of land? What are the features that you look for, and what you would do with it?

J: What I like to do is see what that area already has. For example, if there’s a street where there are a number of new homes being constructed, like things happening, I’m thinking, “Well, okay, there’s obviously some interest in new homes in that area, because that’s what people are clearly doing.” Or if there’s a certain character look to it, I take notice of that.

But ultimately what I do is, I don’t just work on my own opinion. I’ll talk to real estate agents who look after selling properties in the area that I’m looking at and I’ll just say to them, “Look, if I want to build a home in this street, what would be some of the characteristics that would ensure you could sell that home quite easily? What are the things buyers are looking for?”

So I let the market guide me as to what would be the type of features; you know, the number of bedrooms, the level of finish, and various factors like that. I like to get feedback from multiple real estate agents, because they’re the ones who perhaps have the listing of new properties that they couldn’t sell and therefore might say, “Oh, well actually we couldn’t sell this one because the buyers were very upset about the layout of it. They said the kitchen was in the wrong spot” or something like that.

And then I get to know that this is one objection of people in that area, so how can I make sure this doesn’t happen in my project? And, building up a bit of a picture. And also, you can inspect other homes in that area to see what is out there and talk to not just selling agents, but I actually believe there is value in talking to the property managers, like the people who would handle rentals in an area, just to say again, “What sort of things do your tenants look for?”

Because sometimes the properties worth selling will end up being rented, so I’d like to know that I’m catering to the market, whether it’s buyers or tenants, and hopefully there’s a common ground. So my choice of what I do will have appeal with the least amount of objections.

G: How do you find the real estate agents that you want to talk to? Is there any main issue that you look for in an estate agent to go and do this due diligence with?

J: You know, the first thing that sprang to mind is one that doesn’t have a financial impact by giving you their advice! In other words and what I mean by that is, the person selling you the site may not be the one to depend on for the information! So I’d like to find someone who is not connected with the transaction, because I think they’re a little bit less under pressure to say things that would point out the positives of the property, because what they say is not going to affect them one way or the other.

And how I would find them is that it might be that I’ve driven the streets and I’ve seen a few for sale signs of other agents that are working that area, so I might make a note there and just pop into those agents’ offices and have a conversation there.

Or, if I’m wanting to do that from the comfort of my own office, I can do that by looking online and seeing in that suburb who has listings. And, again, it’s just a matter of looking for who are the agents that have some sort of activity in the area, but not just depending on the one that I’m dealing with for that particular purchase, to get a little bit more of an independent opinion from someone who is a local participant in that market as a real estate agent.

G: Okay. So with all this looking around and chatting to people, you must have a current opinion on what are the best opportunities in the market right now! What would you advise someone who is just starting out? What should be the main things they should be looking for right now?

J: So right now is an interesting time in the market. In many ways it feels like it’s reached the bottom, but I’m not convinced. I think it could kind of go either way over the near future.

So a little bit of a safety rule, or what you might call a ‘guideline’ to answer your question, is the type of opportunities right now that I think would make the most sense, are shorter term projects. In other words, something that you could complete and put back to the market in the shortest period of time therefore, whether the market is going a little bit higher or a little bit lower, or staying pretty level, you’ve got less risk of a big change. So if you can exit sooner, I think that lowers your risk.

So that’s one key point. And the other points about the best opportunities are, I believe, smaller sites projects. It would depend very much on the circumstances of who is out there investing and what they are wanting to do, but something where it’s no more than, say, three or four dwellings as a finish, or three or four blocks of land or something like that.

Smaller projects, to me, have left risk in exiting them because you don’t need a lot of pre-sales. You don’t need a lot of hoops to jump through to get the finance. It’s just not as risky as, say, a larger project.

And the other thing is, if someone wants to get into larger projects, then a small falling in value, or even a lack of confidence about the end value, has a very big impact on the profitability. Whereas with a smaller project, you can kind of get through it. You might decide, “Okay, I’ll have this, sell one dwelling and I’ll rent another one or two. So there are different things you can do on smaller projects that aren’t so practical on the larger ones.

But it’s case by case. It depends on how much capital someone has, what sort of cash flow they’ve got and such, so I couldn’t really be more specific than that without sitting down and talking to somebody about their own situation.

G: Yes I think that’s right, and I share your view that the market still could go either way. So, having said that, would you like to just flesh out a bit what you think is going to happen by the end of the year. We’re certainly going to go through an election and who knows what that’s going to bring. And, the world situation, of course.

But what does your gut feeling tell you that might happen by the end of the year?

J: Mm, okay. Well as you would know, interest rates right now are at an all time low – I believe it’s about 53 years since we were actually this low with the official interest rate. I view that as a bit of a double-edges sword, you might say. In one way, it’s starting to be that turning point where people renting properties can actually look at what it would cost to be buying a property and say, “Well, gee, at these sorts of interest rates I could afford repayments on a property instead of rent”, and it doesn’t really end up costing them much different.

So, to me, that’s a sign that we could start to see more people wanting to buy. Like it makes sense to me if someone could buy a place for no more than the amount they’re paying to rent a place, then it becomes very attractive to buy if they can get finance to do so. So in one regard, I think there will be some more buyers appearing in this low interest rate environment.

However, why I call it a double-edges sword is because, with rates so low, eventually they are going to go up again – I can’t see rates staying like this for any long term – and therefore when rates start to go up, the interesting thing is – and no pun intended – is that as an interest rate changes from, lets say 5% up to 6%, so let’s say a 1% interest increase, if your interest rates are currently around about 5% and they go up by 1%, that effectively adds an extra 20% to your interest costs because you’ve kind of gone up one fifth in the total amount of interest that you’re being charged.

So these low interest rates, even with a fairly small move up, will have a big impact on the change of repayments that people will eventually have to deal with when rates go up. Whereas, if we were in a higher interest rate environment, an interest rise isn’t proportionally having as much of an impact.

So it’s really hard for me to take a position and predict whether we’re in for a rising market moving forward that’s sustainable, or a brief rise and then a pause, or even a brief rise and then a bit of a dip, when some people go, “Wow, I can’t even afford this anymore. I thought I could, but it’s become too difficult” once interest rates go up.

And interest rates, of course, are only one aspect of it. So my thinking is to have a conservative view that doesn’t count on capital growth, and think, “Well, what can I do if I’m not getting capital growth to know that I’m still going to be safe, investing in the current climate?” And that’s sort of my outlook; don’t count on capital growth and then if it comes, it’s a bonus!

That’s pretty much how I’ll sum up my answer to that.

G: Well thanks, Jason, I think you’ve gone through pretty much the whole spectrum of company investment in quite a short time, and you’ve gone all the way through the risk management aspect, which I think is always very important for people to remember and think about as they’re weighing up their investment strategies.

J: Yeah. Do you want me to add another point about risk management that I think is useful?

G: Certainly.

J: I think one thing that can help you manage a risk is, if you are putting in an offer – so you’ve worked out a price that you think would make that project work to make your profit – when you put in your offer, it’s quite reasonable to put in some conditions. You might have a subject of finance or a subject of a building inspection or, in the case of development type projects, subject to a due diligence period where that means you can actually give yourself a little bit of time to do some independent research.

And I do highly recommend that, because we can sit down with a spreadsheet and we can put in our numbers and do the best that we can to get all those numbers worked out, but each property in itself is a little bit different, and there can be some characteristics about a specific site that you’re not aware of until you talk to a town planner, or until you realise that there’s some water issues and you need a hydraulics consultant, a hydraulics engineer to help you decide what’s possible.

So there are various little things that aren’t obvious at the start, and by allowing yourself some conditions in your offer that give you time to then research and be 100% - or as close to 100%! - confident as you can, then that’s a really great way to manage a risk, rather than just thinking you have to put in an offer, and then find out later whether you were right or not at the price you put in!

G: That’s a very timely warning. Again, it’s turning back to how your buy is, how you end up at the end of the day with these investments, isn’t it?

J: Yeah, yeah. Because, for most people, they can’t buy and buy and buy. They don’t have unlimited financing capacity, so the last thing you want to do is commit to a project and then realise that that’s a handbrake to you moving forward, because you’re stuck in it and you can’t exit and profit. And then another deal you find out three months later, you wished you could get into but you can’t because you’re all tied up and couldn’t get out.

So, yes, buying well is a real strong key because there’s a limit to how much people can buy and therefore you want to make each purchasing decision count as best you can. But having said that, not to go to the extreme of never buying anything, thinking there’s always a better deal. That won’t work either!

G: Yes, I think we’ve all seen that syndrome.

J: Yes. It’s like a threshold where you say, “You know what? This does have a definite profit margin of some description. I’m not sure all of the details yet, but this is the one I’m going to go forward with to the best of my ability.”

You’ve got to be willing to just put your toe in the water to know how the water feels.

G: That’s right! Very true.

J: Geoff, one more thing I’d like to add, is for people who have listened to this interview and they would like to get a better understanding of some of the possible highs and lows and things they need to be aware of when it comes to doing their own projects, I’ve created a self-assessment process.

I call it the property deal chain and basically what it lets you do is hear the different components that make up doing a property deal, from finding it right through to getting the profit. And in the self-assessment process, you can work out in advance where your strengths are and where any weak areas are. And by knowing that it just means that, rather than be part way through a project and then going, “Oh no, I wish I’d known this at the start” and then getting stuck, you can be a bit more aware of that at the start.

So there’s a website people can go to and they can just listen to this online. And that website is: www.infinitereturns.com.au/bpng.

G: Jason, thank you very much for your time.

[End of recording]

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